It's war. (Pablo Blazquez Dominguez/Getty Images)
When the Bank of England announced its single biggest interest rate hike in 33 years last week, and warned that the UK faces its longest recession ever, it forgot to mention one important detail. It’s the actions of the Bank itself that are setting the country on the path to full-blown depression.
Anyone with a basic grasp of economics knows that raising interest rates at a time of recession is bound to make it worse. Borrowing will become more expensive, while mortgage holders will face higher monthly bills — and all the while, the country is grappling with a devastating cost-of-living crisis.
Officially, the Bank’s actions are aimed at curbing inflation. But this approach would only make sense if the current inflation were being driven by excess demand — that is, if people had magically found themselves flush with cash and had started splashing out. Alas, anyone living in the real world knows that’s not the case: two years of lockdowns and restrictions have left many people poorer, not richer.
Only last month, a study by Bank of England staff confirmed what was obvious to most people, but apparently not to the researchers’ bosses. Current inflation has nothing to do with excess demand, but is largely driven by exogenous, supply-side factors: “supply bottlenecks along global value chains due to the Covid-19 pandemic (for instance, with microchips and used cars) and soaring energy and food prices related to Russia’s invasion of Ukraine”. Other studies have also emphasised the role of corporate profiteering, in particular, price gouging by large corporations with near-monopolistic market power, especially in the energy sector.
Neither is there any evidence of a Seventies-style wage-price spiral. On the contrary, real wages are not only failing to keep up with inflation — they’re falling off a cliff, in the UK and elsewhere. That’s because the bargaining power of workers has been severely weakened by decades of anti-labour and anti-union policies.
Even the Bank of England itself acknowledges that it expects inflation to fall sharply from the middle of next year — even below its target of 2% from late 2023. The reason is fairly obvious: inflation measures the change of prices from one year to the next, so this year’s rate accounts for the massive price increase caused by the conflict in Ukraine. Next year, however, prices are expected to remain relatively high, but not to rise significantly compared to current levels. In other words, we’ll almost certainly still be facing a cost-of-living crisis — especially if the Bank of England continues along this path — but not much of an inflationary crisis.
So if the current inflationary bout has nothing to do either with excess demand nor excessive wage increases, but is in fact driven by factors entirely beyond the control of the Bank of England, and in any case is expected to resolve itself by the beginning of next year, why is the Bank going out of its way to pursue a strategy that would lead to a recession and raise unemployment, and make the cost-of-living crisis even more acute?
One possible answer was alluded to by Andrew Bailey, Governor of the Bank of England, last week: “We have inflation coming back down to target; and going below target actually,” he said. “But we have one of the largest upside risks to inflation in our forecast that we’ve had in the 25-year history of the Monetary Policy Committee. A lot of that has to do with the tightness of the UK labour market.”
Such “tightness” — that is, the fact that there aren’t enough available workers to fill vacant jobs — is currently driven mainly by Brexit and by the fact that since the pandemic a great number of older workers (mainly 50- to 64-year-olds) have left the job market. But it is likely to become a permanent feature of Western economies in the coming years — a result of the de-globalisation and reshoring that will inevitably see countries bring home production lines and supply chains that over the past decades have been outsourced to far-flung countries. For Western workers, this is a welcome development, as it will clearly increase their bargaining power.
But for Bailey and the technocratic elites he represents, this is a terrifying prospect: even though workers aren’t yet strong enough or sufficiently well-organised to fight for better wages, a structurally tighter labour market is liable to make such struggles much more likely in the future, especially in a context of permanently higher prices. They fear this not because it might lead to a wage-price spiral, which is unlikely, but because it would signal a shift in the labour-capital balance for the first time in half a century.
As Adam Tooze has written, what really worries technocrats like Bailey “is that inflation will emerge as a macroeconomic and, one might say, a macrosocial phenomenon. All of that is code for a world in which organised labour is stronger and in which workers receive not gratuitous handouts from socially minded employers to help with the grocery bills, but proper cost of living adjustments”. This is about more than just capitalists having to give workers a bigger share of the pie: a more emboldened labour force is also more likely to start demanding a greater voice in the management of their country’s economic and political affairs — a technocrat’s worst nightmare.
According to this view, bringing about a recession and artificially raising unemployment could be seen by the likes of Bailey as a way to pre-empt a potential rise in labour bargaining power — not only by making borrowing harder, but also by providing a cover for fiscal austerity, which Sunak has already announced. This isn’t because higher interest rates make it any harder for the government to borrow from a technical perspective — a currency-issuing government can ultimately service interest payments in the same way it pays for everything else: by issuing new money via the central bank. Rather, higher rates give the impression of making it harder for the government to borrow, due to the myths we’re constantly fed about deficits and debt. As Larry Elliott has observed: “The idea that Britain is about to be 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.”
Maintaining that fairytale, however, is crucial from the perspective of the ruling class — if citizens understood how the system really worked, they would realise that austerity is nothing more than class war. In this sense, as political economist Richard Murphy put it, the Bank of England shouldn’t be seen as operating independently of the government in pursuing these policies. On the contrary, the Bank is likely “working very closely with the Treasury to create this artificial supposed public spending crisis”.
Bailey and Sunak aren’t alone in pursuing this project. Central banks across the globe are all raising interest rates — with the US Federal Reserve leading the way. And most governments are using this to justify austerity, to some degree or another.
Now, it is often claimed that if the Fed raises interest rates, other central banks have little choice but to follow in order to avoid capital flight. But this is only partially true. Allowing the value of currencies to slide — as most of them are against the dollar, not just the pound — is arguably a better option than engineered recession: the former might lead to higher imported prices, but the latter will cause much more widespread damage, without even resolving the problem of inflation. Besides, it’s unlikely that driving economies into recession is going to bolster “confidence” in their respective currencies — unsurprisingly, the pound slumped once again against the dollar after the Bank of England’s warning of an impending depression. So much for the Bank ousting Truss in order to save the economy. That said, if other central banks were being forced into these policies against their will, we’d expect some criticism of the Fed’s aggressive monetary tightening on their behalf, and yet we’ve seen none of that.
