STAFF NEWS & ANALYSIS
Britain to See Inflation Risk?
By Staff News & Analysis - June 08, 2010

Inflation 'a greater risk to Britain than deflation' … Inflation is a greater risk to the British economy than deflation, a majority of economists polled by The Daily Telegraph have said. They fear policymakers will try to inflate their way out of the debt crisis. Their concerns are not expected to be reflected in the Bank of England's decision this week on interest rates, with the Monetary Policy Committee … A large number were worried that, with public spending being slashed, deflation is a threat to the UK. But more now fear higher prices. Eleven of the 25 economists surveyed said inflation was a bigger worry over the next five-years. Nine of the economists polled said that deflation remained the primary concern, while five other economists said that they either feared a combination of both, or that the two would even each other out. The economists' warning comes after the Bank's deputy governor, Charlie Bean, warned the Government that it would be reckless to assume that it could inflate its way out of its current public finance woes, and after the Retail Price Index leapt to an 18-year high. – UK Telegraph

Dominant Social Theme: The outlook is not good, but we must be prepared.

Free-Market Analysis: The world is in a jam because its biggest economic brains don't know where money is headed. Is the paper money in your pocket, dear reader, going to be worth less or more … tomorrow. This article in Telegraph tells us that more economists believe that money is headed down than up – for Britain anyway. Tomorrow an Englishman's money will be worth a little less than today. That's price inflation.

Why does this article conform to a dominant social theme? Because the power elite and its mainstream media focus on the inflation-deflation argument so that people begin to believe that central banks are an exogenous economic factor, one beyond monetary cause-and-effect. The dominant social theme is that "central bankers are wise inflation fighters" – and that (price) inflation is not of their doing. The promotion is fear based of course, because people are scared of inflation. The solution is authoritarian, as power elite memes always are. In this case the faux-solution is the mechanism of the central bank and its courageous central banker/inflation fighter.

The mainstream press has even given names to certain central bankers. They classify some central bankers as "hawks" – which is supposed to mean that these bankers are tough on price inflation (monetary inflation as well) and want higher short-term interest rates and maybe even, occasionally, a diminished money supply. The idea is apparently to promote within the public mind the concept that central bankers, arguing amongst themselves, eventually arrive at a consensus that represents the best possible wisdom regarding money creation.

Of course nothing could be further from the truth – or not from an Austrian, free-market economic perspective anyway. Central bank money creation is ALWAYS price fixing because the money is not being produced by a private market – and therefore is only paper or electronic digits. (That's why gold and silver, which are dug out of the earth, are the only "real" money, according to free-market thinking.) And arriving at a consensus over what price to "fix" money at doesn't make the process any better. Price forecasts are often inaccurate, but when it comes to monetary matters these forecasts tend to be even worse as the process of money creation has been entirely divorced from the marketplace.

In fact, central banks ARE the proximate cause of "real" inflation according to standard Austrian, economic theory. Central bankers – and those who write about them in the mainstream press – like to pretend that the money supply's direction is never certain. But for most of the 20th century, there was only one direction the money supply went, and that was up, along with subsequent price inflation.

Why is it so hard to tell where money is headed? Did it always used to be so hard to figure out the money supply and subsequent prices? Nowadays, at least according to some neo-Austrians, one can apparently have fleeting combinations of inflation and deflation at the same time (it has to do with consumer-owned paper dollars being hoarded while bank-based electronic ones are not). And horrible terms like "inflationary recession" and "deflationary depression" are regularly tossed about. One other famous nomenclature as well: In the 1970s, when the US downturn was the most severe, a new term was noted – stagflation.

The famous hard-money economist Murray Rothbard was partially responsible for publicizing "stagflation," (at least in our circles) which he claimed Keynesian economists believed was impossible. Keynesian nostrums tend to be socialist in practice because they use powerful government levers to attempt to ameliorate private-market monetary problems. Rothbard also famously explained that when the business cycle swept toward a bust, there was nothing really to be done but stay out the way. Economic activity would drop off, and nothing government or central banks could do would make a difference, though indeed interference could make things worse by prolonging the blow-off (as, in fact, we believe it has).

