Monday, 2 March 2015

Deflation to inflation in one paragraph.

One of the concerns being raised about European QE is that there will not be a enough quality debt left for them to buy or if there is then there won't be enough for the investor to buy. No supply of debt left for the investor to buy?

Well excuse my French but isn't that the whole *^*^** point? To make it so impossible to buy debt that people stop buying debt and buy something else instead? Like 'things that people make' perhaps? At some point someone will realise that there are other things to buy other than negatively yielding IOU's and as soon as they buy those other things the price of those other things will go up and that, voilĂ , is called inflation. At which point people won't want to buy IOUs that they have to pay to hold as there is now something else going up in value and... Woh! Don't want to miss that and, hey, you don't buy bonds during inflation do you? Oh look, our selling of bonds to spend money on other things is making inflation go up even more. Quick, quick! Buy 'stuff' sell bonds! Whoops, this is moving fast, are the central banks going to act? No sorry, I'm a central bank and I'm waiting to see if prices moved LAST month and then I'll look at next month to make sure. Meanwhile - Wow, prices are higher and woh! Bonds are tanking. Hell, yield differentials are making equity holdings look poor on a yield comparison, I'd better sell them and buy stuff too. Quick make more stuff, people are buying stuff! Hire people to make it. Sorry not enough trained people to make stuff. Ok hire the people that can make stuff. They want more money? Just pay them, Jeez we are missing making stuff fast enough to sell (and tell the kids if they want to earn a buck do a degree in stuff making). Whilst - hang on, I'm a central bank. I'd better raise rates a bit, but oh that's odd equities are down and bonds are down but inflation is up, errr should I be raising rates? Perhaps I'll wait a month, and wow, the government refunding is getting expensive. I'm a corporate and my bond rollovers are expensive too and oh, I'm paying people more to make stuff and funding it at higher costs, woops, look stuff is going up in price still, I could hedge by buying stuff myself whilst trying to make more stuff to sell. Uh oh, we've got a stuff bubble. Oh yeah, that's called really high inflation. Huh? Wasn't it yesterday we had deflation? That's confusing. Oh I don't believe it,we are stuffed the other way now.

...or something like that. Here endeth the rant.

6 comments:

JJ AUS said...

Always a good read. What is the 'stuff' representing?

Anoop Menon said...

yes please, very entertaining but what is this "stuff" you speak of.

Polemic said...

Stuff = anything that isn't debt or shares. Stuff on shelves, stuff with wires, stuff with wheels, stuff with a roof or a hull. A metal (precious or otherwise), wood, energy stuff thing. An agricultural stuff thing, an ornament, new or old, a new road, airport, plane, train or automobile, a trip to the theatre, cinema or even getting those wooden sash windows fixed stuff thing.

Of course it would be great to identify a individual new bubble craze but in general we just need to stop funding round in circles and make sure the money flows to the economy and perhaps when it does things will reach a critical tripping point and when they do, it will be fast and unforeseen (apart from here of course!!).

Anonymous said...

Think I'll just buy the "vault cash" ETFs which are sure to pop up soon. Or gold.

Polemic said...

Anon - yes re vault cash . suggested that to bond PMs in last post http://polemics-pains.blogspot.co.uk/2015/02/exhibit-in-case-against-real-money-bund.html

A cash note is just a zero coupon perpetual. So odd to see the day has come when it is better to hold one of those than a normal bond.

KLSE Stock Analysis said...

It can't be said that there wont be enough investment. As if one invests than the other has to sell out that particular thing and thus the process goes on.