The reality that the Bank of England and the Treasury are, in combination, seeking to create the biggest recession in UK living memory is seeping through into the mainstream media.
This was by Larry Elliott in the Guardian yesterday:
If there was really such a thing as a fiscal black hole, it might be a good idea to fill it, but the idea that Britain is about to sucked into a vortex because it is running a budget deficit is a fairytale. A country that has its own currency, as the UK does, can print money to cover its spending. While it is never admitted, the Bank of England's quantitative easing – large-scale buying of bonds – effectively funded government deficits during both the global financial crisis and the pandemic. There is no black hole because there is no way the government can ever run out of money.
Larry added:
But even though it should be obvious that more austerity will make structural economic problems worse, the UK is firmly in the grip of a technocratic, economic orthodoxy that insists budgets must be balanced, inflation tamed and markets kept sweet. The consensus among the commentariat is that there is no real alternative to what the Bank and the Treasury are doing. Credibility is the priority.
This argument has been deployed before. It was used in 1925, when the consensus agreed there was no alternative to putting the pound back on the gold standard. It was used in 1990, when the consensus was that there was no alternative to joining the exchange rate mechanism. Eventually, the “no gain without pain” approach was seen to lack credibility, and abandoned. But only after immense damage was done.
My colleague, Danny Blanchflower gets significant credit for the views we are promoting in the article.
The Guardian editorial this morning reinforces this theme:
Without mechanisms to keep prices going higher, they will fall. This is what happened in 2009 after the last big shock. There's no sign that both price- and wage-setters are simultaneously driving up their demands. But there are distributional and political choices in how inflation is brought down. The Bank places an oppressive thumb on the scale of economic justice, to guarantee the continued – and baleful – dominance of extractive interests in the British economy. As the central banks' annual report shows, they think that if the rising cost of goods causes inflation, then workers, not companies, should pay for it with lower pay. The Bank of England should be stopped in its tracks, not left to ride roughshod over the public.
I hope Labour are listening. They need to, very urgently.
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In some ways the current economic circumstances have helped to reify that many polices are just there to help the greedy rentiers benefit.
And you are right to call out Labour on this – what are they for if not to put an end to this cycle? And nothing works – not even work works anymore to protect oneself from price rises etc., if your wages – what little wages you have – are just being hoovered up by investors and creditors?
Killing the host? Absolutely!
Hear, hear.
Maybe I am being absurdly optimistic this morning…. but do I detect a change in the economic narrative? Or is it merely confined to The Guardian?
See the story I have just put out about Sky
Not a chance of Starmer and Reeves listening, I fear.
They are both what I call flat-earther economists, fully buying into all the bilge being proclaimed, and carried out, by the BoE, exactly as though the 2008/2009 GFC had never happened.
Neoliberal economics, including its flat-earther subgroup, bears remarkable similarity to mediaeval medicine, with its false paradigm of “balance” of the Four Humours leading to the relatively OK practice of leechcraft (using leeches to extract “excess” blood), and its savage variant of bloodletting!
When one application of bloodletting didn’t work, the “obvious” answer was that “more of the same” was required (as in TINA, and, alas clearly now, with the reapplication of austerity).
Alas, the end result was often the death of the patient (of course, “proving” they hadn’t applied the “cure” sufficiently fully – also à la TINA – a totally wrong conceptual model, resulting in misguided, actually wrong-headed, action).
One can sympathise with King Charles ll’s deathbed observation, after being subjected to this treatment more than once, when he said:
“I fear, gentlemen, that I am an unconscionable time dying!”
– something I fear the UK economy might say, if it were capable of speech!
Thanks Richard, I’m glad you keep stating the alternative narrative that interest rate rises are a calamity.
I did a bit of back of napkin maths – even if the rate rise only costs borrowers 50 quid a month each (though it will be more than that) there’s two million on variable rates, and another two million who have to remortgage in the next couple of months. That’s 100m a month sucked out of the economy or £1.2 billion a year from a single rate rise.
If you take labour’s £500 a month figure, then the BoE has already sucked £12 billion out of the economy, just from those 4m borrowers, and not counting all those remortgaging in the near future.
What’s our total consumer spending in this country? If they wanted to devise a plan to shrink the economy and cause a major recession/depression then they couldn’t have come up with a better one. I think this needs stating over and over again – people’s disposable income pays for other people to be employed.
Total wage income is in excess of £1.3 trillion
Energy costs are going to absorb £90 billion next year
Interest is smaller but devastating for those impacted – and as you say. millions will be
Don’t forget business either
Blimey Richard, did you slip something into Larry’s tea?
Tea?
Do you think that’s what we rink when we meet? 🙂
I’ve thought about this, the difficulty in getting a counter-narrative out into the media which points out the flaws in the expected recessionary actions of the Treasury and BoE, and the only person I can think of who might have enough reach to present it is Martin Lewis!
He was the one shouting from the rooftops about how the rises in the energy cap would be so devastating and he was on TV and in the papers day in and day out talking about it. I think he’s seen as someone without an axe to grind in this debate – everyone knows he’s now wealthy but has continued with his money saving advice ( though I expect he does well out of it himself financially).
However, in terms of cutting through, I can’t think of anyone else who would get the same airtime saying how foolish interest rate rises and austerity are at the present time.
Unfortunately, like the IFS, I suspect he ‘doesn’t do macro’ as he is understandably focussed on household budgets so money creation isn’t on his radar.
The media will never run out of current and former bankers and financiers to opine on what is ‘necessary’, so the doom loop we’re facing is going to be inflicted by those running the economy (into the ground).
I think he might believe this too political
“As the central banks’ annual report shows, they think that if the rising cost of goods causes inflation, then workers, not companies, should pay for it with lower pay.”
