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Global trusts are the answer to higher inflation

Global trusts are the answer to higher inflation

Nationalism is back – first Brexit and now President Donald Trump.

This is certainly the end of the post 1945 consensus and an international order supported and policed by America. It is too soon to say that the Trump election will lead to a 1930s world of ‘beggar-my-neighbour’ trade policies, as brought in by America’s 1930 Smoot-Hawley Tariff Act, but tomorrow’s world will be very different from today.

The pound and the economy

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Inflation is here again, and will probably rise to some 4-5 per cent next year. It will be higher for the old than the young, since the former spend most of their money on food and fuel. But the young may well be hit by higher mortgage rates. 

A cheaper pound means more expensive imports and, with two thirds of our food imported and nearly all our fuel, increased prices in the shops should be no surprise.

This is good news for the Bank of England (BoE) since it, like all other central banks of the developed world, has been desperate to reignite inflation, and thereby reduce spiraling government debt. 

Inflation helps politicians, as it is a form of increased but hidden taxation. It helps reduce the burden of debt, which otherwise would need to be tamed through austerity. But past history shows that inflation is a very false friend, and it is bad news for investors.

Since the financial crash of 2008, savers have suffered from ridiculously low rates of return on their savings, whether as a bank deposit or invested in government bonds. This has been due to quantitative easing, or the policy that making money cheap will keep assets dear and the rich happy.

And the happy rich, so the theory goes, will invest in new business capacity, so supplying the rest of us with new jobs, and therefore get the world spending again, so justifying all that extra business investment.

This was a necessary theory in 2008, with world banking facing meltdown, but it has failed to produce a robust recovery in economic activity. Now inflation will give a spurious credence to the idea of growth, which is what all politicians, central bankers and business people are desperate to see.

Changes in central bank policy

Brexit and inflation present an awkward dilemma for the BoE. The UK is running a significant deficit on its trade balance – the gap between what we sell to foreigners and what we buy from them. Until the era of floating exchange rates, this trade gap caused serious problems for the management of the economy.

Floating exchange rates partly solved the problem, but the promotion of the UK as the ideal country for direct foreign investment was the real solution. Add English law and language plus unimpeded access to the EU, and the trading gap ceased to be a worry. But it is a concern now, and will continue to be so until the future EU/UK trading relationship is clarified.