2011 – Now for the Pain


by Tom Paterson


Why This Year Will Wake You Up



Let me take you back to the financial crisis of 2008 in the UK. The spectre of DEflation had our central bank all concerned. So the ‘Old Lady’ slashed interest rates, and continued cutting them, until they reached their historic low levels of 0.5% in March 2009. They remain there to this day.

But this wasn’t enough, in March 2009 the BoE announced that it would print up £75bn, which extended to £150bn and then to £200bn in total today. At the time the BoE said it would use the money to buy up Government Bonds and Corporate debt. As it turns out, the BoE used about 97% of that £200bn to buy up Government debt. This type of debt monetisation is what gave the Republic of Weimar such a headache in the 1920s.

Again, this action and all subsequent additional money printing was deemed necessary to fight off those evil falling prices. But let’s look at the evidence of their actions and remember that the BoE has a mandate of achieving inflation as measured by the CPI of 2%.

As you can see from the chart on the left inflation measured by CPI (turquoise line) dipped below 2% for about six months, and it has remained over 50% above target for more than a year. In fact CPI inflation has been above target for 40 of the past 49 months. To add to the BoE woes, we get news just before Christmas that CPI inflation is again on the rise, reaching 3.3% in the latest report, with many pundits seeing a rise to 4% in 2011.

What this simple little chart tells us is that the BoE couldn’t give a damn about its 2% mandate, the game plan is to inflate away our debts by making the pound in our pocket increasingly worth less.

For an example about how clueless those at the central bank are about predicting inflation, the Central Bank in November said:

“The chances of inflation being either above or below the target by the end of the forecast period are judged to be roughly equal.”

What kind of an assessment is this? This isn’t a prediction, saying something has a 50:50 chance of happening is just a coin toss. It’s like me saying in a two dog race I think fido’s chances of winning are exactly the same as K9. They’re basically admitting they don’t know, and yes, these people really are in charge of the value of our money.

To add insult to injury, in September the Deputy Governor of the BoE, Charles Bean, said savers should “eat into their capital a bit” to help them get by. The country is capital starved and debt saturated, what we desperately need is MORE capital and savings – NOT less. You can’t have capitalism without capital, which comes from savings (under-consumption). This sort of nonsense spouted by people who are supposed to regulate the value of our money should have you sincerely questioning their ability. For a quick recap on how an economy actually grows read “Suicide Shopper’s Last Dance”.

This all stems from a mis-definition of what inflation is. Simply put, it is an increase in the supply of money, it has nothing to do with prices. A consequence of inflation are rising prices. So how can I say with certainly that we will have inflation in 2011? Because it is already here in spades, it just hasn’t fully filtered through into everyday goods …….. yet.

The reckless policy by the BoE in ignoring its mandate is hammering savers. You know, the people that ‘do the right thing’ and don’t go out and blow their money on new fangled i-whatevers, but rather ensure there is capital to grow the economy. It’s also crippling those on fixed incomes like pensioners as the purchasing power of their Pound decreases. In short, it is a wealth transfer from those savers to bail out the debtors like our banks and our government. Is that fair?

To highlight just how acute the problem is, this report indicated that out of 2,203 savings accounts on the UK market just 3 offered any real rate of return. All the people with their money in the other 2,200 savings accounts were losing money because the rise in prices is greater than the interest being paid.

Lets be clear, the deflation argument and why it must be avoided (because somehow, things getting cheaper is bad, right?) is a diversionary tactic. The only reason for the money printing was that our largest banks were (and still are by the way) insolvent as is the UK government. Deflation was put forward as cover to legitimise this transfer of wealth.

To keep the current banking system in place, all those crappy loans and toxic assets which were discussed ad-nauseum in the press in 08 and 09 were dumped right on the back of the UK tax payer. They didn’t go away, they were merely transferred over to the tax payer. They are still there to this day.

The politicians, of whatever political strip really doesn’t matter – they all bat for the banking interests when push comes to shove – claim that with the help of the Central Bank and money printing “we’ve managed to avoid another Great Depression”. Not so fast.

You see nobody, especially the majority in our increasingly irrelevant main stream media, has ever asked the simple question; At what cost?.

