The British Disease Mutates

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In November 2008, during one of their weekly sparring matches at Prime Minister's Question Time, Gordon Brown sought to lecture David Cameron, the Leader of the Opposition, on the threats facing the global economy. After all, Britain's economic woes were, according to the Son of the Manse, exclusively global. "Global problems" put paid to any suggestions about a revival of the so-called "British disease," a term coined in the 70s to describe the industrial strife that appeared to plague the British economy.
 
Brown, like many other global leaders, noted that in the past the main threat facing the UK had been inflation, what President Ronald Reagan described as "violent as a mugger, as frightening as an armed robber and as deadly as a hit man." Instead, the Prime Minister called on the developed world to unite to counter the pernicious effects of deflation. Hardly foresight, but from a former Chancellor of the Exchequer, it gave Brown some glimmer of hope that he could seize back what little credibility he had on economic matters. In addition, given that the United States is now officially experiencing its first phase of deflation since President Eisenhower's first term, how long would it be before the UK had to take action to mitigate falling prices?
 
In fact, this "action" had already started earlier this year, as the Bank of England, like the Federal Reserve, launched its first phase of "quantitative easing," the controversial step of pumping money into an economy in order to stimulate growth. However, what is now clear is that Britain doesn't have a deflation problem, but at 2.2 percent, the highest inflation rate in the "old" European Union, and close to the highest in the developed world. In fact, had the Chancellor of the Exchequer not opted to cut sales tax (VAT) by 2.5 percent during the pre-Budget Report (PBR) in November, Britain's inflation rate would be even higher.
 
Nevertheless, as the VAT cut expires this December and with oil again starting to soar, inflation will not be tempered any time soon. With British high streets continuing to suffer, retailers are closing at a rapid rate rather than cutting prices. And what of the currency? Sterling, to put it bluntly, has been pounded (excuse the pun) versus both the dollar and the Euro. It doesn't take a rocket scientist to discover that a country with a weak currency, that exports little but bad debt, will be susceptible to inflation in the midst of a severe economic downturn.
 
Instead of mitigating deflation, Brown is merely using the printing presses to finance the most profligate government in British history. Sure, this may well be nothing new, but Alistair Darling, the Chancellor of the Exchequer, insisted that the government would be using quantitative easing for private sector asset purchases. Instead, 97 percent of new "funds" have been used to purchase British government gilts.
 
Inevitably, this charade cannot continue. The market is becoming more and more reluctant to purchase British gilts, symbolized last month when the government sold only 93 percent, the first failed gilt auction in 14 years. And as this once proud economic behemoth teeters on the brink of losing its Triple A credit rating, the government appears to have resolved to paying banks (does this count as fiscal stimulus?) to sell its gilts.
 
Of course, the rest of the developed world is in the midst of tackling severe economic stagnation. However, the degree of the inflationary threat in the UK is like no other, and clearly of British making. It seems fitting that the former Chancellor who laughably used to lecture his European counterparts (and baffle economists) that he had found a cure to end "boom and bust," now bears responsibility for the mutation of the "British disease."