As several people have said, making predictions is risky – especially about the future. Nevertheless, based on what has unfolded in recent years, it is possible to discern trends which point to some likely events in the coming year. With this in mind, let me make a few tentative predictions of things to come in 2023. But before I do, let’s look at what I got right and wrong last time:
- The end of the pandemic – outside China – happened pretty much as expected… despite the efforts of some within the political/public health class.
- A new phase in the collapse? Well, sort-of… although I couldn’t foresee the European/UK technocracy voluntarily setting about de-industrialising the entire continent in response to the Russian invasion of Ukraine.
- Peak inflation? Well, maybe… right at the end of 2022 a degree of disinflation has set in.
- Recession? Very likely… particularly if we ignore the Biden Administration’s attempt to change the definition.
- Environmental splits? Certainly, demand for a referendum on net zero has grown, and there is growing criticism of government energy policy. But most Brits – including the government – still haven’t figured out that wind turbines don’t work when the wind isn’t blowing.
- Fracking and nuclear? Other than a brief flurry earlier in the year, there has been little growth in support for either… although the government did finally approve the building of Sizewell C.
- We did, indeed, get a new Prime Minister. Indeed, thanks to the coup in October, we got two for the price of one.
The year the economy tops the political agenda
Large swathes of ex-industrial, rundown seaside, and smalltown rural Britain have been in slow decline since the 1970s. But so long as impoverishment was limited to a growing precariat, the technocracy has been able to ignore it. Indeed, one of the most despicable acts of the technocracy in the wake of the 2008 crash was to engage in a process of victim-blaming in which the unemployed and – more often – underemployed were portrayed as workshy scroungers. Meanwhile, the political arm of the technocracy was able to engage in cultural politics around such things as race, sex, gender, online “safety” and an over-hyped “climate emergency.” None of the big political parties had time for a growing army of people struggling to put food on the table or to avoid dying from cold-related illness every winter.
This began to change in 2016, of course. But even after the technocracy’s cack-handed management of the Brexit referendum campaign, and their three-year attempt to appear to leave the EU without actually doing so, the underlying economic reasons for the vote to leave – and later, the loss of Labour’s “red wall” – were ignored in favour of ridiculous conspiracy theories about Russian bots.
What Brexit did for Britain locally, Trump’s trade war with China did to the global economy. As Jim Rickards explains, global supply chains were already breaking down by 2019, and long before SARS-CoV-2 embarked on its world tour. Of course, the lockdown policy and more recently the decision to deindustrialise Europe in order to virtue signal our disapproval of the Russian invasion of Ukraine, have greatly accelerated the collapse of global supply chains well beyond the point of no return:
“Supply chains were nearly perfected over the thirty years from 1989 to 2019. They were disrupted in a mere three years by trade wars, pandemic, climate alarm, decoupling, energy shortages, geopolitics, and demographics. They will be rebuilt in time, but not quickly.”
Belatedly, as energy prices spiked far above even the most pessimistic economic forecasts, a large part of the technocracy woke up to the fact that their standard of living is threatened too. Even the well-paid tax-fiddlers at Britain’s big accountancy firms are having to don extra layers while working in the office. And while this is a long way from having to resort to eating pet food or attempting to warm food on a radiator, the hit to upper-middle-class discretionary consumption has been sufficient to amplify calls for the government to find a solution.
The bad news for all concerned is that there is no solution… certainly not one which fits within the neoliberal ideology of the big political parties. Most likely the UK economy is already in recession. And even if fiddled official figures and changes to the definition put it back for another quarter, the damage inflicted over the past five years is only beginning to come back to haunt us. So, these are some economic trends we can expect to emerge in 2023:
Unemployment is back
The development of in-work benefits and precarious employment over the past four decades have helped to obscure real rates of unemployment. In the wake of the 2008 crash, for example, millions of otherwise unemployed workers became “self-employed” in an emerging gig-economy characterised by rates of pay well below the official minimum wage. Millions more resorted to multiple low-paid, part-time and zero hours jobs in an attempt to keep their heads above water.
