C: European Central bank / Flickr / CC BY-NC-ND 2.0

The delayed, but inevitable, recession

The Central Statistics office was out yesterday with new figures on inflation in Ireland. Note the most fascinating word in this segment of RTE’s report – “surprise”:

The annual rate of inflation went back up to 8% in February, compared to 7.5% in January, according to an initial estimate from the Central Statistics Office.

Energy prices fell but food prices continued to climb higher last month.

Today’s CSO figures show that Ireland has become the latest euro zone country to record a surprise increase in inflation last month.

Why would it be a surprise that inflation is on the increase, when politicians (and, in their defence, much of the public) do not understand the problem?

Inflation, at the most simple level, is a problem of too much money chasing too few goods. When there is more money in circulation, more people are competing for the right to buy the same products, and therefore, according to the laws of supply and demand, prices increase.

But our current political leadership – both in Dublin and in Brussels, as well as in Washington – appear to have talked themselves into an alternative explanation: Inflation, they argue, is caused by goods shortages as a result of the war. Energy prices are up, they say, because of the sanctions on Russia. Food prices are up because of the higher resulting price of oil, and therefore more transport costs. It’s not a “too much money” problem, they argue, but a “too few goods” problem.

Unfortunately, if you have not noticed, those two problems amount to the same thing: Inflation is too much money, chasing too few goods. There are only two ways to solve it: Either by reducing the amount of money, or increasing the amount of goods.

In Ireland, as in much of the west, the solution has been to pump even more money into the equation. And so for example last week, the Irish Government injected 1.2billion more euros into the economy by way of a “cost of living” package.

The idea behind this is to help people with soaring costs by giving them more money to help meet the newly increased prices. The problem with it is that as more people are able to afford the things they want to buy, demand for them will increase further, driving prices up further. The cost of living packages will not reduce inflation, but drive it higher. And these CSO figures prove that.

On the other end of the ledger, we have a Government that has been ideologically committed for many years to reducing supply, particularly the supply of energy. Consider gas prices – blamed on the war in Ukraine – in the context of the Irish Government’s determination to prevent the import of natural gas through a terminal at Foynes. Consider it in the context of the closing of power plants. If Ireland is highly dependent on Russian gas, well, that is because we made a choice to be so dependent.

Consider too, housing:

Deputy Boyd Barrett says that the price of one of the fourteen – fourteen – properties presently available to rent in Dun Laoghaire is shocking. And shocking it would be, if there were fourteen hundred properties available to rent. But there are only fourteen – why? Well, one reason might be that Deputy Boyd Barrett himself, in one two year period, objected to the construction of 1,300 homes in Dun Laoghaire. Strangle supply, and prices will soar.

This is also true in a wider sense about immigration: The Government is dramatically driving up the demand for housing, and then trying to meet the resultant extra cost with rent supports and payments to renters, all of which simply get absorbed as rent.

Unfortunately, there is only one way to solve inflation that has ever reliably worked, at any time in history: A recession.

For prices to fall, supply and demand must be equalised. This is why central banks put up interest rates to fight inflation: The whole point is to make it harder to borrow, meaning that fewer people can afford to bid on houses, meaning that house prices must fall.

The only way prices will fall, in other words, is if you can no longer afford to pay them. That is not a moral statement, or a personal preference: It is just the basic laws of economics.

So ultimately, those laws tell us, a recession must come. Because eventually, Governments will not be able to keep throwing out more money in cost of living measures, and borrowing to pay for current spending. When their capacity to support people expires (and it will) then the recession will come.

Most politicians, at this stage, are just hoping that someone else is in power when it does come.

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