Iain Macwhirter: Stagflation is the buzzword in 2022 as funny money gets serious


It seems reasonable to bet that the Covid-19 pandemic is in its final stages and will turn gray sometime in 2022. Barring a new virus, life will return to something akin to normalcy.

But we’ll likely find that the economy hasn’t returned to normal, or something like that, and not just because of the temporary upheavals caused by lockdowns and holidays. In 2022, people are going to feel a lot poorer as inflation combines with fuel prices, tax hikes, mortgage increases and Brexit upheaval. The party is really over, and not just in issue # 10.

Fundamental changes have taken place in the economic undergrowth that worryingly resemble a throwback to the 1970s and 1980s. The word of the year will be stagflation – inflation combined with low growth. GDP is shrinking while wages are growing at a faster rate than we have seen in decades, in part because of Brexit but also because workers, often white collar workers, are rediscovering bargaining power.

This is combined with an energy crisis as deep as the OPEC oil price shock of 1973. And with tax increases which, according to the Resolution Foundation, amount to £ 3,000 per UK household.

Then comes the transition to net zero: the imponderable cost of scrapping a fossil fuel-based economy that has supported economic growth over the past century.

You might have thought that COP26 was a non-event, but the story

see it as a turning point. This year – 2022 – will see the end of the bizarre climate war as companies divest themselves of their stockpiles of fossil fuels and a generation of politicians realize they risk being held responsible for the consequences of warming. climate. Climate change is no longer about veganism and bicycles, but investment and big science.

After years in which nobody really thought about the cost of money, we will probably become obsessed with it in 2022. Inflation is currently heading towards 6%, even in the German powerhouse, and will force central banks to put the brakes on it. cheap money by raising interest rates. The rising cost of borrowing discourages investment and spending, depressing economic activity. It also increases the cost of servicing the public debt, just as an increase in mortgage rates increases repayments.

The Bank of England’s surprise pre-Christmas hike in the key rate to 0.25% is a harbinger of things to come. It will take a lot of trouble to get back to “normal” interest rates between 4% and 6%, and not all will happen in 2022. But economists and governments alike are realizing that over the past decade , something very strange happened. is happening in the world of money. The emergence of Bitcoin, a purely fictitious currency without any foundation in economic reality, is a symptom, a kind of metaphor, of the bizarre world we live in.

Since the financial crash, banks in the developed world have been printing money through bond purchases or quantitative easing (QE). Deliberately seeking to undermine the value of their currencies by increasing the money supply and encouraging inflation. Britain injected nearly £ 1 trillion into the economy through QE. That someone thought it was normal is going to be considered one of the great illusions of the time.

The price of the loan has been, in real terms, below zero for more than a decade. This is unprecedented in the Bank of England’s 300-year history. Ultra-cheap money has prompted governments to make spending commitments based on an unrealistic expectation that interest rates will stay at zero or near zero indefinitely. The result has been a huge expansion in public debt. UK debt is now approaching 100% of GDP at £ 2.2 trillion. The global debt pile is 100 times greater. Yet the total value of all the world’s stock markets, all companies combined, is only £ 70 trillion. Either way, the debt will have to be paid off.

Proponents of what is called Modern Monetary Theory (MMT), a kind of New Age Marxism, applauded this money creation. It stimulates economic activity, so why worry? Still, it’s strange that the left is getting on the inflation train, ignoring the huge increase in wealth inequality that has directly followed quantitative easing. Cheap money simply increases the wealth of the richest 10% who own assets. The most obvious sign of this is the ridiculously inflated prices of houses with low mortgage rates.

UK house prices have risen 30% since their pre-crisis peak in 2007 – an extraordinary development since it is house price inflation, supported by irresponsible lending on subprime mortgages, which caused the financial crash of 2008. In London and southern England, prices nearly doubled. In many central London postcodes the average cost of a house is over £ 1million and in some over £ 2million.

This perverse allocation of societal investment priorities has excluded a generation of young people from the housing market. Meanwhile, the lucky ones who have seen home values ​​rise faster than their incomes have also benefited from the rise in asset prices in the stock market which has fueled pensions and ISAs.

QE is madmen’s gold. It has reduced wealth inequalities to levels not seen since Edwardian times. A golden generation of mostly middle-aged asset owners in the south of England has grown into a political force with extraordinary influence over government. They are now determined to pass this unearned wealth down to the next generation. Hence Boris Johnson’s cap on elderly care costs at £ 86,000, the most unfair tax measure since the voting tax.

Yet the Johnson government finds itself in the least conservative position of having raised taxes to the highest levels since the 1950s while increasing public spending to levels not seen since the 1970s. This Conservative government has become more committed to the tax savings and spending that the Labor Party. Keir Starmer has opposed both Johnson’s corporate tax hike and recent increases in national insurance, even though NICs are a stealth income tax.

Boris Johnson has already borrowed three times what Jeremy Corbyn planned for in 2019 and still intends to ‘build back better’ by spending and borrowing even more. In addition, the revenue from recent tax increases goes mainly to the National Health Service. According to the Institute for Fiscal Studies, around 44% of all public service spending will be spent on health care by 2024. It’s hard to believe a Labor government would spend more.

There will be no return to austerity – the rigid budget cuts introduced by Conservative Chancellor George Osborne in 2010. However, it will take some accountability. Boris Johnson will falter until 2022, beaten and bruised by a cost of living crisis that will infuriate his Red Wall voters. That was the real message of the North Shropshire by-election, the Conservatives’ worst electoral defeat since 1993.

No government can survive stagflation for long, certainly not a government led by such an erratic and unconvincing leader as Boris Johnson. Indeed, the only thing the Prime Minister will not have to worry about is a referendum on independence. Scottish voters will have too much in their minds in 2022 to contemplate a Brexit-style constitutional upheaval.


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