Inflation is about to blow up politics

A slightly shorter newsletter than usual this week. It’s Easter and we all, readers and writers, need a lie down rather than long essays about the condition of this, that or the other. So, a quick few thoughts instead. Have a good Easter weekend.

You’re too young to remember proper inflation and how frightening it is, said a friend this week. He’s a decade or so older than me, so flattering me only a little. I do remember rocketing prices being mentioned in the 1970s and the lights going out, but aged seven almost everything seemed rather exciting, even the collapse of the Bretton Woods monetary system and subsequent explosion of the Western economic settlement. Why worry when Liverpool and Scotland had Kenny Dalglish playing? Scotland were going to win the World Cup in Argentina in 1978 (they didn’t). Eating Cheese and Onion Monster Munch crisps by candlelight during power cuts wasn’t so bad. The Beatles Red and Blue greatest hits double albums were out. A few places serving a novel, glamorous foodstuff called pizza were starting to open in Britain’s coal scarred, lead petrol polluted city centres.

The 1970s were the most deeply weird decade in other respects. How strange it seems now that the council in Glasgow banned punk rock bands from playing in the city on the basis they were a bad influence on the young population. But at one of the city’s theatres it was deemed perfectly fine to welcome a performance by Rolf Harris.

There’s a niche group of 1970s inflation veteran enthusiasts, among them a subscriber to Reaction, who will explain to me whenever it comes up that inflation was great because every ten minutes on Fleet Street they were going on strike and being awarded massive pay rises to go back to work. It seems that going back to work mainly meant getting drunk, or doorstepping armed robber friends of the Krays, or handing the wine list to Denis Healey at lunch. There’s something in his defence of the 1970s, although I suspect my friend is underestimating the deleterious monetary effects on the wider economy.

We’re in the process of experiencing proper inflation again. In the UK this week it hit 7% and is headed for 9%, though it feels higher especially in the supermarket. In the US it is at 8.5%.

I’m not sure many people have begun to process how explosive this will be politically. Unless inflation falls away, and if it does that’s probably because a recession will along the way have reduced economic activity, the autumn is going to be brutal for large numbers of the very poorest in our society. The middle classes will feel squeezed too, and are starting to complain already. In a few months there will be fury, particularly against those in power with a reputation for partying like there’s no tomorrow. Politics since the 2016 referendum is seen as having been crazy. I suspect inflation politics will be way crazier.

Voters are on edge and looking for some security in a dangerous world. That partly explains why the government has decided to pursue the policy of sending illegal immigrants to Rwanda. The government can’t lower inflation, this is a global phenomenon, so is looking in other places where it can at least have a chance of looking as though it is in control.

There’s the war backdrop. There’s the unsettling aftermath of the pandemic. And now everything costs too much. The mood this autumn will be vindictive, creating an opportunity for Labour to hammer the Tories as out of touch and out of ideas.

How can this inflation be controlled? I don’t see how it can be, or at least not on the current policy trajectory.

In the 1990s the central banks designed a system to, wherever possible, avoid the pain of recessions. This was the end of boom and bust era, the end of what used to be called “stop go” economics. Recessions were the enemy to be eliminated because they bring pain. Even if they also bring some creative destruction which seeds future growth and business development, they’re not enjoyed at the time. To avoid downturns, at any sign of trouble rates were cut to record lows. Latterly this was accompanied by quantitative easing, crudely known as money-printing to juice the financial system and keep the cheap money show on the road.

Instead of short-term pain, we swapped it for long-term pain, that is pain delayed. The bad side effects of policy were felt so gradually by most voters that they got used to it. In this way low rates and QE have year on year bolstered the fortunes of those who had assets to start with and stiffed the young and those who do not have assets, creating a dangerous generational divide.

Now, with inflation back, something that was never meant to happen, the political system and voters will not contemplate much higher rates to tackle this inflation. The Bank of England will nudge rates up a little and hope that’s enough. They’re trapped. The expectation has been created that the authorities will never have to do anything that causes short term pain, there is only ever more spending and endless cheap money. Now that 25 year experiment has run its course and we are about to find out what happens next.

