Don’t say you weren’t warned: massive inflation is heading the way of the UK

How many of us remember inflation? How many of us experienced, at first hand, the bankruptcies, the strikes, the collapse in business confidence?

I remember it clearly enough. But my memories are not the dire HeathWilson years here. They are of my native Peru, a resource-rich country ruined by money-printing.

Even during my 1970s childhood, the Peruvian sol was a solid enough currency. Old people still called 10-sol notes “libras”, a memory of the years before 1930 when the sol had been pegged to sterling at the rate of 10:1.

Then the debt crisis took hold, and the printing machines began to hum. In 1985, the government created a new currency, the inti, worth 1,000 soles. But the zeroes continued to proliferate and, in 1991, a million intis were declared to be one new sol. That new sol, in other words, was worth a billionth of what a sol had been worth six years earlier.

OK, Britain is unlikely to experience the 1,700 per cent annual inflation of late 1980s Peru. But don’t imagine that the monster can’t get loose here.

Since March 2020, the Bank of England has doubled the scope of its quantitative easing (QE), a policy it initiated in 2009 in response to the financial crisis, whereby it creates extra money and uses it to buy government debt.

The sums involved are unprecedented – indeed, almost unimaginable. To date, the Bank has bought £875billion of government bonds, equivalent to nearly 40 per cent of our GDP. Yet it keeps blandly assuring us, even as prices start to rise, that there will be no inflationary effect.

Others are less sure. The House of Lords economic affairs committee has just published a report raising the alarm over the Government’s “addiction” to QE. Lords reports, by tradition, are consensual and staid, but this one pulls no punches, suggesting that QE is being used to cover unsustainable government borrowing, noting that the policy widens the gap between those who own assets and those who live on their wages, and demanding a clear plan to unwind it.

This from a committee that includes a former governor of the Bank of England, a former general-secretary of the TUC and several economists of global renown, chaired by Lord Forsyth of Drumlean, who is a banker as well as a former Cabinet minister.

Money-printing can be a way for indebted governments to reduce their liabilities. If inflation halves the value of the currency, the government halves the effective value of its debt – and, of course, its citizens lose half the value of whatever was in their bank accounts. Inflation thus serves as an especially nasty tax.

But its effects are more pernicious than that. Once it takes hold, businesses start anticipating its effects in their prices and workers in their wage demands. Before long, a vicious cycle sets in. Financial planning becomes impossible. Productivity and competitiveness are wiped out. Pensioners find themselves penniless.

Look at the debt our Government has been racking up. Rishi Sunak has borrowed more in nine months as Chancellor than Gordon Brown did in nine years – a feat made possible by QE and by ultra-low interest rates.

But what if the rate rises? What if the world stops giving us the benefit of the doubt?

The coronavirus was a one-off hit.

As the economy reopens, we need to wind up the programmes that were supposedly brought in as a response to the emergency, from the furlough scheme to the subsidies being paid out to voluntary, business and parastatal groups.

We need, too, to turn off the printing presses. So far, stupefied and satiated by QE, we seem in no hurry to do either.

Perhaps we are not so different from 1980s Peru after all.