UK economy in danger of being sucked into Ben Bernanke's great inflation

UK economy in danger of being sucked into Ben Bernanke's great inflation

Markets were in party mood on Thursday. But traders' hangovers this morning have less to do with celebrating a market discounting strong economic growth and a lot more to do with equities being seen as a refuge.

By Damian Reece, Head of Business
Published: 6:00AM GMT 05 Nov 2010

Ben Bernanke hopes the $600bn cash injection will re-float the sunken American property market.

The great inflation is under way, its source is the US but we are close to being sucked in too.
Investors are fleeing into equities as a hedge against inflation. The US is now being run by experimental economics, a $600bn (£372bn) experiment to be precise as Ben Bernanke, chairman of the US Federal Reserve, hopes to re-float the sunken American property market and punish savers, transferring wealth to debtors through negative real interest rates.

Bernanke's hoped for by-product of reopening the liquidity floodgates is to stimulate every American's favourite past time – spending. The risk that much of the cash that the Fed is pumping into the US economy will simply be hoarded by banks to reduce their own leverage has been dismissed by Bernanke, a decision which could be his biggest mistake.

This is the man that missed the significance of America's deteriorating mortgage scene in 2006, believing firmly that toxicity had been diluted through the credit markets.

Now he wants inflation higher and interest rates lower to provide a massive one-off refinancing for US householders still in negative equity. By reflating property prices, and keeping the heat under equity prices, he is hoping to trigger a "wealth" effect on main street.

The other constituency in deep debt is the government, running an enormous deficit. President Barack Obama, left helpless by the mid-term elections, will also receive a bail-out through quantitative easing because, as with US households, he will inflate his way out of debt as the ratio of deficit to GDP improves. And if the numbers look better then the less pressure there is to cut spending and raise taxes to sort the deficit.

Our own quantitative easing habit has been put on hold but an official Bank rate of 0.5pc is keeping the inflationary burners alight. As if the Bank of England's Monetary Policy Committee needed any encouragement, George Osborne yesterday reminded the Treasury Select Committee that his tight fiscal policy allowed "flexibility" in monetary policy.

I doubt flexibility to increase rates to head off inflation is what he had in mind when he said that. Flexible monetary policy is fine, as long is its flexible downwards and consistently inflationary. As if on cue, Simon Ward of Henderson Global Investors yesterday predicted CPI would hit 4pc by early 2011.

Britain's saving grace is Osborne's fiscal consolidation plan and supply side reform to boost employment and new business formation.

But the risk is that increasing inflation will dampen the Chancellor's ardour to pursue his much needed reforms, leaving us without the policies enacted to deliver sustainable growth and with prices out of control.


http://www.telegraph.co.uk/finance/comment/damianreece/8111484/UK-economy-in-danger-of-being-sucked-into-Ben-Bernankes-great-inflation.html