What leads The Right Side to believe inflation will be the eventual winner is the advent of "quantitative easing." The £125 billion spending program launched by the Bank of England in March has already boosted the UK’s monetary base and continues to do so. This means that there is more money sloshing around in the economy.
When you combine a growing monetary base with shrinking national output you get, quite literally, more money chasing fewer goods and services. This is the very definition of price inflation, according to Nobel prize-winning economist Milton Friedman.
You can see from the chart below, that more often than not, when the national money supply is increased, inflation rises as a response.
When money supply rises, inflation rises soon after, could it happen again?
Source: Morgan Stanley, IMF
This is exactly what the Bank of England is hoping for again. This is why they have created the biggest money supply in recent history. And they’re not alone. All over the world other central banks are doing the same thing. While we fight to save our banks, the Americans fight to save their automakers and the Chinese aim to keep the construction business going. Every economy is printing money to protect and ensure the survival of key industries.
And rescue by inflation may initially be successful. But once the "inflation toothpaste" is out of the tube, it becomes very difficult to put back in. We may soon find ourselves in a world where inflation goes through the roof and wise investors should be looking to add intelligent inflation hedges to their portfolio... and soon.
Editor’s recommendation: Theo Casey is the investment director of The Fleet Street Letter. Look out for his team’s brand new report on the coming inflation and how to protect yourself against it... out soon.
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