Sunward I’ve climbed, and joined the
tumbling mirth of sun-split clouds

The economic facts behind the Autumn Statement, in as far as they are known or forecast, are available in the Economic and Fiscal Outlook from the Office for Budget Responsibility. Table 4.7 provides forecast current receipts. Table 4.18 provides total managed expenditure. So, here’s a chart of current receipts (i.e. tax) and total managed expenditure (i.e. spending) for the next few years:

The reality is that the Government intend to increase spending every year of the forecast period and to meet that spending with increased revenues. There will only be cuts as a proportion of GDP, and only if it grows. There will only be real cuts if there is inflation.

It’s tragic that we have created for ourselves a state which cannot provide more with more money and that, from the perspective of real public services, there are cuts at all.

There’s much to be said about inflation, inflating the debt away and, indeed, inflating away public expenditure. There’s something fundamentally dishonest about it. That’s why I co-founded The Cobden Centre to press for honest money: our inflationary financial system is undermining society, just as Keynes and Mises said it would.

Keynes wrote,

There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

And Mises explained,

Inflation is the last word in destructionism. The Bolshevists, with their inimitable gift for rationalizing their resentments and interpreting defeats as victories, have represented their financial policy as an effort to abolish Capitalism by destroying the institution of money. But although inflation does indeed destroy Capitalism, it does not do away with private property. It effects great changes of fortune and income, it destroys the whole finely organized mechanism of production based on division of labour, it can cause a relapse into an economy without trade if the use of metal money or at least of barter trade is not maintained. But it cannot create anything, not even a socialist order of society.

We have been plunged into the present misery by a long credit boom caused by low interest rates. Politicians now seem to be helpless in the face of a crisis caused by the inflationary financial institutions they have allowed for the decades following the collapse of Bretton Woods. The only prescription for recovery appears to be more inflation or, as they call it today, “quantitative easing” and “credit easing”.

Yet more money and bank credit may lead to a boom initially, or perhaps merely to a moderation in our difficulties compared to our neighbours, but it is bound to erode the capital stock, to hide losses and to cause a yet worse problem later. The illusion of prosperity created by “monetary activism” cannot last.

If we are to have lasting prosperity and a just socio-economic system, we need instead, as the Chancellor used to say, an economy based on save and invest. That requires, as prerequisites, honest money which holds its value and a state which lives within its means.

In his short article Inflation and You, Ludwig von Mises explains inflation itself, the social and economic effects of inflation, who inflation’s victims are, the futility of attempts to hedge against inflation, the moral and political effects of inflation and, finally, inflation and government borrowing. I thoroughly recommend the whole article, but I reproduce the section on government borrowing, which seems particularly pertinent at the moment:

Inflation and Government Borrowing

The writer, having witnessed the course of inflations in one European nation after another, believes that it is not too late to stop further inflation in the United States by bold and painful measures. Inflation is not an act of God. It is a result of the methods used to provide a part of the means for the conduct of the war. One set of methods can still be replaced by another, less harmful set. It is still possible to keep down the amount of money and money substitutes by financing the total amount necessary through taxation and loans.

People sometimes call inflation a special way of “taxing” a country’s citizens. This is a dangerous opinion. And it is wholly untrue. Inflation is not a method of taxation, but an alternative for taxation. When a government imposes taxes, it has full control. It can tax and distribute the burden any way it considers fair and desirable, allotting a larger share of the tax burden to those who are better able to carry it, reducing the burden on the less fortunate. But in the case of inflation, it sets in motion a mechanism that is beyond its control. It is not the government, but the operation of the price system, that decides how much this or that group will suffer.

And there is another important difference. All taxes collected flow into the vaults of the public treasury. But with inflation, the public treasury’s gain is less than what it costs the individual citizen, since a considerable part of that cost is drained off by the profiteers, the minority that benefits from the inflation.

It is no less fallacious to consider inflation as a method of raising loans for public use. Technically, inflation does increase the total of the government’s indebtedness to the banks. But the banks’ intervention is only instrumental. If the government borrows from the banks, the banks do not grant loans out of their own funds, or out of money deposited with them by the public; the banks are not real lenders; they grant the loans out of their “excess reserves.” They merely expand credit for the benefit of the government. In other words, they increase the quantity of money substitutes.

When you as an individual buy a government bond, you make a loan to the government; you put part of your cash holdings into the hands of the treasury. There is then no increase in the total quantity of currency or credits available and hence no inflation.

However, it is different when government borrows from the banks’ “excess reserves.” Their so-called “excess reserves” are not a tangible thing. The term is merely a phrase indicating the limits within which the law is prepared to tolerate credit expansion, that is to say further inflation. The effects of loans from available “excess reserves” are just as inflationary as the effects of issuing more paper money. It is a mistake, therefore, to confuse this government “borrowing” from the “excess reserves” of the banks with genuine loans.

Popular education is absolutely essential. It is clear that the efforts of the U.S. government to collect the means necessary for the conduct of the war by taxation and by sale of government bonds represent sound measures for heading off inflation. Everybody should be made to understand that the burden of high taxes and of making personal loans to the government are minor evils compared to the disastrous and inexorable consequences of inflation. Not only for the sake of the national welfare, but for the sake of your own interests–whether you are rich or poor, employer or wage earner–you should do your best to arrest the further progress of inflation.

See also Hülsmann, The Ethics of Money Production for a detailed explanation of how the production of money has become an instrument of exploitation and the consequences.

