One Nation under inflation

In his speech at the Conservative Party conference David Cameron described his politics as those of Harold Macmillan:

This is a One Nation deficit reduction plan – from a One Nation party.

Macmillan himself took the phrase from Disraeli's book "Sybil" - the Two Nations were rich and poor; but he did not take his solutions to this "problem" from Disraeli. His solution was inflation, which created a supposed boom and then left us all worse off. As Charles Moore points out, all the problems Thatcher tried to solve were created by these policies.

And this is why Cameron's policies will cost us all dear. The One Nation Solution is inflation; inflation is a form of tax, it reduces purchasing power, it distorts the price system. It creates an artificial boom that Hayek described as "a false sense of wellbeing, in which everyone seems to prosper", when what actually happens is that:

inflation can always give only a temporary fillip to the economy, but must not only cease to have stimulating effect but will always leave us with a legacy of postponed adjustments and new maladjustments which make our problem more difficult.

After the inflation we must get back to real money, to honest investments, to sound finances. We must accept that prices and wages were too high, that some of the goods and services we bought and invested in were not viable. We must let the market adjust. If we do not want to face up to this then inflation is seen as the way out.

I'm not predicting hyperinflation. I'm saying that inflation does not create real prosperity. We are trying to solve a problem that was created in part by loose monetary policy with inflation: we are postponing the adjustments and adding maladjustments to an already poor economic situation. But that will only prolong the underlying causes of the problem.

Allister Heath explains brilliantly that by creating more money the Bank of England is going to make consumer inflation worse, not better; that low interest rates and high inflation are contributing to increasing nominal GDP because they make money circulate more quickly (debunking the myth that there is a need to print money); that QE will devalue the pound, increasing the price of imports.

Cameron's is the sort of Conservativism that Charles Cooke has identified as:

that vacuous and peculiarly British concept of “One Nation” conservatism, which seeks to compromise between liberty and safety, and which has largely accepted the post-war settlement as being the foundation of a “civilized” society, despite mounting evidence to the contrary.

This is all part of Cameron modernising the party, moving centre-left, in order to appeal to the New Labour vote that Blair won by moving centre-right. But Hayek's tiger-by-the-tail metaphor for inflationary policies is looking more and more like a good fit for the current situation:

Not only would the tiger tend to run faster and faster and the movement bumpier and bumpier as one is dragged along, but also the prospective effects of letting go become more and more frightening as the tiger becomes more enraged. That one is soon placed in such a position is the central objection against allowing inflation to run on for some time.

It looks increasingly like Cameron's political stance is one that will give rise to further inflationary problems because his "wet" form of Conservativism doesn't want to admit that we need to let the market adjust to our profligacy.