I am about to quote John Maynard Keynes with approval, from his 1919 Economic Consequences of the Peace.
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.
I do not actually believe that Keynes ever resiled from that belief which is why towards the end of his life he is reported to have said, “I am not a Keynesian.” But whether he was or he wasn’t, it now seems everyone else today still is. The biggest mystery to me till now has been why these policy makers in Treasuries across the world have not tried to finance the huge increases in public deficits by cutting the public sector wages bill, at least for the “non-essential” workforce. It finally occurred to me today why governments have left public sector wages alone.
With their “stimulus” packages, immense gaping budgetary holes have been created through stopping dead a large part of the economy, in this way losing immense tax revenues while funding tremendous increases in their outlays. I believe they have left public sector wages alone because they believe it is important to maintain demand as the economy sinks into recession. They seem to believe their zero-productivity workforce can maintain the level of aggregate demand, while employees within the actually productive parts of the economy – the ones employed by the private sector – have lost their jobs and their incomes with a massive fall in their ability to spend as much as they previously did.
Naturally, those same public servants, the ones who are advising our governments, believe how important it is that they keep receiving their full salaries even though their own decisions have mutilated the livelihoods of millions across the world, both among business owners and their employees. It is disgusting and maddening. Were it not for the absolute junk theories their heads are filled with, this would be as obvious as the day is long.
Our governments have now done two things simultaneously. They have cut production (Q) while pouring money (M) out into the economy. So let me take you to a bit of ancient economics that has never been refuted since basically it is an identity, absolutely true because it cannot be otherwise. This is known as the Quantity Theory of Money. As an equation, it states that P = Mv/Q – the more rapid the amount of money in circulation (M), especially if the increase in the stock of money is coupled with a fall in output (Q), the more rapid the rate of inflation will be. There is also “v” which is an indication of how fast each unit of money passes from hand to hand, “v” standing for “velocity of circulation”. Which leads to this conclusion that no economist denies:
The price level increases with every increase in the amount of money in an economy relative to the amount of output being produced and bought. The faster the money supply grows while output is being cut back, the greater the rate of inflation must be.
And as a matter of policy, that is just exactly what we are doing. We are increasing the amount of money being spent while reducing the amount of goods and services available to buy. The outcome will be an inevitable large increase in the rate of inflation.
There is absolutely no reason, given the potential for runaway inflation following the policies we are now about to endure, to leave public sector wage rates untouched. They must be reduced as a matter of both equity and economic necessity.
The correct policy given our circumstances, a policy which I fully endorsed from the start, was to fill in the income losses for those who lose their jobs, but only for those who lost their jobs, so that they could continue to buy what they need. This is not a stimulus. We are obviously not trying to grow the economy. This is just to make sure people are still able to buy what they need and to pay their bills. The same necessity was to reduce business costs wherever possible. A business without revenue because the government has shut them down and deprived them of their customer base, should have its tax bills deferred along with assistance provided to cover their outgoing costs while they are in shut-down mode, such as taxes, interest payments and rent.
To hammer private sector employees while leaving public service wages untouched is an outrage. It defies explanation for governments to leave untouched the public service wages bill while forcing private sector employees out of their jobs. The most equitable policy is for every one of us to share the sacrifice. It is beyond explanation for the government to hammer private sector employees and leave the public sector earning the incomes they continue to earn.
There is then the inflation that is to come. This inflation will only be contained if it is understood by one and all right now that when this emergency is over that interest rates will have to rise to stop inflation from rising by soaking up the excess liquidity that has now been unleashed. Unless, of course, the aim really is to destroy the capitalist system.