INFLATION

One of my abiding memories of the 1970's in the U.K. was of regular announcements of 20%+ inflation. These were then promptly followed by the sight on the television news of union leaders traipsing into 10, Downing Street in order to demand wage increases that were even higher, 25% or even 30%. Since those were usually given, the result was unemployment. Mrs. Thatcher won the 1979 election on the slogan "Labour isn't working".

Today the world is rather different. Inflation in Denmark in July was 0.79%, the lowest figure in more than 40 years. Basically, prices are not rising at all.

One little noticed consequence of this is that although interest rates are low, they are still above the inflation rate, meaning that real interest rates are positive (though mildly so). That is in contrast to the 1970's, where interest rates of 20% or more were still negative in real terms. The 1970's were a good decade to owe money, since inflation eroded the real value of the obligation. The 2010's are not a good decade to owe money, since that obligation remains in real terms. As Greece, Portugal and others have discovered.

Walter Blotscher