What this really calls into the question is the notion that we need “independent central banks” to protect us from irresponsible politicians. If anything, it’s irresponsible central bankers that we need protection from. But for as long as central banks and governments are able to shift the blame onto each other, the technocrats will always have the upper hand. So, perhaps the time has come to slay the dragon — central banks themselves. A possible solution would be to consolidate monetary and fiscal policy into a single government department. At least this would make macroeconomic policy wholly accountable to voters, instead of being managed by central bankers who are largely unaccountable and dominated by vested interests. The past month has proved that technocracy has failed. The time has come to give democracy a chance.
Thomas Fazi is an UnHerd columnist and translator. His latest book is The Covid Consensus, co-authored with Toby Green.
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SubscribeI got as far as “it’s all caused by the supply chain” and just skimmed the rest.
Simple economic illiteracy.
The author says the bank is acting as if “people had magically found themselves flush with cash” – well they were paid for 2 years to do nothing. So that should give you a hint.
The recession has been caused by the lockdown. The government dumped a half a trillion pounds into the economy. The result is inflation. In other words they adopted a Keynesian measure of demand stimulation at a time when they had literally outlawed activities to meet demand. That’s when the mistake was made.
Inflation is not the result of the supply chain problems. It’s the result of people trying to buy stuff that’s not available with money that they did not earn.
And as for not facing a 1970 style situation then get yourself a bag of popcorn, take a seat and watch the public sector for the next year.
I skimmed it too. The continual claiming of an alternative economic reality by those who were both pro-Lockdown and anti-Brexit is depressing.
In this article, the author suggested Brexit’s reduction of foreign labour will strengthen workers’ leverage against employers.
That’s true, but it does not refute my statement above relating to this comment …. “… the fact that there aren’t enough available workers to fill vacant jobs — is currently driven mainly by Brexit…”
Imagine if someone actually had the balls to write, “the fact that there aren’t enough available workers… is currently mainly driven by low native birth rates, which is in turn driven by decades of feminist, anti-marriage, anti-family propaganda…”
That’d be something to see.
The high point for births per woman was 1820. Since then it’s been an almost uninterrupted, downward track, with fairly insignificant upswings, most notably from 1945 for two decades. Feminist anti-marriage, anti-family is a later arrival at the party.
Thomas Fazi is anti-lockdown and pro-brexit.
It’s odd for anyone opposed to EU membership to get the jitters about alternative economic options. The EU treaties enforce economic orthodoxy and are heavily skewed towards austerity. Article 126 TFEU requires all member states to commit to running a balanced budget. If you really want every UK government to be compelled to practice ‘budgetary discipline’ then start campaigning to rejoin the EU now.
Remainiacs continue to demonise Brexit for all our economic woes, including the labour market. Yet it was the pandemic shutdown that drove hundreds of thousands of EU hospitality workers home. Like everyone else that dread spring, they were stunned by the sudden loss of employment and had no alternative but to head home to family safety to ride out the storm. I remember speaking to many in the very last days, mournful and shocked. It is such a despicable lie to blame a stalled Brexit for the loss of these workers who inevitably- after two years – had found alternative employment. It was the sledgehammer of the Covid lockdown which is the primary cause of our dislocated economy, triggering the present slow unravelling and disintegration of the Ultra Low Interest Rate and QE Bubble Order. Brexit has not even started! EU laws and regs on the books. Even tariffs still in place. Its in aspic waiting for competent leaders to complete the mission.
Much of the inflation is without doubt supply chain problems … start with energy and covid supply chain problems and it becomes quite clear
Absolute bulls***.
I think it’s you who is economically illiterate.
First, inflation is coming from the energy sector, caused by the sanctions on Russia. Some is due to the massive bottlenecks in shipping and Chinas shutdowns during covid, which either slowed down goods getting to market or held up ships at their massive container ports. Will reshare again, as most people seem to miss what is staring them straight in the face. Look at uk gas futures here, and select time period at the bottom of the graph over 10 year period. On that same website you can look at uk and European electricity prices, you will notice the same spike. https://tradingeconomics.com/commodity/uk-natural-gas
There is a global diesel shortage, pushing diesel prices up.
https://www.npr.org/2022/10/29/1132633510/how-the-diesel-shortage-is-being-felt-globally
Supply chain crisis:
Commodity trader Trafigura warned that global copper stocks have fallen to record lows, with current inventories enough to supply world consumption for just 4.9 days. Freeport-McMoran was also vocal about shortage risks, stating that current low prices do not reflect the tightness in the physical market.
Source: https://tradingeconomics.com/commodity/copper
Lng freights hit records: https://www.google.com/amp/s/oilprice.com/Latest-Energy-News/World-News/LNG-Freight-Rates-Hit-Record-High-As-Europe-Races-To-Secure-Gas.amp.html
More supply chain info, just Google it.
https://www.google.com/amp/s/amp.theguardian.com/business/2022/jun/09/global-supply-chain-crisis-fuels-push-to-local-manufacturing-as-chinas-appeal-dims
Electricity and diesel are as important to our economy as water is to us. Increases here knock on to the whole economy. This is where the inflation is coming from, spilling into fertiliser too, which in turn is pushing food prices up, as well as the grain/ fertiliser export business with Ukraine and Russia. So Fazi is correct in saying that the bank of Englands attempt to tackle inflation in the way they are is pretty much superfluous, because they can’t control the global energy market. This couldn’t be a more different situation to the 70s.
Second, I’m sick to death of the line ‘people paid to do nothing in covid’ people were paid because they were FORCED TO STOP WORK. If you are forced to stop working along with the rest of the country how do you propose we didn’t leave people in the position they could loose their homes, not feed their children or anything else for that matter. Not paying people could well have collapsed the economy and society. So seriously, reel it in.
You have completely missed the point of the article, we are being shafted by the bofe which has shat all over our elected government until it got what it wanted. Which I promise you is not good for us, Great article Mr fazi, I think it’s time to give democracy a chance too.
You are failing to realize the impact of shutting down production and keeping people home whilst providing them with income (via printing money) to buy things that were not available in the first place. This entire mess is due to incoherent governmental strategies.
