https://consciousnessofsheep.co.uk/2024/06/02/no-wonder-youre-confused/

Most people regard the economy as simply too confusing to understand. This, in large part, is because establishment media editors and journalists are – by their own admission – clueless. This though, is not entirely their fault, since economists are generally clueless too. Why? Because economics is a modelling of transactions rather than a science of the economy. That is, rather than study the economy – the sum total of the interactions of eight billion humans with each other and with the material world – economists study the flows of currency between households and businesses. Worse still – with a few notable exceptions – economists do not study how currency is created… most still sticking with the discredited “loanable funds” model which imagines that money passes from patient savers to impatient borrowers. In reality, banks – albeit under licence from governments – create currency out of thin air every time they make loans.

This is why elections are so depressingly dull, as politicians talk about magic money trees while inverting the relationship between public spending and tax. If, as they appear to imagine, there is a magic money tree, then governments must tax businesses and households to obtain that money before they can spend it. But once we understand that banks create currency out of thin air, and that governments have their own (central) banks, then we see that the politicians – and the media which report on them – have it completely on its head. Borrowing and spending come first. Tax comes last… and – along with debt repayment – is the means by which currency leaves the system.

Far more of us became aware of the way currency is created as a consequence of the 2008 crash. Which raises a serious question about why establishment media outlets continue to promote the magic money tree nonsense in which governments are not allowed to spend money on public services unless there is little or no public debt. Which is in large part why, among other things, British people can no longer trust the quality of water arriving in their homes, why our roads and railways are falling apart, and why our beaches are covered in raw sewage. The maxim set out by Anthony Stafford Beer comes to mind:

“The purpose of the system is what it does. After all, there is no point in claiming that the purpose of a system is to do what it constantly fails to do.”

The UK government spends billions of pounds every year to create polluted rivers, inadequate healthcare, overcrowded schools, housing shortages, high crime rates, and undriveable roads. If they genuinely wanted a different outcome, those billions would be invested in a different way. But the establishment – including establishment media – close ranks to claim – in Thatcher’s famous words – “there is no alternative.”

The role of establishment media is not to educate and inform (and the entertainment is pretty shit these days too) but rather to obfuscate and confuse. And when it comes to economic coverage, the main aim is to put a positive gloss on any news story. One of the favourite ways of doing this is to claim that the weather is among the biggest drivers of the economy. In the same way, bank holidays – which shouldn’t make much difference to a functioning economy – are also used to explain good news or to downplay bad news. It is rare though, for them to claim the same bank holiday as the cause of both good and bad economic news. This, however, is what they managed last month.

On 10 May, the UK exited the technical recession with a fraction of a percent GDP growth (per capita GDP was still lower than the previous year). But this was reported as if some kind of economic miracle had occurred. Rather than a sober assessment of mediocre GDP growth following one of the worst Christmases in a generation, we were treated to the headline equivalent of polishing a turd:

“UK exits recession with fastest growth in two years!”

Among the reasons for this about turn in economic fortunes, we learn that:

“Growth in the early part of the year was led by services – which includes sectors such as hospitality, arts and entertainment – and was likely to have been helped by an early Easter in March…

“There was anecdotal evidence from looking at credit and debit card transactions that consumers have been treating themselves to clothing and home furnishings.”

A fortnight later though, Schrodinger’s Easter – and the weather – turned out to be the reason why retail spending had slumped:

“Sales volumes fell by 2.3% from the month before. Analysts had expected a drop of about 0.5%…

“April saw storms and heavy rainfall, with several flood warnings issued across the UK. [But] Online sales, which are usually less affected by bad weather, also fell 1.2% on the month… ‘It didn’t help that Easter came early and all those tasty chocolate eggs and family feasts were totted up in the previous month’s numbers, but even then, March’s flatlining sales were revised down,’ said Danni Hewson, head of financial analysis at stockbroker AJ Bell. ‘The shock of the last few years on personal finances has made many wary. People have done without and can continue to make do if it means they can create a little pot of emergency cash to help keep their feet dry.’”

Within the nonsense magic money tree economics of the establishment media, this is all too confusing. The economy, it would seem, is swinging from negative to positive and back again with no obvious rhyme or reason. So that, just a week after the gloomy retail figures (in which, apparently, people didn’t buy stuff online because they were afraid of getting wet) the mood swings positive again with a surprise increase in house prices:

“UK house prices returned to growth in May after rising by 0.4%, according to Nationwide, as buyers’ confidence was buoyed by wage growth and lower inflation. The average house price reached £264,249 this month, compared to £261,962 in April, the building society said…

“An average two-year fixed rate mortgage is currently 5.92%, according to Moneyfacts, the financial information firm. That compares to 5.83% in April. The rate on the average five-year fixed mortgage is 5.49%, up from an average of 5.4% last month.”

