Consciousness of Sheep
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According to the establishment media, the persistently high rate of inflation in the UK is something of a puzzle. Particularly since the latest data on the other side of the Atlantic shows a significant disinflation, while the UK Consumer Price Index (CPI) remains stubbornly above 10 percent.
But is there really a puzzle? After all, most of what was called “inflation” was actually a series of supply-side shocks brought about by two-years of lockdowns and the self-destructive sanctions on the Russian energy and resources which have kept European prices low for decades. And since these have directly impacted the essential “Three ‘F’s – fuel, fertiliser and food – whose prices have risen at more than 20 percent, there is no real mystery as to why prices have remained high.
This though, is not really the question being posed by establishment media. What is actually being asked is, why, after 12 consecutive interest rate rises, have we not seen the CPI plummet? And behind this question is an assumption about the omnipotence of central banks which is not born out in practice. If the primary function of the central bank is the maintenance of the banking system, then its secondary function is to reassure the rest of us – politicians and public – that somebody is in control. Except, of course, that central banks are not really in control, and their one tool – interest rates – is an incredibly blunt instrument which, used inappropriately – such as during a supply-side crisis – may do more harm than good.
This possibility has already occurred to a few members of the Monetary Policy Committee (MPC) who have voted in favour of a pause on further rate rises until the full extent of the damage done so far can be assessed. But the bank cannot pause while the US Federal reserve continues to raise rates without risking a fall in the value of the pound. Were this to happen in an import-dependent economy like the UK, the result would be a further increase in the price of imported goods and of anything made using imported materials. Rates simply have to keep rising until prices come tumbling down.
In this, and despite their public reassurances, the MPC is all too aware that the higher they push interest rates up, the bigger the shock when the effects filter through to the real economy. But this takes time. Even on the shortest time frame, it takes a month before the decision to raise interest rates results in increased payments for households and businesses. But even then, there are various ways in which the increased cost can be handled. Businesses, for example, may allow annual profits to fall in order to absorb the additional cost. In the same way, households might choose to eat into savings rather than cut back on spending.
Longer-term issues also apply. Businesses which took out loans during the pandemic when the interest rate was just 0.1%, will not have even experienced the first interest rate increase yet – although a prudent business manager will have taken steps to deal with higher rates when the debt has to be renewed. Households which took out mortgages during the pandemic are in a similar quandary – according to the Bank of England, while the average new mortgage rate is 4.5%, the average for all mortgages is still below 3% because of the low rates that were available two years ago. But many of those mortgages – as with pandemic business loans – are coming up for renewal. For the average homebuyer who took out a mortgage in 2021, by the beginning of 2023 this translated to an additional £481 per month. And since – unlike the USA, where a mortgage can be fixed for 30 years – many of those mortgages were only fixed for two years, that’s a lot of households facing a massive spending hit this summer.
As we learned between 2005 – when a peak in conventional oil production generated a similar supply-side shock – and 2007, when the central bankers paused their rate rises – using interest rate rises in an attempt to dampen the effects of a supply-side crisis risks pulling the rug out from beneath an already precarious banking Ponzi system. And for all the reassurances that “this time is different,” the only real difference is that this time the central bankers aren’t even pausing.
Meanwhile, banks have tightened their lending standards, making it harder for businesses and households to refinance existing debt, and leaving many would-be borrowers unable to access loans at all. Until now, businesses have avoided the nuclear option of laying-off workers… in part because of the temporary labour shortages which followed the lockdowns. But unemployment – even according to the rigged government data – has finally begun to increase, suggesting that businesses are no longer able to absorb increased costs. Something similar is happening to households as they run out of savings, and resort either to non-payment or late-payment of bills or to using credit card debt to fill the gap between income and expenditure – both of which serve to exacerbate the problem beyond the short-term.
This suggests that we are at the beginning of a new phase in the unfolding economic crisis. Until now, the establishment media and the politicians they serve, have been able to brush over low growth rates and stubbornly high prices with reference to additional bank holidays, strikes and the weather. But with unemployment rising and business insolvencies gathering pace, the unfolding economic downturn will be far harder to ignore.
The policy problem this raises concerns which data the MPC is looking at. If their sole concern is to bring the CPI back to the 2% target set by Gordon Brown in altogether different economic circumstances, then – as in 2008 – they are likely to be spectacularly successful. But the cost to the wider economy in the shape of debt-defaults, business closures, bankruptcies and bank failures will likely be worse than the fall-out from the 2008 crash. Moreover, an isolated post-Brexit UK economy which has wilfully disconnected itself from the last of Europe’s supply of cheap energy and resources may well face a Greek-style currency crisis too. If, on the other hand, the MPC has one eye on maintaining at least some GDP growth, then it may be obliged to lower rates sooner and further than it might like… even if this comes at the cost of higher consumer prices for much longer.
The real risk though, is that we are on the verge of a new stagflationary era – which rising interest rates have accelerated – in which the cost of energy-dependent essentials remains high even as the prices of discretionary goods and services deflate. This may sound academic, but its potential consequences would make the Great Depression of the 1930s look like a golden age of prosperity in comparison. Such a stagflation – with the absence of any cheap and abundant alternative energy source to save the day, as happened in the 1930s and 1940s – would entail an almost total collapse of an over-financialised import economy like the UK, as we had to abandon consumerism in a desperate attempt to produce essentials ourselves or to figure out how to manufacture something of value to continue trading for vital imports… And no, computer coding, search engine optimisation, making artwork using machine learning, and all the other bullshit jobs so many of us do these days do not count as essential skills within a collapsing economy.
As you made it to the end…
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