Yes shutting down production, especially in China has had an impact as I said. There’s has been a lag between goods getting market and demand ramping up, which has also contributed, fair point. Yes we printed money, you could argue it was genuinely helicopter money, the worst kind to feed inflation, down the line yes QE has many dangers, however this QE for covid simply supported the economy in its normal functioning and without it I’m afraid things would have been a lot worse so perhaps the lesser of two evils.
I think that the global energy crisis and supply chain issues are what are causing our problems NOW. Not sure what you mean by we were buying goods that weren’t available in the first place? The inflation in the gas and electricity market is enormous, and in some metal markets also. None of these problems are related to the QE during covid. They are related to the supply chain crisis caused by covid lock downs and the war with russia. Also note when the banks went tits up in 2008 QE was fine then, to save them, and the bofe didn’t have a massive strop and throw its dolly. Neither did the fed. Then it was no price is too high, these guys are too big to fail they said. Now the bofe is about to strangle the little guy, upping taxes as well us coping with price increases it can do absolutely nothing about like the energy/grain war, or global supply chain issues.
China is an implacable geopolitical enemy, and no Western nation should be producing anything in China.
AUTARKY NOW
Yeah I get you, should never have offshored everything in the first place I suppose, but we have and unfortunately the energy war means reshoring any manufacturing is going to be very difficult at the moment. Not saying it can’t be done but this would be a long, expensive process. The Chinese and the Russians have us over a barrel of our own making. The Germans are already shuttering production because of the gas crisis. And China control huge amounts of raw resources, all over the world. So I’m afraid if we don’t want to completely tank the UK and Europe right now it’s probably a good idea to accept that us hegemony is ending and find a way to deal with China. They are going to push their own interests more, not saying this is good or that we shouldn’t be careful, but the US has been exporting and pushing its own interests globally quite aggressively for years, can you blame the Chinese really?
And we have been very happy to buy their cheap products for many years. We have funded their rise to power.
So people should have just starved? Whilst it was an uncomfortable thing to do, it was the only thing to do.
No, you keep your economy 100% open, like Sweden, Netherlands etc., who fared no worse in covid cases than anyone else, yet didn’t sacrifice their economies or sanity.
Good grief Miss Emery a sensible remark at last!
Where has that chippy Midland spirit gone?
Mr Stanhope, have we found something to agree on at last?
We certainly have.
“Second, I’m sick to death of the line ‘people paid to do nothing in covid’ people were paid because they were FORCED TO STOP WORK.”
Nobody seemed to consider forcing power plant employees, truck drivers, factory workers, supermarket workers, delivery drivers or taxi drivers, bin drivers to STOP WORK.
Not for two years, two months, not even for two weeks.
What you did was to prove his point:
“Inflation is not the result of the supply chain problems. It’s the result of people trying to buy stuff that’s not available with money that they did not earn.”.
What you also proved was that this problem with millions of people in the service and public sectors not earning their money, was not merely a Covid issue. It’s a decades old problem, just getting worse by the year.
If we could do without them for months on end, then we don’t we don’t need them. But they still stick around, “earning” money for their “work”.
OK so I didn’t refer to essential workers, so not sure on your point there? Not disputing that some people never stopped. We are electrical contractors that run our own business, so pretty essential if you like your electricity to work. We stopped only during the first lockdown, and only claimed one payment, partly because people were very unsure on the situation at the start and didn’t want us working in their houses, and partly because most of the commercial and industrial companies we worked for were shut/ partially operating too, after that, being classed as essential workers ourselves we went back to work. Not sure what workers your referring to there that we don’t need? I think there’s a fair few in both the service and public sectors that would feel they have earned their money, not sure what you’re getting at there either?
Yes, great article Mr Fazi and great comment Emery. If proof were needed look at the unseemingly swift dispatch of Liz Truss. They were so sure if they put her up against Sunak he would win – banks happy, globalists happy, wef happy. Maybe the blue rinse brigade weren’t so senile. So they manufactured a market meltdown and got their man. Next stop digital banking.
‘First, inflation is coming from the energy sector, caused by the sanctions on Russia.’
Trading Economics shows UK Inflation was almost 7% before Russia invaded Ukraine.
https://tradingeconomics.com/united-kingdom/inflation-cpi
This does show a very definite spike after the invasion though also.
There was a climb before that, granted, which as I said was due to supply chain disruption from covid lockdowns, especially an explosion in shipping costs, all kinds of things upset shipping during covid, the enormous Chinese ports were backlogged, ours were too, the massive one in South Africa suffered awful flooding this year, this meant a shortage of ships and therefore the big hike in costs, as people competed for the capacity available and pushed prices up, maersk have actually posted record profits this year because of this, the same is happening in the lng freight market at the moment. Someone below made an excellent comment on the effect of qe on the housing market, which I took. I’m happy admit qe has contributed but its far from the only cause and at the moment not the main driver of inflation in the UK, from source above:
Consumer costs also grew sharply for housing and utilities (20.2% vs 20%), amid soaring prices for electricity, gas, and home fuels…..
Not being funny but if this wasn’t a massive problem people wouldn’t be having their energy bills subsidised.
What really got my goat was that the original commenter accused Mr fazi of ‘economic illiteracy’ and then proceeded to tell us we got paid to do nothing like we had a choice in the matter. I just wanted to make the point Fazi was right in saying these things have made a massive contribution to inflation and as far as the bofe goes, there’s very little they can do about the gas, diesel, fertiliser, shipping and grain prices because they have no control of the market.
Note that whole sectors of the economy WERENT “forced to shut down work”, notably food distribution and to a great extent, mail and retail distribution but DIDNT drop dead in their thousands.
Inflation is caused by both demand and supply side factors. Anybody claiming to know how much demand-side vs. supply-side and says so with absolute certainty is just as bad as the author.
This couldn’t be a more different situation to the 70s. A sudden increase in energy prices and a tight labour market leading to industrial unrest and runaway inflation seems very familiar to me.
Was there a labour shortage in UK during the 70’s. US had the same increase in energy prices yet unemployment continued to grow from 4 or 5 percent to over 10 percent by the early 1980’s. They called it Stagflation. High inflation (18%), combined with high unemployment.
