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British Bank Notes

Controlling Inflation

Debt and inflation

But things have changed since then – the advent of credit, social security spending and the huge growth of debt. The massive explosion of debt has been the attempt to stave off the slumps of the business cycle but has brought its own problems.

The invention of Credit Cards took place back in 1946 but really took off a few decades later.  The widespread ownership of credit cards has meant two things.  One, that there has been a huge growth in domestic debt to £57 Billion (UK), $998 Billion USA)  which continues to grow except for a small decrease last year, presumably part of the Covid affect. And two, many households have increased their temporary spending power by getting into debt. 

There has also been an large increase in Business Debt: $15.5 Trillion in the USA and £61 Billion in the UK.   The almost unbelievable size of US debt is due to specific factors there, including management buy-outs causing Zombie Firms and firms taking on huge debt at low interest rates to “invest” elsewhere, driving up share (stock) prices to historic levels.

This is called the “Asset Bubble” and is considered by many to bursting already as the price of the shares of two thirds of companies have recently declined by a third. This has been offset by money pouring into the big companies like Amazon, Microsoft etc. due to computer index linking to those companies. Their prices rise because they are considered safe havens. Thus the computers direct even more money to them.  Thus the price rises of the giants offsets the drops elsewhere, giving a false impression that the stock market is stable. (Since writing this, Facebook (Meta) has lost a third of its value. )

It is well known that Government debts have risen enormously over the last decade. US government debt is $29.4 Trillion, UK debt being £2.3 Trillion.   These are staggering sums as are the interest being paid on them:  US: $378 Billion and UK £52 Billion. For the UK that accounts for 5% of government spending. Our taxes going straight into the hands of financial institutions.

It is this vast amount of debt and the consequent interest that has to be paid on it that has a major impact on governments reaction to inflation.

What are the effects of inflation?

The primary historical effect has been the continual transfer of wealth from working people to those who have wealth: the rich. For those on fixed incomes or inelastic salaries we have seen they have not kept up with price rises. The difference has been pocketed in the form of profits and rents.

Thus, for the owners of multinational companies, rented property and finance companies, there has been no incentive to curb inflation. Quite the opposite: the mass media often repeat the nonsense that a little inflation is good for the economy. Over the last decade or so the wealth gap between rich and poor has grown enormously particularly in the USA, Russia and UK where neo-liberal economic policies are in full force and where inflation has been a constant.  Even in China, millions have been left behind in poverty during its economic miracle but this has not been due to inflation.

A key factor is that governments keep an eye on is the level of inflation in relation to the inflation of its competitors.  If prices go up too much in the home market they become uncompetitive in the international market. This will be followed by the value of the currency dropping in relation to other currencies. A stable pound is important for the UK and its role as a World financial centre based in the City of London and Mayfair.

Attempts to peg currencies to gold or to other currencies have been a miserable and expensive failure. Attempts to fix a rate will either collapse or lead to a thriving black market in currency trading as happened with the Russian rouble and the pound at one stage.

The huge rise in inflation in the late 1970s and early 1980s were not so disastrous as they were caused by the oil price hike which affected all oil importing countries the same. Indeed, not soon after the UK had its own oilfields.

But high inflation in one country can be disastrous. I shall discount the 1920’a Weimar Republic hyper-inflation as this was a deliberate ploy to pay off WW1 reparations in German Marks.

Very high inflation would lead to the pound becoming less valuable in relation to other currencies. This means imports will be more expensive. At one time this would have meant our exports would have been cheaper and our economy could have grown. But with manufacturing down to 9% of the economy, this is no longer the case.

Higher import prices will add to the costs and become a spur to even higher inflation.

At all costs, our country must avoid hyper-inflation. There are no agreed figures on this but we can say that if prices are rocketing so high that people want to get rid of the currency as soon as possible and buy real goods then we can say we have hit hyper-inflation. Our currency would be no longer a store of value, a key quality of money and part of its definition. 

After a period of hyper-inflation the currency becomes virtually worthless and a country cannot import goods nor save money so necessary for investment and planning for the future.

For the UK this would be catastrophic. Over 40% of our food is imported let alone masses of manufactured goods.  Starvation could become a reality for millions. The price of clothing and energy would rocket out of the means many people. 

Thus if inflation starts to increase in an uncontrolled way, governments have to act to prevent it. This is just beginning to happen as inflation creeps over 5% per annum. 10% p.a. would be damaging. 20% p.a. would be the beginnings of hyper inflation and a loss of control.

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