If inflation is a bad thing, why is government policy designed to make us want more of it?

Britain is awash with debt, while government policy encourages inflation. But theoretical inflation sorts a lot of stuff out, while actual inflation will hurt.

So, you want to buy your first house. Let's assume (I know, I know, cloud cuckoo land, but let's go with it) you've scraped together a deposit and have persuaded someone to give you a mortgage. You'll be borrowing, on average, around £117,000. Oh, but that's assuming you're not in London. If you are, you're looking at more like £193,000 instead.

You've probably got some other debt outstanding too; most of us have. Last May, the average consumer borrowing - credit cards, overdrafts, car loans and so on - stood at around £3,207. That's an average, mind, so for a lot of us it's a lot more. Oh, and it had, by June, risen - only by £4, admittedly, but still, every little hurts.

Then there are student loans. In 2011, the Push university guide reckoned these averaged out at around £5,680 per student per year. That was before the new tuition fee regime, of course, and now you're probably looking at somewhere closer to £12,000 to cover fees plus maintenance. The resulting hole in your finances isn't really debt - even the government doesn't expect most of it to be paid back - but is more like an extra tax levied on those foolish enough to be born after 1993 (serves ‘em right). Nonetheless, it does mean yet another big red stain on the finances of those starting out in life.

The point, in case it's not quite sledgehammer enough for you, is that Britain is awash with debt - and the younger you are, the more likely you are to be drowning in it. Coalition ministers have spent a lot of time talking about how immoral it is to run up the nation's credit card and leave our children to pay it off. But they've seemed surprisingly blasé about running up our children's actual credit cards, and have cheerfully gone around loading them up with tuition fees and inflating the housing bubble all over again. Reports from the Office of Budget Responsibility, indeed, have been pretty explicit in their expectation that cuts to the deficit would be matched by a vast increase in personal debt.

All this is obviously horrible for those who'll have to pay those debts. But I wonder if it could have a more profound effect on the nation's attitude to its finances.

We're still living in an economic consensus defined, broadly, by the Thatcher government. For much of the seventies, inflation had run at over 10 per cent, which was commonly thought A Bad Thing. Thatcher's economic policies - monetarism, deindustrialisation, a strong pound - were all intended to get inflation down to the sort of level which didn't scare the bejesus out of investors, and keeping inflation low has been one of the main goals of policy ever since.

Now, though, a large and growing chunk of the population would, in the long term, do quite nicely out of spot of inflation. More than that, they're relying on it: some of the mortgages handed out over the last decade haven't got a hope of being repaid unless nominal wages start to spiral.

Think this through for a moment. If you woke up tomorrow to find that wages and prices had both doubled overnight, then the value of whatever debt you're sitting on has effectively halved. More than that, though, the value of the debt the government is sitting on has halved, too. Oh, and with a cheaper pound, suddenly Britain's exports look more competitive too. Halve the value of money in this country, and a lot of our problems suddenly look soluble. (This is economic model that used to work so well for Italy.)

The real world is not so kind, of course, and real inflation would be a lot more painful than that. Interest rates would rise. Holidays would become more expensive. The five or six British people still sitting on savings would see them whittled away, and anyone about to retire gets shafted.

Worst of all, wages are extremely unlikely to move in lockstep with prices, and those that lag most would likely be the ones paid to those with least bargaining power. That means, in all probability, the poorest. Those same people are also the least likely to benefit from an increase in asset prices (houses again, mostly) that'll accompany any inflation.

Oh, and there's the tiny problem that the deficit means we're still dependent on the faith and credit of the international bond markets. Theoretical inflation sorts a lot of stuff out. Actual inflation will hurt.

Nonetheless, though you'll never catch them saying it out loud, this seems to be the plan the government have lumped for. To get out of the mess we're currently in, there are only really three options. One is a sustained and historic boom (unlikely). Another is default (horrible). The third is to try to inflate the debt away and hope nobody notices. If you're young, middle class and sitting on a massive mortgage, this works in your favour. If you're an investor, a pensioner, or, worst of all, poor, it doesn't.

All the reasons inflation was bad in the Seventies still apply. There are many good reasons for wanting to keep it down. But we can't have everything. The larger the share of the population that is sitting on unsustainable debts, the less frightened of inflation the electorate will become. Any monetarist baby boomers out there might want to think about that, next time they're talking gleefully about how much their house is worth.

A boy with a kite made of banknotes in Germany during the depression of 1922 when escalating inflation rendered much of the currency worthless. Photo: Getty

Jonn Elledge is the editor of the New Statesman's sister site CityMetric. He is on Twitter, far too much, as @JonnElledge.

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Erdogan’s purge was too big and too organised to be a mere reaction to the failed coup

There is a specific word for the melancholy of Istanbul. The city is suffering a mighty bout of something like hüzün at the moment. 

