Andy Burnham, who might yet succeed Starmer, has issued his own diagnosis of Britain’s predicament: the “four horsemen” he proffers are deindustrialization, privatization, austerity and Brexit. The first two are simply shadows cast by the elephant trampling across the room; the latter are misguided reactions to the damage it left in its wake. The grey behemoth in question is finance.

Just how broken is Britain, then, and what role did finance play? The “too much finance” argument has fallen somewhat out of fashion since the crisis. But “financialization” — that is, the extent of the growth of the financial sector and financial asset accumulation — remains the central cause of the country’s malaise. It broke the link between corporate profits and productive investment, inflated asset prices and living costs, and hollowed out manufacturing and investment into research and development (R&D), thus leaving the economy structurally vulnerable to the policy disasters that followed the crisis. Now that geopolitics and trade fragmentation have exposed the vulnerability of lacking a domestic manufacturing base, it is worth re-considering finance as the main culprit.

***

The United Kingdom’s relative economic decline and its attendant political dysfunction can be understood as the outcome of several self-reinforcing trends — what economists might call a bad equilibrium — with finance at the center. Where underperformance has been starkest is in the growth of productivity and wages. Data from the Office for National Statistics reveals that, between March 2008 and June 2023, the United Kingdom saw zero growth in real average weekly earnings. By contrast, cumulative real wage growth in France and Germany registered 10% or more during the same period. This astonishing gap is partly the result of a similar trend in productivity growth, which has been poor in both historical and comparative terms. Among the UK’s larger peers, only Italy, bedeviled by deep structural problems and policy failures of its own, performed worse on these measures.

The primary driver of long-term growth is investment, specifically investment into productive assets as well as research and development. This is known as fixed capital formation and includes investment by businesses, households and government. The country’s economic future, principally its growth trajectory and the sustainability of its national debt, depends on present levels of investment being sufficient to drive productivity growth over the long run. And investment decisions depend principally on the expectation of profits. This profit-investment nexus — complemented by public investment in key areas like education, research and infrastructure — forms the beating heart of a healthy market economy. But in Britain, more than almost anywhere else, it appears to have broken down. 

Suggested reading

When will the Hormuz recession hit?

By John Rapley

Since early 1989, private investment has declined dramatically. As a share of gross domestic product, private fixed capital formation and net investment (which accounts for depreciation) are down by 30% and 76% respectively. These are extraordinary figures. The more narrow measure of business investment (which excludes investment by financial corporations, non-profits and investment into housing) is down 51% as a share of GDP from its peak in mid 2000.  

Yet there was plenty to invest: the total surplus in the corporate sector (gross operating surplus, a broad measure of profits that includes the value added after compensating labor but before rent, taxes, dividends and depreciation) has increased fivefold since the mid-Eighties. Where did those surpluses go? The short answer is that finance absorbed them, channeling capital and resources away from productive investment and into financial asset accumulation, shareholder payouts and property speculation.

To understand how this process unfolded, it helps to trace two interconnected stories. The first concerns the deregulatory reforms of the Eighties that unleashed the financial sector. The second concerns the consequences of that expansion: how it distorted the relationship between profits and investment, contributed to the decline of British manufacturing, and left the economy vulnerable to the shocks that followed. Together, they provide a stylized account of how “too much finance” took its toll on the economy.

***

Starting in 1980, Margaret Thatcher and her cabinet enacted a series of deregulatory reforms, beginning with the removal of the credit-rationing “Corset” to allow banks to create credit freely. Other reforms such as the Housing Act 1980 (which included the infamous Right to Buy) and the Local Government, Planning and Land Act 1980 created a large surplus of public land that could be privatized and transformed into financial assets. If 1980 created the flow of money and assets, 1986 created the mechanism to intermediate it. The “Big Bang” in October of that year was the watershed moment: the reform of the London Stock Exchange resulted in the removal of fixed commissions, the introduction of electronic trading and the opening up to foreign banks. It also changed the nature of the domestic financial system in a way that would prove highly consequential. 

By the late Eighties, London had already become the center of the global “offshore” dollar market, acting as the neutral and lightly regulated clearing house for international capital. This sat at odds with its hamstrung banks and exchange: Japanese or American banks in London couldn’t trade equities with the same ease with which they could trade currencies. This was despite the fact that there was no formal separation of commercial banking and merchant banking as there was in the United States. Previously, British banks were prevented from acting in both capacities by tradition, the Bank of England’s “eyebrow” — and by the very rules that were amended in 1986. The liberalization of the domestic market allowed banks to act in “single capacity” and enabled the City to accommodate and integrate the rapidly expanding presence of global finance. The decades after 1986 would see foreign owners continue to pour into UK financial assets: above all, housing.

The reforms were enacted to arrest the City’s declining competitiveness relative to Wall Street. But they were also, implicitly, a bet on a particular model of growth: one that prioritized financial services over the country’s traditional strengths in manufacturing, which was already under severe pressure from global competition and the recession of the early Eighties. The reforms’ architects, chief among them Nigel Lawson, chancellor between 1983 and 1989, expected that a larger and more dynamic financial sector would reinvigorate the British economy. Indeed, the reforms turned out to be highly consequential — just not in the way Lawson expected. “I didn’t give it a great deal of thought at that time,” he would later say about 1986 and its consequences. 

Whatever was left of manufacturing at this point was walloped by the subsequent exchange rate consequences: the capital inflows into sterling assets strengthened the currency, making sterling-denominated goods exports uncompetitive. The other immediate consequence was a build of catastrophic financial risk, resulting in the aptly-named “Lawson Boom” later that same decade, and, ultimately, the 2008 crisis. More consequentially for the real economy, however, the reforms produced a set of incentives that made holding and trading financial assets consistently more profitable than investing in productive capacity. In a financialized economy, simply sitting on assets, such as property, equities or financial instruments, could generate higher returns than expanding production lines or product innovation. The result was a stagnation of the productive sector. 

***

In the years leading up to the 2008 crisis, the financialization of the British economy had a direct and measurable impact on the relationship between corporate surpluses and investment. That is: when companies made a profit, much of that profit went straight into finance. The share of the private sector’s surplus that accrued to financial corporations grew from 7.7% in 1986 to 16.9% in 2007. This change in the sectoral composition of the economy reflected an enormous misdirection of resources and misallocation of capital. Since British equities were volatile during the period, property became the favored asset class from the mid-Nineties onward. The financial sector itself facilitated this process. The composition of bank lending shifted dramatically: the mortgage share of total lending rose from around 30% to 65%. Instead of supporting productive investment, credit growth largely financed the acquisition of property assets.

How did this process unfold over time? In the early Nineties, the returns gap between financial assets and productive capital was reinforced by the poor economic conditions that followed the Lawson housing bubble and the European Exchange Rate Mechanism crisis. Household demand was crushed and unemployment climbed to over 10%. Real wage growth across the decade slowed to 1.6% annually, from 4.4% in the Eighties. With domestic demand and therefore profits weak, the incentive for productive investment was further diminished. At length, the recovery of both property prices and real wages after 1997 started to close this returns gap. Nonetheless, the profit-investment relationship did not reassert itself. The gap had been large enough for long enough to cause a structural break, permanently altering the incentive structure of the British economy. So, even when conditions improved, the structural malincentives created by financialization remained. As a result, the economy-wide share of private net investment continued to fall. 

