David Cameron was right to warn about the debt crisis last year, when everyone else was talking about fiscal stimulus and the need to boost spending. You can’t stimulate a corpse. But note how cagey Cameron is now about how the Tories would hack back the debt mountain . Apart from scrapping identity cards and cutting out waste, he has been as vague as the Chancellor.
An ordinary person, burdened by debt, can do two things: save, or go bankrupt. Governments have a third option: eroding the value of the debts themselves. Saving is hard: it needs a saving culture for a start, and we don’t have one. We have been conditioned by two decades of Ponzi capitalism into taking on ever greater debts to pay off the debts we already have. The entire thrust of government policy is to force people to take on even more debt to boost retail sales.
So, let’s forget about saving - like the environment, you just know the government isn’t serious about it. So, how else do we pay back the debt? Privatising he health service and education isn’t feasible, and cutting entitlements, like public sector pensions or unemployment benefits would likely cause civil unrest. The alternative is to rely on inflation to erode the value of the debt. 10% a year would do nicely, and in case you think inflation is ancient history, remember that inflation was running at nearly 10% as recently as 1990, during the last recession.
Suddenly those frightening figures don’t seem so scary. A decade of inflation would turn a trillion into five hundred billion. The financial press has been discussing this openly since the Bank of England announced that it was going to start printing money, or “quantitative easing”. Inflation is usually good for stock markets, first because it erodes corporate debt and discourages investors from holding cash. Inflation is also good for the housing market because it disguises falling prices and because it encourages people to take on bigger mortgages paid back in depreciated pounds. Governments love it because their debts just disappear; inflation is a kind of get out of jail free card.
But problems arises when the people who lose out decide that they won’t go quietly. The first casualties are pensioners, who see their living standards eroded, but traditionally they don’t go out on the streets. Nor do savers, who effectively have their savings stolen from them by inflation. Resistance comes from foreign bondholders and organised workers.
The last time governments tried ride the inflation tiger was in the 1970s, after the disastrous “Barber Boom” under the Tory chancellor Ted Heath. That “dash for growth” ended up in bank failures, collapsing house prices, and mounting debts which the government thought it could ‘manage’ through inflation. That was until workers started to resist the erosion of their living standards. Trades union membership was high in the 70s, and the UK was a largely manufacturing economy. Led by the miners, workers went on strike for higher pay, and the scene was set for the great industrial confrontations that led to Thatcherism.
The lesson of history is that once you start inflation, it’s very difficult to control it. Price rises peaked at 24.2% in 1975. Imagine your salary losing a quarter of its value every year. Rampant inflation eventually forced the Labour government to negotiate a loan from the IMF in 1976 to stave off bankruptcy. This was because bond investors at home and abroad refused to buy government debt. In effect, the UK became insolvent, like HBOS, and had to cut public spending and increase interest rates to restore the confidence.
There are suggestions that the government is preparing for a trip to the IMF today. An unnamed minister told the Daily Telegraph before the budget that going to the IMF for funds should be thought of as “like going to a spa to recuperate”. Years of living on debt have made politicians believe that, like the banks, we can all be bailed out. But they will likely discover that the only thing they have borrowed is time.