system two

system two
start-up thinking in the enterprise

Thursday, 27 May 2010

The inflation game....

To solve the problem of soverign, corporate and personal debt - either the US or Europe must take the pain of inflating the west’s way out of the crisis. For several months now I’ve been wondering when the game of macro economic inflation chicken would begin. Finally. With increasing evidence of sustained growth - it seems to have started. We can now see political leaders manoeuvring on both sides of the Atlantic (but seemingly more aggressively in Europe) to manipulate the markets into forcing the other side into the firing line.

Although the rules of the game are relatively straightforward, their practical application is an incredibly dangerous political tightrope on which to walk. Nevertheless, both sides of the Atlantic will participate. The size of the prize (running your economy with lower inflation and higher growth compared to your nearest competitors) is simply too great not to have a go.

For the losers – the economic zone left holding the “higher currency bomb” - once growth kicks they get to import even more inflation via more expensive imports, with their export sectors simultaneously hit by the same high currency.

So how do you play?

Well, first of all you need spineless, dithering, self serving politicians who have little or no sense of decency or shame, who are prepared to roll their sleeves up and really get stuck in.

Frankly, on this basis alone, the US may as well go and grab a shower now. “err….Mr President….we need to add a few things into today congressional speech about the economy……” The US were foolish enough to elect someone with a partially working moral compass and a desire to bring decently and humanity to politics…how naive….

We on the other hand we in Europe have been much more sensible. We’ve put people like David Cameron in charge and even had the good sense to weaken his position, by placing him in a coalition with people who detest him, giving both parties the chance to blame lack of economic good governance on the other…...genius - who knew the electorate could be so clever?

Next, you need the aforementioned self-serving, partially educated PR team, to gently, but persistently work to undermine your own currency to the point where the markets devalue you against the other side, without precipitating a full on run. This was done very competently throughout the election by the Conservatives, particular by that odious little turd, George Osborne (someone who exudes lazy, ignorant, mis-placed self confidence with remarkable ease). George was able to point out on a daily basis throughout the campaign, the fragile nature of our economy and the massive cuts he’d need to instigate to bring us back form the brink.

Nice one Georgie…we’re nearly home and dry!

Even the Germans are getting in on the act. Angela Merkels’ brilliantly clumsy talking up of Grecian and Euro zones woes a couple of weeks ago, although seemingly a horribly amateur turn in a field of pros, suddenly was put into context as the French waded in hours later to contradict her – a work of political genius – not only knocking the currency but cleverly adding a “we’re f**ked and we also can’t agree” garnish – bravo!

The game of course is long and hard – and we are only seeing the opening salvos. None of us should underestimate the stakes however. Forget short term volatility, medium term growth or longer term fiscal issues. Whoever loses the game of macro-economic-inflation-chicken, bequeathes their country a generation of lacklustre growth, high unemployment andasset value erosion.

Who said getting the Tories was a bad thing?