Inflation Is Not What We Need to Worry About: the Risk of Major Collapse in the Private Sector Is What Should Be Troubling Us Right Now

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Yves here. Households with tight budgets no doubt will find Richard Murphy’s view that there are bigger problems than inflation to be cold cheer, since inflation is already a serious stressor. But the evidence of lack of adequate official capacity is all around us: the confused, magical-thinking-driven approach to Covid (LA County is calling for even the vaccinated to mask up due to Delta), the Texas grip collapse, the ability of hackers to take down the Colonial pipeline, and now wildfires and heatwave-induced deaths.

By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK

Today we had a parting shot from Andy Haldane on leaving the Bank of England, in. which he claimed inflation will be 4% by Christmas, unleashed as the economy gets over Covid.

I seriously wonder about the ability of people like Haldane to analyse data. He has long had a theory that all the spending deferred by Covid will be unleashed when the pandemic is over and that inflation will result, and the only credit you can give him is that he has stuck to the theory, even though there is no evidence to support it.

Post 2008 it took eight years for consumers to start spending at pre-crash levels in proportion to income. This crisis was worse, threatened more jobs, created more unemployment (albeit still disguised, but furlough is ending now) and there was no Brexit impact to add the air of general economic unease. There are literally no reasons why anyone barring the quite wealthy should go on spending bonanzas now that will wipe out their Covid savings.

As I noted this morning, there are already signs that the spending boom is fading. 

And then there is Covid itself. I know the charlatans in government like to pretend this is all over, but it is not. There were 26,000 new cases today. And that is not all. Click on the links in this live tweet to see more data. Hospitalisations and ICU bed cases are rising too.

The claim that the link with death is over may also not be true: there may simply be (as was always obviously going to be true) a lag. I am not saying that things will be as in January because no one knows. What is glaringly obviously true is that things are going to get much worse as yet.

I just have to look at the data and as an economist I think three things.

First, and glaringly obviously, this pandemic is not over yet. The risks of further waves because our vaccination programme is so poor is high. I say that because too few are vaccinated, children are not, and as yet none of the first batches of elderly people are scheduled for top-ups, and their immune systems may now be very vulnerable again, most especially if they had Pfizer. If anything, risks are now rising from the failure of the vaccination programme rather than falling, as is widely claimed.

Second, in that case, and because a majority of people are not stupid (albeit, some are) self-isolation amongst the population is growing to be increasing rapidly soon as people react to the very obvious risks that Covid creates.

Thirds that means that the chance of a boom is very low this year.

I accept that does not mean there will be no inflation: chaos from Brexit, worldwide increases in food prices and supply chain disruption may create some inflation. But none of those things can be corrected through any of the policy instruments available to the Bank of England, which also marks out how poor the analysis fro Haldane is, when after 30 years at the Bank he does not know that. These things are solved by either political responses, or by accepting that they just have to work their way through the system, with appropriate protection for the most vulnerable in society as to the consequences being provided.

But what we have not got is a scenario remotely close to a boom. The risk we face is of a major collapse in the private sector, and especially amongst smaller companies. That’s the result of spending not growing, effective lockdowns continuing, and government support being withdrawn as debt burdens have to be repaid. That’s a massive triple whammy. But that’s not anywhere on the horizon of the Treasury or the likes of Haldane, who are all deeply comfortable in their own little economic bubbles where they are not exposed to the real world of business, in which none of them has ever been engaged.

I am worried. And the more I see the more worried I am.

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  1. Mikel

    “He has long had a theory that all the spending deferred by Covid will be unleashed when the pandemic is over and that inflation will result, and the only credit you can give him is that he has stuck to the theory, even though there is no evidence to support it….”

    I’d remind him about that stock market, contrarian philosophy: buy when others are fearful, sell when others are greedy or host of others.

    Because that is actually better applied to and has the best results for personal budgets: the time to spend is a recession/depression, the time to save is during “boom” times.

