Inflation disaster powered by epic hubris of central bankers

This is Iain Martin’s weekly newsletter, exclusively for Reaction subscribers.

It’s Mark Carney time again. The former governor of the Bank of England pops up several times a year, offering his views on the ailing British economy.

Carney’s latest intervention a few days ago was about Brexit – again. High inflation in the UK is partly attributable to Britain having left the EU, he said in an interview with the Daily Telegraph.

“We laid out in advance of Brexit that this will be a negative supply shock for a period of time and the consequence of that will be a weaker pound, higher inflation and weaker growth… and the central bank will need to lean against that. Now that’s exactly what’s happened. It’s happened in coincidence with other factors, but it is a unique aspect of the economic adjustment that’s going on here,” he said.

On his blog, the economist Julian Jessop has already debunked Carney. High inflation is hardly a uniquely British problem. Brexit might, at the margins, be an exacerbating factor, because of the barriers put up to trade. When placed against the Covid shock, the energy crisis caused by Russia’s barbaric war in Ukraine, and the effects of extraordinary monetary policy favoured by central banks that loved to print money, the Brexit story is one small element of a much bigger story.

It is interesting how unreflective Carney and some of his central bank contemporaries are about their role in stoking inflation, considering how integral they were to the giant financial experiment that took place in the wake of the financial crisis. In essence, the emergency measures used after 2008 to prevent a rerun of the Great Depression continued for far too long. Afterwards, interest rates and the economy were not normalised because it was feared consumers and businesses could not cope with the adjustment. Instead, continual cheap money to keep the show on the road was used. Interest rates were kept low and there were massive bursts of Quantitative Easing, sometimes branded money printing. All that money swirling around created asset price bubbles. Wonder how Britain managed to have a couple of property booms in the last decade, the latest even during a global pandemic? Too much cheap money.

Carney had left by the time Covid hit, but he was a key figure in this experiment because he had helped set the tone of the times. He was also a pioneer of the idea that central bank governors should worry about much more than inflation, which it was thought, wrongly, had been vanquished. Central bankers should have additional and much more groovy responsibilities, he thought, such as saving the planet. This work he has continued out of office in various net zero initiatives, trying to kill off investment in nasty oil and gas, even though we’ll need a lot of it in the decades ahead to make the transition to cleaner energy.

Carney was appointed by Chancellor George Osborne (but of course) in 2012. It was a “rock star” Davos-style appointment by a politician who loved celebrity and too clever by half manoeuvres. The post should have gone to the cerebral, realistic Paul Tucker, formerly deputy governor of the Bank of England. Osborne wanted to be flash and make a splash.

Carney’s successor Andrew Bailey has got himself into a terrible tangle trying and failing to reestablish the credibility of the Bank. Inflation was deemed to be “transitory.” Now, it may be embedded and stubbornly high, although we’ll see in the second half of this year. While he tries to figure this out, Bailey also has to put up with his predecessor Carney chipping in in public.

As Jessop says, it is not even as though UK inflation is that much worse than comparable economies: “The UK’s current inflation problem is not even as much of an outlier as many assume. ‘Core’ inflation (excluding food and energy) is still higher in several of our European peers, including Sweden, the Netherlands and Austria. It is also only really in the last few months that UK inflation has stood out from the rest of the G7. This may simply be a matter of timing and our inflation will soon fall back too, for the same reasons as it has in other economies.”

This week is a crunch week on inflation in Britain. The latest inflation data is due on Wednesday and rate setters will have to decide whether to pause, as the US Federal Reserve did this month, on the basis any further rises could induce a recession that might otherwise be avoided. The signs from the UK mortgage market point to serious trouble and a worsening squeeze on households as payments rise. (A declaration of interest, we’re buying a house at some point in the next year so I’m wary of falling victim to confirmation bias). I read the property pages of the main newspapers though and they seem to be written for the most part in a parallel universe. There’s a lot of “this is what £8.5m will get you” in West London and “how to buy the perfect corner sofa”, and very little about the real state of the market.

Elsewhere, there are highly credible voices – Jessop included – saying the BoE monetary policy committee should hold off rate rises now to ease the pain, especially when households are suffering the effects of food inflation.

Others claim inflation is already old news, and the next risk is deflation, meaning falling prices, which might sound nice in the current context but really it isn’t once the spiral gets going and production collapses. There are reports from reliable sources that the Chinese economy is stalling, and heading for deflation, in a manner that bodes ill for the rest of us.

My concern is practical and political. Will policymakers have sufficient courage to tell the truth with an election coming? The authorities failed to normalise interest rates and the business environment in time. Too much money was printed for too long. This created domestic and commercial property bubbles that are now going pop. A lot of pain will result. In countries such as Sweden it is happening already. In Britain, it has only just started.

