Bank of England's Mervyn King (left) warns over inflation … Bank of England Governor Mervyn King has warned that high inflation will continue to erode earnings power through next year as the economy faces the threat of 'stagflation'. Prices rises have consistently defied the Bank's expectations of a slowdown, adding to pressure on households as wage growth remains weak and the Government introduces a strict austerity package. The Bank's rate-setters are charged with keeping inflation at 2% but the Consumer Prices Index benchmark has been above 3% throughout the year. However, addressing a committee of MPs, Mr. King suggested that they will be reluctant to try to curb the problem by raising borrowing costs from 0.5 per cent any time soon because of the weakness of the economy. "There will come a point when we will certainly need to ease off the accelerator and return Bank Rate to more normal levels," Mr. King told MPs today. "I look forward to that time because it will probably be a signal that there is a smoother drive ahead, with the economic outlook improving in a durable way. But I fear there is some considerable distance to travel before we can begin to use the word 'normal.'" – UK Telegraph
Dominant Social Theme: Stagflation is part of a normal recovery.
Free-Market Analysis: Bet you didn't know that Britain was suffering from high inflation. We didn't anyway and we try to keep on top of these things. We knew that Britain was suffering from a high jobless rate. And we knew that Britain's debts were out of control, causing the country's new prime minister David Cameron to insist that years of austerity were going to be needed to put things aright. But now, apparently, Britain has high inflation to contend with as well. And its not just Britain. Here's something recent from the Daily Mail on Europe generally:
Euro zone 'heading for stagnation' after Greek debt crisis … 'Uncertain': The euro zone will have years of 'anaemic' growth, warned the IMF … The Greek debt crisis was an abrupt wake-up call for the euro zone, the world's leading economic watchdog said yesterday. In a devastating critique, the International Monetary Fund painted an alarming picture of an unruly economic confederation lacking the necessary controls to rein in its profligate members.
It warned of a prolonged period of stagnation unless Europe puts its house in order. Its report said a 'patchy and uncertain' recovery will unravel unless the root causes of the crisis were tackled. Faced with weak growth rates, many states sleep-walked their way into the crisis by living well beyond their means. … The Washington-based economic body said: 'With lacklustre demand, low inflation and high public debt, a prolonged period of stagnation [is] a distinct possibility.'
Is there a dominant social theme here? We think it is interesting that Bank of England Governor Mervyn King has begun to warn about the "S" word. Thirty years ago, in fact, stagflation was not even an admitted phenomenon in central banking. But today it so well known – and dreaded – that King is talking it up even before its general inception. Call it a sub-dominant theme or mini-meme. With everything else that Britons have to worry about today, stagflation will soon be taking its place at the table. "Expect stagflation," King is telling his countrymen. "It is a normal part of the recovery process. Do not be alarmed."
It may be a normal part of a central-banking crack-up boom, but stagflation is a distinctly irregular financial phenomenon, and one that was for a long time denied by banking types. It is interesting to note that stagflation was really not an accepted phenomenon (except by unknown Austrian economists like Murray Rothbard) back in the 1970s when term was first coined. Mainstream economists liked to proclaim that the process wasn't even possible. Of course overt Keynesianism was the rule of the day; Keynesian economists believed that once central banks began to stimulate the economy that jobs and growth would return. Hence, no possibility of stagnation (joblessness, etc.).
But as the 1970s wore on with a combination of high joblessness and high inflation, it became evident that central bank monetary stimulation was not doing the trick. We discussed this just yesterday in our article "Is It a Deflationary Depression?" We pointed out that in the real world a economic crack-up was followed by severe deflationary deleveraging and then probably even more severe price inflation. We didn't mention it yesterday, but we've mentioned before that almost inevitably after one of these severe central banking downturns, stagflation has got to be a factor.
It's obviously going to be an issue in Europe and it's going to be an issue in America as well. It will also be made worse by the West's obsession with "austerity," which wasn't nearly so apparent as we recall back in the 1970s. But in the 2000s we can see clearly what awaits. There will be high inflation, high interest rates, high joblessness and little government money to cushion the pinch.
As a free-market oriented publication we are not in favor of government programs – not even a single one – but the trouble with fiat money economies is that they can get so far out of whack that the downside is infinitely greater than it would be in a normal economy. In a normal economy with gold and silver money, downturns are often brief. While they may be sharp, they are regional in nature and one probably has little trouble traveling to a more bustling area.
But in the current "globalized" economy, there is no place to turn. First central banks gun the West's economies in unison to the breaking point. Then during a crack-up boom such as the one we are experiencing now, the West again in unison experiences a terrible reversal. Jobs dry up, credit is withdrawn and bankruptcies rise. Not only that but people are over-leveraged and without any survival skills. Fiat economies tend to remove people from subsistence employment by tempting them into incandescent professional jobs that are of short duration. This happened in the 1990s during the tech boom.
Mercantilist central banking is a terrible curse. Economies climb a cliff and then commit virtual suicide, jumping off. Combine inflation, unemployment, high rates and "austerity" together and you get an economic disaster that will haunt the West for years. Additionally, the powers-that-be who have set the terrible parade in motion have just finished propping up "too big to fail" entities which further distorts the economy and guarantees that the parched era of stagflation will continue even longer than it would have otherwise.
It is hard to fathom how a real monetary market would work, absent the current central banking plague. Interest rates would be regional, gold and silver would flow in and out of regional economies as necessary. Banks would offer fully backed bills, real bills and perhaps even fractional reserve notes. There would be monetary competition and no one would be terribly worried about a depression because the economy would exit in a patchwork state where some areas were always doing better than others.
The reality however is stagflation and austerity. Stagflation is a direct result of mercantilist central banking and an indefensible gunning of the money supply. Austerity is oriented around the insistence that the same power-elite entities that created the larger Great Recession need to be paid back for the loans that they have made using the full-faith-and-credit of the population that they are now plunging into poverty. The question at this point – and we have asked it before – is not whether times will be tough but how a population increasingly educated by the Internet about the reality of modern monetary system reacts to what's happening around it. The same thought has no doubt occurred to the power elite.