In the late 1970s and 1980s in America there was Paul Volcker, chairman of the US Federal Reserve. Volcker came down hard on inflation by raising rates to record levels. The only answer, he said, was to face down the politicians squealing about protecting the voters and selling the myth that there is a pain free way through such a crisis. The priority was to get inflation out of the system, to give business and individuals a chance to rebuild the economy. It worked, though Volcker was then fired, or let go, by Reagan for being insufficiently in favour of financial deregulation.

The US is tightening policy now, though not in Volcker style. Today’s central bankers do not inspire confidence.

I only heard the great Volcker speak once (so clear, calm and true) at one of those CEO and trainee global leader events the Wall Street Journal used to hold. I had media observer status. Tory opposition leader David Cameron was the star turn and explained how he and George Osborne would deal with the aftermath of the financial crisis if they won the election. There was considerable scepticism in the audience.

Volcker seemed then like a visitor from another era, as though he had just walked in off the set of All the President’s Men, fresh from featuring as a tough Senator or sharp prosecutor. We could do with someone of Volcker’s stature right now.

Sunak should have quit

The Chancellor of the Exchequer should have resigned this week over being fined, with the Prime Minister, for breaking the ridiculous Covid rules they imposed on the rest of us during the pandemic. After more agonising, Rishi Sunak decided to stay on the basis that leaving would have looked self-indulgent. I’m not sure that’s correct. Not only would resigning have enabled him to regroup and rebuild his reputation, it would have given Boris Johnson a chance to pick a Chancellor he can trust and get on with professionally. Inflation politics will be tough enough, but with a war going on between Number 10 and Number 11 formulating coherent national policy on the economy, energy, taxation and increasing defence spending becomes almost impossible.

Save Scotland!

Regular readers of this newsletter, subscribers to Reaction, will know Scotland figures too much. Not every week, but more frequently than nice Wales, or lovely Somerset. Write what you know.

Scotland plays an outsize role in my thinking and writing, primarily because of family and friends. I like the place, the people and the hills. And it is the root of the Union. If Scotland goes, ancient England would be more than fine, and Scotland too after a painful twenty year adjustment. Nonetheless, both would be diminished by the parting and enemies of the West, such as Russia and China, would enjoy the spectacle. Partly for that reason – who thinks now or any time soon is a good moment to leave the British Army, the RAF or the Royal Navy? – I suspect Scotland won’t leave.

This leaves Scotland stuck, moaning about the Union but neither prepared to leave it nor get on and make a success of staying. All presided over by a dire, grievance seeking government that has been in power for 15 years.

What I’m about to say comes from a place of love, as they say on American television programmes when someone is about to introduce a difficult or terrible thought.

Scotland has been ruined by its government. There’s no shortage of money. The place is awash with UK cash, although the complaint from the SNP is that it is never enough. The local authority schools are in a terrible state. The NHS record is lamentable. The public sector is sinking under its own weight. The nationalised rail service looks like it has more staff than the Chinese army. In the ferries scandal the SNP has let down islanders. What’s the point of a Scottish parliament that cannot at least handle the basics, such as ensuring those in outlying Scotland can get reliably to and from the mainland?

Covid hasn’t helped. Half the population look terrified by Sturgeon’s endless warnings, meaning they are wedded to masks even outside in the street. In Glasgow this week I saw a man press the button on a traffic light and his wife, I’m assuming it was his wife, shoot out a portable hand-sanitiser to purify him. Can they really have missed by now that Covid is airborne and generally not transmitted by touching buttons to call the green man?

Meanwhile, the SNP leader is completely exhausted and with no successor. Her party won’t get a second referendum on independence and has no ideas – none, I’ve looked – on how to make Scotland more successful within the Union where it seems it will stay, certainly for the foreseeable future.

This situation is tragic, especially for those who live there and for the rest of us who care about them. But it must be fixable, no? Even if there is “a great deal of ruin in a nation” as Adam Smith put it. Surely there must be in one of the parties in Scotland, someone, anyone, under the age of 40 with some gumption and a notion to start improving life in Scotland? A country with so much going for it in terms of people, universities and put upon entrepreneurs needs saving. Who’ll do it?