Nice little blog spot from Phil Burton-Cartledge

http://averypublicsociologist.blogspot.com/2022/08/inflation-and-political-paralysis.html

Raising interest rates is an interesting plan to combat inflation that is not spending related.

It’s not the perfect tool, but as the BoE / UK Government can neither conjure up workers in the Far East, stop China’s Covid lockdowns, nor suddenly produce billions of barrels of oil, they don’t have any ability to affect the supply side of the equation.

Raising interest rates will reduce demand, which is one way of balancing the current supply / demand miss match.

As mentioned above, if they didn’t raise interest rates the pound would fall further relative to the Euro / $ and given we’re all chasing the same barrels of oil from the Middle East – that would just make things even more expensive as our £ would buy less oil.

There is no magic bullet out of this situation until demand and supply balance out. It’s a global problem, made worse by Brexit, but fundamentally out of the UK’s hands.

It’s not the perfect tool, but as the BoE / UK Government can neither conjure up workers in the Far East, stop China’s Covid lockdowns, nor suddenly produce billions of barrels of oil, they don’t have any ability to affect the supply side of the equation.

Raising interest rates will reduce demand, which is one way of balancing the current supply / demand miss match.

Then the system is broken – the government should recognise this – and offer solutions. It’s not a suprise that lack of investment in our own shores was going to produce massive problems for the economy, environment and society.

Punishing spending power of the least well off with a COLC is not good policy.

As mentioned above, if they didn’t raise interest rates the pound would fall further relative to the Euro / $ and given we’re all chasing the same barrels of oil from the Middle East – that would just make things even more expensive as our £ would buy less oil.

The government can partly fix what consumers pay for energy.

Why is the free-market solution always more free-market?

There is no magic bullet out of this situation until demand and supply balance out. It’s a global problem, made worse by Brexit, but fundamentally out of the UK’s hands.

I’ve just outlined a direction – you find the deficits in the UKs infrastructure and services and the government spends the money putting that to work. In the meantime you take the utilities into government ownership – I mean Octopus wants 1 Billion (they won’t repay it) from the government to run Bulb!!

Spend the money – but spend it on the things that fix the holes in public services and infrastructure.

This. This. This.

The government can partly fix what consumers pay for energy.

While I agree with the sentiment, can it?

e.g. in the cases of BP and Shell a significant amount of those profits are made in Algeria and Nigeria. Is it then morally right to apply a windfall tax on those profits? Shouldn’t that be upto those countries to apply a windfall tax on their own natural resources before the companies bring the money back to the UK?

Could you be more out of touch? Do you seriously think all the poor live in social housing? This isn’t the 1980s, there is no social housing left. Even if they do, they still have to pay bills, put food on the table etc.

Try reading the point I was responding to.

Then the system is broken – the government should recognise this – and offer solutions.

Well the only solution, in this scenario, is to be self sufficient in gas (or energy). If you’re not and have to buy gas on an open market, then you are dependent on that market.

It’s not something a single government can fix – becoming 100% energy self sufficient is going to take decades and cost 10s of billions.

NB France, who has a massive nuclear power station network, is currently dependent on the UK as they have about 50% offline rectifying problems. So even after that huge investment, they end up having to buy leccy from their neighbours at the worst possible time….

I mean Octopus wants 1 Billion (they won’t repay it) from the government to run Bulb!!

And if HMG doesn’t agree to that, HMG will spend billions honoring contracts to supply energy below market cost. It costs HMG the same either way. They’ve already spent over £1bn doing exactly that up to date.

Why is the free-market solution always more free-market?

Because we’re not energy self sufficient so you either buy energy on the market or stop using energy – there isn’t another choice!

Well we could invade the ME and try and steal oil – that would be a 3rd option….

Because we’re not energy self sufficient so you either buy energy on the market or stop using energy – there isn’t another choice!

Interesting that all the discussion defaults to where to find energy.

Very little discussion about reducing our need for energy – and even less policy and investment aimed at reduction of energy….

Yes, but that’s precisely what the UK hasn’t been doing. Investment in the UK is low, and has been for a long, long time, and investment is a big deal as the UK has rubbish productivity, and this isl inked to investment and matters. This hasn’t been helped after the crash of 2008, after which the UK economy seemed tp start to enter a zombie state (more poor performance). You’ve then been ‘blessed’ with austerity, so more poor investment, further lagging in productivity. All these things add up to make the UK a bad place to invest for the long term, more stagnation, then you get a weakening pound, and stuff from abroad costs more and inflation is harder to manage.

All in all you’ve had a decade plus of bad financial planning by the government.

I don’t think fiddling around with a few tax cuts will help stimulate the economy either. It’s beyond that sort of minor fiddling around

Interesting that all the discussion defaults to where to find energy.

