The Children's Budget

"I shake my head in despair. As the Chancellor faces a terrible fiscal position no one outside the Treasury will believe the forecasts. When I saw the public spending plans I nearly fell off my chair"
Michael Saunders, chief UK economist at Citigroup

"The increase in debt servicing costs alone will be between £35bn and £47bn per year in 2008 money. That is more than the annual transport budget. It is about the same as the entire annual defence budget, and about half the annual education budget."
Danny Gabay, head of Fathom Consulting


In 1909 David Lloyd George, Chancellor of the Exchequer, delivered what became known as the Peoples Budget. It's primary aim was to raise taxes on the rich in an attempt to redistribute wealth within society, which in its day was a historical and radical set of measures. One Hundred years later, Alistair Darling delivered another historic budget, however it was under quite different circumstances. With finances spiralling out of control and a country heading for the worst post war recession, there was no room for social justice. Again a Labour government had spent too much. History will judge it as the Children's Budget.

The repetition of all the budgets figures are not required here, suffice to say the numbers are truly horrendous given the optimistic forecasts the government has used. Some of the areas of worry are:

Future Economic Growth
We are in the midst of the worst recession any living person would have experienced. Looking back at history when events like this happen, economies take years or a decade or more to recover from these credit excesses. The growth projections given yesterday were lies. Not even Mr Darling believed them. The idea that the economy will grow at the end of the year, and be in the thick of a new boom within a couple of years is nonsense. The economy will continue its decline for this year and the next. If there is any recovery after - which this author does not believe - it will be weak at best. Not 3.5% growth. The IMF have recently projected -4.1% and -0.6% growth for the next two years, however they are still playing catch up and their projections have always been wrong. Expect further revisions to these numbers.

Peaking of Debt levels
The government claims that debt will peak at around 80% and again it is more lies, and the markets know it too. It will go much higher. For readers of this blog you will also be aware that this is only the official debt figure. There's many off book debts to come, just at the time they claim debt will peak.

Deficits turning to surpluses?
In order to try and pay the debt back the government needs to be running budget surpluses. Estimates again, state that the deficit will drop below the £100B mark around 2013/2014 with the admission that it may take a decade to balance the books - to just break even. Then we get to the point where we need to be running surpluses to pay for all this debt. We can let our children worry about that. Whose going to fund all this? Isn't global capital low, with the high saving nations in Asia enacting their own stimulus plans? The main buyers of Government bonds have been foreign buyers but for how long?

All of the above is based on government estimates. Estimates that will prove to be as wrong as the estimates of 2008, or the ones in 2007 and so on. There were no proposals to try and balance these figures, which is to be expected as the election looms with unpopular decisions being put back. However the longer the government postpone action, the worse the hardship will be. By not creating a credible framework for balancing the books the risk of further gilt strikes are inevitable. David Cameron again had no polices that would attempt to rectify the perilous position as he follows the focus group discussions not wishing to disturb his poll leads, sending signals to investors that Britain has no intention of paying its creditors back.

The budget was full of contradictions. We had the various environment measures for wind power and then there were incentives to build more Coal power plants along with tax breaks for Oil and Gas. They announced they will pay people to buy new cars, which is in effect throwing money away. We may as well employ some people to dig holes and another set of people to fill them in, rather than subsidise car purchases - at least it will keep the unemployment figures down. If double glazing sales start dropping is the government going to pay people to smash windows in order to create artificial demand? There was extra money for the Job Centre network, when the job market is shrinking. A scheme to back mortgage backed securities, dead assets, further preventing liquidation that is needed in order to bring about the recovery Darling mentions. However the biggest move was an introduction of a new high income tax.

The 50% rate of tax was welcomed by many - "get the rich, they got us in this mess" as many will say. However readers of this blog will be aware it is government that got us in this mess. Unsound money, central planning price stability created huge distortions in the economy. However this tax increase is just a foot in the door. We will all be paying much more in tax in the coming years like I have previously mentioned - crushing any recovery for a generation or more. It was the increase in income tax by Herbert Hoover and then Franklin Roosevelt that assisted in the prolongation of the great depression. By hitting wealth we are also sending a signal to the rest of the world, that if you work hard in the UK we will confiscate your earnings. Suggestions of a brain drain has begun before any of the real hardship has even started. Before our boomers begin to retire. Before we run out of cheap energy. Before printing money has had its full ruiness effects and so on. It also marks a further nail in the coffin for the city of London as a financial center of the world.