We had a chance in 2008 to fix the underlying problem in the UK, debt. Vast, unprecedented world beating debt levels. The cost of government isn’t what it taxes, but rather what it spends. It doesn’t have any money, it only has what it can take through taxes. And if it doesn’t have enough through taxes it borrows the rest, which it must pay for in the future via higher taxes. In 2008 we were bumping up against reality for New Labour’s profligate spending and promises.

The UK needed to pay off its debts, and there are only 2 honest ways to do this, and one very dishonest. The UK could’ve raised taxes to meet its obligations. But with the outcry over 20% VAT this year it’s easy to see just how unpopular this is. Secondly, we could’ve defaulted, but the banks and bondholders who leant us money would’ve been severely burned – so that was never going to happen. So instead we’ve opted for the third way of liquidating debt – inflation. This method is tried and tested by governments throughout history, and because of the people’s bad understanding of the causes of inflation, people fail to make the connection between the rising prices and money printing, courtesy of the Central Bank system.

Essentially inflation is a tax, instead of raising your taxes the government with the central bank just prints up the money to pay down the debt. So the value of your money goes down and the ‘stuff’ you can buy with the same amount of money goes down. It’s exactly the same as a tax in that you now have less purchasing power left over to buy things. It’s a very dishonest tax, and the UK is about to get the mother of all tax bills courtesy of inflation in 2011.

We all know the expression “there’s no such thing as a free lunch”. So when we ‘rescued’ the banks and government in 2008, the ‘at what cost’ question was largely ignored. Well the people in the UK are about to find out the hard way just what the cost actually is.

As our central bank still deceptively talks about DEflation, here are some things to consider that will be happening this year. Can you see the deflation?

• Petrol is the highest price ever in the UK – set to rise to £1.40lt by April
• Gas and electricity prices set to soar as much as 10%
• Anything that attracts VAT (for those that think this doesn’t affect your weekly sainsburys shopping bill because ‘food’ is exempt, think again) is going up 2.5%, permanently
Rail travel up around 13%
• Tuition Fees (in 2012) up 300%!
BA fuel surcharge 10%

Now let’s take a look at the price of commodities today (you know, the stuff that makes all the things we buy), which have a lag time of about 6 months before they are felt by the consumer in the shops. These price rises are already baked in the cake for 2011.

Do you drink coffee? Highest price in 13 years
• Do you take sugar in your coffee? Sugar Price 30 year high
• Do you like cheap t-shirts from Primark? Cotton at 15 year high
• Do you want anything with electrical wiring in it? Copper all time high
• Toast with your coffee in the morning? Wheat prices highest in 2 years.

I could go on – but the trouble is, these prices are expected to rise further in the new-year not decrease. Perhaps two more, and our favourites.

Gold price – highest ever
• Silver price – highest in 30 years

Yeah, clearly there is a severe bout of DEflation just around the corner. Sarcasm off.

These price increases are going to hammer corporate margins, especially those whose business model already operate on razor thin margins (Primark to go out of business in 2011 anyone?). But more importantly, by the time UK citizens have paid more for petrol, more in taxes, more in food, more for just about anything people need in order to go about their day, disposable incomes for electrical trinkets will evaporate. And the ‘at what cost’ question will start to become clear to the UK citizen.

Into these disposable income sapping price hikes, we have unemployment in the UK going the wrong way again. It now stands at 2.5m (7.9%) according to the government numbers. This number is likely to rise as public sector jobs are culled, and private sector jobs are also cut because of the margin compression mentioned above.

With already 25% of borrowers struggling to pay off debts, throw into the mix the price rises and more unemployment and look for that number to rise further. How can anyone look at the state of our economy and think we’ve saved ourselves from ‘The Great Depression 2.0’? At best we delayed it by a couple of years.

What ever you do please don’t listen to absurd argument that as long as wages are ‘sticky’ i.e. not rising you can’t have inflation.

I thought that one of the big lessons from the problems in the 70s was to prove how fallacious this argument is. Wages in Zimbabwe are pretty ‘sticky’ – how did that low inflation work out for them?

So how will our government and central bank deal with this looming problem in 2011?