Because that is the current issue.

I have mentioned several times that we can just stop using energy and the problem goes away…..

EDIT – that’s not actually true, as energy is used to make pretty much everything we buy and the shortage is global (not just UK), even if we switched off the gas network tomorrow, everything we import will still cost more due to the rise in energy costs in it’s manufacture and transport.

NB 2: Our gas network is currently supply Europe as we have excess LNG capacity at our ports so are pumping all our spare LNG across the UK (from Wales to France / Netherlands) as they are short on gas. So switching it off would impact Europe as well – it’s all very interconnected!

Yes, but that’s precisely what the UK hasn’t been doing. Investment in the UK is low, and has been for a long, long time, and investment is a big deal as the UK has rubbish productivity, and this isl inked to investment and matters. This hasn’t been helped after the crash of 2008, after which the UK economy seemed tp start to enter a zombie state (more poor performance). You’ve then been ‘blessed’ with austerity, so more poor investment, further lagging in productivity. All these things add up to make the UK a bad place to invest for the long term, more stagnation, then you get a weakening pound, and stuff from abroad costs more and inflation is harder to manage.

You forgot to add Brexit – another reason not in invest in UK PLC when you can invest in somewhere interested in trading with other countries.

I don’t think fiddling around with a few tax cuts will help stimulate the economy either. It’s beyond that sort of minor fiddling around

Pissing in the wind, but the Tory candidates are not trying to solve any problems for UK PLC they are only trying to get elected, which means appealing to a very small demographic who are probably receptive to Tax cuts regardless of how many Teachers and Nurses we get rid of to pay for the tax cuts.

Spend the money – but spend it on the things that fix the holes in public services and infrastructure.

Yes – but private money won’t necessarily follow – depends on the return AND the speed of that return. These are long-term and for the benefit of all – private investment doesn’t usually prioritise those.

The UK is like an old stately home. The original family still live there, but the statues in the garden are crumbling, the grass is straggly and overgrown, weeds everywhere. They’ve been forced to rent bits out to weddings and conferences for decades now – they put up with the spew and noise so they can hang on to the old pile. But now the actual building is crumbling. The pipes leak and the ceilings sag. Pretty soon they won’t be able to rent bits out either. There’s no money to do the repairs because all the revenue has funded the unsustainable lifestyle up until now.

MMT is not the answer – at least not on its own:

MMT assumes that the capacity of the economy can supply all of the necessities – not true of the UK.

MMT has nothing to offer against externally-driven inflation like the current energy crisis – if you can’t afford the fuel to move stuff, that stuff might as well not exist.

MMT cannot deal with a world where the bad guys control most of the raw material and resources needed for that country’s economy.

It feels very much to me that the situation we had pre-Brexit was pretty damned good. We had control over our currency, yet were part of a bloc with some clout and had a veto within that bloc. Halcyon days!

The BoE had to move to increase rates to curb inflation – they can’t levy taxes to control it as MMT would suggest – the current government would have to do that and are obsessed with promising tax breaks. Even if they did raise taxes, they would raise them in areas that would suit their traditional support – so 75% of us would see no benefit or worse.

Despite the pound being a fiat currency it IS worth something. Be it dollars, euros, barrels of crude, cubic metres of gas, whatever. The UK doesn’t have enough of those real things to fight off global economic realities without being part of a bigger bloc.

Raising interest rates will reduce demand, which is one way of balancing the current supply / demand miss match.

It’s been a while since I studied Economics but (and apologies if answered somewhere – I haven’t trawled through all 3 pages of this thread) I understood that changing IR’s would a) encourage people to save money, b) make it more expensive to borrow and reduce demand for consumables – but if we are looking at the main drivers here – fuel/energy and food – people don’t have a choice in purchasing these. They need to eat and they need to get to work.

Whacking rates up may make GBP a slightly more attractive investment/ raise the currency value v EUR/USD – But is it really going to achieve anything significant other than pushing those already on a financial knife edge over the precipice?

At least we don’t add any further costs to our “basket of goods” by having frictionless trade with our biggest trading partner, I guess.

Governor of the bank of england pretty much explicitly said that companies were taking advantage of the current climate to price aggressively – i.e. put their prices up and blame “inflation”.

They’re raising interest rates to take money away from the population so we can afford to buy less – so companies will be less likely to “aggressively” rip us off.

This will bring real inflation down.

The answer is wholescale global economic reform – capitalism is broken, and is breaking the planet. But we won’t do that, we’ve no appetite to do it and as a result we don’t make it as a species.

So the actual answer is – buy less crap, ride your bike more.

(and apologies if answered somewhere – I haven’t trawled through all 3 pages of this thread

Answers to all your Qs can be found above…

Yes – but private money won’t necessarily follow – depends on the return AND the speed of that return. These are long-term and for the benefit of all – private investment doesn’t usually prioritise those.

