Inflationary folly has consequences

Responses to previous instalments of my “Economic Perspectives” include queries on why unbridled credit expansion by the main central banks in USA, UK, EU and Japan does not appear to be reflected in a commensurate rise in the general price level, affecting all sectors of the economy.

Further, governments’ suppression of interest rates, having discouraged savings, has surely increased a preference for buying goods rather than hoarding cash – in which case, should the prices of goods not have risen in response? And doesn’t the policy of deliberate interest rate suppression also account for the otherwise inexplicable rise in stock market prices, unsupported by underlying corporate earnings growth?

Does all this account for the instinctive popular anticipation that the massive escalation in bank credit must surely lead to imminent price increases?

Well, it is already happening.

Blowing bubbles

This much I have written about many times before: each gratuitous influx of new credit, conjured from thin air courtesy of the Treasury and Bank of England, boosts the spending power of its first receivers in the corporate community of bankers, big business leaders, government and city institutions – creating, in the process, burgeoning asset bubbles in the stock market, commodities, real estate, art, jewellery, luxury goods of every dye, private clinics catering exclusively to the whims of ultra-rich patrons, not forgetting the unprincipled boardroom pay deals from which all this illusory wealth emanates.

This self-feeding escalation continues until the indulgence reaches saturation at a new, higher, point of equilibrium.

The privileged first recipients of each new wave of fiat money may represent a small community statistically, but the immense boost in spending power unleashed by quantitative easing in all its guises will, over time, filter down to every suburban High Street in the form of higher prices that the “last” receivers of printed money now face.

There you will find that many retail establishments, whose customers’ spending power does not stretch to even modest price rises, have been transfigured into “99p” shops, discount stores, dingy coffee and kebab shops, mother-and-baby crèches, Poundland shops, betting shops and a multitude of charity shops that have transformed the face of once bustling suburban shopping streets into a grim reflection of the class divide, grown even wider by lashes of unhinged credit expansion. Thus is the economic reality of government policy experienced at first hand. These graphic consequences, never intended of course, are there for all to see.

The great cover-up

Clearly, it is in everyone’s interest to mask inflation’s impact.

(i)                          Statisticians. Government statisticians are well versed in the dark art of concealing any rate of inflation higher than the anodyne targets they predict (see below).

(ii)                        Consumers. If there are bargains or wholesale deals out there, consumers will seek them out, believing that somehow their income will continue to stretch to provide them with a satisfactory standard of living.

(iii)                      Retailers. They will do anything to keep customers coming in, resorting to bulk buying and cost trimming before having to pass on increases in their own costs to their customers.

(iv)                       Manufacturers are experts in the art of deluding the public that the same money will purchase the same articles, resorting to “shrinkflation” wherever they can: boxes of cereal only half-full, “packs of 20” containing only 18 cigarettes, chocolate bars that feel like post cards, airtight tins of fish that are now so much lighter, and so on. And who can blame them? They have little control over many costs they must either absorb or pass on, such as energy, regulatory imposts and commodity price increases. Many of their inputs are imported from overseas suppliers who, in turn, are subject to local labour laws, transport costs and perverse and destructive tax regulations.

The CPI illusion

The most deceitful ploys of all are, however, those perpetrated by government statisticians whose masters will resort to any device to demonstrate that their economic policies are under control and working effectively. Their favourite weapon is, of course, the index of consumer prices (CPI) and they remain unshaken in their determination to convince the public that the economy is bubbling along nicely within the Treasury’s inflation target of 2 per cent.

The CPI is itself a structure of selective averages that purport to reflect the habits and preferences of the population as a whole, disregarding the fact that the population is made up of individuals who, to a greater or lesser degree, are at liberty to defy those averages every day.

None of us spends money by purchasing the goods and services that happen to be in the statistician’s basket; in precisely the same proportions; or at the same prices; or at the very time specified by the CPI compilers. These geniuses also rely on historic data that take no account of today’s (still less, tomorrow’s) product preferences or prices. The whole mishmash is an exercise in officialdom’s wishful thinking.

As well as wishing to portray an illusion of knowledge-based control, government is aware that its own bureaucratic machinery entails massive pension and social security liabilities that would escalate out of control if the currency’s true loss of purchasing power were to be publicised.

Interest rate suppression always backfires

In this way central bankers everywhere conspire to maintain the illusion of control and planned economic wellbeing. The suppression of interest rates is intended to encourage spending that carries no penalty of borrowing costs. It doesn’t work. Indeed, pressure from those whose savings have been mercilessly eroded by this policy is now forcing even the commercial banking fraternity to recognise that they cannot persevere indefinitely with the insulting range of gimmicky terms they now offer their customers, and that it is time to allow the markets to determine interest rates that reflect customers’ funding time-preferences.

Governments have fallen victim to their own misguided policies. Their interest rate suppression has led them into irresponsible spending commitments that have never been subjected to the simple test of cost accounting, for one reason: they can’t be! There is no reliable costing measure able to guide them on how much to spend, or on which faddish infrastructure brainchild their populist orientation dictates. But just consider: what would even the tiniest interest rate rise (even a Yellen-style quarter of one percent!) add to the cost of servicing all the debt created by successive swathes of fiat money printing?

That’s justice – with a vengeance!