Tuesday, Jun 15, 2010
Danny Boy loses his marbles
Bloomberg: Unemployment Hurts More Than Inflation: David G. Blanchflower
Oh, for a little inflation!
I don’t mean barrow loads full as in 1930s Germany or recently in Zimbabwe, but 4 or 5 percent a year for a few years would work just fine and would really help us to get out of this mess.
Inflation does redistribute wealth from savers to borrowers, but right now that would be a pretty good thing. Many borrowers are in big trouble and need help.
Inflation would reduce the real value of public and private debt. And importantly it would help to push many of those homeowners who are in negative equity back into positive territory.
There is no evidence from any developed country that inflation ever turns into anything catastrophic. Hyperinflation is not on the cards
Posted by little professor @ 01:51 AM (1246 views) Add Comment
19 Comments
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1. hpwatcher said...
Okay, thanks David. Now bu99er off.
2. simon68 said...
Don’t think it will be little inflation in UK. UK is not Japan!!!!!!!!!!!!!!!!!
Japanese are still very rich……………..although its government is heavily in debts.
Japan citizens and businesses can easily absorb the government debts.
Whereas in UK public debts is almost 1 trillion pounds plus households debts of 1.5 trillion pounds, but it still hasn’t counted the unfunded liabilities yet such as pension costs and private sector liabilities. So, the real total debts in UK is 4 trillion pounds.
Once UK government credit rating is being down-graded to below AAA the gilts yield will shoot up. By then, UK financial institutions must pay higher interest to obtain finance from international market. Hyperinflation is a prudent description of what will happen if the government does not cut spending & keep on printing fiat currency!!!!!!!!!!!!!!!
3. simon68 said...
Unlike the 2008 financial tsunami which is inflicted by CDO & CDS type of mortgage related derivative products, this time is not a banking crisis but a sovereign debts crisis. No one will bail out the government this time.
4. paul said...
Now you know why Blanchflower served a very short couple of years on the MPC before erm ... voluntarily retiring.
It was Blanchflower's voting record that contributed to the collapse of the credit market due to rates being too cheap for too long, resulting in overspeculation on asset prices. Blanchflower certainly wasn't the captiain of that ship but he was duty lookout and was definitely asleep on his watch.
5. mr g said...
Blanchflower would be dangerous if he had a brain but then you can make statements like this, if you live in an ivory tower shielded from the effects of inflation.
6. Jim Green said...
Government creation of fiat money does not necessarily lead to hyperinflation. The BoE would be perfectly capable to issuing debt-free fiat money while keeping inflation in check. In fact with no interest to pay off inflation would be easier to contol. You've only got to look at the massive debt bubble to see that private issue of credit is hugely inflationary.
''Between 1966 and 2007, the average percentage increase in the money supply has been 11.9%.
In a little over 40 years, the commercial banks have inflated the money supply by 87 times, or put differently, by 8,700%'' (Ben Dyson.com)
This is an excerpt from ‘Government Debt and Credit Creation: A Study of the Creation of Credit and its effect on the British Economy’, a report published by the Economic Research Council (ERC) in December 1981. In 2010 the numbers are all a lot bigger, but the principal and the message is as relevant as ever:
‘’A quote from the Economic Reform Club's (now part of the ERC) series of papers 'The Banks and the War', IIIrd Paper, published in 1943, put the position clearly, describing the situation where Government does not have full control of credit:
"...it is apparent that no new (credit) money can be created except through the banking system, which issues it as an interest-bearing debt owed to them by the Nation.
The result of this has been the piling up of an enormous burden of debt on which succeeding generations of our people will have to pay huge sums each year in the form of interest and Sinking Fund.
As the banking system in creating this money is merely using the Nation's credit by liquifying it, the right of the Banks to treat such created credits as a loan and to receive payment of interest thereon is unjustifiable, and it is therefore submitted most strongly that they are not entitled to anything more than an agreed fee based on the extra work devolving upon them by the handling of these funds, in a manner similar to that in which the Bank of England is compensated for the management of the National Debt and of the Fiduciary Issue."
The power to issue bank notes has provided for the Government. since 1945, about £19,000 million of revenue, of which £9,300 million arises from the increase in notes issued, and £9,800 million from the interest saved on government securities held as backing for the issue.
In 1980, the Government borrowed £11,154 million and spent £8,661 million paying interest on previous debts. The interest payments represented 10.6% of Central Government current expenditure.
The power of the banks to increase credit has meant that the Government has foregone revenue, since 1945, of over £30,000 million, of which £14,000 million arises from the increase in credit , and £17,000 million from the interest the Government could have earned if the credit had been issued as notes.
Under the present system the Government could have sold direct to the Bank of England Issue Department government stock and received notes in exchange. Interest paid on this stock would have gone to the Issue Department and in turn been credited back to the Treasury.
The effect on total money supply and consequently on inflation would have been nil.’’
7. quiet guy said...
I love this bit:
"Savers can always plump for inflation-linked securities and cost-of-living adjustment clauses can be inserted into wage contracts."
Oh yeah baby! I'm going to have a chat with my employer this morning to make my employment contract inflation proof. As Mr G says, Blanchflower is pure ivory tower.
