Is the UK About to Hit the Wall?

Yves here. It’s not very nice to engage in an economic death watch of sorts, particularly when the underlying disease looks likely to spread. But who will go critical first? Is the rapidly accelerating political crisis in the UK a sign that the sceptered isles will be first to enter the economic ICU?

Many commentators have discussed the near-certainty of de-industrialization of Germany due to high energy costs and how the loss of revenues and jobs would propagate rapidly through its economy and then to the rest of the EU, since Germany is a major driver of EU activity. Credit Suisse analyst Zoltan Pozsar wrote in late August that $2 trillion in German value added depended on $20 billion of cheap Russian gas.

The last two months have featured stories of Germany companies suspending operations or cutting production, from stainless steel to aluminum to papermaking to chemicals, and that list is not complete.

The EU is engaged in yet another rearranging-deck-chairs-on-the-Titanic exercise of trying to come up with gas price caps. Gazprom has already said that’s a no go. From RT:

Plans to set a price cap on Russian gas sales, which are currently being considered by Western leaders, would cause supplies to be halted, according to Gazprom CEO Alexey Miller.

“We rely on the contracts that have been signed. A unilateral decision of the kind is, of course, a violation of essential terms of the agreements which would lead to a termination of supplies,” Miller said on Sunday in an interview with Russia 1 TV.

It’s not clear why any other gas suppliers whose customers contracted for spot or other variable prices should go along either. The EU is trying to solve this problem by calling the cap something else. From Reuters:

The latest draft conclusions showed that the leaders would agree to “explore a temporary dynamic price corridor” on natural gas until an alternative EU gas price benchmark is in place.

Belgium, Greece, Italy and Poland want a price corridor for wholesale transactions, which would mean a price range with a central value below the market price.

The draft said the leaders would also “explore a temporary EU framework to cap the price of gas in electricity generation at a level that helps bring down electricity prices without … leading to overall increased gas consumption.”

Now there are bad design elements in the European electricity scheme that likely does to some degree lead to price distortions on the upside. However, the EU is facing a chronic gas shortage. It not only will have trouble getting through the winter, but its supply woes will continue in 2023 and will be even worse next winter unless Europe kisses and makes up with Russia, which seems impossible at this juncture.

Yet instead of focusing on the necessity of rationing, the European Commission is dithering with the fantasy of technocratic fixes, which is likely to result in disruptive, unplanned rationing in the form of blackouts.

Italy, Europe’s other industrial engine, is also a heavy user of Russian gas, but the business press has yet to focus as intently on its developing tsuris.

The reason for the long-winded German detour is to suggest, despite Germany having a poor prognosis, that the UK might hit the acute phase sooner.

In particular, the UK entered this crisis in weaker condition than major EU countries thanks to Brexit. And Brexit is also exacerbating inflation. From Euronews in July:

In June, a study by the CER’s Deputy Director John Springford examined the economic cost of the UK’s departure from the EU so far, setting out to disentangle it from that of COVID-19….

His “sobering” conclusion is that in the final quarter of 2021, GDP (gross domestic product) was 5.2% smaller, investment 13.7% lower, and goods trade 13.6% lower than what they would have been had the UK remained in the EU.

“The UK had a particularly deep recession in 2020, but it ended COVID restrictions sooner than many of its peers, thanks in part to starting its vaccination campaign early in 2021. That should have made its recovery from COVID faster than other countries, not slower,” he says.

“It should trouble Labour and the Conservatives that the economy is lagging so far behind its peers.”….

….another report from June noted a decline in some aspects of Britain’s trade with both EU and non-EU countries that was “not explained by changes in the pattern of global trade during the pandemic”….

Inflation figures from the Office for National Statistics (ONS) published in June put the UK’s rate at 9.1%, as measured by the consumer prices index. The figure for the eurozone in May was 8.1%, before rising to 8.6% in June according to Eurostat data.

Yet inflation in the UK is worse than in other high-income economies, as the Peterson Institute for International Economics noted in a report in May. This is despite the fact that Britain and its neighbours have suffered the same economic shocks from Russia’s war on Ukraine and soaring energy prices.

“Brexit has amplified the inflationary impact of a simultaneous common shock,” the institute says.

The fact that the UK imports a lot of food and is structurally vulnerable to a triple crisis (a simultaneous currency, banking and fiscal crisis a la Iceland) by virtue of being a small open economy with an outsized banking sector does not help.

If you read Richard Murphy’s post below, it’s not hard to see that his erstwhile suggestions will help only at the margin. In particular, he appears not to appreciate that investing in renewables will do nothing to alleviate the energy shortfall bearing down on the UK now, and is unlikely to have much impact before (optimistically) 2024. Similarly, letting the pound fall will increase the price of food and energy imports. And if any big financial players have significant net dollar or Euro liabilities, a further decline in sterling could put them in distress.

And while we are comparing the severity of the UK’s and Germany’s pathologies, let us also consider a warning from Pozsar that doesn’t appear to have gotten as much attention as his conclusion about the economic leverage of Russian gas:

More broadly, the three “moments” of reckoning we discussed above mean that
global supply chains, whether they produce military or civilian goods, are facing
a Minsky Moment – a Real Minsky Moment. Paul McCulley’s term referred to
the implosion of the long-intermediation chains of the shadow banking system
that marked the onset of the Great Financial Crisis. Today, we are witnessing
the implosion of the long-intermediation chains of the globalized world order:
masks, baby formula, chips, missiles, and artillery shells, for now. The triggers
aren’t a lack of liquidity and capital in the banking and shadow banking systems,
but a lack of inventory and protection in the globalized production system,
in which we design at home and manage from home, but source, produce, and
ship everything from abroad, where commodities, factories, and fleets of ships
are dominated by states – Russia and China – that are in conflict with the West.

Inventory for supply chains is what liquidity is for banks. In 2007-08, big banks
ran on “just-in-time” liquidity: the dominant form of liquidity was market liquidity,
for which you could always sell assets into a deep market without moving prices,
so you did not have to have liquidity reserves at the central bank. Similarly,
big corporations today run “just-in-time” supply chains for which they assume that
they can always source what they need without moving the price. But not really:
the U.S. military has to wait a little bit as Raytheon “will take a little while”;
Taiwan and Saudi Arabia have to wait as well until the conflict in Ukraine is over;
and if your washing machine broke recently, you’ll have to wait a bit too until
defense contractors are done buying them up to rip chips out to make missiles.

