Time to take sides

I could make a hobby of collecting jokes about economists. You know the sort. Put four economists together in a room and you will come to five opinions. If all the economists in the world were laid end to end they still wouldn't reach a conclusion. What do you call five hundred economists at the bottom of the ocean? A start. Well, it rather looks as though the economic debate is polarising. And the two sides are inflation and deflation.

The deflationary lobby is led by Roger Bootle. His book, The Death of Inflation, suggests rising prices will not return. The optimists have adopted this as the new paradigm. Productivity rising through technological advancement without inflation - so no return to the boom/bust cycles of the past. On the other side of the argument are those who believe this time round is no different.

Amongst the very vocal proponents of the belief that inflation will return to haunt us again is Professor Tim Congdon. Not only does he believe we are in the same old cycle as before, but he considers financial markets have failed to realise the fact.

I shared a platform with Tim at the Greig Middleton Investment Seminar in London this week. He argued cogently that it was quite consistent to have rising output with inflation falling. The problem, he suggested, was that eventually output would start to fall at a time when inflation was on the up. He also considers the Bank of England to be quite justified in raising interest rates to dampen inflationary pressures.

It is not really the outpourings of concern over the re-emergence of inflation that has prompted the rethink of market levels, epitomised in share price falls during the past few weeks. Deflation is seen as the problem. Deflation can all too easily turn into recession - and then depression if we are not careful.

You only have to look at Japan to realise deflation is a possibility. There, a particular worry is the effect that the continuing poor performance of the Tokyo market will have upon banks. At 16,000 on the Nikkei Dow, there is reason to believe balance sheets will look a little stretched. We have been through that level and are heading down to 15,000.

Back home the real worry is that the five successive interest rate rises will slow the economy too fast. With 3.5 per cent growth on the cards for this year, we may be looking at a considerable slowdown.

As it happens, London still looks cheap compared with Continental Europe and is an absolute bargain relative to the US. With retail buying having limited the slide on the other side of the Atlantic, I still feel fairly sanguine about the future. But you never know. Time to concentrate on the season of goodwill, I feel, rather than markets.

Brian Tora is chairman of Greig Middleton's investment strategy committee and can be contacted on 0171 655 4000