- Yes, but why? Archived Message
Posted by Keith-264
on August 22, 2023, 11:03 pm
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https://consciousnessofsheep.co.uk/2023/08/18/yes-but-why/ Have you ever noticed that you eat less when it rains? No, me neither. But this is the reason the establishment media have alighted upon to explain why food retail sales were down last month: “Ruth Gregory, deputy chief UK economist at Capital Economics, said she was cautious about reading too much into the retail sales figures since it ‘had a lot to do with last month being the sixth wettest July since records began in 1836.’” Well thank goodness for that, for a moment there you might have been forgiven for thinking that food sales were down because we are in the worst standard of living squeeze since the 1970s, and households were having to cut back even on the food they buy. Food inflation has been far higher than the official Consumer Price Index, and even with a slight fall in July, is still officially standing at 14.9 percent. As the UK now has the highest – and most stubborn – inflation rate in the G7, fingers of blame are beginning to be pointed. Perhaps the easiest – given that neoclassical economics is largely a justification for neoliberal inequality – was to blame greedy workers. Pay rose by 8.2 percent in July – the first time since 2021 that it has risen faster than inflation. This raised concerns about a repeat of the mythical “wage-price spiral” of the 1970s. However, in this instance, claiming that pay – which has been flat since 2009 – is the cause of inflation is like claiming that diarrhoea is the cause of food poisoning. Insofar as some workers have managed to use last-year’s labour shortage to drive up their wages, this was a response to inflation as well as – to some extent – a protection against the recklessness of the Bank of England and the cluelessness of the government. And it goes without saying that in a country as unequal as Britain, an increase in average pay reflects a growth in incomes at the top which more than offsets the declining incomes of those at the bottom in part-time, gig, and self-employed roles. In any case, it turns out that – contrary to media sensationalism – pay didn’t rise by 8.2 percent. As the Office for National Statistics concedes: “Annual growth in employees’ average total pay (including bonuses) was 8.2% in April to June 2023; this total growth rate is affected by the NHS one-off bonus payments made in June 2023.” One-off bonuses of this kind have been used across the labour market during the period of post-lockdown labour shortages as a means of increasing pay without having to increase the rate of pay. Regular pay was just 0.6 percent above inflation in the last quarter and is still lagging well below its 2019 level… although this is unlikely to deter the Bank of England from raising rates again in September. If not the workers, who else to blame? Actually, a good candidate would be Margaret Thatcher. It is she – or at least her government – which blithely allowed the dismantling of the UK’s manufacturing base which left Britain dependent upon imports and thus highly exposed to import inflation of the kind which resulted from supply chain shortages in 2021 and 2022. As Swati Dhingra – the one member of the Bank of England’s Monetary Policy Committee to vote against further rate rises – has argued, most of the inflation in the UK is imported, although this is not entirely captured in official data which focuses on imports for final consumption: “The widespread use of energy and other imported commodities across all sectors of the economy means there are also broad-based knock-on effects on prices of goods and services other than household utilities. To fix ideas, take the example of sliced white bread. The price of a loaf in the UK increased from 108 pence in January 2022 to 139 pence in January 2023, an increase of almost 30%. While bread is rarely directly imported by households, it is indirectly reliant on imported inputs. Prices of electricity for ovens and wheat for flour rose sharply after the invasion of Ukraine. Consequently, households experienced imported inflation indirectly through their consumption of domestically produced bread. “High levels of international and domestic production fragmentation mean that final imports for consumption substantially underestimate the role of imported inflation…” On the bright(ish) side, the collapse in global trade and a growing deflation in China are likely to filter through in a fall in imported goods and components. But on the downside, the price of imported food and energy is highly vulnerable to negative geopolitical events. For example, a large part of the energy inflation last year was due to the imposition of sanctions on Russian gas. Although one of the British elite’s conceits is that because we do not import much gas directly from Russia, we are somehow unaffected… forgetting that our electricity companies buy gas on the open market at the wholesale spot price. This does not bode well for the coming winter, when wholesale gas prices can be expected to spike up again, and there is no reason to believe that relations with Russia