Gold Speculator - Nadeem Walayat http://www.gold-speculator.com/ en Wed, 08 Sep 2010 01:21:56 GMT vBulletin 60 http://www.gold-speculator.com/images/misc/rss.jpg Gold Speculator - Nadeem Walayat http://www.gold-speculator.com/ Deflation Delusion Continues as Economies Trend Towards High Inflation http://www.gold-speculator.com/nadeem-walayat/36954-deflation-delusion-continues-economies-trend-towards-high-inflation.html Sat, 28 Aug 2010 00:41:39 GMT India 13.7% Argentina 11.2% Russia 5.5% Brazil 4.6% China 3.3% UK 3.1% Australia 3.1% Euro zone 1.7% USA 1.2% Japan -0.7% This is leaving aside the fact that the official inflation indices tend to under report real inflation rates as the methodologies have been manipulated LOWER over the decades so that governments can continue to stealth tax the population. For instance UK inflation as measured by the RPI which is the recognised measure for UK Inflation is at 4.8%, with my own real inflation rate measurement coming in at 6%. Whilst the U.S. CPI of 1.2% when measured on the basis of E.U. methodology that ignores Bush and Clinton tweaks comes in at 2.4% Then we have Mr Shadowstats who reports U.S. CPI inflation as being at 8.6% rather than the official 1.2%. I warned of imminent UK and global inflation mega-trend way back in November 2009 (18 Nov 2009 - Deflationists Are WRONG, Prepare for the INFLATION Mega-Trend (http://www.marketoracle.co.uk/Article15131.html)), as deflationists fell into the trap the debt deleveraging deflation red herring, that completely missed the big picture that I attempted to elaborate upon in the 100 page Inflation megatrend ebook of January 2010 (FREE DOWNLOAD (http://www.marketoracle.info/?p=subscribe&id=1)) that contained the specific trend forecast for UK CPI Inflation of Dec 09 (UK CPI Inflation Forecast 2010, Imminent and Sustained Spike Above 3% (http://www.marketoracle.co.uk/Article16085.html)) as illustrated by the below graph against which the Bank of England has continually issued statements that high inflation was just temporary and would imminently fall throughout 2010, the reasons for which I touched on recently upon in the article The Real Reason for Bank of England's Worthless CPI Inflation Forecasts (http://www.marketoracle.co.uk/Article21854.html). Image: http://www.gold-speculator.com/attachments/nadeem-walayat/11642d1282956070-deflation-delusion-continues-economies-trend-towards-high-inflation-uk-cpi-17.gif Debt deleveraging deflation completely ignores the fact that we are NOT living in the 1930's, but in a GLOBALISED world economy that is seeing the CONVERGENCE of REAL GDP's where the developing world is EATING up the worlds resources at a faster pace then the west is cutting back on consumption thus DRIVING INFLATION HIGHER whilst at the same time the west is engaged in COMPETITIVE CURRENCY DEVALUATIONS in an attempt to GENERATE NOMINAL GDP GROWTH which has highly inflationary implications. Governments attempting to inflate nominal GDP's through printing money and near zero interest rates so as to push people towards consumption rather than savings because banks are paying LESS in interest than even the phony official inflation rates. Thus people increasingly seek to hold anything other than negative interest rate paying devaluing fiat currency that can be printed in the trillions at the press of a button. Savers in the UK are realising this as INFLATION EATS a life time of accumulated savings. Workers are realising this as the flow of paper currency raises prices in the shops far greater than the flow of paper into their pay packets that is coming in at an average of 2% against CPI of 3.1%. The paper currency is losing value at a much faster pace than the official inflation statistics, people are waking upto this and will increasingly demand payment in terms of ability to track the price of goods and services not official indices therefore demand wage rises above official inflation indices and thus triggering the dreaded wage price spiral, which as the trend for the convergence of GDP per capital analysis as illustrated by the below graph (*Inflation Mega-Trend Ebook Page 54*) shows for most people will only be a nominal phenomena i.e. they will not actually be able to purchase more as they will be fighting a losing battle against REAL INFLATION. Image: http://www.gold-speculator.com/attachments/nadeem-walayat/11643d1282956070-deflation-delusion-continues-economies-trend-towards-high-inflation-world-economies-gdp-per-capita-2008.gif The threat of Debt debt deleveraging deflation has INFLATIONARY consequences because the governments will not ALLOW for actual Price DEFLATION because it would INCREASE the real value of government debt therefore increases the risk of governments going bankrupt as the debt interest rises, when the real intention is to INFLATE the real value of debt away. INFLATION is also one of the governments most important stealth taxes on the people whilst DEFLATION acts as a subsidy TO the people i.e. their standard of living INCREASES during DELFATION as prices fall whilst inflation gives the illusion of increasing standard of living as workers are stealthily forced to work harder for less real pay despite increasing productivity. *Debt Interest Spiral Inflationary Trend Towards Hyperinflation* Image: http://www.gold-speculator.com/attachments/nadeem-walayat/11644d1282956070-deflation-delusion-continues-economies-trend-towards-high-inflation-britains-debt-spiral.gif As warned off in November 2008 (28 Nov 2008 - Bankrupt Britain Trending Towards Hyper-Inflation? (http://www.marketoracle.co.uk/Article7526.html)), the consequences of ever increasing debt mountain is the risk of igniting the debt interest spiral (03 Dec 2009 - Britain's Inflationary Debt Spiral as Bank of England Keeps Expanding Quantitative Easing (http://www.marketoracle.co.uk/Article15521.html)), since 2008 the Labour government had bent over backwards to ignite an election boom (03 Jun 2009 - UK Economy Set for Debt Fuelled Economic Recovery Into 2010 General Election (http://www.marketoracle.co.uk/Article11088.html)), so as to maximise its chances of winning the next election. the New government is attempting to bring the debt interest spiral to an halt but as the recent debt interest analysis (29 Jun 2010 - UK ConLib Government to Use INFLATION Stealth Tax to Erode Value of Public Debt (http://www.marketoracle.co.uk/Article20682.html)) concluded the Government will not only not be able to halt the accumulation of total debt during the next 5 years but that official debt as a % of GDP is expected to continue to rise to 72% of GDP as illustrated by the below graph which suggests significantly higher debt interest payments i.e. a significant worsening of the governments fiscal position which means MORE money printing despite a economic growth as total public sector net debt rises by 50% to £1.26 trillion (2013-13) from £784 billion (2009-10). Image: http://www.gold-speculator.com/attachments/nadeem-walayat/11645d1282956070-deflation-delusion-continues-economies-trend-towards-high-inflation-uk-debt-pcent-gdp-forecast.gif *The Inflation Mega-trends* The official CPI inflation indices illustrate the facts of what has actually transpired during the whole period of deflation mantra for the past 18 months. Image: http://www.gold-speculator.com/attachments/nadeem-walayat/11646d1282956070-deflation-delusion-continues-economies-trend-towards-high-inflation-uk-cpi-26.gif The actual trend for the UK has been of one of continuing accelerating inflation, where the great deflationary recession of 2008-2009 even barely a year on has become only vaguely visible as an inconsequential blip along the path of the Inflation Mega-trend. Do you see that little dip right at the very end of the above graph ? Well that inconsequential non event is yet again being taken by the mainstream press and Deflationists to run and cry deflation, just as every single minor downward blip during the past 18 months has been followed by something similar, if this type of reaction is not delusional than what is it ? Image: http://www.gold-speculator.com/attachments/nadeem-walayat/11647d1282956082-deflation-delusion-continues-economies-trend-towards-high-inflation-us-cpi-26.gif Meanwhile, the United States has experienced mild inflation since the Great Recession of 2008-2009 began with little overall change but with a positive trend. However this is set against the mantra of deflation that implies the complete opposite of what actually has transpired despite the worst recession since the Great Depression. So all of the talk of the U.S. being in deflation for the past 18 months has been delusional which does not match the reality of what actually has taken place and given the ongoing multi-trillion dollar deficits look set to feed a trend for a stagflationary economy for the U.S. for many years. *Delusional Deflationists Ignore CPI* Having been wrong on deflation in even the officially doctored CPI for the past year, delusional deflationists IGNORE this and any other indicator that implies inflation by picking and choosing any obscure measurements that implies deflation is taking place such as pricing assets in terms of the gold price to imply deflation is taking place when peoples food baskets i.e. the REAL WORLD show INFLATION is accelerating away from them, or in some cases implying that inflation is really deflation in disguise because of loss of purchasing power, which is the whole point of what inflation IS ! Where prices rise to erode the purchasing power of your savings and earnings! I hear weak economies mean deflation looms, well try telling that to Zimbabweans! Do a simple personal inflation test, dig out your credit card statements from 1,2,3 years ago and see how much your food and energy bills have gone up and then you will know how much inflation has taken place during a period of perma deflation mantra. Never mind the amount average food baskets are destined to rise in price going forward! *Quantitative Easing* / Money Printing During 2009, Central Banks detonated the nuclear option of quantitative easing, the Bank of England will under the new governments regime seek to continue QE as part of its monetary policy. Central banks also have the bigger nuclear option of starting to charge banks interest on holding reserves at the central bank which would be highly inflationary as it would force banks to lend. In the United States the prospects for QE2 ahead of the November mid-terms is growing and coming as a surprise to many quarters when it has been obvious since the first print run that *once started money printing cannot be stopped whilst large budget deficits exist*, which where the U.S. is concerned probably means continuing for the next 10 years at least as the U.S. is going to milk its reserve currency advantage to the fullest. So all the talk by the press earlier in the year that Q.E. had come to an end and would be unwound has been found out to be completely WRONG. Again, as I mentioned right at the start of QE in March 2009, once started money printing cannot be stopped whilst huge budget deficits exist EVEN AFTER RECESSIONS END. Therefore rather than be withdrawn or unwound, given the poor deficits outlook for the UK and US,* we can expect QE to morph into a permanent feature of monetary policy. * The bottom line is that the QE already has yet to feed through to the financial system, i.e. UK £200 billion of money printing as a consequence of the fractional reserve system ultimately resolves into total money supply expansion of between £1 trillion and £4 trillion, which is highly inflation and already manifesting in what the Bank of England calls surprisingly high inflation and in the U.S. the $2 trillion of money printing to date looks set to be followed by at least another $1 trillion this year. So the seeds of high inflation have already been sown that will be reaped during the coming years. Given the structure of the western economies, all that quantitative easing will do is to boost asset prices and emerging market economic growth and give an extra lift towards feeding the inflation mega-trend for many years. *Negative Real Interest Rates* At the end of the day the current situation of negative real interest rates is NOT deflationary it is INFLATIONARY as witnessed by official inflation indices that range between +2% to +4% rather than -2% to -4%. Why ? Because negative real interest rates erodes the confidence of people to hold fiat currencies. Workers are more eager to spend, savers are definitely more eager to seek escape from an obvious theft of value when banks are paying 2% against CPI of 3.1% and RPI of 4.8%. They are more likely to SPEND and invest in assets other than fiat currencies which is defacto reduction in the confidence of a population in holding the countries currency. That's the reason why Gold is above $1200 rather than $600 that prominent permanently deluded deflationists have been espousing these past few years as to what 'should' happen. *The Myth of Japanese Economic Depression and Deflation* Deflationists in the mainstream press and BlogosFear constantly perpetuate the myth that Japan has been in a Deflationary depression since the housing and stocks bubble burst in early 1990. One would imagine that the Japanese economy is perhaps 30% smaller with prices 30% cheaper given the repetitive mantra . But what about the facts ? The facts are that the Japanese economy has NOT crashed by 30% i.e. in depression during this time period but grown in virtually every year up until the 2008 global recession to stand at a GDP of some 20% higher than where it was when the bubble burst. *Price Deflation ?* - Another myth. Despite the fact that innovation and increases in productivity should drive prices down, Japan's consumer prices have have not fallen but are in fact marginally higher than where they were in early 1990. Therefore what Japan has experienced is stable prices NOT DEFLATION. Yes Japanese asset prices, namely stocks and real estate have suffered greatly, however this is as a consequence of the bursting of the bubbles that saw prices TRIPLE during the preceding 5 years that turned safe assets such as houses into over bid gambling casino chips that were priced to discount a perpetual never ending boom. Therefore prices fell to reflect reality such as that it was ridiculous for the city of Tokyo in 1990 to be priced to have a greater value then the whole of the United States! So when you hear about the US following a Japanese style deflationary depression, what you really need to understand is that it is for one of low economic GROWTH with STABLE prices. However the USA is NOT going to follow that model as the USA does not have the demographics of a shrinking ageing Japanese population which really SHOULD result in DEFLATION and a contraction in GDP which Japan through continuous innovation has NOT suffered. If there are far less workers generating MORE economic output then is that really an economic depression? Commentators have been pointing to Japanese Debt soaring to now stand at 200% of GDP as highly deflationary when the OPPOSITE is true, as when the japanese debt bubble bursts which it surely will, then it will be highly inflationary if not hyper inflationary as Japan is forced to wipe out the value of its debt *Japanese the Real Gold Bugs* Whilst in the west buying gold for wealth preservation has yet to impact on ordinary people to any significant degree, ordinary Japanese recognising their ever growing debt mountain would ultimately destroy the Japanese currency were buying gold nuggets from their local gold dealers in preparation for hyper inflation 5 years ago! Needless to say despite that not having happened to date, the Gold price rising to $1250 reflects the increased global risks of debt bubbles bursting into high inflation. *Bottom Line *- There has been no Japanese Deflation or Economic Depression. Western countries such as the UK and the USA are NOT Destined to follow the Japanese experience as their demographics are primed both for greater nominal GDP growth and price inflation. *Delusional Deflationists Point to Treasury Bond Market to Illustrate Deflation* Deflationists point to imminent deflation and a double dip recession by pointing to the treasury bond market yields plunging towards the credit crisis lows whilst at the same time continuing an 18 month mantra of the stocks bear market rally whose end is always imminent with the most recent plethora of commentary concluding that it has ended (again) and the bear market has resumed. However the facts are that it is bonds and not stocks are in a bull market that is coming to the end of its life and entering the final manic stage that tends to see markets go parabolic. I am sure in recent weeks you have heard at length as to why bond investors are smarter and thus why the bond rally will go on and on, to me that sounds a lot like the tek stock investors during 1999, they too saw themselves as very smart just as the bubble popped. Every bubble participant thinks its different for them than every other bubble that's popped before, however it NEVER IS! The bond market investors are in total denial of the fact that the U.S. is firmly on the path towards bankruptcy because the US has given NO SIGN that it intends on bridging the forecast $200 trillion fiscal gap between future revenues and liabilities, a gap that can ONLY be filled by printing huge amounts of money triggering very high INFLATION, which will DESTROY the real value of bonds as in purchasing power terms they will just become confetti paper. Against this stocks that consistently pay high dividends can be expected to retain much of their purchasing power, where my focus is on dividend paying stocks because it is more difficult to engage in corporate fraud Enron style if a company is actually making dividend payments. *The Global Bond Market Bubble* The key drivers for the global bond market over the past 20 years has been China and other emerging markets such as India exporting deflation abroad as they industrialised and produced ever cheaper goods and services to drive down costs thus enabling prices in the west to fall, this has now reversed where China is exporting inflation abroad as its workers now start to demand a higher standard of living and the country increasingly looks towards domestic consumption to generate economic growth. On top of this we have the ever expanding supply of bonds that no matter what the central bankers state is not going to diminish (pay down the debt) for either the UK, USA or most of the developed countries during the next 5 years at least. Image: http://www.gold-speculator.com/attachments/nadeem-walayat/11648d1282956082-deflation-delusion-continues-economies-trend-towards-high-inflation-us-treasury-bonds-bull-market.gif The 30 year treasury bond market graph shows a clear long-term uptrend punctuated by several speculative spikes higher amidst's a so called dash for safety during 2008 and at the present time though there is no Lehman style crisis on the horizon, that just as 2008 resolved towards a swift plunge back towards the long-term trendline so will the current bond market rally just as the mainstream media becomes most vocal in its commentary for bonds being a safe haven destination for investors. If the 20 year bull market trend pattern persists then further upside is limited in favour of a trend that targets a move to $USB 120 to 115 over the next 9 months. So those that have bought during the past 6 months are going to be sitting on losses in about 6 months time. The 20 year graph for US treasury bonds as a proxy for the Global Government Bond Market bubbles has investors drowning in delusional deflationist ideology that suggests bond prices can keep rising ever higher, when the actual fact is that the bond market is very close to a significant reversal point. This is a manifestation of the reinforcement of belief that this time it is different for this bubble, just as the housing market bubble participants thought that house prices would keep rising for ever because it was different, and before then the dot com bubble could not be priced on the basis of what had gone before because the Internet meant that this time it really was different - IT NEVER IS DIFFERENT! Off course one of the best inflation mega-trend hedges are Index Linked Government Bonds, and up until recently NS&I Index Linked Certificates, as the new government pulled the plug on these inflation hedges due to the fact that they are paying out 6% per annum TAX FREE, RISK FREE to savers during 2010 and rising to 7% during 2011. Against which the bankrupt tax payer bailed out banks cannot compete that typically pay less than 2.5% that is TAXED at 20% or 40% depending on ones tax band. For 50 pages on how to protect your wealth Download the FREE Inflation Mega-Trend Ebook (http://www.marketoracle.info/?p=subscribe&id=1) The Bottom Line - The global economy is not contracting it is growing by a decent 4.1% this year with similar 4%+ growth for 2011, the emerging markets are more than picking up the slack for the weakly growing western economies as a consequence of high levels of debt AND converging GDP per capita. This ensures that upward pressure on inflation will remain for western economies despite the downward pressure on real wages as the living standards of the east and west converge. For the west this means high inflation as governments attempt to inflate nominal GDP and wages to give the illusion of growth whilst in the east there will be currency appreciation coupled with strong economic growth and higher inflation that will be exported to the west. *What Investors Should Do * The U.S. Fed and the Bank of England are going to keep printing money which is a big positive for asset prices such as stocks. For investors the strategy remains to invest in inflation wealth protection and growth such as agricultural commodities, gold, silver, metals and mining, TIPS, emerging economies such as China, India, Russia, Chile, Brazil, and developed economies such as Australia and Canada as their appreciating currencies will protect your investments purchasing power in sterling and dollars as covered at length in the Inflation mega-trend ebook (FREE DOWNLOAD (http://www.marketoracle.info/?p=subscribe&id=1)). *The Protectionism Disaster Scenario* The disaster scenario is for that of one of protectionism to take hold which will fail to stop the trend towards convergence of GDP per capita between east and west, but it will result in a smaller economic pie i.e. global economic contraction, economic depression in the west and price deflation. This means the west would suffer whilst the east grows much more slowly. Protectionism would be a lose, lose outcome for all. The only real strategy the west has is to resign itself towards slow but sustainable economic growth as the emerging markets continue to grow to fill the huge gap in development that still exists between west and east. *Interest Rate Rises To Feed the Debt Interest Spirals* The debt interest payment pressures are set to accelerate as *interest rates are forced to rise* as a consequence of bond markets baulking at ever increasing supply of debt and rising inflation, *UK short-end real rate interest rate of -2.6% is just NOT sustainable*. Over the past 18 months borrowers have become drunk on extremely low interest rates (even if the banks are not fully passing them on) whilst inflation has started to rage in the UK during 2010 punishing savers and rewarding borrowers to entice them to take out even more debt. *What to Expect in the Future * *The Bank of England WILL RAISE INTEREST RATES AND PRINT MONEY* - This is contrary to anything you will hear anywhere else as the consensus view is that QE and Zero interest rates are complimentary, they will NOT be as we move forward! Because the *Bank of England Will have no choice but to attempt to DEFLATE PRICES whilst INFLATING the Economy* to achieve this it MUST RAISE Short-term Interest rates WHILST KEEPING LONG-TERM interest rates low. To achieve this the Bank of England needs to BUY Bonds and Stocks whilst forcing demand for consumption and wage increases lower. This WILL become the consensus view AFTER the FACT, perhaps in 6 months time ? Just as the mainstream press is ONLY NOW, 9 months on, starting to slowly wake up to the Inflation Mega-trend with the likes of the FT only coming to conclusions on the Bank of England Inflation targeting very recently, something that I came to several years ago! *FT - FT audit casts doubt on Bank’s forecasts* - *9th August 2010* (http://www.ft.com/cms/s/0/4e53a2de-a3f3-11df-9e3a-00144feabdc0.html) The forecasts used by the Bank of England to set interest rates are biased and contain little useful information, a Financial Times audit has demonstrated. *Nadeem Walayat - Bank of England's Worthless 2% 2Year CPI Inflation Forecasts* - *14th August 2008* (http://www.marketoracle.co.uk/Article5864.html) The Bank of England's in depth 48 page quarterly inflation report published yesterday concludes with the forecast for UK CPI inflation to be at 2% in 2 years time. Since the Bank of England first adopted the 2% CPI inflation target back in 2003, the Bank has perpetually made the same forecast for 2% CPI in two years time, and nearly always missed the target by a wide margin. Clearly there is something wrong in the banks procedures which appears to deliver the motions of generating paper work such as the 48 page report, followed by pats on the back rather than an effective response to the failure to meet the Banks primary objective. The full implications of debt and the inflation mega-trend on interest rates as the UK economy recovers will be covered in my next in depth analysis, ensure you are subscribed to my always free news letter (http://www.marketoracle.info/?p=subscribe&id=1)to get this in your email in box. Comments and Source: http://www.marketoracle.co.uk/Article22199.html By Nadeem Walayat http://www.marketoracle.co.uk (http://www.marketoracle.co.uk/) *Copyright *© *2005-10* Marketoracle.co.uk (http://www.marketoracle.co.uk/) (Market Oracle Ltd). All rights reserved. Image: http://www.marketoracle.co.uk/images/2010/Jan/inflation-ebook-small.gif (http://www.marketoracle.info/?p=subscribe&id=1) Nadeem Walayat has over 20 years experience of trading derivatives, (http://www.walayatstreet.com/) portfolio management and analysing the financial markets, including one of few who both anticipated and *Beat the 1987 Crash* (http://www.marketoracle.co.uk/Article2499.html). Nadeem's forward looking analysis specialises on UK inflation (http://www.marketoracle.co.uk/Article16085.html), economy, (http://www.marketoracle.co.uk/Article16167.html) interest rates (http://www.marketoracle.co.uk/Article16450.html) and the housing market and he is the author of the *NEW Inflation Mega-Trend ebook *that can be downloaded for Free (http://www.marketoracle.info/?p=subscribe&id=1). Nadeem is the Editor of The Market Oracle, a *FREE* *Daily* Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. _http://www.marketoracle.co.uk_ (http://www.marketoracle.co.uk/) *Disclaimer: *The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.]]> Delusional deflationists right from the Bank of England MPC, through to the mainstream press for well over a year have pushed the mantra of ongoing debt deleveraging deflation everywhere, everywhere that is than appears in where it counts i.e. the actual INFLATION indices, where inflation is on the rise right across the world as illustrated in the UK by the persistent failure of the Bank of England to control UK inflation that remains above the banks CPI 3% upper limit. Even Greece that really is in an depression is experiencing inflation at above 3%, whilst the US CPI continues to inflate at a more modest 1.2% as summarised below for key world economies.

