My comments posted here yesterday regarding the Bank of England's interest rate rises that it claims will help tackle inflation provide some indication of my feelings on this issue. But, I think, insufficient indication, so I am returning to the subject now.
The Bank of England has effectively admitted in its recent commentaries on inflation that there is nothing it can do to tackle the international inflationary environment. It cannot solve supply chain problems, stop profiteering energy companies, end the war in Ukraine, or the impact of sanctions including food shortages. As it knows, no interest rate change will come close to tackling these issues. And they are the cause of inflation. Nothing else is.
Nor, incidentally, can quantitative tightening (which is simply reversing quantitative easing) solve inflation either, because QE has not contributed to inflation in consumer prices, as I have shown, and reversing it will in that case likewise have no impact on those prices.
In other words, right now there is nothing that the Bank of England, the Fed or any other central bank can do to tackle inflation. The only tools they have available to them tackle excess demand in the economy caused by wage inflation creating spending power in excess of the supply of available resources available to buy, and nothing remotely like that has existed in the UK or any other economy of late, excepting a few odd categories of goods like cars, where the desire for status-driven spending amongst those with higher incomes in the face of supply shortages has created absurd pricing.
Given these facts the central bankers should be saying three things. The first is that this is not inflation that they can tackle. Second, they should be making clear that they are doing nothing in that case. Third, they should be throwing the problem back to governments, telling them that this inflation is caused by political economy and fiscal issues, both of which it is down to them to address.
But that's not what they are doing. Instead, they are claiming that in amongst the inflation created by all the factors that I note they are spotting that supposedly strong labour markets are increasing the wages of some employees in reaction to price rises elsewhere, despite all the remonstrations from central bankers that pay restraint be shown. As a result they claim it is their absolute duty to crack down on labour markets to ensure that there is no chance that any working person should seek too maintain their economic well-being in the face of the inflationary pressure that is creating impossible household budgeting issues for millions, if not billions, of people around the world. And this, they say, justifies them increasing interest rates, because doing so will break the power of the labour market to increase wage rates.
How will it do that? By creating a recession, of course. Consumer sentiment is already doing this. ASOS and Halfords are the latest retailers to complain of the difficulty of selling things, and persuading the consumer not to return them now a shortage of funds is making purchasers a whole lot fussier. But as if household despair at rising bills and little chance of pay increases for anyone outside the financial services elite (where things are going very nicely on the pay front) was not enough, now the central banks are intent on manufacturing recession to put a cap on wage rises.
Let's be blunt in that case about what they're doing. In the face of a crisis that is massively beneficial to energy companies and which will richly reward banks, in both cases for doing nothing of any additional social value whatsoever, the central banks are trying to suck demand for goods and services, employment and so wage rises out of the economy. They will, in the process, harm those businesses that do actually employ people and add real value in the economy, into which category banks and profiteering energy supply companies conveniently do not fall. In other words central bankers are intent on changing the allocation of reward in society, yet again. The shift will be away from workers and away from those employing people towards those who simply make gains on the basis of exploitation by sucking dry those who actually add value in the world in which we live.
This is rentier capitalism writ large in that case. Those committed to that form of exploitation are following the maxim that no crisis should be allowed to go to waste. They are using it to cement their positions. That millions, if not billions of people will suffer as a result once the spillover effects in developing countries who will not be able to service their dollar debts are taken into account, is a matter of inconsequence to them. As the New Economics Foundation pointed out yesterday, and as I did last weekend, this is not their concern. That bankers might gain from pillaging the economy with the supposed aim of eliminating nascent wage increases that might just give people the chance to survive this crisis with their households still intact is inconsequential to them, they say, because it is a necessary price to pay.
I beg to differ. This is a price not only not worth paying, but when we have supply side inflation their putting up the price of money, which is what they are doing, only makes matters worse. That much should be glaringly obvious. They apparently miss the point because changing interest rates is the only tool available to them, and they are determined to use it now that we actually gave inflation for the very first time since the era of independent central banking began more than 25 years ago to solve a problem already resolved by the time that they were created.
In the circumstances we need to recognise that what is happening is deliberate. A small, deeply privileged element in society is taking advantage of the current situation to wage class warfare on those who work for a living. Society is stacked to let them succeed. The cost of them doing so will be immeasurable in terms of human suffering.
