Rumors of changing the formula of calculating the British RPI are undermining the confidence in UK economy and in UK government. Obviously, after years of money print, rising inflation is inevitable. So it starts to appear even in traditionally manipulated government statistics. And this leads to 2 very serious problems. The smaller problem is the increase of interest of connected to RPI government bonds. UK is printing, but this becomes to increase also the government costs, via the system of inflation-protected bonds. The bigger problem is the public fear of inflation that is fed even by official statistics. This fear can bring an economic crash, if people stop believing the paper money (in this case - UK pound) and decide to convert it in more stable and reliable assets. This can destroy entirely the pound, because the only value paper money bring is the confidence in it and in government that has issued it.
Every time when politics face the problem of the inflation, one of the first things they are doing is to blame the statistics. So now RPI is guilty, because is "doesnt meet international standards". This index was used for decades, and has done its job perfectly. And exactly now - when the de facto leftish government of Cameron is having big deficits and is incapable of making spending cuts and reforms, just now they decided that the index is not good enough.
For the time being, the index was saved. The government decided not to change it and this helped British bonds to feel better. But it is sure, the problem will continue. The government has an enormous deficit and a skyrocketing public debt. Bank of England is pouring uncovered money in economy and the economy itself is not improving enough. I.e. money supply increases much faster than the economy is growing. I.e. the money must devalue to balance the system. I.e. the inflation comes. And inflation is not loved by the normal people that are making their wealth by real work.
So RPI will be sacrificed at any time in future. This way some more time will be won, before the inflationary crash. For the wise investors even now fiat money is already a bullshit. But for not so smart investors, let's they be cautious - when the inflation statistics methods are going to be changed, therefore real problems are very close. So run away from the risky asset (pound).
Dobri
Jan 13th 2013