Global CPI Inflation Rates
India 13.7%
Argentina 11.2%
Russia 5.5%
Brazil 4.6%
China 3.3%
UK 3.1%
Australia 3.1%
Euro zone 1.7%
USA 1.2%
Japan -0.7%
This is leaving aside the fact that the official inflation indices tend to under report real inflation rates as the methodologies have been manipulated LOWER over the decades so that governments can continue to stealth tax the population. For instance UK inflation as measured by the RPI which is the recognised measure for UK Inflation is at 4.8%, with my own real inflation rate measurement coming in at 6%. Whilst the U.S. CPI of 1.2% when measured on the basis of E.U. methodology that ignores Bush and Clinton tweaks comes in at 2.4% Then we have Mr Shadowstats who reports U.S. CPI inflation as being at 8.6% rather than the official 1.2%.

I warned of imminent UK and global inflation mega-trend way back in November 2009 (18 Nov 2009 - Deflationists Are WRONG, Prepare for the INFLATION Mega-Trend ), as deflationists fell into the trap the debt deleveraging deflation red herring, that completely missed the big picture that I attempted to elaborate upon in the 100 page Inflation megatrend ebook of January 2010 (FREE DOWNLOAD) that contained the specific trend forecast for UK CPI Inflation of Dec 09 (UK CPI Inflation Forecast 2010, Imminent and Sustained Spike Above 3%) as illustrated by the below graph against which the Bank of England has continually issued statements that high inflation was just temporary and would imminently fall throughout 2010, the reasons for which I touched on recently upon in the article The Real Reason for Bank of England's Worthless CPI Inflation Forecasts.



Debt deleveraging deflation completely ignores the fact that we are NOT living in the 1930's, but in a GLOBALISED world economy that is seeing the CONVERGENCE of REAL GDP's where the developing world is EATING up the worlds resources at a faster pace then the west is cutting back on consumption thus DRIVING INFLATION HIGHER whilst at the same time the west is engaged in COMPETITIVE CURRENCY DEVALUATIONS in an attempt to GENERATE NOMINAL GDP GROWTH which has highly inflationary implications.

Governments attempting to inflate nominal GDP's through printing money and near zero interest rates so as to push people towards consumption rather than savings because banks are paying LESS in interest than even the phony official inflation rates. Thus people increasingly seek to hold anything other than negative interest rate paying devaluing fiat currency that can be printed in the trillions at the press of a button. Savers in the UK are realising this as INFLATION EATS a life time of accumulated savings. Workers are realising this as the flow of paper currency raises prices in the shops far greater than the flow of paper into their pay packets that is coming in at an average of 2% against CPI of 3.1%. The paper currency is losing value at a much faster pace than the official inflation statistics, people are waking upto this and will increasingly demand payment in terms of ability to track the price of goods and services not official indices therefore demand wage rises above official inflation indices and thus triggering the dreaded wage price spiral, which as the trend for the convergence of GDP per capital analysis as illustrated by the below graph (Inflation Mega-Trend Ebook Page 54) shows for most people will only be a nominal phenomena i.e. they will not actually be able to purchase more as they will be fighting a losing battle against REAL INFLATION.



 The threat of Debt debt deleveraging deflation has INFLATIONARY consequences because the governments will not ALLOW for actual Price DEFLATION because it would INCREASE the real value of government debt therefore increases the risk of governments going bankrupt as the debt interest rises, when the real intention is to INFLATE the real value of debt away. INFLATION is also one of the governments most important stealth taxes on the people whilst DEFLATION acts as a subsidy TO the people i.e. their standard of living INCREASES during DELFATION as prices fall whilst inflation gives the illusion of increasing standard of living as workers are stealthily forced to work harder for less real pay despite increasing productivity.

Debt Interest Spiral Inflationary Trend Towards Hyperinflation




As warned off in November 2008 (28 Nov 2008 - Bankrupt Britain Trending Towards Hyper-Inflation?), the consequences of ever increasing debt mountain is the risk of igniting the debt interest spiral (03 Dec 2009 - Britain's Inflationary Debt Spiral as Bank of England Keeps Expanding Quantitative Easing), since 2008 the Labour government had bent over backwards to ignite an election boom (03 Jun 2009 - UK Economy Set for Debt Fuelled Economic Recovery Into 2010 General Election), so as to maximise its chances of winning the next election. the New government is attempting to bring the debt interest spiral to an halt but as the recent debt interest analysis (29 Jun 2010 - UK ConLib Government to Use INFLATION Stealth Tax to Erode Value of Public Debt ) concluded the Government will not only not be able to halt the accumulation of total debt during the next 5 years but that official debt as a % of GDP is expected to continue to rise to 72% of GDP as illustrated by the below graph which suggests significantly higher debt interest payments i.e. a significant worsening of the governments fiscal position which means MORE money printing despite a economic growth as total public sector net debt rises by 50% to £1.26 trillion (2013-13) from £784 billion (2009-10).



The Inflation Mega-trends

The official CPI inflation indices illustrate the facts of what has actually transpired during the whole period of deflation mantra for the past 18 months.



The actual trend for the UK has been of one of continuing accelerating inflation, where the great deflationary recession of 2008-2009 even barely a year on has become only vaguely visible as an inconsequential blip along the path of the Inflation Mega-trend. Do you see that little dip right at the very end of the above graph ? Well that inconsequential non event is yet again being taken by the mainstream press and Deflationists to run and cry deflation, just as every single minor downward blip during the past 18 months has been followed by something similar, if this type of reaction is not delusional than what is it ?



Meanwhile, the United States has experienced mild inflation since the Great Recession of 2008-2009 began with little overall change but with a positive trend. However this is set against the mantra of deflation that implies the complete opposite of what actually has transpired despite the worst recession since the Great Depression. So all of the talk of the U.S. being in deflation for the past 18 months has been delusional which does not match the reality of what actually has taken place and given the ongoing multi-trillion dollar deficits look set to feed a trend for a stagflationary economy for the U.S. for many years.

Delusional Deflationists Ignore CPI

Having been wrong on deflation in even the officially doctored CPI for the past year, delusional deflationists IGNORE this and any other indicator that implies inflation by picking and choosing any obscure measurements that implies deflation is taking place such as pricing assets in terms of the gold price to imply deflation is taking place when peoples food baskets i.e. the REAL WORLD show INFLATION is accelerating away from them, or in some cases implying that inflation is really deflation in disguise because of loss of purchasing power, which is the whole point of what inflation IS ! Where prices rise to erode the purchasing power of your savings and earnings! I hear weak economies mean deflation looms, well try telling that to Zimbabweans!

Do a simple personal inflation test, dig out your credit card statements from 1,2,3 years ago and see how much your food and energy bills have gone up and then you will know how much inflation has taken place during a period of perma deflation mantra. Never mind the amount average food baskets are destined to rise in price going forward!

Quantitative Easing / Money Printing

During 2009, Central Banks detonated the nuclear option of quantitative easing, the Bank of England will under the new governments regime seek to continue QE as part of its monetary policy. Central banks also have the bigger nuclear option of starting to charge banks interest on holding reserves at the central bank which would be highly inflationary as it would force banks to lend.

In the United States the prospects for QE2 ahead of the November mid-terms is growing and coming as a surprise to many quarters when it has been obvious since the first print run that once started money printing cannot be stopped whilst large budget deficits exist, which where the U.S. is concerned probably means continuing for the next 10 years at least as the U.S.
is going to milk its reserve currency advantage to the fullest. So all the talk by the press earlier in the year that Q.E. had come to an end and would be unwound has been found out to be completely WRONG. Again, as I mentioned right at the start of QE in March 2009, once started money printing cannot be stopped whilst huge budget deficits exist EVEN AFTER RECESSIONS END. Therefore rather than be withdrawn or unwound, given the poor deficits outlook for the UK and US, we can expect QE to morph into a permanent feature of monetary policy.

The bottom line is that the QE already has yet to feed through to the financial system, i.e. UK £200 billion of money printing as a consequence of the fractional reserve system ultimately resolves into total money supply expansion of between £1 trillion and £4 trillion, which is highly inflation and already manifesting in what the Bank of England calls surprisingly high inflation and in the U.S. the $2 trillion of money printing to date looks set to be followed by at least another $1 trillion this year. So the seeds of high inflation have already been sown that will be reaped during the coming years.

Given the structure of the western economies, all that quantitative easing will do is to boost asset prices and emerging market economic growth and give an extra lift towards feeding the inflation mega-trend for many years.

Negative Real Interest Rates

At the end of the day the current situation of negative real interest rates is NOT deflationary it is INFLATIONARY as witnessed by official inflation indices that range between +2% to +4% rather than -2% to -4%.

Why ?

Because negative real interest rates erodes the confidence of people to hold fiat currencies. Workers are more eager to spend, savers are definitely more eager to seek escape from an obvious theft of value when banks are paying 2% against CPI of 3.1% and RPI of 4.8%. They are more likely to SPEND and invest in assets other than fiat currencies which is defacto reduction in the confidence of a population in holding the countries currency.

That's the reason why Gold is above $1200 rather than $600 that prominent permanently deluded deflationists have been espousing these past few years as to what 'should' happen.

The Myth of Japanese Economic Depression and Deflation

Deflationists in the mainstream press and BlogosFear constantly perpetuate the myth that Japan has been in a Deflationary depression since the housing and stocks bubble burst in early 1990. One would imagine that the Japanese economy is perhaps 30% smaller with prices 30% cheaper given the repetitive mantra . But what about the facts ? The facts are that the Japanese economy has NOT crashed by 30% i.e. in depression during this time period but grown in virtually every year up until the 2008 global recession to stand at a GDP of some 20% higher than where it was when the bubble burst.

Price Deflation ? - Another myth. Despite the fact that innovation and increases in productivity should drive prices down, Japan's consumer prices have have not fallen but are in fact marginally higher than where they were in early 1990. Therefore what Japan has experienced is stable prices NOT DEFLATION.

Yes Japanese asset prices, namely stocks and real estate have suffered greatly, however this is as a consequence of the bursting of the bubbles that saw prices TRIPLE during the preceding 5 years that turned safe assets such as houses into over bid gambling casino chips that were priced to discount a perpetual never ending boom. Therefore prices fell to reflect reality such as that it was ridiculous for the city of Tokyo in 1990 to be priced to have a greater value then the whole of the United States!

So when you hear about the US following a Japanese style deflationary depression, what you really need to understand is that it is for one of low economic GROWTH with STABLE prices. However the USA is NOT going to follow that model as the USA does not have the demographics of a shrinking ageing Japanese population which really SHOULD result in DEFLATION and a contraction in GDP which Japan through continuous innovation has NOT suffered. If there are far less workers generating MORE economic output then is that really an economic depression?