We’re borrowing from “here” to make things “there”. Do you remember the
three units of Minsky? Hedge units can cover their payments from their incomes.
Speculative units have to borrow to be able to make payments. And Ponzi units
can make their payments only if they sell some of their assets and are thus the
most exposed to rising interest rates. As our chip examples demonstrate,
Minsky would classify our military supply chains as “speculative” units at best,
which are exposed to a further escalation of geopolitical tensions that could
easily turn them into Ponzi supply chains. We can also apply Minsky’s framework
in Europe, where Germany can’t cover its payments without Russian gas and
the government is asking citizens to conserve energy to leave more for industry…

Protection by Pax Americana for global supply chains is what capital is for banks.
In 2007-08, big banks didn’t have enough capital to deal with systemic events,
because they were Too Big to Fail. The assumption was that the state will bail
them out. The state did provide a bailout, but at a cost, which was Basel III…

Today, the assumption among investors is that globalization is Too Big to Fail…
…but globalization is not a bank in need of a bailout. It’s in need of a hegemon
to maintain order. The systemic event is someone challenging the hegemon,
and today, Russia and China are challenging the U.S. hegemon. For the
current world order and its trade arrangements and network of global supply chains
to survive the challenge, the challenge must be squashed quickly and decisively,
in the spirit of the Powell Doctrine. But Ukraine and Taiwan aren’t Kuwait,
Russia and China aren’t Iraq, and Top Gun 2 isn’t the same movie as Top Gun.

With that context, it becomes even clearer why any remedies for the woes afflicting the UK, Europe, and eventually the US will not come quickly, if at all.

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

I am posting this thread on Twitter this morning:

We all know Truss has made a mess of her premiership, and will leave the UK in a parlous state. But what does that mean for the economy and whoever succeeds her both now and after a general election? A thread….

[Please note that this is a long thread. If it appears to stop mid-flow please click on the last Tweet you can see and the next section should appear.]

Let me ignore how we got in the mess we are in. Instead let me address the issues that we face. They are:

– Inflation
– Energy prices that remain out of control
– High, and still increasing interest rates
– Low pay rises
– Pressure on stretched government services

You could add in other issues, like ongoing war and the UK’s crisis being exceptional to that in other counties. You could also mention Brexit, quite appropriately. Whatever is in the list, the issues look to be big.

That is the correct conclusion. So too was the reaction to Truss’s mini-budget correct. Major tax cuts and regulatory reform were, at this moment, wholly inappropriate. Truss got just about everything wrong.

Leave that aside though. What are the consequences of the position we are in, because these have yet to all be seen, and so need to be explained. I stress, what I am suggesting is things are nowhere near as bad as yet as they are going to be.

First, high inflation rates compared to lower wage rate increases meant that households were always going to be facing an economic crisis this winter.

Apart from well focussed energy price interventions (and the one we are getting is poorly focused) there is little the government can do about energy price increases, excepting three things.

One of those is reform to the way energy is priced in the UK. The energy price cap being introduced is a poor way to achieve that goal, but better than nothing.

The second is to impose a bigger windfall tax. Nothing has yet been said about this, which is bizarre.

Third, the quickest to deliver and cheapest forms of alternative energy supply need to be focussed on: Truss has done the exact opposite by ignoring wind and solar and focussing on nuclear and gas. This was straightforwardly wrong by her and needs to change.

There is, then, ample opportunity for an improved energy policy for opponents or a successor to Truss to exploit. Having such a policy would massively help tackle the crisis we are in.

Inflation is a harder issue to tackle. The Bank of England is suggesting interest rate rises to tackle this. Their logic is that UK households have too much to spend and so interest rates must rise to crush their spending power.

The problem with this is it is not true. Households already have too little to spend in most cases, with that likely to get worse without any help from the Bank of England. The fundamental assumption that the BoE makes is wrong in that case.

The only other excuse the BoE has for raising rates is to match the US Fed and its rate increases. This is no argument though. The Fed is intent on crashing the US economy. Why copy it? Why not say a falling pound is a price worth paying in that case?

Tackling inflation is a task not within the reach of government except by energy price controls in that case. `That has to be admitted. In the current environment not everything can be controlled. Inflation might be the one to let go.

That makes sense when the alternative is a full blown mortgage crisis as a result of increasing interest rates when increasing those rates will have no impact on energy or food prices, which are set very largely outside the UK at present.

Let’s turn to that mortgage crisis. As I have been saying for many months, and which others have now caught up with, the average likely increase is around £500 a month. Rent rises are also likely as landlords have mortgages.

This level of increase is unaffordable. Most households have nothing like that margin for error in their budgets. Whether they should have been allowed to borrow the sums they did in that case is now irrelevant. Excessive loans were permitted, and are commonplace.

This crisis has the capacity to make the energy price crisis look like small beer. People will be unable to pay, in their millions. That spills over into a homelessness crisis if they evicted, and into a house price crisis as they sell under pressure.

There will then be the negative equity trap to deal with, as people have mortgages bigger than the values of their homes. Those who lived through the early nineties know the personal tragedies this resulted in.

And we also have the makings of a banking crisis, potentially. I know banks are better capitalised now. And I know there are stress tests. I am not, however, wholly reassured by the reassurances of those who say all will be OK.

The debt crisis to come will hit households, intolerably. It will hit banks hard. Let’s not pretend there will be no victims.

The answer to this is, of course, to stop the Bank of England imposing unnecessary interest rate increases. Sure, the pound will fall and inflation will stay higher for longer. But what is more important? Inflation or 5 million bankrupt households? Does the question need asking?

If the Bank does not agree then they should be told. My problem is I cannot see any Tory doing that, and right now Labour is saying nothing about it either. We may get these interest increases as a result. Mortgage rates of 7% may happen.

What then? Three likely things matter most. The first is that households will stop spending on anything but food, energy and mortgages or rents. There will be a massive fall in demand in the rest of the economy.

Second, as a result of that fall in demand whilst facing their own increased energy and interest costs many businesses will go bust and unemployment will increase, dramatically.

