Dominic Lawson: Inflation is what people fear – and whose fault is that?

MPs of all parties have belatedly addressed themselves to the public's concern

Share

A friend of mine was once apprehended by the police for forgery and counterfeiting. He was a boy at the time, which preserved him from a stretch at Her Majesty's Pleasure; but he was sent down from an illustrious public school – where he had acquired great popularity by handing out what appeared to be £5 notes to delighted fellow pupils. These notes had been doing sterling work in the shops of the nearest village until the recipients took them to put into their bank accounts, and were told that the fivers were cleverly constructed duds (manufactured on the printing blocks of the local newspaper where this entrepreneurial schoolboy had a holiday job).

He did not repeat the endeavour as an adult: but some people can never rid themselves of the compulsion to create spending power at the press of a button. Earlier this year Colin Edgar, a Faversham bricklayer, was handed down a six-year prison sentence following a raid on his premises by the Serious Organised Crime Agency, accompanied by an official from the Bank of England. They found equipment which had been used to produce counterfeit money, in the form of £20 notes.

According to the police: "Investigations discovered that thousands of pounds of finished notes had already entered circulation ... This conspiracy began to take shape while Colin Edgar was in prison coming to the end of a previous sentence for similar offences ...[He] was at the point of beginning to mass-produce perfected notes. The potential economic harm cannot be overstated."

Indeed not; when vast sums of funny money enter the system, apparently at will, without any new goods or services being created to earn them, then economists tell us that there is a reduction in the value of legal tender and a general increase in prices due to more money being circulated. This not only causes both relative and actual impoverishment among those not able to print their own money, but also leads to a general and contagious lack of trust in the currency.

I wonder, however, if it occurred to the Bank of England official who took part in the raid on Colin Edgar's premises that this Faversham bricklayer was just doing what the Bank had done on a vast scale, only without political sanction. Last month the Bank of England reactivated its policy of so-called "quantitative easing", creating a further £75bn of money out of thin air to inject into the financial system, mostly by buying government bonds from the banks.

This has two objectives. The first, unstated one is that by acting as a buyer of government debt it keeps the price artificially high (and therefore the rate of interest on it artificially low). Company directors have been sent to jail for doing the same thing with their shares – that was the fate of Guinness's Ernest Saunders – but as so often, something that is illegal in the private sector is declared as being in the national interest when done by the state. The second and openly declared objective of the quantitative easing is that by flooding the commercial banks with liquidity they will be encouraged to lend more to businesses and thus revive the economy.

To what extent the earlier £200bn of quantitative easing saved the economy from a bigger downturn – as the Bank claims – is impossible to know with certainty. Similarly, we cannot know exactly how much its actions have led to Britain having the highest inflation rate in Europe – but it would be perverse to pretend that these two circumstances are not closely connected.

It is precisely because they don't believe in "buying" economic activity by printing money that the German government has ignored the British government's urging –most recently in person by David Cameron in his meeting with Angela Merkel at the weekend – to allow the European Central Bank to inject billions of euros into the system with a click of the computer mouse. As the ECB council member (and Bundesbank chief) Jens Weidmann said a fortnight ago: "The financing of public debt via the money printing press ... undermines the incentives for sound public finances, creates appetite for ever more of that sweet poison and harms the credibility of the central bank in its quest for price stability."

When Alistair Darling sanctioned the inauguration of the British central bank's quantitative easing, back in 2009, the then shadow Chancellor, George Osborne, issued a press release declaring that "printing money is the last resort of desperate governments". Tu quoque, George.

Last week the Governor of the Bank of England, Sir Mervyn King, attempted to reassure us by revealing that the inflation figure for October had come down to 5 per cent – and he predicted that by 2013 British price inflation would have fallen to 1.7 per cent. Given the Bank's persistent underestimation of inflation over the past few years, we might be forgiven for treating its latest forecast with a degree of apprehension.

While politicians and pundits now assert that the single most pressing concern is the absence of growth in the economy, the public – at least if the opinion polls are to be trusted – are much more worried and upset about price inflation. This anxiety has fastened most on the issue of fuel costs – especially for pensioners, but by no means just for the elderly. In this context, it is worth remembering that oil and gas is traded internationally in dollars and so the depreciation of the pound (another intended consequence of the Government's policies) has led to additional upward pressure on the price of petrol at the pump.