Commentators have been pointing to Japanese Debt soaring to now stand at 200% of GDP as highly deflationary when the OPPOSITE is true, as when the japanese debt bubble bursts which it surely will, then it will be highly inflationary if not hyper inflationary as Japan is forced to wipe out the value of its debt

Japanese the Real Gold Bugs

Whilst in the west buying gold for wealth preservation has yet to impact on ordinary people to any significant degree, ordinary Japanese recognising their ever growing debt mountain would ultimately destroy the Japanese currency were buying gold nuggets from their local gold dealers in preparation for hyper inflation 5 years ago! Needless to say despite that not having happened to date, the Gold price rising to $1250 reflects the increased global risks of debt bubbles bursting into high inflation.

Bottom Line - There has been no Japanese Deflation or Economic Depression. Western countries such as the UK and the USA are NOT Destined to follow the Japanese experience as their demographics are primed both for greater nominal GDP growth and price inflation.

Delusional Deflationists Point to Treasury Bond Market to Illustrate Deflation

Deflationists point to imminent deflation and a double dip recession by pointing to the treasury bond market yields plunging towards the credit crisis lows whilst at the same time continuing an 18 month mantra of the stocks bear market rally whose end is always imminent with the most recent plethora of commentary concluding that it has ended (again) and the bear market has resumed.

However the facts are that it is bonds and not stocks are in a bull market that is coming to the end of its life and entering the final manic stage that tends to see markets go parabolic. I am sure in recent weeks you have heard at length as to why bond investors are smarter and thus why the bond rally will go on and on, to me that sounds a lot like the tek stock investors during 1999, they too saw themselves as very smart just as the bubble popped. Every bubble participant thinks its different for them than every other bubble that's popped before, however it NEVER IS! The bond market investors are in total denial of the fact that the U.S. is firmly on the path towards bankruptcy because the US has given NO SIGN that it intends on bridging the forecast $200 trillion fiscal gap between future revenues and liabilities, a gap that can ONLY be filled by printing huge amounts of money triggering very high INFLATION, which will DESTROY the real value of bonds as in purchasing power terms they will just become confetti paper. Against this stocks that consistently pay high dividends can be expected to retain much of their purchasing power, where my focus is on dividend paying stocks because it is more difficult to engage in corporate fraud Enron style if a company is actually making dividend payments.

The Global Bond Market Bubble

The key drivers for the global bond market over the past 20 years has been China and other emerging markets such as India exporting deflation abroad as they industrialised and produced ever cheaper goods and services to drive down costs thus enabling prices in the west to fall, this has now reversed where China is exporting inflation abroad as its workers now start to demand a higher standard of living and the country increasingly looks towards domestic consumption to generate economic growth. On top of this we have the ever expanding supply of bonds that no matter what the central bankers state is not going to diminish (pay down the debt) for either the UK, USA or most of the developed countries during the next 5 years at least.



The 30 year treasury bond market graph shows a clear long-term uptrend punctuated by several speculative spikes higher amidst's a so called dash for safety during 2008 and at the present time though there is no Lehman style crisis on the horizon, that just as 2008 resolved towards a swift plunge back towards the long-term trendline so will the current bond market rally just as the mainstream media becomes most vocal in its commentary for bonds being a safe haven destination for investors. If the 20 year bull market trend pattern persists then further upside is limited in favour of a trend that targets a move to $USB 120 to 115 over the next 9 months. So those that have bought during the past 6 months are going to be sitting on losses in about 6 months time.

The 20 year graph for US treasury bonds as a proxy for the Global Government Bond Market bubbles has investors drowning in delusional deflationist ideology that suggests bond prices can keep rising ever higher, when the actual fact is that the bond market is very close to a significant reversal point. This is a manifestation of the reinforcement of belief that this time it is different for this bubble, just as the housing market bubble participants thought that house prices would keep rising for ever because it was different, and before then the dot com bubble could not be priced on the basis of what had gone before because the Internet meant that this time it really was different - IT NEVER IS DIFFERENT!

Off course one of the best inflation mega-trend hedges are Index Linked Government Bonds, and up until recently NS&I Index Linked Certificates, as the new government pulled the plug on these inflation hedges due to the fact that they are paying out 6% per annum TAX FREE, RISK FREE to savers during 2010 and rising to 7% during 2011. Against which the bankrupt tax payer bailed out banks cannot compete that typically pay less than 2.5% that is TAXED at 20% or 40% depending on ones tax band. For 50 pages on how to protect your wealth Download the FREE Inflation Mega-Trend Ebook

The Bottom Line - The global economy is not contracting it is growing by a decent 4.1% this year with similar 4%+ growth for 2011, the emerging markets are more than picking up the slack for the weakly growing western economies as a consequence of high levels of debt AND converging GDP per capita. This ensures that upward pressure on inflation will remain for western economies despite the downward pressure on real wages as the living standards of the east and west converge. For the west this means high inflation as governments attempt to inflate nominal GDP and wages to give the illusion of growth whilst in the east there will be currency appreciation coupled with strong economic growth and higher inflation that will be exported to the west.

What Investors Should Do

The U.S. Fed and the Bank of England are going to keep printing money which is a big positive for asset prices such as stocks. For investors the strategy remains to invest in inflation wealth protection and growth such as agricultural commodities, gold, silver, metals and mining, TIPS, emerging economies such as China, India, Russia, Chile, Brazil, and developed economies such as Australia and Canada as their appreciating currencies will protect your investments purchasing power in sterling and dollars as covered at length in the Inflation mega-trend ebook (FREE DOWNLOAD).

The Protectionism Disaster Scenario

The disaster scenario is for that of one of protectionism to take hold which will fail to stop the trend towards convergence of GDP per capita between east and west, but it will result in a smaller economic pie i.e. global economic contraction, economic depression in the west and price deflation. This means the west would suffer whilst the east grows much more slowly. Protectionism would be a lose, lose outcome for all. The only real strategy the west has is to resign itself towards slow but sustainable economic growth as the emerging markets continue to grow to fill the huge gap in development that still exists between west and east.

Interest Rate Rises To Feed the Debt Interest Spirals

The debt interest payment pressures are set to accelerate as interest rates are forced to rise as a consequence of bond markets baulking at ever increasing supply of debt and rising inflation, UK short-end real rate interest rate of -2.6% is just NOT sustainable. Over the past 18 months borrowers have become drunk on extremely low interest rates (even if the banks are not fully passing them on) whilst inflation has started to rage in the UK during 2010 punishing savers and rewarding borrowers to entice them to take out even more debt.

What to Expect in the Future

The Bank of England WILL RAISE INTEREST RATES AND PRINT MONEY - This is contrary to anything you will hear anywhere else as the consensus view is that QE and Zero interest rates are complimentary, they will NOT be as we move forward! Because the Bank of England Will have no choice but to attempt to DEFLATE PRICES whilst INFLATING the Economy to achieve this it MUST RAISE Short-term Interest rates WHILST KEEPING LONG-TERM interest rates low. To achieve this the Bank of England needs to BUY Bonds and Stocks whilst forcing demand for consumption and wage increases lower. This WILL become the consensus view AFTER the FACT, perhaps in 6 months time ? Just as the mainstream press is ONLY NOW, 9 months on, starting to slowly wake up to the Inflation Mega-trend with the likes of the FT only coming to conclusions on the Bank of England Inflation targeting very recently, something that I came to several years ago!

FT - FT audit casts doubt on Bank’s forecasts - 9th August 2010

The forecasts used by the Bank of England to set interest rates are biased and contain little useful information, a Financial Times audit has demonstrated.
Nadeem Walayat - Bank of England's Worthless 2% 2Year CPI Inflation Forecasts - 14th August 2008

The Bank of England's in depth 48 page quarterly inflation report published yesterday concludes with the forecast for UK CPI inflation to be at 2% in 2 years time. Since the Bank of England first adopted the 2% CPI inflation target back in 2003, the Bank has perpetually made the same forecast for 2% CPI in two years time, and nearly always missed the target by a wide margin. Clearly there is something wrong in the banks procedures which appears to deliver the motions of generating paper work such as the 48 page report, followed by pats on the back rather than an effective response to the failure to meet the Banks primary objective.

The full implications of debt and the inflation mega-trend on interest rates as the UK economy recovers will be covered in my next in depth analysis, ensure you are subscribed to my always free news letter to get this in your email in box.

Comments and Source: http://www.marketoracle.co.uk/Article22199.html
By Nadeem Walayat

http://www.marketoracle.co.uk
Copyright © 2005-10 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.



Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction.
http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.
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]]> Nadeem Walayat GoldSpeculator http://www.gold-speculator.com/nadeem-walayat/36954-deflation-delusion-continues-economies-trend-towards-high-inflation.html <![CDATA[The Real Reason for Bank of England's Worthless CPI Inflation Forecasts]]> http://www.gold-speculator.com/nadeem-walayat/35916-real-reason-bank-englands-worthless-cpi-inflation-forecasts.html Sat, 14 Aug 2010 00:41:10 GMT *Bank of England's August Inflation Report Highlights* The most recent August 2010 Bank of England Inflation report concluded in the following trend forecasts for UK inflation and economy.
Image: http://www.gold-speculator.com/attachments/nadeem-walayat/11334d1281746464-real-reason-bank-englands-worthless-cpi-inflation-forecasts-boe-gdp-2011.gif Chart 1 shows the Committee’s best collective judgement for four-quarter GDP growth, assuming that Bank Rate follows a path implied by market interest rates and the stock of purchased assets financed by the issuance of central bank reserves remains at £200 billion. The considerable stimulus from monetary policy, together with a further expansion in world demand and the past depreciation of sterling, should sustain the recovery. But the strength of growth is likely to be tempered by the continuing fiscal consolidation and the persistence of tight credit conditions.
The Bank of England's UK GDP Growth Fan forecast chart shows a forecast for 2011 as being between 0% and 6%, which basically covers all eventualities, the core forecast by ignoring the fan suggests GDP for 2011 of 3%.
Image: http://www.gold-speculator.com/attachments/nadeem-walayat/11335d1281746464-real-reason-bank-englands-worthless-cpi-inflation-forecasts-boe-cpi-2011.gif Chart 3 shows the Committee’s best collective judgement for the outlook for CPI inflation, based on the same assumptions as Chart 1. Inflation is likely to remain above the 2% target for longer than judged likely in May, in large part reflecting the increase in the rate of VAT to 20% in 2011. As the temporary effects adding to inflation drop out of the twelve-month comparison, downward pressure on wages and prices from the persistent margin of spare capacity is likely to bring inflation below the target for a period.
The Bank of England's UK CPI Inflation Fan forecast chart shows a forecast for end 2011 as being between -1% and +4%, which again covers all eventualities, the core forecast by ignoring the fan suggests CPI for end 2011 of +1.2%. *Bank of England's Worthless Inflation Forecasts* The Bank of England's core inflation forecast virtually always converge towards UK Inflation hitting its 2% CPI target in 2 years time which statistically fails to happen 96% of the time. This also means that the forecast trend also fails to be achieved as is usually the case within a matter of months from the publication of each quarterly inflation report as we have seen for the whole of 2010. Off course as illustrated above the Bank of England uses a wide fan chart mechanism to ensure that all eventualities are covered therefore technically the BOE forecasts can never be wrong as the forecast fan continues to expand going forward as the most recent inflation report illustrates that in 2 years time UK inflation could be between 4% and -1%. However whilst this may fool the the government, it amounts to a worthless exercise when it comes to actually making personal and business decisions. The focus of this analysis is in comparing the BoE Forecasts over the past 2 years of where it expected the most recently released CPI inflation for June 2010 to be, i.e. the actual 3.2% against the forecasts during the past 2 years of where it should be - Aug 2008 (http://www.bankofengland.co.uk/publications/inflationreport/ir08aug.pdf) Inflation Report - CPI Forecast for June 2010 *1.7% *- Deviation From Actual 3.2% = -1.5% Nov 2008 (http://www.bankofengland.co.uk/publications/inflationreport/ir08nov.pdf) Inflation Report - CPI Forecast for June 2010 *0.8% *- Deviation From Actual 3.2% = -2.4% Feb 2009 (http://www.bankofengland.co.uk/publications/inflationreport/ir09feb.pdf) Inflation Report - CPI Forecast for June 2010 *0.8% *- Deviation From Actual 3.2% = -2.4% May 2009 (http://www.bankofengland.co.uk/publications/inflationreport/ir09may.pdf) Inflation Report - CPI Forecast for June 2010 *1% *- Deviation From Actual 3.2% = -2.2% Aug 2009 (http://www.bankofengland.co.uk/publications/inflationreport/ir09aug.pdf) Inflation Report - CPI Forecast for June 2010 *1.5%* - Deviation From Actual 3.2% = -1.7% Nov 2009 (http://www.bankofengland.co.uk/publications/inflationreport/ir09nov.pdf) Inflation Report - CPI Forecast for June 2010 *1.6%* - Deviation From Actual 3.2% = -1.8% Feb 2010 (http://www.bankofengland.co.uk/publications/inflationreport/ir10feb.pdf) Inflation Report - CPI Forecast for June 2010 *1.8%* - Deviation From Actual 3.2% = -1.4% The Bank of England's CPI forecasts illustrate an inflation trend that seeks to gradually and magically convergence towards 2% by June 2010 which is in complete ignorance of the actual persistent failure to match the real inflation trend, which is illustrated by the fact that the BoE's failure to forecast UK inflation even barely 4 months before June 2010 in the Feb 2010 inflation report. The forecasts virtually always converge towards 2% being achieved despite the fact that reality is the complete opposite of the forecast trend. The mainstream press as illustrated by the Financial Times is only now recognising something that I concluded on many years ago. *FT - FT audit casts doubt on Bank’s forecasts* - *9th August 2010* (http://www.ft.com/cms/s/0/4e53a2de-a3f3-11df-9e3a-00144feabdc0.html) The forecasts used by the Bank of England to set interest rates are biased and contain little useful information, a Financial Times audit has demonstrated. *Nadeem Walayat - Bank of England's Worthless 2% 2Year CPI Inflation Forecasts* - *14th August 2008* (http://www.marketoracle.co.uk/Article5864.html) The Bank of England's in depth 48 page quarterly inflation report published yesterday concludes with the forecast for UK CPI inflation to be at 2% in 2 years time. Since the Bank of England first adopted the 2% CPI inflation target back in 2003, the Bank has perpetually made the same forecast for 2% CPI in two years time, and nearly always missed the target by a wide margin. Clearly there is something wrong in the banks procedures which appears to deliver the motions of generating paper work such as the 48 page report, followed by pats on the back rather than an effective response to the failure to meet the Banks primary objective. *The Real Reason for Bank of England's Worthless Forecasts* The mainstream press still fails to comprehend an important factor that I have iterated several times over the past few years that the Bank of England DOES NOT actually forecast where the economy or inflation will be in the future. What the Bank of England is actually doing is to state where the BOE would like the Economy and Inflation to be in the future and then slaps the forecast label on the top, which where inflation is concerned is nearly always for the BOE to hit its 2% inflation target and for the economy to be immersed in an trend recovery. This is evident by the fact that the Bank of England FAILS to hit its inflation target 96% of the time and thus relies on the gold fish memory of the press commentators that fail to register why the BoE fails in its forecasts. It is important to realise this fact because it provides a measure as to the degree to which the Bank of England is in a state of panic as per the level of deviation from the forecast trend as illustrated in the persistent failure to forecast the most recent June 2010 CPI inflation. This panic manifests itself in a state of paralysis which I have witnessed several times over the past 10 years and where the current manifestation is in the fact that the UK base interest rate is being held at 0.5%. Just as the UK base interest rate was held at 5% during 2008 whilst the economy fell off the cliff as the at the time the Bank of England was paralysed by the fear of Inflation. Furthermore, it makes sense that the Bank of England is NOT actually making forecasts but pumping out economic propaganda with the primary aim of reassuring the public that *a.* the BOE is in control of inflation when it is not, and *b.* that a strong UK economy is the default norm regardless of what is actually transpiring. The reason for the propaganda push is because if the BoE actually produced accurate forecasts then they would in effect be talking inflation higher and the economy down, thus making their job much harder in achieving both goals of low inflation with trend economic growth. For instance if the BOE told people the truth about high inflation at the start of 2010 then workers would have demanded higher wages during the past 8 months which could have sent inflation even higher and which the Bank of England would have been heavily criticised for contributing towards by its statements, as well as failure of the Bank to do its primary job which is to control inflation. So much better for the BoE to attempt to TALK inflation lower, hence the mantra of temporary high inflation. Therefore politically it is much better for the Bank of England to be surprised by persistent high inflation then to forecast high inflation that implies that it is unable to do its job in controlling inflation which is the banks primary objective. *Bottom Line:* The Bank of England Forecasts are NOT actually forecasts but propaganda aimed at soothing public concerns on the inflation and economic growth fronts by talking the economy in favour of where it wants the economy to be so as to enable the BOE to improve the probability of achieving its set economic targets and goals which would be far more difficult to achieve i.e. to target 2% inflation if it had to be more candid. Additionally admitting to the more probable implies that they are NOT able to do their jobs as it is far better for the Bank of England to be seen to be in error in its forecasting then to have seen high inflation coming but failed to have acted to prevent it. The alternative view is that the several hundred economists and analysts the BoE employs are totally useless and we really are doomed as more powers are transferred over to the Bank of England from the FSA. *Consequences for Savers * Unfortunately whilst the BoE has been busy telling everyone that high inflation is only temporary and destined to fall to just 1% by the end of 2010, the coalition government had been making plans to pull the plug many of the inflation protection opportunities that savers could have used to protect their wealth such as scrapping the NS&I Index Linked certificates in June, which I have been extolling the value of since November 2009 as an excellent risk free inflation hedge. The certificates paid RPI +1% which on the most recent data of 5% would amount to a healthy tax free return of 6% which is set against the bankrupt bailed out banks that generally pay less than 2.3% on even their best accounts, with 20% or 40% of the interest received then taxed by the government, resulting in a net return that is half the CPI inflation rate, let alone RPI the more recognised measure of UK inflation. *The UK Inflation Mega-Trend Forecast 2010* UK Inflation of CPI at 3.2% for June 2010 is exactly in line with my trend forecast for 2010 as of December 2009 that projected June inflation data of 3.2%. My analysis since November has been warning of a spike in UK inflation as part of an anticipated inflation mega-trend (18 Nov 2009 - Deflationists Are WRONG, Prepare for the INFLATION Mega-Trend (http://www.marketoracle.co.uk/Article15131.html)) that culminated in the forecast of 27th December 2009 (UK CPI Inflation Forecast 2010, Imminent and Sustained Spike Above 3% (http://www.marketoracle.co.uk/Article16085.html)) and the *Inflation Mega-trend Ebook *of January 2010 (FREE DOWNLOAD (http://www.marketoracle.info/?p=subscribe&id=1)) as illustrated by the below graph. Image: http://www.gold-speculator.com/attachments/nadeem-walayat/11336d1281746464-real-reason-bank-englands-worthless-cpi-inflation-forecasts-uk-inflation-june10.gif Inflation as illustrated at length in the *INFLATION MEGA-TREND* EBOOK, is a powerful stealth tax that the new government is using to first stabilise and then reduce the debt in terms of percentage of GDP that despite total debt increasing by 50% to £1.24trillion, the ConLib coalition government aims to stabilise the debt at about 70% of GDP and then target a trend lower to about 65% of GDP by 2016. *UK GDP Forecast 2015-2015* The forecast for UK GDP Growth from 2010-2015 was recently updated (UK Economy GDP Growth Forecast 2010 to 2015 (http://www.marketoracle.co.uk/Article21739.html) ) which concluded in a revised growth expectation for 2011 down from 2.3% to 1.3%. Forecasts for Years 2010, 2012, 2013, and 2014 remain unchanged and are illustrated by the below graph. Image: http://www.gold-speculator.com/attachments/nadeem-walayat/11337d1281746464-real-reason-bank-englands-worthless-cpi-inflation-forecasts-uk-gdp-9.gif The updated analysis proved especially opportune in light of today's German GDP data which shows Germany growing at an annualised rate of 8.8% on Q2 data of 2.2%. Well beyond mainstream press and market expectations but precisely in line with my expectations of the past 3 months - *Bottom line* - The large industrialised export orientated areas of the Eurozone such as Germany are going to BOOM! Therefore the PIGS sovereign debt crisis is old news. The U.S. looks set to experience sluggish growth. This is typically set against comments such as the following in the press - Financial Times (http://www.thefinancialexpress-bd.com/more.php?news_id=104677&date=2010-07-01), Martin Wolf is worried that the concerted austerity of Germany, Britain and other industrialised countries may "destroy the recovery". To receive my in depth analysis and forecasts in your email in box then ensure you are subscribed to my ALWAYS FREE Newsletter (http://www.marketoracle.info/?p=subscribe&id=1). Comments and Source: http://www.marketoracle.co.uk/Article21854.html By Nadeem Walayat http://www.marketoracle.co.uk (http://www.marketoracle.co.uk/) *Copyright *© *2005-10* Marketoracle.co.uk (http://www.marketoracle.co.uk/) (Market Oracle Ltd). All rights reserved. Image: http://www.marketoracle.co.uk/images/2010/Jan/inflation-ebook-small.gif (http://www.marketoracle.info/?p=subscribe&id=1) Nadeem Walayat has over 20 years experience of trading derivatives, (http://www.walayatstreet.com/) portfolio management and analysing the financial markets, including one of few who both anticipated and *Beat the 1987 Crash* (http://www.marketoracle.co.uk/Article2499.html). Nadeem's forward looking analysis specialises on UK inflation (http://www.marketoracle.co.uk/Article16085.html), economy, (http://www.marketoracle.co.uk/Article16167.html) interest rates (http://www.marketoracle.co.uk/Article16450.html) and the housing market and he is the author of the *NEW Inflation Mega-Trend ebook *that can be downloaded for Free (http://www.marketoracle.info/?p=subscribe&id=1). Nadeem is the Editor of The Market Oracle, a *FREE* *Daily* Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. _http://www.marketoracle.co.uk_ (http://www.marketoracle.co.uk/) *Disclaimer: *The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.
Nadeem Walayat Archive (http://www.marketoracle.co.uk/UserInfo-Nadeem_Walayat.html)
© 2005-2010 http://www.MarketOracle.co.uk (http://www.marketoracle.co.uk/) - The Market Oracle is a FREE *Daily *Financial Markets Analysis & Forecasting online publication.]]> The Bank of England released their latest quarterly inflation report this week that again sought to revise the forecast for UK inflation to converge towards 2% in 2 years time. However one major change accompanying the forecast was that the mantra of UK inflation being above the 2% target and the 3% upper limit as only temporary has now been dropped, this after repeatedly claiming month in month out for the past 7 months that Inflation would magically fall that the academic economists and mainstream press had swallowed up until quite recently.

