Can we cure inflation?
To recap. The causes of inflation are either too much money in the economic system or the lack of supply to meet the amount of money. The latter is often ignored.
The creation of money in an economy is by bank lending, government Quantitative Easing and direct government money “printing”; the latter of which can take different forms.
Traditionally, the government methods of controlling inflation are four-fold: raising interest rates and/or decrease bank lending by raising the amounts of cash the banks have to hold rather than lend. They can also raise taxes and even introduce price controls.
The National Debt now stands at £2.2 Trillion. Raising interest rates from the present 0.3% to even 3% would raise interest payments by a multiple of ten. Even more if we returned to the interest rates of 5% prior to the 2008 crash.
This would have a devastating effect on businesses, government spending and household debts. Defaults would multiply thus undermining the whole banking sector (again.) Banks would hold on to their cash on refuse to lend to other banks.
Banks would fail. Could the government bail them out as it struggle to pay interest on its own massive debts is a huge question.
Many businesses, already deep in debt (deeply leveraged as our US friends put it) would not be able to afford the extra-interest payments and would have to take on even greater loans or go bust. Hundreds of thousands or even millions would be out of work.
The situation in the USA would be much worse and have a catastrophic effect on the dollar, the World’s international currency.
Many households, already deeply in debt, would just have to walk away from credit card debt causing huge repercussions within the banking sector. Unsecured loans would add to the problems. And many households would lose their homes as repossessions mounted as home secured loans and mortgages would go unpaid.
Seriously raising interest rates in these times of massive debt are almost politically and economically impossible.
So what of the second option: raising the fractional reserves of banks to cut down their lending and thus decrease money supply. This would have the same result as raising interest rates. Money would be in short supply and lenders on the open market would charge more to lend it.
Again banks would cease short term lending to each other (Repos) causing huge defaults by some banks unable to pay their short term debts.
Thirdly, the government could raise taxes thus removing spending power of millions of people already in debt. Poverty levels would rocket and bills would go unpaid putting businesses at risk or shutting them. A very real danger is that by removing spending power and curtailing debt, is that demand would be so reduced as to cause a slump without necessarily curing inflation: Stagflation.
This is dismissed by neo-liberals on ideological grounds. But why should we take notice of them? Their ideas have already proven disastrous for society as a whole with growing poverty and differences in wealth at historic levels. But one hears their absurdities constantly repeated. No matter that their policies have led us to all time levels of debt and imminent social and economic breakdown.
Government investment in infrastructure, manufacturing and science would increase wealth, the other side of the equation, invariably ignored.
Money that is invested in wealth creation is not inflationary, quite the opposite, it increases supply and acts against inflation.
What is inflationary is when governments just spread money around without direction as has happened in the USA and to a lesser extent in the UK. That “helicopter money” has just increased demand without increasing supply.
Increased investment, and thus supply, can be paid for in four ways without harming the economy.
- To stop all tax avoidance and evasion by corporations and the rich.
- Reverse the tax cuts to rich .
- Directed Quantitative Easing. That is buying up assets and ensuring the money goes towards real investment and not to speculation.
- Money creation by the Bank of England where it is needed to fund real investment where other sources of cash are not available.