But apparently the powers that be are going to let it happen. When asked the question ‘who should suffer to pay for this crisis, and who might gain' their answer is ‘those least able to bear the burden should suffer so that the rich might gain'. It's the same answer on Covid, of course. It is the same too on climate change. We are currently in denial on all three issues.
That denial is, however, mightily dangerous. Tensions that might be impossible to peacefully resolve are being crashed at this moment as financialised neoliberal capitalism makes what might be its ultimate, and ultimately destructive, power grab. These are deeply dangerous times. I am not sure how they resolve at present. But resolve they must.
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The first step is actually get someone in opposition that actually provides an alternative vision…
Like or loath Corbyn, he provided an alternative vision and an alternative economic policy framework… Labour are AWOL on this front and, I hate to say it, it looks to be by design rather than negligence. Doomed to repeat the mistakes from 2015, when they embraced austerity…
If this alternative vision was there then the Tories would be offering more concessions…
Just want to say thank you for the blog, it helps broaden my knowledge of economics, keep up the good work!
My view is not dissimilar to yours.
This tendency for vested interests to ensure that they benefit most from Government sponsored central bank activity has always been there.
However, since 2008 – and how the banking sector and the rich got away with the crash without any real backlash because of the domination of alternative idea killing Neo-liberalism – has just emboldened them even more.
Added to that is the perception that we are headed for a change in environment that is going to have some catastrophic consequences for the world – there will be less land to live on and more water – so having loads of money in the view of the thieves, liars and murderers in charge is very attractive to get them ahead of the game. I kid you not – this is a race to grab as much as they can from a changing (dying?) world. The sharp elbows of the rich are as sharp as ever.
As the father of two teenagers this thought leaves me profoundly upset – that we have really fucked up the future but there is a lot of truth in it.
One day, perhaps, someone will discover this blog in some form or fashion, and within will be the REAL back story as to why our civilisation (or what is left of it) failed.
It will be all here and it least show that some of us tried and cared as we went down the drain.
So clear Richard. But why dont BBC journalists hardly ever ask BoE Govt, or their ‘Independent’ economists the question – how exactly is this going to bring down inflation, and why do they just accept ‘wage-price spiral will become ‘baked in” – when real wages are lagging…etc etc
Almost like living in some kind of one party state – this blog and other objective/science based forums (Indie Sage etc) are underground samizdat
“The Bank of England has effectively admitted in its recent commentaries on inflation that there is nothing it can do to tackle the international inflationary environment. It cannot solve supply chain problems, stop profiteering energy companies, end the war in Ukraine, or the impact of sanctions including food shortages. As it knows, no interest rate change will come close to tackling these issues…… ….. Instead, they are claiming that in amongst the inflation created by all the factors that I note they are spotting that supposedly strong labour markets are increasing the wages of some employees in reaction to price rises elsewhere, despite all the remonstrations from central bankers that pay restraint be shown.”
That is the basis of their justification of increasing interest rates when the evidence show we are heading into a very serious recession. If this seems bizarre, we should remember that Government policy is, post Brexit for a ‘high wage’ economy. Allow me to quote the PM at the Conservative Conference, reported in ‘The Times’ (5th October, 2021):
‘Boris Johnson has insisted it is not his job to “fix every problem in business and industry” as he dismissed suggestions of a shortages crisis. The prime minister said he was not worried about inflation resulting from higher wages as he warned businesses that there was “no alternative” to breaking Britain’s reliance on imported workers.’
So the Conservatives encourage labour to push for higher pay; until they actually do, then monetary policy moves in the opposite direction. Notice that Johnson effectively acknowledged the problem was the loss of EU labour, post Brexit: ‘there was “no alternative” to breaking Britain’s reliance on imported workers’.
Meanwhile the PM crows in Parliament about full employment; but the problem is the inflationary effects of Brexit. Even with effective full employment we have a growing, unfilled demand for labour; hence inflationary wage settlements as business struggles to fill the unfillable, because of Brexit. When the BofE implies ” supposedly strong labour markets are increasing the wages of some employees in reaction to price rises elsewhere”, it is simply ignoring the fact that over-heated wage inflation is largely a function of something it has no power over to effect, because the root cause is Brexit. It is worth remembering that historically pay improvement rarely happens through wise policy. The greatest single transformation in the economic power of ordinary people probably arose in Britain solely due to the Black Death (mid-14th century); it wiped out so much of the population, it quickly enhanced the economic power of serfs and their capacity to bargain, and began the long march toward the destruction of feudalism.