Bank of England's August Inflation Report Highlights
The most recent August 2010 Bank of England Inflation report concluded in the following trend forecasts for UK inflation and economy.

Chart 1 shows the Committee’s best collective judgement for four-quarter GDP growth, assuming that Bank Rate follows a path implied by market interest rates and the stock of purchased assets financed by the issuance of central bank reserves remains at £200 billion. The considerable stimulus from monetary policy, together with a further expansion in world demand and the past depreciation of sterling, should sustain the recovery. But the strength of growth is likely to be tempered by the continuing fiscal consolidation and the persistence of tight credit conditions.

The Bank of England's UK GDP Growth Fan forecast chart shows a forecast for 2011 as being between 0% and 6%, which basically covers all eventualities, the core forecast by ignoring the fan suggests GDP for 2011 of 3%.

Chart 3 shows the Committee’s best collective judgement for the outlook for CPI inflation, based on the same assumptions as Chart 1. Inflation is likely to remain above the 2% target for longer than judged likely in May, in large part reflecting the increase in the rate of VAT to 20% in 2011. As the temporary effects adding to inflation drop out of the twelve-month comparison, downward pressure on wages and prices from the persistent margin of spare capacity is likely to bring inflation below the target for a period.

The Bank of England's UK CPI Inflation Fan forecast chart shows a forecast for end 2011 as being between -1% and +4%, which again covers all eventualities, the core forecast by ignoring the fan suggests CPI for end 2011 of +1.2%.

Bank of England's Worthless Inflation Forecasts

The Bank of England's core inflation forecast virtually always converge towards UK Inflation hitting its 2% CPI target in 2 years time which statistically fails to happen 96% of the time. This also means that the forecast trend also fails to be achieved as is usually the case within a matter of months from the publication of each quarterly inflation report as we have seen for the whole of 2010. Off course as illustrated above the Bank of England uses a wide fan chart mechanism to ensure that all eventualities are covered therefore technically the BOE forecasts can never be wrong as the forecast fan continues to expand going forward as the most recent inflation report illustrates that in 2 years time UK inflation could be between 4% and -1%. However whilst this may fool the the government, it amounts to a worthless exercise when it comes to actually making personal and business decisions.

The focus of this analysis is in comparing the BoE Forecasts over the past 2 years of where it expected the most recently released CPI inflation for June 2010 to be, i.e. the actual 3.2% against the forecasts during the past 2 years of where it should be -

Aug 2008 Inflation Report - CPI Forecast for June 2010 1.7% - Deviation From Actual 3.2% = -1.5%

Nov 2008 Inflation Report - CPI Forecast for June 2010 0.8% - Deviation From Actual 3.2% = -2.4%

Feb 2009 Inflation Report - CPI Forecast for June 2010 0.8% - Deviation From Actual 3.2% = -2.4%

May 2009 Inflation Report - CPI Forecast for June 2010 1% - Deviation From Actual 3.2% = -2.2%

Aug 2009 Inflation Report - CPI Forecast for June 2010 1.5% - Deviation From Actual 3.2% = -1.7%

Nov 2009 Inflation Report - CPI Forecast for June 2010 1.6% - Deviation From Actual 3.2% = -1.8%

Feb 2010 Inflation Report - CPI Forecast for June 2010 1.8% - Deviation From Actual 3.2% = -1.4%

The Bank of England's CPI forecasts illustrate an inflation trend that seeks to gradually and magically convergence towards 2% by June 2010 which is in complete ignorance of the actual persistent failure to match the real inflation trend, which is illustrated by the fact that the BoE's failure to forecast UK inflation even barely 4 months before June 2010 in the Feb 2010 inflation report. The forecasts virtually always converge towards 2% being achieved despite the fact that reality is the complete opposite of the forecast trend.
The mainstream press as illustrated by the Financial Times is only now recognising something that I concluded on many years ago.

FT - FT audit casts doubt on Bank’s forecasts - 9th August 2010
The forecasts used by the Bank of England to set interest rates are biased and contain little useful information, a Financial Times audit has demonstrated.

Nadeem Walayat - Bank of England's Worthless 2% 2Year CPI Inflation Forecasts - 14th August 2008

The Bank of England's in depth 48 page quarterly inflation report published yesterday concludes with the forecast for UK CPI inflation to be at 2% in 2 years time. Since the Bank of England first adopted the 2% CPI inflation target back in 2003, the Bank has perpetually made the same forecast for 2% CPI in two years time, and nearly always missed the target by a wide margin. Clearly there is something wrong in the banks procedures which appears to deliver the motions of generating paper work such as the 48 page report, followed by pats on the back rather than an effective response to the failure to meet the Banks primary objective.

The Real Reason for Bank of England's Worthless Forecasts

The mainstream press still fails to comprehend an important factor that I have iterated several times over the past few years that the Bank of England DOES NOT actually forecast where the economy or inflation will be in the future.
What the Bank of England is actually doing is to state where the BOE would like the Economy and Inflation to be in the future and then slaps the forecast label on the top, which where inflation is concerned is nearly always for the BOE to hit its 2% inflation target and for the economy to be immersed in an trend recovery.

This is evident by the fact that the Bank of England FAILS to hit its inflation target 96% of the time and thus relies on the gold fish memory of the press commentators that fail to register why the BoE fails in its forecasts.

It is important to realise this fact because it provides a measure as to the degree to which the Bank of England is in a state of panic as per the level of deviation from the forecast trend as illustrated in the persistent failure to forecast the most recent June 2010 CPI inflation. This panic manifests itself in a state of paralysis which I have witnessed several times over the past 10 years and where the current manifestation is in the fact that the UK base interest rate is being held at 0.5%. Just as the UK base interest rate was held at 5% during 2008 whilst the economy fell off the cliff as the at the time the Bank of England was paralysed by the fear of Inflation.

Furthermore, it makes sense that the Bank of England is NOT actually making forecasts but pumping out economic propaganda with the primary aim of reassuring the public that a. the BOE is in control of inflation when it is not, and b. that a strong UK economy is the default norm regardless of what is actually transpiring. The reason for the propaganda push is because if the BoE actually produced accurate forecasts then they would in effect be talking inflation higher and the economy down, thus making their job much harder in achieving both goals of low inflation with trend economic growth. For instance if the BOE told people the truth about high inflation at the start of 2010 then workers would have demanded higher wages during the past 8 months which could have sent inflation even higher and which the Bank of England would have been heavily criticised for contributing towards by its statements, as well as failure of the Bank to do its primary job which is to control inflation. So much better for the BoE to attempt to TALK inflation lower, hence the mantra of temporary high inflation.

Therefore politically it is much better for the Bank of England to be surprised by persistent high inflation then to forecast high inflation that implies that it is unable to do its job in controlling inflation which is the banks primary objective.

Bottom Line: The Bank of England Forecasts are NOT actually forecasts but propaganda aimed at soothing public concerns on the inflation and economic growth fronts by talking the economy in favour of where it wants the economy to be so as to enable the BOE to improve the probability of achieving its set economic targets and goals which would be far more difficult to achieve i.e. to target 2% inflation if it had to be more candid. Additionally admitting to the more probable implies that they are NOT able to do their jobs as it is far better for the Bank of England to be seen to be in error in its forecasting then to have seen high inflation coming but failed to have acted to prevent it.

The alternative view is that the several hundred economists and analysts the BoE employs are totally useless and we really are doomed as more powers are transferred over to the Bank of England from the FSA.

Consequences for Savers

Unfortunately whilst the BoE has been busy telling everyone that high inflation is only temporary and destined to fall to just 1% by the end of 2010, the coalition government had been making plans to pull the plug many of the inflation protection opportunities that savers could have used to protect their wealth such as scrapping the NS&I Index Linked certificates in June, which I have been extolling the value of since November 2009 as an excellent risk free inflation hedge. The certificates paid RPI +1% which on the most recent data of 5% would amount to a healthy tax free return of 6% which is set against the bankrupt bailed out banks that generally pay less than 2.3% on even their best accounts, with 20% or 40% of the interest received then taxed by the government, resulting in a net return that is half the CPI inflation rate, let alone RPI the more recognised measure of UK inflation.

The UK Inflation Mega-Trend Forecast 2010

UK Inflation of CPI at 3.2% for June 2010 is exactly in line with my trend forecast for 2010 as of December 2009 that projected June inflation data of 3.2%. My analysis since November has been warning of a spike in UK inflation as part of an anticipated inflation mega-trend (18 Nov 2009 - Deflationists Are WRONG, Prepare for the INFLATION Mega-Trend ) that culminated in the forecast of 27th December 2009 (UK CPI Inflation Forecast 2010, Imminent and Sustained Spike Above 3%) and the Inflation Mega-trend Ebook of January 2010 (FREE DOWNLOAD) as illustrated by the below graph.



Inflation as illustrated at length in the INFLATION MEGA-TREND EBOOK, is a powerful stealth tax that the new government is using to first stabilise and then reduce the debt in terms of percentage of GDP that despite total debt increasing by 50% to £1.24trillion, the ConLib coalition government aims to stabilise the debt at about 70% of GDP and then target a trend lower to about 65% of GDP by 2016.

UK GDP Forecast 2015-2015

The forecast for UK GDP Growth from 2010-2015 was recently updated (UK Economy GDP Growth Forecast 2010 to 2015 ) which concluded in a revised growth expectation for 2011 down from 2.3% to 1.3%. Forecasts for Years 2010, 2012, 2013, and 2014 remain unchanged and are illustrated by the below graph.



The updated analysis proved especially opportune in light of today's German GDP data which shows Germany growing at an annualised rate of 8.8% on Q2 data of 2.2%. Well beyond mainstream press and market expectations but precisely in line with my expectations of the past 3 months -

Bottom line - The large industrialised export orientated areas of the Eurozone such as Germany are going to BOOM! Therefore the PIGS sovereign debt crisis is old news. The U.S. looks set to experience sluggish growth.

This is typically set against comments such as the following in the press -
Financial Times, Martin Wolf is worried that the concerted austerity of Germany, Britain and other industrialised countries may "destroy the recovery".

