I was interviewed by Henry Bonsu on Times Radio after ten last night. He wanted to talk about this week's Twitter threads from me and why I thought that the government and Bank of England had got so much wrong when it came to inflation.
I explained that after thirteen times doing the same thing and not getting the result that was desired you should imagine any sensible person standing back and asking “what are we missing here?” My suggestion to Henry was that the fact that this is not happening at the Bank of England is in some ways one of the most worrying aspects of this whole fiasco.
He was curious as to why it is that is not happening. I did, in effect, quote Upton Sinclair when answering that question. Sinclair said “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
But it is worse than that. The Bank of England has had to admit before now that almost everything it thought about banking, how banking worked and how money is created within the banking system, was wrong. They did this in 2014 when they were forced to admit that bank lending creates new money, and so deposits, and it is not bank deposits that fund loans. Doing so they had to quite explicitly admit that everything text books had said about banking was wrong and needed to be rewritten.
I think that is also true on the causes of inflation now. Most of what the Bank thinks it knows about inflation - that it is created by excess demand caused by wage settlements that are too high - is simply wrong and does not fit with the evidence of the current experience of inflation.
However, as I explained, the Bank is not paid to think, let alone to admit that it has got things wrong. The Bank is paid to do. And what the already painful experience of the Covid Inquiry is revealing is that those in charge are those who ‘do', unquestioningly. I am sure that is the case at the Bank.
Henry then asked what I had done. I said I had simply thought about the issue. I sat back, keyboard in front of me, and thought that there had to be a ‘missing X' in the inflation equation that might explain why continual increases in interest rates were not bringing the UK inflation rate down. All I really did was ask “what is the missing X?”
The answer then stared me in the face. The missing X is the fact that because of the current structure of the UK economy interest rate rises not only could not bring inflation down as the Bank wants, but could in all likelihood be forcing inflation upwards. We have now reached the point where increasing the price of money is in itself inflationary.
I have, I suspect, been close to this position for some time. I just happened to put it in Twitter threads this week, and they have been widely read, not least by journalists.
Am I right? Theoretically I think I am: the case I have made is logical and fits the facts. It's a good theory.
Can I prove it? Not yet, is the honest answer. We'd need some rate cutting from the Bank to do that.
Is that rate cutting likely right now when those in power have all their credibility invested in status quo thinking, meaning that they are dedicated to interest rate rises? I think that makes those cuts unlikely, as yet. I fear that we will have the disaster that they are promising us first of all.
But I think my argument holds that if what you are doing is not working, and it clearly is not, and what you are doing as a result is to deliberately stoke fear of ruin for millions and recession for all in the UK then there must be a better option than the one that the Bank is using right now.
So, in the first instance I suggest that the Bank do nothing. They should take the option of doing no more harm, in other words.
And then they should begin to reduce fear. In other words, they should choose to do good by cutting rates.
When doing harm hasn't worked, why not try doing good instead? I think that's a pretty good question to ask. And I have laid my reasoning out for all to see. I just wish it would happen.
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Do rate rises cause inflation? I don’t know.
That interest payments are a cost for companies makes your argument possible… but not certain.
What IS certain is that they cause pain…. and despite expressions to the contrary, they do their job by inflicting pain. Pain is intentional.
Given the time lags associated with monetary policy it really is crazy to keep tightening now…. and this is true even you buy into economic orthodoxy.
When you’re a hammer, everything looks like a nail (= the tunnel vision of Threadneedle St.)
I think there are actually plenty of missing Xs, but this is the biggest one: The profit margins of large corporations. Even though they only have to be maintained to produce a rise in inflation, the are in fact actually increasing too. This excellent piece from Servaas Storm explains this nicely. I’m assuming you can consider the increased cost of borrowing as one of his ‘intermediate costs’ here:
https://www.ineteconomics.org/perspectives/bhttps://www.taxresearch.org.uk/Blog/2023/06/24/the-missing-x/#comment-arealog/profit-inflation-is-real
I think the X I have found is bigger
And I think profit increases very selective
Yep – a great post.
Two observations:
1) I agree with Tim Snyder in that we are in some form of developmental fascist phase in the West. One of the requirements for this is basically an intellectual stasis concerning problem solving – there are apparently no new ideas or innovations to help. Blind orthodoxy is the rule, and it is quite rightly being used as you say elsewhere to create fear – and fear creates chaos and an opportunity for bad actors to reap rewards and control society.
