Due to an ongoing health crisis in the family, blogging will be 'on and off' as time and circumstances permit for the foreseeable future. I also beg your indulgence if I am slow in responding to emails. New posts will appear below this notice.

Friday, March 25, 2011

Britain's £200bn time bomb of debt interest

A little bit of inflation is a good thing, right? Well, that's one way of looking at it, and if you were being charitable, it might even provide a decent explanation of why the Bank of England appears to have given up on the inflation target.

One of the effects of relatively high inflation is to ease the burden of debt by reducing its real value. For a highly indebted nation such as Britain, inflation therefore seems to make sense as an economic strategy.

With no control over their own monetary policy, the Portuguese and other fiscally-challenged eurozone nations don't have that luxury. Without inflation to do the work for them, the austerity required to get public debt under control becomes that much greater, which is one of the reasons why Portugal will soon be following Greece and Ireland into seeking a bail-out. Britain, by contrast, gets a relatively pain-free way out of the mire.

That's the conventional wisdom, anyway, but it is also largely rubbish. Wednesday's analysis of the public finances by the Office for Budget Responsibility provides further evidence of why elevated inflation can never be economically benign.

Three powerfully negative effects are identified by the OBR. As a result of higher than expected inflation, living standards will fall for longer than previously anticipated, public borrowing will end up higher, and real terms cuts in public spending will have to be deeper.
Read the rest here.

No comments: