Last week, to no fanfare whatsoever, the Treasury Committee released an extensive report on a set of policies the Bank of England has undertaken over the past few years. The report’s immediate focus was on the Bank’s recent Quantitative Tightening (QT) programme, which promotes higher interest rates. But read properly, it was an attempt to assess Britain’s central bank policy since 2008. QT, after all, was a direct attempt to unwind the Quantitative Easing (QE) programmes that were put in place in response to the financial crisis. To judge its effectiveness, the report had to look at the Bank’s monetary policies over the past 15 years. Suffice it to say it made for damning reading.

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By Philip Pilkington

In a capitalist economy, financial markets should have one job and one job only: the allocation of capital. They should look at various businesses and assess their viability. Those they assess as being viable should then access funding on good terms; those that are not viable should not.

But since the onset of QE, the City has largely become an arm of the Bank, constantly watching its every move for signals about what to do next. The reason for this is straightforward: the QE programmes have given the central bank almost total control over the government bond market, partial control over the corporate bond market, and a large degree of influence over stock prices. If you are an investor and you want to make money, the easiest way to do so is to guess what the Bank is going to do next.

There are, as a result, plenty of investment professionals consulted in the report, all of whom have firmly bought into the QE/QT framework. Each provides their own minor assessments: one will say QT is being undertaken too fast, another will say that it is being undertaken too slowly — and, at the end of the day, the Bank will fall somewhere in the middle. All very sensible, all very orderly. Until it isn’t.

In fact, what is so striking about these assessments is their lack of clarity. Beyond the fundamental virtue of the QE/QT framework, the only point that everyone agrees on is that they really have no way to know what is going on. The Bank, as the report makes clear, “is uncertain about the macroeconomic and money supply effects of QT”. Elsewhere, it notes that “the Bank is taking a ‘leap in the dark’ by embarking upon a major monetary operation without specifically and separately tracking its effects”. Indeed, at one point, the Governor himself admits this, explaining that such uncertainty is “why we keep QT under constant review”.

Of course, no policy undertaken by any government institution produces certain outcomes. But this, it’s worth spelling out, is the Bank of England, the very institution tasked with keeping the financial peace; indeed, its own independence rests on the pretence that they set monetary policy in line with scientific criteria. Instead, it’s been treating our economy like a roulette wheel — and one that will soon be stacked against us. As interest rates have risen, the value of gilts — government-issued bonds that are supposed to be low-risk — has fallen fast. You don’t need to be a finance whizz to understand what this gap represents: losses.

Indeed, these losses are shown clearly in the Committee’s report: “Annual losses in each of 2023 and 2024 will amount to £40 billion, eroding the cumulative £124 billion positive cashflow that was generated up until September 2022,” it states. Crucially, this doesn’t even take into account that these significant and rapid declines are dependent on optimistic forecasts of future inflation. If inflation remains stubbornly high or even rises again — say, on the back of ever-increasing geopolitical tensions — then the downturn will be even more significant. And who will pick up the bill? The Treasury and, via the Treasury, the taxpayer.

The Committee, understandably, were less than pleased with this: “Notwithstanding the operational independence of the monetary policy… it strikes us as highly anomalous that decisions have been and are being taken concerning huge sums of public money without any regard to the usual value-for-money requirements”. On the face of it, such an indictment surely calls for root and branch reform of the Bank of England. Its QE programmes of the past 15 years have been a disaster, turning would-be investors into dreary inflation-watchers. But beyond this, it has also wasted money — public money — and left the country effectively broke. The Bank of England knows this; it is, after all, what they told Liz Truss when she tried to force through tax cuts.

Yet while the Bank is more than happy to aim their budgetary fire at a sitting Prime Minister, they seem a lot more reluctant to address how much their own monetary policy experiments have cost the country. Amid today’s inflation news, politicians will gloat, the bankers will chatter, and the national press will lap it up. And missing from all this will be any mention of main driver of Britain’s economic woes: the Bank of England itself.

This is despite the fact that the Bank is at risk of going broke because of the very Quantitative Easing (QE) programme it pursued over the past decade. In other words, we are about to enable, with no public debate, the largest self-licking ice cream cone the country has ever seen.

In the event of the Bank going broke, a bailout would be underwritten by a letter sent by the then-Chancellor Alistair Darling to then-Bank of England governor Mervyn King in the heady days of 2009. This document enabled a so-called Asset Purchase Facility to help the Bank clean up the mess left over from the 2008 financial crisis. Yet since the letter can be read as open-ended, the current governor Andrew Bailey has said that it can be used again if the Bank goes broke.

Indeed, to some extent this technique is already being used: public borrowing figures suggest that £9.7 billion have been sent from the Treasury to the Bank. And the Bank is already short on funds to shore up its internal operations. While its current stance is that it will not ask the Treasury to backstop these losses, given recent history of mission creep in a crisis situation, this could change in a pinch.

This follows on from changes made by the Financial Services and Markets Act this year, which allow the Bank of England to raise a levy on private banks in Britain to fund its operations. In the cold light of day, however, the levy looks suspiciously like a tax and raises the question of whether the Bank of England is taking on quasi-governmental powers.

To better understand these developments, we must return to the chaos of March 2009. The global economy was reeling from the effects of the financial crisis and the recession that followed. Economists were terrified that we might be headed for a replay of the Great Depression, and so took on an attitude of “whatever it takes”. The Bank of England, like other central banks in the developed world, committed to a policy of Quantitative Easing (QE). This entailed creating enormous amounts of (electronic) money and flooding the banking system with it. Technically speaking, it meant buying eye-watering amounts of government debt from the private banks. Since the size of government debt and its interest rate are inversely related, interest rates went to the floor. The hope was that this would spur private-sector lending.

