Given the hold that Goethe had over the German elite in the 1920s, it is impossible that the Weimar Republic’s leaders could have been ignorant about what happens when desperate politicians start printing money. In Part II of Faust, the devil suggests to an emperor that he solves his fiscal crisis by mass-producing banknotes. He does so — and, for a brief period, all seems well. The public sector salaries are paid, debts are settled, courtiers run off to feast on food and wine. Later it is revealed that these were ‘bogus riches’ and the empire ‘collapsed in anarchy’. This, more or less, is what happened in Weimar Germany.
For George Osborne, the story is different. He is not deciding to print money — such matters are now devolved to the Governor of the Bank of England. Some £275 billion has been printed so far, and the total could turn out to be £500 billion. This freshly minted cash is being used to buy government IOU notes and keep the interest on its debt down. The Chancellor is thrilled by this cheap debt, and has offered to allow small companies to share his bonanza — all sponsored by Sir Mervyn’s non-stop banknote machine. As Faust puts it: ‘Tens, thirties, hundreds, all to date/ You cannot think how people jubilate.’
Among ordinary British people, however, there is no jubilation, just a deep sense of unease and distrust. The economic risk being taken is hard to exaggerate. Every new pound created reduces the value of the pound in your pocket. When the Bank of England printed £200 billion in the last round of quantitative easing, prices were pushed even higher in Britain. Printing money has a cost: a little extra pain, inflicted on millions of households. This is the unannounced, but official government policy.
The true effect of so-called quantitative easing is still not quite known. But what we do know is that Britain is already suffering the worst inflation in 20 years, with retail prices rising by 5.6 per cent. Behind this dry statistic lies a reality with which millions are now horribly familiar. The price of lamb is up 34 per cent to £8.02 a kilo, margarine 17 per cent to £1.65 per tub, cabbage 19 per cent to 88p a kilo. The cost of living is, for millions, the biggest single problem in Britain today. When the inflation index falls back, these prices will stay high.
Sir Mervyn King did not wait until inflation was back in control before printing more money. But, given the sheer scale of the money-printing exercise now underway, there should have been proper debate about this policy — and some parliamentary scrutiny of its implications. Osborne, for example, should tell us more about the effects of printing money. Might the policy continue for years, as the City expects? Will this artificially lower the interest rate the government pays on its debt, sneakily giving him more to play with in the short term? Will lower bond rates hit British pension pots, and if so by how much?
The Treasury select committee ought to summon the Governor and the Chancellor to explain themselves in detail. Too much is at stake for us simply to assume that they know what they are doing.
Sir Mervyn can, on a personal level, rest assured. Those managing the Bank of England’s pension fund were wise enough to invest 95 per cent of the money in inflation-linked bonds. Outsiders who naively had faith in the Bank’s determination to protect the value of the pound are left stranded. It is virtually impossible for ordinary savers to find inflation-proof deposit accounts now.
Inflation is not a victimless phenomenon. It transfers wealth from the thrifty to the profligate. It punishes the old, who depend on savings, and rewards the young, who are mired in debt. Yet some inside the Treasury see this as a virtue. The old have had it pretty good — runs the argument — it’s the young who are in trouble. So why not let inflation eat away at the real value of young people’s debt? If inflation is being used as a tool to promote ‘inter-generational fairness’, then someone ought to say so. If the Bank of England now considers higher inflation a price worth paying to offset higher unemployment, it ought to say so.
On this, and many other things, the country is due an explanation. David Cameron rightly says that you can’t ‘borrow your way out of a debt crisis’, yet he is doing precisely that. His government is increasing national debt by 51 per cent over this parliament. While less than the 60 per cent proposed by Labour, it is still an astonishing figure — and one to which no minister will own up. They say instead that they are ‘cutting the deficit’, knowing that people often hear the words ‘cutting the debt’. A recent poll showed that only 9 per cent realise that Britain’s national debt is rising rapidly. Most people think debt is falling.
Economic illusions — whether created by word games, inflation or national debt — will always seem preferable to harsh, upsetting truths. The moral of Faust is that one can always play tricks and get away with it for a while. But in the end, there will be hell to pay.
This article first appeared in the print edition of The Spectator magazine, dated October 22, 2011