[OPE] Phillip Blond on inflation theories

From: Jurriaan Bendien (adsl675281@tiscali.nl)
Date: Sun Jun 29 2008 - 12:36:55 EDT

Blond argues that:

(...) the real inflation rate facing ordinary working households is far higher than commonly supposed. In which case higher wage demands seem wholly legitimate. According to neo-liberal ideology such claims should be resisted - but why? With inflation imported from abroad, wage increases are highly unlikely to increase inflationary demands since the price rises are so large that people will struggle to pay the bills anyway. Moreover the traditional outlet for disposable income - clothing, electronic goods, consumer durables - are those items that are falling in price, so any domestic demand would be non-inflationary. In fact the Bank of England risks a far greater danger. Frightened by the right-wing myth of a 1970s wage price spiral, the Bank's monetary policy committee is threatening to deal with the new threat using the tactics of the last war and raise rates. But this will lead to stagflation (no growth and rising prices) rather than avoid it. The only member of the committee who gets it is David Blanchflower who argued for an immediate interest rate cut. Facing imported inflation, a ballooning of personal debt and a collapse in the housing market, the bank should stimulate not depress demand. If we can hold the economy together, Britain can wait until inflation passes through the system, let people get paid what they need and lighten the burden of mortgages. The risks of recession far outweigh an inflation we can't control anyway. Paradoxically, in the face of surging price inflation, the Bank needs to cut rates now or risk a full-blown economic meltdown. http://www.thefirstpost.co.uk/43315,opinion,the-bank-of-england-must-cut-interest-rates

The point here is that the economists cannot even agree anymore among themselves what the precise effect of rising government interest rates would be for the whole economy. The main reason for that is that a gigantic circuit of capital flows has been brought into being across two decades, which is quite unrelated to the ordinary spending and income of the overwhelming majority of the population. It might just be that if interest rates rise, lenders make more money, without much significant positive effect on output, productive investment or employment. But if they do rise, that might become politically very destabilizing, because it sets the stage for a political struggle between the rentier class, the entrepreneurial class, ordinary employees and beneficiaries. Well, once thing is for certain in the discussion: interest rates can only go up, down, or stay the same. What's next?


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