Okay, this is not about writing, it’s just something I need to get off my chest!
Not everyone in the United Kingdom knows that their country has an inflation target and, even if they do, few care. And, of those who care, most think it a good thing. The Bank of England website states that “The Government has set us a target of keeping inflation at 2%.” What does that mean?
I ask bankers, economists and asset managers how they’d explain this to someone without a financial background and they mention consumer price indices. But, to be precise, how could this be rephrased for the ‘layman’? They waffle on about average prices and baskets of goods until they run out of steam, when I propose this: “The government, through its agent the Bank of England, undertakes to do its best to ensure that the £100 you have saved in January will buy you only £98 worth of goods in December.”
The bankers then huff and puff and tell me that that’s a good thing. But is it? And, before we answer that question, is it right? Is it moral?
Inflation-targeting in the U.K. has been around in one way or another since 1992 and the 2% inflation target was formally established in 1997. I don’t remember a referendum on this and I don’t remember any of our major political parties campaigning on it. Labour introduced it, the Conservative and Liberal Democrat coalition ran with it, and the Conservatives after them. I wonder how the referendum or a manifesto might have been phrased. “We propose reducing the value of your savings in real terms.” Or, “You know the money you have at home? You know, the cash under your mattress that doesn’t prop our banking system up? Well, we are going to do our best to ensure that it has lost half of its value when you retire after 36 years.” I’m not sure that either would have garnered many votes.
Inflation-targeting is theft. It’s the sly redistribution of wealth from the saver to the debtor. It’s been imposed on the people with no consultation, explication or vote. It takes place without the explicit consent of the saver. Inflation-targeting is immoral.
While inflation-targeting can’t be justified morally some economists argue that it – the wilful decline in a currency’s purchasing power! – can be justified economically, or socially. Deflation is the bogeyman we have all been brought up to fear. “Just think of Japan!” was the economists’ refrain. “We don’t want to be like Japan.” By this they meant that for long periods in the second half of the last century Japan had suffered weak or negative growth as a result of no inflation or of deflation. However, I never thought being ‘like Japan’ a bad thing: Japan fares better than the UK on population-weighted GDP measures and on any number of indices of health and social problems.
“But,” the economists will say, “it’s so bad to have falling prices that we’d rather have rising prices.” Indeed, The Bank of England website has it that, “if inflation is too low, or negative, then some people may put off spending because they expect prices to fall.” But we know that’s not true. We’ve been buying our computers and lap-tops for 30 years now despite their becoming cheaper every year. We don’t defer our holidays thinking they might be cheaper next year. I don’t let my children catch cold because coats might fall in price next year. How can this economic orthodoxy be sold to us on what we see is a blatant lie? We are led to live in a consumer culture of instant gratification and pay-day lenders, not in one of calculated thrift and patience.
The Bank of England warns that “if everybody reduced their spending then companies could fail,” but what does that really mean? Can it really mean that we want to live in a society in which we spend simply because we think money is going out of fashion? That we have an inflation-oriented society in order to keep people buying things that they might otherwise not want to buy? That successive governments’ explicit undertaking to impoverish us in real terms is in place to ensure that companies that would otherwise fail are propped up by the consumer’s buying of goods that they really neither want nor need? Imagine a society in which prices had a tendency to fall and in which companies had an incentive to improve their productivity or to produce goods that the consumer really wants. (For a start, it would be far more environmentally friendly.) What it really means – The Bank of England continues – is that “people might lose their jobs.” So that’s the Devil’s choice we’re confronted with: we have the real value of our savings fall by 2% a year or we lose our jobs!
This takes me to why I’m writing this now as opposed to 10 years ago, when I asked a C.I.O. of an asset management company what his thoughts on inflation-targeting were. His point of view was that inflation was necessary to industry so that management could give working people a nominal pay increase (and have them go away happy) while giving them a pay cut in real terms. I found that offensive at the time, especially as I thought that working people would have a better idea of the price of a pint of milk than the C.I.O. Today, we see just how wrong that school of thinking is, as nurses and railway workers, amongst others, balk at accepting yet another real pay cut. And, only recently, a former banker turned academic at a leading British university, maintained that “deflation hurts the poor”. I wonder how we can have got to a stage at which a notionally intelligent man believes that people with little or no money are “hurt” by food and other essentials falling in price. I can only assume that he associates “the poor” with debtors, the real value of whose mortgages wouldn’t be eroded by inflation in the way in which his was in the 80s and 90s. But today’s poor don’t have mortgages, because no-one will lend to them, certainly not at seven times their salary (which is today’s average house price to average earnings ratio). This is a double-whammy for the poor: they have not benefited from the considerable price inflation in property and other financial assets over the last 10 years only to be hurt by double-digit price inflation in food and rent. One can’t deny that, simply, the rich have got a lot richer and the poor considerably poorer.
From here, I could mention our indebted government’s being the greatest beneficiary of an inflation ‘regime’; the revolving doors between the Treasury and the investment banking community; the arbitrary – no; calculated! – nature of inflation indices (that omit to measure the price increases of the wealthy’s assets); the complete failure of inflation-targeting to deliver low and stable inflation; the role of central banks; and the anti-capitalist nature of Q.E., amongst other inflation-related factors. However, these would risk detracting from two fundamental points: deflation is not necessarily a bad thing, and inflation-targeting is an immoral thing. We were never consulted about it, we never voted for it and it hasn’t worked. It has delivered, instead, a Devil’s pact that the poor amongst us are being asked to pay while being threatened with losing their jobs.
It’s time for the economic orthodoxy to reconsider.
March 2023
Bruno Noble 