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    Asleep at the wheel Archived Message

    Posted by Keith-264 on August 28, 2023, 8:25 am

    https://consciousnessofsheep.co.uk/2023/08/25/asleep-at-the-wheel/

    My late uncle had no trouble at all calculating wind speed from the spacing of isobars on a weather map. But ask him to make toast and you risked having the kitchen burned to the ground. Almost all of us know or have met someone like this. Academically brilliant but so ungrounded that they cannot tie a shoelace or cross the road on their own. As the late educationalist Ken Robinson once remarked, “if you want to see what an out of body experience is like, go to the last night disco at a physics conference.”

    Over-specialisation of this kind is the inevitable consequence of complexity. Education is designed to produce people who know more and more about less and less. And the further up the education ladder you progress, the narrower your focus becomes. Later, in the world of work – assuming you are not one of millions of surplus graduates working in non-graduate roles – you are obliged to be so narrowly focussed that you have no energy left to keep your feet planted on the ground.

    Perhaps this doesn’t matter too much when the person in question is charged with measuring dark matter or failing to get net energy out of a fusion reactor. Except that over-specialisation has been joined by credentialism in areas of work which absolutely must stay grounded. In economics, for example, the older and more relevant “political economy” has been purged from the universities. Indeed, most economics departments have been fully captured by neoclassicals who deify mathematically exquisite but entirely useless econometric modelling over real world data and experience. So it is, for example, that UK monetary policy is being determined by a group of highly-remunerated economics professors who claim to be “diverse” because three of them happen to be women and one has brown skin… and yet not one of them knows how it feels to go without food so that the children don’t go hungry, or how draining the ongoing stress of falling behind with bills becomes.

    Working from a series of wrong assumptions – that rising prices are always the result of too much currency, that increased interest rates are the best way of reducing prices, and that only when we see increased unemployment can we be sure that inflation is under control – the Bank of England Monetary Policy Committee have already done to the UK economy what that iceberg did to the Titanic 111 years ago… and like the doomed ship, it will be some time – during which large numbers will go under or freeze to death – before the vessel finally sinks.

    The long-term problem, which I’ve repeated many times here, is that from the mid-1970s, the UK followed the USA’s 1971 decision to shift its economic focus from manufacturing to unproductive asset speculation. In the UK’s case, this was enabled by the once-and-done oil boom in the North Sea. Oil revenues provided the income to pay for the early retirement – via incapacity benefit – of a generation of over-50s in order to cut the official unemployment rate following the 1980-82 depression. Meanwhile, a rise in debt-based “bullshit jobs” papered over the offshoring of the UK’s manufacturing base in the false belief that an economy can live on asset speculation alone.

    Housing has been the most obvious casualty of this change in economic direction. Beginning with the mass sale of Britain’s council housing stock – which worked to anchor both rents and house prices at an affordable rate – the UK became a nation of initially voluntary and eventually involuntary homeowners – the cost of rent in regions of high and well-paid employment being higher than a monthly mortgage repayment. And over the same period, housing in areas of high demand became a speculative asset for the wealthy, who have bought up – and left empty – swathes of property in the most expensive regions, such as central London.

    Britain has had a rumbling housing crisis for decades. But this is not due to a shortage of houses. Indeed, the root of the problem is an absence of building land in those regions where the majority of us work. That is, if the land was available, building companies would compete with each other to build houses at the lowest possible price.

    The ripple effect is that people have been forced to move further away from their workplaces to access affordable houses. The South Wales valleys, where housing tends to be cheaper, for example – once the home of thousands of mining, steel working and industrial workers families – have gradually emerged as domicile districts for commuters working in the administrative districts of Newport, Cardiff, Bridgend and Swansea, with the north-south dual carriageways that connect them turning into near car parks during the morning and afternoon commute.

    The more immediate problem stems from the Bank of England lowering interest rates after the 2008 crash, and then forgetting to put them up again afterwards, and later lowering them even further after the Brexit vote in 2016 and during the pandemic of 2020. So that a generation of workers developed the expectation that we were in a permanently low interest rate environment… which allowed those workers who could put down a deposit to move into housing closer to their work than would otherwise have been the case.

