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Rishi is walking us into recession He is being fooled by a problem that doesn't exist

He's fighting the last war - and losing (Christopher Furlong/Getty Images)

He's fighting the last war - and losing (Christopher Furlong/Getty Images)


October 28, 2021   3 mins

More often than not, economic policy misfires when policymakers find themselves fighting the last war. This happens more often in history than non-economists often appreciate. Rishi Sunak’s budget is a classic in the genre.

Take perhaps the most extreme example: Weimar Germany. In the first half of the Twenties, the young republic was seeing its economy collapse due to hyperinflation caused by the punitive repayments imposed by the victors in the First World War. By lending in American capital markets and buttressing the currency, the hyperinflation cooled. But in 1929, as Wall Street went into meltdown, American capital markets seized up and Germany started to slide into a deflationary depression.

But German policymakers remained fixated by the prospect of hyperinflation. So when they saw turbulence ahead, their default position was to assume that trouble was inflationary, not deflationary. As a result, they slammed the brakes on government spending and led their country into a punishing depression. And we all know what happened next.

Sunak’s budget suffers the opposite problem. Since 2008, we have been experiencing a world of economic stagnation and low interests. Keynesian policy proposals — spending more money — have been in circulation in policy circles all throughout this period. I should know, I was one of the people circulating them. They are perfectly suited to an economy with relatively high unemployment and low inflation.

But today we face exactly the opposite economic problem. Labour markets are so tight that employers are finding themselves being slowly strangled. And inflation is starting to tick up. Bank of England interest rate setters are putting on a brave face in public, telling us that inflation is transient — but seasoned watchers know that they are far more sceptical when they gather around the water cooler.

The problems are relatively straightforward. The lockdowns and the emerging vaccine mandates are unprecedented economic interventions. They cause chaos for businesses who are trying to provide goods and services to consumers. They also cause chaos in labour markets — just look how many workers simply left the UK in the first and second half of 2020. Crucially, these conditions imply a high probability that inflation is here to stay.

And this is where Rishi’s budget comes undone. Dumping spending and increasing taxes in an economy already under inflationary strain is akin to tossing a lit match into a barn full of dry hay. The spending increases will drive further demand for goods and services that businesses are already struggling to supply due to the onerous lockdown and vaccine-related regulations. Meanwhile, the tax rises will be passed on immediately as price rises by companies, as they attempt to defend their already thin margins.

Why is Sunak doing this? Because he is fighting the last war; focussing on what has happened rather than what will happen. His budget assumes that the main resistance on the field is overwhelming tank power — and as his soldiers march forward he will look on aghast as they are bombed mercilessly from overhead. Sunak is being fooled by a non-existent problem while a very real one festers.

It will work like this. The spending and tax rises will enter into the economic bloodstream, placing further pressure on prices. Inflation will accelerate. The Bank of England will take one look at their charter and realise that if they do not raise interest rates, they are going to take the heat for the inflation. So, they will raise those interest rates, the yield curve will invert — meaning short-term interest rates become higher than long-term rates — and the economy will slip into recession. That is how an expansionary budget produces contractionary results.

The worst part of all this is that, if the inflation is being driven by the lockdowns and vaccine policies, the recession will not stamp out the inflation. Instead, the British public will get a taste of both: stagflation — low growth, inflation and unemployment. Just like in the Seventies.

The entire economic debate today is topsy-turvy. Economists have been, for the most part, too cowardly to challenge the overarching public health measures. They recline in their seats, either becoming armchair epidemiologists or simply falling asleep. Poor Sunak looks on his desk and finds a plan written for a world that ceased to exist in March 2020. And the rest of us live with the consequences. La Comédie humaine.


Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics

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Paul Smithson
Paul Smithson
2 years ago

The article eludes to it, but doesn’t fully hit the nail on the head. The truth is that the insanity of locking down a whole country for what, in reality, was a very serious flu epidemic, and creating a climate of utter terror for many people (mainly those who watch too much TV) has ruined this country in a way that no other govt has ever managed to come close to, not even in wartime.

Pilkington is certainly right when he says that the old world ceased to exist in March 2020.

I still don’t think most people realise that this country has been ruined beyond any chance of repair. This might sound extreme, but the damage done will become very apparent to everyone over the next five years. God help the children growing up into this dark and dystopian future.

Last edited 2 years ago by Paul Smithson
Cheryl Jones
Cheryl Jones
2 years ago
Reply to  Paul Smithson

But you are also missing the point that for some the Old World is exactly what they are trying to destroy. The revolutionaries are loving it – they just never have a plan for what comes next.

Paul Smithson
Paul Smithson
2 years ago
Reply to  Cheryl Jones

No. Not missing a point. What you raise Cheryl is a whole other can of worms 🙂 I was just trying to stay focused (as best I could) on the realities of Rishi’s economic measures.

