Martin Wolf weighed in on the inflation debate in the FT yesterday. Having had his customary dig at modern monetary theory, on which it seems he wishes to pin all blame, he went on to opine that current US fiscal and monetary policy is dangerous and that, to summarise, we're headed for hell in a handcart if Biden continues with his current plans. As he concluded:
The question is whether societies want low inflation. It is reasonable to doubt this today. It is also reasonable to doubt whether the disinflationary forces of the past three decades are now at work so strongly. It is hard to believe these emergency monetary policies should continue for years, as many at the Fed think. I doubt whether they should continue even now.
In other words, he's saying three things.
First, he does not want the US to have an economic transformation to become the green economy it has to be.
Second, he does not want to break the cycle of low wages that has trapped the US in political decline.
Third, he wants to increase interest rates now, helping to push the US towards a banking crisis.
I think the first two comments are complete in themselves. Biden has to invest in the failing infrastructure of the US. And the failing incomes of middle-class America - created and driven down by an overpowerful finance system - are at the heart of the Trump nightmare.
So let me turn to the third issue. Do we need interest rises now? My answer is no. The reason is in the FT. In another article, it is noted that:
Even before the Covid-19 pandemic struck, Europe had thousands of companies that were the financial equivalent of the living dead, being kept alive by low-interest rates and plentiful amounts of cheap debt.
They added that ECB policies on low-interest rates had exacerbated this. Such policies have done so everywhere, just as in the UK there are many more such companies that are facing massive over-gearing, debts due and rents now payable. And, what is not written about are all the zombie households (if I can extend the rather nasty description used for business) which face exactly the same type of crisis, created by their own over-gearing and the risk of financial failure if borrowing costs rise. It's hard to know precisely how many of these households there are, of course. It is entirely reasonable to think that they run into millions in number. After a decade or more of ultra-low interest rates these are now hardwired into family budgets that are already stretched to limits and could not take the strain of increases.
So, what Martin Wolf is calling for is a cull of businesses. That is, of course, the usual capitalist demand to deliver stable money at the price of unemployment. And he is also calling for massive social stress as people's finances fail, their housing is put at risk and (by logical transmission) banks are put under pressure by mortgage defaults.
Of course, the failing companies would also harm the recovery because, despite Wolf's theory, the capital in them is not redeployed because that is not the way in which capital is now provided in our societies. Meanwhile, supply chain issues that are now the very obvious cause of any short term (and I stress that) inflation risk will be exacerbated as companies fail. Those zombies are usually doing useful things after all: it is only their accounts that are not in good health due to the under-supply of capital and the excess use of debt in economies hollowed out by the false economics of the at forty years. Put them out of action and there will be even less for people to spend on: the result will be more inflation.
So is there a risk from inflation? Yes, there will be inflation: that was always inevitable in the short term. We knew there was spending to be done. But the real risk is from the so-called anti-inflationary policies promoted by the likes of Wolf and Larry Summers. For the sake of short term stable money they will crush productive capacity, increase unemployment and precipitate a household debt crisis when none of these are required. That will most definitely create a crisis - initially of increased inflation as supply chains fail - and then it will turn into recession.
And remember too that the markets think that Covid is already all over, sharing the absurd belief of many from the Prime Minister onwards that vaccines have now seen it off for good. That is not true. Nor is Martin Woldf's economic judgement sound. We have to hope that the Fed, Bank of England and ECB continue to believe in fiscal support and low-interest rates. The alternative is an economic disaster.
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Was it in the film, the Big Short; there were NINJA’s – no income, no job, and something beginning with A! Hell mend us when the ninja-zombies are given free rein!
My mortgage lender – Nationwide – has just put me on a floating rate mortgage as we have just come out of a fixed rate which has ended after 15 years.
We have never missed a payment and they told us that there is no other option but a floating rate since the mortgage expires in December.
You’d think they’d not bother to end the fixed rate wouldn’t you? But no – they did that during Covid and now we are more anxious just in case because of the floating crap we’ve never believed in. We’ve been with them for 20 years.
Great.
That’s pretty crap
Remortgage time?
Hi PSR, if the floating rate they have put you on isn’t better than the fixed rate your previous arrangement was, given that it was taken out in 2006 when base rates were 4.5 to 5%, you need to go and complain.
Unless they are quoting the most expensive floating rate mortgage in Britain ?