    In 2021, James Tatch at Finance UK reported that:

    “2021 has been a bumper year for mortgage lending amid the stamp duty holiday and homeworkers moving from cities. The outlook for the housing and mortgage markets over the next two years is for a return to more stable, balanced picture following the upheavals of the last two years. While risks remain, both to new lending and ongoing affordability, the market looks to be emerging from the pandemic in a better place than previously anticipated, supported by a much-improved wider economic outlook.”

    That was the mythical “V-shaped recovery” in which the UK economy got to escape the economic vandalism of lockdown unscathed. But by the end of that year, sharply rising energy prices (a full six months prior to the invasion of Ukraine) had torpedoed the UK housing market… but with a delayed fuse.

    Unlike in the USA and parts of Europe, UK banks have been allowed to offer “teaser” mortgages which last just two or three years. These might be just one percent above the base rate – which was just 0.1 percent in the summer of 2021. The monthly repayment on a £250,000 house, with a five percent deposit at 1.1 percent would be £905.86 – which would be fixed for the two or three years… which is why the economy is already doomed even if the economists and politicians don’t know it.

    In response to the huge spike in prices – of which only a tiny fraction stems from the state handouts and pent-up demand from the pandemic – once they were finally roused to action, the Bank of England has steadily increased rates from 0.1 percent to 5.25 percent as of August 2023. But with inflation still running at 6.8 percent, this is likely to reach six percent by the end of the year.

    Now consider what happens to the mortgage repayments of those people who bought their homes back in 2021. Another two- or three-year deal – if they can get one – will have risen to seven percent. And that £905.86 monthly payment will rise to £1,678.60 – even if they take up the government offer of switching to interest only for six months, it will still rise to £1,385.42. Remember too, that these are the “lucky” ones. Because bank lending standards have been tightened, they may be forced onto a standard variable rate of some 2.5 percent above the base rate. In which case, the monthly repayment will rise to £1,912.41, with a temporary interest-only payment of £1,682.29 offering no relief.

    No doubt some in the media will attempt to blame feckless borrowers for the coming crash. But this overlooks the consequences of an economic policy that allows speculators to grow their wealth on the back of something as essential as people’s homes. In any case, those speculators are about to take a big haircut too. As the Office for National Statistics reports:

    “More than 1.4 million households in the UK are facing the prospect of interest rate rises when they renew their fixed rate mortgages in 2023.

    “The majority of fixed rate mortgages in the UK (57%) coming up for renewal in 2023 were fixed at interest rates below 2%. Those deals that are due to mature through the course of 2024 will be from two-year fixed rate deals made in 2022 and five-year fixed rate deals made in 2019, when mortgage rates were generally higher than 2%.”

    This is not a crisis waiting to happen, but one which is already breaking over us. As Finance UK – a data-gathering body for mortgage lenders – reported last week:

    “There were 81,900 homeowner mortgages in arrears of 2.5 per cent or more of the outstanding balance in the second quarter of 2023, 7 per cent greater than in the previous quarter. Within the total, there were 30,940 homeowner mortgages in the lightest arrears band (representing between 2.5 and 5 per cent of the outstanding balance). This was 12 per cent greater than in the previous quarter.”

    The picture for buy-to-let mortgages was far worse, with a rise of 28 percent in arrears, and 41 percent in arrears for the first time since the previous quarter. This means that, one way or another, the amount of available rental property is going to decrease even as rents increase. Meanwhile, barring a miracle, those households already in mortgages arrears are going to go from bad to worse, because if you couldn’t afford one month’s payment in August, you are not going to manage two-months’ worth in September. Already then, tens of thousands of households are on the conveyor belt that leads to their homes being repossessed for delinquency… and they are about to be joined by close to a million more.

    On top of the obvious stress and misery of the inevitable uphill battle to fail to keep a roof over your head, the broader impact of this housing shock on an economy which is over-reliant on retail and services is likely catastrophic. Not that anyone on the Monetary Policy Committee will have experienced it, but in the real-world people will sacrifice almost everything to keep their homes. Which adds up to a massive crash not only in discretionary spending, but also to things which up to now would have been considered essential – such as the difference between the calories you have been consuming and the bare number required to keep you alive.

    Worse still, high energy prices – including fuel – which triggered the inflation to begin with have been gradually rising again as autumn approaches. And while you wouldn’t know it from the Pravda headline, the UK’s energy regulator Ofgem has just added to the misery faced by those with the lowest energy consumption – which inevitably includes those households desperately switching their spending to spiking mortgage or rent payments. As the Resolution Foundation explain:

    “The Foundation notes that the upcoming price cap is almost £200 lower for the typical household than last winter’s effective cap of £2,100 – driven by the £2,500 Energy Price Guarantee and £400 universal energy bill rebate.

