FFS. now it’s the dictionary he’s not getting!

The second half of their argument I have a lot of time for: deflation is a danger to be avoided at just about all costs, in my opinion. That a fall in the value of the currency might destroy real opportunity in the economy is unforgivable in my opinion, and it’s right that the Bank should steer clear of it.

Deflation is a rise in the value of the currency.

But equally, I see no reason at all why we should keep inflation to 2% so that the owners of debt (and debt ownership is the basis of wealth) should have their asset values preserved, which is the only reason why I can see the current target is so low.

Would the world end if the target was 3%? Or 4%? Or even 5%? I’m not suggesting any more than that, and might only go for doubling to 4% to be honest. The obvious answer is it would not.

No, that’s not why the target is where it is. The biggest damage caused by inflation is that it screws the price system. It’s the changing relative prices of goods and services which are the useful signals in an economy. Consistent and large inflation masks those. We all just lose track if you like. Deflation is also bad, worse even. Thus, the target is set where we get the least of the distortion of the price system while still avoiding the deflation.

And that rate of inflation would allow for wage growth in proportion to asset prices – and most specifically house prices – which is vital.

Everyone recall how wages kept up with house prices in the 1970s when we had higher inflation?

Such a rate may also allow real wage rises – which has to be good.

4% inflation will increase the likelihood of real wage rises?

Critically, this inflation target would also mean that interest rates need not rise – rate rises that will tip millions into unmanageable debt scenarios and which might precipitate a new banking crisis as a result.

Higher inflation will not increase market determined interest rates? Jeebus, which planet is Ritchie phoning this in from?

There are reasonable – maybe not good but reasonable – arguments for a rise in the inflation target. Amazing that the Senior Lecturer has managed to stumble across absolutely none of them.

15 comments on “FFS. now it’s the dictionary he’s not getting!

  1. Does really think that an inflation rate of 4% with current interest rates on savings of fuck all is going to be meekly accepted by the biggest body of voters who just happen to be close to, or just starting, retirement?

  2. I imagine some of his poor and long suffering students must be wondering if a $50 “Degree in Economics” from the SnakeOil University of Dead Man’s Gulch might not be a better investment, and carry more respect with the public and employers, than a degree from City part of which was taught by Murphy.

  3. “4% inflation will increase the likelihood of real wage rises?”

    Against what some people owe, quite possibly. Against what they consume now, probably not.

    “Does really think that an inflation rate of 4% with current interest rates on savings of fuck all is going to be meekly accepted by the biggest body of voters who just happen to be close to, or just starting, retirement?”

    Why not? Low interest rates have been jacking up the value of their pension fund investments. Oh, wait, they also want the safe cash pots it’s turned into to grow massively with no risk?

    Well, as a result of that, there is also a body of voters who have been thoroughly fucked over by the greed of the double Ponzi (house prices and pensions) body of voters you defend, and an even larger body of voters who will be forever locked out of wealth accumulation by the greed of the body of voters you defend.

    If you don’t want Corbyn (and we really don’t want Corbyn), then the right needs to bring on the revolution itself, or at least accept that devaluation of safe assets (after growing unsustainably thanks to zero interset) held by insatiable boomers who have already eaten their parents’ past, their own present, and their kids’ future, but still want more, more, more, more, more!!!

  4. TMB, It’s a real political problem, a political failure. One generation alone has acquired more of its wealth through fortuitous alignment of asset and debt pricing at exactly the right time in their lives*, than through the sweat of their brow. In doing so, at least two subsequent generations have been impoverished, by mortgaging that future. Including driving every western state into debts unprecedented in peacetime.

    Wouldn’t it be nice to find a good solution tht prevents a bad one from being forced upon us by the millennials and fascist snowflakes?

    *1970s – mortgaged to the hilt, rescued by inflation. Long housing, then through 2000s get wealthy by banning more housing (planning, green belt), and liberalising the property market. Low(ish) inflation helps savings build, pensions are bought, effectively negative interest rates for near a decade drives the value of those through the roof. Cash in your pension just as the market crashes and insist you get a secure inflation-busting return on the cash.

  5. BiG: 1970s – mortgaged to the hilt, rescued by inflation.

    Were you there? I was – and the building society was prepared to lend 25% of the value of the house up to three times annual salary. Some hilt – unless you mean servicing a mortgage with eye-watering interest rates in the later Callaghan years when mortgagees were paying through the nose to be “rescued by inflation”.

    I still live in the same house and its value has risen in nominal terms approximately fifty fold. Big deal. The IHT burden on my estate is proportionately larger than Estate Duty would have been in the 70s so to my way of thinking my utility is the same as ever it was while the percentage equity to my estate has declined. The garden is nicer now, I grant you but there’s no government that can take the credit for that.

    Including driving every western state into debts unprecedented in peacetime.

    What’s that got to do with it?

  6. Low(ish) inflation helps savings build, pensions are bought, effectively negative interest rates for near a decade drives the value of those through the roof.

    The value of pensions has gone through the roof? You sure?

    As for low inflation being some sort of privilege, is absence of illness also privilege? “Low inflation helping savings build” really means ” low inflation meant that savers weren’t robbed of a significant part of their savings”. It doesn’t sound like some sort of massive undeserved benefit to me.

  7. Given Snippa’s brilliance at gaining attention, and the number of niche ( say, less than 10% popular ) but worthwhile ideas that are out there, he could merge the two and thus close his career in a halo of light. All he has to do is jump on some of the great ideas, NGDP targeting, market systems for healthcare ( A&E and communicable diseases excepted ), an inflation target of 0% for housing costs ( would need the BoE, councils or another body to issue permits, and be sanctioned if they went astray ).
    But no, he must press on with his rubbish, because that’s where the grant money is.

  8. The value of pensions has gone through the roof but there are more underfunded schemes than ever and every corporate failure such as carillion puts more strain on the rest of the system. Not sure that we gave the same optics, BIG

  9. The biggest damage caused by inflation is that it screws the price system. It’s the changing relative prices of goods and services which are the useful signals in an economy.

    Which is why there shouldn’t be any inflation target. The inflation rate, to the extent that any single measure of inflation is meaningful (and it isn’t) should just reflect those changing relative prices.

    … while still avoiding the deflation

    Why would we want to avoid things getting cheaper? We live in a deflationary age, particularly in the value of human labour. An increasing percentage of the population dependent on government support, and we want to increase this burden by forcing prices up? Insanity.

  10. You’re missing the distinction being made. A general change in the price level has undesirable consequences. Significant movements either way, in that general price level, make us poorer (because nominal and real incomes are different). Changes in relative prices are just fabuloso.

  11. Fortunate for us all, that The Big Dick has possession of the only Inflation Control Spanner in the known universe. Use it to get inflation up to 4%, then a sharp twist anti-clockwise and BANG that’s where it stops.

  12. @Timmy

    “Changes in relative prices are just fabuloso.”

    I think the nicest analogy I’ve seen for why a bit of inflation is a good thing is that it “lubricates” these relative price changes. Some prices don’t naturally move down very easily (due to greed or contractual agreement) but they can be persuaded to slide down relatively if other prices are allowed to grow faster.

  13. Aka “money illusion”. Wages especially, we don’t like nominal wages going down but we’ll put up with real ones falling through inflation. Very Keynes that is.

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