Consciousness of Sheep
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Sometimes it is the things that slip beneath the media radar that tell us most about our predicament. One such was this month’s miniscule cut in the overnight interest rate. Anaemic GDP growth (and a decline in per capita terms) in the last quarter of 2024, together with fears about the impact of increased taxation on low-paying sectors of the economy made a cut in interest rates a certainty. The only question was about the size of the cut. With the growth fairy refusing to wave her wand, and with the Labour government in increasing trouble as a result, establishment media anticipated a half-point cut. But the mountain laboured and brought forth a mouse… an insignificant quarter-point cut which pleased nobody.
The cut reflected the high uncertainty within the technocracy about what direction the UK economy is headed in. On the one hand, “inflation” (in reality, the supply-side rising cost of imports) remains stubbornly just above the arbitrary 2.0% target, raising the spectre of a return to the high rates in 2023. On the other hand, unemployment is rising, and even though economic inactivity has fallen, hours worked have fallen too. Furthermore, major retail and hospitality companies have been unsuccessfully lobbying government to reverse the coming rises in business rates and employers’ national insurance – warning that thousands of jobs are going to be lost if the measures go ahead.
The way in which central banks determine interest rates has been likened to someone trying to drive a car by covering the windscreen and side windows with cardboard and then looking solely out of the rear window. That is, they base their decisions on data that is months, quarters, and sometimes years old… giving a picture of how the economy was working, not how it is working. Did that slight uptick in GDP data in January continue to rise through February or was it merely picking up people taking advantage of price cuts in the New Year sales? Did the increase in unemployment in Q4 2024 continue, accelerate, or decelerate in Q1 2025? Did the uptick in business failures rise or fall in February? They will only find out in April… by which time, the picture may look very different.
The one notable – though largely unnoticed in establishment media – event in an otherwise bland vote to cut the interest rate, was that the most hawkish member of the Monetary Policy Committee, Catherine Mann, did a 180 degree turn to vote for a half-point cut… apparently sensing that the threat of stagnation and unemployment may be eclipsing inflation as the biggest threat to the economy. And in its way, this highlights the fraud that is central bank interest rate policy. Because what it shows is that when all is said and done, the central bankers are clueless.
It suits the politicians, of course, to pretend that they have handed the management of the economy to qualified technocrats who, in turn, create the illusion that tweaking the overnight interest rate is akin to moving the accelerator in your car. If the economy is going too fast (inflation) you simply ease off the gas and allow engine breaking to slow it down. If, on the other hand, the economy is stalling (recession-stagnation) you give it a bit more gas (cut interest rates) to speed things up.
The illusion has its founding myth in the 1980s, when a global oil shock forced global inflation to fall at the same time US Federal Reserve chairman Paul Volcker had jacked up interest rates to a historical high. Disregarding the oil shock in the real economy, and overlooking the devastating impact of interest rate hikes on the manufacturing base across the western economies, Volcker and his followers took the credit, and governments and public alike began to view central bankers as “the masters of the universe.”
There was a sinister element to the rise of the central bankers too. As G. Edward Griffin explains in The Creature from Jekyll Island, the primary reason why establishing the Federal Reserve Bank was pushed through Congress in December 1913, was to protect the Wall Street banks from growing competitors on the West Coast. That the decision also increased the select banks’ influence over the money system was secondary… although it rose dramatically in the years following deregulation in 1986 – when older European central banks (including the Bank of England) adopted the same, pro-bank, policies. So that, in effect, the central banks’ illusion is that they are somehow managing the economy in the public interest when, in reality, they give primacy to the interests of banking and finance (and to wealth-holders more generally).
Both politicians and central bankers get away with this for the most part because their interests often align with those of a majority of the public. The housing sector is a classic example of this. It suits the bankers to have high and rising house prices, and these also add to the nominal wealth of a sizeable part of the public. More generally, it suits the bankers to have GDP growth, since this too increases the value of assets at a faster pace than incomes grow, even as growing incomes pacify a public which might otherwise seek reform. This though, came to grief in 2008, when the interest of banking and finance diverged radically from the interests of most of the public.
In the UK, real wages in the bottom half of the income distribution have stagnated in the 16 years since the crash, even as public bailouts and subsidies have increased the wealth of the already wealthy. And, of course, increased interest rates – which do little to lower supply-side price increases – have continued to increase returns to the banks – and benefit asset holders in general – even as they cripple those at the bottom with eye-watering rents, unaffordable house prices, and general price increases as firms pass the rate rises onto their customers.
Monkeying around with interest rates can hurt the banking and financial sector and the wider economy too. The latest data from Finance UK shows a marked increase in mortgage possessions (banks taking over the properties of those who can’t keep up with their mortgage payments). Although the number is still low compared to the 2010s (reflecting the time lag between rates going up and people reaching the point when they are forced to hand over their homes) it has risen steadily from 720 in Q4 of 2021, to 1,730 in Q4 2024. Less obviously perhaps, these numbers give a hint as to what is happening in housing across the board, as households are forced to adjust their budgets to switch thousands of pounds extra per year to their housing – whether paying a mortgage or meeting fast-rising rents – thereby depriving the wider – particularly the discretionary – economy of the income required to stay in business.