MPs of all parties have belatedly addressed themselves to the public's concern and have backed a parliamentary motion by the Tory Robert Halfon, itself a response to an e-petition with hundreds of thousands of signatures, calling on the Government to freeze fuel duty. Even Tim Farron, the chairman of the Liberal Democrats – the party which officially regards fossil fuel as the spawn of the devil – now says that cutting the price of petrol and diesel is a matter of "social justice".

Yes, inflation is a matter of social justice: and there will be much more protest along the same lines, to judge from reports that the Government, stunned by the budgetary consequences of September's annualised 5.2 per cent inflation rate, plans to break the link between welfare payments and the consumer price index.

That's the trouble with printing money. It seems to be a pain-free way of getting out of an economic hole – until the bills from everyone else start to come in. After all, if it were not so very dangerous, why should Colin Edgar have been accused of planning "economic harm [which] cannot be overstated" and locked away for six years? And why should my friend have been sent down from his school, just for a bit of quantitative easing?

d.lawson@independent.co.uk

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Austen Lloyd: Private Client Solicitor - Oxford

Excellent Salary : Austen Lloyd: OXFORD - REGIONAL FIRM - An excellent opportu...

Austen Lloyd: Clinical Negligence Associate / Partner - Bristol

Super Package: Austen Lloyd: BRISTOL - SENIOR CLINICAL NEGLIGENCE - An outstan...

Recruitment Genius: Sales Consultant - Solar Energy - OTE £50,000

£15000 - £50000 per annum: Recruitment Genius: Fantastic opportunities are ava...

Recruitment Genius: Compute Engineer

Negotiable: Recruitment Genius: A Compute Engineer is required to join a globa...

Day In a Page

Read Next
Amjad Bashir said Ukip had become a 'party of ruthless self-interest'  

Could Ukip turncoat Amjad Bashir be the Churchill of his day?

Matthew Norman
King Abdullah made Saudi Arabia prosperous but had absolute disregard for what liberal Westerners would view as basic human rights  

The media cannot ignore tricky questions when someone dies - but it must stick to the facts

Will Gore
Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

What the six wise men told Tony Blair

Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

25 years of The Independent on Sunday

The stories, the writers and the changes over the last quarter of a century
Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

Homeless Veterans appeal

As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

Smash hit go under the hammer

It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

The geeks who rocked the world

A new documentary looks back at origins of the computer-games industry
Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

Belle & Sebastian is taking a new direction

Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea
America: Land of the free, home of the political dynasty

America: Land of the free, home of the political dynasty

These days in the US things are pretty much stuck where they are, both in politics and society at large, says Rupert Cornwell
A graphic history of US civil rights – in comic book form

A graphic history of US civil rights – in comic book form

A veteran of the Fifties campaigns is inspiring a new generation of activists
Winston Churchill: the enigma of a British hero

Winston Churchill: the enigma of a British hero

A C Benson called him 'a horrid little fellow', George Orwell would have shot him, but what a giant he seems now, says DJ Taylor
Growing mussels: Precious freshwater shellfish are thriving in a unique green project

Growing mussels

Precious freshwater shellfish are thriving in a unique green project
Diana Krall: The jazz singer on being friends with Elton John, outer space and skiing in Dubai

Diana Krall interview

The jazz singer on being friends with Elton John, outer space and skiing in Dubai
Pinstriped for action: A glimpse of what the very rich man will be wearing this winter

Pinstriped for action

A glimpse of what the very rich man will be wearing this winter
Russell T Davies & Ben Cook: 'Our friendship flourished online. You can share some very revelatory moments at four in the morning…'

Russell T Davies & Ben Cook: How we met

'Our friendship flourished online. You can share some very revelatory moments at four in the morning…'
Bill Granger recipes: Our chef serves up his favourite Japanese dishes

Bill Granger's Japanese recipes

Stock up on mirin, soy and miso and you have the makings of everyday Japanese cuisine
Michael Calvin: How we need more Eric Cantonas to knock some sense into us

Michael Calvin's Last Word

How we need more Eric Cantonas to knock some sense into us