Inflation is indeed a bad problem. The poor suffer more from it than anyone else -- because the wages of the poor are the last to adjust to inflation. Therefore their living standards decline further and faster than those who can insulate themselves from it to some extent. Inflation is, as this newspaper reports, an anti-poor policy. So, given that we are liberals -- even if free market, classical, liberals -- let's not bring it about.
Now, of course, sometimes inflation is just one of those things. The price of energy changes then so will other prices. But it's also possible for the authorities to insist that all inflation is just one of those things. And the authorities are, as reported by this newspaper. That could be true, but it's one of those things that needs examination.
This newspaper also reported that the central bank is injecting high powered money into the system. This is one of those things which is simply a cause of inflation, all by itself. Also known as printing money, or even quantitative easing. There's also an older name, monetization of fiscal policy. None of which is going to make any sense to someone without a thorough base in economics. As most of us don't have that, it's necessary to simplify the explanation.
We can boil it down to first year university level. There's narrow money (also called high power, or M0) and broad money (M3, or M4) and an increase in the amount of them has a different effect upon inflation. The “high power” means that producing more of that narrow money has a higher, greater, effect upon inflation than more of that broad money does. But as also happens in every first year university class, it's possible to see that frown of incomprehension.
So, to make it one step simpler. If there are 100 pieces of money in the system and 100 things that can be bought for money, then each thing costs one piece of money. Okay, this is very simple. We're ignoring that some things are more expensive than others and so on, but very simple is good at this level of explanation.
So, we now print 100 more moneys. We have 200 pieces of money, but still only 100 things. Each thing costs 2 pieces of money. We've doubled the money supply and increased prices by 100% inflation. These “pieces of money” are also called M0, or narrow, high power, money.
Now, we can go back to the complicated things. The central bank is printing new money. That's what “injecting high powered money” into the system means. Sometimes this is necessary, that's what all that quantitative easing was.
But it's also true that this is monetization of fiscal policy. Which means that the government would like to spend more money than it is raising in tax. And the government would also like not to have to borrow the money it is spending. So, it gets the central bank to just make more money. But that then hits our 100 and 200 pieces of money problem -- and so inflation ensues.
As I said, sometimes increasing the base, or narrow, money supply is a good idea -- that QE. But that's when we've got deflation, falling prices. The moment we start to have inflation then it's not a good idea.
We have inflation in Bangladesh. The incomes of the poor -- the real incomes, what they can actually buy -- are declining. And one of the causes of that inflation is not just those things that just happen. It's the central bank deliberately creating it by printing, creating, more of that high powered money. So, let's ask them to stop doing that.
It is entirely true that inflation, money, they're horrendously complex subjects in the details. But sometimes they're really, really simple. If there's more money around then things cost more pieces of money. Just because there's more pieces of money around to use to buy the things that exist. Some part -- not all -- of the current inflation is because the central bank is printing more money.
So, stop doing that! If the government wants to spend more -- maybe a good thing, maybe not, but irrelevant to this argument -- then it can raise it in taxes or go borrow it. But don't make every single piece of money in the country worth less just to please the politicians.
I beg you: Stop printing money.
Tim Worstall is a senior fellow at the Adam Smith Institute in London.