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Comments and Source: http://www.marketoracle.co.uk/Article21854.html
By Nadeem Walayat

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Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.
Nadeem Walayat Archive

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]]> Nadeem Walayat GoldSpeculator http://www.gold-speculator.com/nadeem-walayat/35916-real-reason-bank-englands-worthless-cpi-inflation-forecasts.html UK Economy GDP Growth Forecast 2010 to 2015 http://www.gold-speculator.com/nadeem-walayat/35593-uk-economy-gdp-growth-forecast-2010-2015-a.html Tue, 10 Aug 2010 19:13:38 GMT This analysis seeks to update my existing UK GDP growth forecast for the next 5 years. The analysis of December 2009 concluded in a trend forecast as illustrated below (31 Dec 2009 - UK Economy GDP Growth Forecast 2010 and 2011, The Stealth Election Boom (http://www.marketoracle.co.uk/Article16167.html)), with the most recent UK GDP data confirming strong growth data for the second quarter of 2010 of 1.1%, annualised to 4.4%, which caught the mainstream press, academic economists and even the City by surprise who had typically penciled in growth expectations of between 0.3% and 0.5% and remain firmly fixated on the prospects for a UK double dip recession. *Existing UK GDP Forecast Growth Forecast 2010-2012, Preliminary 2013-2014* The UK economic GDP growth for 2010 Q2 came in at 1.1% compared against my forecast of December 2009 Q2 growth of 1.3% (31 Dec 2009 - UK Economy GDP Growth Forecast 2010 and 2011, The Stealth Election Boom (http://www.marketoracle.co.uk/Article16167.html)). The growth trend is inline with my forecast expectations that projected a strong economic recovery starting in Q4 2009 and for the whole of 2010 continuing into 2011 as illustrated below. *UK GDP Growth Forecast Conclusion* The sum of the above analysis is for a strong economic recovery into the end of 2010 which given the pessimism today I term as the *Stealth Election Boom *that followed the Stealth Bull Market of 2009, the economic 'boom' will continue in to a peak in Q1 2011, which will be followed by weakness during 2012 and 2013 and strong recovery for 2014, and into a 2015 summer general election, breaking this trend down into GDP terms for end 2010 +2.8%, 2011 +2.3%, and taking account of the election cycle preliminary GDP projections for 2012 of +1.1%, 2013 +1.4%. 2014 + 3.1% with expectation of strong Q1 growth for 2015. Therefore I just cannot see this double dip recession that the mainstream press and so called think tanks are obsessing over at this point in time, no year on year economic contraction or even a quarter on quarter dip is visible. The following graph illustrates my trend forecast for quarterly GDP growth over the next 2 years 2010 and 2011. Image: http://www.gold-speculator.com/attachments/nadeem-walayat/11257d1281467578-uk-economy-gdp-growth-forecast-2010-2015-uk-gdp-growth-q2-2010.gif Growth for the first half of 2010 now stands at 1.5%, which compares favourably against my expectations for 2010 growth of 2.8% and compares against forecasts of academic economic institutions as the below table from the Inflation Mega-Trend Ebook illustrates (FREE DOWNLOAD (http://www.marketoracle.info/?p=subscribe&id=1)) - *UK Economic Growth 2010*
*Forecaster* *Forecast*
European Commission +0.9%
International Monetary Fund +0.9%
David Kern, British Chambers of Commerce +1.1%
Organisation for Economic Co-operation and Development (OECD) +1.2%
Alistair Darling, Treasury +1% to +1.5%
Bank of England +2.1%
* Coalition Government Austerity Measures* The June 2010 Emergency Budget announced intentions to take £40 billion out of the economy during 2010-11, rising to a total drain of £113 billion per year by 2015-16 so as to cut the budget deficit from £156 billion per year down to £20 billion by that year. The key measures announced were - * Spending cuts of 25% on non ring fenced budgets * Public sector pay frozen for 2 years for those earning over £21k * VAT Rise to 20% from 1st Jan 2011. * Capital Gains Tax Rising to 28% * Housing Benefit Capped at £400 per week * Inflation indexation switch from RPI to CPI * Child Benefit frozen. * Disability Benefit claimants targeted * Tax credit receipt income limits reduces. * Corporation Tax 1% cut per year. * £2 billion bank levy Where the economy is concerned the policy that will have the most impact on the U.K. economy are public sector spending cuts that won't start to bite until October, with many of the cuts not materialising until well into 2011 which suggests that the real impact of the governments austerity plan won't be felt until Q2 2011. Coupled with the VAT rise from 1st of January 2011 implies significantly lower growth for 2011 than my original forecast of 2.3%. *Coalition Government OBR UK GDP Forecasts * The coalition governments own independant body (though housed in the Treasury) for forecasting economic growth has revised its own expectations (June 2010), and are compared against my Dec 2009 forecasts (NW): * UK GDP 2010 = 1.2 / NW 2.8% * UK GDP 2011 = 2.3 / NW 2.3% * UK GDP 2012 = 2.8 / NW 1.1% * UK GDP 2013 = 2.9 / NW 1.4% * UK GDP 2014 = 2.7 / NW 3.1% As the most recent data shows the governments own forecast for UK GDP for 2010 has already become redundant as growth already stands at 1.5% for 2010. However 2.3% for 2011 matches my forecast of 6 months earlier which sends my own alarm bells ringing, though there is significant difference for 2012 and 2013 where the OBR / Government appear overly optimistic. *Academic Economists Flawed Theoretical models* The academic economists that populate the mainstream press are obsessed with the demand side of the equation i.e. Keynesian stimulus that calls for every more deficit spending debt accumulation that will always FAIL to delivery, whilst at the same time ignoring the supply side of the economic equation that succeeded in resolving the 1980's mini-depression into an economic boom as a consequence of supply side changes to the UK economy. The coalition government appears to be following this working model as it takes an axe to Labour's out of control public sector spending and the deficit whilst laying out plans for cutting corporation taxes, even if income and indirect taxes such as VAT are on the rise. The key to future economic growth is ONLY from the private sector, towards driving innovation, competitiveness and productivity and by cutting taxes and red tape as illustrated by the article (31 Mar 2010 - Solving Britain's Economic Crisis Through Micro Business Capital Investments and Credit (http://www.marketoracle.co.uk/Article18305.html) ). The recent emergency budget illustrated the governments intentions to cut the budget deficit by means of a ratio of 80% of public spending cuts to 20% of tax rises which matches the shift towards a private sector growth orientated economy that had been increasingly crowded out by the last Labour governments policies of an out of control public sector spending binge. Meanwhile frankly, clueless academic economists remain fixated on stimulus deficit spending to fend off an always impending "double dip" recession that their policy suggestions would actually turn out to be the prime drivers for bringing as illustrated below: Telegraph (http://www.telegraph.co.uk/finance/economics/7917357/Britons-fears-raise-double-dip-recession-chance.html) - *Britons' fears raise double-dip recession chance* The prospect of a double-dip recession in Britain is increasing with every month as consumer confidence dwindles to recession levels, a long-running study signaled. Bloomberg (http://www.bloomberg.com/news/2010-06-21/ex-boe-panelist-blanchflower-says-budget-certain-to-lead-to-double-dip.html) - *Blanchflower Says Budget `Certain' to Lead to Double Dip* Former Bank of England policy maker David Blanchflower said the spending cuts the government plans in its emergency budget tomorrow “look certain” to push the U.K. back into a recession. “You can’t just decimate the public sector and assume the private sector will step into the hole,” Blanchflower said in an interview on Bloomberg Television’s “Countdown” in London today. “The danger now is we’re certainly going into a double- dip recession. I think that’s absolutely certain given what’s coming.” Financial Times (http://www.thefinancialexpress-bd.com/more.php?news_id=104677&date=2010-07-01), Martin Wolf is worried that the concerted austerity of Germany, Britain and other industrialised countries may "destroy the recovery". Guardian (http://www.guardian.co.uk/business/2010/jul/05/uk-companies-fear-double-dip-recession) - Britain's leading companies increasingly fear the UK could suffer a double dip recession because of government public spending cuts and a renewed economic slowdown across the globe, according to a report released today. Telegraph (http://www.telegraph.co.uk/finance/economics/7871433/Finance-chiefs-suffer-crisis-of-confidence-on-double-dip-fears.html) - A survey of chief financial officers (CFOs) by Deloitte found that a balance of just 24pc were feeling more optimistic in the second quarter, compared with 40pc in the first quarter. It was the lowest level in 12 months, as the average CFO attached a 38pc probability to the chance of a double-dip, up from 33pc previously. *Economic Coin Flips* Economic analysis is not a science or an art but the calling of a series of coin flips (as is stock market analysis), the actual determining item that flips into a final conclusion may be something inconsequential on its own, realising this will put analysts ahead of the curve. The Grand Media Star Wizards that propagate the press and academic institutions use formulae's and theories as smoke and mirrors to try and persuade you otherwise, but still at the end of the day come out with statements such as there is a 50/50 chance of a double dip recession, 50/50 chance of deflation, 50/50 of..... However without firm actionable conclusions such statements are pretty much worthless. The bottom line, despite the coalition governments severe but highly necessary austerity measures, the actual probability of a double dip recession is extremely low, so instead of a 50% coin flip, I would put it as low as a 15% probability. *Coalition Government Election Boom 2014-15 Strategy* The governments intention to pull a potential 9% of demand out of the economy by 2015-16 means that the next 3 years at least are now going to result in weak economic growth as at least 1 million jobs will be lost (500,000 public sector and 500,000 linked private sector jobs) that are only partially offset by new private sector jobs created as illustrated by the UK unemployment forecast below (01 Jul 2010 - UK Unemployment Forecast 2010 to 2015 (http://www.marketoracle.co.uk/Article20757.html) ). *Final conclusion* - UK unemployment looks set to gradually rise to a peak of just over 2.9 million by mid 2013 before stabilising and starting to decline into a May 2015 General Election of just below 2.7 million against the governments forecast for UK unemployment to fall to 2 million by 2015 (OFBR - Peak at 8.1% this year before falling to 6.1%). Image: http://www.gold-speculator.com/attachments/nadeem-walayat/11258d1281467578-uk-economy-gdp-growth-forecast-2010-2015-uk-unemployment-forecast-june-2010.gif Though beyond the job cutting phase into early 2013 we enter the electioneering phase of the Coalition government in the run up to the May 2015 General Election, that is likely to see significant tax cuts which will place the economy in a far stronger growth state, which by then will have significantly larger more productive private sector economic base than the current position where the public sector under the Labour government has mushroomed to an unsustainable 53% of the economy. This trend expectation is illustrated by my debt forecast (29 Jun 2010 - UK ConLib Government to Use INFLATION Stealth Tax to Erode Value of Public Debt (http://www.marketoracle.co.uk/Article20682.html)), that implies that the Government will abandon its deficit cutting austerity programme during 2013 so as to maximise the the potential for an election win in May 2015. Image: http://www.gold-speculator.com/attachments/nadeem-walayat/11259d1281467578-uk-economy-gdp-growth-forecast-2010-2015-uk-budget-deficit-forecast-june2010.gif The coalition governments election boom strategy suggests that 2013 may turn out to see stronger economic growth than the 1.3% forecast of December 2009, with the forecast for 2014 of 3.1% remaining the most probable outcome. *HMRC and Company Bankruptcies* During the recession the HMRC had agreed for many small companies to delay payment of taxes, now as the economy recovers it will be going after these small companies, a significant number of which will go bankrupt. The HMRC is chasing approx £10 billion which roughly translates into a potential of 100,000 company bankruptcies, thus adds to some downward pressure on the economy during the next 2 years against the OBRS more optimistic growth forecast. *Why You should Not Pay any Attention to PIMCO* on the UK Economy the PIMCO $1+ trillion dollar bond fund on face value appears to be failing in all directions on the UK economy. A few weeks ago PIMCO's head Bill Gross was calling UK gilts nitroglycerine. Now he has apparently turned bullish on the UK economy and UK debt market, so has gone from imminent collapse to a strong bull in just a few weeks. It seems obvious that if mega market moving funds of over $1 trillion want to buy a sizeable position in a market then the best thing to do is to talk the market down to accumulate into it, which appears to be what PIMCO has been doing which is reflected in sterling's strong trend, as instead of the Gilt market falling it has actually risen quite strongly since Gross's doom comments. The lesson here is to consider the media stars that do the rounds on the likes of CNBC and Bloomberg as either propagandists that are not going to tell you anything that you will actually profit from, as position's to be accumulated or academic economists trying to sell their latest books. *Stocks and Housing Bull Markets Generate Economic Growth* As is usually the case, the press and academic economists remain permanently fixated on looking through the rear view mirror, writing reams and reams to explain what has already happened. Whilst their response to one of the greatest drivers for economic growth is to state that that the stock market is detached from reality. Yes I said DRIVER, not LEAD INDICATOR which is the consensus view that the stock market rises to discount future economic growth, which is not quite accurate, a rising stock market acts as a strong positive feed back loop that GENERATES economic growth, that GENERATES RISING Corporate Earnings. This is why the vast majority of analysts that are fixated on valuations and corporate earnings conclude that stocks cannot rise because they are over valued by as much as 40%. When the reality is that the stock market TREND MANIFESTS the economic reality, as I pointed out in Mid March 2009 (Stealth Bull Market Follows Stocks Bear Market Bottom at Dow 6,470 (http://www.marketoracle.co.uk/Article9435.html)) whilst many prominent analysts were stating at the time that stocks could not rise due to the fact that corporate earnings were expected to collapse instead corporate earnings are now materialising to surprise to the upside which is despite the fact that the banks are not lending. I would imagine that the banks are viewing the surge in corporate earnings as a key indicator for increasing lending going forward to finance mergers and acquisitions, something that will NOT appear in analysis of rear view mirror statistics on bank lending. The bottom line - The stock market as a whole does not FOLLOW or LEAD, it GENERATES economic activity. The trend expectations as of March 2009 remains for a multi-year bull market with the forecast trend road map for 2010 illustrated below - Image: http://www.gold-speculator.com/attachments/nadeem-walayat/11260d1281467595-uk-economy-gdp-growth-forecast-2010-2015-dow-weekly.gif My forecast remains for the Dow to target 12k to 12.5k by late 2010, or about a 15% advance on the current level (10,653) which converts into upward pressure on GDP for the balance of 2010 and into 2011, so is not suggestive of a double dip recession at least for the rest of this year and into mid 2011, if anything U.S. growth may actually surprise to the upside, which is contrary to the current stream of 50/50 double dip recession coin flip commentary in the press. The Dow's most recent price action has now fulfilled my last in depth analysis trend expectation of May 2010 (16 May 2010 - Stocks Bull Market Hits Eurozone Debt Crisis Brick Wall, Forecast Into July 2010 (http://www.marketoracle.co.uk/Article19546.html) ) for the Dow to target a low to 9,800 during June to be followed by a rally to 10,700. My next in depth analysis is now pending to cover the period into October that will primary focus on the timing for the prospects of the break to a new bull market high and the quality of any corrective downdraft expected during October, to ensure you receive this in your email in box ensure you are subscribed to my ALWAYS FREE newsletter. (http://www.marketoracle.info/?p=subscribe&id=1) Many analysts point to falling government bond yields as being bearish for stocks, I would say NOW the complete opposite is true, bonds are in fact in a bubble, with safe high dividend paying stocks effectively dirt cheap. What's going to give ? Even lower bond prices ? I don't think so ! There is going to be a major repricing exercise that is going to send stocks sharply higher and bond prices sharply lower that will leave the majority of commentators rewriting what they are writing today to pretend they saw the repricing coming when the exact opposite is true! *Asset Prices *- The same asset price inflation inducing growth can be applied to other major asset classes such as the UK housing market that has bounced by more than 10% off of the March 2009 lows, and personal savings that have acted as a drag on the economy as net interest rates being paid are less than half the official CPI inflation rate. However the overall wealth effect on future growth has been strongly positive taking all asset classes into account that is feeding into strong UK economic growth for 2010 into 2011 as we are witnessing in the most recent UK GDP growth data. Image: http://www.gold-speculator.com/attachments/nadeem-walayat/11261d1281467595-uk-economy-gdp-growth-forecast-2010-2015-uk-house-prices-may-2010.gif An in depth analysis of UK house prices that will culminate in an multi-year forecast ebook is now underway which I aim to complete within the next 6 weeks. *UK Population Growth Driver* Whilst much of Europe's population stagnates, UK population continues to grow strongly as a consequence of a positive births / deaths balance and continuing immigration that contributes towards 1/3rd of the increase in Europe's annual population occurring in Britain. The recent UK population growth analysis article (02 Aug 2010 - UK Population Growth and Immigration Trend Forecast 2010 to 2030 (http://www.marketoracle.co.uk/Article21565.html)) concluded in the following forecast trend graph. Image: http://www.gold-speculator.com/attachments/nadeem-walayat/11262d1281467595-uk-economy-gdp-growth-forecast-2010-2015-uk-population-growth-forecast2010-2030.gif The impact of a rising population is to continue to put upward pressure on nominal GDP even if it means not much change in per capita GDP. Which also continues to feed the UK Inflation Mega-Trend. *High UK Inflation Plus Low Growth Equals Stagflation* UK Inflation of CPI at 3.2% for June 2010 is exactly in line with my trend forecast for 2010 as of December 2009 that projected June inflation data of 3.2%. My analysis since November has been warning of a spike in UK inflation as part of an anticipated inflation mega-trend (18 Nov 2009 - Deflationists Are WRONG, Prepare for the INFLATION Mega-Trend (http://www.marketoracle.co.uk/Article15131.html)) that culminated in the forecast of 27th December 2009 (UK CPI Inflation Forecast 2010, Imminent and Sustained Spike Above 3% (http://www.marketoracle.co.uk/Article16085.html)) and the *Inflation Mega-trend Ebook *of January 2010 (FREE DOWNLOAD (http://www.marketoracle.info/?p=subscribe&id=1)) as illustrated by the below graph. Image: http://www.gold-speculator.com/attachments/nadeem-walayat/11263d1281467603-uk-economy-gdp-growth-forecast-2010-2015-uk-inflation-june10.gif Inflation as illustrated at length in the *INFLATION MEGA-TREND* EBOOK, is a powerful stealth tax that the new government is using to first stabilise and then reduce the debt in terms of percentage of GDP that despite total debt increasing by 50% to £1.24trillion, the ConLib government aims to stabilise the debt at about 70% of GDP and then target a trend lower to about 65% of GDP by 2016. Image: http://www.gold-speculator.com/attachments/nadeem-walayat/11264d1281467603-uk-economy-gdp-growth-forecast-2010-2015-uk-cpi-boe-forecast-2year.gif *Bank of England's Worthless Inflation Forecasts* According to the Bank of England's forecast for UK inflation of 18 months ago (Feb 2009 (http://www.bankofengland.co.uk/publications/inflationreport/ir09feb.pdf)) - June 2010 CPI Inflation should by now be at 0.9%, instead of the actual rate of 3.2%. Whilst this years Bank of England Inflation Report (Feb 2010) (http://www.bankofengland.co.uk/publications/inflationreport/ir10feb.pdf) of barely 6 months ago forecast that UK inflation by June should have fallen to about 1.8%, instead it is at 3.2% (see graph). Therefore how credible have the Bank of England's persistent claims that the ongoing rise in UK inflation is just "temporary" and that it is forecast to fall to UNDER 1% by the end of 2010 (Feb 2010) ? The Bank of England has a track record of being wrong 96% of the time in its inflation forecasts of where inflation will actually be in 2 years time, as the usual mantra is for UK inflation to magically converge to 2% in 2 years time, much as the graph