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Did it work? Well, the old joke — that if you ask a roomful of economists a question, you’ll end up with a roomful of different answers — certainly applies here. There are still some defenders of QE who claim that it saved the economy. A more cynical reading would be that it simply juiced asset markets and generated enormous financial bubbles in everything from stocks to bonds to classic cars and Rolex watches. It is the unwinding of these bubbles that is making the Bank of England’s own financial situation precarious.

After all, having bought this debt, the Bank was saddled with it. So, when we saw an outburst of inflation in the past few months and the Bank moved to raise interest rates, it had to start flooding the market with this debt. The price of the debt duly fell, and the Bank realised that it was haemorrhaging losses on its debt portfolio.

The obvious question is: did the Bank not factor in this possibility when it engaged in the QE programme in the first place? My guess is that they did not. The rush to enact it was driven by fear and more than a touch of hysteria. Economists at the time really had convinced themselves that the developed economies would never see inflation again.

Of course, those in charge at the Bank would no doubt prefer that this is not discussed. They will claim that they did their best in bad circumstances. And this is no doubt true. But it does raise questions about the growing closeness between central banks and financial markets. When I worked in private asset management, a friend at one of the big investment banks joked with me that we were simply overpaid civil servants. He was alluding to the fact that capital allocation by private markets, which should be seeking out the most profitable ventures in the real economy, was increasingly becoming a Punch and Judy show — with investment managers playing the role of puppets and the central bankers pulling the strings.

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The result of this dubious use of monetary policy is now bearing fruit: paradoxically handing the Bank of England more, not less power, further entwining the Bank with the markets. None of this will stuff the pockets of those in charge of the Bank, of course — but it will certainly be ploughed into hiring more economists and financial experts to come up with more “innovative ideas”, such as the QE programme that got us here in the first place.

All of which raises an obvious question: what is the Bank getting out of this? Now that it has quasi-taxation powers and the Government is filling the gap in its funding, what exactly is the money being spent on?

Back in 1998, when the Bank of England was made independent, there was broad consensus among economists on what central banks should do. By the Nineties, the basics of monetary policy management had been gleaned. This, the politicians and the public were assured, was a matter of science. The central bankers were simply carrying out objective exercises in economic modelling and using its interest rate setting policy to align the economy with its findings.

It makes for a nice story, but is it true? Probably not. The effects of monetary policy changes are far less predictable than central bankers make out, and the margin for error in economic forecasts is nothing short of legendary.

Even taking the story at face value is no longer plausible. This is because the Bank’s agenda has begun to creep. Consider its commitment to “net zero” in its corporate bond purchasing scheme, which includes updating the Bank’s “remit to confirm… the economic strategy of the Government”. What does this have to do with the monetary policy debates that led to the Bank’s independence in 1998? Absolutely nothing. It’s just economists playing politics.

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Or take the Bank’s research into a Central Bank Digital Currency (CBDC) — the so-called “Britcoin”. Some view its proposal as a totalitarian imposition. Others see it as the future of finance. It doesn’t matter which side is correct; the very fact that people disagree is the key point. Britcoin does not even carry the pretence of being based on “scientific” or “objective” macroeconomic models. Rather, it is a case of a bunch of economists, hired by a central bank which is independent of the government yet receiving bailouts, getting enthusiastic about investigating an idea and funding themselves to do so.

Here we can see the perverse nature of its incentives. The Bank of England has spent years engaged in experimental monetary policies that have blown a hole in its finances — and now the Bank is asking the Government for a blank cheque to help it find a way to move beyond the monetary policy objectives that were the excuse for its independence in the first place. You need not be a hardcore libertarian to see these developments as dubious.

What is the solution? A debate, perhaps. Let’s have the leaders of the Bank drop the often-haughty pretence of gnostic knowledge and have a real discussion. Let them justify — in clear constitutional English, not the financial jargon they so enjoy — the policies that have led to their own bankruptcies. And let them also justify both the powers they are requesting and what they intend to do with them.

The men and women who are working at the Bank are no doubt well-meaning, diligent civil servants. But perhaps, being economists, it might be time to calculate whether the incentive structure at the Bank itself has become corrupted.

In fact, the economy has not looked truly healthy for years and forward-looking indicators imply that a recession is almost certainly in the pipeline in the next six to 18 months. And one of the key reasons that the Tory Party has already haemorrhaged support is due to the poor condition of the post-Covid economy, specifically with respect to the high rate of inflation. This has gradually made itself manifest in poll numbers. According to YouGov, at the beginning of 2021, still in the midst of the Covid pandemic, the most pressing issue in the country was “Health”. And at this time, and for months after, the Tories were still ahead in the general election polls (though Labour were biting at their heels).

As 2021 progressed, the initial burst of inflation caused by the lockdown’s impact on supply chains rippled through the economy. By the start of last year, with inflation running at about 6%, economic matters had overtaken health in YouGov’s polling. Then on 24 February 2022, another inflationary shock hit the world economy: the Russian invasion of Ukraine. It was not primarily the invasion itself that caused the shock, but rather the counter-sanctions undertaken in response, with the European energy supply in particular drying up. In October 2022, with inflation in Britain peaking at around 11% and a population-wide cost-of-living crisis broadly diagnosed by commentators, economic matters dwarfed any other issue. Labour stood at over 50% in some polls.