    “However, while the price per unit of energy is falling, this will be offset by a rise in the daily standing charge and the end of the £400 universal payments. As a result, while the biggest falls in bills will be seen by those consuming the largest amount of energy, those who consume less than four-fifths of a typical household’s energy usage are likely to see their bills rise this winter, compared to the same period last year.

    “The Foundation’s analysis using the new Ofgem price cap shows that over a third (35 per cent, equivalent to 7.2 million families) of households across England will face higher bills this winter compared to last, rising to almost half (47 per cent) of England’s poorest tenth of households.”

    Once again, this points to a big switch away from discretionary spending and leaves the economy vulnerable to a return to colder winter temperatures.

    This all adds up to a severe drop in profits for UK businesses which are also struggling with the Bank of England’s attempt to torpedo the economy. As the Bank of England recently admitted – giving the lie to Governor Andrew Bailey’s earlier claim that the policy was not intended to create a slump:

    “Higher interest rates are putting pressure on indebted corporates through higher debt servicing costs. Such pressure increases the likelihood of defaults on corporates’ debt and may lead some firms to reduce investment and employment sharply. Defaults can increase risks to financial stability directly through reducing lender resilience, while sharp reductions in investment and employment can indirectly affect financial stability by amplifying macroeconomic downturns.”

    Going into autumn, some 50 percent of big firms and 70 percent of SMEs face debt arrears which at best will result in reduced profitability, lower investment and more unemployment, and at worst could result in a wave of bankruptcies and lay-offs. Hence on both the business and household side of the economy, we are looking at a deflationary downturn on a scale not seen in living memory – one from which there is no obvious route to recovery.

    It is tempting to hold the Bank of England entirely responsible for the coming crash. But as Richard Murphy at Tax Research UK reminds us:

    “Since 2021 we have opted for a wholly unnecessary economic Armageddon as a result of outsourcing the management of the economy to the Bank of England.”

    This is a point echoed by banking insider Sasha Yanshin, with a palpable anger toward a Sunak government which is asleep at the wheel. No doubt Tory strategists are hoping that the Bank of England can keep the lid on until the next election in the hope that the government can persuade enough voters to stick with them to avoid a defeat worse than 1997. But that isn’t going to happen. And by burying their heads in the sand, the government risks allowing the crisis to be far deeper than might otherwise be the case. The rise in the energy standing charge is a case in point – the government should have had the regulators in during the summer and told them in no uncertain terms to force the energy companies – which have been posting record profits – to eat the loss.

    Government ought to have gone much further, of course. There is no excuse for the UK’s crooked mortgage market providing short-term teaser loans on homes that people want to live in for decades. Nor should the banks be permitted to charge fees every time a homeowner has to roll-over a mortgage. Meanwhile, the rented sector is a mess, decades in the making, as successive governments failed to provide the low-rent social housing which used to be provided by local councils.

    Beyond housing, the ability of utility companies to pass costs onto consumers in what is meant to be a competitive market is a scandal… as is the practice of allowing regulators to take up employment with the utilities they are supposed to be holding to account. Nor is it only utility companies which have been price gouging. Fuel companies have taken an age to pass on falling oil prices, supermarkets have yet to pass on big decreases in wholesale food prices, and it goes without saying that the banks have only passed on a fraction of the higher interest to savers. It would no doubt take years to re-work the UK’s anti-monopoly and consumer protection laws… but the government could do a lot worse than signalling a start of the process today.

    Neither government nor opposition though, has offered a single policy on the fiscal side – such as increasing VAT on discretionary items or cutting fuel duty to lower transport costs – to take the weight off a Bank of England whose sole monetary policy is to club the economy to death with interest rates… an approach which no doubt fuels the conspiracy theory that some “they” behind the curtain is engineering a collapse.

    The reality, I suspect (although we should never rule out conspiracies entirely) is that the current crop of politicians, along with the people who advise them, really are that stupid. Or rather, like those specialists who can precisely calculate the speed of light around a black hole but who cannot boil an egg without burning it, they have become so specialised in the dark art of conning their way to re-election that they have lost all contact with reality… not so much asleep at the wheel, as not even knowing there was a wheel to begin with.

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