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Beware these siren voices

According to the establishment media headlines, Britain has officially experienced the two quarters of falling GDP required for a technical recession.  Actually, it’s a lot worse than that because the headline figure does not account for population growth.  On a per capita basis, Britain has been in recession for nearly two years – in 2023 alone, per capita GDP fell by 0.7 percent.

The BBC’s response was to put out idiot’s guides for people with a reading age of about seven years.  While economics editor Faisal Islam asks “Should we care that the UK is in recession?” – the implication being that we shouldn’t because otherwise the headline would have read something like “five reasons why a recession is bad.”  As Islam is at pains to point out:

“It is, however, important to distinguish between the period of broadly zero growth we have just been experiencing and the start of substantial tangible recessions such as during the pandemic and the Great Financial Crisis of 2007-2008.

“Few forecasters believe that it will last into this year.  Indeed if, as expected, the economy is currently growing between January and March, it may be over even as it is officially defined.”

On the other hand, since by their own admission, the BBC are clueless about how the economy operates (something which also applies to the government) perhaps a degree of caution might be sensible.  Indeed, the BBC seems to glimpse that the latest GDP figures “might nudge the Bank of England a little closer to cutting interest rates,” but appears to believe this to be a good thing.  But the current interest rate is low by historical standards.  Between the Dotcom bust and the 2008 crash, interest rates remained between 4.00 and 5.25 percent for four years.  And prior to the Dotcom bust, you have to go back to October 1977 for the last time interest rates fell below 5.25 percent (and that was for just one month).

Why then, should the Bank of England lower rates again… even if inflation falls to the 2.0 percent target?  If the economy settled down, and GDP growth revived, an interest rate of 5.25 percent would begin to solve some of Britain’s long-term pensions and investment woes and encourage saving at a scale not seen since the 1980s.  Given who the BBC are – mostly salaried class metropolitan liberals – the reason why a cut in interest rates is considered desirable is that it promises to kickstart a housing market which has slowed to a crawl since 2021 – the paradox being that a low sales volume, with most sales at the upper end of the market, has resulted in the average house price increasing.

The Bank of England though, has good reason to keep interest rates “higher for longer.”  Not least because cutting rates too soon and too far would risk devaluing the pound on international money markets.  Something which would push import prices up and thus cause the official inflation rate – which mistakes supply shocks for monetary inflation – to increase once more.  The fact that the salaried classes are seeing a hypothetical £100,000 knocked off the theoretical value of their houses is unlikely to trouble the Bank of England Monetary Policy Committee (MPC) to the point where it considers rate cuts.

There are, however, storm clouds gathering which may well force the MPC to reverse course.  The latest mortgage arrears data for October to December 2023 from UK Finance, for example, shows a 25 percent increase in households in arrears compared to the last quarter of 2022.  This rises to a staggering 124 percent for the unregulated buy-to-let sector – which helps to explain the 6.2 percent increase in rents in 2023, as landlords either hiked rents or sold up (removing rental property from the market).

As we are in the middle of a mortgage refinancing crisis – 1.4 million mortgages which were taken out in 2020 when rates were around 1.0 percent are having to refinance at close to 6.0 percent, leaving even people at the top of the income ladder struggling – there is a growing risk of widespread defaults, repossessions, and a self-fuelling negative equity crisis.  And the closer this becomes, the more the MPC will be under pressure to cut rates back to their pandemic crisis level.

Nor does it end there.  Britain’s businesses are dropping like flies.   Insolvencies in 2023 were at their highest since records began in 1993 – itself a bad year following the “Black Wednesday” currency crisis.  For the moment though, the damage has been mostly limited to the small business sector where insolvency doesn’t translate into higher unemployment.  This won’t always be the case though.  And at the end of 2023, we witnessed bigger closures – such as the last of Britain’s steelworks – leading to thousands of job losses (although these will only register in the unemployment data later in the year).  Nevertheless, if insolvencies and unemployment continue to gather pace, the MPC will be under further pressure to make emergency rate cuts.

