DON'T WORRY SIR, THIS IS THE TITANIC 's UNSINKABLE

  • 2007-09-05
  • Harry Gaffney, Riga
Alfred Joseph ["Let's have a debate," Letters, TBT #570, Aug. 23 - 29] speaks for many observers who have chosen to take an interest in Latvia and its economic tightrope walking. He mentioned many alternatives the government could use to reduce the menace of inflation 's too many for me to respond to here.
He used the terms "credit squeeze" and also wage and price freeze to illustrate two measures which could be implemented to bring inflation figures down to manageable levels. I'm not sure if the second would be acceptable to the public (it helped to bring down the British Government under Ted Heath) and I feel it would result in more brown envelopes when there is a desire for less.

A credit squeeze, is far more likely to have the desired effect. It is designed to limit the supply of credit in the economy, in order to curb inflation by controlling growth in the money supply. Two examples of credit squeeze include restricting bank lending and credit sales, and increasing interest rates.
But how to go about it is the question, and how much cooperation would the protagonists in the drama be prepared to offer?

Lenders such as banks and credit card providers cause the problem by lending to all and sundry. They are not interested in turning potential borrowers away despite patronising platitudes to the contrary. Inflationary problems are regarded as somebody else's - not theirs. Their job is to make money; profit increases year on year bear witness to this. If the Central Bank raises interest rates as the Bank of England has steadily done over the past year it will certainly reduce consumer demand for credit as people become aware of the effect such increases would have on their monthly repayments. It will also, unfortunately, increase repayments on a variable mortgage 's and most mortgagees are already stretched to the limit.

So if people find themselves paying more for less (the dreaded negative equity) as property prices stabilize and fall back, the banks may find themselves repossessing hundreds of properties from people who can no longer meet their mortgage commitments. These properties would be put back on the market at the best available price causing an even greater spiral downwards. Hopefully the banks would show patience and leniency towards their clients thereby preventing a difficulty becoming a disaster.
But this is old hat of course, especially to those who took an interest in the British property debacle a few years ago. Then, the banks, who were badly stung and left with huge losses, were blamed for setting the wheels of the collapse in motion by indiscriminate lending.

While all this was happening the government looked on transfixed, as seems to be the case in Latvia at the moment. The PM has even admitted a solution is beyond him, he appears to be way out of his depth. Much pessimism is being aired with measures implemented so far which many regard as too little too late. We'll keep our fingers crossed. The country is booming, but it's all on credit. More workers are required to help steady wage rises, but where will they come from? Other factors are involved: the lat pegged to the euro and under pressure, huge current account deficit, outside investors looking askance at Latvia's growing debt. Will they pull the plug? The party is in full swing (unless you're on a fixed income). Let's hope we recover from the hangover which some say will surely follow.

And please 's don't mention the war ...sorry, I meant devaluation.
 

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