Consciousness of Sheep
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Mid-term blues
This was meant to be the moment when Boris Johnson shuffled off the political stage. Having discredited himself in the public eye with his lockdown parties and his backing of MPs’ corruption, Johnson went on to lose the supposedly safe North Shropshire seat last autumn. His own backbenchers began demanding a leadership contest – although too few of them to trigger the election. Nevertheless, many Tory MPs said that they wanted to see how the Tories performed in the May 2022 local elections before making their minds up about Johnson’s leadership.
It was a gift to the predominantly London-based, neoliberal establishment media, who began to conjure headlines about the Tories losing thousands of seats and hundreds of councils. That was before the official opposition decided that “partygate” was the hill on which they would stand or die. While a good 80 percent of the electorate was forced to rein-in its spending, and to abandon a large part of the discretionary spending which makes life tolerable, as energy prices rocketed and inflation soared, they were treated to the grotesque weekly parliamentary pantomime of Sir Starmer banging on about lockdown parties.
So far, so bad… but then it turned out that the leader of Her Majesty’s loyal opposition was not averse to the odd lockdown beer and curry night of his own. As Shadow Cabinet member Lisa Nandy had warned, there was a danger that the electorate would conclude that “they are all as bad as each other.” Still, Labour went into yesterday’s local elections with a clear 6-to-8-point lead over the Tories, so gains were to be expected.
It is perhaps worth noting that at this stage in the 1992-97 parliament, under Labour’s new, charismatic leader Tony Blair, Labour had opened up a 30-point lead over the Tories and was sweeping all before it in local and by-elections. And in those days, Labour could bank on winning the majority of the seats in Scotland. Today, in contrast, the Scottish National Party holds a solid grip on the seats in Scotland. As a result, Sir Starmer’s Labour Party must win big in England if it is to have any chance of forming a government.
In fairness, Labour has gained seats in yesterday’s elections, notably and unexpectedly taking over Tory councils in London. The trouble is that London is almost a separate city-state – the wealthiest place in northwest Europe – radically different to England or Britain as a whole. And in wider England and Britain, Labour has done far less well. While winning back some of the seats in the “red wall,” they have failed to break through on anything like the scale that would result in them going on to win a general election. Indeed, the Tories have actually gained some seats in the red wall, despite losing hundreds of seats across the country. And the big winners are the Liberal Democrats and the Greens, who appear to be outflanking Labour from the right and left respectively.
For the most part, yesterday’s results are a continuation of the trends seen in the 2019 general election. Labour fares exceptionally well in metropolitan liberal seats in London, Leeds and Manchester, and in its ex-working class rump seats in south Wales – piling up votes where they will make no difference to the result of the election. But across Britain as a whole, Labour simply cannot muster sufficient votes to secure a majority. Winning back a handful of red wall seats yesterday does not change this. As veteran psephologist Sir John Curtice told the BBC this morning:
“Yes Labour have certainly made progress as compared with last year, but last year was a very poor performance so four points up on last year was not exactly surprising.
“I think therefore this is certainly not a local election performance that in any sense indicates a party that is on course for winning a general election with an overall majority, indeed I’m not sure whether we could even say that at this point it’s guaranteed or necessarily on course even to be the largest party in the next parliament.”
One can only speculate about how yesterday’s elections might have turned out if Sir Starmer had spent the last six months setting out a coherent and credible programme for tackling the cost-of-living crisis rather than banging on about Christmas cakes and Abba parties. But then, that would have entailed Labour distancing itself from the failed neoliberal consensus which has held sway in Britain for the last four decades, and which was cemented into place by Blair himself… something Sir Starmer will never do.
The Tories did well enough yesterday for Johnson to hang onto his job. They will be able to spin the results as the usual mid-term dissatisfaction with a sitting government. If they can develop a workable response to the cost-of-living crisis – admittedly a tall order – they may even go on to hold most of the seats they gained in 2019.
And so, perhaps, it is Kier Starmer’s position that needs to be examined after yesterday’s results – although Labour is notoriously bad at ditching lame-duck leaders. Stick with Starmer, and there is a chance that Labour might emerge as the largest party in the next parliament, raising the possibility of a coalition with the SNP and the LibDems. More than this though, is likely beyond them. And it would be naïve in the extreme to assume that the Tories and the bulk of the establishment media wouldn’t run a high-profile attack on “the coalition of chaos” that Britain would end up with if voters didn’t stick with the Tories.
As the old saying goes, a week is a long time in politics. And there are another two years before Britain has to have a general election. The ongoing economic crisis could still do to Johnson what Black Wednesday did to John Major in the early 1990s. Although, again, it is worth remembering that Blair offered – or at least appeared to offer – an alternative economic and social programme to the Tories. Starmer, in contrast, is merely offering to do the same as the Tories, but more/faster/better. If I were a betting man – and please don’t take this as financial advice – I would put a tenner on Boris Johnson still being Britain’s prime minister in 2025.
The end of the central bank myth
Fed Chairman Jerome Powell said the quiet bit out loud at Wednesday’s press conference:
“So our tools don’t really work on supply shocks. Our tools work on demand. And to the extent, we can’t affect really oil prices, or other commodity prices, or food prices and things like that. So we can’t affect those…”
Powell then went on to talk about job vacancies on the demand side, and the need to pre-emptively force demand down to prevent a 1970s style wage-price spiral. In the UK too, Bank of England governor Andrew Bailey was more explicit in explaining the bank’s intention to create a recession in order to raise unemployment and reduce demand. With friends like this, who needs enemies?