With the above there is no hope of retaining quick growth again. By taxing the entrepreneurs who create jobs and wealth for us all we are further impoverishing ourselves. Then there's the point will they pay? There could be a negative effect with more people looking to avoid the tax. Tax revenues could actually fall, as less jobs are created as successful business leaders and entrepreneurs wonder what will happen next. The IFS has recently supported this claim, however I don't think they appreciate the full damage of a policy such as this.

Healy or Howe?

There were discussions about if the increase in income taxes represents a return to Old Labour, or if the cuts to come in spending represent a return to Thatcherite economics. We are a long way from Old Labour 83% high tax brackets, but we are heading in the same dangerous direction. Then there's the myth of the supposed Thatcher Monetarism economics that prevailed during the eighties. Government spending barely moved during her time as prime minister. Standing at around 42.5% in 1977/78, it was 41.7% ten years later. She actually spent more than Ted Heath and Harold Wilson as spending on government rose 32% in real terms through the eighties credit boom. Thatcher kept this fact quiet as she prided herself on the illusion of getting government out of the way, controlling the money supply, the Milton Friedman philosophy. In Milton Friedman's later life he would be critical of the governments and central banks who inflated in his name, rejecting his original ideas that they could be trusted to control the money supply. The Austrian Economists always told him governments could never be trusted. Nevertheless taxes and unprecedented public spending cuts will be required - both of which we have never experienced in tandem. We will need more substantial cuts then just "savings efficiencies" to balance the books and tax rises that can actually make an impact on the deficit.

The government are also starting to admit they may have to take losses on the bank bailouts they carried out, rather than the profit many believed. As I have said before I will be happy to get half the money back. Wait until the losses really start stacking up. There will be an incredible strain in the gilts market for years to come, with further money printing to cover the shortfall as investors appetite for our debt wanes. Indeed questions of Britain's AAA rating has become mainstream news now, as a ten year old could do the sums and realise they don't add up.

Green Shoots?
Before the budget there had been more discussions of green shoots of recovery or the bottom of this and that. These green shoots will be mentioned for years to come as I have mentioned before, many will be fooled by the bull moves in this bear market we find ourselves in. I started this blog around this time last year and everyone was saying the same. The 'worst is behind us', 'the credit crunch won't effect us', 'the UK has sound fundamentals' with everyone having an almost religious belief in the state of the economy. There is plenty more pain to come. Mistakes of history are being repeated which are once again impoverishing society. Unemployment has only just begun its climb. The next bubble, government debt has yet to pop and cause havoc. Energy prices and commodities are historically low. Retirement has yet to set in. As the year goes on the FTSE will hit new lows possibly hitting levels around the mid 1990's in a best case situation.

So the Children's Budget has been announced. A decade of deficits, and a generation of hardship. These were the debts I have been talking about. The debts I knew were in the system, waiting to hatch out and there's much more to come. The debts that are now staring my generation and future generations in the face. Many Western Governments will find themselves in a similar situation, but Britain has managed to come up with the largest deficits of the developed world, even without the substantial stimulus packages other nations are putting in place. The greatest asset we have is a long history of democracy and peoples individual rights, but we have a government that is continuing along the path towards bankruptcy. It's all unsustainable and must be stopped, immediately, if not for our sake then for future generations sake.

Strike!

"The banks are fucked, we're fucked, the country's fucked."
Anonymous Cabinet Minister speaking in regards to the UK

"The last time we built up this much debt was when we were fighting ... half of Europe. This time we've done it on our own. It's quite a chilling thought. This is my worry is that it's like the man in the casino has lost it all on red and you know ... what's to stop Gordon putting it all on red all over again?"
William Buiter ex MPC member on recent events

The first UK Gilt tremors were felt this week. It was the first failure to sell non-inflation linked (regular) government bonds since 1995, with only 93% coverage. Back in 1995 it was 99%, which shows the significance of this event. Comments made earlier in the week by Mervyn King, the Bank of England's Governor in regards to worrying levels of government debt and how he may not wish to print as much money as first anticipated spooked the market. So how significant is this event and what does it mean for Britain in general? Is this a sign of things to come for many Western Governments? Many commentators may dismiss what happened as a one off or just a fact of bond auctions, however this would be very naive. It would be correct to state that this is only one failed auction, however context is key. This is not 1995.

