The Inflation Monster Is Coming.

What’s That Coming Over The Hill, Is It The Inflation Monster?

Yes we’re back to that old canard again, it’s been confidently predicated daily for I’ve forgotten how long but there is something in it this time. I thought it would be a fairly simple task to type “inflation definition” and quickly copy and paste it on here. There are plenty of suggestions which were neat, simple, concise… And wrong. I will take this definition from InflationData.com but everything else written in the article I’m looking at is wrong, just plain flat out wrong. For example expanding the money supply causes through monetary easing (QE) causes inflation! We’re into the third decade of QE in Japan and inflation is there none.It is a great site for raw data though. So, a simple definition then.

A  simple way to define inflation is “an increase in the price you pay for goods” but that only tells part of the story…It could also be seen as a “decline in the purchasing power of your money.

That second part is basically what is happening in the UK economy right now and please don’t make me mention Marmite again. The value of the pound has collapsed and will therefore lead to prices rising, so far so simple, but inflation is a hydra headed beast these days.It is experienced in many different ways depending on your income and what you tend to buy. I work in the gig economy and find my way between Blackpool, Liverpool and the Wirral. As your mouth falls ever wider at the insanity of my cosmopolitan lifestyle I also take in Salford and Leeds as well. What I’m trying to say is, it will affect me in the same way as you. Those at the very top of the income bracket can hedge these risks or even make gains if their assets are denoted in dollars.

In the 70’s it was all about the price oil as OPEC was at the peak of its powers in controlling the cartel of oil exporters. A lot of the bad press the 70’s get stems from this as unions also flexed their muscles to protect their members pay and conditions or holding the nation to ransom depending on your politics. What followed was a nihilistic no score draw between increasingly militant unions versus increasingly incompetent and frankly atrocious management, a lot of commentators tend to overlook the latter. Heath, for the Tories, asked the country who rules? Back came the answer not you. Wilson, for Labour tried a Price and Incomes policy (by stealth) and when that failed tried a stupendously stupid bit of kidology by asking the IMF for a loan to pretend there was no money left. In 1979 along came Thatcher and the rest is history.

Today austerity is (or increasingly was) all the rage because if we don’t cut the deficits the Bond Monster will be followed by the Inflation Monster and come and eat us (See Simon Wren Lewis in Newsfeed). Such is the urgency of this matter that public services must be cut to the bone, our wages and working conditions reduced because if we spend money on those things we will become Like Zimbabwe!!!! or Weimar!!!! That’s what printing money does, it cause rampant inflation and the monster will eat our children. So let’s look at what actually happened to both shall we?

Zimbabwe. Was it excessive money printing that lead to Zimbabwe’s downfall? Everything the Government did was done with the best of intentions but Mugabe became a tyrant, condition 1 of inflation, bad government. Next, citing historical grievance, the most productive farms were seized from white settlers regardless of ability to farm it. At the time Zimbabwe was known as the bread basket of Africa but production plummeted under the new owners, condition 2, a supply (or demand} shock. As prices started rising the American dollar started to compete with the home currency, condition 3 of inflation. Zimbabwe also has debts denoted in foreign a currency so needed more and more Zimbabwean Dollars to purchase American ones for debt repayment, condition 4  of inflation, the debasement of the sovereign currency. It is only now that excessive money printing kicks in, note the cause and effect. The conditions for inflation caused the money printing not the other way round.

Weimar: Google that and telegraph poles in inverted commas. The story goes that Germany was paying part of it’s war reparations and there was an argument over a shortfall but there’s more to it than that.After World War I, the Allied forced imposed enormous reparations on Germany which virtually bankrupted the nation. In the early 1920s, a dispute over how many telegraph poles Germany owed France as part of the reparations ended with France militarily occupying part of western Germany, and killing over 100 German civilians for protesting against them.

Outrage over the killings and the damage done to Germany’s economy greatly destabilized the German Republic (Weimar Republic). Hitler’s initial popularity was almost entirely based on attacking the post-WW1 reparations as unfairly punitive (which was a fair point) and it is fair to say that political support for the Nazis and other nationalist factions was greatly increased by the Poincaré government’s overreaction to Germany’s refusal to give them more telegraph poles. (Source). All the inflation factors were there, debt denoted in a foreign currency as war reparations, a supply shock when a valuable part of it’s economy was taken over.

So please remember that those shouting Weimar and Zimbabwe at what they perceive as excessive spending are wholly ignorant of economics. Advanced nations, such as the UK, have very firmly established institutions to prevent this, quite apart from the fact spending enough money to cause hyperinflation would be just plain stupid, that’s why there’s virtually no example of this happening.

The UK today is in a very different place, wages are stagnant and oil is relatively low. The only inflation factor is the low pound due to Brexit but only the most unforeseeably catastrophic Brexit would keep the effect permanent. The BoE would be insane to raise rates now, that isn’t the inflation monster coming over the hill.

For more see this Bill Mitchell blog.