Needless to say, this arrangement has suited businesses in vulnerable sectors of the economy such as services, retail and hospitality, where slight changes in purchasing patterns can have a big impact on profitability. Being able to extend or lower workers’ hours and pay more or less at will has been the only way many businesses have survived the last decade. But just as cost-of-living issues have become more widespread since lockdown, so too have precarious work arrangements as previously prosperous businesses have been forced to cut costs in the face of energy prices and the supply chain shock.
While we began to see insolvencies and redundancies tick up in 2022, the headline employment figure has remained positive – likely giving the Bank of England a false reassurance that its rapid interest rate rise is not doing damage. Look behind the headline though, and it is clear that businesses across the UK have chosen to cut workers’ hours rather than fire them… and for good reason, given that just a year ago they were struggling to fill vacancies.
Sooner or later though, cutting hours will not be enough to offset the rising cost of staying in business. Indeed, with trade union activity increasing, imposing cuts to hours and changes to working conditions will have become more difficult than it has been in decades. In any case, in 2023 we can expect a big growth in bankruptcies and insolvencies. And even those businesses which escape this fate will likely engage in cost-cutting processes – such as cutting the services on offer – which involve firing workers.
Disinflation or even deflation
“Disinflation” – the rate at which prices are rising – has already begun to appear as discretionary spending falls across the economy. Assuming that the central bankers get it right – something they have signally failed to do previously – then the UK economy will disinflate to somewhere near three percent in the course of 2023. There are though, good reasons for expecting the central bank to mess up – not least because they are ill-prepared for a global recession – and to preside over something far more spectacular than the promised “soft landing.” If the economy reverses sufficiently and if enough workers are cast onto our punitive benefits system, we may well see actual deflation – falling prices – in 2023.
The danger of deflation is that it takes on a logic of its own. If prices are falling, why would you buy anything beyond essentials today? Most people will wait for prices to fall further. But in doing so, we collectively worsen the deflation, as retailers can’t sell their produce for any price. And while central banks have proved very successful in helping to crush economic demand – exacerbating recessions and depressions which would have happened anyway – if we have learned anything from the decade between the Crash and the Covid, it is that central banks – and governments more generally – are clueless when it comes to generating economic growth… deflation could be easy to create but impossible to reverse.
Supply chain failure
If the establishment media are to be believed – something only an imbecile would do these days – the post-lockdown supply chain problems have been overcome. The fact that we made it through to the end of 2022 relatively unscathed is taken as evidence that the system has recovered from last year’s shocks. In reality though, a massive crash in sales of discretionary goods through 2022 have helped to obscure the more obvious issues, such as ships queuing at ports and containers piling up on the dockside for want of trucks and truckers to move them. In many cases, the ships aren’t even bothering to set sail anymore. Meanwhile, trucks are being used as portable storage until stores can shift the inventory which was already piling up.
For the moment, the energy shock has been softened by the closure of heavy industry across Europe, together with China’s ongoing lockdowns. The first of these is likely to become permanent as the gathering recession leads to widespread closures. The second though, is coming to an end. So that, from the start of 2023 we are likely to see another big demand spike as China’s insatiable need for coal, gas and oil causes shortages of all three across the global economy.
Will the dragon king appear?
Despite central bankers insisting that interest rates are going up even higher in 2023, global markets say otherwise. And if you wanted a simple, two-word reason, it can be summed up as “counterparty risk.”
When someone takes out a mortgage on a house or a loan on a car, the bank holds a claim on the car or house against the risk that the borrower will default. In the far distant past, this caused bank managers to be extremely cautious. The bank would make plenty of money on the interest from the loan, but only over a long – 20 to 30 year – timescale. That changed with the use of so-called “collateralised debt obligations” (CDOs) which became easier to develop as the digital revolution took off from the mid-1980s. By packaging and selling the income from a range of loans into a single CDO, banks could rapidly recover the currency they generate when they make loans as profit. In this way, small regional banks morphed into globe-spanning giants by the end of the twentieth century.
We ordinary folk got to learn about CDOs when a raft of “mortgage-backed CDOs” turned out to be duds because too many sub-prime incomes had been bundled in. So that when oil prices rose after 2005, and central banks raised interest rates in response, low-income borrowers defaulted, causing CDOs to be worthless overnight. Worse still, nobody could tell which CDOs were bad, and so banks refused to accept them as collateral on loans between one bank and another. And so, we got to learn what a “credit crunch” was.
