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In Brief: We are saved, If America Sneezes, Bleak Friday, Deflation and inflation

We are saved

Just as Europe is succumbing to yet another self-inflicted energy crisis, news comes of a “major breakthrough” in the quest for the Holy Grail of zero-carbon energy, nuclear fusion.  Scientists at the Lawrence Livermore National Laboratory had, apparently, generated an energy return – EROI – of 0.4MJ from igniting – i.e., fusing – hydrogen.  The establishment media waxed lyrical.  For example, Nicola Davis, Science Correspondent for the Guardian gushed:

“Researchers have reportedly made a breakthrough in the quest to unlock a ‘near-limitless, safe, clean’ source of energy: they have got more energy out of a nuclear fusion reaction than they put in.

“Nuclear fusion involves smashing together light elements such as hydrogen to form heavier elements, releasing a huge burst of energy in the process. The approach, which gives rise to the heat and light of the sun and other stars, has been hailed as having huge potential as a sustainable, low-carbon energy source.

“However, since nuclear fusion research began in the 1950s, researchers have been unable to a demonstrate a positive energy gain, a condition known as ignition.

“That was, it seems, until now.

“According to a report in the Financial Times… researchers have managed to release 2.5 MJ of energy after using just 2.1 MJ to heat the fuel with lasers.”

The news will have no doubt brought cheer to British readers who are currently shivering beneath a slow-moving Arctic weather system.  And how fortuitous that the breakthrough was made just as the laboratory’s grant funding was up for review.

Only those readers of the BBC coverage who were dogged enough to read all the way to the bottom of the article will have found the critical piece of information which ought to have been right at the top of the page:

“The experiment was only able to produce enough energy to boil about 15-20 kettles and required billions of dollars of investment. And although the experiment got more energy out than the laser put in, this did not include the energy needed to make the lasers work – which was far greater than the amount of energy the hydrogen produced.” (My emphasis)

Add in the 330MJ needed to power up the lasers, and that’s an energy loss on investment of 133 to 1… and at a cost of £2.85bn, that’s a seriously expensive way to generate roughly the heat needed for a hot bath (which is something else many Brit’s can’t afford this winter).

The extent of grift and outright fraud among the nuclear fusion silo of the technocracy has been well-documented.  And rather than gushing about the potential benefits of this racket, genuine journalists in a truly independent media would be asking awkward questions about whether there are more realistic energy solutions just over the horizon which might offer a better return on the billions of dollars, pounds and euros which have been shovelled at a technology which was 25 years away when I was born and will still be 25 years away long after I’m gone.

If America sneezes

The phrase was first used in the early nineteenth century by Prussian diplomat Klemens Wenzel Furst von Metternich: “When (Napoleonic) France sneezes, Europe catches cold.”  But following the Wall Street crash in October 1929, the quote was updated to take account of the continental giant’s economic might: “When America sneezes, the world catches cold.”

That was back in the days when, although weakened, the European Empires were still a major force in the world.  Indeed, in 1929, the British Empire was at its territorial and population – although not economic – height.  Today’s Britain is an economic basket case, while the remnants of the once great European Empires huddle together in an unsustainable customs union in the desperate hope that something will save them from the economic and energetic Sword of Damocles hanging over them.

At this point, our economies depend upon the wisdom of the economists at the Bank of England, the European Central Bank and, especially the US Federal Reserve, to steer the economy to a soft landing in the course of 2023… what could possibly go wrong?

At present, there are two predictions of the future of the western economies.  The first is the one made by the central banks, largely based upon backward-looking data.  The rate of inflation fell in October.  But not as much as the Federal Reserve Bank wanted.  And so, they raised their overnight interest rate by another 5 basis points (0.5 percent).  The Bank of England – whose aim is clearly to maintain the value of the pound against the dollar – raised its rate in line with the Fed’s, despite data earlier this week showing that the UK experienced negative growth in the previous quarter.  More worrying still is the rate at which the central banks have raised rates – the most rapid rise in history.  Rates have been far higher, of course, but there has never been so rapid a percentage increase before, so that the effects we are now witnessing in the data may well be the impact of rate rises back in the summer, with far worse to come as the economy finally catches up.

