Written by Gareth Seward
If like myself you ignore most of the mainstream media, you have probably still noticed shopping for your weekly groceries is getting more expensive. However, if you’re on social media you probably won’t have escaped posts blaming the rise in the cost of living due to “capitalism”, and certain factions actually claiming inflation is… a good thing? Both notions are completely wrong to the point of total absurdity.
First, inflation is nothing to do with capitalism and everything to do with state intervention. It is a wide misconception that inflation is caused by an increase in prices. Rising prices are an *effect* of inflation, not the cause. Inflation is simply the purchasing power of your currency getting weaker. As such, it takes more of it to purchase stuff. It simply gets devalued when you increase the money supply; the more there is of something, the less it’s worth. To illustrate this point, take Adam Smith’s famous water/diamond paradox; water is far more valuable to human life than an inanimate carbon rock. However, despite this you’ll pay pennies for water but thousands for a diamond. Why? Because water is abundant and diamonds are far, far scarcer. See how it works? Well, that principle also applies to the supply of money. Whether it’s the Bank of England buying government bonds with freshly printed money, banks granted legal privilege to create credit out of thin air or just being trigger happy with the printing press, it all adds to the money supply.
Our government are keen to blame much of the rapidly increasing inflation on COVID-19. No virus has ever caused inflation, but our government’s reaction certainly contributed to it. Make no mistake though, while lockdowns, bailouts and restrictions seriously harmed the economy, it’s very disingenuous to claim these as the root of the current situation. Our economy was smoke and mirrors long before COVID, and that illusion was balancing on a razor thin wire. Basically, we couldn’t afford for any rainy days to happen. Then along came a rainy day.
Decades of suppressed interest rates and credit expansion have been bubbling away and was always going to lead us to this point. It’s coming to a head now because the government’s panic and hysteria over COVID has simply accelerated things. The unprecedented levels of money printing and government-imposed lockdowns that have choked industries and caused supply chain bottlenecks are what have brought the cost of living rises to current prominence.
The Resolution Foundation estimates the average household is going to feel the pinch to the extent of an extra £1,200 this year. However, it’s not only inflation which is seeing the cost of living rise, but also those broken promises made in the Conservative’s manifesto. We’re seeing direct tax increases and subtle sleight of hand to increase the tax burden. National Insurance is effectively going up by 1.25 percentage points and the frozen income tax threshold means more people will pay higher rates (and let’s not forget inflation itself is an insidious stealth tax).
Of course, there is the energy price crisis too which will weigh heavily on consumers, hammering them even further in these times of inflation and increased taxation. The government is not entirely blameless here either, as their obsessive net-zero green policies and political manoeuvring, such as heavily regulating the North Sea, banning fracking, and effectively restricting domestic gas in favour of relying on foreign supplies are all factors in the costs. Rising energy costs will also increase total costs across the board – as anything that is produced requires energy to produce it in the first place. The ovens that bake your bread will use gas or electric. So this will be reflected in your weekly shopping bill also. That extra £1,200 is a steep price to be paid by many already hard-up families just to not steal Greta’s “dreams and childhood”.
As for the astonishing spin that inflation might be a good thing, no it most certainly isn’t. Correction, it IS good for government but bad for the ordinary folk. Inflation is a stealth tax that transfers wealth from the average person over to the rich and politically connected, and it hurts nobody more so than the poor and vulnerable who see their pounds effectively diminished to pennies.
Whilst inflation hurts savings, pensions, and fixed incomes, it actually helps borrowers – and there’s no bigger borrower than government. Not only does it inflate the value of any existing assets already owned, but high inflation combined with those artificially low interest rates significantly devalues all that government debt too. The Institute of International Finance reports that global debt is now over $300 trillion – more than three times global GDP. The UK national debt alone is officially estimated to be £2.5 trillion. However, that figure is likely to be far short of what it truly is, as it doesn’t account for government liabilities and commitments, such as state and public pensions. It’s a LOT of money to owe, so the higher the inflation and lower the interest rate, the better – cost of living for the peasants be damned.
All the free money wasn’t so free after all, was it? It never was and it never will be. Now that our pockets are about to be hit hard, in summary, the state’s meddling has cost us big.
The interest rates do need to rise. The problem is the state has allowed suppressed rates for too long, and we’re at the stage now that if it increases to where it should be in one jump, it will obliterate the economy. So it needs to be done incrementally. It will be painful, but if we allowed the pain a lot earlier, it would have been much less severe. We need to cut taxation too. By reducing taxes, you will increase productivity and employment – and productivity is the true wealth of an economy. It will also reduce the strain on a public already suffering the consequences of a financially irresponsible state. Deregulation and the removal of bureaucratic red tape will remove many barriers that limit or prevent smaller businesses from flourishing, thus also increasing productivity. We also need to tighten up both monetary and fiscal policy. Cut government spending, and crucially, STOP printing money!