    The caveat to all these philosophies is that you have to have money coming in…

  2. PlutoniumKun

    I think there are a lot of bottlenecks building up which could spike inflation in certain sectors, but thats not the same as the type of inflation Haldane seems to be talking about. Across the Irish Sea here the latest predictions are for a whopping growth rate of 11% (beat that China!) in Ireland, and this is feeding into all sorts of costs, especially in construction where costs have risen maybe 20% in a very short period. Plus there is the familiar problem now of supply bottlenecks meaning there is zero hope of getting your bike or car or laptop on a discount (if you can get one at all). But all this is with the background of seemingly high unemployment all over Europe at least, even while businesses complain they can’t get staff. Rising wages are inevitable, which is of course a very good thing, but it can’t be ignored that this will feed into inflation.

    But I think the key point where I’d agree with Murphy is that the assumption that Covid is gone and a wave of constrained spending will be released is misplaced. A new wave is well under way in the UK (it should really have been called the Boris or Brexit variant as the UK seems to have been the main source due to the refusal to shut down travel to India when it was blindingly obvious that this was needed). Delta is now rapidly becoming the dominant strain in Europe and elsewhere and I think its clear the vaccination rates will not be high enough by autumn to stop a new wave hitting everywhere, especially as its now clear its been spread by football fans (thanks UEFA!), as we’ve seen from an outbreak in Scotland.

  3. Mikel

    “…and as yet none of the first batches of elderly people are scheduled for top-ups, and their immune systems may now be very vulnerable again, most especially if they had Pfizer…”

    I missed the background on this.
    Just weeks ago, people were chunking out articles with claims that Pfizer would have you good to go…then in very small print…at least maybe for a year.

    A Moderna CEO has been very forthcoming about their excitement for booster shots. And most news outlets then immediately start spewing magical thinking about magical “vaccines.”

    Calling docs on this: Wouldn’t it be more accurate to call these shots “gene therapy”?
    Or something like that?

  4. Tom Stone

    Covid is far from gone and here in Sonoma County people are acting as if the pandemic is over.
    Last weekend I drove past the intersection of Mirabel and River Roads, there’s a large parking lot there and access to the River.
    Crammed full at 9 AM, one of those “Limo” buses with about 30 and a total of maybe 150 people. no masks.
    And they float and paddle down the narrow river canyon ( Creek this year) by the thousands on a warm weekend.
    And I do mean thousands, only a few feet between each Kayak, canoe or float from about 10 AM to 3-4 PM when it slows down.
    And big parties this weekend, 300 plus are expected at the Summer Home Park BBQ and that’s one of many.
    3 weeks out and we’ll see what we have, I don’t think it will be pretty.
    As far as a crash, yes.
    Real Estate prices are completely irrational and when that market pops ( This really feels like a Blow off Top) it’s going to hurt.

    1. Blue Duck

      I read that tourism is back to pre-pandemics levels in SoCo. I missed having this place to ourselves. I still see a lot of locals wearing masks, but the % of masked/non-masked looks suspiciously like the vaccinated/non-vaccinated %. As for real estate, out here in west county properties are being sold for $1m over what they were worth pre-pandemic, and for cash at that. The shame is that it is all Bay Area millionaires buying country homes or airbnbs. Our area has seen a lot of turnover during the pandemic, and only one of those homes was bought as a primary family home. It’s like a ghost town here now.

  5. William Hunter Duncan

    “But what we have not got is a scenario remotely close to a boom.”

    It is quite clear to me the housing market here in Minneapolis has peaked. Walking the dog the past two weeks I noticed, quite a few houses were going on the market and quite a few more had been sitting for sale for awhile. A cursory look through the MLS revealed that asking prices are grossly inflated, and many a house had been sitting for awhile. Only a month ago they were still talking about how many homes were sold within a day or two on the market. It is only July 01 and if the market were healthy there should be steady sales.

    Pretty clear too, there are a few spec houses in the neighbor hood priced a few hundred thousand more than near equivalent older homes, and those speculators are going to get wet.

