Ultimately it's a stark choice: higher interest rates or higher inflation?
As the great Jeff Randall at the Daily Telegraph never tires of telling us, this economic downturn is about debt
.
For years, big government threw away £billions of our taxes, while keeping interest rates too low. The result? A sea of public and private debt - and, with too little saved, not enough credit. Hence credit crunch.
Many of Mr Randall's rival commentators lack his perceptiveness. They still see this recession as primarily a problem of aggregate demand. If only big government cut interest rates and injected more demand into the economy, they seem to presume, the good times would start to roll once more.
At last one or two in the media herd, besides Randall, seem to have begun to grasp that such a policy would lead us over a cliff. Edmund Conway, in today's Telegraph, writes about "what to do when interest rates don't function any more". The penny is beginning to drop; low interest rates and high government borrowing and expenditure will not solve this economic down turn - ask the Japanese.
Massive government borrowing is already soaking up whatever credit there is available in the banking system - and making life more difficult for businesses and home owners.
Ultimately, there's only two ways out of this debt created mess; higher cost of borrowing or higher inflation.
Higher costs of borrowing would - painfully - encourage people to reduce debt and save more - thus creating more credit. Higher inflation would erode the value of the debt - and clobber savers too.
One would reward the virtues of thrift and saving. One would punish savers, and reward the less prudent.
Ultimately policy-making boils down to a choice between doing one or the other. I know which one I'd prefer.
With rumours circulating that government plans to print more money, guess which one this government prefers?
Posted on 14 December 2008 by Douglas Carswell