THE dragon which has dominated western economic thinking for decades is about to be slain. Saint George, armed with the sword of privatisation and the shield of weakened trade unions, is about to triumph.
Good news, one might think, for those reared on a diet of government warnings that inflation can seriously damage your health. Not so, says Mr Roger Bootle. In fact the vacuum created by the death of inflation will be more menacing because we are not prepared for it.
Mr Bootle's thesis is founded on fairly convincing arguments. Historically, inflation wasn't much of a problem in the industrialised west until after the Second World War. There were periodic bouts of inflation triggered by war or market fluctuations but overall it wasn't a problem anywhere near the scale of the sustained inflation experienced since the 1940s. His argument is that inflation is an aberration and normal service is now being resumed.
His other main point is that trade unions are in serious trouble. Organised labour once had the muscle to demand year on year increases in pay which in turn led to higher costs for consumers and rising prices and ultimately a rise in inflation.
Mr Bootle points out that those days are over throughout the west. Unions are shadows of themselves and management is now calling the shots. The decrease in jobs for life and the rise in contract working means that the days of big yearly pay rises are gone.
Another factor is that governments have withdrawn from interfering in the economy. Managed capitalism was a good stomping ground for inflation, competitive or raw capitalism is now extant. This coupled with the massive privatisations of state companies means that another inflationary pressure has disappeared. According to Mr Bootle it won't be a happy time for those unable to erase the conditioning of the inflation era and his most interesting point is property and house prices in particular - that staple of dinner parties and get rich quick dreams. Mr Bootle puts forward the horrifying notion that house prices could just edge up in the future and may even fall.
For those on massive mortgages relying on rising prices to cover their costs it will be a nightmare. He warns that the negative equity panic in the early 1990s will be nothing compared to the catastrophe waiting to happen. He advises us to buy a house on the novel premise that its where we want to live, not as an investment. For the consumer the zero era means a drop in prices and low rates for borrowing. It means that mortgages will not be as burdensome and people will have more money to spend. The downside is that pensions could be in trouble as the interest rates and property investments relied on to generate funds will have vanished, leaving pensions underfunded.
Written in an engaging style The Death of Inflation contains some thought provoking arguments. However, while Mr Bootle says in the preface he was writing for the intelligent lay reader, it would definitely help to have a 2.1 in economics.
