It is amusing yet disturbing to see that the UKs media fails to mention the public debt of the UK but refers only to GDP and inflation figures, the ‘everything is awesome’ meme. Both of these numbers are manipulated but asking how the GDP deflator number is derived, what the actual number is and why does it increase GDP and lower inflation? This would be the start of a discussion.
When governments find themselves in a situation where they cannot pay off their accrued debt, they have a number of plays open to them. They will not relinquish power without a good scrap.
1.The first play is hyperinflation and this destroys the currency but also the debt, not ideal if you wish to remain in control.
2. The second is default, also known as the Argentinian option but this eventually leads to the destruction of the currency.
3. The third option is austerity, which is parroted by the political parties as necessary but if we have had austerity for 5 years why has public debt gone up by 80% since the coalition came to power? Currently standing at £1.4 Trillion with £1 billion per week being used to fund interest payments on the debt, £52 billion per year and rising. Austerity is a lie, it’s never worked but we’re all in this together, well most of us as you will see. As public debt has increased so much, interest rates are not going to rise, it’s counterintuitive and illogical for government to do so, they have another option.
4. The fourth and my personal favourite is financial repression, sounds like fun which it is. Repression hits both savers and wage earners, if inflation is higher than interest rates then savers lose out. If inflation is higher than wage increases, the wage earner loses out. If both of these scenarios play out, savers and wage earners lose out and those that hold the debt benefit.
This is a negative real interest rate environment which robs savers and workers of purchasing power, you cannot earn a wage or save fiat (cash) without paying a penalty for doing so. From an accounting perspective this cash that we are all losing has to go somewhere and it goes to the over-extended borrower, government. Low interest rates help to reduce debt servicing costs while negative real interest rates erodes the real value of government debt.
I standby what I say, financial repression is fun, if not why would so many of us consent to this immoral policy and accept a constant loss of purchasing power?