More from this author

Test article

By Dominik A. Leusder

It was not just financial asset substitution. Firms increasingly used profits for share buybacks, to pay out dividends and to hoard cash — extracting value from the productive economy rather than reinvesting in it. The extent of shareholder value extraction is remarkable: dividend payout ratios (the share of net income distributed to shareholders) rose from 30-40% in the Seventies to 60-70% by the 2000s. This was devastating for precisely the kinds of long-term spending on which future growth depends. R&D is the easiest budget item to cut when shareholders demand short-term returns, and Britain’s R&D intensity suffered accordingly. Masking the underlying weakness were “wealth effects” — rising property prices made households feel richer — and an expansion of household debt to sustain consumption. This mask of credit-fueled growth slipped off in 2008. After the crisis, the financial sector’s size and returns on financial assets more or less flatlined.

But the damage had been done — and the underlying problems persisted. Financialization had shifted the composition of total surplus towards finance, a sector with inherently low capital investment needs compared to manufacturing. In relative terms, this reduced both the overall level of fixed capital formation and R&D spending, which is overwhelmingly concentrated in the manufacturing sector. The result is that Britain lags relative to peers like Germany, where manufacturing still comprises just under 20% of economic value creation. Every year of stagnant R&D spending makes this gap wider and harder to close; the cumulative damage to the country’s future potential to innovate is enormous. Britain’s financialized economy also misallocates human capital: financial workers capture 60% of top income decile gains while comprising just 5% of the workforce, drawing talented individuals away from engineering, research, medicine, education and public service. 

***

In this way, the economy’s resources — capital, labor and institutional attention — have been directed away from productive activity. This redirection explains the long-term structural trends in the British economy. But to account for the drastic worsening of the productivity and wage growth trends after the crisis, we have to look at policy. Burnham was correct to identify austerity and Brexit as two of the apocalyptic horsemen. But the reasons they belong on the list have to do with how they worsened the structural obstacles to investment created during the financialization era. Whatever industrial growth might have been possible after the eclipse of finance’s dominance was wrecked on the shores of these grand and unforced policy errors.

The fiscal consolidation program of the Cameron-Osborne era consisted almost entirely (80-85%) of spending cuts, and disproportionately hit public investment, infrastructure and R&D-enabling spending. In the first three years, capital spending was cut by nearly a third in real terms and public investment was pushed down to its lowest levels since the Sixties. By any measure, this was one of the most sustained, and in its cumulative effects severe, austerity programs in modern history. What sets it apart is that it was voluntary: the UK had its own currency, its own central bank, ultra-low borrowing costs throughout and faced no market pressure whatsoever to consolidate at this pace. Yet it did so in a front-loaded fashion between 2010 and 2013, just when public spending was most needed and cheapest to finance.

This matters not just for demand. Public investment is not a substitute for private investment but complementary to it: spending on infrastructure, education and research all raise the expected returns to productive investment in the corporate sector. At the same time, average real wages experienced their longest sustained fall since at least the Victorian era. Why would firms expand if there is not much growth in demand from consumers? And why should they invest in labor-saving (that is, productivity enhancing) processes and technologies in the absence of sustained wage growth? The broken profit-investment nexus, already weakened by decades of financialization, was now further undermined by deliberate policy choices.

The pressure on both real wages and investment started to ease in 2013 and 2014: austerity tapered off while a lower oil price and a stronger pound lifted some of the cost pressures. Brexit snuffed out this nascent recovery halfway through 2016. Since then, the net investment share of GDP reversed course and has not found its way back. It remains well below its 2007/08 levels. By some estimates, Brexit accounts for something like a third of the total growth shortfall that has accumulated since 2016, with the investment channel accounting for the largest single component. Real wages recovered only during the pandemic, when labor shortages and a churn in hiring restored the long-term trend.

The answer to “who broke Britain” must therefore include the governments between 2010 and 2016. Austerity seems to have been informed by the notion that the drag on competitiveness and productivity was the size of the welfare state, whereas Brexit assumed the panacea was remaking Britain’s trade and regulatory relationship with Europe. What these policies reflected was a failure to diagnose what was actually ailing the British economy and a thoughtless, almost frantic administration of the wrong treatments. This is strangely reminiscent of actions of Britain’s elite in the Eighties: overreacting to their own post-imperial decline by defenestrating industrial production, betting the house on finance — and losing.

***

The extent of the mess is such that Britain will likely not be restored to the ranks of the world’s great industrial countries. That privilege belongs now to the late industrializers in East Asia, all of which kept finance in check. But a plan to fix Britain does not require reindustrialization to that extent. Manufacturing’s share of economic output has declined across all advanced economies, who also underwent varying degrees of financialization. What distinguishes them from the UK is the extent to which this process has taken hold and to which it has created a reliance on financial services. Apart from gradually cutting this sector to size, it is not clear how this process can be reversed without a large public concerted investment program: in infrastructure, in education, in the energy transition — all designed to raise aggregate demand and the expected returns to private capital formation. 

But given the British economy’s unusual tendency to generate inflation, as well as the sensitivity of sterling and government borrowing costs to fiscal signals, any sizable public investment program would require a more accommodative central bank, one willing to support larger fiscal commitments rather than reflexively tightening against them. The Bank of England, however, seems more concerned with the interests of the financial sector, which favors stable prices and fiscal prudence. The policies of successive British governments too have reflected these priorities: the financial sector’s weight in the British economy is not just an economic but a political fact. It shapes the incentives of policymakers, the structure of the tax base, and the terms on which Britain engages with the rest of the world. 

It won’t be easy to eradicate the pro-finance bias. But starting with the right diagnosis is crucial. The intensity of Britain’s economic malady relative to that of its peer countries is not about trade relationships or welfare spending or European regulations. It is a particularly unfortunate child of the neoliberal turn, whose main macroeconomic legacy has been the rise of finance and the steady erosion of productive investment despite burgeoning profits. It would be politically expedient to point out that countries who have been able to insulate themselves from the worst effects of this era, chief among them China, are in a position to determine their external affairs autonomously. In the “post-neoliberal” era, then, the first step to “fixing” Britain should involve accepting that the City of London’s status as a global financial center, far from being the crown jewel of the British economy, has come at an enormous cost to the country’s productive capacity and, ultimately, to its sovereignty. 

According to the logic of the radical center, politicians are easily lured by a siren’s song: the electorate’s demands for higher spending and lower taxes. And so they must bind themselves to a Ulysses pact. Homer’s hero tied himself to his ship’s mast and ordered his sailors to plug their ears with wax while sailing past the sirens’ coast. Similarly, centrist chancellors tie themselves to the mast of the Bank of England and the OBR — whose technocrats, their ears stuffed with the wax of economic models, are only too happy to run the economy on our behalf.

