By Mario Innecco,
We have been warning about the consequences of inflation for quite a few years while some like economist Roger Bootle, on the other hand, even wrote a book entitled The Death of Inflation. How could an economist have been so wrong and we right? We hope to clarify this in this article. As a refresher, we think it is important to again look at what inflation is, and then we will look at the fictitious story of a street in Britain where some influential families have taken over the running of affairs of all the residents.
We think it is always important to get down to basics so we will start with the definition of inflation. Simply put inflation is a monetary phenomenon and the word itself says it all; it is when the state or government with the assistance of the Central Bank and the banking sector inflates the supply of currency in the economy. This only happens when the governments spend more than they take in or run budget deficits. In order to cover those deficits, they borrow more by issuing government debt while the lender via the banking sector will issue the government freshly printed banknotes or digitally created currency. As governments do not create wealth this extra spending flows into the real economy and as a result, drives up the prices of goods and services.
Before we get to our street story we just wanted to point out to what some influential characters of the 20th century said about inflation. One of them you probably have not heard of but he was probably one of the most influential bankers of the early 20th century and his name was Felix Somary. He said the following: “The state alone is responsible for inflation: inflation without government, or indeed against government, is impossible.” The other was Vladimir Lenin and according to John Maynard Keynes, he is supposed to have said the following: “There is no subtler, no sure means of overturning the existing basis of society than to debauch the currency. The process engages all hidden forces of economic law on the side of destruction, and does it in a manner which not one in a million is able to diagnose.”
You will most probably have noticed that prices of everything from petrol, food, gas, electricity, and services have been rising quite noticeably and even according to the government bean counters at the ONS the Retail Price Index went up by 9% on an annual basis in March. These price rises are not the cause of inflation but the consequence thereof.
So with no further delay let us transport ourselves to Westminster street, a fictitious street somewhere in Britain. Westminster street is dominated by an imposing mansion owned by the Brown family and they have interests in many businesses. Across the road from them live the Smith family who are associates of the Browns. Westminster street has a good mix of houses, flats, and small businesses and the residents there have varying fortunes so at the opposite end of the street to where the Browns and Smiths live there is a rough area, so to speak, and there live the Key brothers. The Brown family has had a great deal of
success but all of a sudden their fortunes turn and their business empire is in trouble.
The Browns are desperate so they invite the Smiths over for dinner one night to talk business. The Smith family has been involved in lending money and they are known as loan sharks and have a great deal of influence on Westminster street with many of the residents. The Smith also employs the Key brothers whenever they need to “encourage’ residents to pay back their loans. After an elaborate meal and some fine wine Mr. Brown, Mr. Smith, and some close advisors retire to the smoking room for some port and cigars. After an hour of negotiations, the Browns and Smith come to an agreement. The Browns, desperately needing an injection of funds, decide to involve the Smiths in their business, and in return, the Smiths will provide the funds to save the Brown Empire from collapse.
The plan will only work with the help of the Key brothers as there will be a lot of unhappy residents. The Smiths will be increasing their loan rate from 2% per month to 9%. The extra 7% will make sure the Brown Empire survives and even prospers. Before the meeting ends Mr. Smith gives the Key brothers a call and they join them but enter the mansion through the back door. After a few months under the New Deal, there are a lot of unhappy residents, and very few if any understand why they are having to pay more and many are also having to go without. One day there is a protest in front of the Brown and Smith residences as the people of Westminster street are angry and see that the Browns and the Smiths are still living the life of Riley. The protest is quickly stopped with the help of the Key twins and their gang of thugs. The people of Westminster street go back to their homes and things continue to get worse as loan rates start moving higher as the Wilson family from another street tries to take over the Brown Empire and a turf war erupts and more funds are needed to fight the war.
Eventually, the loan rate has to be inflated to 20%, and the Key brothers, under the direction of the Smith family and their propaganda advisers who are also known as economists tell the residents that it is all the Wilsons' fault and that they need to make a sacrifice in order to keep Westminster street safe from the Wilsons. Many of the residents acquiesce but a small minority that is not indebted to the Smiths know better.
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