Inflation is the real threat
We have argued from the start that the policy of lowering interest rates and loosening monetary policies could lead to inflation. This is compounded by the state of the British government’s finances, with falling tax revenues and rising welfare costs as the economy shrinks down.
Damian Reece in the Daily Telegraph writes,
“Controlling rising inflation will be just as much of a headache for the Bank of England in years to come as slashing rates to avoid deflation is now. One of the shams of the past 12 years is how we’ve targeted inflation to try to control it. Missing were property and other financial assets which were allowed to boom like never before while official inflation measures were full of everyday items falling in price as global competition cut costs creating an entirely false sense of security.”
Others still take a different view, of course, but we will hold to the position that inflation remains the underlying danger. One difficulty is that when welfare payments and pensions are tied to inflation statistics, the government has a vested interest in selecting the data to make the figures look as low as possible. It is also the case that when interest rates are the only means of economic regulation, the interest rate that will prevent a housing bubble from developing will be too high for the economy as a whole, especially for less-favoured industries and in marginal areas of the country. The underlying problem is that the “economic technology” available is not up to the task of keeping the economy in a relatively stable state. Referring to “property and financial assets” does not help in understanding, since what is really meant is land. If this were spelled out more clearly and more often, there would be more chance that the appropriate measures would be taken.