Inflation: mercury rising | Comment is free | The Guardian .
Aditya Chakrabortty writes the economic leaders in the Guardian with considerable skill, style and perception.
As he, I presume, says today on inflation:
[I]nflation that continues around [current] levels is a major headache for the new chancellor. For a start, he wants to freeze or cut public-sector pay, which is hard enough at the best of times, but will be near-impossible if shop prices are rising at 5% or more. Second, the whole Conservative justification for cutting back on government spending is that it allows the Bank of England to keep rates at record lows. Again, high inflation makes that hope a no-no. Come 2011, the UK could be in the middle of the biggest spending cuts since the second world war (which is what the Tories have got pencilled in) and mortgage rates and business borrowing costs could be heading north. Put those together and you have an economy that is flatlining.
The funny thing about this situation is that a burst of higher inflation for an indebted, recession-bound economy is not that bad a thing. Adopting a higher inflation target would not only help burn away some of the UK's outstanding debt; it would also enable rates to be kept low to stimulate economic activity. Couple that with direct lending to productive enterprises, and you have a plausible recipe for growth. Even the International Monetary Fund, those sentinels of economic orthodoxy, have suggested something similar. The trouble is that George Osborne is from the party of sound money, and spent much of his time as shadow chancellor warning about higher inflation and a falling pound. Now he faces the same dilemma as his predecessor: allow a little burst of inflation, or get hawkish and choke off any recovery? Not an easy choice.
Not if you're George Osborne.
If you were possessed of economic wisdom the chocuie is glaringly obvious: go for inflation, low interest rates and let growth happen, put people into work, allow debt to write down its own value and create the basis for well being.
You'd have thought it a political no-brainer. Except, I suspect, for the bankers' friends now in the Treasury.
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Except the problem that the last time we tried your prescription we ended up with a hangover that lasted over 20 years!
That is a great idea Richard.
Except of course if you happen to be a lender or bondholder. The type of people you wrote a post about yesterday arguing they should buy more government debt to fund their retirement.
A quick look at the banking industries profit and loss statements should assure you that bankers most definatley DO love inflation.
Richard, what is the meaning of ‘chocuie, please? Or is it a typo?
@Carol Wilcox
Typo
No one (not even Tim Worstall) could dispute I am a master of them!
@James Tyler
Your evidence?
The funny thing is, Richard, when I googled chocuie, there were a few other hits. I thought it was a new word!
My evidence is their annual accounts! Look a Barclays results! QE, 5% inflation and bumper profits!?!?! What a coincidence!!!
@James Tyler
Wow
I never realised accounts analysis was SO easy
Richard, you are always telling me to keep it in simple terms for you.
So, they haven’t made bumper profits then???
Ok, what about this one… How about the fact that Barclays share price has gone up over 600% since QE started.
Now, that is EASY to see….
@James Tyler
And also blindingly obviously wrong
Barclays delivered a barely acceptable result in 2008 with massive provisions in it
In 2009 they could release them – instant profit
And fair value accounting achieved the same result
Much more complex than your simple analysis suggests
Much more human too
That’s the trouble with you right wingers – you always forget this is all about people
Barclays shares ARE UP 600% since QUANTITATIVE EASING began…
In 2008 everyone was worried about deflation. Deflation = bad for banks. All the banks were hours away from insolvency.
Turn the inflation taps on, it’s all change.
Inflation = jolly good for the chaps.
This is not a coincidence.
Listen, this is no good thing. I’m a defender of free markets, not banking, which is an oligopoly operating under special privilidge of government.
Banks operate under a completey different set of accounting from normal businesses.
Banks are at the epicentre of everything that is wrong with the system.
Quote from Martin Wolf yesterday on his FT Exchange:
Spain can default; the UK can inflate, instead. I believe the latter offers big advantages when you suffer from a huge debt overhang….. In the case of the UK, however, it has its own central bank, which can buy sterling-denominated debt with ease. A default is, in principle, impossible. What can happen, however, is open-ended creation of base money. That could well lead to a fall in sterling and so inflation. But note that this is what the UK wants, in order to generate external demand. In other words, when an economy has a large fiscal deficit and a huge amount of slack, the ability to “print money” is very useful.
And actually, I am thinking about the people.
Banking prividge and inflation is a mechanism for expoliting the weakest in society, and is evil. That’s the trouble with you inflationists – in your grand sweep view of the economy and its mystical aggergates, you forget about the little man and the very real effect you have on him.
Your hero, Keynes, advocated inflation as a way to reduce the real wage of workers during a recession.
I beleive that as a society we have to face up to economic realities, but to do it in this kind of underhand way is pretty disgusting.
@Carol Wilcox
Thanks
And he’s right
@James Tyler
I am not sure how you can post such bare faced untruths – and I suspect I will not tolerate you doing so for much longer
With effective unions real wages need no fall during a period of inflation – and I doubt they will
Likewise, if benefits are inflation proofed, and they must be, then the weakest do not suffer
With this caveat in place those who live on a wage and are neither borrowers or lenders – that’s the majority and poorest in our communities – are indifferent to inflation
This then leaves a straight fight between lenders – the haves in society and the borrowers – the aspirational have nots.
The basis for most middle class wealth in the UK now is inflation in house prices which simultaneously wrote off their mortgages at the expense of old wealth – which now has to work for a living
That was for some time redistributional
Then Thatcher reinvented “sound” money to retrench the gain
That was her crime – to stop the aspiration of others
That’s what you desire – and all else you write disguises that truth – that you want to perpetually factionalise society
I don’t
As Martin Wolf says – inflation is what the UK needs
There’s nothing underhand in saying so
It’s a blatant statement of what is necessary
You’re the underhand participant in this debate
@Tax Research LLP
Whilst I agree with you that some moderate inflation may be needed as the lesser of several evils, I struggle to reconcile this with your view that pensioners and other in the soon-to-retire segment society should buy government debt on the basis of yields of less than 4%.
This makes no sense.
@Martin Wolf/Richard
Some inflation is OK and is what the economy needs. Martin Wolf is right to say that the UKs ability to issue debt in its own currency (and to create money) is a wonderful advantage and has served us extremely well in this crisis. But, it is an advantage that would be all too easy to abuse, and we shouldn’t. You are right, up to a point. Some inflation would be good. But it is a slippery slope.
@James Tyler
Barclays profits for the last 3 years have been driven more by
1) tax avoidance arrangements
2) the repricing to market of some of their liabilities (which works to their benefit when debt spreads widen and to their loss when debt spreads narrow)
3) profits on the sale of Barclays Global Investors
4) an £2bn upward revision of the value of the businesses they bought from Lehman
and
5) a few other odds and ends designed to flatter their earnings.
Consequently they are probably the worst example of a bank that you could choose to make your point.
“With effective unions real wages need no fall during a period of inflation – and I doubt they will”
Have never met a trade unionist who didn’t like inflation. Gives them plenty more to do, with more regular pay rounds to negotiate, more reason to pressure people into joining (‘if you don’t join and let us fight your cause, inflation will send you backwards…etc’). But at the cost of the worker who has to pay for it all.
Selfishly I wouldnt mind some inflation right now to help reduce my mortgage. But it really is the cowards pay cut for those on fixed wages.