Estimates for the following years budget deficit has come in at around £150bn - £200bn, which for a small nation such as Britain is a huge amount of money that the government needs to raise. Along with the shrinking economy, with last quarters contraction revised to -1.6% GDP, giving an annualised figure greater than -6% GDP, these billions listed above could turn out to be even worse, as Britain begins the path towards bankruptcy. The fact that a Gilt auction has already failed this early on, and by such a large margin, should be of great worry. As mentioned before on the blog, the governments bond markets are a classic bubble as market forces are being tampered with, along with irrational investment behaviour. Will the Government let market forces burst the bubble now? I doubt it. Like all bubbles it will continue to grow, going against all market fundamentals.

The other day, bond yields went up as the government struggled to sell them. This is market pricing in supply and demand where there was a lack of demand, therefore the government has to raise its returns for potential investors in order to attract buyers. The market forces where yields go up should be allowed to happen. In the Euro zone recently there is now a large divergence on the returns given to hold say German bonds, to say Greek bonds. Greek bonds are now having to offer far higher returns to compensate for the fact that there is more risk in the country, specifically default. Despite what the Greeks may say regarding the Euro, or their wish to have control over monetary policy the current situation is actually beneficial to the Greek public. It ensures the Greek government can not print money to buy government debt, thus artificially reducing short term rates on government debts. This of course encourages the Government to take on more debt as they can print money, thus holds the rate of interest artificially low over the short term so they can increase spending thus piling up more debt. However there is a cost to all this. Specifically this is how massive inflation begins, by the governments spending getting out of control thus printing money to pay for it. If the Greeks still had the Drachma, this is what would happen leading to high inflation and in Greece's case probably currency destruction.

As they are on the Euro, they consequently don't have this control, rather it seems to be the more traditional hard money countries such as France and Germany that have greater control. German officials and the Bundesbank understand the problem, and they know printing money can not help along with huge government spending in the long run. These ECB hawks know we have to take the medicine now allowing market forces to work and ensure real capital is used for government debt, not this 'new' money. This is the problem Britain finds itself in now, however Britain has the pound so it can do what it likes unlike Greece. It still has full autonomy over the printing press. The recent lack of buyers now casts doubts over the governments ability to raise the £200bn or so in money over the next 12 months. And not only the next 12 months as Government deficits are going to be a feature for a very long time, even with huge spending cuts all the other governments debts that are yet to be felt will be coming into play over the next 5 - 10 years. So where does this leave the Government?

It has already embarked on the policy of QE, printing money to buy government Gilts with an initial figure of £150bn mentioned by Mervyn King to buy this debt, with statements when this policy was implemented that this figure could rise. So this is where we come onto how the Government always distorts the markets. The statement that they made sent a signal out to the market, "If there are no genuine buyers of government debt, then we will buy it". Hence the first market bond sale after this statement was made saw huge amounts of buyers with the auction being oversubscribed. The market is now playing the governments game, a game of the last one to hold the debt will get burned, and the market is thinking that will be the Government. In the future all Bonds will be bought by the Government, with all other sellers rushing to sell. It's a classic Ponzi scheme, where the whole pyramid exists on the premise of selling to the bigger fool.

Many nations are embarking on this path, America, Japan even the traditional hard money country Switzerland has followed this route. QE will just blow this bubble up further causing more damage in the long term, as this will become a vicious cycle if it is not stopped soon.