Which is another way of saying that over the last two years, the Tory Party have lost their credibility on the economy. They have ruled over an inflationary mess. But after years of shedding their veneer of competence, it actually looks as though the worst is still to come. Even though Britain has a serious cost-of-living crisis, most people who want work can find it. Until recently, the unemployment rate has been historically low — in 2022 it touched 3.5%, a record that had not been seen in over 40 years. But this is beginning to change. Unemployment has been ticking up since April of this year, with recent reports suggesting that it is set to increase even further. The media has been largely silent about this issue, but economists have been paying attention. After all, the Bank of England has been aggressively increasing interest rates since the beginning of 2022, raising them from almost 0% to 5.25%. Few economists would think that these sorts of hikes can be achieved without generating a recession.

The British economy is particularly prone to higher interest rates, most glaringly through its overinflated and economically axial housing market. At its previous peak in 2007, before housing crashed worldwide, the average house in England was worth around 7.15x the average salary. Fifteen years later, this has risen to 8.28x — a record high. And though our housing debate is dominated by questions of supply — the intractable Yimby v Nimby contestation — there is every reason to think that the current inflation in house prices is another speculative mania of the sort we saw collapse in 2008.

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It is already telling that the housing market has proven completely unable to stomach higher interest rates. House prices have been falling every month since January of this year and in the third quarter of 2023 the average house price was down nearly 5% from its peak. While this may not seem like much, declines in house prices of this nature this rarely bottom out quickly and usually signal further falls. The pressure in this regard can be seen in the falling number of mortgage approvals in Britain, a contraction which dates back to 2020. Mortgage approvals went into steep decline after August 2022 as the Bank of England interest rate rose to just under 2%; it was shortly after this that house prices themselves began to decline.

And this is leading to a consequent decline in construction as firms pull out of new projects, no longer confident of a return on their investments. Private housing construction output in August was down 7.1% since the start of the year, and 15.9% from its peak in May 2022. The labour market is already beginning to mirror this trend. Between July and September, vacancies in the real estate sector fell 29.6% from the previous quarter. It is very likely that — for the second time this century — the Great British housing bubble has burst. And, just as in 2008, it is taking the rest of the economy with it. A deep recession is now very probable.

How this recession interacts with politics is another question. As we have seen, the Conservative Party have already lost their credibility on the economy. If they go into an election with the economy in recession and the unemployment rate rising, they will get eviscerated. A few months ago, there was chatter within the party that maybe they should hold out, see if the Bank of England could get inflation under control, and hope that the economy improves. That position is no longer tenable. Inflation may be coming down, but the economic situation is spiralling beyond the control of central banks, and if the Tory strategists think that the public dislike inflation, just wait until they find out how much they abominate a recession and rising unemployment.

Political strategists are rightly sceptical of those wielding crystal balls. For every accurate forecast, there are a handful of inaccurate ones. Yet all the statistics currently show that the British economy is in a rapid state of decline. For this reason, the Tories might think of what they are facing as what investors refer to as an “asymmetric bet”. This is a gamble in which the loss incurred from losing is far greater than the gain incurred from winning. It is as if two people gamble on a coin toss, but while one gets £1 if he wins the other gets £100 if he wins.

The asymmetric bet the Tories are currently facing is roughly as follows. If they continue sitting on their hands, hoping that the electoral gods will smile favourably on them, the economy may fall into recession. If this happens, the party will lose vastly more seats than they would lose if an election were called today. On the other hand, if the economy stabilises or even improves slightly, people will barely notice. Skyrocketing growth and a booming housing market is simply not on the cards and anyone who tells you otherwise is trading in snake oil.

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Rishi Sunak's war on the young

By Philip Pilkington

On the other side of the bet is Labour. The polling seems to suggest that most people are willing to give Labour a punt in the hope that they can improve the economic situation. The policies that Labour are putting forward that are popular, especially with their base, all involve spending lots of money. This means that if Labour are handed the reins and soon thereafter the economy falls into recession, support for the party will dry up. As the recession hits government tax revenues, Labour will find themselves encircled by the same furious markets that brought down the Truss government. They will be forced impose austerity, and support for the party will likely collapse within 12-18 months.

The statistics do not lie. Recession in the coming months seems very likely, if not almost certain. And its arrival will provide a reminder of how economics undergirds the daily rigamarole of politics. The most important political event of the 21st century so far remains the Great Recession, triggering the populist uprisings and neoliberal collapse that has defined our recent history. The Conservatives and Labour can attempt to read the runes of the British financial system, trying to divine economic growth and surf its waves. But the economy does not serve to buttress political dignity — and whichever party winds up in power will soon have to reckon with the consequences.

It is a marked difference to the optimism of classical economics. Most of us are used to living in a society with a strong belief in material progress, with a sense that we can collectively advance as a society. This belief allowed us to assume that the shared pie that is the national economy is always growing and so, if we work together to grow it ever larger, our slice will grow with it. Not all societies are like this, however. Most throughout human history, especially peasant or tribal societies, have no illusions of material progress and so tend to be structured around zero-sum thinking.

The American anthropologist George M. Foster called this the “principle of the limited good”. In a society where the pie never grows, the only way to increase your share is to decrease the share of another person. Societies that subscribe to the principle of the limited good tend to be static, have high levels of material and social equality, and be strongly resistant to social change. They also tend to be highly susceptible to envy, suspicion and rather aggressive interpersonal politics. Clearly this describes both the small insular village and the communist economies of yesteryear. But it is also becoming an increasingly good approximation of contemporary Britain.