Moving back from BoE Noddy-Land to the real world, let’s try this.
I am involved in a project in the UK aimed at helping Company X reduce its elec bill. Once upon a time (2020) elec costs for industry were in the range £120 – £140/MWh. From jan 2023 Co X will pay………………£900/MWh (feel free to fall off your chair). There are various gov subsidy schemes that reduce this to circa £400/MWh (= 3x what they used to pay). Elec is the main cost for the company. I am devising some work-around solutions which will move elec costs much closer to what they used to be. Nevertheless, a substantive rise in elec costs (in other companies) will drive a rise in the companies prices. Perhaps the BoE would like to explain how reducing workers pay will help in this situation?
Energy costs drive the current inflationary round. I have posted before on this – & there are a range of options open to the Uk gov to substantively address both elec & gas prices (without the need for subsidies). They have failed to use these options suggesting they a) don’t know about them (why?) or b) are imbeciles unfit to run a corner shop. I favour the latter explanation. As for the BoE – they are the village idiots of the City of London.
As usual you are right Mike
Yep you and mike are always right… why is it no one takes a blind bit of notice?
Weird
Your name seems to have been something quite different only a few minutes ago
I agree that we’re on the way to an economic disaster but disagree with the impression you’re giving that this is a purely UK issue. You’ve mentioned neither the US Fed nor the ECB.
Yet, we can read in the financial press, such comments as “ECB must keep raising rates even if recession risks rise, Lagarde says” and “Economists warn of deeper US downturn as Fed keeps up inflation fight”. With the possible exception of Japan, these kinds of recession inducing monetary squeezes are happening everywhere at the same time as there is a fiscal tightening by Governments to supposedly ‘balance their books’.
The US Fed are probably the prime culprits. So when we do see the crash it will be international in nature and caused by the actions of the international community, or international capitalism if anyone prefers a Marxist term. Any solution has therefore to be international in nature and will involve nothing less than the outlawing of monetarist or neoliberal economics.
I have written a post on the Fed this morning!
Karen Ward of JP Morgan Asset Management r4 Today programme around 7.15am seemed to be parroting the group think – about limiting second round wage rises, without really engaging with the logic. She sort-of sounded as though she thought they were doing right to get base rates up to 4 or 5%, but without actually saying so. It’s a kind of endless tape – not saying clearly how this will ‘work’, how many will be unemployed, how many homes lost, and businesses fail.
Richard, Danny, Larrie Elliott and those of us who are saying rates should not go up, or should come down are at least saying why – and can be called to account.
But the Karen Wards of this world tend to leave themselves a little room so they can almost claim they were describing what BoE is doing rather than saying clearly what it should do and how it will work in concrete terms.
I don’t and won’t quibble with MMT as a description of how the economy works, but isn’t there a danger of slipping into the presumption that the British economy is a closed system, 100% autarkic,
sure, the govt. can never run out of money and can balance it’s books by taxing sufficiently to remove the money it spent into the economy,
but the British economy isn’t closed, it’s very open, it’s very import dependent, we import a third of our oil and two thirds of our gas, a lot of food and a lot of finished goods,
some inflation is falling Sterling making imports more expensive, other inflation such as energy prices are driven by a constrained supply side, our demand exceeds the available supply and people bid up the price of energy,
energy is a keystone resource, very little can be done without it and you can’t substitute energy with money, by subsidising energy you just fuel the price inflation because people are still in the game of bidding on a share of a limited supply,
surely the answer to energy price inflation is a combination of producing more energy ourselves and also reducing demand through efficiency drives,
surely the answer to the supply side inflation of import dependence is a drive for the country to be more autarkic and produce the essential goods and service it can’t manage without ourselves,
as far as interest rates go it’s arguable that we haven’t had a capitalist system since the GFC because interest rates have been lower than the rate of inflation, hence effectively negative, that doesn’t build capital it dissipates it, we’ve resorted to speculation instead, speculatorism,
at this point raising interest rates to where they ought to be, inflation + 3%, would crash the economy overnight, it is inflation that must be reduced, if you could reach 0% inflation an interest rate of 3% would be ok and positive,
there’s no escaping the reality that wage rises are inflationary, so how do you close the cost of living gap? well reducing the cost of living has to be where to start,
people are already adapting by cutting down on discretionary expenditures to shift the surplus disposable income to spend on essentials, but once every penny of disposable income is going on essentials they have no wiggle room left,
reducing the cost of essentials is just as effective as raising wages, rents aren’t constrained by aspects of the physical economy like energy and material resources, they are entirely a financial phenomena, if rents both domestic and commercial were reduced it would increase domestic and business disposable income,
get rents down, start domestically producing basic essential goods and services, reduce energy consumption via efficiency and you can reduce inflation and alleviate the cost of living crisis without raising wages,
since 1979 the British economy has been turned over to one that favors speculators, the doors have been thrown wide open to the world, it’s gone as far, if not beyond, as it could possibly go,
it is now time to start closing the doors and favoring producers, to be more self sustaining, live more within our means and rely less on the kindness of strangers,
in terms of MMT, the Zimbabwean govt. didn’t run out of money, but it did end up being worthless.
What a total lot of nonsense
When you have to mention Zimbabwe you know you have lost an economic argument
I suggest you actually go and read some MMT
Don’t come back until you have
So you are saying that if sterling goes into free fall (through Fed rising rates and is cutting to zero), it doesn’t matter??
So you are saying that if sterling goes into free fall (through Fed rising rates and us cutting to zero), it doesn’t matter??
Why will it?
Sure it will drop – but as we saw today, by a cent or two
Reversing Brexit could massively reverse that
Do you agree?