Mervyn King warns against deflation. Meanwhile, in the real world…
Inflation, this morning's newspapers tell us, is higher than expected. Expected by whom, for Heaven's sake? Not, surely, by readers of this blog, which has been predicting hefty price rises for over a year. Not to readers of Fraser Nelson or Allister Heath, nor yet to anyone familiar with the works of Murray Rothbard or Ludwig von Mises. Nor, come to that, to anyone who grasps that, when you increase the supply of something, other things being equal, you reduce its price.(...)
Their mistake is not simply academic. The reason that Britain is growing more slowly than its competitors is not that government expenditure is falling – contrary to the impression you might get from the BBC, spending and borrowing are considerably higher today than during the final demented months of Gordon Brown's premiership. No, the reason we're in such a mess is that inflation is inhibiting our recovery.(...)
Tim Price, an investment manager with an unusual grasp of Austrian economics, summarises the problem beautifully:
If you wanted to perpetuate a depression, suggests Rothbard, the very best way to do it would be to enact the policies the government is pursuing today: prevent widespread liquidation of financial assets by lending money to shaky businesses; deploy as much QE as you can, to ensure that bad banks remain in business like malodorous zombies; inflate further, which prevents a necessary fall in prices; keep wage rates up (thus ensuring permanent mass unemployment); keep prices up (which will create unsaleable surpluses); stimulate consumption and discourage saving — not least, by driving interest rates close to zero.We are doomed. Doomed.
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