Instead of the soft landing promised by the central banks, which they might have delivered if they had paused in the summer to see what the effect would be, we might well get a severe recession or even a bigger collapse than occurred in 2008… the last time the central banks attempted to use interest rates to squash a supply shock.  One reason for believing this is that financial markets are betting big that December’s rate rise is going to be the last, despite central bankers insisting that there are more to come in 2023.

Okay, but we know that “markets can remain irrational for longer than we can stay solvent.”  So why should we pay any attention to them?  Well, the first – and perhaps weakest – reason to pay attention is the sheer volumes of currency involved.  Collectively, the banks, hedge funds, insurance companies, pension funds and private investors have bet trillions of dollars pounds and euros on future interest rates being lower than todays.  We see this in what are referred to as “yield curve inversions.”  In a normal yield curve, the interest rate should be higher on long-term than short-term bonds.  This is because of the relative risk of lending long-term.  But in the UK, Europe, and especially the USA, yield curves are inverted as investors are buying longer-term bonds (whose price is inverse to their rate) at today’s rates in order to lock in an interest rate much higher than it is expected to be next year.

The second reason for paying attention is that the big financial institutions have access to forward-looking proprietary data which is more detailed and more reliable than the public sector data used by the central banks.  If it was only one or two institutions betting on falling interest rates, we might dismiss them as outliers.  But other than governments and the central bankers themselves, almost everyone expects something to break, causing the economy to slump so badly that an interest rate reversal is forced on the central banks.

The third reason to pay attention is simply that yield curve inversions are accurate predictors of recessions:

Only once – 1966-67 – has the US yield curve inverted without a recession.  But even the 1966-67 inversion was followed by a decline in GDP growth from 10 percent down to less than two percent.  In other words, had the growth rate not been so high in the 1960s, that yield curve inversion would have resulted in a recession too.

The real question here is, what can financial institution see that the central banks cannot?  And the answer, given what the central banks say they are targeting, is unemployment.  While, for the moment, headline job figures look strong on both sides of the Atlantic, behind the headlines there have been big cuts to hours worked.  People may be avoiding claiming unemployment benefits by taking on two or more part time jobs, but come the new year, those jobs look set to disappear.

The situation is even more bleak in Europe and the UK, where energy shortages and high prices are causing a growing de-industrialisation, as high energy using industries like metal smelting and chemical production have shut down or moved offshore.  A deep recession would be likely across Europe even if the American economy was robust.  But if the markets are right, America is about to sneeze… and Europe might just die of flu as a result.

Bleak Friday

One of the ways you know you are dealing with propaganda is when the entire establishment media begin the day presenting the same story in the same way.  So it was that as dawn broke on “Black Friday,” journalists began copying from the press release which claimed that stores across the country were experiencing a retail boom as hard-pressed consumers took to the High Streets in search of a bargain.  Only one outlet – the Telegraph – poured a little cold water on the story, pointing out that whatever increase in sales there had been, was largely paid for by people maxing-out their credit cards… if this was a boom, it was one final one before an economic crunch took hold.

Even the Telegraph version of the story, however, turns out to have been excessively optimistic.  According to the Office for National Statistics, retail sales fell in November, down 0.4 percent on October, and down 6.2 percent on the previous November.  Sales values held up, but only because the cost of essentials like food continued to rise.

The figures might have been bleaker still.  However, according to the ONS:

“Food store sales volumes rose by 0.9% in November 2022, with feedback from some retailers suggesting this was because of customers stocking up early for Christmas. Despite this monthly increase, sales volumes were 2.9% below their pre-coronavirus (COVID-19) February 2020 levels.”

The only question that remains to be answered was whether the November – Black Friday – sales figures include early Christmas purchasing.  If they do, then retailers are facing the worst Christmas in decades – likely resulting in a wave of bankruptcies, restructuring and mergers in the New Year.  Retailers themselves will be desperately hoping that there will be a last-minute spending spree.  Although with just days left before the Christmas break, this seems unlikely.

