First let me say, I do not fear deflation; the computer industry has had price deflation and improving products for twenty years, just think what you paid for that laptop with 4MB Ram in the early 1990âs It hasnât hurt Apple or Microsoft any. Indeed the only people who need fear deflation are the indebted, and we know who are the most indebted in the UK ~ dear old HM Government.
But I canât see how a fractional reserve, fiat currency is inherently deflationary, particularly when the last government and this one seem to have conjured Â£275B out of thin air via the QE program. If thatâs not inflationary, I donât know what is? Sure the velocity of money has slowed as the banks variously hoard cash or loan it back to the government via the âsmoke & mirrorsâ accounting that passes for sanity in the Treasury these days. But the cash still exists does it not?
I have heard the argument that as bank lending has contracted (to the private sector at least) this contracts the money supply and is this deflationary and there is something to this. But the ongoing price rises in commodities and imported goods seem to have stoked the RPI figure way above target, and HM Government donât seem terribly concerned.
But the real clincher for me which suggest inflation is what is going on with the Euro. Greece could be bailed out more or less as it is tiny. But trying that with Italy, Spain and now apparently France is a non-starter. The remaining sovereigns wonât pay much more, nor will the Chinese and the Americans canât. The ECB balance sheet is nowhere near sufficient for the task and so the choice is either:
- to let country after country default and smash all their national banks (surely a non-starter),
- let the Euro dissolve and go back to national currencies (the right move, but devastating for the EU project as a whole, so I canât see it on a large scale) or,
- get the ECB to print.
And thus I think inflation, rampant and long-term as the UK engages in de facto devaluation as we also print to avoid having Sterling âover-valuedâ
Questions, comments, thoughts?