Mark Field MP had an excellent article on ConservativeHome yesterday, asking whether the authorities have decided that dealing with inflation will be too painful, and are tacitly accepting above target inflation as the price of not derailing the economic recovery. As Field puts it:
The prolonged near-zero interest rate environment has enabled banks to continue holding toxic assets without realising their losses. Similarly there has been no incentive for banks to foreclose on many struggling businesses and indebted individuals. The impact of even relatively modest interest rate rises would undoubtedly be for creditors to cut their losses. The Council for Mortgage Lenders calculates that the impact on homeowners already perched on the edge of insolvency of a rise in base rate to 2.5% would be devastating to some three million borrowers. It would also lead to a confidence-sapping depression in both house prices (and more accurately still, house values, for those who have become accustomed to borrowing against the rising value of their main asset).
It’s well worth reading the whole thing. Field’s prediction is that interest rates will still be below 1 percent at the end of 2011, based on the ‘calculated gamble by policymakers’ that ‘a little inflation in the system is now more desirable than the alternatives.’ The trouble, as Field points out, is that inflation is very difficult to control once it becomes ingrained – especially once people start demanding higher wages as a result.
The one thing I’m not convinced about is the idea that there can be a genuine trade off between inflation and growth. In the short term, yes, the price of dealing with inflation might be slower GDP growth, or even contraction. But if the result of prolonged easy money is to stop the economy adjusting, to prevent markets realigning with changed consumer preferences, and to hold off indefinitely the necessary deleveraging, then its hard to see where real, sustainable growth is going to come from.
So remind me, what do you get when you put stagnation and inflation together?