Inflation is coming back
There was runaway inflation in Hungary in 1946. I won many bets on that from friends and colleagues. “How many old units became a new unit when the inflation ended?” I asked. “You can have three guesses,” I added, “and I bet you that even your third guess will be a gross underestimate.”
The first guess of those who took the bet was usually between a thousand and ten thousand. “It is a gross underestimate,” I told them. Remembering the German inflation in the 1920s their second guess was around a billion, and for the third guess one person of well above average bravery, suggested 100 billion. A gross underestimate. My nemesis was an astrophysicist, used to big numbers. His first guess was 1012, his second guess 1024, and his third guess 1036. That guess was indeed an overestimate. It cost me a bottle of claret. The actual figure was 2 x 1026 — that is, 2 followed by 26 zeros.
In spite of this setback I declared myself an expert on inflation, and was happy to pontificate about it any time anyone was willing to listen. I did have some success. Once, maybe twice, the Principal’s wife referred to me as an economist, to the great chagrin of the genuine ones. The trouble with economists is that they are so cautious. When it comes to the future, they know very well that the predictions of their rivals are full of inherent flaws, whereas their own predictions are pearls of prophetic revelation. To me they resemble more the oracles of Delphi, who are known to have left some leeway for interpretation.
I have myself no fear of making wrong predictions — all predictions of the future are bound to be wrong. That is the nature of the future. In the past, I was always willing to make predictions about the next moves of Gorbachev, Trump, Putin and Corbyn and if some of them were wrong, well, I just had to live with it.
The present is a good time to make predictions. How many people will die altogether? When will the pandemic end? What will happen when the coronavirus crisis is over? In particular, what will happen to the economy? These questions are on the lips of every citizen of the world.
The first two questions could possibly be answered by mathematicians, or rather by people who can build mathematical models. The only model I have seen, although quite elaborate, failed to offer a relevant answer beyond saying that there might be multiple peaks. I don’t blame them. There are, inevitably, models containing too many parameters which cannot be guessed with any accuracy. The last question above is of course of crucial importance for future generations. What will happen to the economy? Again, various mathematical models will be available with, very likely, conflicting predictions that will give no solace to the layman. Perhaps, solace is the wrong word. Everyone knows that hard times are coming. Children might have psychological problems, and some couples may no longer be on speaking terms. However, it would be worthwhile to forget the broad range of problems and stick to a single topic: inflation.
What are the indications? Let’s just use common sense. If people work less, then fewer products are produced. If fewer products are produced they become more valuable, their prices rise. Actually they rise only if people are able to pay for them. If demand is still there. And here comes furlough. If people have wages without working for them then they have money, unearned income. If they put the money under the mattress then there will be no inflation. The likelihood is however that the recipients of that unearned income will spend the money as soon as it arrives. And that is of course another source of inflation. The faster money changes hands the stronger is the inflationary pressure.
How could the government finance its £300 billion spending plans? Print money, issue bonds, raise taxes. Although taxes will necessarily go up, there is a limit to what is politically sustainable. Would people buy bonds issued by the government which bear low interest rates and have long maturity dates? Unlikely. Companies, or even the public, might be forced to buy bonds but again politics will set limits. What remains is to print money and that will fuel inflation.
So how large will be the inflation? Not as large as the Hungarian inflation of 1946 or the German inflation in the 1920s, though higher than the highest inflation rate the UK has known since the war. Let me commit myself. My guess is that by May 2022 £1 will be worth 40p.