And that’s the point.  Interest rates are not going to be cut just because the economy has gone through the mythical “soft landing.”  Rather, they will only be cut because the economy is in crisis.  And for that reason, a near-term cut in interest rates of the kind favoured by the establishment media would actually be a terrible development.

It would be helpful at this point if the establishment in general, and the Chancellor in particular, were to take a moment to read Steve Keen’s Debunking Economics or to watch Positive Money’s explainer videos on where money comes from.  If they were to do so, they would understand why the instinctive Tory proposal to cut taxes for the already rich while cutting public spending during a recession is an incredibly destructive thing to do.  Put simply, money – or rather “currency” – circulates through the economy via two circuits.  The biggest by far is the debt circuit – new currency is created when households and businesses take out loans, and it is destroyed when households and businesses pay off their debts… which is why raising interest rates – which deters borrowing and encourages early repayment – sucks currency out of the economy and causes a recession.  The second process is the public spending and taxation circuit – the state creates new currency when it spends into the economy, and this currency disappears via taxation.  Cutting taxes at the top has little impact because it will result in saving not spending or investment – particularly if interest rates are high.  Furthermore, cutting public spending at the same time the Bank of England is forcing currency out of the system via interest rate rises, risks turning a central bank-generated recession into a full-blown depression of a kind very few people of working age have ever experienced.

Here though, is where we find the most dangerous siren voices of all… the unreconstructed Thatcherites.  Using the analogy of a forest fire, these lunatics tell us that a recession is actually a good thing, and that we should lean into it.  Britain’s productivity has famously been on the floor for decades, they point out, as a result of too many “zombie” businesses being kept alive by government subsidies and central bank bailouts.  And just like the dying old trees in the forest, they block out the light (investment) which would otherwise allow the vibrant (hyper-productive) saplings to grow tall.  This, they claim, is what happened in Britain in the 1980s.  Against the establishment, even within her own party, Thatcher refused to yield, allowing the great depression of the early-1980s to lay waste to Britain’s old, unproductive nineteenth century industries.  In their place emerged a new and vibrant economy based around information and communications technologies and the globe-spanning banking and financial corporations in the City of London.  Today, they argue, recession offers an opportunity to repeat the trick, shaking the UK economy out of its post-2008 stupor and allowing its inherent entrepreneurial spirit to be revived.

It is a hugely seductive proposition… not least because it appeared to have worked before.  Unfortunately, it suffers one rather large flaw… it is complete and utter horseshit.  What saved the UK economy in the mid-1980s – and then only temporarily – was the arrival on our shores of vast quantities of North Sea oil and gas.  Thatcher had nothing to do with it – save squandering the oil revenue on unproductive tax cuts for Tory donors.  Rather, the black gold provided the City of London spivs with a profitable base on which to grow the massive debt-based derivatives pyramid which came crashing down in 2008… even if it made a lot of people rich for as long as the party lasted.  At the same time, the taxes levied on the oil and gas revenues allowed the British government to paper over the mass unemployment it had helped create, through early retirement, the use of incapacity benefit to hide the inactive over-50s, and increasingly, an expanded university system to hide youth unemployment.

There was no economic miracle though.  The few tech sector successes nurtured in the UK were quickly eaten up by American Big Tech.  Same with Big Pharma.  And while a handful of hi-tech R&D enterprises have been maintained adjacent to the top-tier universities, most of what has passed for “growth” in the UK in recent decades has been a churning of debt-based retail.  As Tim Morgan explained following the Truss/Kwarteng attempt to revive the ghost of Margaret Thatcher last year:

“From an economic perspective, the problem with the new economic gambit is that it’s impossible – in Britain, or anywhere else – to buy growth with debt to a point at which the expanded economy then pays down the incremental borrowing.