Third, government revenues will fall. Fewer people in work guarantees that. Spending more on energy food and mortgages and rent with almost no VAT due on any of them also guarantees that. So tax revenues will be hit, and benefit costs will increase, substantially.

The result of this is recession, plus a big government deficit at the same time. By the time this happens the measures the government can take are limited. They will have to keep people alive: beyond that their scope for action will be small. That will be how bad things will be.

This is the wholly predictable consequence of current actions. So what should be done?

First, stop interest rate rises. They are the easiest and quickest route to calamity, so they must be stopped. Yes, we will be out of step with all but Japan by doing this, but someone has to say recession is no way out of this crisis: it will only make it worse.

Second, do QE now to cover the cost of the energy crisis. This crisis is as serious as Covid: QE has to be used. That will take the immediate pressure off interest rates.

Third, accept inflation. And allow inflationary pay rises. They’re not great. They are much better than millions out of work.

Fourth, reform energy policy.

Fifth, there must be tax increases to balance QE. These must come from the wealthiest alone. I have explained such a programme many times before.

Sixth, consider price controls. We already have them on energy and in some regulated sectors. They now need to be used to squeeze price of essentials. At present they tend to be heavily inflationary. That needs to be reversed.

Seventh, reconsider Bank of England independence. It makes no sense when the result is their current plan to crash the economy.

Eighth, seek international support for low-interest rates. They are essential. They will also save most developing countries from crisis. They can’t afford their debts now.

Ninth, increase energy cooperation, worldwide. Sustainability will require it anyway.

Tenth, pray. In this situation we might all need to do so.

Will that work? Possibly. But what can be said with certainty is that this programme will deliver a lot more hope than the current route to Armageddon on which this government is set and which Labour is not opposing.

We cannot afford interest rate hikes. They must not happen. Recession, homelessness and domestic devastation are prices not worth paying for an anti-inflation policy that is itself doomed to failure. This is the biggest issue in economics now.

The trouble is that the Bank of England think they can do what they want right now after the debacles of the last few weeks. Somehow they have to be stopped. I just wish I knew who was going to do it.

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  1. Ignacio

    Meanwhile, Borrell insists that Europe made the mistake of being dependent on cheap oil and gas from Russia and cheap “stuff” from China while dependent on security from the US. Now we need a “geostrategic awakening” aka military spending, plus massive investments in alternative energy in the worst economic context for the EU. The EU is changing, quite possibly irreversibly, in many contradictory ways. Abandoning some of its previous religious stances about free markets, such as company subsidies that now are kosher, because Germany does. Trying to replace fossil fuels while at the same time subsidizing them, wanting countries to be frugal but accepting and piling their debts, trying to fight inflation by inflicting more pain and figuring out if reality will finally bend to their Powerpoint figures. A nightmarish landscape looks our future.

    Whether the UK, Germany etc. are the first domino pieces falling I don’t care. Must one be happy if misery is worse in our neighbour countries?

    1. Polar Socialist

      Other things EU has lately flushed down the drain are freedom of speech, freedom of assembly and the rule of law. It’s almost as if the Russia has become the greatest excuse for destroying the “liberal democracy” instead of being the greatest threat to it.

      1. vao

        When the EU purely and simply confiscated property from the Russian State, Russian corporations and Russian individuals, the basic principle of due process went down the drain as well.

      2. Keith Newman

        @Polar Socialist, 7:18am
        I suddenly realised the obvious a couple of weeks ago. This crisis is the perfect pretext to put an end once and for all to the social programs that Europe has to support the working class and the poor. US levels, the worst in the developed world, are on their way.
        Sad – unless people mobilise to prevent the decline and are able to get the political system to enact strong corrective policies. I don’t know how likely that is.
        Are there any political parties left in Europe that aren’t neo-liberal or co-opted in some way and can do this?

  2. Colonel Smithers

    Thank you, Yves.

    Readers may be interested in and They sum up what people able to avoid the Westminster circus, political and media, are thinking of.

    My EU27 employer has relationships with small and medium-sized firms in the low countries, Germany, France and UK and, well before the action in Ukraine, detected financial stress in that segment and that stress moving up the food / supply chain. Activities further afield, involving commodities, shipping and energy, are also showing signs of stress.

    The NC community should not think that the Labour opposition will be (much of) an improvement. Over the week-end, Labour politicians, pundits and think tank allies were are pains to stress fiscal responsibility and how Labour will accommodate Mr Market. These types even piled on the BBC’s economics correspondent, Andy Verity, when he wrote a Twitter column over the week-end, urging some perspective over the finances (i.e. a currency issuing government is not a household) and advocated MMT.

    1. Karl

      I’d be interested to know how MMT helps us in an inflationary environment such as we now have. More deficits properly targeted would help, but that’s Keynes (fiscal policy), not MMT…?

      1. Mark Dempsey

        MMT notes resource shortages, not fiscal limitations, are typically what cause inflation. The resource shortages limit government action, but MMT doesn’t specify how to fix those shortages.

        One of the founders of MMT, Warren Mosler, says Volcker’s Fed rate rises were not the cure for the OPEC-induced inflation of the ’70s, caused by petroleum shortages because OPEC withheld production. Instead, Mosler says Carter deregulating natural gas was the beginning of the end for that inflation. I’ll add Alaska’s North Slope coming online made a huge difference too.

        Harder-to-get gas (offshore, or fracked, for example) is more expensive to drill and produce, and the petroleum industry is particularly conscious of costs even before it begins to drill. Drilling and production also take time, so even if the price is right, gas production would not immediately handle any shortfall. I’d suggest the delay here cost Carter the presidency.

        So…while the ’70s inflation fix is attributed to Volcker, that was coincidence, not causation. The luck of a large oilfield finally coming online was also a contributor.

        In any case, Reagan’s tax cuts for the rich maxed out deficit spending too and, as MMT predicts, contributed to “Morning in America” (the Reagan recovery…an average business cycle recovery). The problem is that Reagan’s policies favored the rich. For example, he cut the top marginal tax bracket roughly in half, while, between him and his successor, payroll taxes increased eightfold.

        Of course very little of this penetrates the mainstream media reporting, but it’s true, at least IMHO. You might read my blog’s accounts (first, and second) in answering my brother about his conventional inflation theories too.

  3. jackiebass63

    Neoliberalism pushed by UK conservatives put the country where they now are.I find it interesting to watch things unfold on BBC. It is happening at warp speed.

