No subject

sense. But taken collectively they have probably been shifting into
bonds or selling out their schemes at exactly the wrong time. Next year
or the year after may be a far better time to buy bonds or annuities.

There is also the macroeconomic perspective to consider. If the credit
cycle is on the turn, companies are likely to feel the pinch more than
rich-world governments. Yields on riskier assets (such as corporate
loans) are likely to rise by more than those on safer,
government-backed paper, and index-linked bonds may accentuate the
difference. Those governments, many of which have done too little to
rein in their deficits, will keep borrowing plenty, and
inflation-proofing makes their bonds even safer bets than they used to
be. The relative attraction of lending capital to companies will thus
be slightly reduced. At the margin, this could make a difference to
long-term prosperity. Companies, not governments, are the best creators
of productivity and growth.

So the Bundesbank may have been right after all to hold out so long
against indexation, but for the wrong reasons. It is not the threat of
high inflation that hangs over us, but the possibility of declining
productivity growth. Even so, it is always worth remembering what
happened 83 years ago when the once mighty Reichsbank lost control--and
worth hoping that hyperinflation stays where it belongs: in a museum.

 

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