Conor here: Richard Murphy examines central bankers eager to do their part in helping to speed up the breakdown.
By Richard Murphy, Emeritus Professor of Accounting Practice at Sheffield University Management School and a director of Tax Research LLP. Originally published at Funding the Future.
In an article published yesterday in the Financial Times, Megan Greene, an external member of the Bank of England‘s Monetary Policy Committee, argued that the UK may need higher interest rates if the war in the Middle East continues and energy prices rise as a consequence.
Her concern is that rising energy prices might trigger what economists call “second-round inflationary effects”. In other words, workers might seek higher wages to offset rising living costs, and companies might raise prices to protect their profit margins. That combination, she suggests, could create sustained inflation that would require monetary policy intervention from the Bank of England. In other words, she thinks they might need to raise interest rates.
I think she is wrong, and dangerously so.
The first point to note is that an increase in oil or gas prices is not necessarily inflation in the conventional sense. It creates a relative price change and a resulting economic shock as people and markets adjust to energy becoming more expensive. That adjustment will undoubtedly make many people poorer because they will have to spend more on energy in future and have less left over for other things, demand for which might well fall as a result, with potential impact on their prices.
But that is not the same thing as a generalised inflationary process generated by excess demand. In that case, what Greene is really arguing is that the Bank of England should deliberately ensure that people cannot protect themselves from this process of adjustment that might result in a loss of income. Her logic is that if workers secure higher wages to offset rising energy costs and businesses can pass both those labour and higher energy costs on, the initial shock might spread through the economy. So she says, interest rates should rise, economic activity should slow, unemployment should increase, and bargaining power should be weakened, even though there is no actual increase in demand in the economy as a result of what is happening, and the reverse might well be true.
The question is whether it makes any sense.
Who Is Responsible?
The first problem with Greene’s argument is that it treats the victims of an energy shock as if they are somehow responsible for it.
If a war in the Middle East disrupts energy supplies, British workers did not cause that problem.
Nor did British pensioners.
Nor did British households struggling to pay their mortgages.
Yet the response Greene proposes suggests that these groups should bear the burden of this price adjustment over which they have no control and for which they have no responsibility. That represents a very peculiar concept of economic justice.
The alternative would be to recognise that energy price shocks are distributional events. Someone must undoubtedly bear the cost, but the real question is who might that be?
If energy companies increase profits, as may well happen, or if commodity traders benefit, or if financial markets exploit volatility, as they almost invariably do, then there is a strong case for intervention to limit those gains, or to tax them.
Likewise, there is a strong case for supporting households whose real incomes are damaged by events entirely beyond their control.
What there is not a strong case for is deliberately engineering an economic crisis by raising interest rates with the intention of suppressing wages as a consequence of increasing the unemployment rate in the economy, which is what Greene is proposing.
The Evidence From Recent Years
The second problem is that recent experience hardly supports Greene’s confidence in monetary policy.
The Bank of England raised interest rates aggressively from late 2021 in response to inflation created by temporary supply shocks caused by Covid and inflation driven by commodity traders after the commencement of the war in Ukraine.
Mortgage costs rose sharply.
Business investment weakened.
Economic growth stalled.
And yet much of the inflation that followed Russia’s invasion of Ukraine was always going to disappear once energy prices stabilised, as I predicted at the time, and that is exactly what happened.
Higher interest rates did not create more gas.
They did not create more oil.
They did not reopen supply chains.
They did not end Putin’s war, any more than they will end Trump’s now.
What they did do was transfer very large sums of money to those wealthy enough to own financial assets while increasing the financial stress experienced by millions of households. That was a policy choice, and it is not at all obvious why repeating it now would produce a better outcome this time.
The Real Concern
What, however, I find most revealing in Greene’s argument is her suggestion that inflation expectations may now be more sensitive because inflation has remained above target for much of the past six years.
There is a curious circularity in this claim. As we know, the Bank of England has repeatedly failed to hit its inflation target, very largely, I would suggest, because it has repeatedly misdiagnosed the causes of inflation. It has repeatedly insisted that inflation would prove temporary, and so reacted too late, only to then subsequently tighten policy aggressively, with hardship being the only net outcome, but with the inflation always passing of its own accord, as history proves it always does
Now, however, it is claimed that because inflation expectations may have become less stable, interest rates should perhaps rise again. In other words, the solution to the consequences of previous policy failures is more of the same policy.
Please excuse me if I am not convinced by that argument.
If the current conflict pushes up energy prices, the sensible response is to identify precisely where the inflationary pressures are arising and to address them directly.
That may mean we need windfall taxes.
It may mean we need price controls, or even rationing, in some markets.
It may mean that income support for vulnerable households might be necessary.
It might even mean that increased public investment is required to accelerate the transition away from dependence on fossil fuels.
All of those options address the source of the problem. Higher interest rates do not. They simply redistribute pain.
What Greene’s article actually reveals, then, is that much of modern central banking remains trapped in a framework that treats unemployment and weakened bargaining power as acceptable tools for controlling inflation. Its solution to any problem is to pass the buck to those least able to manage it, with the least blame for it, and the lowest capacity to handle the consequences.