At the moment inflation is not a concern so the bond investor does not demand huge returns. With the Stock market in the tank, other assets falling in value and deflation on many peoples minds Government Bonds look like a good bet, a steady income stream 'sheltered' from the financial dislocations. Therefore people have piled into Gilts. However as government debts have been growing in certain nations, contracting economies and huge economic imbalances in these countries, market forces are trying to set higher returns, specifically for nations with these risks. However with the new intention for expanding the money supply to "combat" deflation, QE is now monetising many of these bonds, in effect creating artificial buyers. Similar to the recent housing bubble, real demand was never there, it was just people flipping houses to one another with artificial cheap money as the driver. The market anticipates this new QE artificial demand, by lowing rates as there is less risk on default as more buyers have entered the market - seemingly increased demand, limited supply. This is where the real trouble begins, the point we find ourselves in now. The UK money supply has actually been expanding over the past few months even more than during the credit boom, which is highly inflationary under an environment such as this. This will eventually feed through to the economy into consumer prices. With the currency devaluing (inflation) there is a decrease in the demand for bonds that are not inflation linked as the future becomes more uncertain. Usually under this environment yields would rise to attract buyers, however with the Government becoming increasingly strained just paying the interest payments (and with the fear of no buyers thus in effect bankrupting the government) they wish to try and keep these yields down. This in turn means the government has to buy more, creating more artificial demand. This in turn feeds back and increases the money supply, thus creating more inflation with investors demanding even higher returns of compensation. With the monetary base getting ever more out of control it leads to investors fleeing Gilts even more, thus eventually leading to no genuine buyers, with the only buyer being the Government. Such a cycle feeds back on itself, creating an even more desperate state of affairs, and worse economic conditions.

We are only in the early stages of the above. In theory, this could be stopped now with the Government abandoning QE, but I doubt it. Not with the huge deficits to come and the lack of Global Capital. The above describes the very process of how the Central Banks believe they can beat the market. However they can't, as the above details, they can only make it worse and the longer they try to 'beat' the market the worse they make the situation. In the event that things go to far they will destroy the currency, the lifeblood of the economy, thus impoverishing us all. Prices are there for a reason. Economists will tell you that when yields come down, that the Central Banks have saved us and proclaim that QE has worked. It can never work and is doomed to failure. The longer they try and hold the short term price down, the higher it will shoot up eventually and the longer it will stay there. Just like any market price, it's there for a reason - basic supply and demand. Kings new hard line will not stay for long. He will keep the QE program on track, with the initial £150bn just a foot in the door. There seems no political will to scale back Government spending or accept the terms of an IMF loan just yet.

The basic process described above is how all governments go broke. It begins with a little, but eventually takes over the whole market similar to Zimbabwe. With statements continually made that they will be able to "turn off the tap" or "mop up the excess", this is simply not true and misleading for many members of the public. Countries like Ireland, Italy, Greece etc may complain with the hard line the Germans have took, but they are doing them a favour in the long run, some tough love. We may well see the EU take exactly the same route described above, I do not discount that. However at least we have witnessed some rational opinions expressed again by the Germans, many whose Great Grandparents and Grandparents lived during the Hyper-inflationary Weimar period. The UK should let their Gilt Prices rise. This puts a check on excessive government spending by the market rationalising on who is solvent and which countries are sound. If there are no buyers, let there be no buyers. This will either stop government spending altogether or let the country go bankrupt. The short term pain would be far better than bankruptcy by the printing press, drawing out the process and leading to a much worse collapse.

The Currency Wars

A new world currency? Russia and China have expressed their recent concern over the Dollar monopoly of reserve status and have mentioned the possibility of an alternative, not associated with any nation - a new world currency. The Austrian School of economics predicted this back in the 1960's, along with the creation of a European Common currency that would supersede this step. We saw the Euros creation back in 1999, are we about to witness the early stages of the Global Currency? The Austrians said this would be the ultimate desire of Governments, the ability to inflate with no apparent currency fluctuations occurring masking the debasement. Timothy Geitner put his foot in it, and contradicted Obama by saying it would be a good idea. The Euro will probably fragment at some point in the future. Nations such as Greece may opt out, thus regaining their autonomy over their currency with the ability to inflate once more. We will have to see. Back around six months ago I said currencies will disappear or merge, with the Icelandic Krona the first victim, there will no doubt be many other interesting twists and turns over the coming decade.