A recent study from Harvard examines the principle of the limited good in granular detail and it suggests that the zero-sum thinking associated with it is becoming commonplace across modern capitalist economies, seeping into our collective psychology. As the authors themselves make clear, this is not a political mindset per se — both Democrats and Republicans can tend in this direction — although overall it is more common among those who categorise themselves as “strong Democrat” or Left-wing. Interestingly, one of the most zero-sum thinking groups the authors found were Democrats who voted for Donald Trump.

This type of thinking does not generate typical Left-Right opinions either, with constituents of both parties favouring both redistributive policies and immigration restriction. Zero-sum thinking is above all else a mindset, a way that people frame the world. If you think that someone else’s slice of the pie comes at the expense of yours then you will favour both fewer people to take slices and policies that give you more in the first place. But though this study shows how this thinking manifests, it fails to answer the question of why it does. The authors seem to want to impose a Left-liberal framing on the data, seeking to prove, for example, that zero-sum thinking is associated with having family that were slaves or slavers. The Confederate flag gets a look-in too, as the authors argue that people with ancestors in the Confederate South have higher rates of this attitude.

These findings arise from a flaw in their methodology. The authors use a questionnaire to ask people about their family backgrounds and then base their findings on this. They find, for example, that “among Black respondents, those who have ancestors who were enslaved have a more zero-sum worldview”. It seems far more likely that people who have this worldview will be more likely to view their own past as a competitive struggle than those who do not. Ditto for those who wave the rebel flag. This is an obvious point, and it feels like it was lost on the authors because they wanted to impose their own worldview onto the findings.

Their two most interesting findings, however, are that young people tend to be more zero-sum in their thinking than older people and that their zero-sum thinking is increasing over time. In fact, the trend is accelerating as young people go on to replace previous generations, shifting society at large in this direction. And this raises an extremely interesting question that the authors do not explore: demographic change, arguably the greatest economic division of the modern West. The authors think primarily in terms of income groups and groups that may have been oppressed in other ways, either now or in the past. Yet it is obvious to the neutral reader that, given their results, the most obvious arena for conflict is between the young and the old.

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The West is losing the plot

By Philip Pilkington

Our societies are ageing rapidly due to low birth rates. The median age in the United States has risen from 28 in 1970 to 38.9 today. In Britain it has risen from 33.2 to 40.7 in the same period. As a society ages, more old people emerge relative to young people. Since older people tend not to work, this means that the remaining young people must work to feed and clothe both themselves and the retirees. This is the most bitter zero-sum economic relationship in any society, and it is the one that is the most obvious and visible. It is also the one that is most often discussed politically. Rarely a year goes by when the newspapers are not filled with talk of a pension crisis and the need for reform and yet this is rarely tied back to the bigger picture: a society with low birth rates that is rapidly ageing.

Fertility rates in both Britain and the United States are now far below replacement. This means that the ageing of the population will accelerate as time goes by, a vicious cycle which in turn means that the economic relationship between the young and the old will become increasingly antagonistic. We have seen that the young tend to be more zero-sum in their thinking and that this group is becoming more so as time goes on. Filling the gap with immigration, which is only a stopgap, will become more difficult as zero-sum thinking makes the society less and less accepting of mass migration – this is already happening amid sluggish economic growth. The confluence of these demographic trajectories appears to be putting us on a path to a society dominated by the “principle of the limited good”.

The dynamics of an ageing society will greatly favour this sort of thinking. Consider the case of precious assets, such as housing. Savings accumulate throughout the life cycle, meaning that older people tend to have more than young people. This also means that older people own more assets than younger people as the savings are typically parked in assets. But as the pool of older people grows, so does the need for assets. Eventually stock and bond markets become too small, and the greying savers need new places to park their savings. One option is property which can then be rented out to earn a yield.

Who rents the property? The asset-poor young, of course. More and more, the older generation will end up owning all the property and renting it to the younger people, who will be doing all the work. Even the most charitable of us would feel economic resentment in such a society. We are already seeing its stirrings in our heavily financialised housing markets, and the concomitant and largely youth led “Yimby” movement — although they misunderstand the problem, thinking that the solution is to build more housing when the reality is that the property prices are being bid up by the asset-rich.

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By Chris Clarke

In his speech to Conference on Wednesday, Rishi Sunak is widely expected to discuss cutting inheritance tax as well as the thorny issue of the triple-lock pension. Reports suggest that his advisors believe it would be “political suicide” to get rid of the latter. And they are right. Older people, and pensioners especially, tend to vote in much larger proportions than younger people. The triple-lock ensures that pensioners will see no decline in their income relative to the inflation by government guarantee. Meanwhile, the pay for workers is barely higher than it was in 2008 when adjusted for inflation and has fallen around 9% since the start of 2022. What is the triple-lock debacle if not a zero-sum debate turned inter-generational ruck?

The inheritance tax issue is similarly an implicit demographic debate. Sunak wants to at least reduce the tax if not abolish it. While some may portray this as a straightforward grab by a notoriously wealthy Prime Minister, Sunak’s advisers rightly point out that polling shows that the tax is the “most hated in Britain”. Why is it so hated? Once again because people accumulate assets as they age. When parents see that their own children have not been able to do so and are stuck as tenants, they want to be able to pass their assets down. This is the founding principle of that mythic financial institution, “The Bank of Mum and Dad”. Parents see all too clearly that the ageing society is no good for their children, and if they can afford to do so they want to do their best to set this right.