2) The other is that good old fashioned neo-liberal reductionism still rules. The wage rise trope is over-emphasised especially when before all this we knew that our wonderful business sector is dominated by debt that is paying interest as well as other factors (BREXIT). The real complexity of the issue is being supressed – and the main benefactors (banks) are being protected and innocent people are being hurt as a result.
On top of this, it fascinates me that I perceive that wage claims always FOLLOW inflation – they are a logical response to it.
So, how can they be solely accused of creating it?
Thanks
Primum non nocere. First do no harm.
That was implicit in my work as a counsellor.
It should be for bankers and economists.
I agree with you.
Hi, I used to receive your daily email, but around the time I set up a monthly donation to support you my emails stopped and I can’t seem to find how to get them back (other than cancelling my existing payment and hitting the donate button again). Am I missing something obvious here (not impossible)?
John
You might have been on the old mail list that Google stopped supporting
The new one is third down in the right hand column of the blog
And getting the mail is utterly unrelated to donating. The site is free and will remain so
Thanks!
Richard
PS Let me know if it does not work
“Alas, all too often, the attributes which get a person to the top of an organisation are not the ones needed to run that organisation well.”
(J. Barclay Gillies)
Some months ago Richard, you said inflation would naturally reduce after the shock rises post Ukraine war left the annual calculation. I think you were right. But what has now happened is three fold:
1) Profiteering has been allowed to run rampant with little political or fiscal accountability – due to off shoring tax avoidance & political parties that dare not challenge this (neo-liberal Labour, LibDems & the Tories)
2) The actions by the BoE have hard boiled in inflation – driven by the ways that you have described & the experience of people who see their food costs AND housing costs rise dramatically (due to interest rate increases) – they must have wage increases to exist!
What we are doing is looking at this from an intellectual/theoretic point of view which is essential. We do also need to look at this in more human terms, in the case of the policy on inflation which is not working, think why is it not working but also who benefits from the current policy.
Additionally we need to look closely where bodies who are increasing their prices, and therefore their profits, well beyond the rate of inflation. This, its seems to me, is a topic which many are reluctant to talk about.
murphy an intellectual????
Yes, I am. That is why I am a Fellow of the Academy of Social Sciences and a professor. The clues are in the appointments. I am not ashamed to be so.
For me, the definition of an intellectual is someone who is interested in ideas for their own sake, irrespective of their utility or validity.
Intelligence does not come into it, so a stupid intellectual is eminently possible (the Otto West character played by Kevin Kline in “A Fish Called Wanda” is a locus classicus of the type – VERY intellectual, and VERY stupid).
Richard, however, is decidedly NOT stupid, and is CERTAINLY an intellectual by my definition: it would be hard to meet anyone more interested in ideas for their own sake than Richard.
His special gift, and USP, however, is that he then subjects those ideas to rigorous, even withering, analysis, a follow-on that is quite rare. I would claim an equivalent interest in ideas, but am poor at that follow-on.
That’s why I’d run any idea of mine in front of Richard, and see what survived! It’s also why this blog is so interesting.
Thanks Andrew
To me Richard’s strength is he has a very good grounding in Economics and Accounting, but is able to question traditional assumptions and think out of the box. Something I wish our government and the BOE would do. Surely this makes him an intellectual?
He’s also a good communicator, able to explain his thoughts to those of us not knowledgeable about such things. As I wished the government would listen to the scientists talking sense during Covid, I wish they listened to him and questioned current practices that are clearly not working. Maybe this is because of the elephant in the room, Brexit?
Thanks
If I’m not mistaken the Academy is actually a charity not a formal educational establishment, and no qualifications were required for your Fellowship?
Just like your professorships have been granted, rather than obtained through qualifications?
Let’s deal with facts
There is no entry exam for the Royal Society either
Nor is there for professorship
They are appointments by peers
And you use an academic address, but I am quite sure you are the fraud here
Darryl speaks like on who has failed his exams.
Darryl
All this misery being caused by interest rates and the lies that enable them – mostly embedded BTW in the received neo-liberal tosh that universities teach in their economics and PPE courses – and all you can do is try to impugn Richard’s scholarship!
Threatened are we?
I’ve been to Uni at undergraduate and post graduate levels. When you’ve spent enough time in a university library, you learn a few things about them as institutions and one of the most awesome things about them is that they know everything about human life there is to know – they are repositories of human learning first and foremost.