This might not have been so bad, except that almost all of our currency is borrowed into existence when banks make loans. Moreover, while governments and central banks continue to maintain the fiction of a fractional reserve – the idea that banks must keep central bank reserves or M0 money in their vaults as a kind of substitute for gold before they can loan out multiples of this to you and me – the reality is that most currency is created when banks lend to each other behind the back of the central bank. In practice, banks would use CDOs as security against loans of newly created currency to each other… the true brake on lending being the perceived counterparty risk rather than any fictional reserve limit set by the central bank. That is, so long as everyone continued to believe that the other bank’s CDOs were good, they could spirit as much new currency into existence as they chose.
When the real economy came knocking after 2005, perceived counterparty risk rose. Banks became more reluctant to lend to each other and, as a consequence, cut back the amount of loans issued to us. With the rate of new lending falling, and with interest rates rising, counterparty risk grew even further as the real economy tanked. Plenty of people saw the inevitable conclusion but they called it a “black swan event” anyway – implying that, in fact, “nobody could have seen it coming.”
Writing in the aftermath of the 2008 crash, Didier Sornette, a specialist in complex systems and risk management, argued that many of the crises which are retrospectively categorised as black swans are, in fact “dragon kings” – big outlier events which, viewed through the correct lens, are entirely predictable.
As Mark Twain is reputed to have said, “History doesn’t repeat itself but it often rhymes.” We are not about to repeat the events of 2007-2008, but there are alarming similarities, together with a few new factors which could make the coming shock much worse. The similarities are:
- Rising energy costs translating into higher prices
- Central banks jacking up interest rates – far faster – in an attempt to crush demand
- Large numbers of “zombie” companies and households – the modern equivalent of 2008’s sub-prime borrowers – that were struggling to service debt even before interest rates began to rise.
New factors include:
- The slow-motion collapse of supply chains
- Global energy and commodity shortages
- The self-inflicted de-industrialisation of Europe
- The non-western states’ move toward a new BRICS currency as an alternative to the US dollar.
There is a plausible argument that we – that is, the central bankers and politicians – never once resolved the economic turmoil which began in the mid-1970s with the end of US energy dominance and the collapse of the Bretton Woods gold standard. Instead, each new manifestation of the crisis was temporarily overcome by making the problem even bigger. Companies bailed out each other – via mergers and takeovers – in the 1980s, then banks bailed out companies in the 1990s and early 2000s. In 2008, governments had to ride to the rescue of banks, and in 2011, the European central bank had to bail out countries which had foolishly joined the Euro – the so-called “PIIGS” (Portugal, Ireland, Italy, Greece, and Spain).
What few people realise is that the international banking system – the “Eurodollar” system – is entirely unregulated. Banks can – and do – simply generate new US dollars out of thin air when they make loans to one another, in almost exactly the same way as they create bank credit when they lend to you and me. But banks don’t lend money to each other for fun. Rather, they do it to settle accounts on dollar denominated debt that they have loaned to governments and to transnational corporations. The same – but much bigger – process of creating and swapping CDOs has been going on internationally. The result is an inverted pyramid of CDOs ultimately based upon the taxed levied by governments. And there is the first element of the dragon king…
With economies struggling following Brexit, trade wars with China, energy shortages, lockdowns and sanctions, governments are struggling to find politically acceptable means of raising taxes. And just as national banks were worried about the counterparty risk from sub-prime borrowers in 2008, so 2022 saw an increasing reluctance to accept even supposedly good government debt – British gilts or Italian bonds – as collateral against dollar loans. This appears to be the reason why yield curves have inverted across the western economies, as banks seek to obtain US Treasuries as the last good currency still standing.
We caught a glimpse of what may happen in 2023 – albeit a partially engineered crisis – when the Bank of England had to buy back UK government debt in order to prevent a pensions crisis. Central banks can, of course, “monetise” debt denominated in their own currency at a cost of devaluation more or less indefinitely. But problems arise when governments seek to roll-over their dollar-denominated debt… which they need in order to pay for essential commodities like oil and gas. If, for example, banks begin to regard, say, the British state as sub-prime, they may refuse to accept British gilts as collateral against dollar loans. The result, in addition to the British population being both metaphorically and literally starved (60 percent of our calories are imported) would be a run on the pound which, eventually, could topple national currencies like dominoes.
