There’s always some comment about inflation, unemployment or interest rates ; usually mixed with quite visceral hatred of Margaret Thatcher (to a degree that I consider potential mental illness – it’s far worse than the comments here about Brown).

Then you start talking about Healey, Callaghan, the IMF, the Winter of Discontent and it either (i) goes very quiet or (ii) gets the response ‘that’s ages ago’. Yeah, like the year before Mrs T took office.

I rather liked the ‘Domesday book’ idea. Publish the accounts, with all the hidden debts, on day one of a Conservative Administration – using some of these analogies here to get across to the stupid innumerate Labour voters quite how bad things are.

I think they think it’s some kind of “minor blip” and when the recession eases everything will be hunky dory again.

You would think so, wouldn’t you. BUT ask yourself, where is the money is going? If as you suggest the government were showering cash into the broad economy, for example handing it out in the market square or the town center then yes, you might expect to see inflation. Because as the quantity of money in circulation increased dramatically the value would fall in proportion.

Well, that is not what is happening, at least not yet. The government has used the gatekeepers of the economy – the banks – to distribute its largess, but they are in no fit state to distribute the cash, they are hording it or parking it at the Bank of England. The banks know two things.

1. Many if not all other banks are in a similar condition. There is much still on their books that if marked to the market price would instantly destroy the banks. By the way, this does not just apply to UK banks, but European banks too.

2. The consumer has already maximum credit and while he/she might like more credit, in the face of falling demand and increasing joblessness is starting to take another look at his/her credit situation. The banks are trying to use the consumer to restore their finances.

So, while there may be an appetite for credit, there isn’t the capacity for credit.

If point one is correct, potentially we have the prospect of another round of de-leveraging (credit contraction) ahead of us.

Certainly this is consistent with the Japanese experience, but Japan’s population growth rate is very low. This, I believe, has exacerbated their domestic deflation and won’t be the case in the UK.

Don’t you think APL, that throwing money from helicopters (i.e. a *prolonged* period of quantitative easing), with provision to feed money to the commercial banks, can solve a contraction in credit?

I think the incoming government will have to choose between, as you say, allowing inflation to get a grip OR taking measures to reduce the country’s indebtedness through deep cuts in public spending.

With an economy overwhelmed with (public sector + bank bailout) debt, inflation is by far the most painless way to reduce the real value of the debt. The other way involves large scale job losses in the public sector, leading, short-term, to deepening recession. For the long term good of the economy, this is what should happen. I don’t think politicians have the nerve for it though.

The fact that inflation will hurt pensioners and people who have been responsible enough to save money won’t cut any mustard with governments. Pensioners and responsible savers don’t riot in the streets. Governments (with the exception of Mrs Thatcher’s) generally take the path of least resistance. In this case, I think they’ll choose inflation.

What we are seeing is a contraction in credit on an extraordinary scale. It is outside the ability of the government to control, we may well get inflation in the future, how far into the future is difficult to say because we do not really know how much deflation there is yet to go.

1) There is a lot of spare capacity in the global economy and most goods are imported.
2) Many big employers have weak balance sheets and will struggle with working capital.
3) Trade unions are very weak.
4) Commodities are all priced in $ not £.

I think it is more likely that we will see inflation in asset prices (including commdities which are nearly all packaged as financial assets these days) but also a fall in the general standard of living as wages fail to keep up.

Public sector employees don’t pay tax. The government pretends to give pse employees money over and above take home, then pretends to take it back again. That book keeping entry is called tax and national insurance.

Martin: “in return for generous pensions and safe jobs that the tax take has to be higher.”

Too late. No generous pensions and especially no safe jobs.