It will.

Government deficits produce private sector surplus.

It will.

Not in proper long-term infrastructure if they think the whole place is in terminal decline*.

*Actually we all know it is in terminal decline, but the pace of it is what will deter private investment. As well as better returns being available elsewhere.

MMT is not the answer – at least not on its own:

MMT assumes that the capacity of the economy can supply all of the necessities – not true of the UK.

Again, like lots of people you misunderstand MMT.

MMT is descriptive. It’s a description of how things currently work. For several decades now.

MMT doesn’t assume anything – MMT merely points out that you should identify the resources and labour force to operate your project. If they’re not available that is your limit and you should look elsewhere to put your money.

Why is it critics of MMT don’t understand MMT at all?

The BoE had to move to increase rates to curb inflation – they can’t levy taxes to control it as MMT would suggest – the current government would have to do that and are obsessed with promising tax breaks. Even if they did raise taxes, they would raise them in areas that would suit their traditional support – so 75% of us would see no benefit or worse.

Again MMT is a description of the monetary system – says if too much money is in circulation from government spending. Taxation removes money and lowers inflation.

We don’t have inflation caused by TOO MUCH MONEY.

MMT has nothing to offer against externally-driven inflation like the current energy crisis – if you can’t afford the fuel to move stuff, that stuff might as well not exist.

Correct, but if you use MMT prescriptively – to identify economic problems in society you put something in place before it creates a problem. That hasn’t been done.

MMT doesn’t correct anything – government policy does, operated within the framework of MMT when it comes to spending.

Energy issues are a product of short-term thinking where could have used government spending 10 years ago to support.

The original Green New Deal was set up in 2007.

Spending, and political will.

Don’t forget the argument coming from government for the last 20+ years or more is that we can’t afford it. That’s what MMT corrects.

Because we’re not energy self sufficient so you either buy energy on the market or stop using energy – there isn’t another choice!

Well we could invade the ME and try and steal oil – that would be a 3rd option….

But you could support people’s bills?

And I’m guessing if HMG was the monopoly supplier of retail energy it could negotiate a better price for start. Or at least lower the cap and pay the difference itself like France.

Why is it critics of MMT don’t understand MMT at all?

Dogma, ideology, an inability to consider new ideas.. Take your pick.

We don’t have inflation caused by TOO MUCH MONEY.

Quite the opposite in fact. The increase in energy and fuel bills is going to do the BoE’s job for them in sucking cash out of the rest of the economy and that in itself is going to cause the recession they desperately seem to want. All the interest rate rise is going to do is turbo-charge that inevitable process while filling the pockets of bankers and speculators. As usual people at the top will get richer off the backs of everyone else. Daylight robbery, plain and simple.

Today’s Bank of England interest rate rise means that they will have to pay an extra £4.2 billion to the UK’s commercial banks in the next year because those banks technically deposit the funds created by quantitative easing with the BoE. 1/n

— Richard Murphy (@RichardJMurphy) August 4, 2022

Hopefully good news for us savers. Rates on savings have been abysmal for 10 years or so.

Savings so last century 🙂

They can’t make money out of savings as opposed to revolving debt.

Well we could invade the ME and try and steal oil – that would be a 3rd option….

probably cheaper to just pay everyone’s energy bills…

Because we’re not energy self sufficient so you either buy energy on the market or stop using energy – there isn’t another choice!

Well we could invade the ME and try and steal oil – that would be a 3rd option….

But you could support people’s bills?

And I’m guessing if HMG was the monopoly supplier of retail energy it could negotiate a better price for start. Or at least lower the cap and pay the difference itself like France.

Yes, we could subsidise bills, but we just store up more debt for the future, so it’s not free. But again, right now our potential new leaders are concerned about getting elected and only care what Tory party members think – hence tax cuts.

And I’m guessing if HMG was the monopoly supplier of retail energy it could negotiate a better price for start.

Highly unlikely, they’re competing against the whole planet! Someone else will just buy it at the asking price.

probably cheaper to just pay everyone’s energy bills…

It will temporarily relieve one half of the problem – the increased cost of energy. The other part – the fact that everything we import uses energy in its production / transportation and hence has gone up in price, would be unaffected.

Plus just paying everyone’s bills is just buy now, pay later – we just have more collective debt to deal with down the line.

It also might cause the value of the £ to fall, if the debt markets thought Uk PLC was running too high a budget deficit, which would in turn make everything even more expensive.

But you could support people’s bills?

Whilst I’m not pro austerity and the “living within our means” mantra of the Cameron/Osborne era. I can’t see how a third wave of debt can be a good thing (2008 bail outs, covid, and now this) can be be sustainable. At some point we’re either going to have to recover, or be utterly shafted.