Tear back the veil and we see that the Tory Party conference is already shot through with zero-sum thinking related to an ageing population. As the population gets older, this will get more and more acute. The only way out of this is to convince people to have more children. And that will require a new type of zero-sum politics, one in which the government recognises two groups fighting over resources: those with children, who produce the people needed to look after them in their old age; and those without children, who must rely on everyone else. To the former the spoils must go, if we want to escape from the dreaded society of the limited good.

At its most extreme, this focus descends into a postmodern oblivion: a world where everything is narrative and there is no difference between Newton’s Principia Mathematica and Carroll’s Alice in Wonderland. Yet this does not mean that narrative analysis is useless. Quite the opposite, in fact.

For more than a decade, our ability to form a coherent narrative about ourselves has been degrading. By “our”, I mean the West, which emerged in its current form in 1945 after three decades of war, desolation, and economic upheaval. The narrative that it told itself was crystalised during the Cold War: that the West would stand for liberty and freedom against the very live totalitarianism of the Soviet Union.

But this framework crumbled together with the Berlin Wall and the fall of communism. Overnight, a new narrative was needed, and it didn’t take long for one to emerge. The post-Cold War narrative formed in response to the Gulf War in 1990, when Saddam Hussein’s Iraq aggressively attacked Kuwait, principally with an eye to seizing its oil reserves. The United States and a 42-country coalition intervened, the Iraqis were soon pushed back, and Kuwait was allowed to govern itself. Here was the seed of the new narrative: the West, having won the Cold War, would keep the peace in the new status quo.

This updated founding myth required a domestic component — something tangible at home — and it found it in the ideology of the New Economy, which emphasised the transition of Western developed nations from highly industrialised economies to more technologically driven ones. This idea grew organically with the computer revolution, a loosening of financial and trade regulations, and the feelgood vibes of the Nineties’ economic boom. This was a world where Bill Clinton played the saxophone as the stock market rocketed.

By the early 2000s, however, this post-Cold War narrative started to fracture. The first blow was the collapse of the New Economy ideology as a massive bubble in the stock market unwound at the turn of the millennium. And then, three years later, came the invasion of Iraq. This intervention was very unlike the first Gulf War in which Hussein had clearly acted as the aggressor. This time, the conflict was instigated by Britain and the United States, opposed by many European countries, and was justified based on false, made-to-order intelligence — the now infamous “dodgy dossier”.

Still, even with these tremors, our narrative broadly held together: economic growth continued apace, and the war gave rise to an anti-war movement that would eventually produce future President Barack Obama. But then came the next hit — a real hammer blow. In 2008, as housing markets collapsed across the world, much of the growth of the 2000s turned out to be fake, fuelled as it was by housing debt. More debilitatingly, the impressive financial architecture that had sprung up as the sector was liberalised turned out to be rotten.

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But all was not yet lost, as two movements emerged out of the ashes of the 2008 collapse: the Right-wing populist movement and the Left-wing populist movement. The former, associated mostly with the Tea Party movement in the United States, saw the government and corporations as corrupt interlopers. Its Left-wing cousin, associated with the rise of Bernie Sanders and Jeremy Corbyn, saw things the same way. The two movements only differed on preferred solutions, with the Left wanting a more interventionist approach and the Right wanting to cut down on the state and promote market competition.

In the subsequent years, its Left-wing incarnation has mostly disappeared. In the US, it was absorbed back into the mainstream of the Democratic Party, won over with promises of radical social and cultural agendas that did not interfere with the economic bottom line. In the UK, the Corbyn movement collapsed in a wave of scandal, and a slightly confused group of Blairites seized the reins.

Meanwhile, the Right-populist movement mutated. Driven largely by the Brexit movement and the rise of Donald Trump, it dropped many of its more libertarian-leaning firebrands and became more pragmatic. It no longer wanted, say, tax cuts for the sake of tax cuts. Rather, it wanted cultural and economic rejuvenation. Taking place against a backdrop of severe and ever-increasing social and economic problems, this evolution was far from a surprise.

Today, however, there is reason to believe that the Right-populist movement has also failed. Donald Trump won the presidency, but he did not produce much in the way of constructive change. What happened instead is that the American political system became highly unstable, and many of the previously existing norms that held it together started to dissolve. This reached its crescendo in recent weeks with the arrest and indictment of Trump, an anarchic blip from which the country is unlikely to ever recover.

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In Britain, the Brexit movement got its way and, after years of bickering, the Conservative Party eventually managed to pull the country out of the European Union. Once again, though, nothing changed. The economy did not take off like a rocket. Mass immigration increased rather than decreased. Right-populist cultural and institutional concerns remain as they had before Brexit. At the same time, nothing catastrophic happened either. The Remainers who promised economic collapse and a sharp fall in trade with Europe were wrong. None of this happened. Indeed, nothing happened.

In both the UK and US, then, there is reason to think that we have no real coherent narrative. No one is sure where to go next or what to believe. And as three recent events have demonstrated, this noxious position is already causing serious dysfunction in our political culture.