Was this really indicating that buyers’ confidence was improving? Might there be some alternative explanation for the average house price to rise at a time when consumers are cutting their general spending?

This is where understanding how currency is created makes all the difference. In the last two years, the Bank of England has raised interest rates in a deliberate attempt to cut the amount of new currency being created. The aim being to trigger a recession and to raise unemployment in the belief that this will force inflation down. The problem is – and Bank of England officials have said as much – that almost all of the price increases since 2021 are the result of supply shocks… initially from disrupted supply chains, but also from self-harming sanctions following Russia’s invasion of Ukraine. So that even if they engineered a deep recession, import prices would remain high.

Where interest rates do have an obvious impact is on house sales – the single biggest transaction most of us will ever make. In the spring of 2021 – with lockdowns seemingly endless – the interest rate on a two-year mortgage was at an all-time low of some 1.5 percent. Unsurprisingly – and in part because viewing houses was one of the few state-approved reasons for leaving home – in April 2021, 113,800 house sales were completed in the UK… the highest monthly figure in more than two decades. In contrast, with interest rates at close to 6.0 percent in April 2024, completed sales had fallen to 79,590. And it is the type of properties and the type of buyers which explain why the average price has risen even as most of the population is struggling to make ends meet.

The average figure reported by lenders like Nationwide and the Halifax is arrived at by simply adding the total of the prices paid and dividing by the number of sales. And so, while it is possible in a booming market for lots of first-time buyers to drive the average price up, during a slump, the more likely reason is that the bottom has fallen out of the market. That is, if almost all of the people buying property are in the highest income groups, and the types of property changing hands are big and highly desirable, then the average price will continue to rise even as the number of sales falls at the bottom end of the market.

Far from being good news then, a rising average house price is indicative of a potential property crisis, because without a steady churn of new buyers of cheaper starter homes, it becomes harder to sell property further up the price range. So that, as we are beginning to see in the UK Finance data, as people fall behind on their mortgage repayments, and as repossessions rise, more households fall into negative equity (the potential sale price of their house is lower than the outstanding mortgage).

As it happens, the regulations and protections implemented following the 2008 crash make it less likely that the “everything bubble” will be punctured by a crisis in the domestic housing market. Nevertheless, declining sales and families falling behind on their payments is a measure of the Bank of England’s success at triggering recessions, since households which are struggling cease buying all but the bare essentials… irrespective of the weather or the timing of bank holidays. More likely, if property is to play a role in the next crash, it will be the unregulated (global) commercial property sector – which is currently struggling to attract rents higher than loan repayments as more businesses cut back on space as a relatively easy way of cutting their overheads, fuelling the trend to working from home. We see this to some extent with the UK buy-to-let market, where the proportion of arrears and repossessions has risen far faster than in domestic property. But the greater problem is with the high amount of pension and insurance fund investment tied up in commercial property, risking a cascading crisis if property owners are forced into bankruptcy.

Beyond this is the so-called “shadow banking” sector where a massive volume of lending went to avoid the post-2008 regulation. A crisis within this sector is likely to come out of the blue and with little forewarning. And given the extent to which the total global debt exceeds any realistic valuation of the total global wealth potential, it is only a matter of time before some “black swan” event brings the whole system down…

Which is one reason, I suspect, why establishment media editors and journalists are at pains not to know how the economy works. To return to Stafford Beer’s maxim, the purpose of the system is to do what it does… to feed the public a happy-clappy tale about how the experts are in control, the economy is doing fine, and it is only a matter of time before the good times return. The aim, no doubt, being to convince people – which apparently includes people on six-figure incomes – that even if they are feeling the pinch, there is no need to panic.

There is no doubt considerable vested interest in this. The people who make decisions about establishment news coverage are paid-up members of a professional-managerial class whose heads may literally be on the block if and when the neoliberal system breaks down. Nevertheless, just as telling someone with a terminal illness that they are dying often accelerates the dying process, if the population as a whole understood just how crooked the system is, just how venal the ruling elites are, and just how screwed the rest of us are about to be, the result can only be to bring about the collapse of a system which, like it or not, almost all of us depend upon for life support.