The problem with this centrist delusion is that, unlike meteorology or other hard sciences, there are no real experts to turn to on macroeconomic matters. As John Kenneth Galbraith once put it: “[t]he only function of economic forecasting is to make astrology look respectable.” There is a reason why not once in the history of capitalism have economic models predicted any major turning point: unlike the weather, which does not give a damn about our predictions or theories, what we call “the economy” is profoundly influenced by our predictions and theories regarding “the economy”.

In other words, economic models are constitutionally incapable of predicting economic phenomena reliably. Consider the Bank of England’s econometric models, which predict every quarter that inflation will fall below the Bank’s maximum target of 2% by the end of the year. These models are built on the assumption that inflation will revert to 2%, which is why they predict that it will. Mistaking an assumption for a forecast is a mistake that would be laughable if it were not so dangerous. And it is not just that.

If you look under the hood of the Bank of England’s models, you will find something else that is very strange. There is an assumption that there exist well-defined relationships linking the rate of interest with investment and with inflation: for example, if interest rates jump to, say, 6%, investment will fall by, say, 1% and inflation by, say, 0.8%. Unfortunately, these relationships are not just difficult to quantify — they are, in fact, impossible to define. The reason is that prices (and inflation) depend far more on variables that the Bank of England neither observes nor controls (such as the fluctuating monopoly power of businesses or overseas energy prices) than on the overnight interest rate that it controls. Similarly with the OBR’s medium- and long-term projections of growth: like sausages, if you knew how they were made, you would not want to touch them.

More from this author

Javier Milei is no libertarian

By Yanis Varoufakis

This is why Rachel Reeves’ predecessors took the Bank of England and OBR forecasts with a massive pinch of salt, seldom hesitating to break their own rules when their best-laid plans were derailed. But not Reeves: paralyzed by the specter of Liz Truss re-emerging from the netherworld of financial catastrophes, the Chancellor is not only choosing to remain within her self-imposed straitjacket but is also reluctant to loosen its straps even a little to give herself some room to maneuver. Two examples illustrate this self-defeating reluctance.

First, Reeves claims she has no alternative than to raise taxes by around £30 billion, or 1% of national income, annually. Why? Only because the OBR says so. And why does the OBR say this? Because, in an attempt to repair its awful reputation for overestimating growth, the OBR suddenly downgraded its productivity growth estimate for the next decade. In short, taxes will go up because a panel of experts, known for their appallingly wrong forecasts, are now forecasting that their forecast was wrong.

If the OBR were similar to the Met Office, and the economy the weather, perhaps Reeves would have cause to stick to the OBR’s advice. But productivity depends on investment, which depends on the Chancellor’s choices: its path cannot be predicted by the OBR independently of the Chancellor’s policy choices. By deferring to the OBR to raise new taxes to an arbitrary number, Rachel Reeves is abdicating her responsibility for the economy.

Second, let’s say, for argument’s sake, that she really must find an additional £30 billion of so-called fiscal space annually. Why raise taxes when she can simply end the £34-billion annual payment the Treasury advances to the City of London for precisely nothing in return? As I explained earlier this year, Reeves has actively allowed the Bank of England to damage the Treasury’s bottom line in two unconscionable ways. By selling off UK Government bonds at a lower price than the Bank purchased them for, she incurred an accounting loss that the Treasury is now plugging and increased the Government’s borrowing costs. Additionally, by choosing to pay private bankers the higher interest rate on every pound they keep in their Bank of England reserve account, the Government has been subsidizing the bankers to avoid lending out billions to the private sector.

Could Reeves have prevented this madness? Is she not bound by the independence of the Bank of England? In the same way that Gordon Brown granted independence to the Bank, Rachel Reeves could have restricted its powers: by insisting it adopt two of the European Central Bank’s sensible policies. Firstly, hold the Bank’s stock of UK Government bonds until maturity to avoid losses from selling them cheaply on the secondary bond market. Secondly, pay interest to bankers only for a small portion of the money they deposit.

What if the Bank of England refused to comply with the Chancellor’s demands? Then she could respond by passing a bill that prevents the Treasury from reimbursing the Bank of England for such self-inflicted losses. Would this not cause the Bank of England to seek insolvency? Of course not. Central banks are not like private banks: as long as they issue the state’s currency, they cannot go broke even if they have negative equity for years on end.

Instead of confronting the Bank of England and showing less deference to the OBR’s predictions, Reeves resorts to acts of total self-sabotage: allowing bracket creep to tax more people whose purchasing power has shrunk; penalizing those who sacrifice salary for future pensions; and impeding the green transition with an absurd per-mile tax on electric vehicles.

The worst part is that Reeves has forced us to debate matters that do not matter, such as foolish fiscal rules, while ignoring those that do. Since at least the 2008 financial crisis, Britain has been caught in a terrible situation of low investment, low wages, low productivity and, crucially, low expectations. Every government since 2008 has failed in its one key task: to convert the vast sums of money sloshing around in the City into productive investments.

For 17 years now, this failure has exacerbated the country’s “finance curse”. Britain is plagued by a process whereby high liquidity and low investment bolster Britain’s assetocracy, draw more foreign capital into the City (which is not invested in manufacturing), increase the UK’s current account deficit (a consequence of growing wealth disparities and declining domestic manufacturing), and cause even greater capital inflows to finance it. And so on. How can this vicious cycle be broken without causing a breakdown in either public confidence or the City?

What the Liz Truss debacle demonstrated is that Britain needs a more political government. To fund the production of things Britain desperately needs — such as green energy, cloud capital, a capacity to build infrastructure well, economically and on time — requires raising some taxes and issuing debt so as to crowd in the private money that has been hitherto reluctant to fund anything socially worthwhile. Sadly, Rachel Reeves, along with Keir Starmer, concluded instead that Britain needs less politics and more rules of the type that reality is bound, sooner or later, to violate.

Turning from Reeves’ sins of commission to her sins of omission, here is an example of what Labour should have done upon winning office. The Government should have established a national investment bank (NIB) to finance green and advanced technology enterprises to the tune of no less than 3% of national income (or around £90 billion) annually. The money would not come from the sale of UK Government bonds but from bonds issued by NIB itself, to be repaid not from taxation but from the future profits of the green projects it funds. All it would take for NIB bonds to sell like hot cakes would be an announcement by the Bank of England that it is standing by, ready, if need be, to purchase these bonds on the secondary market.

By now, Reeves should know that it is foolish to allow fiscal rules and narrow cash calculations to prevent necessary enterprise. “Anything we can do, we can afford,” J.M. Keynes said in 1942. The problem in the UK today is that, after decades of reducing the state’s capacity to do things, there is little that can be done well. Only by investing public money can Britain’s productive frontier expand again, drawing in private investment in pursuit of common goals.

Development and prosperity will not come because Reeves peppers every speech with a hundred mentions of the word “growth”. It will not happen because she appeases the City by continuing to sign bankers’ welfare checks at the behest of the Bank of England. And it certainly won’t transpire if she remains determined above all else to prove her fiscal orthodoxy to conservative critics who will never give her the light of day anyway. Mindless fiscal rules will only worsen the country’s stagnation.