    1. Noone from Nowheresville

      One of my friends in the Twin Cities southern metro area would disagree. They put in bids over asking for multiple condos. Cash buyers bid higher. They finally won a bid (again over asking) and will close at the end of July; paying rent through the end of August. They would’ve stayed put but their landlord majorly increased their rent. With more increases expected, mortgage, insurance, HOAs will be less than the current rent.

  6. Amfortas the hippie

    Black Death:1346–1353
    Spanish Flu: February 1918 – April 1920

    and both of those without our current “let’s fly off to Guangzhu!” norm.

    out here where i live, those who were going to get the shot, have mostly gotten the shot…estimates granular enough to determine the sitrep in my far county are impossible to come by…but based on my informal and quite random sampling, i’d hazard maybe 30%, at best…which tracks 1:1 with the percentage of Dem-Leaners.

    so, no…It Ain’t Over.

    another local observation, regarding supply lines: we’re at the end of the line, out here.
    This is where the big trucks turn around and head back to civilisation.
    Ergo, the Hardware Lady gets the gleanings left over from the Big Box Hardware Stores, further in.
    One can special order things, of course…but you pay a premium, and then still must wait….maybe for months…for that order to be fulfilled.
    everyone i talk to is aware of this:
    the Karens and Kens complain about the lack of tofu and kombucha at HEB, 50 miles south….the Jim Bobs and Billy Sues cry about $40 2×4 studs.
    I’ve been going to the Lowes in The Rim…a rich area of san antonio(and therefore so far overlooked by contractors searching for materials….to stock up on pipe fittings and whatnot.
    (i’ve kept my own pipe store on-site for 25 years…and electrical and so on…a necessity when you live so far out…my debris field(per Mom) with all that cast off lumber full of nails is coming in quite handy, too)
    From beef to tomatoes to garden gnomes, shortages abound…(said he while sitting at the wilderness bar, watching neighbor’s cows roam.)

    in each of these instances, there’s a monopoly, near-monopoly or cartel at the heart of it.
    egg shortage?
    i have more than 50 dozen eggs on hand(last for 9 moths+ in fridge…eggs you get in the store are up to a year old)…but i’m not allowed to sell them save for on-farm…and in back alleys.
    and i know numerous other chicken ranchers out here who are in the same boat…more or less.
    my fave taco place in town is having difficulty keeping eggs…and brisket and even “face meat”(barbacoa)…but if they buy from me, they can get in trouble with the health dept.
    same with tomatoes, and everything else.

    after all these years hearing about “economies of scale” and “efficiency”, turns out that hypercentralised and gigantic hydraulic despots are pretty bad in a crisis.
    everything has to function perfectly for their “efficiency” to work.
    ( —or from Frank’s God Emperor Leto II: “Hydraulic despotism: central control of an essential energy […] Obey the central controlling power or the energy is shut off and you die!”

    and, not to harp overmuch….but now is the time to be evengelising to whomever will listen that “the Way Things Are” is not the way things have to be.

    1. Eclair

      Amfortas, we are not quite at the end of nowhere, here in western NY/PA, but food is cheap. Not building materials, alas, unless you know about a small-time Amish saw mill. We don’t have high tech industry (or any industry, the last furniture and cloth mills closed in the decades after WW2) but we do have tons of trees. Yesterday, when I went to the feed store for buckwheat, they were also selling, the refrigerator conveniently located next to the checkout/order counter, homemade butter at $3 per pound and new-laid eggs at $2 per dozen, which is cheap even for here, where they run at $3 per dozen at the roadside stands. Or free, if you trade with a neighbor.

