I posted this thread on Twitter this morning:
Sunak and Johnson said yesterday that the Bank of England has to act to tackle inflation caused by increased demand in the economy post-Covid. But that's nonsense. Demand has still not recovered to pre-Covid levels and is declining now. They have this very wrong. A thread…..
The fact is there's no sign of excess demand in the UK. We might have limped back to pre-Covid levels earlier this year but all indicators now suggest we are heading for recession. The Tories might want to claim otherwise but there is no economic miracle going on right now.
In fact, consumer confidence is at record low levels. We know there is a cost of living crisis for many. And we know that industry is sending out signs of recession. The prices of key raw materials, like copper, are falling fast. This is downturn territory.
So why are Sunak and Johnson claiming otherwise? The only reason can be to support the only policy response they know of to inflation, which is to have the Bank of England increase interest rates.
The Bank has already increased rates from 0.1% to 1.25%. It says they might go much higher. The financial markets thinks we will be seeing rates of over 3% in a year's time. This is a rate not seen since before the financial crash of 2008.
The object of these interest rate rises is crude. It is to force borrowers to cut their spending on goods and services they want because they have to spend more servicing their debts, and most especially their mortgages. It is also intended to reduce discourage investment.
The trouble is that this is the last thing we need to happen in the UK right now. People are already struggling to pay their bills. They're not spending excessively, as the Bank assumes. They're cutting back on everything they can already to pay fuel bills.
The increase in interest costs for the most vulnerable households makes this worse. And let's be clear that this policy is targeted on the most vulnerable households, which borrowers and renters always are as they have always the smallest budgets available to meet other costs.
So, the families and households most likely to be most under stress in the UK will see their bills for mortgages and rents rise rapidly if the Bank gets its way. All the consequences are bad.
First, some will simply not be able to pay the increased mortgage and rent bills that they face. They will go into default and might eventually lose their homes. We all know that creates social catastrophes.
Second, if the Bank is too tough and many people lose their homes we will have a banking crisis: I think that more rather than less likely. Of course, that will also create a property crisis.
Third, before then, the pressure on household incomes will be so high almost all 'extra' spending will be cut. The knock on effect will be on retail, leisure and hospitality. The Office for Budget Responsibility says one employment will go up by more than 1 million.
I think the OBR is optimistic given the scale of the likely measures the Bank plans. And that also means many business failures. The misery will compound.
Fourth, add on to that the fact that the interest rate increases do under current Bank of England rules mean that the Bank will have to pay maybe £30 billion more in interest to commercial banks each year on the money they were gifted by the government during the Covid era.
Sunak will respond to that by trying to cut government spending. They have already said they want to get rid of 25% of civil servants - which will make the recession to come very much worse.
What Johnson and Sunk are cooking up in that case is the most almighty worst possible case scenario for the UK economy - where everything they do will be intended to make outcomes dire.
Is this necessary? Of course not. First, we need no interest rate rises. They are completely counter-productive right now because they are designed to tackle a problem that does not in any way exist within our economy right now.
Second, the inflation problem can be tackled by actually cutting the prices of oil, gas and energy by reducing the tax takes on them - which might together go up by £30 billion this year, giving Sunak ill-gotten gains.
Third, precisely because we are heading for recession, come what may because people's confidence is shattered, the government needs to be spending more and not less - and can do so at any time it wants using quantitative easing - which did not produce inflation from 2009 to 2021.
The Tories have an economic plan for the UK, but it is one intended to deliver misery, disruption, chaos, and shattered lives, whilst making bankers very much richer. That is all there is to their plan. We have to do better than that. Getting rid of them is stage one.
But Labour has to show it understands the problems we face. Can Keir Starmer and Rachel Reeves step up to the mark? Time will tell.
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” Can Keir Starmer and Rachel Reeves step up to the mark?”
Probably not. They should be sounding their own warnings about the dangers of an economic crash but they are only quibbling about the details of Government policy.
There’s likely to be an Avalanche effect with the tightening of monetary policy. This will convert a high level of private debt into a high level of bad private debt. Bad debts create more bad debts. It’s rather like the R factor in an epidemic being higher than 1. There will be an exponential increase.
Everything will look OK until it suddenly doesn’t! It will be 2008 all over again.