Even at the worst of times Istanbul is a beautiful city, and the Bosphorus is a remarkable stretch of sea. Turks get very irritated if you call it a river. They are right. The Bosphorus has a life and energy that a river could never equal. Spend five minutes watching the Bosphorus and you can understand why Orhan Pamuk, Turkey’s Nobel laureate for literature, became fixated by it as he grew up, tracking the movements of the ocean-going vessels, the warships and the freighters as they steamed between Asia and Europe.

I went to an Ottoman palace on the Asian side of the Bosphorus, waiting to interview the former prime minister Ahmet Davu­toglu. He was pushed out of office two months ago by President Recep Tayyip Erdogan when he appeared to be too wedded to the clauses in the Turkish constitution which say that the prime minister is the head of government and the president is a ceremonial head of state. Erdogan was happy with that when he was prime minister. But now he’s president, he wants to change the constitution. If Erdogan can win the vote in parliament he will, in effect, be rubber-stamping the reality he has created since he became president. In the days since the attempted coup, no one has had any doubt about who is the power in the land.

 

City of melancholy

The view from the Ottoman palace was magnificent. Beneath a luscious, pine-shaded garden an oil tanker plied its way towards the Black Sea. Small ferries dodged across the sea lanes. It was not, I hasten to add, Davutoglu’s private residence. It had just been borrowed, for the backdrop. But it reminded a Turkish friend of something she had heard once from the AKP, Erdogan’s ruling party: that they would not rest until they were living in the apartments with balconies and gardens overlooking the Bosphorus that had always been the preserve of the secular elite they wanted to replace.

Pamuk also writes about hüzün, the melancholy that afflicts the citizens of Istanbul. It comes, he says, from the city’s history and its decline, the foghorns on the Bosphorus, from tumbledown walls that have been ruins since the fall of the Byzantine empire, unemployed men in tea houses, covered women waiting for buses that never come, pelting rain and dark evenings: the city’s whole fabric and all the lives within it. “My starting point,” Pamuk wrote, “was the emotion that a child might feel while looking through a steamy window.”

Istanbul is suffering a mighty bout of something like hüzün at the moment. In Pamuk’s work the citizens of Istanbul take a perverse pride in hüzün. No one in Istanbul, or elsewhere in Turkey, can draw comfort from what is happening now. Erdogan’s opponents wonder what kind of future they can have in his Turkey. I think I sensed it, too, in the triumphalist crowds of Erdogan supporters that have been gathering day after day since the coup was defeated.

 

Down with the generals

Erdogan’s opponents are not downcast because the coup failed; a big reason why it did was that it had no public support. Turks know way too much about the authoritarian ways of military rule to want it back. The melancholy is because Erdogan is using the coup to entrench himself even more deeply in power. The purge looks too far-reaching, too organised and too big to have been a quick reaction to the attempt on his power. Instead it seems to be a plan that was waiting to be used.

Turkey is a deeply unhappy country. It is hard to imagine now, but when the Arab uprisings happened in 2011 it seemed to be a model for the Middle East. It had elections and an economy that worked and grew. When I asked Davutoglu around that time whether there would be a new Ottoman sphere of influence for the 21st century, he smiled modestly, denied any such ambition and went on to explain that the 2011 uprisings were the true succession to the Ottoman empire. A century of European, and then American, domination was ending. It had been a false start in Middle Eastern history. Now it was back on track. The people of the region were deciding their futures, and perhaps Turkey would have a role, almost like a big brother.

Turkey’s position – straddling east and west, facing Europe and Asia – is the key to its history and its future. It could be, should be, a rock of stability in a desperately un­stable part of the world. But it isn’t, and that is a problem for all of us.

 

Contagion of war

The coup did not come out of a clear sky. Turkey was in deep crisis before the attempt was made. Part of the problem has come from Erdogan’s divisive policies. He has led the AKP to successive election victories since it first won in 2002. But the policies of his governments have not been inclusive. As long as his supporters are happy, the president seems unconcerned about the resentment and opposition he is generating on the other side of politics.

Perhaps that was inevitable. His mission, as a political Islamist, was to change the country, to end the power of secular elites, including the army, which had been dominant since Mustafa Kemal Atatürk created modern Turkey after the collapse of the Ottoman empire. And there is also the influence of chaos and war in the Middle East. Turkey has borders with Iraq and Syria, and is deeply involved in their wars. The borders do not stop the contagion of violence. Hundreds of people have died in the past year in bomb attacks in Turkish cities, some carried out by the jihadists of so-called Islamic State, and some sent by Kurdish separatists working under the PKK.

It is a horrible mix. Erdogan might be able to deal with it better if he had used the attempted coup to try to unite Turkey. All the parliamentary parties condemned it. But instead, he has turned the power of the state against his opponents. More rough times lie ahead.

Jeremy Bowen is the BBC’s Middle East editor. He tweets @bowenbbc

This article first appeared in the 28 July 2016 issue of the New Statesman, Summer Double Issue