Lessons to be Learned from 70 Years of Inflation

Published / Last Updated on 21/09/2021

The World including the UK has record public sector debt, not just mounting up from the Credit Crunch Crisis of 2008/09 but also from Covid-19 2020/21.

We have long suggested that governments stimulate economies and use inflation as a means to devalue public sector debt before being required to repay it.  Governments borrow by issuing in the main, fixed rate government bonds (in UK known as Gilts) to fixed their debt costs for 10, 20 or even 50 years.  There are some inflation/index linked bonds/gilts issued but the majority of debt paper issued is fixed rate debt.

Over long time periods, inflation will devalue government fixed rate debt to a point where it is much more affordable to pay.  Looking back to the end of World War 2 and the launch of the NHS and State Pension (as we know it), the government of the day had borrowed huge sums of money to pay for these and then, over the next 10 to 15 years, allowed inflation to run to devalue that debt before repayment.

The same happened in the late 60’s and early 70’s.  We had the Oil crisis of 1973 and the UK had to be ‘bailed out’ in 1975/76 over the sterling crisis to the tune of £2.3bn by the International Monetary Fund (IMF).  Thatcher took over in 1979 when the UK had record public sector debt, inflation was high and we were heading into a recession in the early 80s Inflation was immediately forced down due to the recession but then allowed to run back up in the late 80s and early 90s to devalue public sector debt yet again.

In times of extreme crisis, compounded inflation has run at 200% and 100% over a 10 year period, in difficult times with increased borrowing at  50%+ over 10 years and in settled economic times at 30%+ over a 10 year period.

Inflation has been a tool that governments have regularly used to devalue public sector debt and we expect the same again.  There is a gas supply shortage at present with prices up 250% (this looks very similar to the 1973 Oil crisis) and driving costs up, microchip shortages are driving prices up, food prices are going up and even CO2 shortages in the meat industry that will drive prices up. 

In certain countries, central banks such as the US Federal Reserve have already issued policy statements that they ‘are no longer going to control inflation using interest rates for the time being’ and in the UK, whilst there has been no mention of the same tactic, interest rates are low and the UK government confirmed in the March 2021 Budget that it would change how RPI is calculated in 2030.  Is this because it expects and wants compounded RPI increases to devalue public sector but to then change how RPI is calculated in 2030 when it gets closer to the time of repaying that debt?  Devalue and then repay.

Using our inflation history lesson today, it is clear to us that we should all plan for inflation in our investments, pensions, wallets, spending power, earnings and of course a knock on effect to increase property prices.  All are likely to rise over the coming 10 years.

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