      And, although the deer just browsed down the corn (I left the garden gate open all night, grrr…), we have a bumper crop of potatoes, onions, leeks, garlic and tomatoes. And, the winter squash is doing well … after a second planting because the slugs ate the first sprouts. Fortunately our Amish farming neighbors grow strawberries ($4.75 per quart basket … and they are deep red, perfect, and sweet), peas, summer squash (3 for $1), and later in the year, peppers, cabbage, winter squashes and tons and tons of tomatoes. Just in case our 24 plants don’t produce enough. For dinner yesterday, we finished off the last of the frozen tomatoes from last year. I have a quart of sauce that I canned, plus a quart of tomato and red pepper soup still in the freezer. Then, we hope, the fresh ones will start coming in.

      1. Amfortas the hippie

        after so many failed and/or sabotaged attempts at farmers markets out here*, i’ve been moving towards being a farm that people visit….but i’m still a long way from that.
        when i have a freezer full of quail, goose, chicken and partidge…and an actual garden, again**, then.

        *city has crashed several, including the one i haphazardly started, 20+ years ago…importing austin sized rules, etc(it’s a habit…like with the zoning)
        the current iteration is really meant to market the local wine industry(too pretentious for my taste,lol)

        ** with the ongoing infrastructure stuff(light at end of tunnel), i halfassed the gardening this year.
        likely a good thing, too…weird weather…extreme heat=>crazy cold=>and humidity that feels like the mouth of the Trinity River….and now the grasshoppers have come in with a vengeance. plants are acting strangely around here.
        we’re still eating off of last years garden(canned 8 gallons of pasta sauce, alone)

        …and…a B-52 just flew over me…heard not seen(you can only see them when they’re directly overhead, i have found…then they disappear…a neat trick)

        1. EearlK

          Amfortas- reside in extreme n.Tex,(ok), can confirm the weather departure from normal, super summer in June without a drought in attendance, July and Aug. have their own surprises in store.

        2. juliania

          Nice to see you, Amfortas, and Eclair as well. As signs of what is to come, I find your comments extremely encouraging. We all are going to need you and the other unsungs. Thank you!

    2. Generalfeldmarschall von Hindenburg


      If we have a garden gnome shortage it’s time to hang it all up.

      1. Amfortas the hippie

        i maybe saw that in the guardian a week or more ago…it’s all a blur.
        so while i really dig Gypsy Jazz, i ‘d rather it not be playing incessantly in my head during this chaostime.

        and another thought on shortages….i keep a close eye on the beer stocks, wherever i go.
        in ’05, when Rita hit east houston, where all the warehouses live, we saw a shortage of everything, here(350 miles NW)…gas to food…but when the beer stopped coming, the bidness owners got a caravan together to head north to find an alternative supply.
        because this town running out of beer means a redneck riot.
        (the winepeople will just drive the 50-60 miles to he next town over…or into the city….and they’re not the rioting types, anyway)

  7. Arizona Slim

    My takeaway? If I’m a public space of the indoor variety, I’m going to be masked up. I’m also going to keep that social distance thing going.

    It ain’t over. Not by a longshot.

    1. Mikel

      Currently on a road trip (family emergency). Doing the same. All restroom stops yesterday, was lucky enough to be the only one in the bathroom, so nobody noticed I didn’t flush their no-lid toilets at public restrooms. No shame in my game there….
      Had my hotel reservation for a second floor room with balcony. First thing I did upon entering was turn off all air units (luckily a cool night!) and open the balcony door wide open and Lysol sprayed all air vents and closed the bathroom door. The bathroom had an open vent up high that I would have covered if I had thought to bring anything to cover it with.
      After I took a look at the ventilation in the room, THEN I did a wipe down of surfaces. I got in late a night by design….empty lobbies except for the receptionist. And upon leaving in the day, with more people on the elevators, I will be taking the stairs to leave.
      Spent most of my time on the balcony until I had to lay down for sleep.

      1. salty dawg

        > was lucky enough to be the only one in the bathroom, so nobody noticed I didn’t flush their no-lid toilets at public restrooms. No shame in my game there….

        Take a deep breath, hold it, flush the toilet and walk out.

        Showing consideration for the people who use the public restroom next is the mark of a civilized person.

