I posted this thread on Twitter this morning:
There are warnings in many newspapers this morning that suggest Sunak and Hunt have agreed tax rises right across the board in what is described as an attempt to fill the budget ‘black hole'. Alongside austerity these tax rises will be a disaster. A thread on what we should do…..
The UK is heading for a recession. A cost of living crisis created by externally created inflation, whether it be Putin's war or post-Covid supply chain disruption, is the primary cause of that recession. Almost none of it has been created domestically.
That inflation is a temporary phenomenon. Analysis published by the Bank of England suggests that to be the case. We might have inflation of 10% now, but that will fade rapidly.
For a detailed explanation of why this is the case see this blog post of mine that uses Bank of England data. The key takeaway is easy to understand.
Once the impact of Putin's war becomes limited in the calculation of inflation (which it will be by mid-2023, because by then inflation calculation will compare post-Putin war prices with post-Putin war prices) then inflation might be no more than 3%.
In other words, the Bank of England already know that the mathematics of inflation calculation - which are very crude in that they simply compare prices one year with prices the previous year - guarantees inflation is going to fall in 2023.
This does not mean prices are going to fall. That will not happen. It just means that they will not be increasing nearly as fast as they are now. Unless we have another pandemic or war, that is almost guaranteed.
In that case let's deal with the obvious policy consequences of this fact (since in economic forecasting terms this is as close to a fact as anything can be). That consequence is that no interest rate rises from the Bank of England are required now.
Interest rate increases are an immensely crude measure, given the nice sounding description of monetary policy by economists. Their only use is to stop inflation created by excess wage increases in an economy that in turn drive up inflation.
It is presumed that they work by increasing the cost of borrowing which in turn reduces the amount people have to spend which then puts pressure on businesses to reduce prices as demand for their goods and services falls due to people having less to spend.
It's generally accepted that this policy takes up to two years to have an impact. Market interest rates and people's behaviour takes time to react to official interest rate rises. So, in the short term this policy is pretty useless.
In that case a policy of steadily increasing interest rates, using the excuse that the previous rate rise has not stopped inflation increases, is ridiculous. A rate rise one month will not have impact a few weeks later. So, the Bank of England's policy on this is crazy.
But that policy failure goes much deeper than the failure to get the delivery right. The inflation that we have in this country is not being driven by excessive wage rises. And there is not excess demand as a result driving up wage rises, and so inflation.
The problem in this country is excessive prices driven up by international factors over which we have no control with people then having insufficient income to meet the resulting impact on their cost of living. This is not the type of inflation interest rate rises can address.
This type of inflation is beyond our control. Even pushing up interest rates to increase the exchange rate of the pound fails in this case: the price increases are too big.
It seems that the Bank of England has not noticed any of this. It is pushing up interest rates anyway. The result is that they are taking purchasing power away from households already unable to make ends meet due to price increases.
The Bank of England is, in other words, intent on crushing the ability of households to spend when their ability to spend has already been crushed by inflation and by pay rises that do not in any way compensate for the increase in the cost of living.
If you want to know where the UK recession is being created you should, in that case, look first to the Bank of England. They are doing their utmost to make life impossible for people in this country. They are creating our recession.
However, given that the Bank is already well set on delivering its goal of a deep recession, what should the government be doing? Economics is quite clear. First, interest rate rises should first of all be stopped, and then reversed.
The government can order the Bank of England to reduce interest rates. It has the necessary powers. So called Bank of England independence is a veneer or charade. They must ultimately do what the government wants. The government should want reduced interest rates, now.
Second, there are a number of economic rules that it is well known that a government must follow when facing a recession. All gave one goal, and that is to increase spending power, because it's a shortage of spending power that creates recessions.
So, first, you cut interest rates for all the reasons already noted and because doing so increases spending power, which is what we are short of.
Second, you cut taxes when facing a recession, and most especially do so for the lowest paid as they suffer most from any shortage of spending power that a recession creates.
Third, you increase government spending because that is the only component of national income that any government can control, and in any case all the others will be falling in a recession, so it is the only one that can turn the situation around.
Fourth, you work to increase the pay of those who cannot make ends meet so that they have the ability to spend more and so begin to turn the recession around.
