| Topic: | Re:Is Inflation the inevitable result of the Devaluation of the Gordon Brown Pound ? | |
| Posted by: | Thomas Barry | |
| Date/Time: | 10/11/09 09:35:00 |
| "The devaluation of the pound against the euro, the dollar and the other major trading currencies should normally lead to inflation in the costs of imported goods and services" These aren't normal times, though David, and you need to get out of the 70s mindset where inflation and socialism are the great monsters haunting your world - they aren't, but you should be very worried about deflation. I'm not sure how much economic expertise I should assume on your part, so I'm going for 'none' based on your displayed knowledge of other subjects. I trust this is OK? For starters, read up about Japan's Lost Decade. First of all, you're right in your understanding of what normally happens if you devalue and print money - imported goods go up in price, everyone suddenly has a lot of free money floating around so assets increase in price due to basic supply and demand. The consequence of both is inflation, particularly if one of the things going up in price is oil, which affects everything else. However, we're not starting from an inflationary situation - the credit crunch shocked the economy into the beginnings of a deflationary spiral, where the instant crushing of private sector demand forced massive price cuts. This in turn leads to job cuts and less money in people's pockets, so the price cuts keep coming and so on. Eventually people twig that they can wait and get the same thing cheaper in six months at which point no one's buying anything and even more people lose their jobs, the deficit skyrockets, taxes have to go up to pay for it which crushes demand even more etc. At this stage (or preferably before, once you're in the spiral you rapidly reach a point where you can't borrow the money to get out as your public finances are actually shot to bits) the only way out is for the Government to stimulate inflation, and the way to do that is through exactly the same inflationary bad habits that normally make no sense at all, like devaluation, zero interest rates, unsustainable public borrowing-to-spend and printing money. Which is why Brown and Darling did it, and why anyone who knows about economics is rather grateful to them for recognising the risk and taking bold action for once. It's interesting to look at the trade surplus we're running as a result, of course - that's a positive consequence of devaluation. In the case of cars, everyone knows that the scrappage bonus and VAT cut run out soon, which in itself stimulates demand and thus moves prices up - the expectation is of inflation, which is better than an expectation of deflation. 'Ah, but what about interest rates', I hear you say. Of course, conventionally you can stimulate inflation by cutting interest rates, leading to greater investment and increased consumer demand as mortgage payments reduce, but you can't cut them below zero, which is unfortunate since currently to get into positive inflation territory that's where they need to be. Hence the unconventional measures outlined above. Of course, cutting rates devalues the pound too. We're lucky we're not in the Euro, of course, as countries like Spain and Ireland which are in it and have the same asset bubble collapse issue have to devalue internally, by cutting salaries and slashing spending, while they can't control the resultant deflation to the same extent we can, not having control over interest rates or money printing. I would point out here that G. Brown esq. has been a long-standing opponent of joining the Euro (which I disagreed with him on, but am beginning to be quite grateful for, looking at Spain and Ireland). Inflation, of course, is near zero even after a year of pumping money into the economy, which I think rather bears out what I've said above - it would clearly have been substantially below zero without the stimulus and QE and we would indeed be in a serious deflationary spiral just when our major competitors are getting back on their feet. I'm not sure who's arguing that that would have been better (has G. Osborne met the clue-stick yet?). What's lost in all this is that there was no way out of the credit crunch that wasn't going to cost the UK Treasury multiple billions - the judgement of history will be how close Brown and Darling, given virtually no notice and flying by the seat of their pants, got to the minimum cost, and how well they shape their policies so that the price is paid more by those who most benefitted from the bubble in the first place. The other question that all parties need to answer is 'how do you stimulate private sector growth so the State can ease off the stimulus?' and I'm not sure anyone's got an adequate answer to that. |