Friday, March 5, 2010

Bail out the borrowers! Shaft the savers!

End this 'inflation fundamentalism'

At the root of the problems in the PIGS is the fact that their prices and wages have risen much faster than those of Germany and other eurozone members. This loss of competitiveness can no longer be compensated for by currency devaluation. Wage pressure and rigid labour laws across most of these countries did not help either. In most countries, cutting actual wages is politically difficult if not altogether impossible. But, to regain competitiveness and balance the books, real wage adjustments are sometimes inevitable. A slightly higher level of inflation allows for this painful adjustment with a lower level of political conflict. Ultra-low inflation, on the other hand, can easily become deflation in a recession. Falling prices encourage people to defer spending, which makes things worse.

Posted by drewster @ 07:32 PM (836 views)
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4 thoughts on “Bail out the borrowers! Shaft the savers!

  • AKA borrowers preferring to steal from savers, rather than pay their debts back the hard way. If the authors of this piece were just about to retire on a fixed income they might be less happy with the prospect of 4%+ inflation. After 10 years of 4% inflation you have lost a third of your buying power.

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  • tenyearstogetmymoneyback says:

    Than there is the question of how you measure inflation.
    Had house prices been included for the last ten years it would have been obvious that it was spiralling out of control.
    Instead they based it on things things like digital camera memory cards (unfortunately I’m not joking).

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  • I think you’ve got it there goweresque.

    At the end of the day, it comes dow to a question of morality of who gets the pain. Is it moral to let the prudent bail out the reckless? So far our central banks have decided it is, but in the future they will not have that option because unfortunately the central banks have come to the end of the line.

    If they do try to inflate away, the money will dry up as it has in Greece. This silly article might try to paint a different picture but the only way ahead is to let borrowers take the pain for their daft investment decisions.

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  • It’s not just about protecting savers. It’s about building a fairer system for everybody. Inflation benefits those with first access to credit – big companies and well-connected people – those at the top of the pyramid. They don’t even need to work hard or invest in productive businesses – they can simply buy assets (property & shares) first, then as the newly-printed money trickles down to everyone else, the value of those assets rises. The further down the pyramid you are, the more you lose out. Make no mistake – inflation benefits the well-connected elites. Stable prices are fairer for everybody.

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