The broader context in which this is taking place is dark too. The natural monopolies – water, energy, railways, etc. – have imposed higher-than-inflation price increases, taking even more spending away from the discretionary (and even some essential) sectors of the economy. And adding to our woes, more than half of the councils across Britain are technically bankrupt and so, are imposing big increases in council tax and business rates in April. Beyond this, while we have seen considerable disinflation (a slowing of the rate that prices are rising) we have not seen an end of inflation, which continues to outpace average wage rises.
The big risk to the UK economy from April is that we witness a Laffer Effect on steroids… in which the UK government’s attempt to raise taxes results in so big a drop in spending across the economy that business failures and unemployment result in less tax being gathered than today. And were that to happen – particularly if the Trump administration’s efforts to make America more attractive to investors were to pay off – Britain’s slow motion sovereign debt problem might rapidly turn into a sovereign debt predicament. As Philip Pilkington at UnHerd warned back in January:
“The problem is that the British Government is still borrowing heavily with a budget deficit of 4.4% of GDP. The rise in yields reflects the fact that the Government is having to issue very large volumes of debt into the markets. Analysts are saying that the market demand for these assets is mixed with the recent auction having the weakest oversubscription rate since 2023. Labour will now be forced to continue risking ever higher interest rates or engage in even more austerity, likely by hiking taxes.
“This is a precarious position to be in. In 2023, the Office for Budget Responsibility (OBR) registered its concerns that the share of debt held by foreigners had doubled since 2004 to around 25%. Britain has been running enormous trade deficits in recent years, contributing to the changes in the share of debt. The only way that the country can live far beyond its means is to sell financial assets to foreigners.
“But, as the OBR notes, foreign investors are more likely to cut and run if they do not like what they see happening in the British economy. ‘Smaller changes in the relative attractiveness of gilts can mean foreign investors quickly switch to other assets in potentially large volumes,’ the OBR analysts say. If something like this were to happen, we would start to see significant pressure on sterling.”
In the event that GDP slumps and tax income falls, that deficit will rise dramatically. Were that to happen, the central bankers will find themselves caught on the horns of a dilemma that has been decades in the making. This is because the financial chicanery in the City of London is the only thing that makes Britain a developed economy at this point. If for any reason the City of London was to collapse – and a run on the pound is one thing guaranteed to collapse it – Britain would no longer be a member of the G7 and might not even make it into the G20. That is, since the late-1970s, and particularly since the 2008 crash, the majority of Britain – what I refer to as “ex-industrial, rundown seaside, and smalltown rural Britain” – is closer to the emerging economies (except ours is going backward) than to the developed economies. And in the event that the City of London golden goose was to stop laying, wider Britain would experience a collapse in living standards worse than any austerity package imposed by a government thus far.
Nor is this merely an economic issue. As counterinsurgency specialist David Betz explained in a recent podcast, the UK is showing the classic – albeit early – warning signs that manifest prior to open civil conflict. That is, of dissident groups within the impoverished majority taking first to attacking things – Betz points to the blade runners (the people who vandalise ULEZ and traffic cameras) as an early example of this, but argues it is only a small step for this to morph into attacks on critical infrastructure more generally. Moreover, Betz points out that in the past, social cohesion made governing and policing of social order relatively cheap. But as cohesion breaks down, policing and governance becomes much more expensive and considerably less effective. In a declining economy which struggles to bear these costs, accusations of two-tear policing will emerge, further alienating those who believe they have been treated unfairly.
How far these wider crises weigh on the minds of those charged with setting interest rates is an open question. But the immediate economic dilemma is very real. Set interest rates too low, and foreign investment dries up. The result is that imports – which are involved in some 70 to 75 percent of economic activity in the UK – will rapidly rise in price, causing stagflation (a combination of rising prices and flat or falling growth). This might suggest that raising rates might be the best approach, since this makes investment in the UK more profitable for foreign investors. If, as seems very likely though, higher rates take even more spending out of the economy, thereby increasing business failures and unemployment, then the tax take will collapse, and foreign investors may doubt the UK government’s ability to repay (the value of) its borrowing. And so, raising rates may also cause a run on the pound leaving the UK with no way to pay for the imports it depends upon.
Most likely, this latter problem explains why Catherine Mann flipped from being the leading advocate of rate rises to joining Swati Dhingra in advocating for a big cut in interest rates. But this presupposes that interest rate policy can have much of an effect on an economy which has been in slow decline for half a century, with accelerating crises and inept government policy compounding the problem in recent years. Maybe the best the Bank of England can do at this point is to do as little as possible – a quarter-point shift either way – while hoping that the government can conjure the fabled real GDP growth that might reverse the UK’s misfortunes.
Unfortunately, the Starmer administration appears to have had a competency by-pass operation and has sunk to merely mouthing words about things that might restore growth – new runways, AI databases, millions of houses and thousands of wind turbines – despite lacking the knowledge, skills, equipment, resources, and energy to build them. Nor can an alternative economics based on direct government currency creation save the UK in a sovereign debt crisis. Because, as I explained in an earlier post, not only could the UK government be bankrupted, it has already happened once before… and this time around there will be nobody to ride to the rescue.
As you made it to the end…
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