These are the general rules. In the UK's current case there are a couple of twists to add. The first of these is that because of our gross inequality you could tax the wealthiest (top 5%) more to redistribute income to those who will spend and not save.
The second is that you might want to specifically direct spending to a) keep people wanting to work in essential services and b) to deliver better healthcare as nothing improves productivity faster in the economy and c) to invest in sustainability.
I make the point to make clear decisions on priorities have to be made.
Why are decisions on priorities required? Three reasons, as usual. First, money in the right place turns things around quickest. Second, to politically signal that things have changed. Third, because funding has to be considered.
Cutting taxes overall and increasing spending in a recession is essential. It is the way the government injects money into the economy to get it going again. Without this deficit spending recessions get worse, not better.
Our government is planning to do the exact opposite. It is planning to increase taxes and cut spending on top of increased interest rates. That is because it is obsessed with not borrowing. On top of BoE interest rate rises Downing Street is intent on making recession much worse.
When the reckoning on the recession to come is made Sunak and Hunt, along with Andrew Bailey at the Bank of England, will be seen as the architects of the economic despair that will happen over the next few years, wholly unnecessarily.
But let's deal with that ‘black hole' that the government claims exists which they say must be filled with austerity and tax increases.
There is no black hole. There never are holes in government funding. It is impossible for the UK government to not have the money it needs to spend because its bank, the Bank of England, ultimately creates all the money that we use.
To pretend that there is a black hole of unfunded spending the government cannot pay for is in that case to lie. There is no other word for it. Ignorance is the only excuse. And no one in charge of the economy can surely be unaware that our money is made by the Bank of England?
My guess is that maybe £80 billion might be required by my policy. Where to find it then?
The simple answer is to let the Bank of England create it. This is, in effect, quantitative easing. This could be done: the reason for doing so is to say that the energy price crisis requires it. The problem is solved immediately in that case. There is no black hole left.
Alternatively, ask the markets for it as borrowing. Given that the BoE is planning to sell £80bn of the government bonds it owns as a result of QE back to the markets over the next few months in an attempt to push interest rates up we know that market capacity for £80bn exists.
So, the government should simply tell the Bank of England not to sell those bonds and the Treasury should sell new bonds to fund the deficit instead. Again, the black hole disappeared, immediately.
Quote literally, the so-called funding crisis that we face can be solved as simply as the last few tweets imply. There is no issue or stress that we face that requires anyone to say we have a black hole or need austerity.
So why is that message being sent out? I have to conclude the government wants a recession, And it wants to cover that desire up by creating divisions in society. That is why Braverman is at the Home Office.
This is also why racism is being fuelled, very strongly. The aim is to blame migrants for the recession and the inability to provide public services with the goal of distracting attention from the actual economic policy, which is deliberate destruction of public services.
Why deliberately destroy public services? So they can be privatised to deliver gain to a few, of course.
Why is a recession, plus a racist diversion, needed to do that? To grind people down to the point where they are so indifferent to politics and the abuse of democracy that they will accept anything, of course.
The aim is the destruction of the state as we have known it. The goal is a fascist state. How else can policy so bad, and so deliberately so, be explained? Our government is at war with us. There must be a reason. It can only be for their gain at cost to the rest of us.
None of this need happen. I do not dispute that we are in an economic mess. But it is soluble. It is not hard to see how. And the government intends to make it very much worse.
My serious hope is that opposition politicians will see what is happening. If they don't, our descent into fascism will happen. I am fearful. I can't pretend otherwise. ENDS
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Richard, it’s dangerous to confuse your interpretation of a BoE blog with the actual view of the the BoE. You readers can access the BoE forecasts for themselves. They state their view that inflation will remain elevated throughout next year. Rightly or wrongly, they do not foresee a rapid fall away in inflation as you suggest.
That said you are correct to be concerned that the folly of austerity is about to be repeated.
They published the article I referred to
They did and I read it and your interpretation of it, which was interesting.
Nonetheless, they official BoE forecast is for inflation to remain elevated throughout next year. That is official and published too (see their monetary policy statement). The two should not be confused.
But the official line is a lie
I’m afraid our opposition politicians do see this and are actually prepared to go along with it because they too wish to appease the markets and those interests that power them.