    1. NorfolkSceptic

      Not UK conservatives, but members of the parliamentary Conservative Party and other parties, including the most influential Climate Emergency agency, the BBC, and the Bank of England, who have, very surprisingly :) , woken up, realised what they have been doing for months and months and chosen the mini-budget as the straw that will break the camel’s back.

      Britain is now returning to doing what we have been doing, and expecting a different outcome. HS2, a £100+ billion project, that will lose money to run it, is still being developed, but then, it was inspired by Brussels!

      After six years of hitting a Remainer brick wall, and NET Zero fanaticism, Britain may be on a different path to the EU but it looks like we will end up in the same place.

      1. Colonel Smithers

        Thank you, NS.

        HS2 inspired by Brussels? I live near and often walk by its path in mid-Buckinghamshire and used to work with / in Brussels and am surprised by your assertion.

        I thought corrupt officials and ministers, including the former member for Tatton and resident of No 11, and dodgy contractors and, ahem, entrepreneurs, including the largest landowner around Tatton, were responsible. They are British, although one has a Greek name.

        The disused / defunct Central Railway, London to Sheffield, could have been resurrected and, near Buckingham, a junction with the Varsity line and even the disused bits of the Metropolitan line, could have been built. There would be local support for that, as there is for the Varsity line.

        1. Revenant


          Or the line could have been built up the East Coast Mainland (flat farmland) in a straight line from London to Newcastle and then across to Carlisle and up to Glasgow/Edinburgh. This would have optimised the impact of faster journey times, which is greatest over the longest distance run. Nobody needs to get to Birmingham in 55 minutes when the current train makes it in 1h10 and no extra capacity to Birmingham is required. Bringing Scotland within 2h of London would be a big benefit. The capacity and speed increases are need to the North and to Scotland.

          The trains should be running on conventional track once they reach the north to provide direct services to all major cities whereas my understanding is that HS2 does not even replicate the TGV’s through-running because the trains will be too large for UK conventional line gauge (Colonel, the Grand Central would have been OK here because it was original built to European dynamic loading gauge with a view to running under an Edwardian channel tunnel!).

          For better connectivity, a second phase of cross-lines could have been built, one at Peterborough serving Birmingham-Norwich and one at Leeds serving Liverpool-Hull could have been built (the latter would have been expensive, given the Pennines, but a true grand projet). Getting to Birmingham on two sides of a triangle (London-Peterborough-Birmingham) is a longer distance but, at twice the current speed, would still be faster and would still increase capacity.

          1. Colonel Smithers

            Thank you, Revenant.

            It’s good to highlight the European gauge.

            One of the promoters was the last Duke of Buckingham. His former estates still include stations served by these lines. These could be resurrected.

      2. Revenant

        In what way have “members of the parliamentary Conservative Party and other parties, including the most influential Climate Emergency agency, the BBC, and the Bank of England” woken up to what they have done. The course remains hard to starboard on the HMS Neoliberal, it is just that the captain has now ordered smaller rations and beatings for everyone until morale improves.

        Gilt yields were rising before the mini budget and its announcement did not steepen the trajectory.
        Gilt yields are a choice, not a force of nature. The BoE has chosen to control the yield curve with high yields.

        It could just as easily control the yield curve with low yields. Truss should have fire Bailey and the Treasury should have insisted on yield curve control – had we known about the LDI risks, it could have all been done with the Governor’s eyebrows, as in the past: that’s a nice interest rate hedge you’ve got there, shame if anything happened to it, I trust I will see you at next gilt sale?

        Truss’s budget was political poison, handing out tax cuts to the wealthiest, but the energy scheme was smart (and potentially far less expensive than originally billed, both directly, depending on the gas price curve, and indirectly, depending on the second order effects on corporation tax etc; it is in some sense a little like Kurzarbeit as a stabiliser of the price of energy rather than labour). Now both have gone, tax cuts immediately and energy stabiliser from April. However, the neoliberal deregulatory agenda has survived intact! And the windfall profits of marginal pricing in the electricity market survive untaxed.

        Anybody who sees Jeremy Hunt in charge of anything and thinks that the orthodoxy has woken up is smoking something.

        I think we just saw a Remainer coup a la Berlusconi and Draghi.

        1. Colonel Smithers

          Thank you and well said, Revenant.

          I can’t see how Bailey, a good politician and early backer of Brexit and “Britzerland” (sic), should be able to survive this disaster.

          Bailey was the only academic economist in his intake. He has never really engaged on financial stability issues and ignored recent warnings on such matters, contagion arising from defaults and LDI. He’s like his predecessor Mervyn King in that regard.

          One hopes former Bank of England official Harry and Irrational chime in.

          1. Synoia

            The working class can kiss my a..
            I’ve got the foreman’s job at last…

            Applies to all industries, Including Central Banking

  4. Sausage_Factory

    oh I think the UK was always going to be the canary in the coal mine, its liabilities are endless yet its 85% service sector economy is ripe for collapse, especially now no one has any disposable income to spend on all those services. Added to which it has completely de-skilled itself (unlike say the Germans) More financial trickery will lead to hyper inflation and even higher interest rates, handing it all over to the IMF seems to be the only course open to it. Best let it happen whilst Truss is in office and then dump her and hand the election over to Labour who can deal with it all and be despised for 20 years more austerity.

  5. crantok

    That’s alarming enough for me to write to my MP today.

    Another inflationary pressure?… The ONS estimates that 3.5% of the UK population currently has COVID that has lasted for more than 4 weeks. Of those, nearly half self-report as having had symptoms for more than a year, most prevalent of which is fatigue. I assume that’s a big hole in the workforce:

    Regarding Italy, I spoke to a friend from there on Saturday. The government is rationing energy. The number of hours you are allowed to have the heating on per day depends on your latitude.

  6. Patrick Donnelly

    Pigs at the trough. Kleptocracy is reigning in the UK.

    ‘Getting it now’, short termism, was always a failing with the Tories. Due to the first past the post system, the third major party and Blair-ism, soon the be Starmer-ism, no structural changes are possible until they have reached absolute bottom.

    When those ruled have nothing to lose but their lack of shelter and frequent starvation, the only issue is whom will bear their attacks? Stealing food in small quantities is most telling.

