Monday, 30 December 2013

Creating inflation

I only discovered this phenomenon very recently. Although prices have risen all my life at varying rates, it never occurred to me it was planned, but a nascent fault in most economies. When I was young France simply lopped a couple of zeroes off the Franc and no one minded or noticed except for needing to change the currency next time we went there.

Of course the hyperinflation which caused the second world war and currently decimating Zimbabwe is a symptom of the country's health, and the clearest indication of an economy's sharp decline. So technically there really isn't a lot going for inflation, unless you borrow money and then your wages rise faster than the interest on the loan. Of course this is cheating, as anyone who borrows clearly cannot afford whatever they borrow for or they would never pay more than they need to, so if you then manipulate the inflation through the blunt instruments of governments to direct it, that is also cheating.

Most people lose from inflation, as you would expect. You save, it gains interest, and inflation continues either above or below it. In Britain today the inflation outstrips the usual interest gained so everyone with fixed rate accounts is still losing money. Governments now say they fear deflation even more than inflation. They do agree high inflation is ruinous to the economy but diverge from what is now called 'best practice' as most western governments now plan inflation deliberately, manipulating interest rates and money printing to direct it as much as they can, normally to an 'ideal point' of 2%.

It is very simple. Your savings will be worth £98 for every £100 per year with 2% inflation, less any interest. Whatever happens interest wise inflation spoils forward planning, as whatever you own or save for becomes further and further from the original amount, unless you both have large amounts of savings and high enough interest rates to at least fill this gap. Borrowers do not pay what savers get in interest, but usually from 2-2000 times the difference so are not helped that much by a few percent of inflation either way. The planned 2% is never going to make any difference to non-mortgage loans at typical rates of around 10%, and a citizen's lowest rate on a mortgage is very unlikely to fall even close to 2%. So basically no one can benefit from even a low rate of 2% inflation, savers could profit in a good economy but currently losing, but whether planning oneself or an accountant, having to factor in any inflation will only make it harder to see ahead and make any arrangements, and doing the budgeting ahead would always rather work with zero, and ideally falling prices.

As banks cannot yet (it is being considered) reduce savings rates beyond zero (many people would risk not using them if they took money for storing it safely) then deflation means your £100 is worth more per year simply by the passage of time, at the rate of deflation. It is so rare and short lived I'm not aware of any test runs in history, but the arithmetic is known. It would also discourage borrowing as there would be no incentive to do so as it would effectively cost more to borrow than save the money over time. I am certainly not aware of any legitimate business or saver suffering from deflation, as even if rates were zero the money would still be technically worth more over time.

So, you ask, why do governments all aim for around 2%, bearing in mind only borrowers at very low rates ever benefit from any inflation as it eats away everyone else's like male pattern baldness. The standard phrase 'Follow the money' covers it all. Not being an economist I won't try and explain the complex ways bankers and businesses betting on a falling economy and winning benefit from any level of inflation (if you can hedge against it then you win the bet), and also explains why the City of London is dreading an improvement in the economy with consequent rise in interest rates and fall in inflation. All I can say is in any fight there are winners and losers, and the small percentage of winners from inflation are so powerful they control government policy and swing it their way except in the most democratic country in the world (and one of the richest, no coincidence there), Switzerland.

So, another reason governments do not give a damn about you, added to keeping interest rates low (which is 100% in their control), they use all the indirect methods to keep an undercurrent of inflation, which debases the currency worldwide (which is on the list of treasonous acts) and makes nearly everyone poorer. You can listen to all the excuses they give for doing so, but in the end none can add up as the end result is a shrinkage of your spending power.

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