Inflation ruins lives
Posted on July 7, 2010Liberal Conspiracy can be the home of some pretty stupid ideas, but today they have surpassed themselves.
They start innocuously, with a fairly interesting observation that the Coalition’s shift away from index-linked National Savings certificates could be part of a tactic to inflate away Britain’s debt.
If the Government were to be plotting that, of course, it would be an absolute scandal.
But not in the land of Liberal Conspiracy, oh no. For them “this would be a good idea”.
What? Why? For two reasons, apparently:
“Because the UK’s debt is mostly long term , with an average maturity of 14 years, a little surprise inflation won’t lead to a significant rise in the cost of financing the debt. We can reduce our debt burden without risking increasing by much how much we pay for our debt.”
Erm, only if you think the money markets are utterly, utterly stupid. Once bitten, twice shy as the saying goes. The debts that have already been locked in may be reduced by inflation, but the loss of good faith would bring its own premium. Inflating away debt is cheating lenders out of their profits – and they would punish us for it.
“The other good side to a rise in inflation is that it makes holding money less attractive and investing more attractive, which is exactly what our economy currently needs to boost demand, growth and jobs.”
So the best way to “boost demand” is to force people into panic buying so as to convert their life savings into whatever they can get hold of before they become worthless? This is the bully state writ large, and would lay waste to millions of lives.
Liberal Conspiracy love to think of themselves as the caring conscience of the world. Their favourite taunts against free marketeers and libertarians is that we are “uncaring” or “inhumane”.
Yet here they are, proposing that Britain should should deliberately pursue a policy that would take an axe to the life savings of millions of people.
Every person who had saved a bit of cash for a holiday; everyone who had fixed sum pensions, or annuities; any school kid whose parents had set money aside each year so they could afford to go to university. All of them would be punished for having been responsible, for planning for the future and for standing on their own two feet. Inflation ruins lives, and it would ruin Britain.
Tags: Britain, Brown, Economics, Inflation, Liberal Conspiracy, Politics
Categories: Economics, Opinion, Politics
Did the fine folks at Liberal Conspiracy work as SPADs to Zimbabwe’s economic minister?
21.07.2010 11:14
Yes yes, inflation scaremongering, very good. No actual policy suggestions instead though?
I’m not the only one who things a little inflation is a good idea, Ryan Avent at the Economist, Scott Sumner (noted hard rightwinger), Ben Bernake of 2002 would also be on board.
Some people are drowning in debt, they didn’t make irresponsible decisions, the economy crahsed and turned godd decisions into bad overnight. They will be helped by inflation, what makes “savers” so sacred. You can’t save without a borrower you know.
The economy is performing well below potential and a little inflation would help boost it, making everyone richer, borrowers and savers.
Inflationbaaaad, is not particularly helpful policy advice.
21.07.2010 11:17
I do have a policy suggestion – instead of your approach, which is spend, spend, spend, borrow, borrow, borrow, borrow, inflate, cut public spending.
It is bizarre that you simply deny the severe harm that this policy would do to a lot of people – many of them vulnerable.
By the way, if you inflate deliberately to deter saving, what do you expect will happen to the banks, including those owned by the taxpayer?
21.07.2010 11:38
I have to say, you’re rather overstating the case against inflation somewhat, although to be fair Left Outside is rather overstating case for it. The removal of index-linked savings certificates in all likelihood is a device intended to lessen the supply of products that permit cash-rich businesses & funds to easily hedge against inflation, forcing them to push more of their money into the equity markets – i.e. part of a broader strategy intended to get the banks to lend to businesses again. This may result in a greater rate of inflation as a result of increased demand, but only incidentally. It will, of course, result in buyers of National Savings Certificates demanding a higher rate of interest, which may or may not wipe out gains in national debt reduction as a consequence of inflation.
Inflation may be positive for the indebted if it’s coupled with wage inflation at the same time, but given the current employment rates the latter seems unlikely. Otherwise reducing the real value of their debt will not permit them to consume more, as rising inflation will reduce their ability to access credit at a reasonable price.
21.07.2010 12:09
“By the way, if you inflate deliberately to deter saving, what do you expect will happen to the banks, including those owned by the taxpayer?”
- you mutualise them
21.07.2010 12:14
Remember, Adam, we’re talking about inflation on the scale to effectively devalue our massive debts – I don’t think it’s overstating the case once you consider how much would be required.
