It is now official. Next year is going to be miserable. At least in so far as economic wellbeing is concerned. The Bank of England has told us that it expects the cost of living to go up by 13% a year, it has put up the key interest rate that triggers mortgage payments to rise and told us there is more to come. More importantly it has told us that it intends to take £80bn out of the economy in a single year by reverse quantitative easing.
Which effectively means quantitative toughening. Quantitative misery. Quantitative recession.
Quantitative toughening
For those who don’t understand why quantitative toughening is so critically important, which is the vast majority of the general public, what will happen is that the central bank will deliberately destroy a lot of money.
To do this, it will sell debts to banks at rates of interest that are high enough to attract them to buy. Once it has pulled that cash out of the banks it will simply remove it from the economy.
In other words, the Bank of England is planning to remove around a thousand pounds for every person in Britain over the course of the next year, at the same time as it is going to put up the cost of living for anyone with a loan or mortgage (or who rents from someone with a mortgage).
It thinks that this is a hard but unavoidable means of driving out inflation and that there is no other way of stopping prices from rising than to make people and businesses poorer. So living standards fall, ordinary working people get real terms pay cuts, strikes increase in frequency, young people struggle to meet their mortgage, and everything is blamed on fuel price rises, the war in Ukraine and the recovery from Covid.
Trickle-up economics
Liz Truss is busy promising something equally stupid. She intends to cut taxes by £30bn in the naïve belief that if you reward the rich then the economy will grow and everyone will be better off. What actually happens when you reward the rich is that many of them squirrel it away in an offshore bank account and a dangerous minority use some of the gains to fund political campaigns for even more tax cuts and even lighter regulations on offshore banking.
It is virtually certain that if she delivers on her promises then interest rates will rise even higher than the Bank of England currently plans, and even more people will have to hand the keys to their first home back to the mortgage company when they fail to make the payments.
It is a sad reflection of the state of modern economics that the British economy looks likely to be managed by two sets of theorists working in different directions with neither of them demonstrating the least understanding of how to really fight inflation. We are about to experience massive economic pain and a dangerous experiment with trickle up economics. The richest and most powerful are being promised tax cuts. The rest of us are to experience levels of austerity that haven’t been witnessed for 50 years.
Tackle inflation by reducing demand for oil and gas
The good news is that there is an alternative. There are some relatively simple things that can be done to cut inflation that cause a lot less harm and indeed actually do some good. The first and most obvious of those things is to identify the areas of the economy where prices are rising and to take steps to cut the consumption of the products and services which are causing the problem.
Put simply, if there is a problem with the price of oil and gas rising rapidly, then any responsible government should start by trying to cut demand for it. That starts with lowering the temperature of public buildings and reducing private car transport by encouraging a lot more of the home working many of us learned how to do during Covid.
It picks up momentum by subsidising insulation of homes and providing better incentives to switch to using power at off peak times and to install more home and office battery units. It broadens out into policies that focus on every opportunity to cut energy consumption or increase pollution-free local energy production such as solar panels on every school roof or better incentives to use public transport.
Economic growth must be supported by cutting demand for energy
Some of that money the Bank of England is about to destroy could be used to re-engineer the economy to reduce the use and thus the cost of energy instead of to punish us.
At the moment we are hearing a lot from both the government and the opposition about growth being the solution to this cost-of-living crisis. It actually might make it a whole lot worse. If energy costs are rising, then the single daftest thing you can do is to increase demand for energy.
Any growth in the economy can only come if it can be accompanied by reduced consumption of energy and of raw materials. It needs to be the product of better technology, improved productivity and a more sustainable economy. Increasing demand for fossil fuels or of labour simply drives up inflation if there is a shortage of supply.
Truss fails to understand economic reality
Truss has demonstrated a dangerously thin grasp of this reality. She appears to think that the only way to impact on the high price is to spend money on increased production. She has talked about bringing back fracking in Britain and paying local communities to take the pain. She hasn’t talked about it taking at least five years before the increase supply hits the world market.
She has talked about abolishing green levies on gas prices; without telling anyone that subsidising extra consumption is the worst way to provide them with help because it pushes energy prices even higher. She has promised to cut fuel duty. Yet she hasn’t explained how she will prevent the likes of BP and Shell from simply pocketing the tax cut in increased profits as they continue to charge what the market will bear, not what they have to pay plus reasonable expenses.
There’s an alternative to growth, recession and inflation
Growth, growth, growth is a strategy that is at direct odds with the inflationary realities. Deliberately slowing the economy into recession is an equally awful solution to a cost-of-living crisis. It is time that politicians and economists opened their minds to a third solution. Try putting into practice the policies that were promised at the COP22 conference.
They might just find that using less oil and gas is a very good way to drive the price down. Without putting people through a year of extreme economic misery.
There is an alternative to this dreadful cost-of-living crisis. Unfortunately, neither the Bank of England nor either of the two candidates to be our next prime minister understands it.