    But lots of hand wringing will take place by the chatterati …

    Economics is designed to bamboozle and facilitate the Bezzles. Economic history is a far more dependable guide as to what is going to happen?

  7. David

    Pozsar is exactly right.
    When I was born, the UK still had rationing, because there was not enough Stuff to go round. The generation born a decade later, and now in control, has never known a situation where there was not enough Stuff, even if there were occasional delays in getting what you ordered from Amazon. Moreover, forty years of ignorant economics have persuaded people that demand creates its own supply, and that, if the demand for Stuff exceeds its supply, then new suppliers will instantly enter the market, and the problem will be resolved.In such a context, higher prices are actually a good thing, because they encourage new entrants to the market: and as we know, there are never any time or cost penalties associated with that. It’s this intellectual failure that seems to me far more worrying than anything else.
    Back to ration-books, then.

    1. Keith Newman

      Enough Stuff…I was wondering to what extent the UK is self-sufficient in energy – North Sea oil and gas, wind power, etc. I looked for the info a couple of weeks ago but didn’t find an obvious source and wasn’t interested enough to spend the considerable time required to figure it out myself from government and other sources.
      Any NC reader know where to look?

      1. digi_owl

        Unlikely when it comes to natgas, as there is a pipeline feeding it from the Norwegian part of the North sea.

    2. Karl

      Rationing is way too egalitarian an approach for the leadership class–everyone gets the same ration, no matter your power, wealth or influence.

      1. HotFlash

        Karl, you just do not understand. Goods will be distributed by *markets*!!! Ie., if you can’t pay you don’t get. It’s just *soooooo* rational! And, of course, self adjusting. IOW, those too poor to buy will die. Scarcity problem solved!

        So, the poor will die, the non-producers will be fine — but only until they run out of food. Too bad I won’t be around to enjoy the schadenfreud.

  8. Stephen

    So the broad, approximate history of Europe over the past three decades seems to be:

    1. We outsourced our industrial economy overseas to achieve labour price arbitrage and outsourced our energy supply overseas so that we could pretend we are going “green”;
    2. We assumed the merry go round would never end so we “leaned” every supply chain and forgot that inventory and excess capacity can actually serve beneficial purposes;
    3. We then decided to follow the US into geo-political conflict with the very countries that we had outsourced to and which are crucial to keep the “just in time” and “lean” show on the road.

    What an awesome strategy.

    Difficult to see that interest rate rises will help in the UK (or US) case, given that the prime issue is lack of supply. There are no good choices when it comes to macro economic policy levers such as interest rates and the currency. Just trade offs to make.

    If interest rates rise then that is not going to stop inflation but will impoverish mortgagees and hurt people who have accumulated assets to fund retirement. Will also kill the private equity boom that depends on cheap money seeking returns and no doubt uncover more leveraged LDI type issues that have been hidden up to now.

    But if the currency falls then that will also feed into the cost of living too via higher prices for any traded essentials such as food, which we are already seeing. It will make exports cheaper, of course.

    Ultimately, the macro economic levers are simply about trading off one set of bad outcomes with another, and likely hurting different groups in the process.

    My suspicion is that ultimately the Bank will back off on interest rate rises. The pain on politically aware groups in society will be too great. The last time this was a “thing” was in the late 80s / early 90s and the Tories lost power for a generation as a consequence. Many people never forgave them for the housing market shock.

    The one silver lining in the UK though is that the collective authorities do control the currency. So they can pull the full range of policy levers for the UK’s needs and currency falls can take some of the adjustment strain; albeit this needs to be done smartly, which is questionable. Countries in the Eurozone lack this luxury though and one suspects that Eurozone macroeconomic policy will follow Germany’s needs which may well not align with southern Europe’s challenges. Of course, Brexit has nothing to do with being in or out of the Eurozone. Hungary is not in it either, which partly explains why Orban can take an independent line in my view, as well as his popularity at home.

    Another point to make I think is that the super low (by historical standards) interest rates have had real effects on decision making, many of which seem to be bad ones. At some point, an adjustment is likely to be needed. A big issue though is when and how fast, given the real pain that unravelling this would cause. Now seems a bad time!

    1. Carolinian

      We then decided to follow the US into geo-political conflict with the very countries that we had outsourced to

      Of course it’s a little different for us since our politicians are willing to fight Russia to the last European. We’ll get ours when they move onto the war with China and consumers find nothing to buy from Walmart or Amazon. Given the supposed power of those last two companies and many others you wonder why they are so blithely willing to allow self destruction in order to appease DC’s mad vanity and corruption. Our senior senator dismisses criticism and says of course SC voters support him on Ukraine even though our local economy is highly tied to Germany. For most of our American politicians actions have no consequences. That must end.

        1. Alfred

          I can’t answer that question, but I can recommend this book about the situation in South Carolina: Guten Tag, Y’all: Globalization and the South Carolina Piedmont, 1950-2000 / Marko Maunula (University of Georgia Press, 2010).

      1. tegnost

        Given the supposed power of those last two companies and many others you wonder why they are so blithely willing to allow self destruction

        Because wages are too high

        1. Carolinian

          Walmart in particular is joined at the hip with China–both for low priced products to fuel their “always low prices” pitch and for a low wage working class that needs those low prices. So it’s hard to see how your statement applies to them. They already outsourced the labor that matters. Domestically–even though the company is the country’s largest employer–their workforce are a small percentage and if wages did increase they would do so for their competitors as well. I’ve always contended here that the Walmart theory of social change is misguided in that if you take away Walmart you’ll just get another Walmart not named Walmart. Walmart is the symptom, not the disease.

          And while Biden impoverishing America might help a “poor people store” we’ve already heard reports of falling profits as Walmart customers to switch to the cheapest available goods in the store. I don’t see how an attack on China helps them at all. Perhaps, per Trump, it would help the poor if factories really did come back but likely that’s not the motive.

          1. digi_owl

            The factories are simply moving to Vietnam and India (from one system of colonizing to another).

          2. NotTimothyGeithner

            The point is it’s China at fault not Joe Biden types and their decades of support for moving factories there.

            I remember back in the 2006 team blue senate primary in Virginia that the Mark Warner flunky was denouncing China. Jim Webb beat that mf into the ground.

    2. Colonel Smithers

      Thank you, Stephen.

