The French government spent €240bn ($283bn) in financial aid to businesses hit by the coronavirus pandemic since March 2020. This was mainly in the form of state-guaranteed loans.
The Bill Comes Due
An increase in the amount of money without a corresponding increase in the supply of real goods means simply that there is more money chasing the same amount of goods and that therefore, according to the universal laws of supply and demand, prices rise.
Many people complained loudly at the time, but to no avail, about this economic inevitability, which was entirely foreseeable.
Now, after a brief period when price growth slowed, inflation is on the rise again. In the UK, it has reached its highest level since the beginning of the war in the Middle East, driven by a surge in household energy bills. The Office for National Statistics (ONS) said on Wednesday that prices rose by 2.9% in the year to July, up from an annual increase of 2.6% in the previous month. The rise was in line with analysts’ expectations and took the rate to the highest level since March.
In response to the inflation figures, John Healey, the relatively new Chancellor of the Exchequer, said that the conflict in the Gulf “continues to impact prices here at home, but Britain’s economy is resilient”. Indeed, the recent social media row on the American right over the cost of burritos was in reality the result of often misunderstood forces of inflation.
It is easy to dismiss inflation as dry economics, but it is not.
At the Ballot Box
In Nigeria, Africa’s most populous country, the economy is set to dominate the upcoming election. Nigerian President Bola Tinubu is seeking re-election. Tinubu, who was elected in 2023, used his first term to push through ambitious economic reforms, including ending a costly fuel subsidy that for years had indirectly suppressed prices throughout the economy.
Though praised by economists and investors, the reforms have sparked a cost-of-living crisis that saw the value of the currency crumble and inflation spike to 34%. Headline inflation cooled to 15.4% in July. The money in people’s pockets is worth less every day. The public gets ever poorer, even as incomes rise. A Nigerian who gets a 10% pay rise this year will still be less well off than he or she was a year ago. This is the reality of inflation – and why former Federal Reserve chairman William McChesney Martin described inflation as a “thief in the night”.
Former US President Ronald Reagan was more aggressive, describing inflation “as violent as a mugger, as frightening as an armed robber and as deadly as a hit man”.
Punishing Prudence
Reagan and Thatcher in the 1980s were revolutionary in the way that they presented inflation, rightly, in moral terms. They were correct precisely because inflation punishes moral goods such as hard work and the wages it produces. Inflation reduces the purchasing power of those wages. It eats away at the value of savings, punishing those who save for the future. There is little point saving money if the government pumps more of it into the economy, reducing its value.
And this is precisely what Western governments have been doing for years now, not only during Covid but also during the long years after the economic crisis of 2011, when the ECB adopted its policy of quantitative easing, which is a fancy-dan way of saying printing money. Trillions of extra euros were pumped into the economy, each one worth marginally less than the one before it. That the ECB and other central banks are independent means that this attack on the value of savings comes with little to no democratic accountability.
Many economists have pointed out what a dangerous power this gives to government officials. John Maynard Keynes, for example, wrote: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”
Who Bears the Cost?
Tax rises often get the headlines, but inflation can be just as damaging to the family economy. In addition, inflation is actually a regressive tax rise because it usually impacts the poor to a greater extent than it does the rich. Thomas Sowell explains that “inflation is not only a hidden tax, it is a broad-based tax”.
Sowell continues, writing that “by creating inflation the government in effect transfers some of the wealth of everyone who has money, which is to say, it siphons off wealth across the whole range of incomes and wealth, from the richest to the poorest. To the extent that the rich have their wealth invested in stocks, real estate or other tangible assets that rise in value along with inflation, they escape some of this de facto taxation, which people in lower income tax brackets may not be able to escape”.
A Self-Defeating Cure
Government spending and increasing the size of the state also cause inflation. These measures, along with those of the Covid era, were most ferociously supported by those on the economic left. The irony is that these are the economic policies that hurt the poor, who the left claim to care about, the most. Lower-income families spend a disproportionate share of their income on food compared with wealthier families.
If governments really do care about lower-income families as they claim, they would do well to control inflation by limiting the size of the state and government spending and by being cautious about printing money to fund bailouts.
Until this old truth is once again remembered, Europeans will continue to get poorer, even as they work harder to earn more.