In February 2022 there was a huge groundswell of sympathy for the Ukrainian people. The result was an emotional but irrational response of the “something must be done” type. Few questioned the wisdom of fighting a proxy war against Russia, and those who did were usually shouted down as “Putin apologists.” But as is the case in matters green, pointing out that the proposed solution is unlikely to work is not the same as denying that the crisis exists. And from the beginning of Russia’s invasion of Ukraine, there was good reason to question the NATO strategy… a strategy, by the way, that neither the political leadership nor the establishment media has sought to explain to western populations which are facing increasing hardship as a result.
If we turn to military history, we can find parallels for the – very different – strategies being employed by NATO and Russia. NATO has been operating the British Napoleonic Wars playbook – blockading the enemy economy and paying and arming Austria and Russia then, and Ukraine today, to do the actual fighting. The strategy being to exhaust the enemy’s ability to continue fighting while preventing it from replenishing its military supplies… and if, on the off chance, that the blockade results in the overthrow of the enemy government, so much the better.
Russia, in contrast, is employing the strategy attempted by General Erich Georg von Falkenhayn in 1916 to break the stalemate on the Western Front. Falkenhayn’s belief was that trench warfare so favoured the defenders – a point learned tragically by the British on the Somme battlefield later that year – that only by finding a means of forcing the French armies to go on the offensive, could the German army hope to break the deadlock. By attacking the culturally symbolic forts around Verdun, Falkenhayn initially succeeded. Rather than abandoning forts which had held out in 1870-71, the French moved to reinforce them, losing thousands of men in the process. Ultimately, Falkenhayn failed because in order to keep the French fighting, the Germans were obliged to carry out attacks of a similar scale. By the time the front settled down in December 1916, the Germans had lost around 350,000 men and the French some 400,000. The Ukrainians – no doubt urged on by NATO desk generals, sandpit journalists and politicians – have proved far more obliging than their 1916 French counterparts… regularly leaving their defensive trenches and allowing themselves to be killed and maimed by Russian artillery as they attempt to cross no-man’s land. Exact losses will only be known when the fighting is over. But in November, EU President Ursula von der Leyen appeared to confirm figures given by independent media of some 100,000 dead soldiers and a further 20,000 civilian deaths. The fact that Ukraine has drafted women into the frontline trenches, months after conscripting men aged 18 to 60 into the armed forces, suggests that Ukraine is experiencing manpower problems.
The problem facing the NATO leadership – and thus a Ukraine government and military which only exists on the back of Western financial and military aid – is that the economic blockade has backfired. NATO, it turns out, was far weaker in the wake of the 2008 crash than anyone anticipated – although the debacle in Afghanistan in 2021 provided a big clue. Russia, on the other hand, has taken the opportunity of a distracted West to rebuild its economy following the collapse of the Soviet Union in 1991, with Putin taking recent steps – such as exchanging US Treasuries for gold – to insulate the Russian economy from the entirely predictable barrage of sanctions.
Western populations were told that the Russian economy was going to collapse before Easter 2022. After that, it would only be a matter of weeks before the Russian military ran out of munitions. It was only a matter of time before a hostile Russian population rose up to overthrow the Putin government. After which, a new pro-western Russian government would turn the gas and oil pipelines back on… the modern equivalent of the August 1914 claim that it would all be over before the leaves had fallen from the trees.
Fast forward to the end of December 2022, and it is increasingly obvious that none of those things happened. Rather, it is the European economy which is the biggest victim of NATO sanctions – the lights only staying on during the December cold snap because heavy industry was shut down across the continent. And even this is of little comfort to millions of Europeans who cannot afford to fully heat and light their homes this winter.
The longer-term cost, of course, is that the “temporary” shutdown of heavy industry will soon become permanent as the rising cost of energy makes European industry unviable. We have already seen European wind turbine and chemical production collapse, with firms either relocating to Asia or closing altogether. Car makers, BMW and Volkswagen have also shifted production to the USA. And this is bound to impact upon the various retail and service businesses which depended upon those large manufacturers. In short, 2023 may well herald a massive wave of closures and redundancies across Europe unless some means of lifting the sanctions and restoring imports from Russian can be found.