      Further to your comment about about interest rates, which some Bank and Treasury officials reckon could get to 7% next year, I always though that the first rise was not justified by the data and seemed like a gateway drug, especially as the Bank can’t influence what is causing the inflation and is merely trying to attract hot money, like Icelandic banks and their fanciful rates of interest on deposits in 2008.

      One thing that may temper the Bank and Treasury fanaticism is the risk of bank collapses and contagion overseas. 2008 will seem like a nothing burger. Just in case anyone claims that banks are on a sounder footing than 2008, I was involved with what became known as Basel III and say that Basel III was better than nothing, but this was a missed opportunity.*

      I wrote my masters dissertation on central bank independence (CBI) in 1995 and opposed the concept and still do, as much for political as economic reasons. I have not seen anything to change my mind since. If anything, my opposition to CBI has strengthened. Institutional capture by financial interests and, to use Yves’ phrase, “elite technocrats, has helped bring us to today. Plus the left’s unwillingness and inability to grasp economics (political economy), e.g. getting economists from the trade union or socialist movement on monetary policy committees.

      *What would I do if I was Colonel Smithers in real life, other than order some brandy on this fine autumn day in the City? Break up banks. Limit balance sheets to, say, USD100bn**. Prevent deposit taking banks from gambling in capital markets, i.e. the return of Glass-Steagall. Stiffen liquidity and leverage ratios, say 5% for the latter. **Why USD100bn? I sat with analysts and fund managers from Schroders in 2011 and concluded that banks with balance sheets above that figure did not show better returns on equity and had worse conduct risk records.

    3. Mikel

      Considering the outsourcing, I’m curious to see how price controls are supposed to work with certain goods.

      And globally, there has been consolidation in many industries.

  9. dftbs

    Yes. Hit the wall, hit the iceberg. The UK elites will sneak off to their USD life rafts and leave the “wankers” on the Titanic. They’ll buy Gilts on sell-offs, wait for Boe to jump on the bid and then turn the proceeds to dollars. Of course one day the Fed will be forced to do the same, hike and buy!

  10. orlbucfan

    If private equity gets killed off, that would be a good thing. I am still shaking my head over Brexit and the U.K. I and mine are prepared for the worse, and have been doing so for 40+ years.

  11. Olivier

    I am irritated that Pozsar claims what the world needs to maintain order is a ruthless hegemon when the only credible candidate seems only interested in smashing the so-called international order, most notably with its brazen theft of Russian state property. You cannot be both an arsonist and a fireman.

    The US was arguably never a benevolent hegemon interested in ensuring good outcomes for all but now even the pretense of that has gone out the window.

    1. Dftbs

      He works for a big bank, he’s an analyst and has to couch his analysis in terms that are palatable to his employer; it doesn’t matter if he believes the moral characterization required for publishing it, what matters is the viability and usefulness of his work. We have to extract the pure metal from the ore.

      1. Ben

        If you were paid per call-out then being a arsonist and a fireman would be essential for your pay-packet.

    2. Karl

      The US was arguably never a benevolent hegemon….

      I think it was arguably striving for benevolence (as opposed to national advantage) before neocons started infecting the DC establishment around 1990 (Wolfowitz et al and later Madeline Albright, Jesse Helms and Joe Biden, then GWB) and the collapse of the USSR….Remember, with the “End of History” who needs benevolence?

      It will take another younger generation to bring back the better angels of our nature.

      1. Michaelmas

        Karl: I think it was arguably striving for benevolence (as opposed to national advantage) … 1990

        A perusal of the CV of James Jesus Angleton — whose main career achievement at CIA seems to have occurred in WWII’s wake, when he labored hard and long to save the most odious Nazis and Fascists he could find, gave them new lives, and then purposely installed them in anti-communist programs like Operation Gladio throughout Europe — does not support that interpretation.

        Nor does the CV of Allan Dulles, Angleton’s erstwhile superior, who did notable work fomenting brutal coups in Iran and Guatamala in the 1950s, and directing covert ops by CIA in French IndoChina following Dien Bien Phu, in 1954.

        Psychopaths and malign narcissists always have the highest, most shining accounts of themselves. So it is with the United States and its ‘shining city on a hill’ bilge.

      2. Tom Pfotzer

        It’s important to distinguish between the sociopaths and the reg’lr Americans.

        Keep in mind that almost nobody in the public had any idea what was going on overseas until the last few decades.

        Even during the Korean, Viet Nam war, most of the machinations were invisible. There were no controls, no discussion, all opaque.

        Even in the early 80’s nobody knew anything about Iran @ 1953 Mossadegh, for example. I heard about it in college thru some bootleg book that was passed around among political types. I was scared to read the book; I did, but I didn’t talk about what I’d read. First tremor in the Force.

        My goodness we were sooooo hood-winked. It’s truly embarrassing to recall.

        We still are buffaloed and lied to, of course, but we’re way ahead of where we were last century.

  12. Tom Pfotzer

    The objective of outsourcing and automation is to remove (local) labor from the production equation. That has been largely accomplished.

    That means local labor can’t afford to buy unless their income is supplemented with … household debt, or public debt. That’s credit-card and home-equity loans at the household level, and “fiscal stimulus” and “QE” (expand money supply) at the public level. That can-kicking mechanism appears to be finally dying.

    Why can’t more QE and debt be used to supplement household income?

    Because inflation is now absolutely visible, painful, and growing. Central banks fight inflation by raising interest rates and money-supply reduction (.vs. expansion via QE). Tightening compounds household distress because the effect is to raise rents, and mortgage payments. So there’s now big pain involved: easing causes more inflation, and tightening also causes more inflation. Central Banks have no good options at this time.

    And we are now at war with China and Russia. China provided cheap goods, which _was_ one of the main reasons that inflation didn’t go ballistic earlier.

    Russia used to provide energy and raw materials. We’ve sanctioned Russia and indirectly OPEC, and now energy and materials prices are in a long-term rising trend. Manufacturing, food, transport – key real economy processes here in the West – are being choked off, which is further reducing supply. More inflation.

    We’re now poking China in the eye (again). The container traffic between China and U.S. is already abating, and is likely to continue to fall as more sanctions are applied to China. Less incoming cheap goods means … more inflation.