Reagan fixed it solid by forcing the US into a 3 quarter long recession.
Yes we had low unemployment and a rising cost of living caused by a sudden increase in oil prices by OPEC in a political anti-Zionist act. This was followed by labour unrest and a wage rise fuelled inflation. What’s so difficult to understand? Were you there? I was.
Except that everyone who ended up on furlough were paid less than they usually got paid – a maximum of 80%/£35k as I recall. So their spending power went down. So furlough itself wasn’t inflationary at all. Now, it’s true that, for some, household expenditure also went down because people weren’t driving to work, going to the pub or shopping centres. So some furloughed households might have ended up with more savings at the end of it but that just meant that there was even less aggregate spending in the market. None of that is inflationary
Also, you write as though the Government’s half trillion of spending all went into furlough. The total cost of furlough was about £70billion. The rest of that spending went, essentially, to people who were much better off than the median. That is why many households experienced economic misery and many industries a near death experience whilst the property market and stock markets went bananas – because that’s what better off people spend their money on!
Now, shovelling all the rest of that money out the door might well have been inflationary – at least to the housing market. But furlough wasn’t. so can we please stop pretending that the increase in fuel prices is somehow down to people being forcibly sent home from work and being partially compensated for removing themselves from the labour force for months?
Excellent points, put it much better than I could. We had to pay 20% of our self employment furlough payment back in tax too and pay NI contributions on it! Self employment payment was calculated at 80% of a 3 month average of profits, so much less money than we would have made if trading.
In the US, it’s pretty clear that covid stimulus was massively inflationary. It also continues to cause labor shortages, because people have savings that they’ve never had before — thanks to stimmy checks (free money.)
They’re about to run out of that money, probably in December/January, right when the job market tanks. There will be blood.
So you think the problem is people getting money they did not earn? What about the industrial military complex, do they make anything that improves the economy? And what about the financial markets? Making billions just by pushing paper around? How is that earning it? It is the same old story. When the rich get money they did not earn, given to them by manipulation of the stock market, government grants, bribes or the thievery of other countries resources, we never say they did not earn it, we don’t even dare call it criminal or socialism for the rich. But when working poeple get a bail out, heaven forbid, it is socialism, communism, verging to criminality. Never mind that it is the working stiff that pays a larger chunck of his earnings as taxes and cannot avail himself to the island tax heavens like Ritchie Sunack’s wife and countless other billionaires in the US and UK who refuse to pay their fair share of dues in a capitalistic system that benefits them the most.
The answer is pretty simple, it is due to greed, a few people making a whole lot of profit, some billionaires being worth more than some countries treasuries, without doing much of anything. As my father who was a world war 2 slave laborer was told by the Germans “Nicht arbeit, nicht essen.” The rapidly expanding, on a geometric progression, of mass fortunes of billionaires has nothing to back it up, no work behind it, it is mostly artificial, that is the cause of this super inflation. The US and UK make nothing, all manufacturing has gone to China and that is why they are becoming the dominant economy, they have worked for it. Unfortunately, for the US and UK, the chickens are coming home to roost.
I think this article was written by a Modern Monetary Theorist. Only an MMR believer could write something like this: “The idea that Britain is about to be 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.”
That’s EXACTLY what we’re doing right now… and it’s causing inflation!
“Current inflation has nothing to do with excess demand”
I can’t speak to England, but in America, this is not at all obvious. Our government is borrowing 6% of GDP every year and giving it to people — that’s massive consumption. The central bank can’t do anything about screwed up fiscal policy though, all it can do is try to offset it with monetary policy.
The logic is sound, and it’s not fair to say that the suffering is caused by the central bank. The suffering is caused by politicians who can’t stop spending money they don’t have (again, at least in America).
Real interest rates have been negative for a decade, money is cheap. A likely reason that the coming recession will be particularly difficult is that we have allowed this situation to continue with its attendant malinvestments for so long.
It’s been like this since the 80’s. The vast majority of growth in the UK since then, has been based on government and personal debt. Until we break that cycle things won’t improve for most people. Sunak is just another banker, who thinks they know best, when it’s pretty obvious to the average observer that he’s out of his depth. Yet he’ll try the same things and expect a different result.
Whenever an article begins with “Anyone with a basic grasp of economics…”
… we are in for a finger-wagging lecture from a talking head repeating something he read in a textbook.
Well quite. Inflation is always and in every place a monetary phenomenon.
If true, then only vacuously so. There are two kinds of “inflation”: increase in prices (price inflation) and increase in money supply. They are not necessarily related. I assume by “monetary” you mean an increase in money supply. In that case, your assertion is 100% false.
But was not the BoE complicit by facilitating QE ( aka printing money) for so long whilst also asserting rising Inflation was a temporary phenomenon which would soon subside?
The only people who benefit from QE, are the ones who first receive it. The rest of the people down the line, end up paying for it. Sadly the BofE don’t know of any other path to take.
And they do not know any people from down the line
That is so true.
Not sure what you mean by “know,” but the only way money gets from the first holder to “people from down the line” is through direct exchange. They “know” them economically, if in no other way.
P.S., direct payments from government to the underclass, tied to inflation, are an example of (huge amounts of) new money being spent first by the people you characterize as “down the line.” In many cases, they’re right at the front of the line.
Not quite. Prices don’t rise nearly as fast as that. It’s true the first users of new money benefit the most. However, the others benefit too — as long as they spend it fast enough. The people that are hurt the most are those that spend the least — savers, the thrifty, the poor, etc.
Yes. They were. As was the US Fed. QE was just a fancy coat around “printing money”. Many of us predicted inflation at the time, and were shocked when it didn’t materialize. I’m not trying to let the bankers off the hook for past behavior, only point out that today, they’re fighting against a counter-fiscal policy pushed by politicians.
Personally, my money is on the politicians. I hate to say that, since I think they’re making the wrong decisions, but in an electoral democracy, the politicians (as the people’s representatives) have control of the central bankers. They won’t tolerate working at cross-purposes forever.
The idea that the politicians are in charge of anything is hilarious.
