Monday, 20 February 2012

Thoughts on how we might counter negative political and social economic trends

Part 1 - Inflation is a symptom, not the cause of problems
A number of people on twitter have expressed surprise at my assertion that a pro-inflation policy might be the way forward for Britain.

People worry about hyper inflation, and the UK's experience of it. Seeing inflation as the enemy. To these people inflation is what causes living standards to fall as purchasing power relative to the price of goods rapidly collapses.

Consider a medical analogy. Soldiers who suffered limb loss in Vietnam suffered greater fatality rates than British soldiers who suffered comparable traumatic injuries in the Falklands war. A key difference was that US soldiers got rapid helicopter evacuation where the traditional medical view prevailed - If blood pressure falls, raise blood pressure... ...and if blood was not available, they would use plasma to return the vitals as near to normal as possible.
   British soldiers in contrast had suffered many hours in the field in shock - But the loss of blood pressure, the natural shock response actually saves life by preventing excessive blood loss - artificially raising the blood pressure with plasma can kill despite the vitals returning to normal.
   As another example, mice given drugs to suppress fever when they are sick with flu like symptoms die. Sometimes treating the  symptoms does real damage and slows down or prevents recovery.


The UK has had the bottom fall out of its economy. Inflation has risen and some advocate fixing the inflation problem with monetarist dogmatic blunt instrument of raised interest rates. Raising interest rates would further retard investment which is needed to raise production capacity in order to pay our way in the world.
   Countering UK inflation with high interest rates would therefore prolong our nations agony. We need pro-longed low interest rates and high inflation to boost investment - increases in domestic production will be the key to reducing inflation in the future. Inflation has mainly been driven by rising import costs and an inability of the UK domestic economy to adapt as £ falls.

Higher interest rates would do nothing to resolve our fundamental problem, a huge trade imbalance. In fact, it would be the equivalent of injecting huge amounts of plasma into a body with a missing limb. Low Inflation may seem 'healthy' but the rest of the body would be dying faster than it can recover.

Inflation may not be universally pleasant but it is a necesary part of the correction to our economy following the 3 decades of ultra-capitalism.

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