Reader’s letter: “Inflation is a function of money, not prices”

Money Management’s recent article on the economic outlook for the UK was largely well received, but one quote from a big-name fund manager raised the hackles of Steven Farrall, a partner at Ipswich-based Williams Farrall Woodward, who was moved to pen the following in reply:


This passage caught my eye:

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“…Julian Chillingworth, CIO at Rathbone Unit Trust Management, the only obvious thing that is not good for the UK would be deflation as it would mean that the economy was not growing….Inflation is like Goldilocks. What you want is a little bit of inflation but not too much..”

That is absolute nonsense. To explain, inflation is and always will be a function of money, not prices. Price rises are the result of inflation, not its cause. Inflation can only arise from the unwarranted expansion of money and credit by the central bank egged on by politicians and ignorant and self-serving state bureaucrats. It is the favoured tool by which they steal our wealth (that and tax).

Deflation is the opposite. As so, it is perfectly possible to have a growing economy – more wealth creation – and deflation. In fact, it is the natural order of things ex the invention of central banking and regulationism. Arguably had we not bailed out the banks with money created out of thin air (inflation) we would by now be enjoying a post boom and bust recovery. As Mark Thornton says:

“This doesn’t even consider what prices would be like if the Fed and world central banks had not acted as they did. Housing prices would be lower, commodity prices would be lower, CPI and PPI would be running negative. Low-income families would have seen a surge in their standard of living. Savers would get a decent return on their savings. Of course, the stock market and the bond market would also see significantly lower prices. Bank stocks would collapse and the bad banks would close. Finance, hedge funds, and investment banks would have collapsed. Manhattan real estate would be in the tank. The market for fund managers, hedge fund operators, and bankers would evaporate.”

I despair, I really do, at the impressive ignorance and the slavish clinging to failed cod Keynesianism that bedevils the regulationists, politicians and now fund management.

There is no hope for the poor bloody client is there?


Steven Farrall