on the right concludes towards. *VAT 20% Inflation Surge Time Bomb* The ticking inflation surge time bomb has been primed to go off during early 2011 as a consequence of the ConDem governments emergency budget VAT hike from 17.5% to 20% that will likely result in an surge in Inflation to above 4% CPI and 6% RPI as I wrote of during the election campaign (05 May 2010 - Greece Economic Depression Resulting in INFLATION NOT DEFLATION Surge (http://www.marketoracle.co.uk/Article19199.html)) A post UK election VAT hike to 20% from 17.5% is near certain to bring in extra revenue of about £13 billion per year. This will have the effect of both spiking inflation sharply higher and maintaining the ongoing longer-term inflationary mega-trend, therefore I would not be surprised that following the implementation of a VAT tax hike that CPI spikes above 4% and RPI as high as 6%! Which would further discredit the Bank of England's mantra of "Don't Worry Folks its Only Temporary". I wonder how many ordinary UK citizens will still believe the Bank of England's statements of temporary inflation when they see Inflation of CPI 4%+ and RPI 6% a year on. Will they still be willing to accept wage hikes of 2% or even freezes, or will they start to demand ever higher wage rises to match surging inflation and hence feed the the wage price spiral. Therefore my expectations remain unchanged for the continuation of the high UK inflationary trend well into 2011 and beyond, with an in depth forecast for 2011 to follow before the end of 2010 that will aim to replicate the accuracy of this years forecast. Overall in economic terms this points to a long period of stagflation i.e. low economic growth plus high inflation. *Low UK Interest Rates Only for the Banks* The Bank of England kept UK interests on hold at 0.5% last week as it continues its policy of IGNORING HIGH UK inflation that continues to stand above the Bank of England's 3% upper limit for the purpose of the BoE continuing to funnel tax payer cash onto the balance sheet of bailed out bankrupt banks as illustrated by the most recent banking sector profit announcements, most of which are fictitious as in actual fact the banks are not generating any profits because they continue to only partially write down bad debts. The only reason why bankrupt banks are announcing profits is so as to allow them to pay their chief officers huge bonuses as a reward for succeeding in conning the tax payers by means of threats of financial armageddon as inept regulators with themselves having one hand in the cookie jar watch on as they intend to return to commercial banking themselves so as to have their turn at getting a piece of the tax payer funded bailout pie. The ways and means by which these fictitious profits are being achieved are many, such as The Bank of England loaning the banks at 0.5% which they then run along and invest at zero risk in longer dated UK government stock at 3.5% and thus make a 3% risk free profit with the tax payers money, meanwhile the ordinary tax payers who have been saving hard all their working lives are seeing the value of their savings being stolen by means of the stealth inflation tax as banks drunk on central bank cash pay a pittance of less than 2% in interest whilst even the official doctored CPI inflation rages at 3.2%, well above the BOE target of 2%. And not to forget the government adding insult to injury by TAXING the pittance of interest received at 20% for basic rate and 40% for higher rate tax payers. Similarly borrowers are not receiving anywhere near 0.5% for loans and mortgages as most mortgage borrowers will be lucky to see any rate below 4% with many on rates of as high as 6% which is resulting in huge profit margins for the banks that continue to penalise their customers for their own mistakes. Where savers and borrowers are concerned Britain would be far better off with a nationalised banking sector that exists purely to service the loans and savings market rather than the bankster elite maximising the amount of money that can be stolen from tax payers, savers and borrowers by means of an officially sanctioned artificial banking system. In all probability we remain sometime away from a point when the tax payer monies stop being funneled onto bank balance sheets which implies a continuing theft from savers of the the value of their wealth by means of inflation and interest income tax, which means continuing low interest rates, which is set against my forecast of January 2010*: **UK Interest Rates Forecast 2010-11: **UK interest Rates to Start Rising From Mid 2010 and Continue into end of 2010 to Target 1.75% / 2%, Continue Higher into Mid 2011 to Target 3%*. (UK Interest Rate Forecast 2010 and 2011 (http://www.marketoracle.co.uk/Article16450.html) ) This requires in depth analysis to fully evaluate the impact of the coalition government hitting the reset button on the economy, which will follow in the next few days, to receive this in your email box ensure you are subscribed to my Always FREE newsletter (http://www.marketoracle.info/?p=subscribe&id=1). The impact of continuing low interest rates 'should' act as a huge boost for the UK economy,however the bailed out banks are NOT Lending to small and medium sized businesses, this is illustrated by Lloyds TSB statements of increasing lending to small business by £24 billion, whilst hoping that people will ignore the fact that there has been NO increase in NET lending i.e. new lending is offset by repayments from businesses. In total that banks have sucked an estimated £50 billion OUT of the economy instead of increasing lending by £60 billion as promised several times to previous Labour Government. Therefore the benefits of the 0.5% interest rates are only being reaped by the banks and not the wider economy. The impact of this is that the 0.5% interest rate is having little effect on the UK economy, therefore a rise in UK interest rates to 1% would similarly have little effect on the UK economy but would increase the cost of financing Britains huge budget deficit and the continuing tax payer bailout of the banks. The implications for the UK economy are for UK interest rates to be maintained at a low rate until more of the bank bad debt losses have been paid for by the tax payers. However even when the banks become more liberal in lending, the boom years of 120% mortgages are not even apparent on a 5 year time horizon, which suggests consistently below trend economic growth for many years if not the rest of the decade. The Bank of England has succeeded in inflating the bank share prices towards break even levels where the capital injection elements of the tax payer funded bailouts are concerned. This has prompted the bankster elite and their minions in the press to start calling on the government to sell its bank shares at break even levels, whilst conveniently forgetting that the capital injections of some £100 billion amount to a mere tip of the tax payer bailout of the banks iceberg of over £1 trillion, so effectively the bankster's return to the tax payer 10% of the pie in return for 90% of the cake. Instead the government should fully nationalise all the banks it has stakes in, which despite Liberal Democrat influences is not going to happen, so the coalition government will at some point follow the Thatcher trick of selling shares on the cheap to the general public in the run up to the May 2015 general election which will have an economic wealth effect as share buyers will be sitting on instant profits of as much as 30%. The bottom line - The Bank of England is paralysed by the fear of Credit Crash II, therefore it is sowing the seeds of high inflation for many years if not more than a decade by NOT Acting to bring inflation under control during 2010, the price for which is being paid for by ordinary citizens. *Stuttering Euro-Zone and U.S. Economic Recovery's* *Europe *- Europe has been reeling from the sovereign debt crisis shock waves emanating out of Greece, Spain and the other PIGS, however whilst the headlines of debt deflationary depressions may hold true to an extent for the PIGS, they do not speak for the other 85% of Europe, especially the industrialised north with Germany at the heart of the economic revival. especially as a weak Euro currency acts as a huge boost for German exports. Therefore the PIGS crisis has been hugely beneficial for Germany which despite having to bail them out looks set to enjoy a strong exports led economic recovery over the next few years. With other north european countries not too far behind. The effect of a strong recovery plus weak currency therefore suggests inflation and higher interest rates are not too far away for the eurozone which is contrary to the current mainstream press clamour of eurozone deflation, depression and calls to cut Euro zone interest rates when the exact opposite is more probable. *U.S.* - The immediate focus of attention in the U.S. has been on abysmal U.S. jobs numbers that have seen no change in the headline U.S. unemployment rate of 9.5% which has barely changed from the recession peak of 10.1% registered in October 2009. Many commentators have concluded that this further confirms expectations that the U.S. is heading for a double dip recession. Whilst the economic numbers do look bad when taken individually, especially in the face of the US governments and Feds ongoing fiscal and monetary stimulus which is contrary to the increasing austerity of Europe. However that can also be down to the fact that increasing the size of the government is NOT actually what is best for generating sustained economic growth as increasing the public sector by means of increasing debt just crowds out the productive private sector which will result in lower economic activity, especially as deficit spending is not sustainable. Therefore on the plus side many of the jobs being lost in the U.S. are state and federal public jobs whilst most of the jobs being created are private sector which as we can see are more or less canceling out in the headline figures but are a positive in terms of generating economic growth. Also as is the case of the trend for UK unemployment, US unemployment is not going to suddenly fall and may even rise as companies will remain reluctant to hire until they see a government that is in firm control of the economy rather then one that apparently only knows how to press the print money button. So U.S. unemployment may yet have to peak, which does not bode well for the Democrats in terms of U.S. politics i.e. the mid-term elections in November 2010, which suggests continuing engineering (printing money) to artificially hold unemployment down until the elections are out of the way which effectively means delaying real economic recovery. Looking at the markets once more to see what is actually happening against what should happen we see a stock market that is just 5% from its bull market peak which implies a growing economy and the U.S. Dollar that has gone into reverse gear that implies a weaker economy and low interest rates with more money printing. Whilst not signaling a double dip recession, it is neither signaling a strong U.S. Economic recovery therefore continues to suggest a low growth outcome as the most probable outcome for the U.S. over the next few years which is similar in expectations for the U.K. economy i.e. well below trend growth for 2011 to 2013. *Bottom line* - The large industrialised export orientated areas of the Eurozone such as Germany are going to BOOM! Therefore the PIGS sovereign debt crisis is old news. The U.S. looks set to experience sluggish growth. *China Boom Continues* The Chinese central planning capitalists are succeeding in slowing the over heating Chinese economy down towards a growth rate of about 8%, this is prompting the press and aspects of the BlogosFear to conclude that China is heading for a crash, collapse , as illustrated by Marc Faber's continuing commentary - *India Times (http://economictimes.indiatimes.com/articleshow/5887630.cms)- China may 'crash' in next 9-12 months: * Investor Marc Faber said China’s economy will slow and possibly “crash” within a year as declines in stock and commodity prices signal the nation’s property bubble is set to burst. “The Chinese economy is going to slow down regardless. It is more likely that we will even have a crash sometime in the next nine to 12 months.” This is in complete ignorance of the fact as illustrated in the *Inflation Mega-trend Ebook *(FREE DOWNLOAD (http://www.marketoracle.info/?p=subscribe&id=1)), that the large emerging giants have the room to continue to grow at rates of between 5% and 10% for many more years - *Inflation Mega-Trend Ebook - Page 54* And last but not least is the per capita graph capacity as illustrated by the following graph: Image: http://www.gold-speculator.com/attachments/nadeem-walayat/11265d1281467612-uk-economy-gdp-growth-forecast-2010-2015-world-economies-gdp-per-capita-2008.gif At the present, the mainstream press is busy worrying about the credit bubble in China, however the economic growth to date has barely bridged the huge gap between the emerging market giants and established western economies which implies a huge potential for the gap to narrow as manifested by strong growth in the emerging markets and below trend growth or even economic stagnation by many of the western economies which means that capital investments made today can be expected to return significant real capital growth over the next 10 years on the basis of real GDP growth that typically targets a growth increase of 100%. Therefore rather than economic collapse, the emerging giants are still a long way from hitting capacity constraints as measured by per capita output. There exists huge potential for increased productivity in asia whilst in the west huge over capacity as wages over the next decade or two as productivity and wages will continue to converge which implies strong growth for the likes of Chindia and low growth or even stagnation for the developed West. This implies that investors should continue to take advantage of short-term stock market volatility that present excellent long-term accumulation opportunities as I pointed out 3 weeks ago for China (18 Jul 2010 - Stocks Stealth Bull Market Correction Generating China Buying Opportunity? (http://www.marketoracle.co.uk/Article21199.html)), just as many commentators were announcing that the Chinese stock market was heading for a crash when the SSEC was trading at 2,424, with the continuing benefit and real time experience for western investors of an appreciating Yuan currency as illustrated by the strong performance of the key China FXI ETF. *Internet Information Age Boom *Continues Human eagerness to share information appears to be encoded in our genes which is why we have trended towards the creation of the internet that at present represents the pinnacle for free sharing of information and ideas that seeks to have an exponential impact on human productivity as the reach, depth and available supply bandwidth continues to expand. All of which implies both greater overall productivity & wealth and greater equalisation of earning power across the world. Where literally bright individuals can be stationed anywhere on the planet without restriction on earning and purchasing power. Therefore despite the dot com crash of the noughties, the worlds largest companies are increasingly listing huge internet based cash cows such as Google that are increasingly driving innovation in connecting the virtual world with the real world that concludes towards ever greater personal and corporate much as the mobile phone has achieved during the past 20 years and the PDA's during the past 5 years so will the expansion in human real life immersion into virtual work and play worlds that will develop over the next 10 years driving huge gains in human productivity and economic growth, wealth and prosperity that will branch out in all directions. The internet information age has barely begun and where the west has a clear advantage over states such as China which lacks the necessary freedom of thought elements to compete against countries such as the UK and USA (as long as they don't converge towards where China sits). In conclusion, the economies of the west, east and south contrary to much that you will read are not heading for a Deflationary Great Depression II, World War III or the end of civilisation just as the doom mongers at the end of the last millennium were stating. The western economies point to a period of below trend economic growth with inflation for the next few years, with the UK at the head of the list, U.S. in the middle and parts of Europe averaging third in line in terms of inflation / growth rate expectations. *Quantitative Easing* Talk of further QE had gone quite earlier in the year and remains so in the UK. However in the U.S. the talk of quantitative easing having ended in March 2010 has now been replaced with chatter for QE2. However, I have always maintained since March 2009 that once started Quantitative Easing is difficult to stop regardless of the statements emanating out of the central banks, as the only answer the governments have to weak economic activity is to continue printing money to inflate economies and asset bubbles. *UK Growth Forecast Conclusion 2010-2015* The conclusion drawn from the sum of the above analysis is that the forecasts for years 2010, 2012,2013 and 2014 remain unchanged as per the original analysis and forecast of December 2009 (UK Economy GDP Growth Forecast 2010 and 2011, The Stealth Election Boom (http://www.marketoracle.co.uk/Article16167.html)). However the original forecast for 2011 is now overly optimistic in the face of the governments recently announced severe austerity measures, therefore the forecast for 2011 GDP growth is revised lower to 1.3%: * UK GDP 2010 2.8% * UK GDP 2011 = 2.3% - *Revised down to 1.3%* * UK GDP 2012 = 1.1% * UK GDP 2013 = 1.4% * UK GDP 2014 = 3.1% * UK GDP Mid 2015 = 3.3% - *NEW* Image: http://www.gold-speculator.com/attachments/nadeem-walayat/11266d1281467612-uk-economy-gdp-growth-forecast-2010-2015-uk-gdp-9.gif The trend forecasts for the three years from 2011 to 2013 suggests that of a stagflationary environment of low growth and above trend inflation to be followed by an engineered election boom into May 2015 starting in 2014. Whilst growth for 2012 to 2013 is expected to be well below trend, however at this point I still do not see any signs of a double dip recession that the academics and the mainstream press have been obsessing over for the past year, in fact the London 2012 Olympics could see South East experience an early economic boom. However against this areas with large public sectors such as the North of England, Wales and Scotland, where there are city's where the public sector amounts to more than 70% of the economy probably will experience a double dip recession as the spending cuts start to hit during 2011 and 2012. *Coalition Government Risks to the forecast * Risks to the Forecast are political, in that if the coalition government disintegrates resulting in an early general election during 2012 and 2013 then that would negate the balance of this forecast. If the coalition government can hold its nerve during these two years then it will lay the ground work towards an outright Conservative government. The problem here is that the likelihood of this will slowly dawn upon the Liberal Democrats during 2013-2014 who may then decide to pull the plug on the coalition government before they hand the Conservatives a victory in 2015. Therefore UK politics whilst quiet at the moment are increasingly going to start to heat up as the May 2015 Election nears, all of which bodes well for Labour to step in during a period of Coalition disintegration as voters by then will see the Labour debt fuelled growth years through rose tinted glasses. Comments and Source: http://www.marketoracle.co.uk/Article21739.html By Nadeem Walayat http://www.marketoracle.co.uk (http://www.marketoracle.co.uk/) *Copyright *© *2005-10* Marketoracle.co.uk (http://www.marketoracle.co.uk/) (Market Oracle Ltd). All rights reserved. Image: http://www.marketoracle.co.uk/images/2010/Jan/inflation-ebook-small.gif (http://www.marketoracle.info/?p=subscribe&id=1) Nadeem Walayat has over 20 years experience of trading derivatives, (http://www.walayatstreet.com/) portfolio management and analysing the financial markets, including one of few who both anticipated and *Beat the 1987 Crash* (http://www.marketoracle.co.uk/Article2499.html). Nadeem's forward looking analysis specialises on UK inflation (http://www.marketoracle.co.uk/Article16085.html), economy, (http://www.marketoracle.co.uk/Article16167.html) interest rates (http://www.marketoracle.co.uk/Article16450.html) and the housing market and he is the author of the *NEW Inflation Mega-Trend ebook *that can be downloaded for Free (http://www.marketoracle.info/?p=subscribe&id=1). Nadeem is the Editor of The Market Oracle, a *FREE* *Daily* Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. _http://www.marketoracle.co.uk_ (http://www.marketoracle.co.uk/) *Disclaimer: *The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.
Nadeem Walayat Archive (http://www.marketoracle.co.uk/UserInfo-Nadeem_Walayat.html)
© 2005-2010 http://www.MarketOracle.co.uk (http://www.marketoracle.co.uk/) - The Market Oracle is a FREE *Daily *Financial Markets Analysis & Forecasting online publication.]]> This analysis is a continuation of the UK Debt Forecast article (UK ConLib Government to Use INFLATION Stealth Tax to Erode Value of Public Debt ) on the impact of the new coalition government having effectively hit the reset button on the UK economy to now primarily target a reduction in the £156 billion annual budget deficit which aims to suck £113 billion a year out of the economy by 2015-16 by means of swinging public sector spending cuts and tax rises. The government has now clearly reversed the Labour governments policy of continuous fiscal expansion and set the country on a course for severe fiscal contraction for at least the next 3 years.