More Carry trades will continue unwinding over the year. The Yen carry trade that we witnessed unwind last year, causing the collapse of the Icelandic Krona, the fall in the British Pound and the spectacular rise of the Yen, should still unwind some more this year, as more of these currencies come under pressure along with the increasing scramble for cash. The Eastern European Debts have been unwinding too, with these debts bought in Euros, Yen or Swiss Francs beginning to undo as the hryvnya, Forint or Zloty have devalued. There will be lots of civil unrest to come in these countries, Latvia and the Ukraine will not be the last to succumb to protests. We will continue to see more gyrations of the worlds currencies, as "beggar thy neighbour" policies continue and carry trades continue to unwind.

The Fallacies of Deflation

It seems every authoritative figure has begun warning about the dangers of deflation. With Britain's Monetary committee making a case for printing money, we are told that this is to ward off the 'dangers' of a falling money supply, and we need to inject more cash into the system to get the economy moving again. The Keynesian's, the governments economic cheerleaders, are proposing that inflation is needed in order to combat deflation and the new money can ensure increased consumption in order to drive the economy forward. Deflation is one of the most misconceived economic terms, used as a scapegoat by the above institutions portrayed that it can somehow cripple an economy. Yet Deflation should always be embraced as it is a sign of a healthy free market economy. If our economic system was truly free, we would never get inflation. We would always have deflation in the modern sense of falling prices. However Banks and Governments always prosper with inflation. Throughout history this has been demonstrated with the costs borne by the rest of us. I felt this post was needed as I have become weary of these statements that deflation is some how a terrible event that should be avoided at all costs, used to try and justify printing money. Nothing can ever justify printing money or inflation and this post attempts to tackle these common misconceptions that have been indoctrinated onto the public, either by officials and economists that prosper from such policies or are incompetent to see what is happening.

Credit Expansion, Banks and Governments

Governments worship inflation. It funds their expensive welfare programs. It funds their wasteful consumption. It funds their political ideologies, their Utopian society they promise the public who elect them. Permanent inflation, like the one we have in our monetary system would never occur in a stable and free market monetary system. It can only occur by the continual expansion of our money supply. Markets always reduce the costs of goods ensuring greater productivity efficiencies as capital is used to enhance the way we make products. The debasement occurs with the co-operation between the banks and the state, similar to what we are seeing now. There is no conspiracy behind this as there is a long history of governments encouraging reckless credit expansion from the banks. A credit boom, like the one we have just come out of, creates huge amounts of credit which is spent during the boom. Most of this money does not exist as fractional reserve lending allows banks to lend far more money than they hold on deposit (money that actually exists). The government allows this privilege to banks as it inflates the currency, expanding the amount of money in the system. Despite the huge deflation we have had over the past 10 years in, computers, mobile phones, holidays, with all these items coming down in price, we have still had continual inflation. That inflation was a credit boom created by the private banks orchestrated by the central banks who prop up this credit expansion process, ensuring it goes on for far longer then would occur in a free market system.

At some point this process breaks down (a credit crunch), usually by previous investments turning bad (sub prime was the trigger recently) thus wiping out what little reserves the banks have. The banks reach a point where they can no longer inflate and central banks become the lender of last resort propping up these banks, and essentially printing money to replace the credit being destroyed. This is the current time frame we find ourselves in. Deflation, as in a contracting money supply is happening, thus the government and institutions step in to inflate. Since the credit crunch began true deflation has not actually occurred. Instead the money supply (Broad Money, M3, M4) is still growing as the governments resort to running huge budget deficits, that will be paid by printing money. We are told that this is necessary, as our economy needs the credit in order for it to operate. This however is not the case.

It doesn't matter how much money you have in the economy, so long as it is stable and divisible enough to price goods and services. Zimbabwe has huge amounts of money, yet they are no better off than traditional hard money countries such as Switzerland. In other words our prosperity does not depend on how much money there is, only that it be a commodity that can retain its value. If we allowed our money supply to drop, as markets are currently indicating, prices would just fall to a new equilibrium. If our money supply fell 50% then prices would generally fall 50%. This is the way to get out of the economic hardship we find ourselves in. This ensures a healthy liquidation process runs its course and cleans out these excessive speculative debts, those of the wasteful businesses and individuals. It would also stop government spending, and these unpayable deficits that we now see. It would be painful, depending on your circumstances, but it was brought about by the excessive credit expansion of the previous boom. The market is simply trying to get rid of these excesses. The worst thing we can do is try to re-inflate like we are currently doing. History has always shown this, and economic theory proves it.