US Treasury Secretary Scott Bessent has made his view on the matter clear: central banks are asked to do too much. But others have argued the opposite. Earlier this month, economic historian Adam Tooze wrote in the Financial Times that the monetary policymaking arrangement in the UK isn’t working well, and should be revisited. In essence, the Bank of England is not helping, and perhaps even hindering, the government’s efforts to grow the economy. Suffering from a severe period of economic malaise, the UK needs all the help it can get, from every part of the state, independent or not.

Without delving too deeply into the quagmire of central bank independence, Tooze called for a “new concordat” between the Bank and the Government. Others on the progressive end of politics have, along similar lines, advocated for more fiscal and monetary coordination. Personally, I don’t like the term “coordination”, because it hides the real question: who should be in charge, the Bank or the Government? The answer to that question, in the context of a modern democracy, would seemingly have to be the Government.

So, whether you think that we should junk central bank independence altogether (a point I’ll return to) or merely that the nature of the relationship between the Bank and Parliament, which was set down in 1997, needs revisiting, it’s worth considering what such a new concordat might address. In other words, what should the Government consider changing about how the Bank of England operates?

The concordat should address four things. First, the Bank’s mandate which is currently to secure price stability and then to support government policy. On this basis, one could argue that the central bank is already failing. Currently, it is engaged in a process known as Quantitative Tightening (QT), which is effectively the unwinding of the better-known Quantitative Easing, which was first used after the financial crisis. During QE, the Bank purchased bonds in order to inject money into the economy. QT involves selling off those bonds, or simply letting them mature without reinvesting. In so doing, the Bank of England is shrinking its balance sheet and affecting the gilt market. QT is not necessary for price stability, and — far from supporting government policy — it is, by some accounts, making things fiscally tighter for the government. This might lead one to ask: is the Bank’s decision to engage in QT, particularly right now, in line with its mandate?

That is not even to mention all the things that the Bank is choosing not to do, which could support the Government’s aims and are unlikely to prejudice price stability. Consider, for instance, changes in bank regulation to encourage investment —particularly domestic growth driving investment, even green investment, or investment in particular regions of the country. Other central banks have deployed programs designed to support credit creation in particular regions and sectors — India, Japan, and the Eurozone, for instance. The Bank itself, prior to the recent bout of inflation, had committed to tilting its own bond purchases, meaning skewing them toward “green” rather than “dirty” bonds. It later abandoned this program.

A concordat could change the way we understand price stability. Instead of instructing the Bank to aim for 2% inflation precisely, a target that is widely accepted as itself arbitrary, the Government could instruct the Bank to seek price stability understood as the absence of highly volatile price levels or hyperinflation. We might imagine this as keeping inflation roughly below 10%, as much empirical evidence suggests inflation doesn’t do lasting harm to the real economy until it gets into double digits.

Some would undoubtedly object: we’ve just had a bout of inflation below this level and it was very painful. This is, of course, true, but even with a precise target, the central bank was unable to prevent the pain and its solution was far from painless, as many at the time pointed out. In fact, it was government action, not central bank policy, that was required to ease the inflationary hurt, something we’d be more likely to get if there was no pretense that solving the issue was the central bank’s sole responsibility in the first place.

More from this author

How independent is the Fed?

By Leah Downey

The second area I’d suggest considering in a potential new concordat would be the Treasury indemnity of central bank losses. The UK is unusual among central banks for two reasons: first, the Bank of England considers itself capable of making a loss, and second, the Treasury has committed to an indemnity covering any central bank losses. That is: the Treasury, if need be, will bail out the Bank.

Not all central banks consider themselves capable of making a loss. The most obvious counter-example is the US Federal Reserve System, which does not register central bank losses in its official records. Instead, it has adopted a practice of deferred asset accounting. This means that anything which might be otherwise logged as a loss for the Fed is balanced off against the assumption of future gains — this assumption is not unrealistic, given the history of regular gains in the past that are remitted to the Treasury. In short, it is a choice for the Bank of England to account for “losses” in the way it does, and it is a choice for the Treasury to indemnify them. The alternative would be for the central bank to simply cover the losses itself, as in the US, based on future gains, or by virtue of its power to print money.

MPs involved in this new concordat should consider changing the Bank’s accounting practices and/or eliminating the indemnity. Or at the very least, they could force the publication of the legal terms of the indemnity. At the moment the conditions for the Treasury covering central bank losses are unknown to those outside the Treasury. Many have called for the release of the details; among them is the House of Lords committee on Economic Affairs, twice. Without knowledge of how the current indemnity works, it’s hard to understand why it should exist at all.

The third area ripe for reconsideration is the way the Bank of England conducts monetary policy. Since 2009, the Bank has conducted interest rate policy by paying bank rate — that is, the interest rate paid by banks rather than consumers — on the reserves that private banks hold at the central bank. In 2024 it paid out approximately £40 billion to private banks, and such payments are projected to continue through 2033. As well as being large, these payments tend to be politically counter-cyclical. The central bank pays more to private banks when it is trying to raise the interest rate. This is usually a moment of economic pain for the average citizen. It’s hard to understand why the state should be giving huge sums of money, in such a tough moment, to private banks, and not using it to support public institutions. Some will claim that the answer is that we need to induce banks to hold reserves, and that paying them to keep their reserves at the central bank is the best way to do it. I’m not so sure. We don’t pay car companies to install seat belts, we just require it.

By paying interest on reserves to private banks since 2009, the Bank has effectively separated balance-sheet policy from interest rate policy, enabling the central bank to hold a large balance sheet without distorting interest rates. In practice, this has given the Bank a new and incredibly powerful policy tool — the balance sheet. But it’s not obvious what the Bank should be using this tool to achieve, given it is not technically necessary to secure price stability. One might suppose, based on the mandate, that it should be used to support government policy, but the Bank has not adopted such a view.

One way in which a new concordat could alter the contemporary payment on reserves mechanism would be for the Bank could adopt a tiered system of reserves — as many of various political stripes have suggested and other central banks (like the European Central Bank) have implemented. This involves paying banks different rates depending on the amount of reserves they hold at the central bank. It could mean paying banks only for a certain level of reserves — and not for excess or even placing a negative rate on excess. Or it could mean not paying banks at all for the required level of reserves and perhaps implementing a negative rate for those above that level. Notably, for this to work, the bank would likely need to embrace, or re-embrace, reserve requirements — reserve requirements are rules that set out the minimum amount of liquid assets that a commercial bank must hold.

Questioned by Richard Tice about whether the Bank should introduce reserve requirements, Andrew Bailey dismissed the idea. There is, in fact, no reason to dismiss the possibility of reserve requirements: they have been deployed historically by nearly every monetary jurisdiction and are still used (and encouraged) in many jurisdictions today.

Suggested reading

The fall of the crypto-oligarchs

By John Rapley

Finally, the last specific area ripe for reconsideration as part of a new concordat is balance sheet policy itself. QE, as we all know by now, had a major impact on the economy, but also on our political and social life. This is not particularly surprising as it involved the government creating buckets of money and using it to buy particular assets and not others. What the Bank buys, and how much, matters. There is good reason to consider a means of political input into any such deployment of the balance sheet. In 2024, the House of Lords Committee on Economic Affairs issued a report which called for a memo of understanding between the Treasury and the Bank on such policy, suggesting that two were not in full accord on the matter. Each institution responded to the report effectively saying there was no need for such a memo because I know what I’m doing. Clearly that’s not sufficient, given the mess we’re in right now where the Treasury is desperate to initiate economic growth and the Bank is chuntering on with QT as if it can’t hear the Chancellor at all.

