Archive for the ‘inflation’ Tag

tory dunces

I am astonished at how badly the Tory party is playing the current crisis. In the UK, we need a competent opposition, but all their pronouncements on the economy are just plain wrong. This morning, on the Today programme, their shadow Chief Secretary to the Treasury, Phil Hammond, no doubt fielded because George Osborne is already totally discredited, spouted more of the same rubbish. The Tory case is Yes to boost the economy, but only on a funded basis,  because we are over-borrowed.

But the case is overwhelming for more government borrowing now. Too bad that the Government has already borrowed too much; that’s in the past. It will make today’s essential borrowing more difficult, and more expensive, but it doesn’t make it any less essential. Tory policies will lead to a longer, more painful recession. The funded-expenditure argument is as ridiculous now as  was the 1920’s insistence on sticking to the Gold Standard.

More borrowing now, to be used for tax cuts and public works expenditure – specifically aimed at solving energy problems, e.g by insulating homes, building high-speed rail links and zero-carbon power stations, installing smart electricity meters nationwide – will tend to push up interest rates, which will encourage people who have money to save it, and those who don’t to borrow less. This is a good thing.

It will also create inflationary pressure. A little inflation is a good thing, particularly when asset prices are low. It encourages people to put their money into title-denominated assets like shares and property, and will therefore get the housing market and the stock market moving upwards in nominal terms. At least it gets them moving.

The economic case is almost identical on both sides of the Atlantic. The lame-duck presidency can’t do very much, but the new regime will have to embark on the same sort of programme against the same sort of economic background.  Expect a massive rise in the already-massive Federal deficit; the difference between the US and the UK being that the current US deficit is because of  the Cheney cabal’s larceny,  whereas the current UK deficit has been used to bring long-overdue improvements to the nation’s schools and hospitals which were so damaged by eighteen years of malign neglect under the previous Tory administration.

The fact that the world is all in the same mess does mitigate at least one risk factor associated with the huge borrowing the UK government is going to have to undertake: a run on the pound. Everyone else is going to have to do the same. There will be US inflation and there will be Eurozone inflation; and this inflation will help us all out of the debt mire.

My prescription is pure Keynesianism. I suspect that the Tory problem is that they believe that Keynesianism was wholly discredited by Friedmanite Thatcherism. They are wrong; it is a matter of horses for courses. The misapplication of Keynesian policies in the 1960s led to 1970s stagflation, which required a good dose of Friedmanite Thatcherism to correct. The problem we now face is much more like the problems of the 1920s than the 1970s, and it needs a Keynesian solution.


The spectre of inflation

is a horrible journalistic cliche.

Sooner or later, we are going to have to face up to inflation. Yet the Bank of England is hurriedly dropping its base rate because it can see inflation falling fast in the coming months, and if the inflation rate falls below zero the economy enters a period of deflation, which – according to the economic textbooks – is universally-bad.  So who is right: me, a lowly blogger, or the great and the good on the Bank of England Monetary Policy Committee?

We both are: it’s just a matter of timing. First comes the fall in inflation, against which the Bank is attempting to defend by its interest rate cuts. This fall is an inevitable consequence of the burst of the bubble. The prices of assets and commodities peaked during the bubble, and consumer prices tend to lag these.  The inflation I am talking about comes afterwards, as the effects of the big injections of liquidity into the global economy begin to be felt, and it may be quite a good thing when it does.


The money that the governments of the world are putting into the economy is intended to stimulate growth. Whether it does so or not will depend on lots of different factors; but not all of it will. Corruption and cock-ups are inevitable, some of the extra loot will go awol: it won’t stimulate growth. Governments will back companies which then go bankrupt; individuals will spend their tax credits on cocaine. It is this unproductive loot sloshing around in the economy which creates inflation. But, if it’s accompanied by any positive economic growth, it’ll be OK.  Overall, when there’s positive economic growth, what people earn goes up faster than the prices of the stuff they spend their earnings on, all of which is fine if you are in work.


But not so good if you are a pensioner on a fixed income. And more and more of us are going to be; or at least, that’s the assumption. Personally, I think its time to ditch that assumption. Improved healthcare and improved lifespan mean that as we live longer, we should expect to work for longer.  The economy will not be able to continue supporting the idleness of a growing cohort of fit sixty- and seventy-somethings. But as we grow older, we should  manage our lives to make an income from a variety of investments as well as from our labour. This will be be the best strategy to deal with the inflation which is on its way.