Sea of Liquidity could sink us
28 12 08 - 09:34 On the principles outlined above, the independently minded ought to be suspicious. And on even the most cursory examination, there is an intellectual contradiction at the heart of the anti-deflation crusade.To fight deflation, the authorities have created a Sargasso Sea of liquidity. Either this deluge is going to have an impact or it is not. If not, why bother? And if it is, then as soon as the blocked pipes of the banking and credit system are cleared, that impact can only be highly inflationary.
Deflation battlers retort that the downward pull on economic activity of the deflationary vortex is so great that all this extra money merely restores some balance. But we in the small but hardy band of deflation sceptics have serious doubts about the likelihood of constantly falling prices in a modern, developed welfare state. We may be wrong, but if not, how does the Bank of England intend to get back on top of spiralling prices?
The recent peak in the Consumer Prices Index was 5.2%. Should the next peak be higher, then an inflationary rhythm has set in and we really are in trouble.
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I'm pessimistic on this. But out of bad things, good things can follow - like yin and yang.
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