    2. Amfortas the hippie

      regarding the social distance thing…especially in areas like mine that are hostile to antipandemic measures of any kind:
      i’ve felt pretty smug this last year and a half that my appearance has just sort of naturally engendered strangers keeping their distance,lol.
      even the maskless and/or obviously “it aint real” types.
      long tangled hair and beard, crazy eye, limp and stick, and hobo clothes works pretty well for this purpose.
      and i can always throw in a glare or a glamour if i run into a logjam in the grocery store.

      i also forgot to mention that all the inflation anecdotes i listed above are NOT the “Inflation!” that the priesthood of Moloch are all on tenterhooks over.
      That kind of inflation(makes warding sign) won’t happen until all those offshore accounts start to empty into the real economy.
      what it it up to now? quadrillions squirrelled away?
      i keep seeing references to the stimulus check making all the remodeling and housebuilding happen…but that can’t be it(same way folks aren’t avoiding a job due to gubmint largesse—$1400(or whatever) ain’t all that much)
      here, it’s insurance companies paying for a lot of the remodels….due to the snow hurricane and hail and whatnot…same in houston, per cousin in the trades.
      and the people i actually see having new stuff built were well off before covid…the remodels aren’t happening in the 3 barrios in town(old, new and redneck barrios…i should do a paper).

      mom just said that the bottom has fallen out of the lumber market…haven’t had time to check. i immediately suggested we rush out and obtain a modest stockpile of the boards we use most.
      with mom, it’s best to plant the seed as soon as possible, so she can ruminate it and then eventually present it as her own, enlightened plan.

      1. Eye 65

        I’m still seeing about $7.50 for 2x4x8 at Home Depot, Menards and Lowe’s.

        We’re only in the 5th inning with this, no telling how bad the conditions in the PNW will impact, either.

    3. Krystyn Podgajski

      I am fully vaccinated, but as long as I am still homeless I don’t care. I do not wear a mask if they say I do not have to. I am not afraid for myself and I do not have the energy of the care to worry about other people. If you think people do not share the source of my frustration you are mistaken. I finally understand the YOLO crowd, it’s not about enjoying life, it is about being so close to death.

      If you want people to care about living, you have to care about their lives.

    4. petal

      Slim, you’re right-this isn’t over by a longshot.
      I left work early today and swung by the store on way home. Forgot today was the first day masks weren’t required in there. I wore one, and was getting stares and judgy looks from other shoppers. Once it hit me no one else was wearing one, I started to feel an anxiety attack coming on. Got what I needed and left. Will be majorly limiting my visits there now. No one walking in town had masks on, but people inside the post office did. Everything’s over, guys! Mission accomplished and all that! Back to normal. Grocery prices keep going up, post office prices have gone up, and my dog’s prescription food is up 5%. Inflation is definitely hitting us little people in a big way, but I do agree with the author, that there’s instability on the horizon. People and the government(s) are partying like it’s 1999 and ignoring the red flags popping up all over the place. It feels like they’re all drunk speeding down the highway and nobody has their hands on the wheel. Just ignore it and it’s not there, right? Need to get me the See No Evil monkeys.

      Also received an email from the dept chair this morning talking about how he is pushing hard to get the mask mandate lifted for the research floors at the hospital. Yes, Jen, it’s who you were intimating it was. It’s insanity reading through the email chain on that one. If it is dropped, it’s just a matter of time before something happens. Things have been going so well and now they’re going to blow it. I just do not understand the magical thinking, especially by this cast of characters. I don’t dare send this person a note saying “I don’t think this is a good idea” because one would get their head taken off.

      Btw, I think I finally got through to my mother about vaccines and continued masking at least. Small victory, but I’ll take it. Cheers, y’all. Be well. amfortas, nice to hear from you!

      1. Jen

        My wager is that the hospital’s policy will prevail on this one, as it does with flu shots. I’ll be interested to see what the epidemiology group’s posture is. They bugged out to work from home not long after Eric Ding’s infamous “holy mother of god” tweet, while the rest of the campus was still in “just the flu!” mode.