8. estrader said...
Just 4 or 5% David aye? Would you like any fries with that? You seem to be so good at spouting numbers...Whilst you are at it why not give us an unemployment target you would like... to 3 decimal places and GDP to 4 decimal places. By the way, why do I pay taxes? Why not just let me keep all the money I earn and have the Government print the money it needs to pay its bills? Same goes for all those poor people in debt, not paying any tax would help them more than inflation would. How about it David?
9. another alan said...
"If the choice is between more inflation and less unemployment or less inflation and more unemployment, I choose the former." Blanchflower
I agree with this.
recaptcha: "mentions community"
10. estrader said...
"If the choice is between more inflation and less unemployment or less inflation and more unemployment, I choose the former." Blanchflower
But, surely people want money in order to have a higher standard of living? Nobody, or I should say, very few people want a job for the sake of working. What is the point of full employment if everybody’s standard of living is diminished? That is what inflation will do. You could easily have full employment if everybody worked for the government.
11. simon68 said...
I visited my cousin who lives in Calgary, Canada last year. He bought a house for about the equivalent of £400,000. I am amazed of the decoration condition which is modern and spacious in size. With that amount of money, I am sure you can’t find a similarly decent house in UK.
Thanks for properties speculators in UK.
12. Jim Green said...
Inflation - could public issue of debt-free credit be less inflationary than private bank credit?
http://www.bendyson.com/objections-the-reform-would-be-inflationary/2009/09/
13. growler said...
Inflation is a cop out:-
(1) Governments borrow, spend and have to repay less
(2) Savers get punished for not helping the Government spend
(3) Companies get massaged into a business size that is in the real world not quite so real. Except now, they're screwed and need the sales to support their models. They also have borrowings, so they won't mind too much about inflation.
(4) Jo public - as long as inflation is not too large - will pay the increased price, since there is no competition for most of the essential goods and services.
(5) the house-owning jo public also likes a bit of inflation - this makes house prices increase thus feedign the feel good factor.
meaning in the last analysis, inflation is just the perfect disease for a deficient Government.
Frankly, all savings should by law be inflation linked. It ought to be illegal to pay less interest than there is inflation. We need a check and balance in the system that does naturally seek to tame inflation. Since if it doesn't reduce the value of debt, it will be actively managed down.
Such a policy would mean people will pay lower prices and exessive spending will actually cause pain.
14. simon68 said...
Hope the government won’t bring back the poll tax or set up legislations to outlaw all savings accounts, where the government could then use money of savers to fill the national debts hole.
15. This comment has been removed as it was found to be in breach of our Blog Policies.
16. ontheotherhand said...
"If the choice is between more inflation and less unemployment or less inflation and more unemployment, I choose the former." Notice he says "If" here because he knows there is no choice because he is ignoring the Friedman literature showing that in the long term there is no Phillips Curve trade-off between inflation and unemployment. In the short term when inflation goes higher than the population expected, their employers benefit because the pay rises don't keep up with inflation, and so the employers can create more jobs. In the long term the population comes to expect the inflation and wages adjust fully with inflation. e.g. He admits as much himself "cost-of-living adjustment clauses can be inserted into wage contracts". - if wages go up automatically with inflation, then how does inflation create less unemployment anymore?
Therefore what David proposes is that we can buy ourselves a couple of years of breathing room by ripping off savers and reducing real wages to the employed.
17. mark wadsworth said...
As OTOH says, if there were a choice, then I would also choose lower unemployment, it's about spreading the pain more evenly. But there is no such choice.
As to this whole "inflation cures nequity" concept, if house prices were to halve overnight (which they would do if I became PM and replaced most taxes with full-blooded LVT) then the total amount of nequity would be in the order of £250 billion, but that is a one off-hit - it could easily be split three ways between unlucky purchaser (who can easily repay his share out of his household's next five to ten years' worth of Citizen's Dividend); the banks themselves (who can pass this on to bondholders via debt for equity swaps) and central government (who can divert a small chunk of LVT revenues, say £10 billion a year, into paying off the government's one-third share over ten years).
It's got to be better lancing that boil once and for all rather than this permanent transfer from savers to borrowers and from the productive economy to landowners and property owners.
18. another alan said...
estrader - I kind of agree with you about working for the sake of working (although many people do just this), but fear that unemployment is much more detrimental to standard of living than a bit of inflation. (This is not to say that I advocate mass inflation, but just my response to if - IF -there is a choice between the two (as in the Blanchflower quote).)
"leader retread"
19. nickb said...
@simon @2
Is £1 trillion debt high or low? Suppose UK Public debt is at £1 trillion (=£bn 1000). Then it's well under 100% of GDP, so low by long term historical standards. (in 2009 GDP was £1400 billion). Phew!
Japan has never defaulted on its Yen denominated debt.
The USA has never defaulted on its dollar denominated debt.
The UK has never defaulted on its sterling denominated debt.
They have in common that they issue their own fiat currencies - unlike Greece, Spain, Italy, Germany et al.
Seems to me there is some scaremongering going on somewhere.
Nick