Deflation and inflation

Using the original definition of inflation – an expansion of the currency in circulation which causes price to increase – the UK economy is on the verge of a deflation, as the currency supply began to shrink in October:

This suggests that the Bank of England had already achieved its stated aim of curbing inflation even before this month’s 0.5 percent interest rate rise.  However, the decline in the supply of currency has not been reflected in the overall Consumer Prices Index (CPI) inflation, where disinflation – a slowing of the rate of increase – has taken hold, but where prices continue to rise.  Nor have we witnessed the growth in unemployment which the central bank wants to see before considering a loosening of interest rate policy.  Here though, the headline figures are deceptive.  The price of non-essential goods and services has been falling steadily since the summer, even though supply shocks and high energy and food prices continue to push prices up.  And while full-scale unemployment remains low, the number of hours worked has also fallen steadily since the summer.

This is one reason why the speed with which the central bank has raised interest rates is likely to come back to haunt us in the coming years.  Put simply, it takes time for something as complex as an economy to adapt to change… and ours is having to adapt to a plethora of changes.  First, there was the shock of lockdown itself, which left many small and medium businesses even more indebted than they had been before the pandemic.  Then there were the supply shocks which drove the price of just about everything up at a pace not seen since the 1970s.  Then came the eye-watering increases in the price of energy, adding to the operating cost of businesses while crushing the discretionary income of households.  It was into this concussive shock that central banks decided that the fastest interest rate rises in history would be a good idea.  And to make matters worse, following the coup in October, the new British government has decided to claw even more currency out of the economy by raising taxes.

We, of course, have reacted in the most individually logical way – cutting back on discretionary spending and, in the case of energy and food, even managing to make savings on essentials… with perhaps two million at the very bottom having little choice but to go hungry and to shiver in the dark.  Collectively though, the impact on the economy is devastating.  With less currency to go around, retail sales have begun to slump.  Businesses have responded in three ways: raising prices, cutting workers’ hours, and attempting to get suppliers to lower their costs.  But again, collectively this has a negative impact on the economy – rising prices cause consumers to cut their spending even further, as does the loss of wages which comes from working fewer hours.  And if suppliers can be forced to cut their prices, that just leads them to cut their staff costs – either through lower hours or through redundancies… both of which take even more currency out of the economy.

Because of the way currency is created – via bank lending – the situation is exacerbated as lines of credit are cut, as the cost of debt servicing is rising, and as households and businesses use any spare currency they still have to pay off debt rather than take on new loans.  Again, to individuals and individual businesses, this makes sense.  But to the economy as a whole, the result is that there is even less currency to go around, causing even more businesses to make cutbacks until, eventually, businesses fail and the unemployment that the central bank is trying to generate appear on a scale not seen since the 1930s.

This is where government itself runs into trouble.  Although a good deal of the UK government’s outstanding debt can simply be monetised by the Bank of England – spiriting new pounds into existence to buy outstanding government bonds held by commercial banks.  This though, cannot be done with debt which is denominated in US dollars.  To service this debt, government must convince international banks that it can raise enough taxes in future to pay off the debt with interest.  The UK government, however, is already reaching “peak taxation.”  Income tax is the biggest source of government income, followed by National Insurance – both of which depend upon people being fully employed.  Value Added Tax – which depends mostly upon people spending on discretionary goods and services – is the third source of government income.  Corporation Tax – a tax on the profits made by businesses is the fourth largest source of government tax income.  In 2021-22, these four taxes accounted for 72.5 percent of the government’s tax income and 65 percent of its total income.  Clearly, in the coming recession, all four taxes – along with smaller tax centres like fuel duty and business rates – are going to shrink.

The same process is also likely to increase public spending on items like out-of-work benefits, housing benefit, council tax relief, as well as less direct spending on things like health and social care as the longer-term consequences of unemployment and economic depression filter through.

While, technically, a sovereign government cannot be bankrupted – Zimbabwe, for example, never was – in the event of a deep enough recession in 2023, the UK government may face a prolonged version of the bond sale failure which almost pulled the rug out from under the pensions industry in October.  If foreign investors refuse to make dollar loans to the UK government, then the UK economy faces a combination of domestic deflation – as the economy slumps – and international inflation, as the dollar cost of everything we import rises… and this process will be exacerbated anyway by ongoing energy and commodity supply shocks, because when China finally ends its attempt at zero-covid, its demand for oil, coal and gas will send energy prices to new highs… irrespective of whether small economies like the UK attempt to cut our energy consumption.

As you made it to the end…

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