Deflation is Compatible with Economic Growth

The recent credit bubble has now morphed into a violent contraction as the credit expansion process has turned into a credit contraction. This is not to be confused with normal market deflation (constantly falling prices), rather a by product of the elasticity of our money. In a free market that did not permit excess credit creation (ideally none), used sound money and removed the monopoly our governments hold on our money, deflation would be a normal occurrence. As history has shown, economies that have undergone deflation, have performed better than economies that have experienced inflation. Milton Friedman, who in fact believed in price stability therefore inflation, concluded that America during the period from 1865 to 1879 experienced huge economic growth despite having no inflation. On the contrary the U.S. was experiencing deflation.

"[T]he price level fell to half its initial level in the course of less than fifteen years and, at the same time, economic growth proceeded at a rapid rate. . . . [T]heir coincidence casts serious doubts on the validity of the now widely held view that secular price deflation and rapid economic growth are incompatible."
Milton Friedman and Anna J. Schwartz, A Monetary History of the United States 1867–1960

Around this time Germany also experienced rapid price declines, yet had the best economic growth in the whole of Europe as they became a world superpower that challenged Britain's status at the start of the twentieth century.

These false justifications to create more credit will ruin market forces for years to come. Credit merely channels societies resources. If we have less credit then prices drop to their new equilibrium. Just because credit contracts, doesn't mean we suddenly loose all our infrastructure, our skills, our resources? They are still there, and will just be re-priced accordingly. The competent, people and businesses who did not overextend themselves during the credit boom, did not make wasteful purchases, will take over from the people who were overextended and have been liquidated, who could not manage societies scarce resources.

'Price Stability'

So why do we have this catastrophic credit expansion that creates all the issues we now have? Governments and Central banks use a concept of price stability. Many of you would have heard of it before. In the UK for example we have a composite index that represents typical consumer goods, called the CPI (Consumer Prices Index). The government (Central Bank) try to keep this target in a range of 2-3%. Around the turn of the Twentieth Century a proponent of this concept was an economist called Irving Fischer (an early day monetarist). The concept goes that this will somehow ensure greater economic productivity and planning. Another economist at the time, Friedrich Hayek, indicated that this proposal was doomed from the start. In order to stabilise prices in a free market where prices were continually falling, the stabilisation would inevitably take the form of a credit expansion, which would provoke a boom. This boom would be unsustainable and would result in these artificial credit distortions eventually unwinding with a bust.

These polices were used during the 1920's in America, with the Federal Chairman Benjamin Strong, ensuring 'price stability' by crediting a huge credit bubble in the stock market. Irving Fischer, who supported such polices said in 1929;

"Stocks have reached what looks like a permanently high plateau."

He also made statements for the continuing years that stock prices seem to have stabilised, even as they continued to decline until 1933. Meanwhile in 1928/1929 Friedrich Hayek, had wrote that a great depression was coming. Price Stability was a form of central planning, targeting fixed metrics that were incompatible with market forces. It was central planning intervention, interference with markets just like Communist Russia. At the time he was laughed at, people were saying it could never happen, this was the "Global Economy", the "New Economy". However the disaster was always on the cards, it was just a matter of time. Governments and Central Banks subsequently use 'Price Stability' to legitimise this expansion of the money supply that always brings about the boom and bust process we are currently seeing.

Price Indexes

Then we come to the point of the price index (CPI, RPI etc). How do we determine the algorithm to use? In a free society how do we decide what people spend their money on? Well one cost would be living costs, as we all have to live somewhere. Not in CPI. CPI, the preferred measure the government uses doesn't even include typically peoples biggest cost, their roof over their head. So how can they target 'price stability' when we don't include house costs. Quite simply they can't and its all an illusion. All the inflation went into houses - trillions of it, now its all spilling out as the governments try and replace the bad loans that were lent on these assets. It's a similar story with stock markets, they are also not included in any measure. The indexes they use from the start are flawed. Its all deliberate, to give people the illusion of prosperity i.e. rising asset prices to ensure continual inflation, debasement of our money. These are the justifications they now use for printing money, flawed centrally planned metrics which is just the same as any Communist centrally planned ethos. All monopolies are doomed to fail and impoverish the people. This is no different.