I fear the Labour leadership is still trying to placate the Red Wall voters who were persuaded to blame all our troubles on the EU.
They will lose the support of younger and more skilled people. Leadership sometimes means risking division. But as the defects of Brexit become more and more apparent, Starmer will have to answer why he didn’t see it coming.
Of course this faux Conservative government of the authoritarian English nationalist Johnson and his paymasters – you can tell I enjoyed Peter Oborne’s latest blast – has to be got rid of. Of course… but who by? Starmer’s latest obscurantist ‘policy’ announcements – no talking to the SNP, ‘making Brexit work’ and no possibility of rejoining the EU or even its single market and NO to freedom of movement – are all politically foolish, tone-deaf and economically doomed. Just wait till he gets round to spitting on PR, supporting strike breaking and shuffling away from anything too Green for the right-wing press barons. This buffoon clearly isn’t finished barking up every wrong tree going.
As a Scot, I still have some hope left that my country can escape – but short of a new genuine democratic political mass movement infused with some of this blog’s economic insight and green purposes, I can see nothing but disaster, corruption and inhumane authoritarianism ahead for any remaining rump of the so-called ‘U’ K.
If Starmer is the answer, the wrong question is being asked.
Maybe the Durham police are the last chance after all?
The only other argument I have seen for raising interest rates is to try and strengthen the pound against the dollar, since we import so much that is priced in dollars.
One question that people are asking is why if the oil price has dropped, the price at the pump hasn’t. Looking over the last month, the pound has dropped from $1.25/£ to $1.21/£ and the Brent oil price over the same period from $120 to $111.
Given as you point out, it would really be disastrous for most people in this country, to increase interest rates much more, how else can we strengthen the pound in the short term to reduce our balance of payments deficit?
End Brecit
Really easy
Indeed, Richard. However, there is now absolutely NO UK party willing to do so – not even to campaign for removing its economically worst effects. This surely means that UK politics has now sunk to a depth from which any meaningful recovery – economic or political – is beyond reach. I applaud your unwearying campaign for economic and political sense but this Monday morning it is increasingly hard to see how it is ever going to gain political purchase; but, please, don’t give up.
End Brexit?!!!
It’s a bitch when ‘democracy’ doesn’t go the way you want isn’t it? That’s when your facist & authoritarian viewpoints really come to the surface.
You do realise that the essence of democracy is the right to change one’s mind?
This appears to have passed you by
Well, that and freedom of speech
Trust me, your fascism is very apparent
@ Richard M,
Ending Brexit is not so easy politically. I’m not sure if Sheffield counts as Red Wall but many nearby towns will. A few conversations with Labour and ex-Labour voters the next time you’re up that way will give you a better appreciation of the scale of the problem.
@ Richard K,
The pound is relatively stable against the euro. It’s almost exactly what it was a year ago. So are both the pound and euro falling against the dollar or is the dollar rising against the pound and euro?
I agree ending Brexit is difficult politically. I also think it is impossible. We cannot rejoin without EU acceptance and it would be on far worse terms than we had before. Just really not an option.
However rejoining the market may be feasible and would allevuate many of the worst economic effects AND the NI issue. It was what the Leave campaigners said would happen back in 19016.
Of course it would also show that the whole charade of Brexit was utterly pointless.
Odd, isn’t it. The Bank of England are tasked with keeping inflation under control, but the only tool they have to do that with is interest rates, which is wholly unable to deal with supply chain constraints caused by Covid, and Brexit, and the war in Ukraine.
Perhaps it might help to strengthen the pound, to make imports cheaper, but not if other central banks are increasing their interest rates by equivalent amounts.
They know it won’t work, but they do it anyway. Like attempting to cut down a tree with a sledgehammer.
So we must also have pay restraint. As if paying more to doctors or nurses, or teachers, or civil servants, would fuel inflation, because the prices of healthcare or education or, er, civil service, would have to rise as a result.
Does this make any sense?
It does
Interesting comment from Simon Jenkins
https://www.theguardian.com/commentisfree/2022/jul/04/keir-starmer-labour-brexit-plan-mouse-policy-afraid
Agreed
Possibly the first time I’ve been wholly in agreement with an article from Jenkins.
