THE Treasury Select Committee hit the nail on the head yesterday, when it pointed out that savers and pensioners are suffering as a result of the Bank of England’s low interest rates and quantitative easing. Disappointingly, the Committee urged the government to compensate pensioners for their losses, rather than to attack the root cause: the favourite funding stream for profligate governments everywhere, money printing.
Debasing the currency through quantitative easing and artificially low interest rates is a tax that punishes saving. And the state compensation for savers’ and pensioners’ losses which MPs on the Treasury Select Committee urged yesterday is no answer, since it would increase state hand-outs for privileged voters instead of allowing people to keep their own money.
Here are five reasons to control inflation, not just pay compensation for it:
Inflation is a tax on everybody who is paid in money or who owns money. If your income is somehow index-linked or you can charge your customers more, you may think you are fine. You are not: your company will become less competitive; demanding higher prices may result in losing customers; and ultimately jobs will be exported and lost. If you are on a fixed income or you own at least one penny in savings, your situation is even worse. Inflation is an attack on private property. But it is the desire for private property which incentivises people to get out of bed in the morning and to improve their lives. Private property results in growth, as people invest it to make it multiply. If you take property away through inflation, you reduce incentives and growth.
Inflation punishes saving; that is, people taking responsibility for themselves. You work hard, you save for a nest-egg, something to support you and your family when you fall upon hard times or old age. If inflation takes it away, why save for tomorrow? Tomorrow, of course, has never been an important consideration for politicians, focused no further than the horizon of the next election. Saving is the opposite of the perpetual disease of governments living above their means – no wonder protecting it is so alien to spendthrift politicians.
Inflation allows governments to live above their means. It thereby encourages irresponsible government. It has been used by all spendthrift governments in the history of mankind. In 1920, before the Weimar hyperinflation even began, John Maynard Keynes described Europe’s spendthrift ways in The Economic Consequences of the Peace: “The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The various belligerent governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance.” In our own history, Elizabeth I started her glorious reign by restoring the British coinage at the advice of Sir Thomas Gresham, after Henry VIII had replaced 40 per cent of the silver in coins with base metal. More recently, Margaret Thatcher’s reforms reduced inflation drastically, opening a new chapter of economic optimism.
Inflation tries to prolong an economic bubble. State-induced, artificially cheap credit created the economic bubble that burst in 2007. Rather than let the economy re-adjust, the Bank of England pumped money into the economy to prolong the artificial boom. But as you cannot continue to print money forever, you cannot inflate your way out of an economic crisis – only postpone and worsen it.
Inflation is a hidden tax. Keynes also wrote in The Economic Consequences of the Peace that: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens... in a manner which not one man in a million is able to diagnose.” Taking citizens’ wealth by stealth in this way is hardly the hallmark of an open government.
Sir Mervyn King, the governor of the Bank of England, has had to write 15 letters to the chancellor so far, nine of them consecutive, to explain why inflation is higher than the Bank’s target. He will step down in the summer of 2013 and the speculation over King’s heir has already begun. Lots of irrelevant characteristics of the candidates are debated, yet the most fundamental question is rarely raised. Will the next governor of the Bank of England continue to debase our currency, or not?
JP Floru is senior research fellow at the Adam Smith Institute.