Consciousness of Sheep
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When the establishment media bury bad news, you know things are getting bad. So it was that on Monday, the BBC headlined the Bank of England Governor’s response to bad news while giving the bad news itself just one sentence halfway down the article. The bad news wasn’t just that unemployment is increasing – something that the interest rate hikes in recent years were designed to achieve – but that the proverbial elastic band the Bank of England has been pulling is now moving rapidly and the brick it is attached to is about to hit the Governor square in the face:
“Only the pandemic, the global financial crisis of 2008-09 and the immediate aftermath of the Sept. 11 attacks in the United States have resulted in faster growth in job market slack in the REC and KPMG report.”
Not that the collapse in job vacancies and rise in people seeking work is happening in isolation. Last Friday, the entire establishment media inserted the word “unexpectedly” to the news that GDP had fallen. There was nothing unexpected about it, given that the previous figure was based on sleight of hand and exports to the USA being brought forward to dodge the tariffs. In reality, the UK is likely already in recession despite the full impact of the government’s tax on employment only beginning to be felt (the bigger, secondary drop in demand caused by the unemployment and business failures will come later in the year).
At least the economic (mis)managers at the Bank of England and the Treasury could console themselves with the quasi-religious belief that with unemployment rising and the economy slowing, at least inflation had been overcome. This, after all, is what the (discredited but still esteemed among mainstream economists) Phillips Curve promises… indeed, it is the primary reason for high interest rates in the first place. But alas no. The ongoing rises in food prices caused by high energy prices (in large part due to ill-conceived sanctions on Russia) have helped drive the official (CPI) inflation rate up once more. Even the 0.2% increase on May’s figure will seem implausibly low to many households and businesses. And not unreasonably, since the figure excludes unavoidables like housing costs and utilities published in the less publicised CPIH figure of 4.1%.
There is a word that sums up the trends now emerging in the UK, although nobody in the establishment dare utter it… stagflation.
This is clearly bad news for a government that has bet the house on using public spending to generate growth, since creating demand for often global resources which are in short supply can only drive prices up (at least in the short-term). Without that additional public spending though, business failures and unemployment might spiral out of control. It is also bad news for the technocrats at the Bank of England, whose reputations are based on the wrong-headed idea that interest rate policy can steer economic growth and contraction. Having baulked at further rate cuts last month because of stubbornly high inflation, it is difficult to see them cutting in August now that inflation is rising again. But what does this do to the Governor’s promise to cut rates now that unemployment is spiking up?
This is the dilemma set out by Peter Gratton at Investopedia:
“Stagflation is an economic nightmare, both for those who live through it and the policymakers called on to solve it. This rare economic condition defies the conventional economics that links inflation with economic booms and falling prices with recessions…
“Stagflation is particularly troublesome because the traditional tools that address one problem typically worsen the others. A tight monetary policy (increasing interest rates) to fight inflation typically slows growth and thus increases unemployment, while stimulus measures (increasing government spending) to boost growth may accelerate inflation since that increases demand in the market, putting pressure on prices. This policy dilemma explains why stagflationary periods like the 1970s tend to be prolonged and difficult to resolve.”
The big difference between now and the 1970s is that years of quasi-religious faith in the neoliberal Free Market™ has created an atrophied political class which is no longer up to the challenges before it. But leaving the private sector to solve a mess of its own creation is the very last thing we should expect to work (even if the alternative looks no more plausible).
Last time around, the problem was kicked down the road by the opening of new, cheap-enough, offshore oil fields in the North Sea, the Gulf of Mexico, and North of Alaska, together with massive unproductive debt-based speculation, while offshoring manufacturing and selling off public assets. None of that is available this time around. And without the economic stability to attract the necessary long-term investment in key energy generation and mineral extraction, even the resources which appear to be available to allow for another round of growth are already beyond us… and nobody has developed an economic theory for the permanent decline that this implies.
As you made it to the end…
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