Blogging from the Highlands of Scotland
'From fanaticism to barbarism is only one step' - Diderot

Friday, 7 January 2011

The truth about inflation, interest rates and Mervyn King

Fraser Nelson in this week's Spectator tells it like it is about the policies being pursued by the Bank of England under current governor Mervyn King: inflation is being allowed to gain a hold, probably quite deliberately, as a way of inflating away the value of debt. Read a summary of Fraser's contention (with which I agree wholeheartedly) in a CoffeeHouse article appropriately entitled King's Ransom. The tool of choice to engineer this madness has of course been the now-ubiquitous 'quantitative easing', in other words 'debasing the currency'. A couple of excerpts from Fraser's article:

Inflating away debt is politically attractive.

It makes cuts all the more easy. Freezing pay means a 3.3 percent pay cut, thanks to inflation (of 4.8 percent if we were using RPI, as we did from the war until the Brown era). Reducing the actual amount of government debt – or staff salaries – is hard. But to debase the value of the currency in which they are paid has always been the easy option.

But once unleashed, inflation is very difficult to control.

As we know to our cost. Rates have to be rammed up to emergency levels, and the only victors from such struggles against money tend to be people like George Soros. Fiscal problems do not go away if you ignore them – that was the moral of the last crisis. Credibility, once lost, is very hard to retain for a central bank. And, given how much debt the UK government needs to issue, credibility is a very precious commodity.

- read the full article here

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