Consciousness of Sheep
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Establishment media outlets continue to claim that central banks are raising interest rates to curb inflation. If this is true, then we can only assume that central bankers are imbeciles. Because there is no inflation to be found anywhere. Yes, prices are rising… but they are rising into a global currency shortage. The problem is not too much currency chasing too few goods, it is too few goods and too little currency racing each other to the bottom. To put it more concretely, the sole drivers of rising prices today are energy – particularly gas – and food. And the main reason that food prices are increasing is because of the high price of fertiliser… which is made from too expensive gas.
Strip food and energy prices out of the official figures, and “inflation” is already falling. And it is impossible to believe that while any one of us can look at the official data and see this, that somehow the highly remunerated folk at the central bank cannot. It follows that interest rate rises are not aimed at lowering prices – indeed, the Governor of the Bank of England has said as much. So why else may they be raising rates.
One clue can be found in the UK Chancellor’s response to the latest rise:
“The most important thing the British government can do right now is to restore stability, sort out our public finances, and get debt falling so that interest rate rises are kept as low as possible.”
This seems to confirm reports over the weekend that the government were drawing up a raft of tax increases and austerity cuts despite the Bank of England acknowledging that:
“The Bank had previously expected the UK to fall into recession at the end of this year and said it would last for all next year. But it now believes the economy already entered a ‘challenging’ downturn this summer, which will continue next year and into the first half of 2024 – a possible general election year.”
With Russian oil and gas out of the western economies, even if the UK economy was cut in half, any energy saved would be quickly swallowed up elsewhere in Europe. And so, the impact on international prices would be barely more than a rounding error. Rather, what the Bank of England seems to be doing is raising rates in parallel with the US Federal Reserve in an attempt to maintain the value of the pound against the dollar… which, given that the pound has fallen close to the value it plunged to after Kwarteng’s ill-judged mini-budget may well be beyond them.
A large part of Britain’s problem at present is that our leaders are caught in the “psychology of prior investment.” For the last four decades, governments have banked the house on building a globe-spanning banking and financial system at the expense of the real economy. So long as we had a surplus of North Sea oil and gas to underwrite it, it seemed to work. And when governments needed a transfusion of foreign exchange, they could always sell public assets to the highest bidder. Today we have an atrophied real economy, no public assets worth selling, a rapidly disappearing dollar reserve, and a mountain of unrepayable debt. Nevertheless, the central bank – whose primary responsibility, remember, is to protect the banks – and the government continue to pull levers and press buttons which appeared to work in the past.
The alternative – and it sounds odd to have to say this to a Tory administration – is that the markets are correct. The value of the pound no longer reflects the true state of the British economy. And the sooner we accept that reality, the better. Because for most ordinary people in the UK, the choice is between getting poorer in an attempt to bolster the pound or getting poorer in order to reflect the true value of the economy. The former is doomed to fail, but the latter at least allows a degree of import substitution and a restructuring of the economy in favour of what remains of our productive capacity.
How bad will it be?
It is helpful that the Bank of England has finally conceded that the UK economy was already in the grip of a challenging downturn in the summer. It is less helpful that it continues to raise interest rates before taking stock of the damage it has already done. This is because it takes time for the effects of a rise in interest rates to feed through the economy. For example, most businesses and households borrow on fixed terms, so that it is only when loans need to be rolled over that the impact of higher rates is felt. This said, the psychological impact is that many people try to prepare for the worse – those who can, save rather than spend what discretionary income they still have. Nevertheless, the impact of a string of monthly rate rises is little different – but politically easier – to a single three or four percent shock.
The problem is compounded because almost all of the data that is used to decide whether to continue raising rates is backward-looking… it tells us what was happening months ago not what is happening now. This mostly leaves us with anecdotal evidence such as the closure of more than 100 McColl’s convenience stores, the woes and temporary bailout of the Britishvolt EV battery plant, or supermarket profit falls, to guide us. Just at the moment, the negative stories outweigh anything positive.
There is though, one indicator which has proved reasonably reliable as a forward-looking guide. This is the survey of businesses conducted monthly by the Chartered Institute of Procurement & Supply. This produces an index of forward purchasing by businesses. So that, for example, in a healthy economy, businesses will be purchasing more supplies in anticipation of growing sales. In a recession, in contrast, businesses will be cutting back as sales fall. A score above 50 on the index represents growth, while a score below 50 is a mark of a slowdown – a score at or below 45 being a sign of a serious recession.
So how is the UK economy doing?
According to the latest survey:
“The seasonally adjusted S&P Global / CIPS UK Manufacturing Purchasing Managers’ Index fell to a 29-month low of 46.2 in October, down from 48.4 in September but above the earlier flash estimate of 45.8. The PMI has remained below the neutral 50.0 mark for three consecutive months.
“October saw new order intakes decline at the fastest pace since May 2020. The latest contraction was blamed on the weaker domestic market, already high stock levels at clients, subdued client confidence and inflationary pressures.
“The impact of lower demand was felt across industry. Although the rate of contraction in production volumes eased to a three-month low in October, the consumer, intermediate and investment goods sectors all saw output decline. The performance of the intermediate goods sector was especially weak.
“Sales from overseas clients also fared poorly, with new export business decreasing for the ninth month running in October.”
Okay, we’re not in a full-blown crisis yet. But if consumer demand remains subdued over the Christmas period – and it is hard to see any reason why it wouldn’t – the downward trend is likely to continue.