But do we have “effective full employment”?
It seems to me that a measure of effective full employment should mean that most, if not all, people are in jobs that allow them to meet at least the three lowest of Maslow’s hierarchy of needs, basic needs, security and belonging, without which you have a population with no basis for reasonably independent, stable lives with the very important sense of being part a community.
The full employment currently experienced by a third of our working population includes none of these things and decreasingly less opportunity for a better job. We are back in the world of Dickens where effective full employment meant earning pennies to sweep a way through the horse-shit blanketing the roads so that the rich could cross unsullied.
Agreed
Mr Langston, I agree. The problem still remains unfixed. You cannot reconfigure the population retrospectively to fit the requirements of the vacancy profile. The population of aspirants are over, under qualified or otherwise unsuitable to cover the shortfall. I took a shortcut in a long comment, but I argue that my basic proposition stands. The problem of Brexit has not been fixed, and is very, very difficult to fix even partially outside the single market; whether Conservatives want to hear it or not.
Also the brexit disaster – has reduced exchange rate and increased inflation
https://twitter.com/Simon_Nixon/status/1537415189590589446
I asked, on a business forum:
Please can someone explain to me, preferably in words of 1 syllable how raising interest rates will control inflation and how it is good for the people of this country.
The only answer I got was:
They have to do something to stop money leaving the country and the £ crashing.
If USA puts rates up and we don’t, why wouldn’t the big investors just move funds to the USA? With potential of a run on UK banks.
I don’t think I have seen that put forward as a justification. Any thoughts?
We already have a run on the pound
Brexit and Johson have done that
Interest rates will make little difference – although aggressive US policy is pushing the dollar upwards – which will end in many tears
Japan is ignoring it
But to suggest that this could lead to runs on banks is fanciful. They are profoundly solvent because the government has gifted them the money to be so
There is an interesting piece in the Grauniad today by Aditya Chakrabortty.
https://www.theguardian.com/commentisfree/2022/jun/17/profiteering-bosses-workers-inflation-unite-sharon-graham-labour
Towards the end of the piece he says
‘While the Bank of England is jacking up the rates on your mortgage and credit cards, and hastening a recession, policymakers are fighting a war that is half a century old. It’s not workers who are pushing up inflation; it’s often their employers.
Threadneedle Street knows this is happening. Its chief economist, Huw Pill, talked last month of companies pushing up prices to “pass on” costs, and of a “further strengthening of margins”. The obvious answer would be for Westminster to crack down. But while Bernie Sanders and others in the US are threatening a profiteering tax, Starmer’s team is paralysed by the fear it may be seen as too much in hock to the very labour movement that founded it.’
As Nick touched on further up the comments, where is the alternate vision.
We are not being served well by our political system, those in power seem almost completely without morals or empathy and yet those in opposition sit on their hands and offer nothing beyond watered down Tory policies. The Neoliberal beast now wanders amongst us unrestrained. Echoing Ann’s remarks yesterday (?) how do we effect change in an environment where democracy has become little more than a game?
I read that
I worked for that Unite team for a couple of years
It is bizarre that it should be so widely believed that this rise in inflation CAN and MUST be countered with higher rates.
Consider if a government hiked energy taxes massively. It would raise inflation but nobody would suggest that the BoE hiked rates to reduce it; on the contrary they might consider monetary easing to counter fiscal tightening.
Just because the price rise has been generated externally doesn’t make a different monetary response (tightening) sensible
Richard, once again many thanks for the enlightening blog. What’s happening does make me angry and more determined to support the campaign for Scottish independence and once obtained to help make change happen here.
The latest justification seems to be using rate rises to prop up the currency – it’s 1992 all over again!
There’s no doubt we’re now experiencing long run internal devaluation (petrol pump prices are the clearest indicator of that), but that is thanks to Brexit and it seems to me screwing over ordinary mortgage payers in a futile attempt to temporarily hold up a sterling battered by the pariah government’s flagship policy is abhorrent.