That is the consequence of the power assumption implicit in orthodox economics, with its inherent biases to those already well off. Call it a bias towards the survival of the fattest when measured by wealth, if you like.
This orthodoxy does, however, have a remarkably poor record when confronted by supply shocks, energy crises and geopolitical instability.
The lesson of recent years is not that interest rates should rise more quickly. It is, instead, that central banks should be much more cautious about assuming they can solve every problem by making most people in a country poorer as a result of their policy decisions, because that is what higher interest rates are deliberately intended to do.
The simple fact is that if another energy shock is coming, making millions of people poorer is not a solution. It will simply add a second crisis to the first and compound the shock the economy will suffer.
Megan Greene is not offering a solution to our problems. Her goal, and that of the Bank and the ideology she serves, is to make everything very much worse once a crisis has begun by imposing additional and unnecessary poverty by imposing interest rate rises, and that is why, right now, reining in or even abolishing the supposedly independent powers of the Bank of England is one of the most important things the government can do. The people of this country really cannot afford Megan Greene and her deeply misguided ideology.
Hear, hear!
One of the reasons the stock market highs is the phenomenal earnings of publicly traded companies. The source of the earnings is the pricing power of these companies discovered during the Covid supply shock. The only thing that will work is if the common people break their addiction to the garbage being sold by these companies. Just don’t buy shit that you don’t need.
This solution is much too parochial. The stock market is high because the wealthy have too much money, often borrowed, and have to put it somewhere safe. The cause of ‘too much money’ is ultimately the lack of appropriate taxation. Tax the rich of their incomes, their financial rent, and their inheritance. And if the result is they have no longer incentive to work, that is a bonus!
“Higher interest rates…What they did do was transfer very large sums of money to those wealthy enough to own financial assets while increasing the financial stress experienced by millions of households. That was a policy choice, and it is not at all obvious why repeating it now would produce a better outcome this time.”
As if interest rate cuts are not going to be plowed into the same asset bubbles, speculation, or serving other debt payments…
Heads I win, tails you lose for the 1%. It’s almost as if rate policy can’t really do anything when there’s floating exchange rates.
When all you have are hammers, everything looks like a nail.
Monetary policy is the wrong tool for supply shocks.
But these people are ideologues who will continue with their ridiculous ritual cargo cult behaviour regardless of all the empirical evidence.
They’re worse than useless — they’re dangerous.
In the US 10% of the population is responsible for 50% of the total spending. If the objective is to curb inflation by suppressing demand, then targeting the spending of this cohort would seem to me to be an effective strategy. Much easier for the orthodox economist to get out the hammer and nail the other 90% of the population. After all, all of our institutional arrangements are built for precisely this purpose. No reason to ever forget Keynes, but every reason to continue to forget Kalecki.
I realised this recently, there’s a simple reason why productivity hasn’t tracked wages and incomes have declined a great deal relative to inflation from the 1970’s at least in the UK.
Its lack of Unions and collective worker power. The capitalists and the bankers and the governments with their neo-liberal religion won. They successfully destroyed all the Unions(even the few that survived did not adequately fight for workers). And they atomised the population so they don’t even understand the potential power they could have and with the added addition of the social media sedative, people cannot be bothered to fight.
Strategies like this, we must suppress workers wages at all costs for fear of the wage price spiral, will just cause an economic spiral in which the country can never get out of. The wage price spiral is a myth, but it’s a convenient myth and excuse for the rich.
“It’s a feature, not a bug.” “Follow the money.” “Never let a crisis go to waste.” We know the slogans. When somebody rich and powerful says something dumb, do not assume they are dumb. It’s probably just more propaganda providing cover for imperial exploitation. Now pretending to take them seriously so as to skewer their logic can be effective, but follow the comedians, and give us a knowing wink here and there. Otherwise you may get sucked into the propaganda machine.
As a tangential note to this, I surmise that the underlying impetus to the Central Banks’ actions is their adherence to the Myth of Technocracy. If only the “smart” and “educated” can adequately run the society for the “Rest of Us,” then we end up in the clutches of a very pathological set of “Philosopher Kings.” Unfortunately for the “True Believers,” the ‘system’ is made up of flawed Terran human beings. Mass movements and mob psychology skew the basic inputs of “the System” in definite directions. The ‘Elite Religion Du Jour’ today is Neo-liberalism. All else follows.
Considering the above, the “solution” to the problem is the tried and true Post Revolution strategy; take over and use the education system to advance one’s ideology. Thinking here must be generational. No Quarterly Reports afficionados need apply. The relevant example here is the slow but methodical takeover of the Texas School Book System by the Evangelical Right. The long term result of that movement is the ever creeping slide of the State of Texas into a New Dark Ages.
The old Unions played a sophisticated game against the Oligarchs of their day. The Unions developed a parallel governing system to fill in all the gaps the formal governing system ignored. Make no mistake about it, the present day rush to deconstruct the remnants of the American New Deal has specific and socially destructive goals. A poor, sick, uneducated and sedated, both physically and intellectually, public is easy to manipulate. Said manipulation is aimed at the promotion of the private and selfish goals of the Oligarchs and their Elite enablers. To accomplish those goals, the general public must suffer. Nothing less will do.