The press in in charge. They control public opinion, which means they control elections. Academia tells them what to print. And academia is controlled by the left.
My money is therefore on the professors and journalists. Ever notice how they never disagree with each other on anything important?
Agreed. As I see it money printing caused inflation first in assets (Try buying a house in England) and then inflation in the rest of the economy. MMT is the modern equivalent of the perpetual motion machine – The Magic Money Tree that gives something for nothing.
Correct. I would have respected the author and given his article some weight if he had of just owned that he was a MMT proponent. I suppose he would answer something along the lines of MMT becoming a term used by “the establishment” to scare us or some such dribble.
Same old Remoaner cobblers alleging that Brexit is the main cause of labour shortages.
The author should lift their head out of the sand to see the same issue happening across the G7.
Cobblers indeed … there is no shortage of labour in reality but when you have a State Welfare system that facilitates part time working you shouldn’t be surprised
They clearly ignore the circa 6m EU nationals who applied and were accepted to stay.
The author is a man, singular, therefore, he should lift his head out of his *ss.
Well spotted 🙂
Good article on this week to that very point
Thomas Fazi is no Remoaner – check out his other articles, his social media output or ‘Reclaiming The State’. I think you’ll find that he sees tightening of the labour market as a good thing for workers, he’s not complaining about it. When you cut employers off from a large pool of flexible labour then they have to start paying more to attract employees. He’s just pointing this out. Just before Covid hysteria was launched upon us there were several news stories about UK warehouse operators having to increase their pay offers by 15%. Something the left of old would have celebrated (and I’m sure Thomas did, as did I).
Agree with the sentiments- but best for the author not to undermine them with factually incorrect statements as quoted above
I did agree with the author initially over rising interest rates and potentially tax increases not being a great idea right now, especially as you need people to spend money to drive off recession (or at least ease it), However, to say things like the labour shortage are a Brexit only issue when almost every Western country has this issue is laughable.
Yes, on one hand he is saying workers have no leverage, due to no unions, yet on the other he says they are in extreme demand. Can’t have both.
This is called “doublethink,” and leftists are experts at it.
I think the last paragraph in this article sums up the most poignant truth and reality facing human society, today:
“… Perhaps the time has come to slay the dragon — central banks themselves. A possible solution would be to consolidate monetary and fiscal policy into a single government department. At least, this would make macroeconomic policy wholly accountable to voters, instead of being managed by central bankers who are largely unaccountable and dominated by vested interests. The past month has proved that technocracy has failed. The time has come to give democracy a chance.”
This has to be done. Our world should be governed by our elected representatives, whom we can at least vote out of office. The reality, however, is that the world is increasingly being run by unelected institutions and corporations for their own benefit – to the detriment of the rest of us. This has to end.
Your whole life is run by unelected people. You don’t grow your own crops, build your own house, make your own car, provide your own healthcare etc etc. That is what a post agrarian society looks like.
You’re talking of professional services which, of course, we all rely on in our daily life as we can’t all be doctors. I just feel that big errors are made with dangerous consequences due to excessive centralized decision-making. We need to take much more control of our lives in important ways.
For example, I no longer rely on the supermarket for my food supply, as I’m switching over to growing my own. The result of which is, I now know what goes into my family’s food – no dodgy additives etc.
Imagine if every town and village – even house – had its own source of energy and food supply, and was no longer dependent on what mistakes the government made in planning, or greedy speculators or wars causing excessive heating bills or food shortages.
These kinds of problems come from too much centralization of resources and decision-making.
Go local and less global will solve much, I believe.
The palpable reality that everyone is feeling of extended lockdown + money printing ( a term that will be outlawed any time now) = inflation, sorry, I mean “cost of living crisis” , should have killed these Keynesian MME zombies off for good.
But alas, they are impervious to the silver bullets of reality and history.
“two years of lockdowns and restrictions have left many people poorer, not richer.”
Undoubtedly, but with furlough and cash handouts and working from home and limited spending opportunities over that period, many have found themselves with more cash, and I’m not just talking about the very well off, I’m talking about ordinary bods. Like me.
What’s is the data? Mr Fazi is not offering any to back up his assertion.
Can’t let data get in the way of a good narrative.
And, by the way, did you hear about the 10.5% pay award most council workers are getting? It’s the 2022/23 national cost of living pay award for local government, which is in addition to pay rises awarded already in April this year. As a recipient I’m not complaining but, y’know… who knew?
https://www.unison.org.uk/news/article/2022/11/council-workers-accept-deal-that-will-give-lowest-paid-10-5/#:~:text=Local%20government%20trade%20unions%20today,for%20the%20lowest%2Dpaid%20workers.
Regardless of inflation and recessions, another reason for raising UK interest rates is presumably because the US has been steadily doing so, and if we don’t follow suit then investors in UK government bonds and suchlike will abandon sterling like a flock of starlings and invest in dollars instead.
I got as far as:
“A possible solution would be to consolidate monetary and fiscal policy into a single government department.”
Yes, centralising it into a bunch of rotating idiot politicians in hock to their bat-sh!t election manifesto promises sounds like a plan alright ….
Run
Amazing how completely economic dogma can blind people – especially academics – to basic common sense. I’ll keep saying it: MMT can only work (if at all) in an economy that is largely self-sufficient. For an economy like ours that depends on imports of food, materials and energy it’s a recipe for disaster.
That said, we are undoubtedly in a class war. GDP per capita peaked in 2006. Between 2007 and 2019 it fell by almost 20 percent. Meanwhile asset owners went on getting richer every year. What does that tell you?
MMT doesn’t ‘work’ or ‘not work’. It just describes the constraints and options available to a currency issuing government. It provides a different view of how the economy works.
For example, a typical MMT view is that an import is a net benefit to the importing nation. Someone in another country has gathered the raw materials (from finite reserves) and input their labour and energy into creating saleable goods. These get sent abroad in exchange for some currency, which is no ‘real’ (material) loss to the issuing nation. The exporter nation loses those raw resources and the labour that went into their transformation. The importing nation benefits from those materials and labour in the form of something useful (like a car for example).
So, just a quick example of how MMT is clear on the differences between real constraints (real resources like raw materials and labour) and artificial constraints (such as fearing that the government will run out of money).