I have recently come across your work and have enjoyed reading it all. It very informative and interesting. Whether it is 100% correct I wouldn’t be clever enough to tell but it seems pretty spot on to me.
I was pleased to read that there will not be a run on the banks in your view as they are extremely solvent due to gifted money. It is my opinion that I would rather pay them appeasement money than have them rape and pillage more than they already do. e.g. Bail ins !!!
Having been brought up in the Carribbean for my early years and witnessed the Expat communities first hand, I was more than aware of British history. The Pirates never went away. Privateers = Bankers
On that point of bank solvency, why do you think Bridgewater has reportedly shorted Santander and other European banks ?
On a more general overview, with all of the posts I have read here you have to ask yourself/selves, is the UK (England) the place where you want to live. As with all great empires, they ebb and flow, and if we were the fifth largest economy in the World, what number do you think it will be in 10, 20 years’ time? After all it was number 1 a short while ago and is on a one way ticket. Look at all the negatives stacked against it; Brexit, break up of the union, lowest growth, super low productivity etc etc. and this cannot not be turned around quickly. With only one life, wouldn’t it be best to vote with your feet and find a new nirvana and invest your hard work and endeavour to make that a better place ? If all the good people leave, who and what is left? It happened to the Romans, and they were probably the greatest empire that ever was.
I have my personal answer, and am also actively encouraging my children to get out of Dodge. Don’t get mad, get even. I love spending money abroad and can’t wait to take my pension with me too. Rat, ship, sinking, leaving 🙂
Re Santander etc, I don’t know
Re leaving, I would be going to Scotland, as and when…
Well if we both go then there really is no hope. Scotland does sound like a good idea. It’s got such a strong brand in the world. Got to be the best bet among the runners a riders within the UK.
I am forever hopeful that the British people will see sense. I am praying that the byelections next week give our own little mini Trump another bloody nose. Perhaps death by a thousand cuts is the best way for vermin.
Can you explain this part better please ” because QE has not contributed to inflation in consumer prices, as I have shown, and reversing it will in that case likewise have no impact on those prices.”
The Bank of England data shows that inflation during the pre-Covid period was around 3%. That’s from around 2008-2019. This was also a period where new bank lending was restrained compared to the 11 years previously. So I don’t get why you think the BoE data is wrong and the true inflation in that period was nil for practical purposes. That’s what no inflation means does it not. Just can’t make sense of the argument without this fundamental discrepancy being addressed – you say QE had no effect, the data says it did.
You do know that 2% inflation is planned and for most of that period did not exist?
I think you are trolling
Very clear as always.
I will be going on the TUC march today, but the TUC and the unions must avoid fighting the cost of living crisis we have today in the same way that they fought it in the 1970s. They need to make much more explicit the distributional nature of this struggle if they are to fight it effectively. It may have to be accepted that some drop in the standard of living will be unavoidable if the current disruption in the supply of goods and energy continues. The TUC and unions must demand that they be active participants in determining how any drop in the standard living is distributed through society. The TUC had an active input into the design of the Furlough scheme to deal with the pandemic. They should insist on an equally active role in designing a response to the cost of living crisis.
A simple call for an increase in wages to match price increases is not enough.
Agreed
In a democracy, the government decide policy – they may choose to involve other groups, but the TUC (or any other group) have no right to insist on anything.
That’s a deeply enlightened view
You realise Putin shares your totalitarian views?
So let’s rephrase it:
‘They should demand an equally active role in designing a response to the cost of living crisis.’
The government can then reject that demand if it so wishes. The important point is that the trade unions must make clear that they are considering the wider interests of society rather than just pursuing narrow sectional interests. They failed to do that in the 1970s and opened the way for Margaret Thatcher.
Hang on! Capitalists are meant to act in their own self-interests but trade unions are not? Who created that asymmetry of power?
You think it’s ‘totalitarian’ to allow the elected government to govern?
Wow, just wow.
You do realise that democracy requires freedom of speech don’t you?
And the presentation of an alternative?
And it is a human right to withdraw one’s labour?
In other words – you do know you’re talking totalitarian drivel, don’t you?
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