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I'd guess that unrest is inevitable when a country gets a debt problem whichever way you deal with it. The current unrest in London and other UK cities may be t

by djm 15y ago

I'd guess that unrest is inevitable when a country gets a debt problem whichever way you deal with it. The current unrest in London and other UK cities may be the result of austerity and what happened in Greece recently certainly is. However, the alternative (inflation) would have the same effect. See 1920's Germany/Austria for example - 'When Money Dies' by Adam Fergusson is the book on this.

_delirium 15y ago
> However, the alternative (inflation) would have the same effect. I don't think this is necessarily true. Pre-euro, Greece devalued the drachma several times in order to manage its debts and trade balance (by around 15% each time in 1983, 1985, and 1998), but it didn't lead to rioting in the streets.
- djm 15y ago
  That's interesting. I guess it depends on the scale of the inflation. Germany printed money to pay their war reparations with and when it got to the hyper-inflation stage everybody was screwed. Inflation in relatively small amounts is only going to really hurt savers so I guess if the population distribution is skewed towards more people with debt than with savings (isn't it always!) then a government might be able to use it to reduce the likelyhood and scale of unrest.
  - _delirium 15y ago
    Yeah; now that I think of it, it also may depend on how easily you can decouple inflation in external terms (currency devaluation vis-a-vis another currency) from internal inflation (change in prices in local currency). From what I can tell from Greek relatives, the average person didn't see much effect from the 83/85 devaluations, because there wasn't much internal inflation. Imported items got more expensive in drachma terms due to the exchange rate, but going to the barber didn't: he still charged about as many drachmas as previously, so your local buying power wasn't really reduced. It's just that everyone now both made and charged less money in dollar terms, which is actually deflation from an external perspective.
nhaehnle 15y ago
1. What makes you believe that the UK government has a debt problem? As long as the UK government emits gilts in pounds, they will never become unable to pay the resulting obligations. So: where exactly is the problem? Where are the Emperor's clothes? 2. What makes you believe that unusually high inflation would result if the UK government reversed its austerity stance and implemented some kind of public works program? Inflation is largely the result of the normal processes in the economy whereby the relative valuation of different goods changes, and different actors in the economy strive to increase their share of the total income. If you actually look behind the scenes how the various inflation measures are computed, you will see that the different types of goods in the baskets used usually show quite different behavior. Most of the time, a few goods and services will be decreasing in price while the majority increases in price, though at (often vastly) different speed. So what you are really seeing is changes in relative price, which reflects changes in how goods are valued. Without this process, the market could not function properly. This process is biased towards larger nominal prices on average for a number of reasons - mostly because it is rare that somebody voluntarily decreases their profit - but there is nothing inherently bad about that. You could think of it as the Red Queen Hypothesis of economics. It is clear that, beyond those processes, inflation can be pushed higher by excessive aggregate demand or by increasing resource prices - price increases in the last months were dominated by energy prices. So I could rephrase my question as: What makes you believe that turning away from austerity would create excessive aggregate demand in the UK? Keep in mind that the current context is one of high unemployment and idle factories, i.e. there is more supply capacity than is currently being used. As a final note: I think it is quite disingenuous to jump directly from "there could be higher inflation" to "1920's Germany". Those scenarios are entirely different beasts.
- djm 15y ago
  Perhaps my comment didn't make my thoughts clear enough. First of all, I think we are working on different definitions of 'inflation'. There seems to be two schools of thought on this: some people think inflation is driven by prices and some people think prices are driven by inflation. Your comment suggests you are in the first camp and I am in the second. I define inflation as simply being 'when the government prints more money'. Prices increase when the money supply increases. Businesses have to raise prices when this happens because otherwise they will reduce the buying power of their profit. I wasn't talking about the UK specifically. I was just trying to say that, in general, I think the outcome in terms of social unrest is going to be about the same whether you reduce the amount of money you give people or whether you give them money that is worth less. To be clear, I didn't say that reversing the austerity measures would result directly in hyper-inflation or that we'd end up like 1920's Germany. I'd agree that that kind of scenario is a long way off.

by djm 15y ago

_delirium 15y ago

> However, the alternative (inflation) would have the same effect. I don't think this is necessarily true. Pre-euro, Greece devalued the drachma several times in order to manage its debts and trade balance (by around 15% each time in 1983, 1985, and 1998), but it didn't lead to rioting in the streets.

djm 15y ago
That's interesting. I guess it depends on the scale of the inflation. Germany printed money to pay their war reparations with and when it got to the hyper-inflation stage everybody was screwed. Inflation in relatively small amounts is only going to really hurt savers so I guess if the population distribution is skewed towards more people with debt than with savings (isn't it always!) then a government might be able to use it to reduce the likelyhood and scale of unrest.
- _delirium 15y ago
  Yeah; now that I think of it, it also may depend on how easily you can decouple inflation in external terms (currency devaluation vis-a-vis another currency) from internal inflation (change in prices in local currency). From what I can tell from Greek relatives, the average person didn't see much effect from the 83/85 devaluations, because there wasn't much internal inflation. Imported items got more expensive in drachma terms due to the exchange rate, but going to the barber didn't: he still charged about as many drachmas as previously, so your local buying power wasn't really reduced. It's just that everyone now both made and charged less money in dollar terms, which is actually deflation from an external perspective.

nhaehnle 15y ago

1. What makes you believe that the UK government has a debt problem? As long as the UK government emits gilts in pounds, they will never become unable to pay the resulting obligations. So: where exactly is the problem? Where are the Emperor's clothes? 2. What makes you believe that unusually high inflation would result if the UK government reversed its austerity stance and implemented some kind of public works program? Inflation is largely the result of the normal processes in the economy whereby the relative valuation of different goods changes, and different actors in the economy strive to increase their share of the total income. If you actually look behind the scenes how the various inflation measures are computed, you will see that the different types of goods in the baskets used usually show quite different behavior. Most of the time, a few goods and services will be decreasing in price while the majority increases in price, though at (often vastly) different speed. So what you are really seeing is changes in relative price, which reflects changes in how goods are valued. Without this process, the market could not function properly. This process is biased towards larger nominal prices on average for a number of reasons - mostly because it is rare that somebody voluntarily decreases their profit - but there is nothing inherently bad about that. You could think of it as the Red Queen Hypothesis of economics. It is clear that, beyond those processes, inflation can be pushed higher by excessive aggregate demand or by increasing resource prices - price increases in the last months were dominated by energy prices. So I could rephrase my question as: What makes you believe that turning away from austerity would create excessive aggregate demand in the UK? Keep in mind that the current context is one of high unemployment and idle factories, i.e. there is more supply capacity than is currently being used. As a final note: I think it is quite disingenuous to jump directly from "there could be higher inflation" to "1920's Germany". Those scenarios are entirely different beasts.

djm 15y ago
Perhaps my comment didn't make my thoughts clear enough. First of all, I think we are working on different definitions of 'inflation'. There seems to be two schools of thought on this: some people think inflation is driven by prices and some people think prices are driven by inflation. Your comment suggests you are in the first camp and I am in the second. I define inflation as simply being 'when the government prints more money'. Prices increase when the money supply increases. Businesses have to raise prices when this happens because otherwise they will reduce the buying power of their profit. I wasn't talking about the UK specifically. I was just trying to say that, in general, I think the outcome in terms of social unrest is going to be about the same whether you reduce the amount of money you give people or whether you give them money that is worth less. To be clear, I didn't say that reversing the austerity measures would result directly in hyper-inflation or that we'd end up like 1920's Germany. I'd agree that that kind of scenario is a long way off.