“Between 1999 and pre-covid 2019, the UK economy expanded by £0.72 trillion whilst increasing aggregate debt by £2.9tn.  An equation in which each £1 of borrowing yields less than £0.25 of growth makes it impossible to pull a rabbit of solvency out of the top hat of debt.

“Analysis undertaken using the SEEDS economic model shows that, between 2001 and 2021, British real GDP increased by £560bn (at constant 2021 values) whilst debt soared by £2.93tn, a borrowing-to-growth ratio of 5.22:1. Within the ‘growth’ reported over that period, fully 69% was the purely cosmetic effect of pouring so much extra credit into the system.  Reported growth may have averaged 1.8% annually over that period, but annual borrowing averaged 7.2% of GDP.”

While the arrival of oil and gas was Thatcher’s greatest stroke of luck, she enjoyed several others which are no longer present today.  Not least massive, stored wealth in the form of public assets.  The privatisation of these assets brought in tens of billions of dollars in essential foreign currency to fill the self-inflicted gap between declining exports and growing dependence upon imports.  But today, the cupboard is bare.

Thatcher also came to power just as the baby boomers were at the peak of their productive lives.  This still youthful population could absorb the shocks of the depression with enough vitality to bounce back in the late-1980s.  Today, one reason why the UK appears to have an ill-health crisis is due to the growing failure of its pensions system – as the pension age rises, and as private pensions no longer fully provide for early retirement, a growing proportion of the over-60s is diverted into the sickness sector of the welfare system.  Meanwhile, those older people who continue to work are naturally less productive than their younger counterparts.  And increasingly, Britain’s only source of productive young workers is via immigration – although even here, the UK is importing too many unskilled and less productive workers.

Today we face several social disadvantages which are the opposite to what Thatcher inherited.  Most obviously, Britain had been a far more equal society than it is today.  Absolute poverty – people not being able to afford basic needs like food – was almost unknown in 1979.  And where it did exist, it was generally in people with profound social and/or mental disorders.  Today, a third of children regularly go without food, while a metastasising foodbank network is the only thing preventing widespread famine.  Surely even the most hard-hearted of Neo-Thatcherites would concede that the well-fed population of 1979 was far more productive than the undernourished workforce of 2024.

Nor is poverty measured solely in monetary terms.  Britain in the 1980s enjoyed access to a raft of public services and public goods which provided additional non-monetary wealth to the population.  Vast public housing – built in response to the bombed-out homelessness at the end of the war – kept house prices and rents in check, ensuring that almost everyone could afford a roof over their heads.  By encouraging the sale of that public housing without enforcing the construction of its replacement, Thatcher created the housing crisis which plagues us today, and which serves to divert currency away from the productive economy.

Government itself has been transformed in the decades since Thatcher too.  In the early-1980s, most elected politicians had previously worked in industry or had had to meet a wage bill.  At the same time, the senior civil servants had begun their careers administering the war effort before moving on to oversee the post-war reconstruction.  In short, government was made up of people with a track record of getting things done – skills maintained even then by the need to administer a large public sector.  Government today, in contrast, seems incapable of getting anything done – whether fixing the smallest pothole or completing the largest high-speed rail or nuclear power project… a failure which feeds into a growing popular revolt against incompetent, kleptocratic, and often hostile government.

If not a revival of the 1980s, what then?  Most likely a severe unravelling of the UK economy, because the neoliberal economics of Thatcher and Blair is so embedded that even supposed “challenger” parties like Reform UK are wedded to it.  And in the governing duopoly, Jeremy Hunt and his likely replacement – former Bank of England economist Rachel Reeves – are two cheeks of the same arse… so wedded to the economic orthodoxy that there is no gap between them.  Only after the economy has crashed are we likely to see the emergence of an alternative economics.  But, of course, by then with the loss of critical infrastructure like steel making, a huge energy deficit (currently filled by imports from an increasingly energy deficient EU) and a rapidly devaluing currency, it will be too late for any alternative economic policy to save us.

As you made it to the end…

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