We face a calamity even worse than the financial crisis thanks to the hubris of our failed ruling class says Allister Heath for the Telegraph
To the experts, economists and other idiot savants who inexplicably failed to see this storm coming, thanks for nothing. All of their acronyms, PhDs, fancy modelling and algorithms have proved useless: Britain and the world are plunging into the most terrifying economic, political and cultural crisis of the past 40 years. A bunch of intelligent amateurs couldn’t have done much worse.
Inflation is out of control, a terrible recession is looming and higher interest rates are about to send house prices tumbling and unemployment soaring: the politicians are still in denial, unlike the voters, but the reckoning, when it comes, will be traumatic.
This is like the financial crisis all over again, only worse: for the second time in less than 15 years, the public has been betrayed by a failed technocratic orthodoxy, an over-educated yet staggeringly ignorant ruling class convinced that it can defy human nature as well as the laws of economics.
Why do these people never learn? Why do they have no shame? Where is the abject apology from the Governor of the Bank of England for the fact that, even after stripping out the cost of food and energy, inflation is hugely higher than his target? And why are our politicians refusing to treat this crisis with the sense of emergency that it requires?
The system is broken, millions are facing poverty, the middle classes are being hammered and yet no action is being taken on tax or supply-side deregulation, while interest rates, scandalously, remain at just 1 per cent.
Why is the Chancellor not holding Andrew Bailey, the Governor, publicly to account for his reluctance to act and his abysmal predictions? Since when is the Bank’s “independence” an excuse to allow it to fail with zero consequences, with no genuine oversight? The cowardice and buck-passing are sickening.
The rot started, as with so much else, in 1997 with the election of Tony Blair. The Bank of England was given the wrong mandate when it was granted its operational autonomy: it had to focus almost exclusively on consumer price inflation, rather than asset prices (such as property) or financial stability.
Soon enough, house prices started to surge, the Bank ignored the liquidity-fuelled madness in the City, and economists on a power trip started to believe their own propaganda.
The experts drew exactly the wrong lessons in 2008 when Northern Rock and Lehman Brothers went bust: they thought that bailouts and ultra-low interest rates were the answer to every problem, even though they were actually the very cause of the irrational exuberance of the 2000s.
All of these tools and more were wheeled out again and again over the past decade, as those entrusted with our money convinced themselves that inflation was forever tamed. Fixated as they were on narrow measures of price increases, they turned a blind eye to the money gushing into property, commodities or tech stocks.
The central banks, the supposed guardians of our capitalist society, had become central planners, prisoners of an intoxicating groupthink: they were sure they could manipulate interest rates and use QE to guarantee perpetual growth. They thought they were right, god-like even, and everybody who didn’t buy into their new religion was not just wrong but stupid and old-fashioned.
The politicians, starting with David Cameron, lost interest in economics: an older generation of Tories studied Keynes, Hayek, Friedman and even Mises to understand the chaos of the 1970s, 1980s and 1990s, but their successors – with a few glorious exceptions – couldn’t be bothered.
They quickly forgot two of the golden rules of economics: too much money chasing too few goods, services and assets pushes up their price; and debasing the currency is one of the easiest ways to destroy a civilisation.
Instead, the job of the politician, as Cameron, Theresa May and even Boris Johnson see it, is to divvy up the proceeds of growth that somehow automatically appear like manna from heaven, rather than having to think how to grow the size of the GDP pie. Thanks to the magic of ever-lower interest rates, it no longer mattered whether they hit businesses with regulations or entrepreneurs with higher taxes – or so they thought.
This emboldened the hard-Left. If it was OK to print money after the sub-prime crisis, why not print more now to pay for public spending? Why not ignore budget deficits altogether? The centre-Right, meanwhile, embraced green and public health schemes to make energy, travel and food more expensive, convinced that overall prices would remain low.
The lockdowns were the culmination of this madness: the Government spent as if in a World War, “paid” for by central banks creating money out of thin air. The Corbynites had won. The magic money-tree was normalised, with catastrophic short, medium and long-term consequences that haven’t all become clear.
Millions became addicted to the crack cocaine of free money. House prices and share prices rose further, fuelling the rage of the have-nots. Many decided that they were entitled to an income without needing to work for it. Older workers quit the labour market. A socialist ethic gained ground, undermining the free society.
The benefit-to-cost ratio of lockdowns continues to deteriorate: yes, furlough bailed out millions, but now is the time to pay up, and the inflation tax, dislocation and cultural meltdown is going to prove extraordinarily steep.
The inflationary hit is being greatly exacerbated by Russia’s invasion of Ukraine and the massively reduced supply of food this is causing. But this supply shock comes in the context of years of excessively low interest rates and quantitative easing, a grievous set of errors for which Western elites have nobody to blame but themselves. Inflation would have been a massive problem even without Putin’s crimes.
It now looks as if the public will either be forced to accept its greatest real-terms pay cut ever, or wages will spiral, requiring a savage overreaction via much higher interest rates – and a bitter recession – to wring the inflation out of the system.
“Why did no one see it coming?” the Queen asked after the demise of Lehman Brothers during a trip to the London School of Economics in 2008. The answer then is the same as it is today: a toxic combination of intellectual error, hubris and political short-termism. The voters’ revenge, when it comes, will be pitiless.
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