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Too big to comprehend

I am invited to comment on my local council’s proposed budget for the 2024/25 financial year.  This is not due to some privileged access – they ask everyone on their email list for their views before ignoring them and doing what they were going to do anyway.  But at least it gives a pseudo-democratic wash over what is likely to be an inadequate technocratic fix.  Despite this though, it is instructive to see the level at which council bureaucrats are operating as we begin our descent into what is likely to be the worst economic slump since the 1930s.

The one positive is that the council has at least acknowledged that trouble is coming.  Although, given that the council – which is far from unusual by UK standards – is running £850m debts on an annual budget of £804m, the space for manoeuvre is going to be limited.  Not least because the funding it receives from government is being cut.  Beyond this though, the bureaucrats are behaving as if everything else in the economy is fine.  Increased business rates – which are collected by the government before being returned to councils – are being treated as additional income despite obvious indicators that they are going to cause even more business failures and thus a decrease in tax income.  Similarly, an increase in the council tax levied on ordinary households is being treated as cash in the bank rather than the final straw which tips hundreds of thousands of people into bankruptcy and homelessness…  both of which would add significantly to the council’s costs, as they are currently responsible for addressing homelessness and supporting people on low incomes.

As with every other branch of government, they will only respond to a full-blown economic crisis when it is too late… mostly through fear of being wrong after being proactive.  And so, the proposed cost savings are levels of magnitude short of what is going to be required if we experience something on the scale of 2008 in 2024.  The kind of measures being proposed include cutting library opening hours, firing one of the three dogshit monitors (sorry, park wardens) selling off a few of the publicly-owned city centre buildings, raising the charges on council sports facilities, and – inevitably – increasing local taxes… all of which are a reasonable response to a temporary rise in interest rates within a growing economy. 

But that isn’t the situation we find ourselves in.  British businesses are already failing at their fastest rate since 1993, with retail, hospitality and construction leading the charge.  The number of households in arrears on their mortgages is also climbing at an alarming rate – although the bigger threat comes from the less regulated commercial property sector where property owners have struggled to raise rents to cover rising interest rates.  Even this though, only scratches the surface of our woes in the event that – as happened briefly following Dagenham Liz’s proposed unfunded tax cuts and again when Birmingham council declared the equivalent of bankruptcy – the Bank of England loses control of interest rates.

This may sound odd because the establishment media give the impression that the Bank of England sets interest rates.  But consider the recent cuts in interest rates offered by the banks.  They are not doing that just to spite the central bankers.  Rather, they have been losing business hand over fist and are now desperate to get new – provided it is “safe” – borrowing onto their books.  Far from following the Bank of England then, the banks are pushing for lower domestic interest rates.  This though, is not the real threat. 

Rather, the biggest financial threat to the UK is that it is running a huge current account (aka balance of payments) deficit on a massively import-dependent economy.  So that, while the government and the Bank of England can monkey around with some currency printing and interest rate changes, they dare not push beyond the point at which foreign investors – i.e., institutions which buy British government bonds – “Gilts” – using foreign currency – mostly US dollars and euros – consider further investment too risky.  This means that the government and the Bank of England must maintain the pound at a level where it can convert to euros or dollars at a rate sufficient to repay the existing debt.

This – at least in part – explains the Bank of England’s decision to keep interest rates “higher for longer” despite growing evidence of the destruction this is causing to the UK economy… a dilemma which cannot continue indefinitely.  In previous economic cycles, new sources of cheap energy and resources coupled to productivity gains would kick-start a new round of growth which, in turn, would bolster the value of the pound.  But since the North Sea began to deplete at the turn of the century, and especially since the UK became a net importer of oil and gas in 2005, productivity has stalled.

Unlike the 1980s, when the UK had several advantages – including the oil and gas – to grow its way out of the self-harm of the early-1980s, this time around Britain has only disadvantages.  This leaves the Bank of England (because the government is worse than useless) having to – against all past performance – steer a course which slows the economy but doesn’t crash it, while leaving enough businesses unscathed to make a rapid return to growth once disinflation is entrenched… i.e., the fabled “soft landing.”  Because if, just for a moment, they lose control and cause investors to flee, the whole house of cards can quickly come tumbling down.

Nor is the process entirely – or even mostly – in the Bank of England’s gift.  Failure in the economic war against Russia is taking a huge toll on all the European economies.  And since – despite Brexit – these are Britain’s biggest trade partners, their growing decay is also the UK’s growing weakness.  At the same time, global supply chains have yet to recover from the shock of two years of lockdowns… and the current disruption to western shipping in the Red Sea has made the problem even worse.  The obvious consequence is that price increases in an import-dependent UK have become “sticky,” making an early cut in interest rates less likely.  Less obviously though, a global dollar shortage coupled to a growing race for safe collateral among the international banks is threatening to inadvertently crush the value of the pound and the euro against the dollar.

It is in this that things could go very badly very quickly.  Because a British population whose discretionary spending has already collapsed, and whose ability to afford essentials is already being tested, will not be able to cope with the spike in import prices that would follow a crash in the value of the pound.  And no amount of currency printing by the government or central bank could solve the problem because neither can print dollars.

In this – far from unlikely – scenario, banks could fail and even the biggest businesses could go bust overnight.  To make matters worse, government would have to raise interest rates to an economy-crushing level just to secure the dollars required to service its outstanding debt… or alternatively default and have no further means of obtaining the dollars and euros it needs.  But since government – central and local – is already over-indebted, widespread cuts would also be inevitable.  Which creates a second order crisis because since the destruction of the UK’s economic base in the 1980s, government has also become a major provider of high-paid employment.  Thus, government cuts result in even less demand and an even more rapid collapse in the economy and in the value of the currency.

In one sense, this is no more than the extension of the crisis of 2008.  Prior to that point, it had been possible to take economic growth – both domestically and internationally – for granted.  And despite the scale of the crash and the unprecedented bailouts by governments and central banks, the broad assumption was that soon things would “return to normal.”  Instead, we settled into a silent depression in which most people across the western states saw their prosperity evaporate even as a shrinking salaried/managerial class continued to enjoy a rising standard of living.  And since the only people with the power of decision across the western technocracies are drawn from that salaried/managerial class, they had been able to act as if normality was just around the corner.

After two years of lockdown, a further two years of self-destructive sanctions, and the new loss of maritime access to the Suez Canal, however, “normal” seems further away than ever.  And for most ordinary people across the western economies, it has meant an even faster loss of prosperity… which is a problem because without their discretionary consumption the economy continues to shrink and governments – local and national – increasingly struggle to raise the taxes required to maintain the value of the currency.

Even so, who would dare begin to admit that another global crash might be just months away?  Far better to carry on as if tomorrow will be just like yesterday, while hoping that clever people somewhere else have got your back.  And if the proverbial does hit the fan, council bureaucrats, government ministers, and central bankers can just claim that “nobody could have seen it coming.”

As you made it to the end…

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