are likely to be any warmer by then. Nor is this the only geopolitical crisis with the potential to hit UK energy prices. The coup in Niger was in part driven by the desire to get a fair price for the country’s uranium – which the French continued to exploit after Niger was formally decolonised. Again, the UK conceit is that we will not be impacted… except that the UK imported 11.5 percent of our electricity last month, and that during a cold snap this can rise above 12 percent. Most of that imported electricity is generated in French nuclear power stations which will now be seeking to conserve their reserves and will likely face higher prices to import uranium from other sources. Price gouging is no doubt also causing UK inflation to remain high. A longstanding complaint here in the UK is that while, when oil prices rise, the price of fuel goes up immediately, when the oil price falls it takes months for fuel prices to fall back. The same goes for the electricity and gas supply companies, which have been posting record profits while failing to pass on the fall in wholesale prices. Food input prices, including the prices paid to farmers, have also fallen steeply but have not thus far been passed on by the supermarkets. And it goes without saying that the banks have only passed on a tiny fraction of their additional income from rising interest rates to the few people who are still able to save these days. While this points to a clear failure of regulation, which is meant to prevent cartel behaviour, the reason price decreases across the economy are not being passed on may be a harbinger of far greater difficulties ahead. To understand this, consider that in a healthy economy this would not be happening. Banks, for example, would be competing with each other for depositors, which would mean offering competitive savings rates. In a similar way, supermarkets would be holding prices down to get more people to shop with them rather than their competitors. And even the quasi-private energy supply companies would be offering lower prices to capture new customers. Instead, companies are raising prices even when it means losing their customer base. At first glance, price gouging may look like companies – including banks – simply passing their own rising costs onto their customers. However, given that we have seen a global tightening of lending standards, something far more dangerous is happening… a search for liquidity. That is, in an economic crisis, the supply of currency operates like a game of musical chairs – the total amount of currency in circulation falls, causing everyone in the game to try to hang onto as much disposable cash (liquidity) as they can. Most of the “assets” of a bank, for example, will be highly illiquid – mainly loans to businesses and households. But with the economy struggling and the risk of defaults growing, banks will seek both to minimise new loans and at the same time to build up liquid assets, such as the cash on deposit of businesses and households… hence the widening gap between the interest rate offered to savers and the amount charged to borrowers. Businesses (and households) are in a slightly different situation, since cash on deposit is their asset. Nevertheless, since in the current economic conditions they often depend upon lines of credit – which may not be available as bank lending standards tighten – they may also seek to build a cash buffer. This is also something that relatively affluent and economically-aware households might do, since getting out of debt and building at least some savings to cover emergencies makes sense during an economic downturn. In its way, this behaviour confirms the old adage about the answer to high prices being high prices. The building of cash buffers to offset rising costs makes sense to individual households, businesses and banks. But the collective result is a deflationary fall in the currency supply. So that, as in musical chairs, we end up praying that the music doesn’t stop. Not least because, as we discovered in 2008, the base “assets” in the banking and financial sector are multiplied via securitisation and derivatives into a mountain of illiquid paper assets that can become worthless in the event that the economy crashes. And while the big banks are likely covered this time around – having learned from 2008 – the same probably doesn’t go for the so-called shadow banking sector or – most worrying – for the international Eurodollar system. Of course, rather like Wile E. Coyote running off the edge of the cliff, so long as nobody looks down, this situation could continue for some time. And that leaves us trying to guess what could cause the music to stop – which puts us in a new game of black swan spotting which is likely to be self-defeating because anything you can see coming has likely already been hedged against. But one day – likely sooner rather than later – some event is going to hit us from left field, and the whole banking and finance edifice is going to come tumbling down. And the risk this time around is that what was too big to fail in 2008 will prove to be too big to save this time around. |
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