Quantitative (diseasing) - Book Review

Inflation Tax: The Plan to Deal With the Debts Peter Comley - pp.209 - July 2013

Inflation presupposes money. Money has evolved as an unplanned social institution during a period of perhaps 2500 years. Still, the worst excesses of inflation have occurred during the 20th century. The prime cause of inflation has been governments trying to amortize (degrade) their debts through printing money in the hope that the subsequent debased currency will significantly reduce the value of their debt. It works like this. If I borrow £100 pounds from you in year 2013 to be paid back in 5 years and assuming an annual inflation rate of 5% then effectively I will pay you back less than I borrowed by a factor of 25% when the loan is set for redemption in 2018. This is essentially a default by the back door. In similar manner governments create inflation which means their debts are amortized, but the cost in borne by the population at large whose income and wealth - particularly when it is held in cash - undergoes a devaluation. The author refers to this policy as a hidden (inflation) tax. It is hidden because most of the population, whilst aware of inflation, are not aware of how the Central Bank and Treasury both connive in a deliberate policy of wealth and income confiscation leading to this income redistribution. Unquestionably, the Bank of England, (BoE) along with other central banks around the world are doing their best to stoke up inflation with low interest rates and the creation of new money through quantitative easing (QE). In terms of redistribution most of this new money goes to banks since QE results from the BoE buying gilts which are part of the banks' asset portfolio. In other words the BoE is effectively redistributing savers and taxpayers monies to the bloated FIRE (finance, Insurance and Real Estate) sector. Inflation is, therefore, not an accident; it is a deliberate policy option, though this fact must never be made public. Among those who pay most of the inflation taxes are, according to the author, . Direct holders (bond holders) of government debt; . Cash savers in banks; . Wage-earners, benefit recipients, pensioners, and anyone else on a fixed income, since their incomes have lagged behind the rate of inflation; . Companies whose costs rise; and this of course adds another twist to the inflationary spiral. The principal recipients in this inflation bonus are debtors of various kinds, including of course the government itself. It should also be added that the speculator community, i.e., hedge funds, private equity, investment banks who operate at highly leveraged positions (i.e., where the majority of their capital is debt) who have welcomed with open arms what is virtually free money (interest rate 0.5% in the UK and 0.25% in the US) from the central banks. Such a policy of income confiscation will impact most severely upon those who are most vulnerable in society. Those higher income groups will see the price of their assets increase and in any case can switch into other more stable foreign currencies. The recent food riots in Brazil are a reminder of what inflation can do and those who are most exposed. Of course the BoE will never admit to an inflation problem and will provide statistics to 'prove' that inflation is not a problem. But careful scrutiny of their claims opens up a Pandora's Box of mendacity and delusion. In the first instance the BoE's projections for inflation (for which the target has been 2%) have been wide of the mark - i.e., underestimated - on every occasion since 2005. The object of course has been to downplay the true level of price rises. Secondly there is the outright fraud in the way inflation is measured. This has occurred principally since the switch from the Retail Price Index (RPI) to the Consumer Price index (CPI). (Incidentally, the switch from RPI to CPI along with the abolition of the 10P tax rate and the selling of 60% of the UK's gold stock at rock bottom prices were some of Gordon Brown's 'achievements'.) The CPI does not include the following: Council Tax, Interest of mortgage repayments, other housing costs such as service charges and ground rent, as well as income tax and national insurance. Then there are the other cute little wheezes such as 'hedonic pricing' 'substitution effect' and use of the 'geometric mean' amounting to little more than pseudo-accountancy and statistician bullshit, but which also add a downward push on real, as opposed to nominal inflation rates. Everyone, or almost everyone in the UK has lost some purchasing power since the start of the crash in 2007. UK savers for example have lost a cumulative 11% of their savings during a 4 year period, and it is a trend which will continue. This is far greater than the original proposed 'haircut' that depositors in Cypriot banks were expected to swallow. The initial scheme had proposed that deposits up to 100,000.00 euros would lose 6.7% (9.9% for higher deposits). Cypriots took to the streets, riots broke out until the government relented and agreed to protect depositors up to 100,000.00 euros. Note that none of this got any coverage from the pathological anti-EU media. But best of all was this little nugget dug up by the author. Although the BoE was reputedly relaxed about the dangers of inflation its actions spoke louder than words. In 2007 the BoE's assets consisted of shares/investments, fixed interest bonds (74%) and Index linked bonds (26%). Index linked securities are adjusted for the rise in inflation, in this way they do not lose any value as they pay a return above the rate of inflation. They are an inflation hedge. By 2009 Index linked bonds represented 88% of the BoE asset portfolio and by 2012 they represented 95%. Now if the BoE didn't think inflation was a problem, or was not going to be a problem in the foreseeable future, why did it make this switch into index linked bonds? Did they know something that they think we didn't t know? A wry comment from the Daily Telegraph article on the subject was: Inspired Trading or Insider Trading. Insider trading is of course illegal. This is a very readable book, informative and mercifully free of the usual gibberish emanating from official sources and management consultancyspeak.