The first was the Covid-19 outbreak and the responses in the form of the lockdowns and the vaccines. Compare this traumatic incident with, say, the Iraq War. Today, most people in the West agree that the Iraq War was a mistake; it was tragic and produced a terrible aftermath, and we have managed to come to terms with it. If you were to sit down at a dinner table full of strangers, you would all broadly know what the narrative is on the Iraq War — and so you can discuss it. Yet this is not the case with Covid-19 and the government’s response to it. There is no accepted narrative. Did we beat the virus with our prudent and rational response? Or did we overreact and create havoc? There is no settled answer, so it festers.

The second of these events was the destruction of the Nord Stream pipeline last year. Once again, we have no official or widely accepted narrative of what happened. Most people appreciate that it was an enormous development that will have tremendous economic and geopolitical ramifications in the coming years. Yet we do not have a coherent narrative of why the pipeline was destroyed, who destroyed it, and what this means. Instead, conspiratorial thinking permeates and, as with Covid-19, it festers.

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By Edward Luttwak

Then, at the start of summer, there was the march of Yevgeny Prigozhin, the head of Russia’s Wagner private military company, on Moscow. As it happened, the media went into overdrive. We were told that a world-changing coup was unfolding; a major historic event, possibly of the magnitude of the collapse of the Soviet Union, was taking place before our eyes. But then, once again, nothing happened. Prigozhin stopped, apologised, and went to Belarus with some of his troops. The conclusion was inconclusive; there is no coherent narrative about what happened. We cannot digest it, and so it festers.

In turn, each of these world-changing moments confirmed that narrative breaks are becoming more frequent as time marches forward. The recent coup in Niger demonstrates this once again, exposing uncomfortable truths about French-African relations that we would prefer to ignore. And yet, as we try to ignore it, our global influence ebbs. Increasingly, major events — or pseudo-events — are taking place in the world and provoking impassioned reactions, but then seem to lead into a ditch of unmeaning.

And then what happens? After the initial passion or even hysteria, people are forced to move on without processing what has just happened. In other words, we, as a society, advance without forming a coherent, broadly accepted narrative. We drift on, allowing doubt to fester, paralysed by a sneaking suspicion that the West is losing the plot.

Why were their crystal balls so inaccurate? Was today’s inflation simply unforeseeable? The straightforward answer is: no. The initial inflation was caused by the disruptions brought on by the lockdowns and was perfectly foreseeable using basic macroeconomic models taught in undergraduate classes. Yet most economists seem to have missed this — largely because, starting in March 2020, they stopped focusing on economic problems and became armchair epidemiologists, offering opinions on how the virus spread and what might stop it.

There was no meaningful economic discussion during the pandemic; normal repairs and maintenance appear to have been neglected, leading to serious problems with supply chains. In 2021, for example, there were 1,946 factory fires — the most ever recorded in a single year and an increase of 129% over the previous year. And these problems have been supercharged by recent geopolitical developments, the most obvious being the war in Ukraine.

As with the lockdowns, economists and policymakers repeatedly misjudged the effect of imposing sanctions on Russia. Most commentators thought they would lead to a collapse in the rouble and the disintegration of the Russian economy. The sanctions would “reduce the rouble to rubble”, predicted Joe Biden. This has not happened. The rouble is currently 30% higher than it was pre-war and while Russia is facing down a recession, the Bank of Russia is slashing interest rates rapidly, signalling that the worst is over.

While the sanctions have not impacted Russia as many assumed they would, they have crippled the Western economies. Before the war, it was fashionable to say that Russia only had an economy the size of Italy’s. This was always misleading. When properly adjusted for relative prices, Russia has an economy substantially larger than the United Kingdom. And it is not simply the size of the Russian economy that was underestimated, but also its importance in the markets for core goods.

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Don't blame Brexit for shortages

By Philip Pilkington

For example, Russia produces large amounts of the world’s fertiliser. It accounts for 19%, 15% and 14% of the world’s potassium, nitrogen, and phosphorus exports respectively. Fertiliser is obviously key to growing foods, so disruptions to these markets tend to increase food inflation. Russia produces large amounts of basic foodstuffs too, and is the largest wheat exporter in the world. Put simply, the Russians punch above their weight in the production of the necessities for life. While they may not, say, have a world-leading social media industry, they produce a great deal of the goods that we simply cannot do without.

But Russia’s real economic trump card is energy exports, particularly energy exports to Europe. Prior to the war, 40% of gas and around 25% of oil consumed in Europe came from Russia. And as European countries have ramped up weapons shipments to Ukraine, Russia has started to close the taps, driving up prices and further exacerbating the inflation.

These are the most powerful short-term drivers of inflation, but if we look further down the track there are long-term trends that look even more ominous. It is, for instance, becoming increasingly clear that the war in Ukraine has driven Russia and China much closer together, with the two countries opening up important new trade links. This appears to be part of a broader shift in which the BRICs countries (Brazil, Russia, India and China), as well as Argentina, Iran, and Saudi Arabia, attempt to decouple from the Western-led global economic system. Recently, the BRICs announced that they would attempt to establish a new reserve currency to challenge the US dollar.

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Will we escape our age of failure?

By Martin Gurri

Until now, the West has benefited from the cheap labour and raw materials provided by the developing world. But at a certain point it was inevitable that the developing world would decide it is done playing second fiddle to the West. That day appears to be here, with Russia and China ushering in this new age. Without easy access to cheap labour and raw materials, prices in the West will have to rise — and living standards will have to fall accordingly.

Amid all this, there is every chance the BoE will find it cannot control inflation. Normal or “cyclical” inflation occurs when the economy runs too hot, labour markets tighten up and workers demand higher wages, which are then passed on to consumers in the form of higher prices. Central banks then raise interest rates to slow the economy and the inflation is rung out of the system.