Just before Christmas we had the staggering “Plan b” from that unelected mandarin, Sir Gus O’donnell. The talk in Whitehall and Government is that there is a real chance the economy ‘falters’ next year – one wonders why we pay these people upwards of £285k a year to come up with genius assessments like this.

What was staggering about the “Plan b” memo was the very first action the government, through the BoE, should apparently undertake. Print more money. Yes you read that correctly, option number 1 in ‘Plan b’ is to “extend quantitative easing”.

A Quick aside, we’re constantly told that the ‘independence’ of the central bank is crucial for a smooth running economy. Question; if it is really independent, then how can an un-elected civil servant’s first action for countering a downturn be “extend quantitative easing”, is that not a decision solely for the ‘independent’ central bank to make? Truth is the idea of independence is just a fig leaf covering the private parts of corporatism in the hope the public don’t notice. Every time you hear someone in the press talk about BoE independence, just replace that word with secrecy and you’ll be a lot closer to the truth – “The secrecy of the BoE is vital to the smooth running of the economy”.

So the UK policy, in the face of massive price hikes this year, will be to follow the US Central Bank right off the cliff. The Fed has just announced another $600bn of money printing themselves, with the threat of more to come. It is clear now, that in the face of huge cost of living expenses in 2011, the Central Bank will pull its one and only lever, and print and print and print some more. This completely reckless policy of ‘debauching’ the currency was warned about by the very economist they revere so much.

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
JM Keynes.

This is a very powerful quote, and one that demands be read a few times to realise just what is being said. Essentially devaluing a currency is a way to steal wealth from the citizens with not “one man in a million” noticing.

Remember, we highlighted the fine work over at Hinde Captial who pointed out that on a per-capita basis, the public and private debt of citizen of the UK is the highest in the world, yes, even the US. Being number 1 in the world isn’t always great.

The clear policy of the BoE, the Government and now we understand the head of our Civil Service, will be to run those printing presses until those debts are liquidated. Which means a Pound with vastly less purchasing power than it has today. Because we have a ‘fiat currency’ (1), it doesn’t have any intrinsic value, it’s just a piece of paper with some pretty signatures on it, it only has value so long as people believe and trust that it does. That trust will be stretched to the very limit this year.

And if we are not careful with our money printing, we run the very real risk, according to Keynes, of “over-turning the existing basis of society”. We are already starting to see those cracks with ongoing riots in Ireland, Greece and here in the UK. 2011 will be a very interesting year indeed.

Tom Paterson

Chief Economist of www.GoldMadeSimple.com


Editorial view: Tom is spot on. Anyone who thinks we have not experienced inflation AND rising prices should talk to their butler. There are a great many things we can easily do before money printing. We can cut expenditure by stopping wars and abolishing trident, renegotiating PFI, putting the insolvent financial sector into liquidation and issue a non debt-based money. Those who propose spending money we don’t have are unwittingly supporting the global fraudulant ponzi scheme which is now reducing people, municipalities and nations to debt peonage. The financial system is out of control and demanding more and more money. The governments will not borrow to help public finances, they’ll borrow to bail out the banks again. That’s the scam. The central banks are flooding the world with money. At home this is causing inflation and the devaluation of pensions and savings and thus killing the ability to form capital and so invest in vital manfucacturing that we need to dig ourselves out of this hole. The flood is also causing volatility in other markets. This is not yet so visible TO US but if not stopped now the banking oligarchs will lead us in to trade wars and then more military conflagrations. We must awake from our stupor and hold our politicians to account. Thanks again to Tom and all those out there who struggle to get the realities across to us and through the fog of the monetary war currently being waged against the people.

Tom Paterson is the Chief Economist at Gold Made Simple, one of the world’s leading gold bullion ownership and trading services. Tom previously worked as a Broker on a Futures and Options desk at a main brokerage in Canary Wharf and was responsible for the production of “The Economissed” , a research paper tracking Macro themes and trade ideas. Tom is a keen student of the Austrian School of Economics – or as he refers to it ‘real’ economics – and feels very passionate about the lessons that can be gained by all that understand its guiding principals.


1. Currency that a government has declared to be legal tender, despite the fact that it has no intrinsic value and is not backed by reserves. Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on faith.
Courtesy http://www.investopedia.com/terms/f/fiatmoney.asp