This analysis seeks to update my existing UK GDP growth forecast for the next 5 years. The analysis of December 2009 concluded in a trend forecast as illustrated below (31 Dec 2009 - UK Economy GDP Growth Forecast 2010 and 2011, The Stealth Election Boom ), with the most recent UK GDP data confirming strong growth data for the second quarter of 2010 of 1.1%, annualised to 4.4%, which caught the mainstream press, academic economists and even the City by surprise who had typically penciled in growth expectations of between 0.3% and 0.5% and remain firmly fixated on the prospects for a UK double dip recession.

Existing UK GDP Forecast Growth Forecast 2010-2012, Preliminary 2013-2014

The UK economic GDP growth for 2010 Q2 came in at 1.1% compared against my forecast of December 2009 Q2 growth of 1.3% (31 Dec 2009 - UK Economy GDP Growth Forecast 2010 and 2011, The Stealth Election Boom ). The growth trend is inline with my forecast expectations that projected a strong economic recovery starting in Q4 2009 and for the whole of 2010 continuing into 2011 as illustrated below.

UK GDP Growth Forecast Conclusion

The sum of the above analysis is for a strong economic recovery into the end of 2010 which given the pessimism today I term as the Stealth Election Boom that followed the Stealth Bull Market of 2009, the economic 'boom' will continue in to a peak in Q1 2011, which will be followed by weakness during 2012 and 2013 and strong recovery for 2014, and into a 2015 summer general election, breaking this trend down into GDP terms for end 2010 +2.8%, 2011 +2.3%, and taking account of the election cycle preliminary GDP projections for 2012 of +1.1%, 2013 +1.4%. 2014 + 3.1% with expectation of strong Q1 growth for 2015.

Therefore I just cannot see this double dip recession that the mainstream press and so called think tanks are obsessing over at this point in time, no year on year economic contraction or even a quarter on quarter dip is visible.
The following graph illustrates my trend forecast for quarterly GDP growth over the next 2 years 2010 and 2011.



Growth for the first half of 2010 now stands at 1.5%, which compares favourably against my expectations for 2010 growth of 2.8% and compares against forecasts of academic economic institutions as the below table from the Inflation Mega-Trend Ebook illustrates (FREE DOWNLOAD) -

UK Economic Growth 2010
Forecaster Forecast
European Commission +0.9%
International Monetary Fund +0.9%
David Kern, British Chambers of Commerce +1.1%
Organisation for Economic Co-operation and Development (OECD) +1.2%
Alistair Darling, Treasury +1% to +1.5%
Bank of England +2.1%


Coalition Government Austerity Measures

The June 2010 Emergency Budget announced intentions to take £40 billion out of the economy during 2010-11, rising to a total drain of £113 billion per year by 2015-16 so as to cut the budget deficit from £156 billion per year down to £20 billion by that year. The key measures announced were -
  • Spending cuts of 25% on non ring fenced budgets
  • Public sector pay frozen for 2 years for those earning over £21k
  • VAT Rise to 20% from 1st Jan 2011.
  • Capital Gains Tax Rising to 28%
  • Housing Benefit Capped at £400 per week
  • Inflation indexation switch from RPI to CPI
  • Child Benefit frozen.
  • Disability Benefit claimants targeted
  • Tax credit receipt income limits reduces.
  • Corporation Tax 1% cut per year.
  • £2 billion bank levy
Where the economy is concerned the policy that will have the most impact on the U.K. economy are public sector spending cuts that won't start to bite until October, with many of the cuts not materialising until well into 2011 which suggests that the real impact of the governments austerity plan won't be felt until Q2 2011. Coupled with the VAT rise from 1st of January 2011 implies significantly lower growth for 2011 than my original forecast of 2.3%.
Coalition Government OBR UK GDP Forecasts
The coalition governments own independant body (though housed in the Treasury) for forecasting economic growth has revised its own expectations (June 2010), and are compared against my Dec 2009 forecasts (NW):
  • UK GDP 2010 = 1.2 / NW 2.8%
  • UK GDP 2011 = 2.3 / NW 2.3%
  • UK GDP 2012 = 2.8 / NW 1.1%
  • UK GDP 2013 = 2.9 / NW 1.4%
  • UK GDP 2014 = 2.7 / NW 3.1%
As the most recent data shows the governments own forecast for UK GDP for 2010 has already become redundant as growth already stands at 1.5% for 2010. However 2.3% for 2011 matches my forecast of 6 months earlier which sends my own alarm bells ringing, though there is significant difference for 2012 and 2013 where the OBR / Government appear overly optimistic.

Academic Economists Flawed Theoretical models

The academic economists that populate the mainstream press are obsessed with the demand side of the equation i.e. Keynesian stimulus that calls for every more deficit spending debt accumulation that will always FAIL to delivery, whilst at the same time ignoring the supply side of the economic equation that succeeded in resolving the 1980's mini-depression into an economic boom as a consequence of supply side changes to the UK economy. The coalition government appears to be following this working model as it takes an axe to Labour's out of control public sector spending and the deficit whilst laying out plans for cutting corporation taxes, even if income and indirect taxes such as VAT are on the rise.

The key to future economic growth is ONLY from the private sector, towards driving innovation, competitiveness and productivity and by cutting taxes and red tape as illustrated by the article (31 Mar 2010 - Solving Britain's Economic Crisis Through Micro Business Capital Investments and Credit ). The recent emergency budget illustrated the governments intentions to cut the budget deficit by means of a ratio of 80% of public spending cuts to 20% of tax rises which matches the shift towards a private sector growth orientated economy that had been increasingly crowded out by the last Labour governments policies of an out of control public sector spending binge.

Meanwhile frankly, clueless academic economists remain fixated on stimulus deficit spending to fend off an always impending "double dip" recession that their policy suggestions would actually turn out to be the prime drivers for bringing as illustrated below:

Telegraph - Britons' fears raise double-dip recession chance

The prospect of a double-dip recession in Britain is increasing with every month as consumer confidence dwindles to recession levels, a long-running study signaled.

Bloomberg - Blanchflower Says Budget `Certain' to Lead to Double Dip
Former Bank of England policy maker David Blanchflower said the spending cuts the government plans in its emergency budget tomorrow “look certain” to push the U.K. back into a recession.

“You can’t just decimate the public sector and assume the private sector will step into the hole,” Blanchflower said in an interview on Bloomberg Television’s “Countdown” in London today. “The danger now is we’re certainly going into a double- dip recession. I think that’s absolutely certain given what’s coming.”

Financial Times, Martin Wolf is worried that the concerted austerity of Germany, Britain and other industrialised countries may "destroy the recovery".

Guardian - Britain's leading companies increasingly fear the UK could suffer a double dip recession because of government public spending cuts and a renewed economic slowdown across the globe, according to a report released today.

Telegraph - A survey of chief financial officers (CFOs) by Deloitte found that a balance of just 24pc were feeling more optimistic in the second quarter, compared with 40pc in the first quarter.

It was the lowest level in 12 months, as the average CFO attached a 38pc probability to the chance of a double-dip, up from 33pc previously.

Economic Coin Flips

Economic analysis is not a science or an art but the calling of a series of coin flips (as is stock market analysis), the actual determining item that flips into a final conclusion may be something inconsequential on its own, realising this will put analysts ahead of the curve. The Grand Media Star Wizards that propagate the press and academic institutions use formulae's and theories as smoke and mirrors to try and persuade you otherwise, but still at the end of the day come out with statements such as there is a 50/50 chance of a double dip recession, 50/50 chance of deflation, 50/50 of..... However without firm actionable conclusions such statements are pretty much worthless.

The bottom line, despite the coalition governments severe but highly necessary austerity measures, the actual probability of a double dip recession is extremely low, so instead of a 50% coin flip, I would put it as low as a 15% probability.

Coalition Government Election Boom 2014-15 Strategy

The governments intention to pull a potential 9% of demand out of the economy by 2015-16 means that the next 3 years at least are now going to result in weak economic growth as at least 1 million jobs will be lost (500,000 public sector and 500,000 linked private sector jobs) that are only partially offset by new private sector jobs created as illustrated by the UK unemployment forecast below (01 Jul 2010 - UK Unemployment Forecast 2010 to 2015 ).

Final conclusion - UK unemployment looks set to gradually rise to a peak of just over 2.9 million by mid 2013 before stabilising and starting to decline into a May 2015 General Election of just below 2.7 million against the governments forecast for UK unemployment to fall to 2 million by 2015 (OFBR - Peak at 8.1% this year before falling to 6.1%).



Though beyond the job cutting phase into early 2013 we enter the electioneering phase of the Coalition government in the run up to the May 2015 General Election, that is likely to see significant tax cuts which will place the economy in a far stronger growth state, which by then will have significantly larger more productive private sector economic base than the current position where the public sector under the Labour government has mushroomed to an unsustainable 53% of the economy. This trend expectation is illustrated by my debt forecast (29 Jun 2010 - UK ConLib Government to Use INFLATION Stealth Tax to Erode Value of Public Debt ), that implies that the Government will abandon its deficit cutting austerity programme during 2013 so as to maximise the the potential for an election win in May 2015.



The coalition governments election boom strategy suggests that 2013 may turn out to see stronger economic growth than the 1.3% forecast of December 2009, with the forecast for 2014 of 3.1% remaining the most probable outcome.

HMRC and Company Bankruptcies

During the recession the HMRC had agreed for many small companies to delay payment of taxes, now as the economy recovers it will be going after these small companies, a significant number of which will go bankrupt. The HMRC is chasing approx £10 billion which roughly translates into a potential of 100,000 company bankruptcies, thus adds to some downward pressure on the economy during the next 2 years against the OBRS more optimistic growth forecast.

Why You should Not Pay any Attention to PIMCO on the UK Economy
the PIMCO $1+ trillion dollar bond fund on face value appears to be failing in all directions on the UK economy. A few weeks ago PIMCO's head Bill Gross was calling UK gilts nitroglycerine. Now he has apparently turned bullish on the UK economy and UK debt market, so has gone from imminent collapse to a strong bull in just a few weeks.

It seems obvious that if mega market moving funds of over $1 trillion want to buy a sizeable position in a market then the best thing to do is to talk the market down to accumulate into it, which appears to be what PIMCO has been doing which is reflected in sterling's strong trend, as instead of the Gilt market falling it has actually risen quite strongly since Gross's doom comments. The lesson here is to consider the media stars that do the rounds on the likes of CNBC and Bloomberg as either propagandists that are not going to tell you anything that you will actually profit from, as position's to be accumulated or academic economists trying to sell their latest books.

Stocks and Housing Bull Markets Generate Economic Growth

As is usually the case, the press and academic economists remain permanently fixated on looking through the rear view mirror, writing reams and reams to explain what has already happened. Whilst their response to one of the greatest drivers for economic growth is to state that that the stock market is detached from reality. Yes I said DRIVER, not LEAD INDICATOR which is the consensus view that the stock market rises to discount future economic growth, which is not quite accurate, a rising stock market acts as a strong positive feed back loop that GENERATES economic growth, that GENERATES RISING Corporate Earnings.

This is why the vast majority of analysts that are fixated on valuations and corporate earnings conclude that stocks cannot rise because they are over valued by as much as 40%. When the reality is that the stock market TREND MANIFESTS the economic reality, as I pointed out in Mid March 2009 (Stealth Bull Market Follows Stocks Bear Market Bottom at Dow 6,470) whilst many prominent analysts were stating at the time that stocks could not rise due to the fact that corporate earnings were expected to collapse instead corporate earnings are now materialising to surprise to the upside which is despite the fact that the banks are not lending. I would imagine that the banks are viewing the surge in corporate earnings as a key indicator for increasing lending going forward to finance mergers and acquisitions, something that will NOT appear in analysis of rear view mirror statistics on bank lending.

The bottom line - The stock market as a whole does not FOLLOW or LEAD, it GENERATES economic activity. The trend expectations as of March 2009 remains for a multi-year bull market with the forecast trend road map for 2010 illustrated below -



My forecast remains for the Dow to target 12k to 12.5k by late 2010, or about a 15% advance on the current level (10,653) which converts into upward pressure on GDP for the balance of 2010 and into 2011, so is not suggestive of a double dip recession at least for the rest of this year and into mid 2011, if anything U.S. growth may actually surprise to the upside, which is contrary to the current stream of 50/50 double dip recession coin flip commentary in the press.

The Dow's most recent price action has now fulfilled my last in depth analysis trend expectation of May 2010 (16 May 2010 - Stocks Bull Market Hits Eurozone Debt Crisis Brick Wall, Forecast Into July 2010 ) for the Dow to target a low to 9,800 during June to be followed by a rally to 10,700. My next in depth analysis is now pending to cover the period into October that will primary focus on the timing for the prospects of the break to a new bull market high and the quality of any corrective downdraft expected during October, to ensure you receive this in your email in box ensure you are subscribed to my ALWAYS FREE newsletter.

Many analysts point to falling government bond yields as being bearish for stocks, I would say NOW the complete opposite is true, bonds are in fact in a bubble, with safe high dividend paying stocks effectively dirt cheap. What's going to give ? Even lower bond prices ? I don't think so ! There is going to be a major repricing exercise that is going to send stocks sharply higher and bond prices sharply lower that will leave the majority of commentators rewriting what they are writing today to pretend they saw the repricing coming when the exact opposite is true!

Asset Prices - The same asset price inflation inducing growth can be applied to other major asset classes such as the UK housing market that has bounced by more than 10% off of the March 2009 lows, and personal savings that have acted as a drag on the economy as net interest rates being paid are less than half the official CPI inflation rate. However the overall wealth effect on future growth has been strongly positive taking all asset classes into account that is feeding into strong UK economic growth for 2010 into 2011 as we are witnessing in the most recent UK GDP growth data.



An in depth analysis of UK house prices that will culminate in an multi-year forecast ebook is now underway which I aim to complete within the next 6 weeks.

UK Population Growth Driver

Whilst much of Europe's population stagnates, UK population continues to grow strongly as a consequence of a positive births / deaths balance and continuing immigration that contributes towards 1/3rd of the increase in Europe's annual population occurring in Britain. The recent UK population growth analysis article (02 Aug 2010 - UK Population Growth and Immigration Trend Forecast 2010 to 2030) concluded in the following forecast trend graph.



The impact of a rising population is to continue to put upward pressure on nominal GDP even if it means not much change in per capita GDP. Which also continues to feed the UK Inflation Mega-Trend.