So the Bank of England knows inflation is going to fall next year anyway. Most of the general public don’t know that. What a nice little headline it’ll make when the govt / Bank can assure us all the pain of interest rate and tax increases ‘was worth it’.
That is what they will say
That is why I say these things now
Just my assumption. Money will flow before the next election – “because of the sacrifice of the British People over the past months and a conservative government that balanced the books, unlike those on the benches opposite” will be the phrase. The Tories fiscal competence conjuring trick. Hopefully it will go wrong.
In some odd way I am disappointed with Rishi Sunak. I thought he would give more thoughtful answers at PMQs but he is just another Johnson (naive me).
It is clear that Braverman’s appointment was payback, just disgusting. Taking your tack on spending, clearly spending more on checking fast who are refugees in need so that others would be sent back promply (surely a deterrent for those who are not desperate) and giving the refugees residence rights so that they can work would solve many problems including all those hotel bills. What nasty plan do they have in not doing this?
Apologies for an off-thread comment; but I have been boring everybody to death here on the oil major profits and the urgent need for a larger windfall tax. BP annouces a £7Bn profit for three months. BP has reported “exceptional profits” from its gas operations. My very hasty and rough estimate is that profits were circa £14Bn for six months. Shell had a profit for three months of £8Bn. The windfall tax is too low.
The hard pressed British public are facing further tax rises and 10% inflation. The oil majors are producing egregious. Apologists for oil argue the oil industry is ‘volatile’. Oil has always been volatile, but it has been around for over a century and are still among the most profitable areas of operation in business. Volatility is their business, it is not an excuse. The profits they make, frankly are worth the risk. It is the business they are in. Often, the losses they make are due to their own follies (pollution disasters to mention only one). Currently both Shell and BP, British companies – are operating share buybacks; an indicator they are making so much money they are returning it to shareholders; and not for the first time in their modern history.
A significant windfall tax is needed now. The worst of this is that eventually the price ‘spike’ will pass; and the British Government has managed to gerrymander applying the windfall tax so long, we have already lost a large tax source from the missed windfall tax (Shell paid zero windfall tax paid, for last quarter’s huge profit).
Ordinary people will have their taxes raised in the Budget that will affect their capacity to feed their families or heat their homes; the disproportion of effects in this is utterly, unjustifiably, unsustainably unacceptable. It is not politics; it is a scandal.
Agreed
John S Warren , sorry John but oil and gas is running out , it may already have ran out , i take it you are referring to Scottish oil or as Westminster call it , British oil , since 2013 Westminster have assured us here in Scotland that there is no oil or gas left that is worth extraction , pity because its price right now on world markets is about a hundred dollars a barrel , that’s for Brent oil , I think the Brent oil field is in Scottish waters but it may have been moved since i last looked , anything over about 46 dollars a barrel is profit .
I am not sure what this post is meant to add to discussion
Can you make an argument when commenting please? I am not sure there is one here
Well, I did suspect tht I was boring everyone to death on this subject (the sheer scale of the disparity between oil & gas windfall profits and the insignificant windfall tac levied, essentially to scam the public), and I hear what you think of it; not much! Ouch! It seems I was right.
I think that was my third attempt to raise the issue; and all I have elicited as a response only one single comment; from Mr Callachan; and I cannot even understand it, or fathom what conceivable point he could be harbouring to bother wishing to make it. I begin to appreciate the nuances of the life cycle of a wastepaper basket; the receptacle, often of broken ideas …..
Oh, well. Ho, hum; back to the drawing board! Or maybe a short spell in a darkened room.
What is your view on inflation is wrong and it doesn’t just dissipate. What then are the risks of cutting interest rates to near zero and printing money to boost public services?
If I am wrong the evidence of 500 years of history is also wrong
As a matter of fact inflation always drops after a spike
Oh, and that was, I think, the eleventh identity you have used here…
You say…“That inflation is a temporary phenomenon. Analysis published by the Bank of England suggests that to be the case. We might have inflation of 10% now, but that will fade rapidly.”
You are being disingenuous. Those who read the BofE report will see it says “monetary policy will ensure inflation gets back to its 2% target”
You say..,”Interest rate increases are an immensely crude measure, given the nice sounding description of monetary policy by economists. Their only use is to stop inflation created by excess wage increases in an economy that in turn drive up inflation.It is presumed that they work by increasing the cost of borrowing which in turn reduces the amount people have to spend which then puts pressure on businesses to reduce prices as demand for their goods and services falls due to people having less to spend.”