Britain is broken
Remember that heading, it is likely to become a slogan for opposition parties of both left and right as we approach the next general election. Indeed, 2023 looks set to be the year when public frustration with quasi-markets in critical infrastructure finally spills over into the political sphere. Even as 2022 comes to an end, the energy supply companies are in the firing line – again – for ripping off British households to the tune of £2 billion, even as millions fear the price of turning the heating on.
Rail companies – which receive a permanent taxpayer bailout – are currently hiding behind a wave of strikes in the hope that the public don’t notice that most of the current disruption – cancelled trains, severe overcrowding, and a real-time operation that bears only a passing resemblance to the advertised timetable – has nothing to do with the unions, but is the result of decades of under-investment by companies which prefer to trouser bonuses than to train and employ sufficient staff.
Worst of all among the public utilities are private water companies whose main activity turns out to have been borrowing tens of billions of pounds to pay dividends to shareholders while failing to make even the most basic upgrades to the infrastructure they inherited in 1991. The whole point of privatisation – which was heavily opposed by the public – was that private investment was going to lead to a modernisation of the water and sewage infrastructure. In reality, the private companies have barely managed to plug the leaks in the antiquated network of pipes. Meanwhile, a country which experiences extreme flooding in spring and autumn lacks the infrastructure – reservoirs and a truly national water grid – to prevent regular droughts in summer. It is hard to imagine that a nationalised industry would have done any worse – indeed, Scotland, where water is publicly owned, and Wales, where water is delivered by a non-profit, were the two areas least impacted by drought in 2022.
Common to all of these rip-off monopolies is a failure of regulation. And here, Anthony Stafford Beer’s famous maxim applies – “the purpose of the system is what it does…” The primary career path for people who work in the regulatory bodies is into the industry they are charged with regulating. And so, while minor punishments are levied on the most blatant rule-breakers, for the most part, regulators prefer not to do anything which might impact management bonuses or shareholder dividends.
The rot goes much further than public utilities of course. The cherished NHS is currently falling apart as a consequence of government failure to manage the pandemic. In the early stages, government notably failed to persuade retired clinicians to return to the NHS, so that expensive “Nightingale Hospitals” were left empty while those infected with SARS-CoV-2 were left on ordinary wards or shunted back to care homes, where they promptly infected and killed the vulnerable people that we were supposed to be protecting. At the same time, frontline clinicians left without PPE – because Jeremy Hunt had sold it – were exposed to massive viral loads, resulting in many deaths and far more incidences of long covid.
The NHS was going to be under-staffed coming out of the pandemic anyway, because of NHS managers’ preference for poaching trained doctors and nurses from developing countries rather than paying to train our own workforce. But with the additional deaths and long-term sickness, together with demoralised staff opting for early retirement, it was doubtful that the NHS would cope with a normal workload in 2022. Normal though, it most certainly wasn’t. An army of people who had put off seeing a GP – or who couldn’t get an appointment even if they wanted to – with the early onset of cancers and cardiovascular disease, began turning up at Accident and Emergency departments with conditions which had deteriorated to the point that expensive, long-term treatment is now required. As a result, several million Brits have been left waiting more than a year for routine operations, thereby contributing to labour shortages in some sectors of the economy.
It is not just critical infrastructure and public services which are failing before our eyes. Private business faces similar problems, as supply chain disruption and a shortage of skilled workers result in shortages and declining standards. We see this to a small extent in the “rotten turkeys” story which did the rounds on Christmas Day. While this may not have been widespread, it reflects both turkey shortages – caused by a combination of avian flu and fertiliser/animal feed shortages – and under-staffed supermarkets having to relax quality control.
We can expect similar shortages and quality control issues across the retail and hospitality sectors throughout 2023, with little respite on the horizon. Indeed, despite huge efforts to keep deliveries running, even Amazon is experiencing shortages – reflected in longer delivery times and/or certain sizes or colours being out of stock.
