The “Occupy the London Stock Exchange” and “Occupy Wall Street” crowd have got the wrong target. Living standards are being deliberately and systematically undermined by central bankers not stockbrokers. The London protestors should head over to the Bank of England and their friends in NYC should head for DC. Inflation at 5% is robbing rich and poor alike of our earning power.
In consistently predicting this inflationary mess Guido would happily claim sagacity, but it is pretty basic economics that if the supply of something rises, unless demand increases, the value of it goes down. If you print more money, you get inflation. Simples.
Ben Bernanke and Mervyn King say inflation isn’t a problem, in fact the Bank of England’s official position is that deflation is the danger. The Chancellor says he agrees with the governor. George Osborne also claims he is a “monetary activist”, though since monetary policy is in the hands of the nominally independent Bank of England it is hard to understand how his activism can take effect. He also claims to be a “fiscal conservative” who, when not putting up taxes, spends and borrows more than Gordon Brown. Mervyn King is alright, his pension is inflation protected.
In the think-tanks and on the financial pages the likes of Allister Heath, Dan Hannan, the MPs Douglas Carswell and Steve Baker, as well as yours truly, are all sympathetic to a radical school of economics that is attracting growing interest. The father of this school was an Austrian economics professor, Ludwig von Mises, as the credit crisis deepens his books are selling better, in particular “Human Action” in which he warns
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
Capitalism is widely understood as a profit and loss system, through trial and error in free markets we find a more optimal allocation of resources. If central banks deliberately provide cheap and easy credit the creative destruction that is part and parcel of capitalism ceases. The losses and errors are not destroyed, instead they are bailed out until an incredible €2 trillion €uro bailout is the consequence.
Banks under-priced risk because interest rates were too low for too long. The US housing bubble owes its existence to central bankers, the recklessness of investment banks was encouraged by the Fed rescuing investors in Long Term Capital because it was “too big too fail”. The credit crisis of the West is now, finally, approaching “too big to bail” territory. The catastrophe will be greater the longer we try to head off economic reality with short-term bailouts which make things worse in the long-run.