    Each of these self-inflicted, gaping, bleeding wounds are occurring for the same reason: The West’s oligarchs and their spear-head the NeoCons are desperately trying to maintain their position at the top of the world’s _political_ economy. “Political” means “who gets what”.

    This is all about “who gets what”.

    Nearly all of us are not one of the “who”.

    The little people’s interest is to become one of the “who”. A “who” is a person that owns and operates wealth-building production assets. That’s a “who”.

    It’s time we little people started taking action to create, operate, and _own_ wealth-building productive assets.

    That is definitively _not_ an appeal for expropriation, just to head off the first-tier objections.

    It’s about _creation_, operation and ownership of wealth-producing assets by and for the “little people”.

    Then we can have a viable economy again.

    1. Tom Pfotzer

      To get some authoritative support for some of the assertions I made above, may I recommend this 9-minute video.

      The video features Dr. Michael Hudson as he contrasts China’s capitalism (money creation and allocation) with the U.S.’ current form of capitalism.

      Dr. Hudson points out that China succeeds because of who is allocating the money, and what it’s allocated to.

      In the U.S. banks create (floods of) money, and allocate it to rich people who buy stocks and bonds and real estate. Those are financial assets, not productive assets. The 1% are the primary beneficiaries of new money creation.

      In China, the government creates money and allocates it to the creation of wealth-building assets, like infrastructure, factories, education, and housing. The 99% are the primary beneficiaries of the money creation.

      U.K. does the same thing the U.S. does, and since it’s smaller and has much less ability to extract wealth from an empire, it is much further down into the economic death-spiral.

      Note that Dr. Hudson asserts that China is very much a capitalist society. They are implementing capitalism the way it used to get done here in the U.S.

      Before Wall Street / the City of London took over the West’s economy, and ran it into the ground.

      It’s all about allocation: who gets what, and why.

    2. digi_owl

      Consumer credit, the gearbox of modern life. Only problem is that it is easy to upshift, but downright impossible to downshift.

      1. Anthony G Stegman

        Yes, the Porsche lifestyle on the Honda income. The American (and perhaps UK) way of life!!!

  13. ChrisFromGA

    It appears that Truss has completely climbed down from her disastrous mini-budget. Which has calmed the bond market, at least for the moment.

    I think that the larger significance of this is being lost by markets, as usual. If the bond “vigilantes” are truly back, then not just the UK but also the US is going to have a very rude awakening here shortly. Every crisis over the past 30 years has been met with fiscal profligacy, tax cuts, giveaways and bailouts. If governments are no longer able to go to their tried and true playbook, then real economic suffering will be the result.

    Truss may be a light weight but I don’t think she is crazy. Without the giveaways, the real UK economy will suffer more from high energy costs, which appear to be no longer subsidized to the extent she wished.
    And Hunt has hinted at more severe cuts to come.

    This smells like austerity to save the bond markets. Just wait until it comes to the US, which it will!

    1. Revenant

      There are no bond vigilantes. There are only bond paramilitaries – actors with plausible deniability for the disaster capitalists.

      What will happen in the UK:
      – rich old people will start making bank on interest income
      – house prices will fall but rents will not (because of increase interest bills for landlords and short housing supply)
      – rich old people will buy cheap houses for cash
      – big business will be awarded contracts for state services “because savings”
      – no savings will accrue
      – the working class will be immiserated

      The UK did not have a post-GFC foreclosure crisis but it is about to get one now….

      1. ChrisFromGA

        I don’t live there and cannot comment intelligently on the differences between the UK and the US. I was under the impression that the UK practices a slightly less “wild west” form of predatory capitalism than the US, but I could be wrong.

        Vigilantes, paramilitaries, whatever you want to call them, I think it is worth some more thinking on why the UK, and why now? Moar neoliberal policies are not the answer. Seems like the UK is on a path similar to Greece … forced austerity by external forces.

        1. Revenant

          Remainer coup. Truss fured chief secretary to Treasury, injected demand from HMT; BoE sees its independence and right to cause a recession threatened, BoE chose to let go go of the yield curve. Now it is back control and so is the government. Doing god’s work. Austerity for you but not for me….

  14. The Rev Kev

    I think that the only way that the UK can get through this is to clean house in their politicians. I have railed about Liz Truss as she was a terrible choice as Foreign Minister and a worse one as Prime Minister. And yet she was chosen leading to the present chaos. And to a large measure, she was chosen by Boris Johnson who should never have been chosen either. And you look at the leadership of the Tories and Labour and they are equally as bad. It is going to require a chaotic period before some better candidates are allowed to rise. I don’t expect another Churchill but a moderately competent one would be nice at the moment.

    1. Pokhara

      I would say that only the Tories have shown any political imagination or flexibility in response to conditions since 2016. Their reaction to Brexit – the Johnson regime – was something new in British politics. It was a kind of English Trumpism, which for a while looked set to develop into a fair imitation of the Orban model. In other words: a very carefully tuned mix of neoliberalism with ethno-nationalism, culture war and, crucially, handouts to the electoral base (not just to donors and friends), including working-class Leave voters. That was something new. Thatcher did English nationalism, authoritarianism, and culture war. But talking about ‘levelling up’ the deindustrialised regions of England… Did this talk really mean that the cultural benefits enjoyed by the Leave-voting base (the ‘war on woke’, shipping immigrants to Rwanda, etc) would be matched by some real material benefits, however limited? We will never know. Truss and her people are still hypnotised by Trump – hence the tax cuts – but they lack any ability to connect with the masses. They are basically a bunch of nerds incubated by think tanks. Johnson had an uncanny feel for what the Sex Pistols, long ago, called ‘England’s dreaming’ – which, if matched with Orban-style handouts to the base, could have proved very powerful politically.

    2. Rcohn

      The only way to solve the crisis is to stop pretending that it is pre WW1 when the pound was supreme and England ruled the waves . England needs to slash its defense budget and England should cut all aid ( gifts) to Ukraine . Why should England have to borrow monies to fund Ukraine , when many of its own people are struggling . Together with cutting ALL aid to Ukraibe , England needs to renounce all sanctions , which have only served to raise prices .
      Next England needs to eliminate its financial derivative
      Industry , which creates products which only exacerbate financial moves .
      Those who advocate QE are both ignorant of financial history and blind to the consequences of embedding higher inflation into government policy

      1. Pokhara

        Agree that Truss, Kwarteng and their people really seemed to think that they could do Trump-style tax cuts, plus a colossal payout to the energy firms, without any blowback. They really didn’t seem to understand that, without the ‘exorbitant privilege’ of controlling the global reserve currency, things can get out of hand very quickly, especially given the booby traps hidden in the pension funds.

