The Bank of England should seek to deliberately increase inflation!

The reasoning behind this would be to ensure that there were negative real interest rates.

If the Bank of England commits itself to producing significant inflation then real interest rates could become negative.

Thus people might borrow money (at 0% interest) and repay in their (devalued) pounds.

This would give people a significant incentive to borrow and spend.

A little more inflation might be preferable to rising unemployment or a series of fiscal measures that pile on debt bequeathed to future generations.

The idea of negative interest rates may strike some people as absurd, the concoction of some impractical theorist. Perhaps it is. But remember this: Early mathematicians thought that the idea of negative numbers was absurd. Today, these numbers are commonplace. Even children can be taught that some problems (such as 2x + 6 = 0) have no solution unless you are ready to invoke negative numbers.

1 comment:

  1. The Bank of England cannot commit to creating inflation other than its target of +- 2% as this is the target set by the government. Furthermore, this would punish the savers in the economy as those who did not spend money but accumulated it, will now see it loose in value unless the banks commit to keep their interest rates will prevent this from happening. Furthermore, banks would not lend money at 0% just to get it back when it is worth less. This would not generate any profit