We should reflect for a moment on what all this adds up to. This is a list of pretty major aspects of the contemporary monetary policymaking system. All of them are in need of a re-think if we are to assemble a unified macroeconomic policy in the UK that is fit for the moment. But that might make you wonder: is this a one-off? Should we be engaging in an ad-hoc reconsideration of the system, and then go back to our respective corners (the Government and the central bank)? Or is it more sensible to consider a mechanism through which the Government and the central bank can more regularly “coordinate” policy?

The UK, unlike many other jurisdictions, already has a means for establishing more institutionalized, regular exchange between the Government and the central bank. Every year the Chancellor writes a letter to the Bank offering guidance. In recent decades, as a result of deference to central bank independence, this letter has largely been pro forma and not imbued with much coercive power. But that need not be the case. We could reinvigorate this mechanism, should the Chancellor decide to use this letter to inform the Bank of changes the Government wishes to see both in the structure and operation of the central bank, starting with the four I’ve discussed here.

Unfortunately, it seems unlikely that Rachel Reeves will announce anything like a new concordat at the budget in November, or anytime really. Labour seems committed to hewing as closely as possible to what they understand to be conventional economic and financial wisdom on the subject. I don’t understand why exactly, but right now, the party in government seems unable or unwilling to try anything the contemporary central bank hasn’t already embraced. Consequently, it’s easy to see who is in charge here. One agent hoards the conventional wisdom and the other bows to it. It’s a shame twice over. Doing things as they have been done since the late Nineties is not a recipe for economic success in the 2020s and a system of government in which the central bank is calling the shots is not a democracy.

The phrase “sleeping with an elephant” has come to define US-Canadian relations in the minds of many Canadians. But since President Trump launched his second term in Oval Office, the elephant has been neither friendly nor even-tempered. In fact, its twitches and grunts have recently become more like angry kicks and menacing roars, especially with Trump’s imposition of a 25% tariff on most goods from Canada.

Rather than meek acceptance, however, the response in Canada has been a surge of nationalist sentiment. Only, at the helm of this patriotic revival is a new prime minister, Mark Carney, for whom the substance of Canadian identity amounts to little more than . . . globalism, multiculturalism, and liberal proceduralism.

Trump has offered varied justifications for his punishing tariffs. He alleges an uncontrolled stream of illegal immigrants and fentanyl pouring across the border, notwithstanding the Canadian government’s serious efforts at interdicting such flows. He is on much firmer ground when he points to the trade imbalance between the two countries, with Canada running a significant trade surplus with the United States; about 20% of what Canada produces is consumed by Americans.

At a meeting in Mar-a-Lago, Justin Trudeau, the recently ousted prime minister, protested that such tariffs would “kill the Canadian economy”, eliciting from Trump a suggestion that Canada would be better off as the 51^st state. This line was initially heard by most people as a jest, but Trump has become fixated on the idea. Remarks about the US-Canadian border as an “artificially drawn line” have fueled fears that his real endgame is annexation.

Suggested reading

What the Right gets wrong about Canada

By Michael Ledger-Lomas

Perhaps Trump is just trolling, something that certainly wouldn’t be out of character for him. But a recent post on his Truth Social website signals that he may mean business. “The only thing that makes sense is for Canada to become our cherished Fifty First State”, he wrote. “This would make all Tariffs, and everything else, totally disappear”. Trudeau, for one, takes Trump at his word, stating that he believes the real aim of the tariffs is nothing less than “a total collapse of the Canadian economy because that will make it easier to annex us”.

Trump’s tariffs and his annexation rhetoric have had consequences that he surely did not intend. Canadians have never been big flag-wavers, but sales of Canadian flags have skyrocketed, American liquors are being pulled from store shelves, grocery stores are slapping labels on domestically produced items, and many people are scrapping travel plans to the United States. A movement to boycott US goods is underway.

The tariffs have also been a godsend to the governing Liberal Party. Trudeau’s plummeting approval ratings threatened to deliver his party a crashing defeat in the election to be held later this year. But when Trudeau’s unpopularity prompted his resignation, the Liberals were forced to replace him as party leader and prime minister. Mark Carney, an economist and banker with no previous experience in elected office, won in a landslide in the party vote. Like a phoenix rising from the ashes, the Liberals are now inching their way back up in the polls, though they still face a steep uphill climb.

Carney’s victory speech on 9 March tapped into the rising nationalist sentiment. Switching back and forth from English to French, Canada’s two official languages, he called out Trump for “trying to weaken our economy”. But more than the Canadian economy is at stake, he warned: “The Americans want our resources, our water, our land, our country. If they succeed, they will destroy our way of life.”

What exactly did Carney mean by the phrase “our way of life”? Hockey, maple syrup, Tim Hortons, and politeness come to mind. But the features of Canadian identity that Carney highlighted were all political or institutional, such as universal health care and the country’s strong tradition of social programs and wealth redistribution. He also lauded Canada’s much-vaunted policy of multiculturalism: “America is a melting pot. Canada is a mosaic.”

“America is not Canada. And Canada never, ever, will be part of America in any way, shape, or form”, he declared to an enthusiastic audience. He made it clear that the future of Canada now depends on pivoting away from economic integration with the United States to seek more “reliable” trading partners.

Carney also sought to attach the odor of Trump to the opposition party, insinuating that the Conservative standard-bearer Pierre Poilievre “worships at the altar of Donald Trump”. To accuse Poilievre of kneeling before the US president may be an overstatement, but he has voiced support for many of Trump’s policies and has a reputation of being cozy with MAGA types. He recently accepted the endorsement of Elon Musk, an action that may come back to bite him.

Still, Carney is an unlikely champion of Canadian nationalism. Born in the Northwest Territories, he spent most of his adult life outside Canada, studying at Harvard and Oxford, then working for Goldman Sachs in London, New York, and Tokyo. After a stint as the governor of the Bank of Canada, he in the same role at the Bank of England. He holds both British and Irish citizenship, making him an EU citizen.

From the perspective of nationalism, it is noteworthy that he stoked controversy at the helm of the Bank of England when, prior to the Brexit vote, he decried leaving the European Union as the “biggest domestic risk to financial stability”. Many interpreted his remark as a political intervention that overstepped his job description.

Carney also has strong ties to globalist elites, with memberships in the G30, the World Economic Forum, and the Bilderberg Group. In short, he is the quintessential Davos Man, a cosmopolitan technocrat and financial bureaucrat with a newfound fondness for nationalist rhetoric.

Arguably, what Carney defends as “our way of life” is a vision of Canadians as good global citizens pulling their weight within the rules-based international order that Trump seeks to dismantle. As Canadian political scientist Tyler Chamberlain has observed, “Canadian identity is bound up very closely with multilateralism, international organizations, and free trade. That’s the kind of nationalism that is playing well today”. Meanwhile, Canadians watch American television, cheer American sports teams, and “think like Americans in many ways that really matter — but we have health care.”

