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Inflation - The Cruellest Tax

by John de Roe.
2011-01-27

Inflation is the nastiest of all stealth taxes, a tax that that hardest on people who have done what government and financial institutions advised, lived thriftily, planned for their retirement, paid a substantial percentage of their hard earned into a pension account, controlled their debts, paid their bills and amassed a nest egg as insurance against hard times and to provide a few luxuries.

Infltion is, in effect a financial mechanism to transfer wealth from savers to the state. From a political leader's point of view it is preferable to punitive tax increases in that voters are less likely to blame the politicians who screwed up the economy than to ascribe their misfortune and the dwindling value of their assets to the wider economic crisis . Economically, however, inflation is worse than taxation. It penalises thrift, rewards prodigality, disadvantages financially stable businesses and weakens competitiveness.

For thirty years following the end of World War 2 in 1945 British governments of both Labour and Conservative parties used inflation to erode the debts Churchill had unavoidably incurred during the War. As a result Britain fell further and further behind its rivals both in terms of output and living standards. In the mid-1970s, with a third debt crazy and financially incompetent Labour government in power since the ending of hostilities we were close to meltdown: power shortages had put the country on a three day week, prices and incomes policies had squeezed workers while inflation ran in double figures, and the unions were out of control. There were constant strikes and it was difficult for bosses in a unionised environment to get any worker to do anything they did not feel like doing.

I was never a fan of Margaret Thatcher but at least the Conservative team she led appeared to understand the problem. Strict control of the money supply would bring down inflation and so make possible a national recovery. The economic that carried the Conservatives to power was opposed by 364 leading economists in an open letter to the media. These were the self styled Keynsians although their addiction to big government, an ever expanding public sector, constantly increasing taxes and borrowing by selling bonds to fund deficits.

The economists would have had the new government continue with the policies that had twice seen Labour governments appeal to the International Monetary Fund for help and had twice seen the IMF impose draconian austerity measures to bring the haemorrhaging of money under control. Measures far more harsh than the austerity measures the coalition government is now imposing to the fury of left wing politicians and academics who, true to the track record of the left, are insisting their is the ONLY way and we should defy logic and continue to spend, funding our deficit when we can no longer sell our bonds on the international market by printing money.

That way lie Weimar and Zimbabwe.

How inflation works to help facilitate the thinking of this insane cabal of left wing authoritarians (yes, that is a coontradiction but it is also the political position of many politicians who refer to themselves as liberal,) is that in a modern economy the amount of money in circulation should reflect the total value of a nations assests.The traditional was of regulating that was by making a currency unit worth an amount of gold or lesser precious metal. Thus in Britain when we were the world's leading economy, a pound (weight) of bronze coin was worth a gold sovereign. All prices derived from that, a 2 pound loaf of bread was fourpence (the price was regulated) to stop profiteering during grain shortages.

Start printing money and for each £billion put into the economy the money already in circulation becomes worth a little less. Traders want to live decently and nations we import from want to be sure their farmers and workers and businesses are getting a fair deal and so prices go up. And money buys a little less.

Normally in times of inflation interest rates are raised to curb the inflationary pressures in the economy. In the current bout of inflation fever however rates have been kept insanely low. This, we are told, is to stimulate economic recovery but it is not working. While governments are running such huge deficits the banks can make easy money by borrowing from central banks at 0.5% and lending the same money back to the government by using it to buy bonds paying 3.5%.

While that goes on there is no end in sight to the economic depression or to the deficits being run by some of the world's biggest economies. So long as there are no other options available inflation will continue and peoples' savings and nest eggs will continue to evaporate.

In the 1960s The Who released a record called, "Won't get fooled again."

Somehow we always do get fooled again.

Successive governments have done the right thing in standing up to the whining of the left and risking temporary unpopularity by attacking Britain's deficit early in their term of office so the benefits will be apparent by the time they must face the electorate.

The economy has moved back into growth and now sems to be slipping back towards recession. Inflation is already taking off. Fraser Nelson reproduces an eye-popping table of consumer prices, showing double-digit rises on last year. Yet the Monetary Policy gurus continue to hold interest rates artificially low whining that to raise rates will make us uncompetitive.

Do we have to go through the whole nightmare of the 1950s and 60s again. Stagflation, Labour finance ministers talking about 'squeezing the rich until the pips squeak and and the rich simply taking their money and leaving the country for more money friendly environments. The singer Tom Jones talking on television about his life recently said he had always though of Britain, the Welsh Valleys in particular as his home but he felt compelled to live abroad when in 1970 with supertax rates at 97% he learned he had earned £1 million the previous year and ended up with only £40,000 in his pocket.

According to the received wisdom of economics inflation is supposed to be kept below two per cent. In spite of all the accounting trickery to disguise the true figure it is officially running at tice that and gathering pace. Western nations must stop printing money and start raising interest rates. Inflation must be stopped now. If we do not we are heading for disaster.

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