Nor are UK services faring much better:
“Meanwhile, business activity across the service economy declined for the first time in 20 months and at the fastest pace since January 2021 (index at 47.5). Squeezed household budgets, recession concerns and delayed business investment decisions due to political uncertainty were all cited as factors leading to lower output in October.”
The idea that this is merely “challenging” is surely complacency on a toxic scale. The reality is that the UK is one poor Christmas and/or one cold winter away from an economic meltdown. And it is doubtful that the central bankers, the government or the opposition parties has the first idea how to prevent it, still less how to rebuild afterward.
Fracking banned?
We really need to do more to understand how this game is played. In the political arena – even in these benighted times – politicians go out of their way to avoid being caught in a lie. And so, they go to extraordinary lengths to appear to say one thing when in reality they are saying something different. Last week’s Prime Minister’s Questions provided us with a case in point. During the session, Britain’s only Green Party MP, Caroline Lucas asked:
“If he [the Prime Minister] is a man of his word, will he start by reversing the green light she [Liz Truss] gave to fracking, since it has been categorically shown not to be safe, and instead maintain the moratorium that was pledged in that very manifesto he promised to uphold?”
Sunak’s response appeared to be a convoluted yes:
“I have already said that I stand by the manifesto on that. What I would say is that I am proud that this Government passed the landmark Environment Act 2021, putting in more protection for the natural environment than we have ever had, with a clear plan to deliver it. I can give the honourable Lady my commitment that we will deliver on all those ambitions, and that we will deliver on what we said at COP, because we care deeply about passing on to our children an environment that is in a better state than we found it ourselves.”
This is certainly how Britain’s establishment media reported it. The Guardian reported that “Rishi Sunak will keep ban on fracking in UK, No. 10 confirms,” the BBC said “Rishi Sunak brings back fracking ban in first PMQs,” While the Financial Times announced “Sunak reinstates fracking ban in England” (Scotland and Wales have their own bans on fracking). So that’s it then, activists can put down their placards and go and throw soup over an artwork instead, or something… well, not so fast.
While each of these propaganda outlets referred to what the 2019 Tory Manifesto said about fracking, they brushed over the true meaning:
“We placed a moratorium on fracking in England with immediate effect. Having listened to local communities, we have ruled out changes to the planning system. We will not support fracking unless the science shows categorically that it can be done safely.”
However, as Paul Goodman at Conservative Home explained at the time, those words were chosen carefully to leave the door open to fracking:
“The manifesto’s wording potentially allows the Government to turn turtle: Ministers could eventually argue that in their view science suggests that fracking can be done safely. The door may seem to have been closed, but it has been left slightly ajar.”
With the energy crisis likely to continue – and worsen – for years to come, it would be all too easy for “the science” to pronounce that earlier safety standards were far too tight and that, in fact, fracking is perfectly safe, and that anyone who says differently is just a conspiracy theorist who wants granny to freeze to death (cf. lockdowns). Thus, Sunak can still give the go-ahead for fracking without having lied to parliament.
The other energy crisis
While all eyes are on the supplies of gas reaching Europe as winter closes in, there is another – far more dangerous – energy crisis brewing just out of sight of the establishment media. As Irina Slav at OilPrice reported last month:
“Global diesel and other distillate fuel stocks have been on the decline for a while now, and there is no reversal of this trend in sight. Demand, on the other hand, has been growing, leading to a widening shortage.
“The situation has become so grave that U.S. buyers have begun snapping up diesel cargos originally sailing for Europe.”
And the situation has worsened since:
“U.S. inventories of distillate fuels are at record lows, demand remains robust, and an impending EU embargo on Russian fuels are all contributing to the shortage, whose original cause was the reduction in refining capacity in both Europe and the U.S. and the faster-than-expected rebound in demand after the pandemic lockdowns.
“It’s getting worse by the day, too. CNBC called it a perfect storm, with low inventories combining with rising demand ahead of winter, which is a recipe for even higher prices spilling out across industries and hitting consumers’ already emptying pockets.”
This understates the impact of a diesel shortage on any modern industrial economy. Because while a petrol shortage can be a nuisance, a diesel shortage is truly life-threatening. Diesel does all of the heavy lifting in manufacturing, mining and quarrying, agriculture and transport. And because of the energy-density, there is no replacement – the reason battery-powered haulage trucks have yet to put in an appearance, is that the size and weight of the batteries means that only a tiny fraction of the space remains for the load. In short, if the diesel is unavailable, the heavy lifting will not happen.
The financial problem is that despite growing demand and supply shortages, refiners are unwilling to invest in increased capacity. And why should they? Building new capacity is expensive, and the predicted recession – means that any new investment may struggle to return a profit. Moreover, western governments are committed to phasing out fossil fuels over the next couple of decades so that, from a refiner’s point of view, it makes more sense to cut rather than increase capacity.
The short-term situation isn’t helped by the USA’s greater purchasing power – allowing it to outbid the UK for shipments of diesel fuel. And also coming back to bite us, is George Osborne’s decision to close Britain’s main diesel refinery and import diesel from Russia because, you know, as with just about everything else Osborne ever went near… what could possibly go wrong?
At the very best then, Britain is looking at higher diesel prices – which will in turn raise the price of just about everything else in the economy. At worst, we could be facing intermittent supplies with a cascading crisis spreading across the economy.
As you made it to the end…
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