Ok, it’s a theory. A theory that brilliantly explains why Zimbabwe is the world’s richest country
Oh …
Slay the central banks … how sensible … but sadly we all know that ain’t going to happen as long as our Country is dominated by the Big State … sucking in all the political parties and the Establishment to prosper from it’s black hole spending of our money
I strongly disagree with almost all of this analysis. The current inflation was caused by the massive increase in the money supply in the form of QE after 2008. We’d all be better off if governments *and* central banks stopped meddling in free markets and allowed the invisible hand to work its miracles.
” … a result of the de-globalisation and reshoring that will inevitably see countries bring home production lines and supply chains that over the past decades have been outsourced to far-flung countries.” Anything that has been produced in Asia and will be produced in the UK or Europe will be much more expensive. That’s inflation.
Earnings growth is at the highest level in the UK since 2000. See link below:
https://www.statista.com/statistics/802113/annual-earning-growth-in-the-uk/#:~:text=Annual%20growth%20in%20earnings%20for,in%20the%20UK%202000%2D2022&text=Annual%20earnings%20for%20full%2Dtime,percent%20in%20the%20previous%20year.
Even if recession hits us, there is a good chance of inflation rising to and staying at around 5%. That is in fact what the markets are anticipating -short term interest rates rising to meet falling inflation at around 5% with GDP falling.
Disregard anything Bailey says. He is simply trying to justify his inactivity on interest rates last year. He is a shameless chancer who somewhere got to be Governor of the Bank of England.
I watched a good interview with James Rickards on Wealthion yesterday (book launch) in which he helpfully outlined the 2 kinds of inflation. “Push inflation” driven by rising costs of making and transporting stuff. And “Pull inflation” driven by consumer demand including the issue of stimulus checks and other free money and fear.
Governments hav no tools to tackle the first “Push” supply side type inflation as energy, raw material and transportation costs inflation are outside of their fiscal and monetary control. But they can slow done the “Pull” type by making people poorer.
What he thought was especiallysticky after that was deflation, which is very hard to shift and very destructive.
If UnHerd will let me do this, the Jim Rickards view may be found here:
https://www.youtube.com/watch?v=0dusL6ii0Jc
Hmmm. Thought provoking. What I think is that Push Inflation is not really inflation. The term by definition describes a compound effect (think of the outer circumference of a balloon being inflated with the same input each breath). The increased cost of designing, producing, transporting, storing and selling things is an escalator, but a linear one relative to the base cost requirement. Therefore, we are not experiencing inflation.
“If anything, it’s irresponsible central bankers that we need protection from.” Very true, but it is the question of responsibility which is key here. In their own terms they are responsible but to the wrong people. In other words they follow the logic of the 1% as alas do some of the comments here. Since the 1% and those who mistakenly align with them got us into this mess, I would suggest that ‘we the 99%’, must not only critique their TINA ways out of it, but also offer the alternatives… There are several out there, all worth serene discussion …
Fascinating to see how passionate, well-informed and diametrically opposed UnHerd’s readers are on this subject. Will be interesting to return to these comments in six months – if/when inflation has come shooting down – and see who was right. Meanwhile, my energy and mortgage bills have gone up by hundreds of pounds per month, but this has made precious little difference to how much I spend on non-essentials, which wasn’t that much before 2022 anyway. So if interest rates hadn’t gone up, or only by a small amount, it would have made no difference to my contribution towards inflation. I have to conclude that linking interest rates to inflation, on this particular occasion, is a mistake.
Just a thought: housing prices went up dramatically during Covid(in the UK and the Angosphere overall). The extra savings from homeworking made by the lap top classes – aided by loose monetary policy also, itself helping to raise asset prices- went into bricks and mortar. A deeply inflationary event which must have fed back into the real economy and bank lending. I don’t doubt the impact of the Ukraine war and labour shortages and I do think lockdowns damaged our economy and left a legacy of big problems socially and economically. The two together have been catastrophic.
Bravo! I can’t believe it has taken so long for somebody to write an article describing what is actually driving price increases and how the BoE’s response is rather bizarre. I think the real reason for the interest rate hike is to keep bond yields attractive, but that is the inner-conspiracy theorist in me coming out again.
But I think you have not really identified THE primary cause for the supply shocks and price rises. Simply the price of energy, that is far and away the primary driver, not a side-show. This means that we will either face continuing inflation as energy becomes even more scarce (with perhaps a lull in the warmer months) or deflation as the cost of energy plummets once the supply side is resolved with a resolution in Ukraine. But I doubt they will permit deflation and keep energy scarce no matter what.
Inflation is as artificial as the prices selected to be used for an ” inflation index” and is a disingenuous attempt to ” macro the micro”. For example, Amazon and the internet gives consumers a competitive choice, and drives down prices: A good example is Coca Cola’s ” direct” site that makes its drinks available at prices 30-30 pc cheaper than over the counter. Where taxation is involved ( alcohol, for example) the Government just creates price inflation: where the consumer has no choice a( car parks, train fares, utilities) the providers sting their captive market, so causing price inflation. One only has to look at airline ticket pricing to see the effect of competitive pricing, AND Ryanair still makes money. I recall flights to Nice return in 1971 at £40, and recently booked same at the same price!
The late Sir Freddie Laker would be proud!
Anyone with a basic grasp of economics knows that printing money with a Xerox machine and blaming its worthlessness on magically pernicious “supply bottlenecks” is apparently not writing for UnHerd.
