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If you ask two economists for an opinion, expect at least 3 conflicting answers.
Economics is not the «dismal science» of Thomas Carlyle, a term he coined in an 1849 tract, it's not any kind of science.
As an interested layman I have been wrestling with the ins and outs of the financial crisis and trying to make sense of the views bandied about by pundits, politicians and punters. Where are we in the economic cycle and what might happen in our economic future? Will there be serious inlation or even hyperinflation (like in Zimbabwe or 1930s Germany) so that the savings of the prudent and thrifty quickly become valueless?
Massive inflation in house prices in the decade after 1997 was obscured by
Adam Smith, the original economist, pointed out that wealth could only be produced by fixed assets (like tractors or factories) but such assets cannot themselves be counted as wealth. So, for example, buy-to-let landlords contribute to the economy, but only if their properties are actually let.
Following the tailspin in house prices, western governments have been busy injecting liquidity (i.e. money) into their economies. The current euphemism is quantitative easing (QE), a.k.a. seigniorage or sovereign credit, or to you and me, printing money.
And they are the RPI is currently negative is mainly due to the reduction in property prices and clearly they can't go down forever. At some point the RPI will bottom out. If you aren't paying a mortgage, then inflation is still over 2% and was up as high as 5% last year.
So will printing money produce hyperinflation in the long term?
Unfortunately economics isn't up to the job of answering that question - there are just too many unknowns: how much longer will the government printing presses roll; will Asian creditors demand their money back; when will property prices bottom out; will people continue to accept wage cuts to save jobs; and many more.
Perhaps the best we can hope for are indicators of coming disaster - like economic earthquake detectors. Let's look at the background first.
In the UK we have already begun to import inflation as the pound has weakened with respect to other currencies (even after its recent revival, it's still only 80% of the dollar value it was a year ago). As many imports are paid for in dollars, this inflation is working its way through to retail prices at the moment. Judging by the recession in the early 90s, these effects take about 18 months to work through so inflation (the real kind) should start to show during the first quarter of next year. The government's desperate attempts to push house prices back up may also be having some effect.
The temptation for governments now is to inflate their way out of their debt - if a government borrows a trillion dollars at 5% interest over 10 years then it has to pay back over $600 billion more than it borrowed, and that extra money comes from the taxpayer. But if inflation runs at 5% then that 60% increase is effectively wiped out - an interest-free loan!
As governments have the power to control inflation, and are not known for their ethical principles, we can all expect a dose of engineered inflation over the next decade.
We can also expect that governments will make every effort to suppress the true inflation rate.
In fact this has already happened in the UK (and possibly
But what about hyperinflation?
In one sense we have already experienced it - it's known as the credit bubble and when it burst, we saw hyperdeflation as the new money - credit default swaps and similar - was seen to be almost valueless. All of a sudden, banks discovered their billions of dollars of capital was worthless. Most of us weren't directly affected by these massive gains and losses but our governments soon made sure that we were.
In 1920s Germany, a complex mix of government good intentions, unpaid war reparations and currency speculation (short selling the mark) led to hyperinflation. In 1920 a loaf of bread cost 2 marks but by June 1923 harbingers of inflation are rapidly rising interest rates and money changing hands more quickly. So keep an eye on lending rates and the velocity of money. If either of these start to climb suddenly, be prepared for serious inflation.
There are of course winners in inflation - property owners, mortgage holders and other debtors.
Sound like any MPs you know?
Let Adam Smith have the last word: «The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.»
Economics is not the «dismal science» of Thomas Carlyle, a term he coined in an 1849 tract, it's not any kind of science.
As an interested layman I have been wrestling with the ins and outs of the financial crisis and trying to make sense of the views bandied about by pundits, politicians and punters. Where are we in the economic cycle and what might happen in our economic future? Will there be serious inlation or even hyperinflation (like in Zimbabwe or 1930s Germany) so that the savings of the prudent and thrifty quickly become valueless?
Massive inflation in house prices in the decade after 1997 was obscured by
- (1) historically low interest rates,
- (2) dropping the rises from the index of inflation - or rather using an index which doesn't include them,
- (3) gearing - an increase of say £100000 in the price of a house is geared down - the buyer pays off the increase over typically 25 years softening the impact.
Adam Smith, the original economist, pointed out that wealth could only be produced by fixed assets (like tractors or factories) but such assets cannot themselves be counted as wealth. So, for example, buy-to-let landlords contribute to the economy, but only if their properties are actually let.
Following the tailspin in house prices, western governments have been busy injecting liquidity (i.e. money) into their economies. The current euphemism is quantitative easing (QE), a.k.a. seigniorage or sovereign credit, or to you and me, printing money.
And they are the RPI is currently negative is mainly due to the reduction in property prices and clearly they can't go down forever. At some point the RPI will bottom out. If you aren't paying a mortgage, then inflation is still over 2% and was up as high as 5% last year.
So will printing money produce hyperinflation in the long term?
Unfortunately economics isn't up to the job of answering that question - there are just too many unknowns: how much longer will the government printing presses roll; will Asian creditors demand their money back; when will property prices bottom out; will people continue to accept wage cuts to save jobs; and many more.
Perhaps the best we can hope for are indicators of coming disaster - like economic earthquake detectors. Let's look at the background first.
In the UK we have already begun to import inflation as the pound has weakened with respect to other currencies (even after its recent revival, it's still only 80% of the dollar value it was a year ago). As many imports are paid for in dollars, this inflation is working its way through to retail prices at the moment. Judging by the recession in the early 90s, these effects take about 18 months to work through so inflation (the real kind) should start to show during the first quarter of next year. The government's desperate attempts to push house prices back up may also be having some effect.
The temptation for governments now is to inflate their way out of their debt - if a government borrows a trillion dollars at 5% interest over 10 years then it has to pay back over $600 billion more than it borrowed, and that extra money comes from the taxpayer. But if inflation runs at 5% then that 60% increase is effectively wiped out - an interest-free loan!
As governments have the power to control inflation, and are not known for their ethical principles, we can all expect a dose of engineered inflation over the next decade.
We can also expect that governments will make every effort to suppress the true inflation rate.
In fact this has already happened in the UK (and possibly
But what about hyperinflation?
In one sense we have already experienced it - it's known as the credit bubble and when it burst, we saw hyperdeflation as the new money - credit default swaps and similar - was seen to be almost valueless. All of a sudden, banks discovered their billions of dollars of capital was worthless. Most of us weren't directly affected by these massive gains and losses but our governments soon made sure that we were.
In 1920s Germany, a complex mix of government good intentions, unpaid war reparations and currency speculation (short selling the mark) led to hyperinflation. In 1920 a loaf of bread cost 2 marks but by June 1923 harbingers of inflation are rapidly rising interest rates and money changing hands more quickly. So keep an eye on lending rates and the velocity of money. If either of these start to climb suddenly, be prepared for serious inflation.
There are of course winners in inflation - property owners, mortgage holders and other debtors.
Sound like any MPs you know?
Let Adam Smith have the last word: «The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.»
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