Carney is a specimen of what Canadian political philosopher Ron Dart calls liberal nationalism, which is of relatively recent vintage, the chief precedent for the present moment being Prime Minister Pierre Trudeau’s trade disputes with Richard Nixon. “Liberal nationalism usually emerges from a position taken by the United States at a given moment that threatens certain elements of the Canadian economy”, says Dart. It tends to be reactive and narrowly focused on economics.

Suggested reading

Justin Trudeau's ‘feminist‘ hellscape

By Julie Bindel

It differs from what Dart calls High Tory nationalism, “which comes from a much deeper grounding in the Canadian soul”. Its most prominent exponent in the 20^th century was the philosopher George Parkin Grant, but it harks back to the founding of Canada as a nation that sought to preserve British and French traditions that were foreign to the society taking shape in the United States. Instead of placing a premium on liberty and individualism, like the Americans, the Canadian High Tory tradition aspired to a more orderly society oriented toward the common good of the whole.

Over time, however, Canada was transformed into what Grant called a “branch plant satellite” of the United States, a supplier of raw materials to the superpower that had emerged postwar as the “spearhead” of the dynamic liberal capitalist order. As early as 1965, Grant lamented that Canada was ceasing to exist as a sovereign nation. Dependent on the United States for both markets and defense, Canada was being absorbed, culturally and economically, into the behemoth to its south. Canada’s formal political independence might still persist for some time, Grant thought, but only due to a kind of inertia.

Grant believed that Canada was being swallowed up into an emerging global order helmed by the American hegemon. In a surprising twist, the American republic that now threatens Canadian sovereignty is a nation in open revolt against that liberal hegemonic order. Living within the gravitational field of the United States, Canada has always retained ties to its older roots in Europe. Ironically, Trump is now forcing Canada to become more internationalist in the name of Canadian nationalism.

But Dart believes this current upsurge of liberal nationalism is shallow. Though intensely felt at the moment, it is also likely to be ephemeral, lasting only as long as MAGA’s reign, since it is motivated by an external threat rather than a living memory of older Canadian traditions. “If you have no memory of anything”, he says, “then what holds you together? What holds Canadians together at this point is anti-Trumpism.”

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.

More from this author

Britain is facing a second 2008

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.

Suggested reading

Welcome to the cashless dystopia

By Rachel O'Dwyer

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.

Suggested reading

Marx's vision of inequality

By Branko Milanovic

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.

Suggested reading

How Coutts destroyed capitalism

By Peter Ormerod

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.

It seems almost inevitable that the Bank of England’s recent decision to raise interest rates for the 13th consecutive time since the end of 2021 will push the UK economy into recession by the end of the year. Simply put, raising interest rates means that homeowners have to devote a bigger chunk of their disposable incomes (as much as 20%, according to estimates) to paying back their mortgages, potentially pushing 1.2 million households into insolvency. Renters, too, are likely to see their payments increase as buy-to-let landlords pass on higher mortgage repayments. Meanwhile, businesses will fail, workers will be laid off, and, with less money being channelled into the economy, the latter will ground to a halt.

What’s worse, this catastrophic scenario isn’t the result of the Bank’s economists not realising the consequences of their actions; among Britain’s policymaking elite, it’s the desired outcome. As J.P. Morgan’s Karen Ward, who is also an external adviser to Chancellor Jeremy Hunt, said: “The difficulty for the Bank of England is they have to create a recession. They have to create uncertainty and frailty.” Asked if he agreed with the idea of the central bank doing whatever was needed to bring down inflation, even if that could cause a recession, Hunt himself responded in the affirmative.

In this, however, he was merely channelling Andrew Bailey, the governor of the Bank of England, who said: “We’re not desiring a recession. But we will do what is necessary to bring inflation down to target” — even if that means causing a recession. Rishi Sunak has also expressed unwavering support for the Bank’s work, though no-one is more explicit than the Financial Times’ Martin Wolf, who went so far as to call for an engineered recession: “The question is not whether there will be a recession; it is rather whether there needs to be one, if the spiral is to be halted. The plausible view is that the answer to the latter part of this question is ‘yes’.”

If the idea of wealthy politicians, journalists and bankers (Bailey earns $575,000 a year) casually talking about the need to plunge millions of people into poverty makes your blood boil, good for you: you’re still human. But there is, of course, a logic to their madness. Their argument is that the British economy is facing a wage-price spiral, where workers demand higher wages to compensate for higher prices, to which companies respond by raising prices even more in an attempt to defend their profit margins, causing workers to push for even higher wages — and so on, in an inflationary feedback loop.

In this context, Bailey and his peers argue, the only way to break the inflationary spiral and put an end to the “unsustainable” wage demands of workers is to raise unemployment through an engineered recession, thus recreating a reserve army of labour and weakening the latter’s bargaining power. If such a policy sounds crazy, or wicked, it’s because it is. For starters, even if we were actually witnessing a textbook wage-price spiral, you would have to be particularly callous to blame ordinary workers for trying to protect their living standards and feed their families in the face of a cost-of-living crisis which they did nothing to create. Even the former deputy governor of the Bank of England, Sir Charlie Bean, has acknowledged this, criticising the Bank’s interest rate hike.

At the very least, this situation would call for a consensual approach to the problem, via wage and price guidelines that would distribute the burden of reducing inflation equitably among labour and capital, rather than a one-sided approach aimed at placing it on workers alone via higher unemployment. But even this ignores the fact that the UK’s wage-price spiral might not exist at all. Over the last two years, real wages — that is, wages adjusted for inflation — have been falling at among the fastest rates for more than two decades, while corporate profits, in several sectors, have been soaring. Workers, then, are already losing out in their tug of war with capital over who should shoulder the burden of inflation.

More importantly, there is no evidence that inflation in the UK is driven primarily by “irresponsible” wage demands or even overall excess demand in the economy (as was partially the case when the Government supported people’s incomes during the pandemic), which would at least provide some theoretical justification for the argument that the economy needs cooling down. If anything, we would appear to be witnessing a price-wage spiral, where workers are simply trying (and failing) to keep up with companies pushing up prices, rather than vice versa.

Since the start of the year, however, many of the supply-side costs which had been driving up prices throughout 2021 and 2022 — such as the increased cost of energy, fertilisers, metals and other commodities, as a result of supply-chain bottlenecks and the war in Ukraine — have been rapidly falling. It’s also hard to argue that Brexit is responsible when food price inflation has been higher in the euro area. So, why are prices continuing to rise?

Suggested reading

Why Britain can't control inflation

By Tom McTague

According to a number of economists, it all comes down to greed. The idea is that, in late 2022 and early this year, large companies, especially those enjoying considerable market power, have raised prices by a greater margin than necessary to accommodate for higher input prices, thus leading to considerable profit margins. As Albert Edwards, investment strategist at Société Générale, has observed: “Companies have used the ‘cover’ of supply constraints from the pandemic and the war in Ukraine to raise output prices well beyond what is justified to maintain margins” — and consumers have largely accepted these hikes as inevitable after hearing so many stories about energy prices, the war in Ukraine, supply-chain disruption, Brexit and so on.