The author is clearly a devotee of MMT, or modern monetary theory, an economic theory that arose after nearly three decades of very low interest rates and high government deficits failed to raise inflation. It basically challenges every economic assumption made by government since Keynes. In MMT, taxation, fiscal policy, and their effects on unemployment are the cause of inflation, not the money supply per se. Money is more like any other commodity where one party, the government, has a total monopoly. Taxation is less a way to pay for government spending than a way to create various incentives in the system. Thus a government can spend all it likes so long as inflation remains low. Deficits are ultimately irrelevant. Economics doesn’t lend itself to traditional experimentation as hard sciences do, so it will be difficult to prove one way or the other. One cannot easily reproduce a complex interconnected system with hundreds of variables and millions of participants in a laboratory setting. Computer modeling can and is often used, but I suspect Unherd readers are well aware of the unreliability of these compared to traditional experimentation, so I won’t get into that. There is one key point though. The one common thread in MMT and traditional economics is that excessive government spending can trigger inflation, though the theories disagree on the ‘why’ and ‘how’. Government profligacy is bad in times of inflation and cutting spending would be called for regardless. MMT has other problems. Governments do not have a true monopoly in the sense that other governments also issue currencies and their relative value fluctuates against each other based on supply, causing differences in price of goods passing between nations, and so on. MMT is fundamentally an American theory, and while the dollar holds as the universal reserve currency, it’s likely to work for the American system. I’m skeptical it would be effective anywhere else.
“as ye sow, so shall ye reap“*
REJOICE:The Corona Dividend long prophesied by Lord Jonathan Sumption and others is now upon us.
(*Galatians6:7.)
I don’t particularly agree with your analysis.
Inflation is a result of demand pull and cost push. The former as a result of COVID handouts which was financed by the BoE through direct monetary financing and the latter as a result of COVID lockdowns and Putin’s war.
In other words we are still experiencing the lag from COVID money printing and the negative supply shocks due to lockdowns and Putin’s war.
More direct monetary financing will increase inflation and despite the MMT myth about currency issuing countries, QE or indirect monetary financing incurs liabilities for the BoE especially when gilt prices reduce.
As such, the Federal Reserve is set to lose $1 trillion on its bond holdings.
Regarding the BoE, my impression is that they wish to create a recession in order to intentionally create political and social instability. The pro-Brexit government will be blamed for a recession at the next election and unionised workers will be encouraged to strike as they see their disposable incomes drop as mortgage rates and rents increase.
In this respect, the BoE is working against the government and is using the inflation they helped to create to invoke more instability.
If they weren’t working against the government, then they would solely rely on quantatitive tightening to dampen market interest rate hikes, especially if they release short gilts which are very much in demand as they can be used by the financial market as collateral for borrowing.
I confess, friends, to be deeply skeptical of any appeals to “price gouging” and “monopoly”. Prices go up; it’s “price gouging” by “monopolists”! But, one question must be: Where have these evil, price-gouging monopolists been hiding all of this time? Why price gouge today and not yesterday or the day before that?
Edgeworth (1925) on “The Pure Theory of Monopoly” does offer some ideas: Basically, absent supply constraints, competing firms may find themselves with spare production capacity laying around may find themselves competing vigorously. But, if supply constraints start to bind, then each entity might start to perceive some capacity to raise prices. Each of them find themselves operating like a local monopolist; binding supply constraints diminishes the capacity of one firm to flood the market with produce. In fact, each of these temporary, local monopolists might themselves producing less output than an unconstrained monopolist would choose. We end up with something even worse than monopoly.
Edgeworth’s contribution got folded up into a larger body of research subsequently labeled “Bertrand-Edgeworth competition.” The basic point is that characterizing competition in the face of capacity constraints can be tricky.
I cannot afford to buy mince or cheese or butter.
Yet everything is coming up roses.
Honest set of questions. Why could Zimbabwe not spend its way out of its economic sanctions? Surely hyperinflation could not occur since Zimbabwe had its own currency. So why did printing money fail to save Zim’s currency? Was Zim’s currency pegged to the dollar/pound in a way that nullified the fact that it had its own currency? Were the sanctions and damage to agricultural output too significant even for government spending to save them? Did the Zimbabwe government just fail to spend enough?
These are the genuine questions that come to mind when I hear the MMT type ideas espoused in this article. How do you explain the Zimbabwe case?
If banks actually made their own decisions ….. what would happen ?
Speaking of bankers I see Mark Carney is now working on the UN climate agenda…
The sort of class war that amused me in banking and stockbroking has sadly gone as the lower middles have taken over… Cazenove employees being sent home for not wearing lace up shoes, visitors vulgar golfing umbrellas put in a skip, and a German finance minister being led out of the back door as he was wearing a brown suit… fantastic!!
I got as far as “it’s all caused by supply chain problems” and stopped reading.
Simple economic illiteracy.
“people had magically found themselves flush with cash
I sighed as I read this. Over my lifetime I’ve read so much basic economic theory lauded by the left and the right. Economics is held up as a science whereas its characteristics are more of an art. This place is called Unherd but the author continually quotes from the herd! Nothing of value here. I’d suggest that Unherd is a bit more selective with contributors and the subject matter on which they write.
But only up to a certain point. And that certain point depends on international factors beyond the control of a national government. And it’s not as if there were not modern examples of excess money printing. Think Venezuela, Zimbabwe, Turkey, or Argentina.
Strange how excessive money printing is not criticised by some political parties.
Hilarious! you are either trying to be deliberately funny or don’t understand basic debt economics:
-we don’t get to “decide” what interest rate suits us best- your lender does. About half of UK debt is to EXTERNAL borrowers. – ie not sterling denominated.
The global bond market -our lender- decides our interest rate. That’s the problem with being in debt.
– if a person earns £1000 a month but spends £2000 they can carry on fine as long as someone keeps on loaning the other £1000.
If the lender demands a higher interest in order to sustain the loan you can’t force them to lend you money.
Trying to personify the bond market as a some specifically evil group is like trying to blame the Pacific for the particular wave that just swamped your boat.
The truth is that central banks borrowed money from other banks on which they promised to pay (minimal) interest. Central banks then used this money to buy financial assets (like government bonds). The idea was that sellers would use the proceeds to purchase assets like stocks to replace the ones they had sold to the central bank. These purchases raised stock prices significantly and lowered interest rates to zero, making everybody who had borrowed to buy assets feel rich. The U.S. Federal reserve had liabilities of $8.9 trillion as of March 31, 2022, including $4.6 trillion in debt to these (sometimes foreign) banks.
But in the end, these shenanigans were bound to fail because creditors became concerned that central banks (like the Fed) would not be able to service their debt because inflation would undermine the value of their bonds. This Ponzi scheme is now near collapse as central banks find that the bond markets demand higher rates when they come to refinance – of course, this only worsens the situation. The only realistic outcome is a financial collapse. We are back in the 1970s.