The amusing thing with CPI in the UK, is it hasn't even fallen in it's targeted range and yet the government are already wanting to print money, even before true falling prices have actually met their bounds that they use.

Arguments against deflation

There are many common horror stories with deflation, a fear is installed in people with various doomsday scenarios that will occur, and all of them incorrect.

The first one, is no one will buy anything. People will stop consuming and we will all have no jobs. So when mobile phones, computers, televisions, holidays, cars etc have all been falling, did people prospone their consumption? Of course they didn't, people have a time preference to enjoy their life now. Everyone knew these goods would most probably fall in price over the past 10 years yet everyone kept buying them at record levels for the enjoyment of these products now. People buy mobile phones every year, despite them continually falling in value. Common sense says people always spend money. We always need goods. People use these justifications for houses, if prices keep falling then no one will buy them. People will always buy houses regardless, as its a home, and people will always pay for the enjoyment of 'their' home. If peoples past expectation during the housing bubble was rising appreciation, then these attitudes need to change. A house is a home and historically has been a poor investment. When the credit crunch began people stopped buying homes not because they thought they would fall, but because the banks stopped reckless lending. Now people are not even sure if they will have a job, so buying a home suddenly seems like a liability.

Second, it would be harder to service our debts. Sure, if you have a million pound house with an income on minimum wage and a 125% mortgage. This only occurs in the extreme case we find ourselves in now, that is caused not by deflation, but the excessive credit expansion of the preceding years, all in the name of 'price stability'. Even in our current situation, people who have over extended themselves get liquidated. The people who have been prudent and competent take over these assets. Governments cut their wasteful spending, and don't rob the people through inflation allowing the competent private sector companies to take over - not the government like we are seeing now. An attempt to re-inflate will only result in further struggles to pay debts as the new money ends up in food, energy etc meanwhile production is distorted and hampered by these re-inflationary tactics.

Third, we will get a deflationary collapse like Japan in the nineties. It wasn't the deflation that killed Japan, as in a monetary trap, it was the government, a structural trap. It continued with further inflation. The government expanded its involvement, tried to prop up prices and didn't allow liquidation. The funny thing is U.S. Treasury Secretary Timothy Geithner now states that Japan did not inflate enough and that's why their economy never recovered. Talk about clown school economics. I couldn't believe what I was hearing. It was like Robert Mugabe stating that Zimbabwe's economy is in such a bad state, because he didn't print enough money.

Deflation allows all sections of society to prosper. It distributes lower priced goods and services to all income groups, regardless of social standing or what assets they hold. Inflation enriches the wealthy at the expense of the poor. It puts a break on social mobility. Banks and Governments are always the winners as they receive the money first. As the money moves out, prices rise and the last to get it suffer. As long as the government holds a monopoly on our money they will always inflate, regardless of the consequences. Regardless of robbing the very people they are elected to represent. The only way to prevent this is by giving production of money back to the people - to the market. Just like any other good, Chicken, Shoes, Phones, all are provided by the market and money is no different. It is merely a convenient commodity to exchange our more cumbersome goods. Britain had free market money around the turn of the nineteenth century, as it rose to become the economic superpower of the world. Government intervention outlawed it, as there was no benefit for them subsequently creating the modern money monopoly they still hold. One day, I hope we will look back at inflation as an ancient cult, extinct, with deflation a permanent feature in our economic landscape, discriminating against no social group and ensuring everyone can enjoy the fruits of a true free market.

"Today everybody is prepared to consider a rise in his nominal or monetary income as an improvement to his material well being. People’s attention is directed more toward the rise in nominal wage rates and the money equivalent of wealth than to the increase in the supply of commodities. In a world of rising purchasing power for the monetary unit they would concern themselves more with the fall in living costs. This would bring into clearer relief the fact that economic progress consists primarily in making the amenities of life more easily accessible."
Ludwig Von Mises, Human Action