Thursday, 10 January 2013

Thursday Rant

A lot going on, some of it pretty silly though the net result is even more asset inflation as normally conservative investors put on lemming-onesies and leap over any handy cliff.

I'll start with a question that I was pondering for a fair bit of the day. Which would you rather put your money in - the UK 50-year index-linked gilt that will pay you (about) 0.016% above the RPI inflation rate (3% at the moment), or the US 30-year bond which yields about 3.07% at the moment? The yields are pretty much the same, so 3% is what you can earn on your savings if you want them to be 'safe'. I'm tempted to conclude that UK index-linked, even after today's rally, is the better yield. Neither exactly sets my pulse racing!

That you can lend money to your government for around 3% for as long as you like, is of course, why equity indices are back at levels we haven't seen in a while, why house prices are so high, why paintings, tuna, truffles and Bordeaux wines are all being sold for prices that blow your mind. Oh, and the price of a premiership footballer  -that too.

But the real reason I wanted to rant was about two, related topics. The first is the BOJ, who are widely touted as being on the point of adopting a 2% inflation target. I get lots and lots of emails about this. But how on earth does increasing the inflation target from 1% to 2%, when you have been seeing prices FALL for ages? Why not have a 5% inflation target on this basis? The target is not what will get the country out of deflation. Fortunately, a weaker yen will, and a weaker yen is coming.

There's a ink between the 2% inflation target and the real nonsense story in financial markets - the idea that the US should issue a trillion-dollar coin, made (it is suggested) out of platinum. the purpose of this is to get round the debt ceiling. Issuing a trillion dollar coin, boosts the country';s assets and allows it to borrow more. At one daft level, it is sensible because it gets around the really, really silly risk of a rich country defaulting because having committed to spend money, it decides bot to finance the spending, even though it could. This, in  my language is the same as agreeing to buy a house, signing on the dotted line, hiring the movers and then having a meeting with Mrs J, and agreeing that we don't want a mortgage.

If the US doesn't want to increase its debt levee, it needs a grown-up debate about that. Cut spending, or raise taxes. The coin is a gimmick that merely highlights the inability of the government to govern. But my real, deep down grouse against the coin is the same as with the 2% inflation target. It is masquerading as a sensible plan by being made out of platinum. They are not going to make a coin whose metal content itself is worth $1trn. Of course not, that would be silly.  And counter-productive. So why use expensive metal at all? Plastic would be better and a coin made up of old bottle tops would be even more sensible.

So I've had a silly decision on keeping a silly measure of inflation in the UK. A silly debate about a trillion dollar coin in the US to get around a self-imposed debt ceiling; and a silly decision to raise the inflation target in a country which can't get any inflation (yet). And we're only 10 days into the New Year.

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