Quantitative Easing and Inflation

A while ago there were two news items, one after the other.

In the first, they described how the Tory-Libdem coalition government in the UK had authorized £375 billion pounds worth of “quantitative easing” – letting the banks create money to oil the wheels of the economy. That’s about £6,000 each for every man, woman and child in the country.

In the second, they described how local councils are so strapped for cash that they can’t afford enough care workers to be able to give adequate help to those in need of it.

It was the juxtaposition of the two news items that struck me. They presented the two as though there was no connection.

If you’re going to create new money, you could give it to those in need of it, not to those who are already loaded. The people who need it need it to spend on stuff – which would oil the wheels of the economy just as well as giving it to the banks. Well, no: it would oil the wheels of the economy very much BETTER.

The “trouble” with creating new money is, of course, that it causes inflation. However, if you give the money to the people who need it, what you’re effectively doing is transferring wealth from those to whom you are not giving money (their money loses value) to those to whom you are giving it – which is what we’re trying to achieve (as well as oiling the wheels of the economy).

Obviously (well, I hope it’s obvious) you don’t want to cause the kind of inflation that means you have to spend money as soon as you get it before it loses all its value, but inflation considerably higher than current targets actually makes for a more flexible economy, where it’s easier to make adjustments – whether by the market making its own adjustments, or directly by government intervention.

Of course the wealthy can avoid their wealth being transferred to others by inflation, by converting it into other currencies, or by converting it into assets. The only solution to that avoidance tactic is taxation – not based on income or “value added,” but on assets. No, I’m not suggesting that income tax should be abolished, but that a wealth tax should be introduced in addition (income tax might be reduced somewhat). If people can’t (or won’t) pay the tax on their assets, then the state (or local authority) should take a steadily rising share in ownership of those assets. (If those assets are dwellings rented out to tenants, this is potentially a good way to re-establish the council house principle. A family’s main residence could perhaps be exempt – as long as it doesn’t have too many bedrooms...)

Yes, I do believe in the redistribution of wealth. Not to try to bring everyone exactly level, but to reduce the disparity a great deal – that is, to redress the balance somewhat. The gap between the rich and the poor has widened a great deal in recent decades.