The UK inflation rate is rapidly heading towards double digits, making Adam Smith spin like a top in his grave. There he was, teaching the multitudes about natural market forces and the invisible hand.
However, the hand that has been steadily debauching Western currencies with inflation is clearly visible to anyone with eyes to see. It belongs to state officials.
Their motivation is clear: inflation is a tax requiring no legislative approval. By inflating the currency, the state effectively transfers money from the people’s accounts into its own, with a parallel transfer of even more power the same way. This fulfils the overarching objective modern politicians feel in their bone marrow, even if they don’t articulate it.
Any economic primer will tell you that inflation is too much money chasing too few goods. Modern states seldom dirty their hands with producing goods. Yet they have total control over the money supply, using to that end their own good offices and also the quasi-independent central banks.
The US led the way with the Federal Reserve system. In 1913, the year the Federal Reserve Act came into effect, the Sixteenth Amendment to the US Constitution was passed, empowering Congress to levy federal income tax as it saw fit.
European countries were all following suit at roughly the same time. The printing presses went into high gear, banknotes floated through the air like snowflakes, melting as they spiralled down to the ground.
A brief look at the numbers will confirm the distinctly modern flavour of high inflation. Before Western governments were allowed to meddle in economies, inflation was practically nonexistent, varying from 0.1 to 0.2 percent a year.
In Britain, £100 in 1850 equalled £110 in 1900, a negligible inflation of 10 percent over half a century. That meant Britons could confidently plan for the future, anticipating that hard work accompanied by thrift could make them independent not only of want but also of the state.
Conversely, if we look at the next century, £100 in 1950 equalled £2,000 in 2000 – a wealth-busting, soul-destroying inflation of 2,000 percent. To take another Anglo-Saxon currency as an example, over the past 100 years the US dollar has lost 95 percent of its value, a marginally better, though still abysmal, performance.
During the same period, productivity was increasing steadily in both countries, as were the production volumes and GDP per capita. Thus the only thing the state had to do to keep inflation in check was make sure that its spending and the money supply marched in step with production.
Inflation figures, however, prove that everywhere in the West the state did exactly the opposite. It was spending like a beached sailor and, whenever the money ran out, the printing press would go into high gear. And the state has never changed its behaviour.
So why do governments spend more than they take in if they know that such profligacy will predictably turn money into wrapping paper (or, in our days of electronic transfers, not even that)? The only logical answer is that they want money to lose value. They must feel that by acting in this manner they advance their objectives.
One objective I’ve already mentioned: gradual increase of their own power, which these days comes out of the money purse more often than out of the barrel of a gun.
The other is more subtle, though ultimately it amounts to the same thing: by reducing the purchasing power of a monetary unit, the state makes people seek a greater and greater number of such units to make ends meet. Some succeed, others fail.
But both groups have to be wholly committed to economic activity to stay afloat. This commitment has to be expressed not only in working halfway around the clock but also in taking a gambler’s risks with investments.
Those who fail will have to fall back on the state’s largesse in order to survive. But even those who succeed will also depend on the government, if less directly and more negatively.
After all, a quick pull on the printing press lever can usher in a double-digit inflation rate (our consumer price index grew 9% in April). A few years of that, and a nest egg lovingly hatched over a lifetime is broken, with no omelette anywhere in sight.
Some people lack the nous to do anything other than watch their money melt away like snow on the first warm day. Most, however, take a more active approach: they either go on a spending spree or invest in assets, mostly property, but also more speculative ventures.
Suddenly people become spendthrifts or gamblers, with no temperament for either. Since saving is pointless, they might as well borrow to buy that sports car they’ve always wanted or take a huge mortgage on a house with a south-facing garden. After all, inflation will steadily reduce their debt to practically nothing.
The state encourages such recklessness, with the central bank creating conditions not only for promiscuous borrowing, but also for irresponsible lending. Just a few days ago, an announcement was made that our banks would remove the affordability requirement from mortgage applicants. Another 2008 is ghosting into view, and it looms large.
This situation is disastrous not only economically, but also socially. For the rush to invest inflates assets – the law of supply-demand hasn’t yet been repealed. In Britain, for example, over the past 50 years property inflation has outstripped money inflation by a factor of 10.
That means that people doing the same jobs their parents used to do can’t afford the same houses. The side streets around me are filled with two-up-two-down workers’ cottages built some 120 years ago. Today they cost over two million each, which is beyond the means of most workers I know.
As a result, young people can’t get on the property ladder anywhere near their work. Some of my advertising colleagues, for example, earned twice or three times the average UK salary – and still had to commute almost 100 miles each way.
Since rents are also sky-high, the only alternative is to share, and many young executives live in conditions similar to the Soviet communal apartments of my youth. And in New York the average rent for a one-bedroom flat is edging towards £5,000 a month – against the median monthly income of about $3,000.
The upshot is that people have to spend every waking moment either working or commuting. There’s no time left for normal social or family life, and little inclination to start a family.
The desire to consume, however, never abates – with concomitant indebtedness burgeoning pari passu. In the US, for example, average household expenditure over the past three decades has been three times greater than average household income, with the balance funded by packs of credit cards, irresponsible loans and eventually bankruptcies.
People, especially young ones, seem to be competing with one another in who can get rid of their inflated cash faster. Unrestrained consumption becomes the central aspiration of modern societies, making them all consumptive.
People are increasingly losing control of their finances and their lives. But, vindicating the First Law of Thermodynamics, control doesn’t vanish. It merely shifts from individuals to the state.