Yet for more than a decade voters have been conditioned by central bankers and politicians to think that any such problem when it appears can always be smoothed away, with another go on the old cheap money and QE machine. Will policymakers do it again, printing ever more money, slashing rates, and creating the conditions for another burst of inflation, perhaps next year, or at some point (God forbid) hyperinflation?

Last week there were even suggestions in Britain – on the madhouse of social media, but in this era of ever bigger government it’ll spread soon to Westminster – that the government should intervene to help prop up squeezed mortgage payers who can’t handle the increase in monthly payments. That way lies national insanity. Why should mortgage payers receive taxpayer subsidy in effect from hard-pressed, young renters who cannot afford to buy or start a family? Ah, it will be said, in that case help renters too by freezing rents. Rent controls are one of the worst policy ideas known to man, because they distort the market and end up reducing the supply of rental properties as landlords quit the market.

The alternative is for the Prime Minister, or the leader of the opposition, or the governor of the Bank of England, to explain to voters what is really going on and how tough it will be, to point out that the cheap money holiday from reality is over. I will not hold my breath.

Waiting for China’s first great crash

Speaking of financial reality, since 2010 total bank assets of Chinese banks appear to have more than quadrupled. I say they appear to have more than quadrupled. Such is the grip of the Chinese Communist Party, and so opaque is the country’s system of financial reporting when no-one dares give President Xi bad news, that it is impossible to know with any certainty.

Assets sounds like a comforting word and if assets is a nice term then assets trebling might be thought a positive sign. No, sadly, in banking assets means, along with other holdings, loans the bank has made to customers. The total assets of Chinese banks have an incredible value of $55 trillion, and perhaps more.

In a world of rising interest rates and reduced growth those who took out the loans feel the pressure. The property boom has been craziest of all in China and last year it turned to spectacular bust. Local governments are being hit by falling tax revenues.

When an autocracy, or a totalitarian set-up such as China, encounters economic trouble the regime needs to generate a diversion to placate or inspire domestic opinion. The diversion can sometimes be war. In this way there may be a direct connection between China’s serious economic travails and the Chinese Communist Party having become steadily more belligerent.

Engelsberg Seminar 2023

On the good news front, it was the Engelsberg Seminar last week. It’s a fantastic annual gathering held in Sweden, in the wilds, with about thirty leading speakers from around the world and an invited audience. This time the theme was “Leadership and Statecraft”.

Our team is involved in putting together the programme for the three-day event, which takes place close to midsummer. It doesn’t get properly dark this time of year in Scandinavia and the light plays tricks on the brain. At midnight it feels like mid-evening in Britain and the Brits become discombobulated.

Earlier, during dinner, one of my Swedish colleagues had sung a spirited traditional drinking song. At this there was wild applause. What would the Brits present do in response? Nothing. I told one of the most distinguished British speakers there that I had put him down to sing Jerusalem. There was nervous laughter. Of course I hadn’t put him down for Jerusalem. We Brits sat there looking embarrassed, hoping no-on asked for a British song. What would we choose if they did? Anarchy in the UK, by the Sex Pistols, was suggested.

Boris’s diet pills column bit thin

The former Prime Minister has gone back to doing what he sometimes does best, that is writing entertaining newspaper columns. The Daily Mail unveiled Boris proudly as its new, star signing on Saturday.

Might the Mail have felt a little cheated when the first one landed? They would be entitled to. Johnson delivered a column not about Rishi Sunak, or the Commons authorities, or Joe Biden, or the war in Ukraine. He wrote about diet pills and his attempts to lose weight.

This is such a Johnson move. Building up excitement, scrambling something together and then letting down in a slightly sad manner the people paying him.

As former Telegraph comment desk people who worked with him could have told the Mail, Johnson needs prodding, cajoling and watching. Otherwise he’ll produce the most ludicrous shaggy dog stories in a hurry, filing copy so late there is little chance of doing anything other than just throwing it on the page in a matter of minutes or seconds.

What I’m watching

This item contains spoilers. We’ve been weeks behind on Succession and only made it to the final episode this week. I didn’t see the Shiv move coming and found it disappointing. It seemed to me to be an act of surrender on her part, to Tom and to the terrible purchaser of her dead father’s empire. But was it surrender? Several women I spoke to about the conclusion saw it differently. Pregnant Shiv still had her pile made from the sale and she stayed in the company orbit, in position to swoop if, as seems certain, the new mob and Tom mess it up. The producers have said there will be no series five. I bet there is, and in it Shiv ends up firing Tom and getting Waystar, the family firm, back.

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