No!!! MV=PQ. Higher interest rates reduces V – because fewer people go out and borrow money – meaning that inflation falls as the wide money supply does. You are trying to do monetary policy without the money equation. That equation not being some recondite piece of Continuity Neoliberalism but an identity.
Oh dear…..I guess I have to let an idiot who believes in this supposed identity
Tell me what has caused V to decline so rapidly in the last decade or so with low rates
Then tell me why we need high rates now in that case
I keep hearing on YouTube statements like “The government needs to grow the economy so that it can afford to spend more” but I really don’t know what these people think economic growth is, especially when their notion of growing the economy seems to involve filling the “black hole”. The main point of difference between different commentators seems to be whether it should be the rich or the poor that should do the most black hole filling.
There is no black hole
Indeed there is no black hole. However there are many YouTubers many with a vast number of followers who are pontificating about how to fill this non-existent object.
Change the rules and it has gone
Easy
Especially when the rules are totally arbitrary
They are in fear of the tabloid readers to whom any new idea is wrong.
Part of leadership is to lead and that means explaining.
Hence my blog threads
If the following seems like a stupid question, you’ll have to excuse my ignorance as I try to get my mechanical engineers head round some of this stuff. One assumes that there are alternative theories as to how to deal with the current issues facing us and both the Tories, and perhaps to a slightly lesser extent Labour slavishly follow those who promote them. What for example, are the potential pitfalls of creating money in the quantities that you suggest are required, and over what timescales would they have an effect?
£900 billion of QE to bail out banks and pay for QE did not create inflation
Nor did they create a recession
Brexit and the cost of living crisis are creating recession
Inflation has been created externally
The real question is what would the cost of not creating that money have been and the answer is economic disaster
Same now
You can only begin to understand the cause of the problems that this country faces when you read that after 12 years of Tory imposed financial, social and political mayhem, culminating in Liz Truss blowing a £50 billion hole in the UK economy, the Tories are still polling as the party most trusted to look after the UKs finances.
The ability of a tiny number of people to manipulate the rest of the population with lies, distraction and propaganda is truly a wonderful thing.
Sometimes I think ordinary people loose understanding of large amounts of money. £50 billion hole in the economy means very little to a lot of people.
The figure that ought to hit home is that, due to 12 years of Tory austerity (economic) policies, more than 300,000 people died early. How many more will die due to Truss’ criminal stupidity and the proposals that will come out in a couple of weeks’ time.
There appears to be a well justified and reasoned consensus that those who are pushing this economic illiteracy, regardless of whatever nominal party political label they happen to wear, are lying to the public about how economics actually work.
Lies which have been an integral part of the orthodox narrative and subsequent policy for at least forty or more years.
Whether these are lies of commission or omission one undeniable fact is that the vast majority of what presents itself as the media, whatever form it takes, is totally on board with pushing these false economic narratives.
At the risk of stating what should be obvious but may not be, such falsehoods in whatever form they take are not and never have been limited to the economic sphere either in the present moment or in the past.
Whatever topic or issue anyone cares to pluck out of the air – from immigration and refugee crisis’s to industrial disputes; civil unrest to security; problems in education and health; democracy and its definition to foreign affairs, along with their root causes – one constant is the amount of evidence which exists of the same level of dishonest dissembling one encounters in the field of economics.
And just as those such as Richard Murphy or Micheal Hudson among many others who call out these lies about the official economic doctrine and offer alternative analysis which challenges that economic orthodoxy are vilified for contradicting that false narrative so it is with those who point out the same false narratives in other fields.
As Micheal Miles used to say, ‘take your pick’ of examples of official narratives, in addition to the economic field, in which those who were vilified for pointing them out to be complete falsehoods were subsequently vindicated: the 1984-85 miners strike; The Belgrano; Hillsborough football tragedy and numerous other miscarriages of justice; Gulf of Tonkin, babies ripped out of incubators, WMD’s, Douma and other false flags; Watergate, Partygate et al; BAE and similar corruption scandals; ‘Extraordinary Rendition’, Mei Lei, and numerous subsequent war crimes; and so on.