        I assume that this was a result of their people — I mean the coterie of young special advisers who act as their filter on reality — being particularly pure products of right-wing libertarian think tanks, which are tightly bound into a transatlantic network. They are hypnotised by Trump, and they have swallowed so much dark money in their young lives that they evidently saw no problem with a simple cut-and-paste of the Tax Cuts and Jobs Act.

  15. JBird4049

    This crisis has the capacity to make the energy price crisis look like small beer. People will be unable to pay, in their millions. That spills over into a homelessness crisis if they evicted, and into a house price crisis as they sell under pressure.

    I have to ask; I get that increasing interest rates will force landlords to raise rents, but if they start mass evictions to do so, just who will replace the renters now living on the streets? Space Elves or Ukrainians?

  16. YuShan

    6-7% mortgage rates are perfectly normal, historically. Interest rates below inflation are completely moronic. They are the cause of the shit we are in now.

    For some reason, these articles always ignore that there are two sides to debt: Somebody’s mortgage is somebody else’s savings/pension. Why is it acceptable to wipe out the savings of a prudent renter to keep somebody else in his overpriced house that he can’t afford at positive real interest rates?

    And what is the drama with negative equity on a home? Renters ALWAYS have negative equity (of sorts). They continuously lose money on their home, year in year out. Shelter costs money. Why do they think the sky falling down when people have to pay more for their mortgage? Renters pay more for their rent every single year.

    Some people who have taken on unaffordable mortgages that they cannot afford at normal rates will lose their house. Of course that is very sad. Welcome to the world of renters, who are used to 10% annual rent increases and get kicked out too if they cannot afford it. But nobody ever sees THAT as a problem.

    1. JBird4049

      >>>Some people who have taken on unaffordable mortgages that they cannot afford at normal rates will lose their house. Of course that is very sad. Welcome to the world of renters, who are used to 10% annual rent increases and get kicked out too if they cannot afford it. But nobody ever sees THAT as a problem.

      People need a place to live and use their best guess as to how to get that place. The mortgage or the rent will be at X and they will be making Y at certain times and places and one will have to do Z to meet the need; the problem is that most people are having an ever increasing difficulty in doing this, so that, no matter how prudent they are that homelessness is a likely, if not probable, event; further, they are deliberately being herded into this by the wealthy and connected as one would sheep to an abattoir for the herders’ benefit.

      It is increasingly victim blaming to punish those people facing homelessness when they are being victimized, robbed really by those people who are wealthier, and therefore more powerful, and use this power to rob and immiserate others.

      But again, once all the renters have been evicted because the rent is too damn high, just to whom will the landlords rent to? Space Elves? Or will they use the police to evict all the squatters once winter comes? If there are empty buildings everywhere will people continue to obey the law and will the law continue to be enforced anyways? If a law is not followed, is it even a law? (Yes, I know that some of the then even more rich asses will buy the empties, but that still doesn’t answer the question of replacement renters. Or evictions)

      1. caucus99percenter

        > But again, once all the renters have been evicted because the rent is too damn high, just to whom will the landlords rent to?

        Short-term visitors, mediated via AirBnB?

    2. Anthony G Stegman

      I’ve often thought it is foolish to see a domicile as an investment that should provide a positive return. This is a large part of the problem. A house should be seen primarily as shelter. It should not provide opportunities for speculation, for “flipping”, for tax avoidance, for borrowing against, and so forth. All of these bad behaviors can destabilize economies and so ought to be discouraged, if not banned outright.

      1. Tom Pfotzer

        Anthony: here’s some rebuttal to consider.

        I see the household as a potentially highly productive asset. A platform to conduct all manner of wealth-creating, persona-expanding activity.

        Why is it that the office or the factory is our only arena for wealth-producing actions? Why not the household?

        I say “wealth” is knowledge, skills, tools, facilities (e.g. workshop) and materials. Lumber, oil paints, sewing machine, pizza oven, CAD/CAM design workstation. Stuff you might find in a highly creative person’s house.

        Why spend all that money – houses cost you a great deal of your life’s energy – why spend all that and just get a closet, a TV, a bed and a kitchen out of it? A place to crash after you get home from your enervating job?

        So I say “speculate away! Invest in yourself. Equip your house with all manner of inspirational artwork, with tools and things to do that fire your imagination, and grow your skills and competency”.

        And after you transform that house into a wonderful place to live, if you’re ready to make your move, well, sell it for the profit you deserve, and get a new canvas upon which to create something even more wonderful.

        Someone might say “but that’s not what people actually do, Tom”.

        And they’d be right. Mostly.

  17. Anthony G Stegman

    What about people on fixed incomes. It’s easy to say that high inflation is better than recession when one has income that can grow with inflation. Many seniors rely on savings and perhaps a small pension. Neither rises with inflation; most certainly not near enough to offset high inflation. There will always be winners and losers. It’s important to have a robust safety net in order to protect the losers from the very worst outcomes. A piecemeal approach in the UK (or the US) will not be effective. Everything needs to be considered – reasonable returns on savings, a truly fair tax regimen that drives desired behaviors and outcomes, a strong safety net, a dismantling of the financialization of economies, and so on.

    1. Yves Smith Post author

      Society should not rely on capital markets to fund retirement. They can’t produce the needed level of income without becoming predatory and destroying productive industry (see private equity).

      1. Tom Pfotzer

        What should people rely upon to fund retirement, Yves?

        No snark. What you’re saying is so in-your-face not-what-I’ve-learned, I had to ask.

        1. Rcohn

          The simple answer is twofold
          1.contributions were not sufficient
          2. Long term interest rates were too low because of stupid government policies
          Because of interest rate policies returns on these contributions

  18. everydayjoe

    UK is still trying to punch above it’s weight thinking it is a colonial power! Asian and African immigrants keep UK’s health system running for instance. I was surprised how the Queen’s death got so much air time across India and the US and especially the US. Countries that rely on rentier capitalism ( Singapore UK and even US) will not thrive in a high yield environment.

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