Further to my post of 21 June 2023, which I hoped the Times would publish, I redrafted and sent the following to Professor William Davies who had just published an article on Inflation and Interest Rates in the London Review of Books.
Dear William Davies,
The rather rapid rise in interest rates in recent months is certainly putting a great strain on many young house-buyers. And it is generating a lot of comment in the media (by which I really mean Radio 4). Yet my analysis is completely different from that of the mainstream media.
I believe a great deal of extra money was released into the economy during the COVID crisis, which must eventually cause inflation unless it is withdrawn. The fundamental dogma of the monetarists (that the value of money is set by the ratio of goods to cash) did not go away; it merely lay in wait. Devaluation (i.e.Inflation) would, in time, remove the extra money automatically, but is unfair in that if impoverishes those who hold or earn cash, but not those who hold assets. It is also destabilising, forcing a wage and price scramble.
The Bank of England is charged with suppressing inflation, but their standard (and perhaps only) means of doing so is to raise interest rates. This, however, is even more unfair than inflation/devaluation, as it enriches the rich and impoverishes the poor. It is in any case ineffective while extra money is still sloshing around in the economy.
By far the fairest means of getting the extra money out of the economy would have been by raising income tax rates. This, however, seems unthinkable in a democracy, because too few people understand the relationship between taxes and the benefits they fund (like roads, education, health, etc). Witness the surprising fact that every one of the candidates for the leadership of the Conservative party promised to degrade the quality of our public services, (entailed by cutting taxes).
Is this basically correct? And has anybody said it yet? I think not.
Please comment directly to Cawstein@gmail.com
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