        1. petal

          I’d be interested, too. I sure hope so(hospital policy wins out). It should. Over the last year and a half I’ve lost all respect for a certain person. This stuff blows my mind.

    1. Geo

      Thanks for this. Good to know as I’m about to begin on a new film. :)

      Did one back in October and we made it through four weeks without a single case which was probably lucky but also ran a very tight ship in regards to Covid protocol. Had one anti-masker we fired the first day and no troubles after that!

      So true that these unions, some of the only strong ones left, really do look out for the well-being of their members. Sad that it’s entertainment that is the area that workers are valued most since what we do is not essential in any important way (and often times a disservice to society as anyone who has had the misfortune of being exposed to network TV knows).

      But, I guess we need to keep the gladiator coliseums running so the people don’t notice Rome is burning.

  8. Carolinian

    Wolfstreet on auto inflation

    The nut is that car purchase is mostly discretionary but pent up demand above all is driving huge price icreases–often above sticker. You could say that Americans are ready for Covid to be over and irrationalily exuberant. Add in that gas prices are about to go up due to actions by OPEC

  9. Wukchumni

    Everything regarding money is pretty much make believe these days, and it looks as if they perfected & protected us from the ravages of inflation as long as it isn’t something you need in the most expensive items category of homes & cars.

    The things they can’t dicker with on this contraption is what matters, climate change being the focal point.

    We’re in for another heat wave starting next weekend, and if the Fed was in charge, the claim would be that we can expect 73 degree weather, never varying all that much like their inflation reports.

  10. Susan the other

    Now I’m wondering if when the Fed cut the commercial banks out of the helicopter money they maybe thought they were preventing demand inflation – that would be one way to do that. The Biden plan is pretty focused on doing a GND infra using PPP – but look at the standoff between Biden and Pelosi. That’s another shut down for demand inflation – it’s the money nazi: No money for you, families! And all this analysis isn’t even looking at the social pressure that drives a consumer economy: family formation. We have population decline everywhere, not just in this country. The Fed isn’t talking about its priorities but clearly it is to save the Big Private Sector, aka the stock market. Small business might have a very hard time going forward. And construction is barely hanging on from my vantage point. It seemed to crash overnight. Maybe multi-family housing projects are doing OK. Clearly if the 99% isn’t getting bailed and they don’t have jobs then debt will have to be written off. That even fits into this context – the commercial banks are facing big write offs, no way the Gov. wants them to start lending. They are paying for the GND by killing Mainstreet. If Biden doesn’t get his GND in gear the whole thing is gonna implode.

  11. Sound of the Suburbs

    A perplexed Australian has been watching the coronavirus fiasco in Europe with some amazement.
    When I heard his argument, I knew exactly what he was talking about.

    Coronavirus is extremely contagious.
    Successful countries have all aimed for eradication.
    When it’s gone, it can’t spread.

    Europe has favoured lockdowns that gets numbers down, but doesn’t eradicate it.
    Coronavirus is extremely contagious.
    The virus soon starts to spread and you are back where you started.

    The UK did look as though we had succeeded, and even I thought we had things under control (cynical old git that I am).
    Oh no, delays in putting India on the red list for international travel has allowed another variant into the country that is now spreading rapidly.

    Recognising the nature of the problem we are dealing with has allowed other countries to successfully control the coronavirus.
    We just haven’t done that yet.

  12. Gregory Etchason

    COVID 2020 affected mostly the retired over 65. COVID 2021 “Delta” will potentially affect greater numbers under 50 and create much more severe economic fall out.

  13. Steven Greenberg

    I think the cause of the current inflation is obvious and should have been obvious to policy makers. In the USA, we have finally started to give economic relief to people who tend to have to spend what they earn. This gave a boost to spending before the supply side had recovered enough to be able to respond to the increase in demand. I do not know what the policy planners could have done to avoid this situation, but acting surprised at the easily foreseen could be a dangerous reaction. It could evoke counterproductive responses to the inflation.

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