Yet while wages are certainly rising now, it is not clear that this is a core driver of inflation. More likely, the inflation is being driven by the after-effects of lockdowns and by the enormous and chaotic geopolitical shifts that we are witnessing. And if this is true then interest rate hikes by the BoE could make the situation even worse. It wouldn’t just cause a recession, but an inflationary recession — the worst of all possible outcomes, as it means rising unemployment and rising prices.

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The BoE does appear to be aware of this prospect. In their Monetary Policy Report in May, they stated that they “can’t do anything about the global supply problems or the energy prices that are currently pushing up inflation”. So why are they proceeding with the interest rate hikes? The most likely answer is that they realise that they need to try something. If inflation gets completely out of control, it will crush living standards and irreparably damage the economy. The BoE likely figures that they need to give tightening monetary policy a shot and see if it works. If it does, then they will have done their job; if it doesn’t, at least they know that they tried their best.

Either way, the stakes are enormously high. If the BoE fails to squeeze inflation out of the system and it turns out that price rises are reflective of a new global economic order, living standards in Western countries will decline at a rate never seen before in history. Since the Second World War, and especially in the last 40 or so years, we in the West have based our entire way of life around commerce and rising living standards. If it turns out that this era is now over, how will we choose to live? Will we be able to accept a lower standard of living? Or will modern society fragment? If the interest rate hikes by the BoE fail to tame inflation, we could soon be about to find out.

Take perhaps the most extreme example: Weimar Germany. In the first half of the Twenties, the young republic was seeing its economy collapse due to hyperinflation caused by the punitive repayments imposed by the victors in the First World War. By lending in American capital markets and buttressing the currency, the hyperinflation cooled. But in 1929, as Wall Street went into meltdown, American capital markets seized up and Germany started to slide into a deflationary depression.

But German policymakers remained fixated by the prospect of hyperinflation. So when they saw turbulence ahead, their default position was to assume that trouble was inflationary, not deflationary. As a result, they slammed the brakes on government spending and led their country into a punishing depression. And we all know what happened next.

Sunak’s budget suffers the opposite problem. Since 2008, we have been experiencing a world of economic stagnation and low interests. Keynesian policy proposals — spending more money — have been in circulation in policy circles all throughout this period. I should know, I was one of the people circulating them. They are perfectly suited to an economy with relatively high unemployment and low inflation.

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The Tories will never change

By Tim Bale

But today we face exactly the opposite economic problem. Labour markets are so tight that employers are finding themselves being slowly strangled. And inflation is starting to tick up. Bank of England interest rate setters are putting on a brave face in public, telling us that inflation is transient — but seasoned watchers know that they are far more sceptical when they gather around the water cooler.

The problems are relatively straightforward. The lockdowns and the emerging vaccine mandates are unprecedented economic interventions. They cause chaos for businesses who are trying to provide goods and services to consumers. They also cause chaos in labour markets — just look how many workers simply left the UK in the first and second half of 2020. Crucially, these conditions imply a high probability that inflation is here to stay.

And this is where Rishi’s budget comes undone. Dumping spending and increasing taxes in an economy already under inflationary strain is akin to tossing a lit match into a barn full of dry hay. The spending increases will drive further demand for goods and services that businesses are already struggling to supply due to the onerous lockdown and vaccine-related regulations. Meanwhile, the tax rises will be passed on immediately as price rises by companies, as they attempt to defend their already thin margins.

Why is Sunak doing this? Because he is fighting the last war; focussing on what has happened rather than what will happen. His budget assumes that the main resistance on the field is overwhelming tank power — and as his soldiers march forward he will look on aghast as they are bombed mercilessly from overhead. Sunak is being fooled by a non-existent problem while a very real one festers.

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Is Boris taking us back to the Seventies?

By Dominic Sandbrook

It will work like this. The spending and tax rises will enter into the economic bloodstream, placing further pressure on prices. Inflation will accelerate. The Bank of England will take one look at their charter and realise that if they do not raise interest rates, they are going to take the heat for the inflation. So, they will raise those interest rates, the yield curve will invert — meaning short-term interest rates become higher than long-term rates — and the economy will slip into recession. That is how an expansionary budget produces contractionary results.

The worst part of all this is that, if the inflation is being driven by the lockdowns and vaccine policies, the recession will not stamp out the inflation. Instead, the British public will get a taste of both: stagflation — low growth, inflation and unemployment. Just like in the Seventies.

The entire economic debate today is topsy-turvy. Economists have been, for the most part, too cowardly to challenge the overarching public health measures. They recline in their seats, either becoming armchair epidemiologists or simply falling asleep. Poor Sunak looks on his desk and finds a plan written for a world that ceased to exist in March 2020. And the rest of us live with the consequences. La Comédie humaine.

With shortages come price rises. Inflation is already running at a fair clip — 3% in August versus the Bank of England’s target of 2%, with a similar rate in the eurozone. But even these figures pale in comparison to the ominous signs emerging from the United States, where inflation is clocking in at 5.3% in August — the highest since 2008.

People are quick to blame whatever political topic is at the top of their mind, and Brexit is an enormously popular choice — and no prizes for guessing why. But domestic concerns are unlikely to explain the shortages and inflation, as the international statistics show. Britain may have had Brexit, but the United States certainly did not — and a bottle of whiskey for anyone who can explain to me how the euro area could leave the European Union.