21.07.2010 12:18
Hmm. I’m not sure about that. Let’s consider the case of conventional gilts, which currently constitute 79% of all gilts, which constitute the biggest proportion of debt issued by the government – far more than the national saving certificates discussed here. Yield on these has been hovering around 4-4.5% for medium to long term gilts for a while. To decrease the value of this debt in real terms – rather than it increasing year on year, as it does at present – would require an inflation value of around 5%, which was not unknown before the economic crisis. Of course, to devalue debt rapidly in the short term would require a far higher rate of inflation, but it’s not clear that Left Outside was calling for anything beyond a rate of inflation that would cause our debt to decrease rather than increase.
21.07.2010 12:52
There also seems to be a slightly misguided idea indicated that inflation is somehting that can be controlled easily – just turn it on and off. Of course the reality (and very, very painful experience) is that once inflation gets entrenched it’s very painful to reduce it again (remember the evil Thatch and the 80′s? You boys over at Liberal Conspiracy go on about it enough…). The short term gain is unlikley to be worth the long term pain.
Whereas debt financed stimulus, although I don’t agree with it, is at least a realistic policy with something to recommend it, this seems plain bonkers.
21.07.2010 13:10
There are different schools of thought.
One is that there are two inflation regimes, one is low and stable (which we currently have) and the other is high and variable (the 1970s).
The other is that although difficult, Central Banks can hit whatever inflation rate they want, so if we aim for 4% for the next couple of years and then bring it back down to 2% that is what will happen.
I don’t think the lowstable/highunstable hypothesis looks correct, because there have been extended times of moderate but stable inflation all throughout the world and central banks have proven very effective at hitting their targets when they are committed to doing so (the current Fed in the US is a disgrace and should be doing more).
We have two options. Experiment 1 do what we’re doing, accept disinflation and high unemployment.
Experiment 2, plan for a little inflation which gets the economy moving and people back into work.
Both are risky, but experiment 2 offers hope that the risk will quickly turn into recovery, whereas experiment 1 offers only anaemic growth in GDP and jobs.
22.07.2010 23:44
Yeah, fucking socialists; what really grinds my gears is the way these nutters can’t see that low inflation and the consolidation of capital are desirable, and that trying to be ‘fair’, is, ultimately, simply theft. I’d much rather live in a state with very low inflation and very high unemployment than one with moderate inflation and low unemployment, because, at least that way the incentives to work will be there – you can keep what you earn.
22.07.2010 03:49
Where’s this place with low unemployment then, Tone?
22.07.2010 15:48
Tony, I can’t work out if you’re a parody or not.
“I’d much rather live in a state with very low inflation and very high unemployment than one with moderate inflation and low unemployment, because, at least that way the incentives to work will be there – you can keep what you earn.”
That statement doesn’t make any sense. If unemployment is high then its quite obvious the incentive to work isn’t there… because if the incentive was there people would be working.
22.07.2010 23:37
Mark, here’s a video about inflation and it’s symptoms.
http://video.google.com/videoplay?docid=-6484061137769305763#
22.07.2010 10:09
“Some people are drowning in debt, they didn’t make irresponsible decisions,” – so which bit of borrowing shed loads of money they could possibly finance, even at 0.5% interest rates, is responsible behaviour then? Why should ther people who didn’t indulge in mass consumption of goods & services they couldn’t afford (holidays, new cars, electronic gadgets etc etc) and have built up a little nest egg have those savings effectively confiscated to bail out those who did over-reach themselves?
What sort of society destroys the lifes work of the elderly by cutting the spending power of their savings and pensions? A terrribly selfish one thats what.
Its just more proof that the Left regard those who save, and work to be self reliant, as enemies to be destroyed as quickly as possible, so they can be reduced to supplicants on the State’s teat, and thus controlled by those in power.
22.07.2010 13:38
Jim, I’m amazed at the vitriol which you poor on me.
“Its just more proof that the Left regard those who save, and work to be self reliant, as enemies to be destroyed as quickly as possible, so they can be reduced to supplicants on the State’s teat, and thus controlled by those in power.”
You just sound foolish.
People who bought houses, to live in find themselves in negative equity. They are not bad people. Yet you want them thrown out of their homes because you worry about the effects of inflation.
People who have taken out loans to start businesses which were profitable in 2006 are now on the edge, you would rather they go bankrupt because you worry about the effects of inflation.
For those on fixed incomes we can transfer money to them, an extra few pounds a week will make up for a modestly higher rate of inflation.
Those who are saving now are the problem. We need people to spend and to invest and to boost demand because at the moment there are 2.5 million people unemployed in this country because there is not a demand for their services at the moment. Your beloved savers are causing a problem, the paradox of thrift, when we all try to save at the same time we get poorer.
For every penny saved a penny is lent. Think about it, the net debt of the world, assets minus liabilities is zero (we don’t owe money to venus and receive dividends from mars). When you talk about “responsible” savers andyou don’t see that they can only exist if others borrow.
