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

Recruitment Genius: SEO Manager

£25000 - £28000 per annum: Recruitment Genius: They are looking for a white-ha...

Recruitment Genius: Operations and Administration Support Assistant

£16000 - £18000 per annum: Recruitment Genius: One of the UK's leading Solar P...

Recruitment Genius: Customer Support Specialist

£18000 per annum: Recruitment Genius: This organisation is changing the way at...

Recruitment Genius: Digital Web Designer

Negotiable: Recruitment Genius: A Digital Web Designer is required to join a f...

Day In a Page

Read Next
David Cameron has reiterated his pre-election promise to radically improve the NHS  

How can we save the NHS? Rediscover the stiff upper lip

Jeremy Laurance
 

Thanks to Harriet Harman, Labour is holding its own against the Tory legislative assault

Isabel Hardman
Fifa corruption: The 161-page dossier that exposes the organisation's dark heart

The 161-page dossier that exposes Fifa's dark heart

How did a group of corrupt officials turn football’s governing body into what was, in essence, a criminal enterprise? Chris Green and David Connett reveal all
Mediterranean migrant crisis: 'If Europe thinks bombing boats will stop smuggling, it will not. We will defend ourselves,' says Tripoli PM

Exclusive interview with Tripoli PM Khalifa al-Ghweil

'If Europe thinks bombing boats will stop smuggling, it will not. We will defend ourselves'
Raymond Chandler's Los Angeles: How the author foretold the Californian water crisis

Raymond Chandler's Los Angeles

How the author foretold the Californian water crisis
Chinese artist who posted funny image of President Xi Jinping facing five years in prison as authorities crackdown on dissent in the arts

Art attack

Chinese artist who posted funny image of President Xi Jinping facing five years in prison
Marc Jacobs is putting Cher in the limelight as the face of his latest campaign

Cher is the new face of Marc Jacobs

Alexander Fury explains why designers are turning to august stars to front their lines
Parents of six-year-old who beat leukaemia plan to climb Ben Nevis for cancer charity

'I'm climbing Ben Nevis for my daughter'

Karen Attwood's young daughter Yasmin beat cancer. Now her family is about to take on a new challenge - scaling Ben Nevis to help other children
10 best wedding gift ideas

It's that time of year again... 10 best wedding gift ideas

Forget that fancy toaster, we've gone off-list to find memorable gifts that will last a lifetime
Paul Scholes column: With the Premier League over for another year, here are my end of season awards

Paul Scholes column

With the Premier League over for another year, here are my end of season awards
Heysel disaster 30th anniversary: Liverpool have seen too much tragedy to forget fateful day in Belgium

Liverpool have seen too much tragedy to forget Heysel

Thirty years ago, 39 fans waiting to watch a European Cup final died as a result of a fatal cocktail of circumstances. Ian Herbert looks at how a club dealt with this tragedy
Amir Khan vs Chris Algieri: Khan’s audition for Floyd Mayweather may turn into a no-win situation, says Frank Warren

Khan’s audition for Mayweather may turn into a no-win situation

The Bolton fighter could be damned if he dazzles and damned if he doesn’t against Algieri, the man last seen being decked six times by Pacquiao, says Frank Warren
Blundering Tony Blair quits as Middle East peace envoy – only Israel will miss him

Blundering Blair quits as Middle East peace envoy – only Israel will miss him

For Arabs – and for Britons who lost their loved ones in his shambolic war in Iraq – his appointment was an insult, says Robert Fisk
Fifa corruption arrests: All hail the Feds for riding to football's rescue

Fifa corruption arrests

All hail the Feds for riding to football's rescue, says Ian Herbert
Isis in Syria: The Kurdish enclave still resisting the tyranny of President Assad and militant fighters

The Kurdish enclave still resisting the tyranny of Assad and Isis

In Syrian Kurdish cantons along the Turkish border, the progressive aims of the 2011 uprising are being enacted despite the war. Patrick Cockburn returns to Amuda
How I survived Cambodia's Killing Fields: Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape the US

How I survived Cambodia's Killing Fields

Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape to the US
Stephen Mangan interview: From posh buffoon to pregnant dad, the actor has quite a range

How Stephen Mangan got his range

Posh buffoon, hapless writer, pregnant dad - Mangan is certainly a versatile actor