Let’s be realistic: this debt will not be repaid

Let’s be realistic: this debt will not be repaid

by Richard Murphy

The credit crisis and the recession that followed happened because of a collective suspension of belief in economic reality. It was assumed that low income related inflation could be coupled with high asset price inflation fueled by the issue of new money in the form of credit by banks and that this imbalance between incomes and asset prices could continue ad infinitum without strain arising. That was wrong. It was always going to be wrong. The crash was inevitable, even if it took a few false starts for it to happen.

What is extraordinary is that this sleep walking to disaster as a result of collective denial of the truth is continuing. It has, for example, been reported that:

Every household in the UK will have to face a ‘fiscal squeeze’ of over £5000 a year – through tax increases and spending cuts – if the government is to get public debt back under control and meet the costs of an aging population, PricewaterhouseCoopers (PwC) has said.

Let’s put this in context. First this assumes we have to get back to national debt of less than 40% of GDP: there is no reason why that is true. Second, it is written deliberately, I suggest, to promote the idea that massive cuts in public services are required – an agenda PWC pursues with some enthusiasm. You can be sure it does not believe in the alternative prescription it offers of tax increases.

But whichever scenario is offered the reality is that when average household incomes in the UK are around £30,000 this cost burden of £,5,000 is not going to be imposed: as a simple matter of fact that cost could not be borne by those households without collapse of the underlying economy, not least due to the lack of demand for other goods and services it would precipitate which would leave the economy spiraling into massive depression.

So what will happen? The answer has to be that we will inflate our way out of this situation. No other option is possible. The inflation will be in incomes, not asset prices. Asset prices are what have been over-inflated to date. The benefit of this inflation will be that it will restore the relative balance between incomes and asset worth. Ordinary people – those outside the top 10% of asset owners in society – will benefit as a consequence. They will be able to afford houses once more. Those currently crippled with debt to repay obligations to the asset owners in that top tier will have their burden lifted. And the rotten money that the banks flooded into the system to allow asset price inflation will be washed out of it through the simple process of devaluation.

It’s time to be realistic: this is the only option we have. We can’t raise taxes enough to pay for the bank’s folly. We cannot impose a burden of £5,000 a year on every household in the UK to ensure that the current, post asset price inflated disorder in society that has meant the wealthy have got considerably more wealthy compared to all others in society is maintained. We would face complete economic ruin if we were to try to do so – though be sure the Conservatives, backed by the likes of PC (who have close links with them) will argue this is exactly what should be done.

Just stand back and use common sense: there is no way on earth we can get out of this mess without inflation. It creates all its own problems, I know, but when in a hole you have to use the only ladder available to get out.