Monday, January 25, 2010

We'll just inflate away the debt!

Ah, well, no. That won't work, you see, as Timmy explains over at the Adam Smith Institute blog.
But the truly gargantuan problem is the supposition that inflation would eat away at the debt burden. Firstly, of course, what this really means is a hidden default on that debt. You know, sort of a "Tee hee...we'll pay you your money back but it won't be worth anything by then. Aren't we clever!". Well, no actually, this isn't big and it's not clever. Those gilts largely exist in the pension funds of us out here in the general population so that suggestion is really that you'll steal from us in our old age in order to fund your fiscal incontinence now.

Worse than that though is that it won't actually work. For markets have been stung by that inflation ruse once already and so matters are now different. Some 25% (so I'm told) of long term gilts are now inflation linked. Inflation does nothing to reduce that burden then. Short term gilts will of course need to be refinanced at the new, higher, (nominal) interest rates that inflation will bring. And the largest parts of government debt, things like the PFI exposures and the public sector pension plans are all inflation indexed. So inflation would be both a default upon those who are not inflation protected and wouldn't solve the debt problem either.

So, the solutions that we are left with are...?
Inflation simply won't cure the debt problem. We're back to either raising taxes so as to choke off new economic activity or firing some portion of the army of wastrels who consume the current tax take. Given my language choices there you can probably guess which course I regard as sensible...

Quite.

16 comments:

Roue le Jour said...

I still think inflation's a good bet, though, DK, because, combined with a pay freeze, it will allow the government to reduce public sector pay without having to directly confront the public sector unions.

Anon 00.32 said...

Pay freeze + inflation = industrial action I reckon. I suspect the indignant public sector will go all "how very dare you" over their standard of troughing being reduced.

buy american platinum eagle said...

Well, thanks for sharing your post.I learned a lot.

Andy said...

Sounds like inflation is going to work exactly the way they want it to.

Those gilts largely exist in the pension funds of us out here in the general population so that suggestion is really that you'll steal from us in our old age in order to fund your fiscal incontinence now.


So why is that a problem? Stealing from people with pensions is not a problem in the slightest for this government. Stealing in a way which punishes them in 20 years is even better.


Some 25% (so I'm told) of long term gilts are now inflation linked.


By implication then, 75% is not inflation linked. Therefore inflation will sort that problem out too. We'll just need more of it.

Inflation is definitely going to work, and it's definitely what Gordon or Dave will do. See if you can guess why Dave hasn't announced any serious spending cuts?

neil craig said...

However we could grow our way out of the debt. If instead of 10% inflation Britain had 10% growth, like China, India & a growing number, we would genuinely grow past it.

Since that growth is being achieved it is possible to achieve it - indeed history shows growth to average faster in already developed countries. What we need is a pro-business regime which, like Ireland, cuts corporation tax to 12.5% & even moreso we need an end of the regulatory environment which already halves our GNP. Nuclear electricity could quarter power bills; allowing housebuiders to build could quater housing costs; ending the 'elfins could massively reduce costs; being subject to EU regulations reduces GNP by 5.5% according to the "Enterprise" commissioner.

Anonymous said...

Just get rid of a few parasites in the Public sector.
They could start with the fake charities, cut the funding .
Now there is an easy saving ?
And populist too.

Furor Teutonicus said...

"Tee hee...we'll pay you your money back but it won't be worth anything by then. Aren't we clever!".

I may have misunderstood, but is that not this "Short selling" or whatever it is called*, that they were supossed to have banned the stock traders from doing?

*(Borrowing shares, the paying for them at the rate they were worth at the time of borrowing, or whatever, and all that stuff).

Anonymous said...

Well short selling or whatever is only illegal if the public do it.

Rob said...

We abide by Laws, They abide by 'rules'.

ThousandsOfMilesAway said...

Inflation won't get rid of the debt.

That's what deflation's for - default on debts that can never be repaid - and it looks like the next phase of that process might have begun...

http://www.screencast.com/users/ultrabear/folders/Jing/media/d96cfaf8-3259-4c98-9bea-32f7985f7d9b

Anon 00.32 said...

@ThousandsOfMilesAway

A long overdue correction in the FTSE but can't tell yet if it's just a correction or resumption of bear market. I expect any serious weakness in the markets to be met with money printing, sorry QE, as deflation is a politician's worst nightmare. Whether it'll work or not is another question but I suspect this is what will foster a wave of sovereign debt wobbles.

Heskett Bellé-Sauvage said...

Hello!

Spring will soon be upon us, so it’s already that time of year when the poor start arriving at the Hall, asking if they can help till the fields. It’s a most pernicious nuisance, seeing the woe begotten types come trudging up the driveway. I don’t know how they manage to get over the electrified fence and keep the guard dogs at bay, and My Man’s time is completely taken up with chasing them away. What I spend on shotgun shells during March and April has been known to fund small revolutions in certain Middle African states.

However, with Spring comes the renewed optimism that I might soon be called upon to stand for election in this great country of ours. It’s about time that we had a change in government. The current state of things reminds me of the great bard’s words in his Lear.

When usurers tell their gold i’ the field;
And bawds and whores do churches build:
Then shall the realm of Albion
Come to great confusion.

You might say that I’m an old fashioned Tory in that I’m not one to have bawds and whores building churches. In fact, if I had my way, not a penny of lottery month would go towards such schemes. Which is quite unlike the police of the current administration. If there’s anything that the lottery now funds which isn’t built by bawds and whores, then I really think we should be told. I’m pretty damn sure that neither bawds nor whores understand the first thing about civil engineering.

Which brings me neatly around to Tories.

I’ve been looking around at the types of people who have become Tories in recent years and I’m rather disappointed by the sort of chap we’ve been attracting. Oh, they’re Toryish in their principals of low taxation and pro-business, but where’s all the charisma of the old guard? Where are well rounded characters of Churchill and Wellington? Tories need not be men (or indeed women) whose definition of happiness begins and ends with a discussion on interest rates. They should be people who are living proof that being a Tory brings happiness because we are in touch with the life spirit.

Anonymous said...

Are Youth Workers part of that army of Wastrels even if they have worked hard to get where they are?

GCooper said...

The BBC and the rest of the Leftist media have already started pumping out the notion that slashing the unproductive sector of the economy (ie the public sector) will inhibit 'the recovery'.

Must protect their fellow toilers against capitalism, after all...

heng said...

top Christian Audigier womens dress
www.lookedhardy.com

Furor Teutonicus said...

GCooper said...

The BBC and the rest of the Leftist media have already started pumping out the notion that slashing the unproductive sector of the economy (ie the public sector) will inhibit 'the recovery'.


Kind of agree. Throw a couple of tens of thousands MORE useless wasters onto the dole, and it can not HELP the ecconomy as they are so used to doing fuck all for their pay, that they are unemployable in the private sector.

Better leave them where they are, but slash their department funding and pay packets by three quarters.