Cheryl Jones
Cheryl Jones
2 years ago
Reply to  Paul Smithson

Fair point

Paul Smithson
Paul Smithson
2 years ago
Reply to  Cheryl Jones

I totally agree with you Cheryl. I was just trying my best to hold back, so I appreciate you adding it in 🙂

J Hop
J Hop
2 years ago
Reply to  Cheryl Jones

They plan on placing themselves at the top of the hierarchy.
My mother’s newest partner is a failure in every sense of the word and one of the oldest socialists I’ve ever met at age 72. In his not very intelligent mind, socialism means the government takes from all those awful people who managed to be more successful than he is and then he gets all the toys. Useful idiot? Indeed and fitting with his legacy of failure. Yet the intention, as misguided as it is, isn’t equity or justice, but revenge.

Claire D
Claire D
2 years ago
Reply to  Paul Smithson

Sorry, but it’s alludes, not “eludes”.

Paul Smithson
Paul Smithson
2 years ago
Reply to  Claire D

Thanks Claire.

Cheryl Jones
Cheryl Jones
2 years ago

So WHAT IS THE SOLUTION?

Franz Von Peppercorn
Franz Von Peppercorn
2 years ago
Reply to  Cheryl Jones

Good question. He doesn’t mention QE here, although it’s implied.

Giles Chance
Giles Chance
2 years ago
Reply to  Cheryl Jones

The solution is to kill yourself.

Galeti Tavas
Galeti Tavas
2 years ago
Reply to  Cheryl Jones

Think of this as a health problem. The cure is going to be very painful indeed – so you keep putting it off, and the longer you delay, the more painful and costly it will be.

The solution is Austrian – TNSTAAFL, ‘there is no such thing as a free lunch’. The past spending will have to be paid for. The unplayable debts written off, and every debt is someone’s asset – and that is harsh. The Zombie Companies kept walking by gov support have to be let fail (USA 20% companies are Zombies now, according to DeMartino-Booth.!!!) and resulting job loss, and bankruptcy and Bonds gone.

Gov Debt too high to pay off will have to have the currency devlued, unfunded mandates (Social Security, Medicare, Basic State Pension UK, NHS, gov pensions) reduced. Social programs reduced by ferocious austerity.

That sort of thing. Because it will happen unless the Central Bank Digital Currency is used to make MMT and UBI and we all become like USSR in the 1960s.

Giles Chance
Giles Chance
2 years ago

Good analysis. Some members of the MPC – the witless academics – are also fighting the last war by pretending that inflation is not a problem. They were born in the 1980’s, were brought up on deflation, and have no imagination, only algorithms to guide them. The BoE will have to raise raise rates to at least 2% from the current 0.15%, in short order, and probably further. Shock Horror for 30-something borrowers. Stand by .

Last edited 2 years ago by Giles Chance
Galeti Tavas
Galeti Tavas
2 years ago
Reply to  Giles Chance

This is one of the best articles Unherd has printed to date.

At least USA 30 year mortgages are fixed interest for the full term, and Very low. I believe Europe and UK have adjustable mostly, is that correct? Because that will be a shock indeed. And as house prices are based on the cost of the monthly mortgage payment, well, a rise in interest raises the payment, and drops the property value in line.

Christopher Barclay
Christopher Barclay
2 years ago

Sunak is not fighting the last war. He is cutting the ground from under Labour. What he is banking on is that inflation will be back under control by the time he replaces Johnson as PM.

Galeti Tavas
Galeti Tavas
2 years ago

My guess is Sunak is just kicking the can down the road. If he reduces spending or raises interest it is game over, and an entirely new game begins. One of great hardship to the common folk. His chosen path is inflation, yes – but doing the right thing of just letting the market correct, and the debts default, will bring deflation and mass job loss, like 1929.ï»ż

D M
D M
2 years ago

Dare I mention the impact of net zero on standard of living ?

William Cameron
William Cameron
2 years ago

If you print money (QE) you get inflation. Iron law.

Gordon Welford
Gordon Welford
2 years ago

Not necessarily,it depends where the cash ends up.Read John Greenwood

Last edited 2 years ago by Gordon Welford
Gordon Welford
Gordon Welford
2 years ago

JG does this time forecast strong inflationary trends continuing after the transitory effects of current price rises due to high money growth

Galeti Tavas
Galeti Tavas
2 years ago
Reply to  Gordon Welford

Yes, when the Central bank has to monetize the debt and make it fiscal spending, ‘Stimie’ checks at the extreme, then it is infaltionary in the extreme – otherwise QE just keeps interest rates low – But both togther is Negative Real Interest Rates, and savings, pensions, wages, all messed up. That is where we are now.

Nick Bernard
Nick Bernard
2 years ago

Reducing corporation tax to 15%, immediately making UK the go to place to set up your business, is the only thing the budget should’ve announced. The endless tweaking on a thousand little financial strings is just farcical arrogant posturing – believing the nation / the economy can actually be micro-controlled for the better by a puppet master is patently ridiculous. The most all-seeing, all-knowing, super-dexterous millipede could not achieve the task. Sadly none on the left, and fewer and fewer elsewhere on the spectrum can perceive of an improving world without such a god-like entomological commandante in charge. As long as we search for the god-like we will only select those humans who pretend to be so. And so we will have egotistical delusionists in charge whose actual impact can only be measured negatively.

G A
G A
2 years ago

The BoE isn’t putting on a brave face – it’s lying to us. And it thinks we’re stupid enough to fall for it.