In other words they contain observation and reflection of centuries of human experience in all fields. So it seems to me that Richard – as a professor or practice (not a dissertation professor) is in the right place – his erudition, his praxis from his real life observation has been acknowledged. And why not? Isn’t that how universities were formed? Which came first – the knowledge or the qualification? The university who has appointed him as such is essentially going back to its roots and is being consistent with what a university actually is. Rather Richard than some hack, politician or celebrity getting an honorary degree for what exactly?
Honestly! How pathetic you are Darryl.
The big issue illustrated by you Darryl is the ignorance as to why universities have become so selective or biased about what they teach in certain fields and no subject illustrates this more keenly and destructively than economics, where debate is effectively closed down by a cabal of professors, ‘think tanks’ and external funders who all have skin in the game.
And that game is lies and obfuscation based on theories that do not work for society as whole but enable the rich to plunder communities and the planet and make themselves richer at everyone else’s expense.
Now, why not deal with that Darryl, eh? What are your views on that, perchance?
Unless you are a neoloberal you preetyt much cannot get a university appointmnt in economics now, or publish in most economics journals
Thankfully there is still hegemony in political economy and accounting
Simple solution – windfall tax on banks to help out those struggling to pay their mortgages and rent to private sector landlords. If you have any morals as a politician it’s clearly the right thing to do.
In the second century BCE, the Chinese political philosopher, Han Feizi warned against those who unthinkingly keep doing the same useless thing, calling them “stump watchers”, a term still used in China today.
The term comes from the story of the “Ploughman from Song” who saw a rabbit run into a stump in his field, break it’s neck and die. He then gave up ploughing and spent his life sitting by the stump waiting for more rabbits.
Two millennia later there are still plenty of stump watchers in organisations like the BofE. Humanity may have progressed materially, but it has much less progress in wisdom.
I would suggest what lies at the heart of the Neoliberal Death Cult gripping the UK is “leaching” or being “parasitical.” Why else would this Tory government and Andrew Bailey think it acceptable that private sector bankers should be entitled to big increases in their money income simply from base rate increases when a windfall tax could automatically be imposed on the banks to help out those especially adversely affected by such increases? (Same argument applies of course to bankers getting increased income on the reserves they hold.) Of course I say all of this sort of tongue-in-cheek because I want to stress the importance of keeping the price of money cheap and taking out inflationary sting by a raft of other methods.
I mentioned it before but it got lost, Stephanie Kelton thinks there is a role played by interest in inflation.
https://stephaniekelton.substack.com/p/more-on-the-interest-income-channel
Hi, I am no financial expert, just an ordinary but thinking citizen. I have watched the British economy for many years. I think, as a lay person, that it is not managed very well. Wages are not rising as much as some say, but prices are. And surely someone is benefitting. Who? Also who owns many of the British companies? Surely the sell-offs benefit the buyers not the sellers or workers. Why would the government even allow this. It is a money drain on the economy, not a benefit, like the Tories think and proclaim. I know I am not talking about your subject of interest rates. I am concerned for the whole economy. In such a rich land there are too many poor, and something is very wrong ‘in the land of Denmark’. Maybe you can shed light on it. These are my own humble observations. And I agree that raising interest rates has not reduced inflation. I think inflation is worse then what they calculate. The price increases in shops are horrendous. From last year some of them 100%. How is that even possible? I don’t trust the inflation figures that are published, I believe them to be wrong. I do the shopping. That’s all, I hope my comments are useful.
Thank you
Noted
Whilst I agree the approach of the BoE is rudimentary in trying to curb inflation by raising interest rates isn’t it the case this is the hand they’ve been dealt by politicians and seems to be the only tool in the box ? Isn’t there also an international dimension whereby interest rates are raised to attract funds from abroad to fund government borrowing ? If rates are not competitive would govt have trouble in funding their borrowing. Appreciate thoughts. I recognise it’s a multi dimensional conundrum
A government that can create all the money it requires has no borrowing requirement
Richard
Another thing to consider is that the BOE policy is not to reduce inflation but to increase it.
As in the seventies inflation is assisted as a weapon to increase profitability at the expense of the workers.
Which is the main function of the BOE, to reinforce the existing liberal order.
High interest rates are also good for financial services and the value of the pound.
There are just too many people who benefit from inflation for this not to be the X factor
Maybe…..
Richard,
Something that is puzzling me is that in all the discussion of the reasons for and consequences of inflation the role of commodities trading is hardly mentioned. The major commodities trading firms seem to have been doing very nicely out of the upheavals that are causing so much pain for others. Are their significantly increased profits, dividend payouts and trader bonuses not an appropriate target for windfall taxation?
I did on LBC last night
You are right