High UK Inflation Plus Low Growth Equals Stagflation

UK Inflation of CPI at 3.2% for June 2010 is exactly in line with my trend forecast for 2010 as of December 2009 that projected June inflation data of 3.2%. My analysis since November has been warning of a spike in UK inflation as part of an anticipated inflation mega-trend (18 Nov 2009 - Deflationists Are WRONG, Prepare for the INFLATION Mega-Trend ) that culminated in the forecast of 27th December 2009 (UK CPI Inflation Forecast 2010, Imminent and Sustained Spike Above 3%) and the Inflation Mega-trend Ebook of January 2010 (FREE DOWNLOAD) as illustrated by the below graph.



Inflation as illustrated at length in the INFLATION MEGA-TREND EBOOK, is a powerful stealth tax that the new government is using to first stabilise and then reduce the debt in terms of percentage of GDP that despite total debt increasing by 50% to £1.24trillion, the ConLib government aims to stabilise the debt at about 70% of GDP and then target a trend lower to about 65% of GDP by 2016.



Bank of England's Worthless Inflation Forecasts

According to the Bank of England's forecast for UK inflation of 18 months ago (Feb 2009) - June 2010 CPI Inflation should by now be at 0.9%, instead of the actual rate of 3.2%. Whilst this years Bank of England Inflation Report (Feb 2010) of barely 6 months ago forecast that UK inflation by June should have fallen to about 1.8%, instead it is at 3.2% (see graph).

Therefore how credible have the Bank of England's persistent claims that the ongoing rise in UK inflation is just "temporary" and that it is forecast to fall to UNDER 1% by the end of 2010 (Feb 2010) ?

The Bank of England has a track record of being wrong 96% of the time in its inflation forecasts of where inflation will actually be in 2 years time, as the usual mantra is for UK inflation to magically converge to 2% in 2 years time, much as the graph on the right concludes towards.

VAT 20% Inflation Surge Time Bomb

The ticking inflation surge time bomb has been primed to go off during early 2011 as a consequence of the ConDem governments emergency budget VAT hike from 17.5% to 20% that will likely result in an surge in Inflation to above 4% CPI and 6% RPI as I wrote of during the election campaign (05 May 2010 - Greece Economic Depression Resulting in INFLATION NOT DEFLATION Surge )
A post UK election VAT hike to 20% from 17.5% is near certain to bring in extra revenue of about £13 billion per year. This will have the effect of both spiking inflation sharply higher and maintaining the ongoing longer-term inflationary mega-trend, therefore I would not be surprised that following the implementation of a VAT tax hike that CPI spikes above 4% and RPI as high as 6%! Which would further discredit the Bank of England's mantra of "Don't Worry Folks its Only Temporary".

I wonder how many ordinary UK citizens will still believe the Bank of England's statements of temporary inflation when they see Inflation of CPI 4%+ and RPI 6% a year on. Will they still be willing to accept wage hikes of 2% or even freezes, or will they start to demand ever higher wage rises to match surging inflation and hence feed the the wage price spiral.

Therefore my expectations remain unchanged for the continuation of the high UK inflationary trend well into 2011 and beyond, with an in depth forecast for 2011 to follow before the end of 2010 that will aim to replicate the accuracy of this years forecast. Overall in economic terms this points to a long period of stagflation i.e. low economic growth plus high inflation.

Low UK Interest Rates Only for the Banks

The Bank of England kept UK interests on hold at 0.5% last week as it continues its policy of IGNORING HIGH UK inflation that continues to stand above the Bank of England's 3% upper limit for the purpose of the BoE continuing to funnel tax payer cash onto the balance sheet of bailed out bankrupt banks as illustrated by the most recent banking sector profit announcements, most of which are fictitious as in actual fact the banks are not generating any profits because they continue to only partially write down bad debts. The only reason why bankrupt banks are announcing profits is so as to allow them to pay their chief officers huge bonuses as a reward for succeeding in conning the tax payers by means of threats of financial armageddon as inept regulators with themselves having one hand in the cookie jar watch on as they intend to return to commercial banking themselves so as to have their turn at getting a piece of the tax payer funded bailout pie.

The ways and means by which these fictitious profits are being achieved are many, such as The Bank of England loaning the banks at 0.5% which they then run along and invest at zero risk in longer dated UK government stock at 3.5% and thus make a 3% risk free profit with the tax payers money, meanwhile the ordinary tax payers who have been saving hard all their working lives are seeing the value of their savings being stolen by means of the stealth inflation tax as banks drunk on central bank cash pay a pittance of less than 2% in interest whilst even the official doctored CPI inflation rages at 3.2%, well above the BOE target of 2%. And not to forget the government adding insult to injury by TAXING the pittance of interest received at 20% for basic rate and 40% for higher rate tax payers.

Similarly borrowers are not receiving anywhere near 0.5% for loans and mortgages as most mortgage borrowers will be lucky to see any rate below 4% with many on rates of as high as 6% which is resulting in huge profit margins for the banks that continue to penalise their customers for their own mistakes. Where savers and borrowers are concerned Britain would be far better off with a nationalised banking sector that exists purely to service the loans and savings market rather than the bankster elite maximising the amount of money that can be stolen from tax payers, savers and borrowers by means of an officially sanctioned artificial banking system.

In all probability we remain sometime away from a point when the tax payer monies stop being funneled onto bank balance sheets which implies a continuing theft from savers of the the value of their wealth by means of inflation and interest income tax, which means continuing low interest rates, which is set against my forecast of January 2010: UK Interest Rates Forecast 2010-11: UK interest Rates to Start Rising From Mid 2010 and Continue into end of 2010 to Target 1.75% / 2%, Continue Higher into Mid 2011 to Target 3%. (UK Interest Rate Forecast 2010 and 2011 )

This requires in depth analysis to fully evaluate the impact of the coalition government hitting the reset button on the economy, which will follow in the next few days, to receive this in your email box ensure you are subscribed to my Always FREE newsletter.

The impact of continuing low interest rates 'should' act as a huge boost for the UK economy,however the bailed out banks are NOT Lending to small and medium sized businesses, this is illustrated by Lloyds TSB statements of increasing lending to small business by £24 billion, whilst hoping that people will ignore the fact that there has been NO increase in NET lending i.e. new lending is offset by repayments from businesses.

In total that banks have sucked an estimated £50 billion OUT of the economy instead of increasing lending by £60 billion as promised several times to previous Labour Government. Therefore the benefits of the 0.5% interest rates are only being reaped by the banks and not the wider economy. The impact of this is that the 0.5% interest rate is having little effect on the UK economy, therefore a rise in UK interest rates to 1% would similarly have little effect on the UK economy but would increase the cost of financing Britains huge budget deficit and the continuing tax payer bailout of the banks. The implications for the UK economy are for UK interest rates to be maintained at a low rate until more of the bank bad debt losses have been paid for by the tax payers.

However even when the banks become more liberal in lending, the boom years of 120% mortgages are not even apparent on a 5 year time horizon, which suggests consistently below trend economic growth for many years if not the rest of the decade.

The Bank of England has succeeded in inflating the bank share prices towards break even levels where the capital injection elements of the tax payer funded bailouts are concerned. This has prompted the bankster elite and their minions in the press to start calling on the government to sell its bank shares at break even levels, whilst conveniently forgetting that the capital injections of some £100 billion amount to a mere tip of the tax payer bailout of the banks iceberg of over £1 trillion, so effectively the bankster's return to the tax payer 10% of the pie in return for 90% of the cake. Instead the government should fully nationalise all the banks it has stakes in, which despite Liberal Democrat influences is not going to happen, so the coalition government will at some point follow the Thatcher trick of selling shares on the cheap to the general public in the run up to the May 2015 general election which will have an economic wealth effect as share buyers will be sitting on instant profits of as much as 30%.

The bottom line - The Bank of England is paralysed by the fear of Credit Crash II, therefore it is sowing the seeds of high inflation for many years if not more than a decade by NOT Acting to bring inflation under control during 2010, the price for which is being paid for by ordinary citizens.

Stuttering Euro-Zone and U.S. Economic Recovery's

Europe - Europe has been reeling from the sovereign debt crisis shock waves emanating out of Greece, Spain and the other PIGS, however whilst the headlines of debt deflationary depressions may hold true to an extent for the PIGS, they do not speak for the other 85% of Europe, especially the industrialised north with Germany at the heart of the economic revival.
especially as a weak Euro currency acts as a huge boost for German exports.
Therefore the PIGS crisis has been hugely beneficial for Germany which despite having to bail them out looks set to enjoy a strong exports led economic recovery over the next few years. With other north european countries not too far behind. The effect of a strong recovery plus weak currency therefore suggests inflation and higher interest rates are not too far away for the eurozone which is contrary to the current mainstream press clamour of eurozone deflation, depression and calls to cut Euro zone interest rates when the exact opposite is more probable.

U.S. - The immediate focus of attention in the U.S. has been on abysmal U.S. jobs numbers that have seen no change in the headline U.S. unemployment rate of 9.5% which has barely changed from the recession peak of 10.1% registered in October 2009. Many commentators have concluded that this further confirms expectations that the U.S. is heading for a double dip recession.

Whilst the economic numbers do look bad when taken individually, especially in the face of the US governments and Feds ongoing fiscal and monetary stimulus which is contrary to the increasing austerity of Europe. However that can also be down to the fact that increasing the size of the government is NOT actually what is best for generating sustained economic growth as increasing the public sector by means of increasing debt just crowds out the productive private sector which will result in lower economic activity, especially as deficit spending is not sustainable. Therefore on the plus side many of the jobs being lost in the U.S. are state and federal public jobs whilst most of the jobs being created are private sector which as we can see are more or less canceling out in the headline figures but are a positive in terms of generating economic growth.

Also as is the case of the trend for UK unemployment, US unemployment is not going to suddenly fall and may even rise as companies will remain reluctant to hire until they see a government that is in firm control of the economy rather then one that apparently only knows how to press the print money button. So U.S. unemployment may yet have to peak, which does not bode well for the Democrats in terms of U.S. politics i.e. the mid-term elections in November 2010, which suggests continuing engineering (printing money) to artificially hold unemployment down until the elections are out of the way which effectively means delaying real economic recovery.

Looking at the markets once more to see what is actually happening against what should happen we see a stock market that is just 5% from its bull market peak which implies a growing economy and the U.S. Dollar that has gone into reverse gear that implies a weaker economy and low interest rates with more money printing. Whilst not signaling a double dip recession, it is neither signaling a strong U.S. Economic recovery therefore continues to suggest a low growth outcome as the most probable outcome for the U.S. over the next few years which is similar in expectations for the U.K. economy i.e. well below trend growth for 2011 to 2013.

Bottom line - The large industrialised export orientated areas of the Eurozone such as Germany are going to BOOM! Therefore the PIGS sovereign debt crisis is old news. The U.S. looks set to experience sluggish growth.
China Boom Continues

The Chinese central planning capitalists are succeeding in slowing the over heating Chinese economy down towards a growth rate of about 8%, this is prompting the press and aspects of the BlogosFear to conclude that China is heading for a crash, collapse , as illustrated by Marc Faber's continuing commentary -

India Times - China may 'crash' in next 9-12 months:
Investor Marc Faber said China’s economy will slow and possibly “crash” within a year as declines in stock and commodity prices signal the nation’s property bubble is set to burst.

“The Chinese economy is going to slow down regardless. It is more likely that we will even have a crash sometime in the next nine to 12 months.”
This is in complete ignorance of the fact as illustrated in the Inflation Mega-trend Ebook (FREE DOWNLOAD), that the large emerging giants have the room to continue to grow at rates of between 5% and 10% for many more years -

Inflation Mega-Trend Ebook - Page 54

And last but not least is the per capita graph capacity as illustrated by the following graph:



At the present, the mainstream press is busy worrying about the credit bubble in China, however the economic growth to date has barely bridged the huge gap between the emerging market giants and established western economies which implies a huge potential for the gap to narrow as manifested by strong growth in the emerging markets and below trend growth or even economic stagnation by many of the western economies which means that capital investments made today can be expected to return significant real capital growth over the next 10 years on the basis of real GDP growth that typically targets a growth increase of 100%.

Therefore rather than economic collapse, the emerging giants are still a long way from hitting capacity constraints as measured by per capita output. There exists huge potential for increased productivity in asia whilst in the west huge over capacity as wages over the next decade or two as productivity and wages will continue to converge which implies strong growth for the likes of Chindia and low growth or even stagnation for the developed West.

This implies that investors should continue to take advantage of short-term stock market volatility that present excellent long-term accumulation opportunities as I pointed out 3 weeks ago for China (18 Jul 2010 - Stocks Stealth Bull Market Correction Generating China Buying Opportunity? ), just as many commentators were announcing that the Chinese stock market was heading for a crash when the SSEC was trading at 2,424, with the continuing benefit and real time experience for western investors of an appreciating Yuan currency as illustrated by the strong performance of the key China FXI ETF.
Internet Information Age Boom Continues

Human eagerness to share information appears to be encoded in our genes which is why we have trended towards the creation of the internet that at present represents the pinnacle for free sharing of information and ideas that seeks to have an exponential impact on human productivity as the reach, depth and available supply bandwidth continues to expand. All of which implies both greater overall productivity & wealth and greater equalisation of earning power across the world. Where literally bright individuals can be stationed anywhere on the planet without restriction on earning and purchasing power. Therefore despite the dot com crash of the noughties, the worlds largest companies are increasingly listing huge internet based cash cows such as Google that are increasingly driving innovation in connecting the virtual world with the real world that concludes towards ever greater personal and corporate much as the mobile phone has achieved during the past 20 years and the PDA's during the past 5 years so will the expansion in human real life immersion into virtual work and play worlds that will develop over the next 10 years driving huge gains in human productivity and economic growth, wealth and prosperity that will branch out in all directions.

The internet information age has barely begun and where the west has a clear advantage over states such as China which lacks the necessary freedom of thought elements to compete against countries such as the UK and USA (as long as they don't converge towards where China sits).

In conclusion, the economies of the west, east and south contrary to much that you will read are not heading for a Deflationary Great Depression II, World War III or the end of civilisation just as the doom mongers at the end of the last millennium were stating. The western economies point to a period of below trend economic growth with inflation for the next few years, with the UK at the head of the list, U.S. in the middle and parts of Europe averaging third in line in terms of inflation / growth rate expectations.

Quantitative Easing

Talk of further QE had gone quite earlier in the year and remains so in the UK. However in the U.S. the talk of quantitative easing having ended in March 2010 has now been replaced with chatter for QE2. However, I have always maintained since March 2009 that once started Quantitative Easing is difficult to stop regardless of the statements emanating out of the central banks, as the only answer the governments have to weak economic activity is to continue printing money to inflate economies and asset bubbles.

UK Growth Forecast Conclusion 2010-2015

The conclusion drawn from the sum of the above analysis is that the forecasts for years 2010, 2012,2013 and 2014 remain unchanged as per the original analysis and forecast of December 2009 (UK Economy GDP Growth Forecast 2010 and 2011, The Stealth Election Boom). However the original forecast for 2011 is now overly optimistic in the face of the governments recently announced severe austerity measures, therefore the forecast for 2011 GDP growth is revised lower to 1.3%:
  • UK GDP 2010 2.8%
  • UK GDP 2011 = 2.3% - Revised down to 1.3%
  • UK GDP 2012 = 1.1%
  • UK GDP 2013 = 1.4%
  • UK GDP 2014 = 3.1%
  • UK GDP Mid 2015 = 3.3% - NEW


The trend forecasts for the three years from 2011 to 2013 suggests that of a stagflationary environment of low growth and above trend inflation to be followed by an engineered election boom into May 2015 starting in 2014. Whilst growth for 2012 to 2013 is expected to be well below trend, however at this point I still do not see any signs of a double dip recession that the academics and the mainstream press have been obsessing over for the past year, in fact the London 2012 Olympics could see South East experience an early economic boom. However against this areas with large public sectors such as the North of England, Wales and Scotland, where there are city's where the public sector amounts to more than 70% of the economy probably will experience a double dip recession as the spending cuts start to hit during 2011 and 2012.

Coalition Government Risks to the forecast

Risks to the Forecast are political, in that if the coalition government disintegrates resulting in an early general election during 2012 and 2013 then that would negate the balance of this forecast. If the coalition government can hold its nerve during these two years then it will lay the ground work towards an outright Conservative government. The problem here is that the likelihood of this will slowly dawn upon the Liberal Democrats during 2013-2014 who may then decide to pull the plug on the coalition government before they hand the Conservatives a victory in 2015. Therefore UK politics whilst quiet at the moment are increasingly going to start to heat up as the May 2015 Election nears, all of which bodes well for Labour to step in during a period of Coalition disintegration as voters by then will see the Labour debt fuelled growth years through rose tinted glasses.

Comments and Source: http://www.marketoracle.co.uk/Article21739.html

By Nadeem Walayat

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Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction.
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