” What sort of society destroys the lifes work of the elderly by cutting the spending power of their savings and pensions? A terrribly selfish one thats what. ”
What sort of society allows people to wallow in unemployment and destitution in order to protect wealth already established. A terribly selfish one thats what.
22.07.2010 23:34
Lefties hate savers, hate independence, to them fairness means the lowest common denominator for all
23.07.2010 14:18
LeftOutside
Jim, I’m amazed at the vitriol which you poor on me.
“Its just more proof that the Left regard those who save, and work to be self reliant, as enemies to be destroyed as quickly as possible, so they can be reduced to supplicants on the State’s teat, and thus controlled by those in power.”
You just sound foolish.’
Agreed – your idea is stupid, but let’s not get hysterical about this.
‘People who bought houses, to live in find themselves in negative equity. They are not bad people. Yet you want them thrown out of their homes because you worry about the effects of inflation.’
No they are not bad people, (and no one wants repossessions), but neither are those who didn’t overstretch themselves, but they are now losing out as their savings are eroded (and would be eroded faster under your plan). You are taking a moral stance that some people are more deserving of help than others. Also you present your scheme as primarily about getting the economy going, but then emote on a non-economic issue (repossessions) to provide support for your scheme. If we, as a society, decide that we should help those who overstretched themselves, then there are surely better ways to do it than inflating their debt away, (which, incidentally, will benefit not just stretched homeowners but also the holders of high levels of corporate debt – redistribution from pensioners who have saved all their lives to highly geared hedge fund managers and large corporations? Remarkably big business minded of you…or maybe an unintended consequence, however I’m not sure they need the help, however I digress.). Helping overstretched households, however desperate their plight, is a terrible justification for letting inflation rise. Feel free to make the case for helping them (I’ll probably disagree by the way), but not like this.
‘People who have taken out loans to start businesses which were profitable in 2006 are now on the edge, you would rather they go bankrupt because you worry about the effects of inflation.’
No, of course we wouldn’t, again with the “if you don’t want something bad to happen, you must agree with me” approach. No one wants businesses to go bust, no one wants homes to be repossessed, it’s a matter of balancing the costs and benefits across society. So let’s just ignore your initial implication that anyone who is concerned about inflation wants businesses to close down, and again focus on the facts. Ahem.
When people lend money they look to make a real return (real being greater than inflation). Now savers pretty much have to take the rates on offer, but banks don’t. If inflation goes up, what do we think will happen to the rates at which banks lend to businesses? Anyone, anyone? That is correct, they will increase to compensate for the increase in inflation. Which companies are more likely to have short dated debt and thus be the most affected? Anyone, anyone? That is right, small and medium sized companies tend to have shorter dated debt and are likely to be less financially secure in any case. The uncertainty in the cost environment, and the increase in debt costs seem likely to outweigh the benefits of a nominal devaluation. In fact, you are effectively rescheduling the debt repayment forward in real terms by increasing the cost of servicing but, also the rate at which if reduces.
‘For those on fixed incomes we can transfer money to them, an extra few pounds a week will make up for a modestly higher rate of inflation.’
That’s jolly decent of you, but we’re not just talking about the loss of income, but the loss of capital? OK, and with no judgment implied, you may feel that is a price worth paying, I disagree, but there we go.
‘Those who are saving now are the problem. We need people to spend and to invest and to boost demand because at the moment there are 2.5 million people unemployed in this country because there is not a demand for their services at the moment. Your beloved savers are causing a problem, the paradox of thrift, when we all try to save at the same time we get poorer.’
Of course, that is potentially true, but you would seem to be making an argument for debt financed government stimulus, which does not necessarily imply inflation. Inflation does not actually increase spending power, merely reallocates it (although potentially to those with a higher marginal propensity to spend). If you want to have that debate, let’s do it (stick another article on LC, we’ll be there!). However, in the meantime, let’s stick to the effects of inflation.
Finally, I don’t think you are “bad” or an “evil socialist” or wish to “drive people into dependence on the state”. I just think you’re wrong, and hence I’m trying to explain my point of view and why I think you’re wrong. I hope you’ll read and consider.
Charlie
26.07.2010 14:49
[...] example, when I highlighted that inflation would have some positive effects an ex-TPA propagandist offered a simple alternative (after calling me immoral, a thief, uncaring and inhumane)… I do [...]
26.07.2010 17:54
[...] example, when I highlighted that inflation would have some positive effects an ex-TPA propagandist offered a simple alternative (after calling me immoral, a thief, uncaring and inhumane)… I do [...]
27.07.2010 13:18