"We need a devil's advocate. We've tried economists and bond experts, but they've all turned us down. What we need is an iconoclast." Some invitations are difficult to resist. Success in the market requires the ability to think the impossible. The best "buy" signal is when the last bull sells. Imagine my thoughts when the debate was cancelled on the grounds that there was nothing to debate. The topic? Could we return to a period of high inflation?
A main foundation of the prosperity of the past 20 years has been quiescent inflation. It has allowed businesses to plan in a secure environment, smoothed the conflict between labour and capital, and punished inefficient companies by removing the escape valve of price increases.
For those who knew the conditions of the Seventies, this has at times been referred to as "the economic miracle". But this non-inflationary boom has many precedents. The "industrial revolution" which the internet represents has delivered improvements in productivity allowing prices to fall – exactly as many previous booms have done. A young colleague asked me: "What did offices do before email?" Explaining business life in the Eighties felt like explaining the age before the telephone.
Similarly, this recession may resemble previous ones. We have seen before how the natural course of markets, whereby investors and businesses readjust to economic slowdown, can be disrupted by some deus ex machina.
We live in an age of laissez faire and yet governments are inexplicably caught up in the direction of economic policy. The levers of control – interest rates, taxation, government spending – all have economic effects. The massive cuts in interest rates made in the face of the "war on terrorism" may represent world governments stepping too hard on the accelerator. The judgement is fine.
Here in the UK, the reversion from new to old Labour government must add to the worries. It isn't simply that Mr Brown has converted to old-style tax and spend, it is the fact that this playing with inflationary fire exacerbates what is going on in the labour market. Businesses are complaining of skills shortages across the country; 65 per cent of employers registered this in a survey this month. In the public sector, a generation of under-spending and mismanagement has made the shortfall even more acute. Correcting this imbalance requires careful handling. A whopping 40 per cent increase in the NHS budget (the biggest ever) can hardly lead to easy wage bargaining.
As the NHS is the largest employer in Europe after the Russian army, what happens to the million people in it matters considerably. This week, the Royal College of Nurses has refused to rule out industrial action, hardliners looking for a pay rise five times the rate of inflation. And for the first time since the Seventies there is talk of a nationwide strike by firemen, in pursuit of an £8,500 pay claim.
The demands may not seem unreasonable after years where the private sector has romped ahead of the public. They are also an inevitable consequence of the vice-like grip that inflation in the housing market is placing on the finances of many households. An average semi in London now costs £237,750. A fireman is paid less than 10 per cent of that (£21,531). This is a tinderbox.
Some commentators have suggested that Mr Brown's largesse was a consequence of personal political calculations: a bold gesture to propel him closer to becoming Prime Minister and to monopolise the credit for spending the dividend of a cautious first term. If this posturing has the consequence of letting the inflationary genie out of the bottle, we can never forgive him. That would be a real devil.Reuse content