Sunday, 21 September 2014

Inflation is never a good thing

Following from my exposure of governments planning inflation deliberately (why it's called a target rather than an aim), I have heard so many idiots on the radio praising price rises I must do my best, not as an economist but basic in accounting, why it can never be a good thing for anyone.

If you start with the obvious, your food and energy costs are essentials, and if they go up you earn the same and have less for everything else. If everything else goes up you have more and more set back for essentials less for luxuries. The only people who benefit from rising prices (albeit temporarily, as they have to spend the money on things themselves which have also gone up) are investors, actual consumers can never gain from prices going up, as if they have the same amount it won't go as far. Obviously.

Then they still cheer when their house is worth more, they paid less so are in their minds paying less now than its worth. No, they are paying what it was worth to them the day they bought it, and have a fixed loan which will never change whatever it is worth today. And come the time they sell it then every penny will be lost when they buy another one, none of it will be theirs unless they trade down, and then if they do they will never be able to return where they were in future unless they earn a lot more, as however much the current property goes up (inflates) all the other better ones will do more. It's like any other balloon, pump them up more and the bigger ones will go from being 50% larger than the small ones to twice as big. You'll simply never catch up, either as a first time buyer, as you have no assets at all to liquidate, so totally dependent on your income, or as an owner, as whatever yours goes up the better ones must go up more as 10% of 500 is more than 10% of 300 etc.

Negative equity was raised as a downside, but that is the fault of the market and not the system. Anyone risking so much for a property not worth the amount has become an investor, and will suffer the same conequences as any other if their asset goes down. Unless they are forced to move then the usual route is to keep it and pay down the debt and then you will catch up. If not then you will still pay less for another one, if you have anything left, and it is so unusual it is barely worth considering, as negative equity only happens when there is such high inflation it becomes temporarily corrected. But as houses are essentials they rarely stay down that long so the problem usually vanishes on its own.

Otherwise it's pretty simple. You save money, inflation makes it worth less. You earn interest, it may not keep up with inflation. You earn the same, prices go up, same result. It's only the friend of crooks who borrow other people's money, invest it in things which go up slightly more than inflation, and fix the term of the loan so the longer it lasts the less they pay in real terms, assuming their asset beats the rise then they make a profit. They produce nothing, all they're doing is spending someone else's money and paying them to loan it out, and create absolutely zero in the process. Real business is adding value through work or production, and just because long term loans are reduced by inflation it wrecks the economy for absolutely no practical benefits.

The only good inflation (technically it isn't real inflation, as it only relates to prices) is wage rises, as they are the indications of a genuinely growing economy, so while China has the far larger economy than Britain, last time they told me each person earned on average 1/7 than Britain, so were many times poorer. Earnings to price ratio is the actual measure of economic success, so in Britain in the 60s you could buy a house for 3X average income, now it's 10X. Therefore Britain has shrunk its genuine economy (entirely through inflation) three times in 50 years, they are dropping while China is rising. We have peaked and are going down. But unless people understand inflation is a relative parameter between average/absolute prices v earnings they will get lost and fooled by businesses and governments every time. High prices are always bad, as if you sell high you still have to spend the money and everything else will have gone up as well so that money is worth less as all relative to earnings alone. So rising wages are the sign of health and rising prices the sign of fraud.

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