Inflation can bring down Governments. It can also bring about war – thankfully less so in Europe than in the past (I’m thinking of Germany). Inflation can also bring disaster to an economy rapidly, for instance the European Exchange Rate Mechanism when the UK targeted the Deutschemark by raising interest rates to show its commitment to keep wages lower. That’s complicated you may think. Well, it came up in my Oxford entrance interview. The idea was that unions would ask for higher wages thinking price inflation would not make their products more expensive given that the currency could depreciate on the back of higher inflation. So, the Government would raise rates (no Indy BoE back then) and thereby make it less attractive for unions to push for higher wages as it would now make their products uncompetitive and lead to redundancies.
Of course, the theory was too tenuous and complicated and didn’t hold water. And the Major Government with Lamont as Chancellor lost a billion to Soros who shorted the Pound i.e., sold Pounds as he knew raising rates by the Government to track the Deutschmark was not credible as a promise. You see Soros as a hedge fund manager knew about another branch of economics – Game Theory and if your threat (high interest rates) is not credible then your currency will fall as the market anticipates any interest rate rises leading to buying of your currency will not last long and sales follow as the much-expected interest rate drops indeed happen sooner or later.
I know, complicated! But important. We are again in an inflationary period and old grey hairs which were once full and young have memories which help us anticipate direction. Now the Bank of England can make its own decisions and is unlikely, unlike Lamont, but because of Lamont, to make thousands of business bankrupt by spiking up rates. Lamont was a mediocre economist as was his naïve special advisor at the time – one David Cameron. Both studied economics at a time when Game Theory was novel. Game Theory (you’ve seen the movie “A Beautiful Mind” is essentially about anticipating the next move of your opponent in a multi-stage game.
Also telling is the political culture of a country. In the US they’d rather have growth over low inflation and so interest rates are more likely to remain lower for longer. In the German, they still recall inter-war inflation and would sacrifice growth for low inflation. In the UK we are somewhere in between. So, you should anticipate some rises in rates – do not wish it away. For all you readers with lots of corporate debt and landlords – plan ahead now and start deleveraging!