Subprime silliness, nailed by two comedians back in 2007. (As opposed to being explained by the comedians who came up with sub-prime and were still defending it back then.)

For non-UK readers, the chaps in the video are the always excellent Fortune and Bird, who often speak more the truth in their rambling obfuscations. MBEs ahoy, I say!

The BBC has ran a more serious explanation of subprime mortgages in easy-to-get diagram form, if you’d like to know more. Or go back to the funnies with this Seven Sins sub-prime meltdown summary.

Going down: Barclays' share price from Feb '07 to Nov '08

So about two years ago I got talking to a friend’s mother who had inherited Barclays shares, because I am the sort of nerdy person who talks about shares at dinner parties. She had no thoughts on the bank’s future. She simply owned a bit of it.

I suggested to my friend that she might nudge her mother towards diversifying out of Barclays. Not because of any worries about the share price, but because:

• Her mother clearly wasn’t following the company’s business, and if you’re crazy enough to own just one share you really ought to watch the business like a hawk.

• Even though I don’t give individual advice about shares, it would surely be cruel not to cough and mention that having all your shares in one company, even one as ancient as Barclays, is a rather risky strategy. Banks go bust.

Where did all her money go?

Fast-forward to this week, when I was asked by my friend why the Barclays share price was all but missing a zero off the end. Sure, she’d seen some noisy financial news on the television, but what did this have to do with her shares?

Argh! Where to even start?

Rather than changing the subject, which any normal person would have done, being a share nerd I asked whether any of the Barclays shares had ever been diversified into the wider index. They hadn’t. And then with a heavy heart got to work creating the chart above, and the explanation you’ll find below.
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This fan chart depicts the Bank of England's assessment of the probability of various outcomes for CPI inflation up until 2012.

Pretty, isn’t it? Well, perhaps not if you’re a member of the Bank of England’s monetary policy committee, responsible for setting interest rates. In your case it’s a headache: a rather bloodier shade of red might be more appropriate.

The graph is taken from the Bank of England’s latest quarterly Inflation Report for November 2008. What does it mean?

Well, you’ll notice the fan grows outward from the red line, starting in Summer 2008. As the fan, erm, fans, the Bank becomes steadily less sure about the likely value of inflation.

Inflation is high now, but expected to plummet

The key thing to notice is that most of the fan is below the 2% inflation rate line, even though we’re starting off with whopping CPI inflation of around 5%. The Bank sees almost no chance inflation will rise any higher in the near-term; with nary a shimmy upwards, the central expectation plunges down with a trajectory to make an Olympic diver proud.

This graph tells us then that on current information, the Bank of England sees a very good chance that inflation will fall below the target rate of 2% over the next few years, all things being equal.

All things won’t be equal, of course. For one, the Bank will cut rates to try to stave off deflation (that’s the scary bit where the graph goes under 0%).

Base rates are now 4.5% but some predict rates could go to 1% or lower. Time to secure those 6.95% one-year fixed cash savings rates?

There’s always a danger that rates will be held low for too long, stoking up inflation for the future. But for now, the recession is more pressing. There’s probably plenty of time yet for those who fear inflation to buy gold.