One of the key mistakes of the American Unions was that they tried to ‘fit in to’ the extant socio-political system. Then they were easy to co-opt. Instead, they should have rejected the “status quo” and fought to replace that “status quo” with their basic alternate vision of social relations. True Unions are always revolutionary. The neutered and co-opted Unions are merely appendages to the Status Quo. There is a vast difference and importance in that split.
When you spend much time around the Elites, at least in America, one comes away with a strong impression that one of their core characteristics is sadism. Not just depraved indifference, but an actual gut level enjoyment of feeling responsible for the infliction of pain on others. Otherwise, how can anyone feel “special” if almost everyone is happy and content? How does one gauge the graduations of the social hierarchy? Therein lies the importance of education. Roughly, if one tries to educate the young to become well rounded persons, a harmonious society should result. (I say ‘should’ here because I see no evidence of any society trying to enact such a program at scale in recent Terran human history.) If, as is the case today, one “educates” the young to fit into a society that values cogs and spread sheets, one ends up with an Enabler Class comprised of hack economists.
I will mention that those “Progressive” economists that gain popular notice and notoriety do so because they are not ‘cookie cutter’ “output” of the Satanic Degree Mills. Those more enlightened sages discovered that effective Economics requires much more than a simple grasp of limited “rules and theories.” A Society is the sum of its parts. Considering that the human “parts” of a society run into the hundreds of millions, then the level of complexity thus encountered requires more art than science to understand and guide. The ‘enlightened’ economists seek out a deep grounding in the Humanities alongside their studies in ‘proper’ economics. That breadth of learning imbues their thinking and writing with a deeper understanding and wider scope than basic “hack” economics. Their lesson for us all is that “the Economy” is not a sterile and detached machine, but a living nexus of forces and effects.
Just as I have said elsewhere that Politics is not just a “business” but an art, so too is Economics not a profession, but a calling.
Stay safe.
Nicely put. I noticed your reference to Unions. I don’t know how the trade union movement gained ascendance over the worker internationalists like the IWW, but they end up acting too locally and gain advantage without considering a broader labor movement. The worst of this is when these unions create pension funds that invest in some of the most exploitative capitalist concerns. Thus, they can literally cheer on management in some other workers’ struggle.
I am thinking aloud here, never a good sign, but here we are. I date the “co-option” of the Trades Unions to the infiltration of, especially in the US, those organizations by the elements of Organized Crime. Seeing the wealth of information now available concerning the mutual integration of the Intelligence Agencies with the Organized Crime Organizations after WW-2, the take over of many Union Locals by mobsters can be seen as part of a wider pro-Oligarchy policy on the part of the State. The Mobs take the place of the National Guards and the Pinkertons in the suppression of the more “active” Unions.
To me, the turning point for the Union movement in America, and probably in England too, was its abandonment of “kinetic” actions in favour of “political organizing.” At that point, the Unions had acceded to the demand of the Oligarchs that the Unions “play by the rules.” The fact that the Oligarchs and their minions made those rules seems never to have become a factor. It was the essential point.
This is probably why “wildcat strikes” are so heavily demonized by the “Union as part of the Status Quo.” Wildcat strikes show that many times, going outside of the box is the only way to get one’s demands met. They show up the Official Union as an appendage to the Status Quo.
Until the Unions commit to going toe to toe with the Oligarchs “in the streets,” nothing significant will change. The Capitalist class has shown time and again that it is not averse to spilling blood in the furtherance of its aims. Time for the Unions to meet that challenge and return blood for blood.
When Unions turn to coercion in the furtherance of their goals, it is called “Terrorism.” When the Oligarchs do so, it is called “Good Business Practice.” Time to level the playing field. If at first we need to burn the field off to eliminate the ‘deadwood,’ so be it. Ash, like blood, is an excellent manure.
Stay safe.
If inflation is a result of “excessive demand,” is it also a result of diminished supply of goods, as in the reduction of the availability of petrol, and other petroleum products? What is it when the diminished value of wages confronts the diminished supply of goods, and when both are faced with higher interest rates? Higher interest rates benefit but one class: those who require benefits the least. The bad joke is that low interest rates benefit the same class by enabling greater financial speculation and manipulation on the cheap.
So long as banking is a private enterprise rather than, say, a public utility the upper classes will be beneficiaries.
Michael Hudson is quite clear that raising interest rates to control inflation is a move by the rich to protect their assets and their purchasing power. In all else, higher interest rates only can increase inflation. Russia’s Central Bank has ostensibly tried to control inflation with interest rate increases and it has not worked. I doubt that there is any instance when such policy works, if by ‘works’ one means benefiting the people as a whole rather than investors.
If this was supposed to be satire, it completely went over my head.
What is the original purpose of interest? ( Not interest rate control)
Pull in (or push out) dollars to control the money supply during the gold standard. It’s a relic we keep around b/c it’s 1) collateral for banks, and 2) income for bank balance sheets.