I have argued that inflation is no bad thing for some time. When the world is populated by rotten money the only way out is, eventually, to root it out of the system and if that can't be done by growth (and given there's about for times more rotten money in the world than total world GDP that was never going to be likely) then inflation is the only way to do it unless the horrible mess of default is to be sanctioned.
Will Hutton argues this case in the Observer this morning.
So does its editorial.
Both are right: letting inflation, modest inflation hut well above 2% inflation, is vital now.
That does not mean I argue fo a reduction in real wages: wage inflation has to be part of this. Inflation is needed so that current wages increase relative to debt, gradually writing it down rather than paying it off.
Of course the bankers will protest. This challenges 30 years of their control - where money has been far more important than people. Than hegemony has to he challenged,now. People must come first and the bankers and their wealthy backers have to lose.
Inflation is a necessary tool in bringing the feral economy under control. So be it. That control has to be imposed now, for the good of all ordinary people - the 99% of the people of the world over.
Oh, and how's that done? Well - as the Observer argues, by quantitative easing - but of the form I have also argued for - where cash is spent into the economy - and not just given to banks.
NB Apologies for an uncorrected draft of this being posted this morning
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typos, typos!
As noted – apologies – this was done in haste – I corrected all typos and then an uncorrected version went up before going out for the day with family – apologies – show’s I’m human despite right wing rumours to contrary
You’re not a Hayekian, therefore you must be human.
Bad weekend ?
Your typos’ have typos’ !!
For those of us with uneasy memories of the 1960’s when it was argued that 3% inflation a year would be tolerable and have beneficial effects, notably the reduction of national debt, we have been there before. The problems then were the structural issues in the economy and the pace of change in technology which the inflation theory did not solve and gave politicians the excuse for evading decisions. The problem now is also structural and the pace of change but this time round it is the banks, the banker and other financial agencies on top of major shifts in resource patterns and costs.
I read Will Hutton’s article in the Observer this morning and I was reminded of Ann Pettifor’s excellent book ‘The Coming First World Debt Crisis’ published in 2006. If policy makers had responded to some of the concerns expressed in this book maybe the West would not be in such a parlous state. I expect that her message was not what the policymakers wanted to hear at the time and now we are paying the price for that.
Several riders—most of which you include but need more emphasis. First, we’re talking about ‘moderate inflation’ (around 3.5% average pa) that characterised 25 years of the the post war period. Secondly, QE involves the BoE forcing down long-term i-rates by buying gilts—but the banks are already awash with money. Instead, QE should be used to capitalise a British Investment Bank (as I and many others have argued) which would invest in greening Britain, social housing, infrastructure as well as creating productive capaicity (the latter by definition reducing inflationary pressure). Thirdly, an effective way of indexing real wages and benefits would be crucial if the poor were not to get poorer. Finally, Will Hutton does seem to miss out a key point—the need to stop tax avoidance and make the super-rich pay their fair share.
George
Entirely agreed!
Although I think 4% or so would be OK – this needs to happen
Richard
I have said myself for quite a while that far too much emphasis is put on getting inflation down. I believe this is largely due to bondholders, who lose out when inflation goes up.
I would argue that, as long as inflation doesn’t grow beyond double figures, it is manageable. Inflation will also help to burn off some of the debt we have. Of course, wages must keep pace with inflation as well.
Raising wages can only help suppressed demand in the economy too. If people have more money to buy stuff, more stuff will be sold. Of course, fuelling demand in the economy to create jobs will need more than just this, but it would be a start.
The time is more than overdue for a proper redistrbution of wealth in this country.
I don’t know enough about this to meaningfully contribute, but haven’t we had 4%+ inflation for some time now in the UK? Isn’t the problem that we need something more radical than this?
Although I know you are hostile to me generally Richard, I genuinely share your concerns at the moment (I too have laid in food) and have no idea what the answers are. I just hope that the end result is a more sustainable economy and society, which necessarily entails a move away from globalisation and convenience towards localism and actually making rather than buying everything we need.
Don’t like this. Your response is wiping out the life savings of a lot of people like my mother who have never taken unsupportable risks in their entire lives. I know you will characterise this sort of thinking as “autistic” but, IMO, if you earn £30k pa & you take out a £200k mortgage then you are a @@@@ing idiot & you deserve to lose the house.