Could it be though, that both Powell and Bailey are acting from a belief in a myth which is long past its sell-by date? Richard Murphy summarises the central bank inflation myth thus:
“The central banker’s view is that all inflation is ultimately down to the availability of too much money in the hands of those consumers who must work for a living. This either creates demand-pull inflation, because those in work have already been paid too much, or it creates cost-push inflation because those workers are demanding to be paid too much in the future. In either case their answer is the same. The income of those in work must be crushed. Jobs must be lost. Poverty must be imposed. Recession must be endured. And it’s all the fault of greedy, overpaid employees, whose spirits must be destroyed by forcing them into expensive debt for a significant period until such time as they learn their lesson and stop being greedy.”
This is almost a founding myth for the modern iteration of central banking, and it goes back to Saint Paul Volcker himself, who is credited with using ultra-high interest rates to squeeze the inflation of the 1970s out of the economies of the USA and Europe. It is so seductive a myth – based in large part on the deliberate inflating of the German Deutschemark in the aftermath of the First World War – that it has gone largely unchallenged for decades. It is though, a myth which ignores what was happening in the real economy of the late-1970s, which nearly led us to disaster in the years leading up to the 2008 crash, and which threatens the very core of western civilisation today.
The claim that Volcker chose to hike interest rates to rein in inflation is what psychologists refer to as a “rationalisation” – a story that we later tell ourselves in an attempt to explain an otherwise irrational action. How do we know this? Because, as economic historian Jeffrey Snider explains, that is not what was said at the time:
“Supply. Supply. Supply.
“Oil shock combined with stupidity, that was the 1980 recession, not Volcker.
“Don’t believe me? Let’s go back to November 1979’s FOMC, from back then I’ll let Minneapolis Fed President Mark Willes sum things up:
“’MR. WILLES. I have to admit that I don’t know what’s going to happen to the real economy. I’m not sure I even know how to go about predicting that at the moment because it seems to me that it depends so much on what OPEC does and what the Congress does [about oil] and lots of other things. I will go on to say, which will be no news to some of you, that in terms of policy it’s not clear to me that it makes any difference what the real sector does over the next twelve months because I’m not sure that we have any demonstrated ability to have an impact on that–in a predictable way anyway.’
“The Volcker Myth was conjured much later to give a newly-reconstituted Federal Reserve its foundation legend. We’re led to believe in an always-almighty central bank that will even go so far as to use massively restrictive monetary policy to provoke nasty recession if it feels the need. As Willes straight admitted, there wasn’t even intent then.”
It was the oil shock caused by the revolution in Iran and the subsequent war with Iraq which caused the recession. Volcker and his central bank buddies merely exacerbated the problems facing US businesses and households. And it was the opening up of new oil deposits in Alaska and the North Sea rather than any financial meddling by the central banks that kick-started the next round of growth.
The ensuing period of relative stability – the “Great Moderation,” as Bernanke claimed – was also a supply-side process resulting from the opening up of cheap commodities and goods from Russia and China after the Cold War. And what brought it to an end was the peak of global conventional oil extraction in 2005. As in the 1970s, oil shortages drove general price rises. And as with the 1970s, central bank meddling with interest rates served only to exacerbate the crisis. In 2008, the establishment media consensus was that so-called sub-prime borrowers were responsible for the crash… conveniently forgetting that those borrowers only defaulted after the central bank had jacked up their interest rates.
The system may, of course, have collapsed anyway. Rising oil prices also hit the budgets of sub-prime borrowers, forcing them to rein-in spending and switch from discretionary to essential purchases. Those closest to the margins will have defaulted anyway. But the interest rate rises threw far more households into default, triggering the collapse of the derivative and shadow banking sector and threatening to destroy the entire western banking and financial system.
What of the present moment?
Once again we have rising oil prices – and, indeed, price rises in a raft of key commodities – causing general price increases across the economy. Once again we have war and revolution – this time in Ukraine – adding to the supply-side shock and threatening to drive prices far higher. And once again we have central banks adding to our woes by shadow-boxing an enemy – rising wages and labour shortages – which doesn’t exist in the real world. Labour “shortages” are primarily the result of regional imbalances, with too many jobs in one place and too many workers in another. Moreover, under-employment remains a significant problem, suggesting that the labour market is far slacker than the central bankers believe. In any case, rising prices – especially in energy and fuel – have already slowed the economy dramatically, and we are starting to see the first wave of bankruptcies as those businesses closest to the edge begin to fail. Even without the additional pressure from interest rates – which, after all, add to inflation – we may already be in a recession. And the true enemy may be deflation as the economy shrinks to accommodate the loss of surplus energy available to us.
As Jeffrey Snider points out, events in the real economy will not stop the central banks from doing what the central banks do:
“What if the ‘central bank’ was actually clueless about money, and, more to the point, affected only the narrow kind of slightly useful interbank token (bank reserves) as a byproduct of its random stabs of dart-throwing? How might everything look differently if you understood that oil and a supply shock, not Volcker, was responsible for recession in 1980?
“It might look a lot like today, to be honest, especially in the bond market. The Fed’s going to do what the Fed’s going to do, but outside the short-run and short-run interest rates this won’t matter much at all.”
In the coming months and years we will have to face up to what we should have accepted in 2008 – that the central bankers are just another self-serving technocracy which, in truth, has nothing to offer us in the way of mitigating an energy crisis which has been slowly coming to the boil since the 1970s. Insofar as it has done a good job at all, it has been in persuading the masses that central bank policy is good for them, even as those same central banks have shovelled billions of dollars, euros and pounds into the pockets of the already wealthy while simultaneously watching real wages collapse.
It is surely long past time for us to restore democratic control over the central banks before their actions bring an end to social cohesion entirely.
As you made it to the end…
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