Keynesians, of course, have never agreed with such a free-market perspective. Those who follow Keynes (and Keynesian economics constitutes a virtual government industry) focus on monetary stimulation as pretty much the sole remedy for economic slumps. Until the 1970s, classic Keynesian economists seem to have believed that it was impossible to have a stagnant economy along with an aggressive monetary stimulus program. In slumps, central banks should print money, and more money, to stimulate via government spending and bank lending. Of course, while such Keynesian solutions may not stimulate the economy much (not with real jobs anyway), they do lead to inflation, and then price inflation, especially in severe slumps. Hence, stagflation.

While the above analysis is not especially complex (though unless you follow this stuff it can sound that way), the world of economic thought has been further complicated by the emergence of a whole new class of economic lay-theorists and economists who believe for one reason or another that the West in particular is headed toward irredeemable deflation and price deflation (less money worth more, as a result). The idea is that fiat money is rapidly being removed from circulation – perhaps via bankruptcies, abandoned projects and other kinds of systemic and economic ruin, making the remaining money stock dearer for perhaps a long period – and prices lower. While this view certainly remains controversial among the formal Austrian crowd, even free-market economists might argue that there can be deflation, or at least price deflation, within the context of a rapid systemic blow-off. Here's some more from the article:

Although the persistence of rising prices is thought partly to be down to the 25 percent depreciation of the pound since the onset of the crisis, some economists suspect it could indicate that inflation had become "sticky" in the UK economy. Most striking was the idea that policy-makers would be tempted to generate inflation to erode away the debts.

Tim Congdon, chief executive of International Monetary Research, said: "Now that central banks realise that Quantitative Easing-type operations can be conducted to stop any recession, inflation is more of a risk than deflation." Stephen Lewis of Monument Securities added: "Given the sensitivities of policy-makers and the way they are likely to act on them, the greater risk is inflation."

Meanwhile, Peter Warburton of Economic Perspectives said that rich countries should prepare themselves for "high and variable inflation", adding that they had "been shielded from rising inflationary pressures in recent years by a seeming infinitely elastic supply curve for goods and commoditised services".

"The credit crisis has shattered the old supply models and reduced the degree of global competition markedly. Latent inflation pressures in food, water, energy and materials will be more generally experienced. Where currency depreciation has been significant, as for the UK, the impact on domestic inflation will be the more obvious," he said.

Other economists maintained, however, that policy-makers would still struggle to beat down deflationary headwinds. Gerard Lyons, chief economist of Standard Chartered, said: "There is no pricing power in this economy. Firms will find it hard to make higher prices stick."

There are lots of problems with the analyses in the above article excerpt from an Austrian, free-market perspective. Inflation of course (the Austrian, classical view) is a monetary phenomenon. When somebody such as Peter Waburton speaks of inflation, he usually means "price inflation," in our view, which is the RESULT of inflating the money supply. The same can be said for Gerard Lyons who speaks of how "firms will find it hard to make higher prices stick."

Again, higher prices are a secondary aspect of monetary inflation from an Austrian perspective. Without the initial inflation of the money supply, banks would not have the money to circulate. The article also mentions quantitative easing in which central banks purchase securities directly, which is certainly a strategy to effectively bypass the stodgy banking system, but also a way, essentially, of insuring price inflation in our view.

After Thoughts

Despite arguments to the contrary, the Bell would cast its lot with those who believe that significant price inflation will eventually haunt the West (and likely already is in patches, along with price deflation in such obvious areas as housing). Central banks have already inflated hugely during the latest economic crisis by printing trillions and there is no way, in our view, that all that money will be pulled out of circulation before it flows into the real economy and cheapens the larger money stock. Yes, central banks operate these days by printing an overabundance of money – mostly electronic – but paper money as well. In good times and bad they continue to print, or at least push buttons. But we are interested in memes. And for the most, the mainstream argument over inflation versus deflation disguises the reality of what central banks are and what they do, at least in the modern era. Ultimately, they are gigantic inflation machines. The job of a central banker, so far as we can tell these days, is to try to disguise that fact.

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