Until recently, “greedflation”, or profit-led inflation, was dismissed as a fringe theory, but thanks to the work of economists such as professor Isabella Weber of the University of Massachusetts, its importance — at least in the US and eurozone — is no longer ignored. In March, experts at the European Central Bank concluded that profit margins had become the main driver of inflation, accounting for two-thirds of real-terms price increases in 2022. Just this week, a similar conclusion was reached by the International Monetary Fund, while several studies have pointed to a similar dynamic at play in the United States.

What about the UK? Unfortunately, neither the Bank of England, with its 4,500 staff, nor the Government, has felt the need to commission an in-depth investigation into the phenomenon, so we don’t really have much solid data to go on. However, analysis published in March by Unite, the UK’s largest private sector trade union, found that the average profit margins of the top 350 companies listed on the London Stock Exchange increased from 5.7% in the first half of 2019 to 10.7% in the first half of 2022. And a more recent study found that the jump in UK-wide company profits was responsible for almost 60% of inflation in the past half year, as opposed to just 8.3% due to labour costs.

Despite this, the Bank of England has systematically dismissed the issue of corporate profiteering. Only last month, Andrew Bailey said that the increase in corporate profits was not the result of greed but “a story about rebuilding margins that were squeezed, particularly in the early part of last year”. Even if this were true, it is telling that the Bank considers it fine for corporations to “rebuild their margins” after a two-year squeeze, but if workers demand higher wages to compensate for their own living standards squeeze, they have to be crushed.

Suggested reading

America's fake bankruptcy crisis

By Thomas Fazi

That said, there is evidence that, in some sectors at least, there is a degree of price-gouging going on in the UK as well. Food inflation, for example, remains at a historic high despite the falling wholesale costs faced by farmers and food manufacturers. MPs, academics and trade unionists have largely blamed supermarkets, accusing them of increasing food prices beyond the pace of inflation and their own rising costs. Tesco, the UK’s biggest supermarket, made £2.6 billion in adjusted operating profit in the 2022-23 financial year — £1 billion more than it made in 2018 and the highest it has made in any year other than 2021-22.

But the pressure may also be coming from further down the supply chain: from food manufacturers and producers. Margins among the big food manufacturers, for instance, are in the 16-22% range. And Paul Donovan, the chief economist at UBS Wealth Management, believes that thousands of companies have jacked up bills for many months, improving profit margins at their customers’ expense.

No doubt realising this, the Bank of England and Government have started to timidly acknowledge that big businesses may be playing a role in the inflationary surge — but it’s too little, too late. Indeed, following pushback from the industry, the Government quickly drew back from suggestions that supermarkets should impose “voluntary caps” on the prices of essential goods. What’s left is a recessionary policy that will do little to appease inflation, but will serve to punish workers for daring to protect their incomes. And this comes as no surprise: not for the first time, in the silent class war being waged by big business against workers and consumers, Britain’s technocratic elites have made it amply clear on whose side they stand.

Are things as bad as they were in 1978? Not on the surface, at least. Back then, the dead were left unburied and rubbish piled up in the streets as the government and trade unions entered into a battle to the death that both would lose. But today, like then, spiralling inflation is tearing at the fabric of society, forcing policymakers to squeeze the life out of the economy just to contain rising prices. And this time, it comes after 15 years of stagnant living standards; in the Seventies, life for the ordinary worker had improved year on year thanks to strong unions who could squeeze real-terms pay rises from employers.

Britain’s post-war economic history could be seen as one long battle against inflation and the search for an “anchor” to stop the doom loop of stop-start, boom and bust. In the Sixties and Seventies, both Labour and Tory governments adopted a “prices and incomes policy” believing that the way to control inflation was to manage people’s pay rises and what companies could charge for certain goods. This collapsed with the Winter of Discontent and the election of Margaret Thatcher, who came into power with her own grand theory, monetarism, which also failed.

Next, the European Exchange Rate Mechanism was taken up — only to spectacularly collapse in 1992, along with John Major’s economic credibility. At this point, we formulated the “inflation target” and then outsourced the problem to the Bank of England in 1998: a monetary policy committee of technocratic experts was allowed to set interest rates which would keep inflation to this target. With this, we believed we had solved the problem.

For most of the next 20 years, inflation was not much of a story. First came the boom years of Blair and Brown when, apparently, the business cycle had been abolished — an era Mervyn King referred to (tongue firmly in cheek) as the “nice” years of “non-inflationary consistently expansionary” economics, his point being that no such thing existed. This was in 2005 and King was worried about rising oil prices fuelling inflation again. But then came the crash of 2008 and the subsequent years of austerity and stagnating living standards, cushioned only by the record-low interest rates which have now spectacularly come to an end.

Today, with inflation almost in double digits, the Bank of England is squeezing the economy hard, ratcheting up interest rates. Sunak, meanwhile, is hinting at further wage restraint on public-sector workers to put even more downward pressure on the economy in order to hit his own political target to halve inflation by the end of the year.

This, some might say, is merely the Bank doing its job: force-feeding the country some necessary bitter medicine. The problem, in other words, is not the system, or even those in charge of the system, but conditions beyond their control.

But the Bank can’t have it both ways. Were those decades of low inflation really thanks to its good judgement? Or could other structural reasons have played a part? After 1998, China flooded the world market with cheap goods; immigration from poor parts of Europe soared; and trade unions were no longer powerful enough to protect their workers’ living standards.

Many regard the period between 1992 and 2008 as Britain’s golden age, when sensible politics reigned; inflation was low, the economy grew, deficits were sustainable, debt was low and Britain’s place in Europe was settled. This was the post-Maastricht, post-ERM settlement: Britain was in the EU but outside the euro, conveniently placed within both the European single market and the great global financial system — a trusted, stable, liberally regulated investment opportunity, perfectly placed to boom in the 21st century. After decades searching for our anti-inflationary anchor, we had found it. We had solved politics. Many people still yearn for this settlement to be rebuilt.

And yet almost every plank of this settlement has collapsed. The financial system blew up in 2008, shattering the British economy and, with it, the New Labour political settlement on which it was built. A few years later, the eurozone crisis revealed the diplomatic weakness of Britain’s place outside the single currency, precipitating David Cameron’s failed attempt to renegotiate the terms of British membership, leading to Brexit. Our faith that the Bank of England could control inflation is one of the last remaining planks left in place. And now that looks close to breaking.

There are good arguments that our current spike in inflation is a blip caused by the pandemic and Russia’s invasion of Ukraine. But there are other reasons to believe it might be here to stay. China, for example, is no longer simply a mass producer of cheap goods, but is turning itself into a high-skilled, hi-tech manufacturing superpower — a kind of super-Germany. Meanwhile, the great power rivalry between the US and China is bifurcating the world economy, throwing up protectionist trade barriers which will inevitably drive up the price of goods. And finally, the free movement of workers from Europe has ended with Brexit. In short, the three structural reasons which might have kept inflation low for 30 years are no longer in place. And this is before taking into account the energy transition to “net zero” which most Western governments are currently pursuing.

