Currency War and Debasement

When is inflation not called inflation? Answer, according to Mr Carney, when it’s dressed with the words, “Targeting Growth”. In fact it’s impossible to create growth through inflation in the long run.

In the short, you’ll get growth for one year, then the money is worth less, which wipes the growth out, so you have to generate more inflation to get another burst of growth, which is wiped out again.

The reason George Osborne doubled the money to attract Mark Carney to the Bank of England, was that he was desperate for someone from outside to invent a debt reduction policy which doesn’t look like Plan B.

The good news about inflation is that debt gets eroded. Government debt, the fixed-interest UK Gilts worth £1.15 trillion, get eroded pretty double-compound quick. If there was sufficient inflation, the debt would be eroded faster than Osborne’s failed policies are adding to it, and that’s saying something.

If the policy was moderate, using moderate inflation to reduce our debt, then maybe this wouldn’t be such a bad thing. But the problem is that they are being sneaky, shifty. They are calling it one thing but delivering another. Why the sleight of hand?

The bad news about inflation is that the policy maker can lose control very easily.

The other effect of debasing the currency is that Sterling falls against other countries on the foreign exchange proportionately, which should give our exports a boost and our imports some stiff competition. Although it doesn’t take long for prices to adjust accordingly and for the advantage to be removed again.

If everyone else around the world started trying to do the same trick, then chaos could potentially follow. If we try to outdo the Japanese, who try to outdo the Chinese, who try to outdo the Americans, who try to outdo us, then we’re engaged in a currency war.

If the Bank of England increased the inflation target from 2% to 4%, then we would be able to judge the success or failure of the policy against the target. But by “targeting growth”, there is no specific number for inflation, which means there is no accountability.

Mark Carney arrives at the Bank of England this summer. If he wants to reward George Osborne for his massive pay packet, he could try to generate a spurt of 1970s style economic boom, just in time for the election. If the Tories don’t win, they ain’t bothered, because Labour is left to clear up the mess.

Without a clearly defined policy there is no accountability, and without accountability, expect currency war and debasement.

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