July 23, 2000

The Potemkin approach to dealing with inflation

Posted in International Economy ·
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In the summer of 1787, determined to show foreign ambassadors the might of Russian power in the newly subjugated Ukraine, Catherine the Great organised a boat trip down the Dneiper past modern-day Kiev.

Her trusted field marshal, and her lover at the time, Prince Gregory Potemkin, organised a series of mobile villages to appear as soon as the imperial barge, stuffed with innocent and gullible foreign dignitaries, came into view.

When the riverbank came within earshot the villagers would break into a spontaneous, sycophantic chorus of praise for the empress, giving the perplexed foreigners the impression that not only had Russia pacified Ukraine, it had also managed to win over the local peasantry, which was no mean feat in the 18th century.

As soon as the imperial barge turned the corner the villagers would dismantle their villages and rebuild them overnight further downstream, with a view to performing precisely the same mullarkey the following day.

This continued each day for over two weeks. The overwhelmed foreign dignitaries then reported back to Berlin, Paris and London on the marvel of the Russian conquest and pacification of Ukraine. Thus was born the “Potemkin village” approach to economic and political progress.

Over the years, the Russians have perfected this approach of half-truths, misinformation, disingenuous analysis and obfuscation. Russian governments perfected the art of identifying culprits on which to pin the blame for their own failings: Jews, Poles, profiteers, priests, intellectuals, kulaks, enemies of the revolution and so on. Typically, if there is a problem, a few culprits are rounded on and grandiose decrees are announced to fight the evil, whether it is economic, social or political.

In recent weeks, any objective observer of the debate in Ireland would be forgiven for thinking that the Potemkin village approach to politics and policy is alive and well. The sham that is today’s inflation debate is one particularly duplicitous case in point.

Does anyone actually believe that by holding the price of drink steady from May 15 inflation will be stopped in its tracks? Or that preventing the VHI from raising its premiums will bring prices back down? Do we seriously entertain that either of these measures will make a jot of difference?

In true Supreme Soviet style this spurious economic analysis is bolstered by the identification of a nasty culprit. In our case the profiteer is the problem. Solicitors, doctors, surveyors, publicans and accountants are, according to the Government, the enemies of the state, making exorbitant profits at the expense of the ordinary workers, and thereby causing inflation.

Not only is this errant nonsense, it is quite a dangerous precedent. The practice of blaming certain groups, issuing decrees about prices and trotting out spurious excuses for inflation is straight out of the Supreme Soviet approach to economics.

In the interests of clarity, let’s work backwards. The reason that publicans (or anyone else) raise their prices is either because they have to or because they can. Any publican who has bought a pub in the past few years at present prices of four to five times turnover probably has to raise prices.

Publicans who find that their wage bills have soared over the past few years have to raise prices. Finally, in case you haven’t noticed, many pubs have had a makeover in the past two years which must have cost their owners a fortune.

Publicans are doing this because they have been convinced that this is what the punters want. These micro Trevi fountains and Venetian mosaics have to be paid for, and ultimately this involves selling more pints or selling more expensive pints, or both.

Not surprisingly, if publicans find that they can raise prices, they will. That, it would appear, is how the market works.

The second question is why punters will pay the higher prices. Is it because demand among boozers is so strong? Or is this because the Irish have become even more committed alcoholics in the past few years? Hardly.

The main reason is that we have more cash in our pockets. In fact, we are stuffing 30 per cent more cash into our pockets every month compared to this time last year.

But why are we doing this? Not only because we can but because we have to. With inflation at over 5 per cent and deposit interest rates well below 3 per cent there is no incentive to save. We are now being penalised for saving, so is it any surprise that the savings ratio is falling?

And the banks are lending the cash. Well, of course, they are, because their share prices are flagging and without high volume growth, profits will fall, increasing the chances either of management being sacked by shareholders or predators buying the entire bank at the present low share price.

But where is all this cash coming from? How come the banks have so much money to lend to the rest of us? The banks are borrowing huge amounts every day from the Central Bank, which is obliged to give them the cash. Or else they will borrow the money in France, Germany or anywhere else in the eurozone. EMU has made all this possible.

So we are borrowing money which was saved by Germans over years and years, to spend on pints. This is why publicans can raise prices. They are not the culprits any more than the VHI, accountants, solicitors, surgeons or bricklayers are.

The culprit is the huge wave of credit washing down over the economy. This is causing excess cash to seep into every pore of economic activity, pushing up prices and wages. The so-called free market government with its price-fixing nonsense is taking a leaf out of the Leonid Breshnev economic manifesto. Meanwhile the rounding up of spurious suspects, like Potemkin villages, serves to mask the Government’s weakness, rather than exemplify its strengths.