Will your innocent children suffer ? Wel they wouldn’t if we had enough social housing. (I agree with you on that).
It is only moving house & children have to do that all the time.
Leave the pensioners alone, they’ve suffered enough !
I don’t know what is so bad about default anyway. Obviously the defaulting country will have to leave the Euro but almost everyone is saying that is a given anyway.
In an administrative period you (if you were head of the Eurobank) could categorise the bond holders.
The bulk will probably be Sovereign Wealth Funds representing China or the middle-east. We can’t afford to alienate those people so we’d issue them A bonds in the defaulting country’s currency (Drachmas, Pesetas) promising full repayment at a market interest rate.
Secondly, there would be the European banks. They have to get most of their money back as otherwise they all fall over. So we’d issue them B bonds in the defaulting country’s currency promising full repayment at some point (eg within 100 years) at a lower than market interest rate.
Thirdly, there would be the bonds held by individuals & institutions acting as speculators. They have to get tanked to teach them a lesson which, IMHO, would achieve a lot more than the Tobin tax. So we’d issue them C bonds in the defaulting country’s currency promising full repayment at some point (eg never) at a nil interest rate.
Problem solved – seemples, innit ?
If only it were
There’s something else we can do. We can levy a 10% back tax on the salaries and bonuses derived from the financial services industries transactions in the period 1997-2007. When I say 10%, what I really mean is 50%, and allow credit for tax already paid at 40%. Doing it this way I strongly suspect that we’d get rather more than 10% on the income so taxable.
It sounds attractive – but retrospective tax can’t be justified, I think
I may be wrong, but didn’t the Japanese carry out some quantitative easing recently by simply mailing out a big cheque to every one of their citizens? There’s probably no better way to ensure the money raises demand, gets spent in the economy and doesn’t just disappear into the banking system. I also heard somewhere that the Japanese fiscal authority is far more agressive about hunting down corporate tax evasion. Does anyone from Japan have further knowledge of either of these issues?
I regret that I’m not aware that either is true
And I think QE would just end in a lot of imports and saving that way….
Not what we need
This sounds remarkably like CH Douglas’s proposal of a ‘bational dividend’, where a proportion of money is handed to everybody, rich or poor, every year or so in order to increase purchasing power and hopefully meaning consumers and businesses wouldn’t need to borrow as much and in the process break the destructive cycle of debt. CH Douglas surmised that business always had to pass on borrowing costs to consumers in order to maintain profit, leading to a chronic lack of consumer buying power and more borrowing by businesses. By paying out this ‘national dividend’, it was believed that consumer purchasing could be increasd, meaning that bisinesses should need to borrow less and sell products to consumers at prices they could afford. This describes the theory roughly, of course, but this is the gist of it.
If course, as Richard says, much of this money will probably just end up paying for foreign imports, increasing our trade deficit and leaving us little better off.
The problem of our lack of home grown manufacturing needs to be addressed first, gearing more of the economy towards actually making things and a shift away from the unproductive banking and financial sectors.
Little’s probably going to change otherwise.
“‘bational dividend’
That, of course, should be ‘NATIONAL DIVIDEND!’ I have an awful keyboard. The letters are very faint and you can hardly see them! 🙁
If wages are allowed to rise… this ignores the reality of surplus labour in an international labour market as exploited by capital.
Inflation can lead to a depression and a destruction of demand spiral. We may need rationing and state control of basic goods. How many 20% increase in Gas? before problems.
Maybe we do need that – but only inflation washes bad money out of the system
It’s going to happen so we have to protect people in the process
Richard. Hi.
Where did you get the data that there is 4x’s as much ‘rotten’ money globally as total world GDP? Would love to know.
Researching these statistics (have interest in link between racial intolerance & corruption).
Thanks.
Observer….editorial ….I think I linked to it
But data on this can be secured via Bank for International Settlement etc
Richard
@liz:
World gdp is about USD 60tr while the last (2007) estimate of total world financial trading I saw (from BIS 2007) was $700tr; if 80% of the latter is ‘socially useless’, that would imply Richard’s ‘rotten money’ estimate is far too low!