I do appreciate that Mr Fazi is a writer, but I wonder if he ever takes the trouble to read?
The BIS have been calling out the potential stickiness of inflation for a year. A very prescient speech from Agustin Carstens in April nails it.
https://www.bis.org/speeches/sp220405.htm
MMT is a complex and nuanced theory that has been co-opted by lazy economic hacks to support their agenda(s).
The first question to ask suck hacks is a simple one- ‘If a nation that issues it’s own currency can print money to cover its spending, why not print unlimited money?’
Suddenly the hack becomes dismissive- ‘Don’t be silly, I’m not saying print unlimited money…’
Ok- ‘How much money are you saying to print?’
Silence. Tumbleweeds drift by.
And there is the rub- without a fuller understanding of the checks and balances that true MMT proposes (rightly or wrongly) such as minimum wage guaranteed government jobs to all (a facet few hacks seem to mention when proudly displaying their ‘knowledge’ of MMT) the whole concept becomes meaningless.
Ironically, given the thrust of this article, MMT is precisely an economic theory geared to control wage price spirals whilst allowing the political elite to pursue their spending goals. It is in essence a monetary ‘dummy’ that will be soothingly inserted into the mewling mouths of the hungry masses
The Job Guarantee (JG) is an interesting component of MMT that really should appeal to people of all political colours. In the UK we already have a system dedicated to helping people find jobs which often don’t exist where they live. Under a JG this system would be changed to a system that puts people to work.
Orthodox economic thinking has it that keeping a proportion of the working population unemployed acts as a price stabiliser (the NAIRU index – a buffer stock of unemployed people is a damper on wages). But the cost to society for keeping a percentage of the workforce out of work is huge. There are ill effects on health and society in general. The JG is also a price stabiliser, but it doesn’t condemn a section of society to being unemployed in order to satisfy business demands for price stability. The wage that the government assigns the JG work would be an indication of their view of the value of the currency they issue. If the amount paid to those workers is what the government considers a living wage then prices (especially rent and other wages) would have to fall in line with that.
People who are medically fit to work but choose not to are not catered for in all the discussions of JG that I’ve seen. Those folks would have to rely on the charity of others who sympathise with their position (good luck with that).
A Job Guarantee is not UBI. I’ve only ever seen UBI condemned by MMTers. It undermines workers, subsidises wages (so employers will feel they can pay less) and removes any responsibility from the government to build a society and infrastructure to support a near-fully employed population.
Although the JG might bother businesses in that it would most likely lift wages they have to pay (tight labour market), it’s worth bearing in mind that the population will be at near full employment where ever you are in the country. Any business would have a near-fully employed customer base with no fear of a local community being plunged into unemployment if a local industry closes down.
A JG would also act to strengthen community bonds. It would provide people with the freedom to work in the community they are born in or want to settle in, rather than having to chase capital to where ever it chooses to settle (usually where it can make most profit).
The more I think about it, the more I think the JG is very suitable system for a largely conservative society such as the UK.
An interesting take on JG. My concern about JG is the same concern I have about any of these theories and methods that aim to ‘solve’ employment (or unemployment, if you like) namely that they are not in the best interests of the masses they claim to serve. They ultimately are a novel form of control in the interests of capital and profit. This is why I thought it ironic that the author was so aghast at the BOE meddling (serving the interests of the elite) and saw MMT as the panacea. It is simply another side of the same coin. Without doubt the main issue with JG is that it is specifically a minimum wage backstop designed to be unattractive yet irrecusable to the unemployed- for all the protestations to the contrary by MMT proponents it stinks of ‘workfare’ (the sinister brother of welfare).
As a society we have fetishised Capital and Profit to such an extent that even those who are least likely to ever benefit from the protections and controls that subdue labour in favour of business, still vote for masters who will exploit them.
We need a theory that puts labour on an equal footing with capital, not ones that through complexity obscure the fact they are more of the same- maintaining the status quo of worker exploitation.
Thanks for the reply Alex. I can understand your concerns about the JG being used a minimum wage backstop. I don’t know if I have a complete answer for that, but I’m sure the (25 years plus of) MMT literature will have covered it. Here’s my take, off the top of my head.
One of the key tenets of MMT is that a currency issuing government can afford to buy everything available for sale in that currency, including all unused labour.
Any government that introduced a JG would presumably have already bust the myth with the electorate that they could ever run out of money. So when committing to pay a living wage they would be judged on the value they set on labour. The current free-market situation where potential employees have to compete for too few jobs results in some ending up unemployed and the ‘lucky ones’ working for a wage set by ‘the market’.
With a JG paying a proper living wage the market would have to compete to attract workers. This might be by offering a more attractive job at the same or lower wage, or by matching or exceeding the living wage paid by the JG.
Unemployed people receive welfare payments that are not enough to live on and, because those payments are not being made in return for their labour, there is not a great deal of public pressure to change this. Imagine if that system was changed to one where all those people receive payment for the work they do, and suddenly you have a measure of how your government values labour and, coincidentally, the currency they issue. If they don’t value a worker enough to pay them a living wage then the fate of that government would be set at the ballot box.
“austerity is nothing more than class war”
Reads like it was written by communists.
What i want to know is the appropriate terminology for these ‘people’ – who are so viciously selfish to the point of ‘inhumanity’. Cancerous parasites ?? Zombie psychopaths ?? – maybe just good old ‘evil’ – ie that which activ ely works AGAINST the common good. Yes I think EVIL is appropriate and will use it henceforth – and I know that that will annoy many people that I know – let the ‘no more mucking around’ battle commence cos i am sick of all of IT !!!
‘Untermenschen’?
Or perhaps we need ‘him’?
https://m.youtube.com/watch?v=Dz0egrNk83U
Just the keep it simple focus cos there is soo much lying everywhere – if actions actively destroy the greater good then lets just name those with a metaphor we already have that most understand ie EVIL – and cut through all the lying, posturing, propaganda etc etc. If it looks,walks and smells like a duck let us just call it a duck !!