I’m less impressed with Starmer every passing day and I wasn’t overly impressed to begin with. Not being Corbyn and not being Johnson isn’t an identity.
We’re more likely to get a ‘Courageous State’ with Johnson or his successor than Starmer at this point in time and I don’t imagine much will change before the next election. His New Labour advisors somehow don’t seem to be aware that the world has changed since they were last in power and being a bit less crap than the Tories isn’t near what the country needs.
It’s as if Starmer is now expected to save the face of the Establishment who pushed for BREXIT in the first place by not drawing attention to its consequences.
Starmer is not vying to become a prime minister of a better government; he’s vying to become accepted by those really in charge of the country at the moment on their terms.
Yes this seems depressingly true about Starmer. How can we have an effective opposition if it’s leader is afraid of being annihilated by the media if he speaks truth to power? Is he giving the government enough rope to hang themselves? Both main parties are wooing that section of the voting population who are easily swayed by soundbites, headlines and slogans on buses.
Brexit has become not just the elephant in the room, but much, much more. It is now unspeakable, a phantom, the idea that dare not speak its name; a political taboo subject. It has ceased to exist in British politics anymore.
“Roll up the map [of Europe]: it will not be wanted these ten years.” (William Pitt, after he was informed of Napoleon’s victory at Austerlitz in 1805). In Britain it did not require a Napoleon; Boris Johnson – the Man Without Qualities – was sufficient to triumph over the basic sense and judgement of the British people.
The rest is to come.
Agreed
Sky News reports that: “Labour shortages on British farms have left tonnes of food unpicked, costing millions of pounds and pushing food inflation as high as 20% at the farm gate, the agriculture industry has told Sky News.”
Sssssh! Taboo subject.
Quite so
Incidentally, there is a second issue going the same way as Brexit: dubious PPE contracts. They are not being challenged in court. At the same time the media-spin is growing that Covid was such a desperate time, mistakes were bound to happen in the Government’s efforts to buy PPE urgently.
There are two basic problems with this; and I am not even scratching the surface.
1) When the Conservative came into office in 2010 rhere was at least £1Bn of PPE stockpiled from an expected future pandemic: note that, an expected an planned for pandemic. Using sweeping austerity arguments, the Conservatives did not maintain the viability of the stock. When the covid pandemic hit, much of the stock was out-of-date, and unusable. The cost of that blunder outstripped by an exponential factor what would have been required to maintain, in the stratosphere: a cost disaster.
2) There were persistent stories at the time contracts were awarded to companies with no history of PPE competence, and the purchase of unusable PPE; that well qualified caompnies in the sector were not being approached for help. There is no public evidence that these concerns have been pursued by anyone.
This whole irresponsible catastrophe is now being buried in plain sight. There will be a large new contract awarded, for Conservative Whitewash. Problem solved.
Another taboo subject within the year.
The Good Law Project is pursuing. Starmer needless to say is entirely missing in action. If I was a member of he Labour party I would be demanding my money back – a more useless “leader of the opposition” is impossible to imagine.
As I understand the current position, GLP are not in fact now pursuing the matter in court.
There are lots of good people campaigning for justice The Good Law Project is taking the government to court over the illegal tendering or more accurately non tendering of contracts during COVID
If you remember back to the coalition when no doubt the Lib Dem’s thought they could get their policies through. The serpent Tories stabbed them in the back and destroyed their credibility. Since then this juggernaut of lies and corruption has stream rolled to destroy all that is good about the UK. Integrity and honesty is no longer expected in government and when honesty comes along people laugh in its face and it’s deemed as weakness
Starmer is also a liar . You have to have been active in the party and on numerous social media sites to know what has gone on as the media are not interested so how would anyone know? I heard it reported that he inherited a bankrupt party. Totally not true. He used party funds unnecessarily . Members like myself have left in droves or have been thrown out of the party for having socialist views . I wish people would learn the difference between socialism and communism . Personally I think we have no hope and many poor families will die. So sad
Your last is so true
This is a different type of inflationary mindset. People are not rushing to buy in fear of rising prices, nor are they storing demand for a later date. The savings bulk that central banks talk of doesn’t matter. This is behavioural economics 101.
I have no idea what you are suggesting