Shaking the magic money tree a few times for some infrastructure projects (renewables, railways, the good stuff), that’s one thing. Government borrowing to “give” people (well, ultimately the energy co’s) money, that’s another. It’s a short term sticking plaster keeping money in our pockets, crossing your fingers that recovery is just around the corner.

Daylight robbery, plain and simple.

Conversely, inflation wipes out the value of those balance sheets. And the governments income* through taxation should track with inflation, which means the BoE issuing less of those bonds to cover the shortfall?

*yea yea yea, MMT, etc.

yea yea yea, MMT, etc.

Basically this.

And Jeremy Corbyn would have won the next election.

And the EU is a sinister conspiracy to provide modern day slavery.

I’m now on message. Nothing more to consider.

@ tthew
“Sorry, I know this part of the thread is old now, but Manchester Guardian quoted yesterday that only 0.2% of Shell and BP shares are owned by pensions investors, so you can’t really claim that’s a benefit of high fuel inflation.”

thats direct ownership, most share ownership will be indrect via ETF’s index funds and pension funds..

Yes, we could subsidise bills, but we just store up more debt for the future, so it’s not free.

Government debt is not an issue, and barely ever gets paid back.

It’s not a debt as such when you’re a currency issuer.

Government debt is just a rolling amount of money spent into the economy.

It’s simply how modern economies with central banks work.

Nothing scary.

Shaking the magic money tree a few times for some infrastructure projects (renewables, railways, the good stuff), that’s one thing. Government borrowing to “give” people (well, ultimately the energy co’s) money, that’s another. It’s a short term sticking plaster keeping money in our pockets, crossing your fingers that recovery is just around the corner.

Government always spends with new money creation. Has done for decades.

It’s the opposite to what you think here. Government spending, on the correct things is very much long term.

Too many people don’t understand the difference between Q/E and MMT. But simply carry on conflating.

Government’s don’t really borrow and more to the point don’t need to borrow. The spending comes first irrespective.

They are currency issuers.

The UK is buying electricity from Norway, and if you don’t pay the current rate, we will sell it to someone else. It’s not all roses locally in Southern Norway as the grid is so connected that household in Southern Norway are also needing to pay spot despite the fact that we are producing a massive excess of wind and hydro.
This isn’t popular and isn’t sustainable – a lot of people aren’t happy subsidising the UK. Especially as power rates in North Norway, not connected to the UK, are about 100 times lower

Basically this.

And Jeremy Corbyn would have won the next election.

And the EU is a sinister conspiracy to provide modern day slavery.

I’m now on message. Nothing more to consider.

I assume this response is because you can’t articulate anything else of merit?

This isn’t popular and isn’t sustainable – a lot of people aren’t happy subsidising the UK.

this isn’t on message. I thought Norway did everything right that the UK didnt?

And the governments income* through taxation should track with inflation, which means the BoE issuing less of those bonds to cover the shortfall?

In what fantasy economic world do govt tax receipts go up in a stagflationary recession? In real terms tax receipts are going to go through the floor, requiring a lot more borrowing/QE to prop up a collapsing economy.

Meanwhile bank profits will soar and that money will end up in the pockets of millionaires in the city in the form of fat bonuses to be spunked on champagne, sports cars and prostitutes, whilst people at the other end of the spectrum freeze in winter and have to beg for food from food banks to feed their kids.

I assume this response is because you can’t articulate anything else of merit?

Yes, that’s it. Totally.

It’s the opposite to what you think here. Government spending, on the correct things is very much long term.

That’s the opposite of what was said, subsidizing energy bills isn’t “the correct things” (infrastructure).

In what fantasy economic world do govt tax receipts go up in a stagflationary recession?

More than one in which you have stagnation/recession and no inflation? At the very least inflation encourages people/companies to spend their cash reserves or borrow money as it’s driving the NPV of projects down.

Government debt is not an issue, and barely ever gets paid back.

It’s not a debt as such when you’re a currency issuer.

Government debt is just a rolling amount of money spent into the economy.

It’s simply how modern economies with central banks work.

Nothing scary.

You say that, but every month the BoE goes to the markets, cap in hand, to sell guilts, to pay for our deficit. The interest rate they achieve (or whether anyone buys them at all) depends on the market’s perception of the fiscal probity of HMG / BoE.

So you can’t just run up endless debt saying it doesn’t matter, you have to at least look like it does matter.

Plenty of countries end up defaulting on their debt and it never ends well (except for the very rich).

At the very least inflation encourages people/companies to spend their cash reserves or borrow money as it’s driving the NPV of projects down

I’m far from an expert, but I can’t see this being anything close to a universal truth in business particularly if there are shareholders to keep happy.

We are no longer in a short-term issue it’s now a mid-term concern.