The driver of the immediate trends seems to be a lack of actual drivers — truck drivers, in particular. Where did they all go? Once again, the stuffed Brexit bear is wheeled out — but he is not very scary. Foreign labour was not scared out of Britain due to an abstract legal change; it was driven out by the Government’s lockdown policies in response to the pandemic, which shuffled many from their jobs onto a souped-up dole. Many realised that the dole is better where they came from on the continent, especially relative to the cost of living, and so they left.

Data published by the ONS shows this clearly. Between January and April 2019 — when Brexit was but months away — around 200,000 visa applications were being registered in Britain. In January and February 2020, after Brexit had happened, these numbers held up. But in March and April, as the lockdown set in, they collapsed to zero. European citizens making applications for the EU Settlement Scheme collapsed, too, from around 350,000 in January 2020 to around 50,000 in April. It wasn’t Brexit.

The truck driver shortage is hitting my home country of Ireland too — a nation that not only stayed in the EU, but has spent the last few years reminding everyone who will listen that they stayed in the EU.

On top of the exodus caused by lockdown restrictions, the lockdown also delayed the process of replacing those drivers with new ones. So if you apply for a driving test today, you will not get a date for at least six months. Given that many people fail the first time around, it is not unreasonable to say that it could take up to a year to get a licence in today’s Britain — more if you add on the time it takes to do lessons. This has led to a shortage of new drivers.

All these issues are a product of lockdown policies, unprecedented interventions in Western economies and societies outside of wartime.

Market economies tend to be pretty good at getting food on the supermarket shelves and fuel in petrol stations, if left to themselves. That last part is key: if left to themselves. Heavy-handed interference in market economies tends to produce the same pathologies we see in socialist economies, including shortages and inflation. That has been the unintended consequence of lockdown.

When they started last year, what was most striking to me — cursed as I am with an economist’s brain — was that there was no discussion of the collateral damage they would have on the economy, not just immediately but down the line. As the weeks rolled on and it became clear that the lockdown was no one-off intervention, I looked to my Left and to my Right, expecting a phalanx of economists to come out warning of the dangers to the economy. But the cavalry never arrived.

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Covid safetyism has gone mad

By Tom Chivers

It soon became clear to me that economists had, for the most part, undertaken a swift change of career. They were no longer concerned with GDP growth, employment or inflation — instead they became armchair epidemiologists, experts on the fashionable subject of viruses.

Polling of 44 academic economists by the University of Chicago at the start of the lockdowns asked whether “comprehensive policy response will involve tolerating a very large contraction in economic activity until the spread of infections has dropped significantly”. No respondents disagreed, and while there were some notable dissidents in the world of economics, they were mostly extreme free-market types who had burned their brand in 2008.

Today we are starting to see the effect of such drastic policy interventions. It began with a massive shock to GDP in 2020 — the biggest on record. Now shortages and inflation are emerging. Soon we will see growth expectations fall — watch those stock markets carefully. We are finally paying the price for all those weeks spent at home on Zoom.

What is to be done? The politicians — having wielded too much power for the last 18 months — are tempted to play policy whack-a-mole. They talk about micromanagement of whatever is in the headlines. Shortage of young lads with driving licences? “No problem,” they say, “we will draft the squaddies.” Not enough foreign drivers? “Let’s tinker with the visa system.”

Wise policymakers should resist these temptations, which are a bit like when a person cannot face up to big problems in their lives, so instead they focus on minutiae. What happens is that the big problem tends, inevitably, to fester and worsen.

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Are we heading for another winter lockdown?

By Tom Chivers

We see this sort of response in socialist countries a lot. In 2013, Venezuela was facing a shortage of toilet paper due to the heavy-handed government interferences in the economy. Instead of reflecting on their economic policies more broadly, the Venezuelan government used the army to seize a toilet paper factory. Needless to say, this did not precipitate the end of shortages in the country — but it certainly precipitated an exponential increase in censorship and repression.

The big problem in Britain, and one that risks leading us into chaos, is the massive interference in our work and personal lives that the Government now seems to regard as normal and reasonable. Every time an app pinged a person working in a coffee shop over the summer, and they had to take time off to sit around watching Netflix, the economy became that much less efficient.

Every driving licence not issued renders the economy that much less able to deliver the goods. When companies issue vaccine mandates to their staff — which has started to happen — and a certain percentage walk out the door, the number of workers in the labour pool shrinks. (If the US is anything to go by, that will include quite a few lorry drivers.)

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What's the point of Australia?

By Shahar Hameiri

The solution is as simple as it is blunt: stop the interventions and do your best to repair the damage done. Otherwise we are risking our prosperity. We are risking it to inflation, to low growth, to sluggish returns in our pension funds, to unemployment — you name it, if it sounds bad, it’s probably in there.

Many of the Tories in government appear to have PPE degrees from Oxbridge. If the economists could not resist the temptation to become armchair epidemiologists, then we can surely forgive the politicians for not drawing out the macroeconomic consequences before they locked down the country. But if they took anything from those degrees, please let it be the simple notion that every action has a cost associated with it — there is no free lunch. The economic costs of so-called non-pharmaceutical interventions have yet to be weighed against the public health benefits in any serious way.

The reality is that we will probably have to pay for the interventions of the past 18 months no matter what we do from now on. But how long will we remain indebted? From where we currently stand, perhaps we could pay off the piper in a few years if we quickly wind back the interventions. But if we keep blundering along down this path, we could end up running up such a tab that it can never be repaid. Just ask Venezuela.