It was reported last week that the Bank of England recently issued a report which confirmed that its programme of quantitative easing (printing money) had increased the UK inflation rate. The ‘official story’ is that it added 1.5% but that, of course, is unlikely to be the real figure – that is the politically acceptable figure. Independence only goes so far – and even people at the Bank of England like to hold onto their jobs.
Regular Schezzer readers will be aware of our previous “what to expect” articles on the economic front and so this news will come as no surprise to them. For others, welcome on board!
The report also concluded that QE did boost the economy as well, it was not all inflationary. But this is true more-or-less by definition also. The more fundamental point is that it increased inflation. This actually means that the boost “topped-up” economic activity – it did not act as the cure for an impending deflationary depression, talk of which greatly exaggerated at the time to lay the ground for the ‘printing money’ policy.
The real problem the authorities find themselves with is that it did not produce enough inflation.
The debt burden is still high and the slow down in world economic growth makes it harder for us to pay our way. So the odds are now strongly in favour of the likelihood of more QE happening this Autumn. So expect inflation to remain at well above 5% at least until 2013, and as we mentioned last time, the risk is that it will go even higher if the inflationary spiral kicks-in.
So the bottom line is still – as we have been saying since 2009 – that now is a good time to spend and to borrow – because prices in the near future will be much higher than today, and with savings rates at artificially pathetic levels and stock markets providing returns that would be unlikely to support a large family let alone the whole nation, savings should be minimised.
How much to save?
Someone reading our comments above could be forgiven for interpreting our advice as being not to save at all. This would be incorrect though.
Analyses of the motivations for savings indicate that there are 3 key reasons to save. The first is ‘precautionary’ or, ‘saving for a rainy day’. The amount you need for this is easy to calculate. It is about 3 times your essential annual outgoings. What you class as “essential” is clearly a personal preference (!).
The second is savings that are made to afford a better life in the future. These are discretionary and if you do not have a specific near-term goal in mind (such as buying a house or buying a plane ticket to emigrate from the UK because things are so bad) then this is the type of saving it’s worth economising on.
The third type is savings through financial instruments. This includes everything from insurance policies, life assurance and stock Market ISA’s to pension plans. These are the investments that should be avoided. There was a great poster ad for an insurance company a couple of years back which put it well. It asked people what their reasons were for choosing a pensions provider. The best response ever was “I want a pensions company that won’t retire before I do”. Enough said.