The objective of creating a fascist state contains many connected and interrelated facets in addition to the false economic narratives. Which is why it is necessary to ensure that the values which form the basis of the criteria applied in one field are consistently used across all other spheres to avoid the possibility of undermining the arguments challenging such lies in one area by tacitly accepting the same lies in another.
I think that you are being too nice Richard on the question of inflation.
Had – after 12 years in power – the Tories pursued a more green agenda (GQE), then we’d be generating more of our own power and might be facing marginally less increases than we are now in energy prices. They have made our energy supply less secure as a result.
It is hard in my view for the Tories to escape any responsibility for the state of the nation across the board. Everything reeks of their rank neglect and negligence.
Economic warfare? Agreed. There is a method in their madness for sure – as you say, enabling them cast off the remaining public sector areas under the lie that they cannot afford it.
But there is something else troubling me as well. The planet is warming up, and certain parts of it are becoming inhabitable. That along with conflict and unfairness means that migrations are on the way.
The Tory attitude seems to be to pull up the drawbridge and isolate ourselves when these crises call for more global working together. And whilst doing that, they’ll entomb the rest of us in a low wage, short life economy to serve as chattels for the rich – English chattels of course who will know their place because TINA.
We’ll be the capitalist version of North Korea – inward looking, secretive, poor but ruled over by the mega rich and powerful.
You know me: always the moderate 🙂
Well, being moderate is hard job but someone has to do it!
🙂
My comment on Facebook, where I shared this blogpost:
We don’t have a government any more.
There’s a board of asset-strippers instead. They used to be recognised by the name of “carpet-baggers”. They are selling off our shares in our country.
What follows from understanding the simple facts about the UK’s money creation?
Any austerity is the political choice of a Party that is either ignorant of those facts, or lying for personal gain.
Any recession is the political choice of a Party that is either ignorant of those facts, or lying for personal gain.
Either Westminster is a “ship of fools” or a parcel of conniving carpet-baggers.
Whichever it is, Westminster is not a government.
Aye, pretty much Anne, it has been that way since the “sick man of europe” and are not inclined to change…
What’s with that conluding “ENDS” ?
Do you imagine to be a newswire service, where editors with green eye-shades in dusty offices around the world are yelling “stop the presses” every time you thump out some ex cathedra drivel?
It tells people on Twitter they have reached the last Tweet
I forgot to delete it here
And as for the drivel, you seem to be the ,master of that
Quantitative Easing (QE) seems to the increase in energy prices, so QE appears to be an indicator that inflation has risen (past tense), and is not the cause of it.
There is no “black hole” or “financial hole” (per the BBC article today), or funding crisis, because (a) taxes do not fund government spending (b) the government does not have to rely on an external source for its funds. The government is not like a household.
I admit I do not understand your first para
Oops. Quantitative Easing (QE) seems to increase after an increase in energy prices…
Does it?
I have always wondered how a government that has its own currency can ever run out of money it just does not make sense to believe it can , we see throughout our lives that the money for certain things , war for example , is always found so it clearly makes sense that governments with their own currency can always always create more money.
What I would like to know is , how does QE affect our currency in terms of its value compared to other currencies , one would think that there may be a risk that our currency drops in value compared to other currencies if substantial or repeated QE is introduced but i dont know if this would be the case.
Can you explain please.
Also , if we do not import much would I be right in saying that a drop in the value of our currency would not cause us much difficulty but if we import a lot it could be a big problem.
There is no evidence QE has changed values
Productivity does
So do political events like Brexit
the law and order bill is ready to crush us and ban noise however that is defined. And now we learn that police ranks are full of crooks ( Today’s Times)
“Why deliberately destroy public services? So they can be privatised to deliver gain to a few, of course.” So what is the motive of members of government to do that? Is it for personal financial gain? That doesn’t seem so plausible in Rishi Sunak’s case, as he already has more money than anyone could ever need. What else might be his motive?
The rich always want more
If you want to meet someone with an insecurity complex meet a rich person. They are paranoid about losing what they have so always want more
And are there other countries that are doing the four things you recommend (cutting interest rates, cutting taxes, increasing spending, and working to increase wages)?
Try Japan
It also keeps them ingratiated with their like-minded friends, and demonstrates their commitment against the “loony left”.