The Armchair Inflation Fallacy

“Zimbabwe.” That’s the favourite one.

Sometimes backed up with “The Weimar Republic.”

Galloping inflation.

That’s what you get when the government prints money.

Swiftly followed by economic collapse.


Anyone with half a brain knows that.

When armchair economists are finally forced to admit that there is a magic money tree, which government can use to fund public services without limit, they invariably invoke Zimbabwe or 1920s Germany and tell us that printing money will end in tears, specifically catastrophic inflation.

If only these recumbent sages were able to heave themselves out of their upholstery and do a bit of legwork. It doesn’t take long to discover that the assumed certainty of cause (money-printing) and effect (inflation) isn’t supported by evidence.

In 1977 the UK money supply was estimated to be £74,595 million (BoE) and inflation was running at an annual rate of 15.8% (ONS).

In 2016 the UK money supply was £2,251,678 million and inflation was 1.8%.

There is thirty times more money in the UK economy now than there was forty years ago but inflation is a fraction of what it was.

In fact, despite an exponential increase in the money supply, the inflation trend has been steadily downward.

Over the same period the value of sterling against the US dollar has fluctuated between $1.30 and $2.30 but the trend has been approximately neutral. At times in both 1977 and 2014 the rate was $1.70.

I’m not a fan of using GDP as a measure of economic success but we have the data and they give some idea of the scale of activity within an economy, so here goes. In 1977 UK GDP per capita was a shade over £20,000. In 2017 it’s over £40,000 (adjusted for inflation).

So over the last forty years we’ve been printing money like crazy but GDP per capita has doubled and inflation has tumbled to a fraction of what it was.

Printing money in gargantuan quantities appears to have had no ill effects on the health of the economy. Indeed, it could be argued that the opposite is the case: more money makes the economy flourish.

There are caveats, of course.

Much of the money-printing over the last four decades has been in the form of mortgage lending, which has grossly inflated the price of houses and land.

This is an example of speculative inflation, a classic bubble. It’s driven by people seeing a chance to get rich quick for little or no effort. The mortgage bubble has been a bonanza for those doing the money printing (bankers) and those flipping the properties but is a disaster for the rest of the economy which has to devote more and more of its output to servicing debt, just to keep roofs over heads.

The other thing that we have to be wary of is demand-driven inflation, which brings us back to our friend in the armchair.

People need bread (or maize). They can’t live without it. If there is a shortage of bread the price goes up. The correct response to this is to increase the opportunities for farmers to grow grain and millers to mill flour and bakers to bake bread. When supply increases to meet demand the price will fall.

The governments of the Weimar Republic and Zimbabwe failed to follow this logic. Instead of baking more bread they printed more money, which made the bread even more expensive, or the money less valuable (take your pick).

The UK today is not Germany in 1924 or Zimbabwe in 2008. We have a diverse, stable, productive economy that is crying out for more money to be made available.

We are destroying money in massive amounts every day as we pay off £1.5 trillion of private debt, money that needs to be replaced to keep the productive economy working.

Our private sector has an insatiable desire to hoard money or use if for financial gambling, which means there’s less money available for the real economy to do what needs to be done.

And most importantly of all there are huge reserves of latent supply and demand that are waiting to be activated by the application of money. We are in dire need of economic revolutions in the care sector, energy efficiency, renewable energy, food production, and healthcare, to name but a few, all of which need money to make them happen.

So the next time a politician suggests increasing public spending without increasing taxation don’t get distracted by the armchair inflation fallacy or the austerians “live within our means” nonsense. Judge the proposed policy on its merits not its cost. Money is available. We can create it in infinite amounts at almost zero cost and our economy needs more of it.

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