Our fixed rate for 15 years was 2.29%.
Their floating rate is going to be 3.59% and I’m writing a really pissed off letter right this minute. We do actually complete the mortgage this December.
Thank you all for your input.
Nationwide does some strange things. For instance 10 months ago they launched a “Start to Save” account that allowed you to save up to £200 per month over a period of 2 years yealding 1% interest, with instant access to your savings. Now they are trying to persuade people not to save so much by entering them into a prize draw for £100 if they save less than £100 per month over any period of three consecutive months.
They may not want my money but they’re getting it anyway!
Hello Pilgrim Slight Return,
I’m sorry to hear about your predicament. I am a former board member still involved with the building society. I presume there is a record of you asking for the fixed rate contract to be extended to the end of the mortgage term when it was take out in 2006. The records will be retrievable but I would rather not go on a goose chase if that didn’t happen.
Anyways please consider calling me in the next two days on Swindon 524852 and asking for the NKVD department. We may be able to work something out without violins or a hit being required.
regards
Graham Beale
Well, there’s an extremely angry letter going off to bloody Swindon today I can tell you.
Responding to Bill Kruse highlighting the NZ and Oz trade deals – could it be that the Tories – who are in the throes of relaxing planning laws yet again – want to throw British farming to the wolves because it will release more land for green belt development? Hmmmmm…….wouldn’t put it past them.
The average age of a farmer these days is 59 apparently.
We know how UK politicians like to sort these sorts of things out – the easiest route – don’t invest – buy it in from elsewhere – yeah!!!!
Jeepers BTL rates are under 3% that really is crap 🙁 . My own Principal Residence with Nationwide is 1.74% fixed rate 4 years.
This sentence from the blog “supply chain issues that are now the very obvious cause of any short term (and I stress that) inflation risk will be exacerbated as companies fail” was rather nicely addressed by a article in the Guardian today:
https://www.theguardian.com/world/2021/may/19/chips-with-everything-how-one-taiwanese-company-drives-the-world-economy
Supply chain issues, coupled to a dependency on one company in one location may cause a temporary rise in inflation & the G’ article notes the same.
However, perhaps Europe (& the UK) needs to address a broader question: strategic dependency. EU policy with respect to semiconductor manufacturing can best summarised in one word: pathetic. “Let markets decide” encapsulates the approach – doubtless one supported by Wolf. However, one could argue that (gov?) spending needs to be directed at developing some strategic capacity in core areas – you know – high tech ones. This goes directly counter to the inclinations of Wolf, Sumers et al. However, if there was spending in this area, there is a “cherry on the top”. One of the world’s leading manufacturers of semiconductor manufacturing equipment is… ASM – a Dutch company. Indeed, the EU has all the ingredients to take a DIY approach (towards semiconductors) that this does not happen is odd.
I agree
Instead we want to hit agriculture hard with an Australian trade deal
You could not make this up
The problem Boris has is he hasn’t yet, can’t in fact, implement the import controls he’s contractually obligated to by his own TCA. When he does, assuming a way can ever be found, it will make us a lot harder to trade with and more expensive too. It’s reasonable to think a lot of the companies supplying us with food will simply stop bothering, leading to starvation, rationing etc. here. If he doesn’t, then the EU will take the UK to court, probably the ECJ to add to the embarrassment, and end up hitting us with a load of tariffs, again, for Boris and the electorate a bad outcome. These problems are barrelling towards Boris at a rate of knots so I’d imagine they’re the real reason the UK will accede to all and any trade demands from Oz and NZ, including throwing the UK farming sector under the bus. Something else which needs to be considered is that we’re entering a solar minimum, bringing with it wild and unpredictable weather and making production of food difficult and unpredictable. Running out is a distinct possibility. Australia and New Zealand could well find themselves unable to meet any contractual obligations to supply as with food here as they may well not have enough for themselves. This is really not the time to be giving up domestic food production.
Frighteningly appropriate
Again what about the decline in the percentage of GDP that goes to wages, from 65% in 1976 to just under 50% now to say nothing of the increase in the share of the total wage bill that goes to the top 10% which results in over indebted households as they are not earning enough to cover their essential bills.
If we were looking at a target for any progressive political party, what about the percentage of GDP that goes to wages and its distribution?
Let’s just count the pennies whilst the roof falls in.