From an address by Ludwig von Mises in 1931, published in The Causes of the Economic Crisis and Other Essays Before and After the Great Depression (PDF) (emphasis mine):

According to the circulation credit theory (monetary theory of the trade cycle), cyclical changes in business conditions stem from attempts to reduce artificially the interest rates on loans through measures of banking policy—expansion of bank credit by the issue or creation of additional fiduciary media (that is banknotes and/or checking deposits not covered 100 percent by gold). On a market, which is not disturbed by the interference of such an “inflationist” banking policy, interest rates develop at which the means are available to carry out all the plans and enterprises that are initiated. Such unhampered market interest rates are known as “natural” or “static” interest rates. If these interest rates were adhered to, then economic development would proceed without interruption—except for the influence of natural cataclysms or political acts such as war, revolution, and the like. The fact that economic development follows a wavy pattern must be attributed to the intervention of the banks through their interest rate policy.

The point of view prevails generally among politicians, business people, the press and public opinion that reducing the interest rates below those developed by market conditions is a worthy goal for economic policy, and that the simplest way to reach this goal is through expanding bank credit. Under the influence of this view, the attempt is undertaken, again and again, to spark an economic upswing through granting additional loans. At first, to be sure, the result of such credit expansion comes up to expectations. Business is revived. An upswing develops. However, the stimulating effect emanating from the credit expansion cannot continue forever. Sooner or later, a business boom created in this way must collapse.

The book repays close study, especially the section which explains the way out:

All attempts to emerge from the crisis by new interventionist measures are completely misguided. There is only one way out of the crisis: Forgo every attempt to prevent the impact of market prices on production. Give up the pursuit of policies which seekto establish interest rates, wage rates and commodity prices different from those the market indicates. This may contradict the prevailing view. It certainly is not popular. Today all governments and political parties have full confidence in interventionism and it is not likely that they will abandon their program. However, it is perhaps not too optimistic to assume that those governments and parties whose policies have led to this crisis will some day disappear from the stage and make way for men whose economic program leads, not to destruction and chaos, but to economic development and progress.

This week, I was glad to hear David Cameron say ”I’d rather be a child of Thatcher than a son of Brown” but what does that mean for policy and society?

Famously, Lady Thatcher settled a discussion by taking a book from her handbag and banging it on the table, declaring,

“This is what we believe.”

Read the rest of my article at ConservativeHome’s Platform.

In researching a piece on QE, I found this from Mises’ Socialism, which can stand alone for the moment. Here, by “inflation”, Mises means an increase in the money supply, which causes price rises. For Mises, “Destructionism” is the socialist strategy of tearing down the existing order in the hope that the socialist utopia will emerge. The work dates from 1932 and it tells us most of what we need to know today.

Inflation is the last word in destructionism. The Bolshevists, with their inimitable gift for rationalizing their resentments and interpreting defeats as victories, have represented their financial policy as an effort to abolish Capitalism by destroying the institution of money. But although inflation does indeed destroy Capitalism, it does not do away with private property. It effects great changes of fortune and income, it destroys the whole finely organized mechanism of production based on division of labour, it can cause a relapse into an economy without trade if the use of metal money or at least of barter trade is not maintained. But it cannot create anything, not even a socialist order of society.

By destroying the basis of reckoning values—the possibility of calculating with a general denominator of prices which, for short periods at least, does not fluctuate too wildly—inflation shakes the system of calculations in terms of money, the most important aid to economic action which thought has evolved. As long as it is kept within certain limits, inflation is an excellent psychological support of an economic policy which lives on the consumption of capital. In the usual, and indeed the only possible, kind of capitalist book-keeping, inflation creates an illusion of profit where in reality there are only losses. As people start off from the nominal sum of the erstwhile cost price, they allow too little for depreciation on fixed capital, and since they take into account the apparent increases in the value of circulating capital as if these increases were real increases of value, they show profits where accounts in a stable currency would reveal losses. This is certainly not a means of abolishing the effects of an evil etatistic policy, of war and revolution; it merely hides them from the eye of the multitude. People talk of profits, they think they are living in a period of economic progress, and finally they even applaud the wise policy which apparently makes everyone richer.

But the moment inflation passes a certain point the picture changes. It begins to promote destructionism, not merely indirectly by disguising the effects of destructionist policy; it becomes in itself one of the most important tools of destructionism. It leads everyone to consume his fortune; it discourages saving, and thereby prevents the formation of fresh capital. It encourages the confiscatory policy of taxation. The depreciation of money raises the monetary expression of commodity values and this, reacting on the book values of changes in capital—which the tax administration regards as increases in income and capital—becomes a new legal justification for confiscation of part of the owners’ fortune. References to the apparently high profits which entrepreneurs can be shown to be making, on a calculation assuming that the value of money remains stable, offers an excellent means of stimulating popular frenzy. In this way, one can easily represent all entrepreneurial activity as profiteering, swindling, and parasitism. And the chaos which follows, the money system collapsing under the avalanche of continuous issues of additional notes, gives a favourable opportunity for completing the work of destruction.

The destructionist policy of interventionism and Socialism has plunged the world into great misery. Politicians are helpless in the face of the crisis they have conjured up. They cannot recommend any way out except more inflation or, as they call it now, reflation. Economic life is to be “cranked up again” by new bank credits (that is, by additional “circulation” credit) as the moderates demand, or by the issue of fresh government paper money, which is the more radical programme.

But increases in the quantity of money and fiduciary media will not enrich the world or build up what destructionism has torn down. Expansion of credit does lead to a boom at first, it is true, but sooner or later this boom is bound to crash and bring about a new depression. Only apparent and temporary relief can be won by tricks of banking and currency. In the long run they must land the nation in profounder catastrophe. For the damage such methods inflict on national well-being is all the heavier, the longer people have managed to deceive themselves with the illusion of prosperity which the continuous creation of credit has conjured up.