Published by Kauders Portfolio Management, Authorised and regulated by the Financial Services Authority
Seriously interventionist policies started with wartime rationing. But it was only in the late 1950's that post war inflation began, following the Bank rate leak of 1957. The Macmillan Government discovered that it could generate a feeling of well-being in the electorate, by creating credit and causing inflationary price rises. Intervention and inflation then became intertwined.
People perceived that Governments could influence and change the normal economic cycle. Politicians were delighted to do so. Inflation was their hand maiden. Occasionally, as in Mr Barber's dash for growth in 1972, they went too far, too fast, so price levels rose, politicians claimed more skills in managing the economy, and homeowners and equity players were rewarded.
It is irritating to see statistics that "prove" that shares always rise. Such statistics invariably fail to isolate the effect of the great post-war inflation. Since that inflation is over, there is no reason whatsoever to suppose that equity prices have the natural characteristic of always going up. They don't.
This deflation is simply the reverse side of the post war inflationary boom. This is a very long cycle. Governments that try to create inflation cannot achieve lasting success. Conversely, Governments that fight inflation will apply the wrong medicine and do damage instead. You can be sure that Mr Brown's inflation fighting credentials are going to exacerbate the next recession.
At heart, politicians can do three things:-
1. A very few can provide leadership. Most merely jump on board passing trends. A few duck and weave. Churchill was a leader, Major a weaver. Thatcher capitalised on the economic trends of the time. Blair is a trend follower.
2. They can redistribute your money, taking from A to give to B. Denis Healey squeezed the pips, only for Thatcherism to put the juice back again.
3. They can intervene, by positively promoting particular industries, or by imposing bureaucratic requirements. With a few exceptions concerning infrastructure, we believe most intervention and regulation is self-defeating.
What politicians cannot do is stop the long-term deflationary forces. Instead, they develop smoke screens to protect themselves from the tide. But the trouble is, these clouds of spin get found out, as this week's events have shown. In Newsletter 49 we look at the next General Election: more of that in the future. We also note that the Clinton-inspired era of spin, lies and an answer for everything, is coming to an end. Notting Hill AND Downing Street residents please note.
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