It used to be claimed that Britain’s problems were due to voters wanting Scandinavian levels of service in exchange for American levels of taxation. In 2023 though, more and more of us will be complaining about paying Scandinavian levels of tax in exchange for worse than American levels of public service. And perhaps the worst offender in 2022 has been a BBC management which is even more out of touch with ordinary people than the Prime Minister. The broadcaster has managed the unlikely achievement of losing the trust of people on the political left and right – both of whom claim the organisation is biased – by aggressively promoting both the social liberal – aka “woke” – and economic liberal – aka “free-market” – dimensions of a fast-failing neoliberal order. As a consequence, trust in the BBC has plummeted in recent years.
Despite strong-arm tactics to try to frighten people into paying the licence fee – which you only need if you watch TV in real time or catch-up TV on the BBC i-player – millions of us have decided that funding the BBC is a cost we no longer need nor want, particularly since many are struggling with more immediate needs like staying warm and putting food on the table. Moreover, in an age of subscription TV, there is a growing demand to defund the BBC and to oblige the corporation to stand on its own two feet.
Nevertheless, like all organisations which grow fat sucking on the public teat, the BBC simply cannot resist the temptation to waste money. So it is that, just as 2022 is coming to an end, and after a string of Freedom of Information requests and appeals to the Information Commissioner, we finally learned that the BBC had wasted the equivalent of 45,000 licence fees on new logos:
“New logos – which have met with a mixed response from licence-payers – were designed for the main TV channels BBC One, Two and Four and other services including iPlayer, BBC Sounds, Weather, Sport and Bitesize.
“The main BBC logo saw changes including ‘three blocks incorporating the letters BBC will be slightly wider apart and will feature the corporation’s own Reith font’. The font named after the BBC’s founder Lord Reith replaced the existing [and remarkably similar] Gill Sans one.”
The insult to licence fee payers is not so much that BBC managers chose to update the logos, but that, at a time when we are all having to tighten our belts, the BBC chose to spend £7,261,039 outsourcing a design job which could have been done for a fraction of the price by the corporation’s internal graphics department.
Britain’s new third party
Following October’s coup, the British government has reverted to the kind of neoliberal centrism pursued by David Cameron and Tony Blair. Although in Rishi Sunak, they have a leader who lacks charisma and fails even to pretend to understand the needs and wishes of the common people. Nevertheless, having ousted Johnson and Truss, the Tories are stuck with Sunak through to the next election – most likely in 2024, although legally, and in the hope of a miracle, they could stretch it out until January 2025.
For the moment, it is the Labour Party which is the beneficiary of an increasingly disgruntled electorate… a massive change of fortune from just 18 months ago, when Jill Mortimer won a huge majority for the Tories in the historically red seat of Hartlepool. On current polling, Labour is looking at a majority similar to that won by Tony Blair in 1997… except… Except that Labour’s current polling owes more to the post-partygate Tory meltdown than to Labour’s – largely invisible – policies or to its equally wooden leader Keith Stammerer.
Rather like the situation in 2016 in the run-up to a Brexit referendum that the pundits were convinced would result in a big vote to remain in the EU, there is a massive undecided bloc within the current UK electorate. This includes a large number of former Leave voters who still believe that leaving the EU was the correct decision but regret the naivete of expecting the Tories not to f**k it up. Insofar as anyone can win these votes, it will be one of the anti-neoliberal parties, and most likely Reform UK.
Under the UK’s first-past-the-post voting system, there is no chance of a Reform UK electoral breakthrough – although they might just win one or two seats. However, it is entirely possible that they will overtake the LibDems to become the third most popular party in the polls in England in the course of 2023.
Ironically, the growing popularity of the populist right would be a tactical win for the Labour Party in a similar manner to the popularity of the Social Democratic Party being a win for Thatcher’s Tories in 1983. While Reform UK will struggle to win seats at a general election, they will split the Tory vote, allowing Labour to win seats which are not currently on even their most optimistic target list.
Strategically though, Labour will be in real trouble if it cannot develop a policy offering which addresses the growing economic, energy and supply chain crises that are engulfing the UK economy. With the Tories down and out, Labour failure would open the door for a populist third party to move from third to first place.
As you made it to the end…
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