THE BLOG

Inflation - It's Coming Round the Curve

12/04/2013 14:05 BST | Updated 11/06/2013 10:12 BST

Inflation targeting is so 80s, 90s and Noughties. Yesterday evening I watched the London leg of Meatloaf's last tour at the O2 stadium (I love it when fat guys do well), and at one point a giant inflated Bat out of Hell soared over the band, as the great man belted out the wonderful, iconic, eponymous song and, rather nerdishly, my mind turned to the inflation monster that our hitherto oh-so-self-righteous po-faced central bankers seem intent upon releasing from its 30-year slumber.

The irony is that it's all about 4 years too late. Even in the depths of global economic despair in 2009 when we needed really aggressive monetary policy, the measures used and the quantum of money printed as Quantitative Easing was much too timid, and anyway it got stuck in the bowels of banks' balance sheets as excess reserves as they were all too terrified of lending money on to real people or businesses, as the policy intended. Sure, the Bank of Japan (BOJ) started the experiment as early as 2001 and the Fed had already embarked upon QE in 2008, after Lehman collapsed, but events have proved that the amounts employed were just too small, (if you even allow that QE, i.e. monetary policy, can indeed be used to address a balance sheet crisis). The Bank of England, (BOE), joined the party in September 2009 but, as consecutive MPC lone-voices Adam Posen and David (Danny) Blanchflower kept insisting, it was never enough.

You will notice that I haven't thus far even mentioned the European Central Bank (ECB), the bank that raised rates even as the world was patently crumbling in the summer of 2008, just because of an imagined inflation problem in Germany, and again in 2011 as the Eurozone debt crisis was still very much spiralling down. The ECB has since adopted the most timid forms of stimulation, (not really even worthy of the name QE), and even those have proved too much for Bundesbank grandees Weber and Stark to stomach, prompting their resignations.

But now, here we are, with the world's major developed economy and locomotive, the US, showing real signs of growth, and finally Japan has got religion, opening the floodgates with a QE program that dwarfs the Fed's puny efforts as a percentage of GDP. Already the results seem dramatic, the Nikkei has soared by 50% since November and the yen has plunged by 25%; and herein lies the danger, central bankers around the world may themselves start to look upon the Japanese 'success' with envy, and more dangerously, so may their governments, and that will lead to pressure upon the BOE, the Fed and the Swiss National Bank (SNB) to keep up with the pace that Japan is setting.

It starts quietly, almost imperceptibly, by design. You look away for a second and suddenly the Fed's mandate doesn't seem so dual anymore, and the BOE's has been changed subtly to allow for more latitude on inflation, in the search for growth.

At least one can hope that Bundesbank President Weidmann will hold the ECB in check.

Just as intentional currency depreciation is the policy that dare not speak its name, so is government debt monetisation, and it will no doubt also be entirely disingenuously dressed up as purely a 'necessary domestic measure' aimed at stimulating demand with no ulterior motive. What's that, 'negative real rates are a great way to cut the real value of government debt'? Oh, we never even thought of that, honest guv.

Let the burglary begin, the silent but deadly transfer of wealth from rich old baby boomer savers to young, feckless borrowers, from pensioners to the dwindling workforce, from individual to government.

I have a trading saw which has always stood me in good stead. When a successful trade hits the front pages, or even just the front pages of the business section, it's probably time to get out. Well, by the time central banks do the amount of QE they should have done 4 years ago, it's probably time to be very worried.

In the words of the great Jim Steinman, 'And I never see the sudden curve till it's way too late'