Generation X.0

Mervyn King's policy of moderate long term inflation (he's extraordinarily bad at his job if it isn't) along with the current government's penny pinching is in danger of creating a new kind of generation X.

Increasing the retirement age while there is a shrinking job market is leading to mass youth unemployment and imposition of educational fees is closing the route of self-improvement to many. Even for those lucky enough to get a job, the immediate prospects are bleak. Home values are beyond their reach and the wealth firmly locked up in the generations approaching to retirement. In protecting his own generation's wealth (and admittedly the liquidity of the UK banks) Mr King is seeing to it that any cash anyone might be able to save after exorbitant rents (due to the lack of cheap houses there is little competition) is being eroded at 5% a year and will be for the foreseeable future.

Mervyn is right to say that someone is going to feel the pain, his rationale is that savers can afford it a little better than borrowers even if that's unfair on those who saved when everyone else was borrowing. However the long term implications of this decision are being ignored.

I am guessing that the medium term plan is that after the immediate issues are 'fixed' inflation will fall slightly, enough to placate businesses anyway, while still being enough to slowly erode real asset values, thus avoiding a housing market crash and destroying the UK banking sector (if the banks suddenly had to write off 40% of the value of their mortgage assets we would be in a very similar position to Ireland). After that I guess he's hoping that the economy is generating wealth in some unspecified way.

If he's right that still leaves Generation Rent. Unable to afford property and unable to save meaningfully, by the time the economy picks up they will have missed out on entering 'graduate-level' jobs by a few years and the intake will simply skip to the new generation. Even assuming they get jobs they will be relying on wage increases outstripping inflation in order to get ahead. That seems like a remote possibility right now and even if the economy does pick up there will be a long wait for average salary multiples to close with real house prices.

If he's wrong all bets are off. Inflation could keep increasing indefinitely as the value of sterling drops because of the low interest rates and we import almost everything (Eurozone interest rates are rising already; Chinese ones are going through the roof: the value of their goods will rise). This seems the likely outcome to me. On the other hand the BoE seem to be more worried about deflation. I do struggle to see how this will happen though. Energy prices might fall temporarily, but long term oil is only going in one direction and without rate rises sterling will stay weak. If the UK could start exporting manufactured goods again it might happen but that time seems past now and even if it did manufacturer would still need to import inflation-racked raw materials.

Buying property in Germany would seem like the best long term plan...