Are inflation figures in the UK representative?

Inflation is defined as the rate at which the general level of prices for goods and services, increases over time. For example, if the inflation rate is 3%, then a £1’s worth of midget gems will cost £1.03 next year.

The CPI or Customer Price Index is the official measure of inflation of consumer prices of the United Kingdom. It can also be referred to as the Harmonised Index of Consumer Prices (HICP). The CPI calculates the average price increase as a percentage for a basket of 600 different goods and services. Around the middle of each month it collects information on prices of these commodities from 120,000 different retailing outlets.

Now bare with me, although it all sounds quite boring it gets interesting if you look at history. The basket of goods that they use to calculate CPI, or what was the RPI or RPIX changes over time and goods are added or removed. This can be done if goods are no longer relevant but it can also be done to replace items that are rising in price. They are then replaced for alternate and cheaper goods. This then impacts on the inflation figure keeping it lower than what it is. I’m not saying it happens on all products but from a political stand point, keeping inflation low is a priority.

Consider the below chart, the inflation figure is derived from the BLS (Bureau of Labour Statistics). How inflation is calculated was changed in the early 80’s and again in the 90’s with the change to the RPIX. The blue chart is how inflation is calculated now and the grey chart is how inflation would be calculated with pre 82 measurements. 9% inflation sounds about right.

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Is the inflation figure reported properly? In my opinion, no it isn’t. The costs of many essential purchases have risen much more steeply than what is reported. In the last 5 years, vehicle tax and insurance has gone up 88%, petrol 56%, electricity and gas 46%, bus and rail fares 32%, food 30% and water 24%. These are not discretionary items but costs you have to pay to just survive. These rises cannot be ignored and need to be represented in actual inflation figures, civil servants need to be doing a better job and held to account, rather than worrying about opinion polls.

I can see the direct impact of inflation in my life, instead of finding crisp notes in my pocket I’m just jingling change these days. Though one thing to consider, it is not a wedge of notes that makes me happy, but its my friends and family that make me richer than any paper billionaire.

UK’s Current Debt Based Economic System

The current economic model is a debt based system using fractional reserve banking and fiat currency. What does that mean and what does it look like?

Money is created almost exclusivley by commercial banks who create the money supply through debt, this is called fractional reserve banking. By issuing more debt and loans they increase the money supply but only keep a fraction of the paper money in reserve. The majority of money now is digital money…numbers on a screen.

Currency is termed fiat because it is intrinsically worthless and derives it value from confidence in the currency only. The alternative would be to have a gold or silver backed currency.

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I’ll explain fractional reserve banking by giving an example:

Imagine you deposit £100 into Bank A. Assuming a 10% fractional reserve ratio, Bank A then takes 10 percent of it, £10, and sets it aside as reserves and then loans out the remaining 90 percent, or £90. At this point there is actually a total of £190 in the system, not £100. The bank has loaned out £90, kept £10 in reserve, and substituted a newly created £90 IOU claim for the depositor which charges interest and is a profit loan for the bank. At this point Bank A still holds £100 reserves on its books, but £90 of those reserves are soon going to be needed to satisfy the loan recipient. The loan recipient soon spends the £90. The receiver of the £90 then deposits it into Bank B. Bank B demands £90 to be delivered from Bank A to Bank B.

Bank B is now in the same situation as Bank A started with, except it has a deposit of £90 instead of £100. Similar to Bank A, Bank B sets aside 10 percent of that £90, or £9, as reserves and lends out the remaining £81 thus creating £81 of IOUs to its depositors. As the process continues, more electronic number money is created.

Fractional reserve banking and its effects on the money supply have reaching consequences for the business cycle, monetary inflation, price inflation and interest rates. What disturbs me is that the banks are creating and benefiting from the interest generated from creating new money, rather than the UK itself. Should we as a country not issue the money and charge the banks for the privilege?

A study by Huber and Robertson ‘Creating New Money‘ (2000) suggested that the loss to the government of allowing commercial banks to create money was in the order of £49bn per annum. Plus the cost of servicing the national debt, at £32bn per annum and the cost of stimulating a recovery during recession after inevitable recession, runs to hundreds of billions, if not trillions.

What does our debt based system look like compared to other countries and is it working?

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The UK as a country is no longer in control of its finances. We have a GDP/Debt ratio of over 900% and with bank debt over 600% of GDP. Our financial sector is disgustingly over-leveraged, couple that with close to zero percent interest rates which allows banks to speculate for free. They take riskier and riskier bets and its the UK public who pick up the tab if it all goes wrong! Iceland had a debt to GDP ratio of 1000% before it collapsed.

We need to be in charge of our currency, move on from a debt based currency and return to sound economic principles. The system hasn’t failed, its just coming to its logical conclusion and history has plenty of examples how this will play out.

The Legacy and the Lies

Margaret Thatcher was born a fishmongers daughter in 1925 and rose to power as Prime Minister 1979-1990. She is one of the most decisive figures in our current history and like marmite you either love her or hate her. When she came to power on the 4th of May 1979 and upon arriving at 10 Downing Street she is quoted as saying:

“Where there is discord, may we bring harmony. Where there is error, may we bring truth. Where there is doubt, may we bring faith. And where there is despair, may we bring hope.”

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My grandad was a miner on my mums side and my great-grandads were a miner and a ship builder, my allegiances were set from an early age, I dislike Thatcher and her policies. She didn’t bring harmony, nor truth or faith but plenty of despair to the people of the North. She destroyed Northern communities without a bat of the eye.

I’d like to look at her policies and what she did during her tenure as a British PM. My dislike rests not on what the mainstream media spouts as gospel, which are just perverted and bastardised truths.

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