If we are entering a world of persistent inflation, high interest rates and the return of stop-start economics, you can bet that, as night follows day, the search for a new easy fix will commence — a new “anchor”. If only we returned to the EU, our problems would be solved, some will argue. If only we replaced the Bank of England’s monetary policy committee with better people; if only we returned to some kind of collective pay bargaining; if only we unilaterally abandoned our trade barriers. If only, if only, if only.

The truth is we have far less control than we like to admit. To think that we have solved the inflationary conundrum by outsourcing it to the Bank of England is as hubristic as all the other assumptions we made about the end of history in the Nineties.

Britain’s central bankers can’t solve the inflation problem in isolation. It has one set of tools — interest rates — and these are blunt instruments at best. In both the Seventies and Eighties, it quickly became clear that monetary policy alone was not enough to deal with inflation; fiscal tightening was also necessary. And even then, sudden shocks in the global economy completely changed the domestic picture, whether the oil price rise of 1973 or oil price crash of 1986.

The other lesson from history is that the battle to control inflation is, by its nature, political not technocratic. Whichever method you choose to keep it under control, the burden necessarily falls on one group in society over another. In the Seventies, unionised workers protected themselves with good pay rises, while those living on fixed incomes, like the elderly, were badly hurt. Over the past 15 years it has been the opposite. Today, meanwhile, it looks like the burden will fall on those with mortgages — a group that has largely avoided the pain until now.

While inflation seemed under control in the Nineties and early 2000s, few paid much attention to the distributional consequences of the system, but today the whole structure is back under scrutiny. And so it should be. Not only is the Bank’s competence fair game, so too is the system itself, resting as heavily as it does on interest rate rises over other tools.

With an election on the horizon, we may find ourselves in a new world where the Bank of England is working to meet a medium-term target set by a government whose other policies are making it harder to reach that target. This was briefly the case under Liz Truss, when she tried to put rocket boosters under the British economy regardless of the inflationary consequences. In doing so, she was not acting like her hero, Margaret Thatcher, but far more like Ted Heath in 1972 who ordered his chancellor Anthony Barber to unveil an expansionary budget in time for Britain’s entry into the European Economic Community in 1973, wrongly believing a virtuous cycle of growth and modernisation was on the horizon.

Truss is unlikely to be the last prime minister to find themselves in conflict with the Bank. Will Sunak really be able to avoid the temptation of an inflationary tax cut before the next election? Don’t bet on it. And if he does cut taxes, prepare for the squeeze after the election — and the stop-start cycle begins again.

The eternal truth is that there is no magic cure for Britain’s economic ills — no framework which solves our problems forever. Governance is art, not architecture: the management of circumstance, not the building of permanent structures. Inflation is back and so too are the politics of inflation. Strap in for a bumpy ride.

One might think that, amid a global cost-of-living crisis, these bodies would have other, more pressing concerns. But central bankers are never ones to miss an opportunity — and in fractious times like these, uncertainty is the most profitable opportunity in the business.

To understand the sudden rush towards digital currencies, let’s begin with the notion of “digital money”: as flashy as this may sound, it’s nothing new. In fact, fiat currencies are already digital and have been for a long time: in the UK, for example, 95% of all the money in circulation is electronic (the ones and zeroes that make up the money in our bank accounts), and 85% of transactions are made electronically. Online-only banks are also becoming increasingly common. CBDCs are therefore clearly not about making money digital — it already is.

Where a CBDC would change things, however, is that the digital money would be created directly by the central bank, as opposed to commercial banks. Indeed, when people hear the words “money creation” or “money printing” they tend to think of central banks and quantitative easing, but most of the digital money held in our bank accounts is actually created by commercial banks. We tend to assume that banks collect deposits from savers and lend them to borrowers. But that is not how today’s system works. In reality, when a bank makes a new loan, it simply taps some numbers into a computer and “creates” brand new money, which it then deposits into the borrower’s account. The bank’s pre-existing deposits are not even touched; the money is effectively created out of thin air. Instead of deposits leading to loans, it actually works the opposite way: it’s the loans that lead to newly created deposits. In other words, the banks lend money that they don’t own, at a rate of interest.

This creates a number of problems. First and foremost, privately created digital money is always accompanied by debt (since the new money is created in the form of loans). Moreover, it means that to a large degree, private banks — not central banks — control the supply of money in the economy. This gives them the power to create a potentially infinite supply of money, especially through the process of securitisation, fuelling massive credit bubbles (which inevitably go bust). It also hands them control over where this money goes, which is usually to those who are already well-off and can therefore provide the necessary collateral.

There are several reasons, then, why the current system of privatised money creation is problematic, and needs to be radically reformed. But central bank digital currencies will not solve the problem, unless they were associated with a move towards a full-reserve banking system, whereby commercial banks could only lend deposits created by the central bank, thus giving the latter full control of the money supply. This, however, is not currently under discussion. As the Bank of England has made clear: “The digital pound would not fundamentally alter the traditional channels of money creation”.

So what is the point of central bank digital currencies? One of the arguments made by governments and central banks is that they would provide a safe, state-backed digital alternative to private cryptocurrencies, which are highly speculative, extremely volatile and outside the regulatory control of governments. Regardless of what one thinks of cryptos (personally I’m no fan), this explanation makes little sense. People invest in Bitcoin and similar blockchain-based cryptocurrencies precisely because they are decentralised systems beyond the control of governments, and because they hope their value will rise over time. It’s hard to see why those same people would opt for a highly centralised system like CBDCs, which have failed to build on any of the core insights that led to the creation of cryptocurrencies. Most CBDC implementations, for example, will likely not use any sort of distributed ledger technology such as blockchain.

Suggested reading

The crypto revolution is failing

By Greg Barker

Other arguments offered in favour of CBDCs — that they will help promote financial inclusion, improve transactions speeds and economic efficiency, bolster confidence in the currency, and even help fight climate change — either make little sense or are little more than empty slogans. Why would the 1.2 million people in the UK who don’t have a bank account be inclined to open a “digital wallet”? Why would the latter be less energy-intensive than ordinary bank accounts? And if governments want to lower transaction fees and bank charges, why don’t they simply legislate to that end?

Ultimately, it’s unclear exactly what problems CBDCs are supposed to solve or even what their benefits would be. The potential risks of digital currencies, on the other hand, are all too clear. One issue is that of privacy. CBDCs would allow central banks to monitor, record and analyse all transactions in real time, accumulating sensitive payment and user data at an unprecedented scale. As a report published by the IMF notes, “accumulating so much sensitive data in one place increases security risk by making the payoff for would-be intruders much greater, amplifying the scope and scale of many of the security and privacy threats that already exist in today’s financial system”. Such threats could come from cybercriminals or foreign states — but they could also come from government authorities themselves.

CBDCs, after all, would give governments sweeping powers of surveillance and control, allowing them to instantly punish citizens and consumers for behaviours deemed undesirable, by fining them or even locking them out of their accounts at the flick of a switch — in much the same way as China already uses its “social credit” system to prevent people from buying plane and train tickets for so-called “behaviour crimes”.  

This is especially true if we consider that the widespread use of CBDCs could accelerate the transition towards a “cashless society”, a pet project of the World Economic Forum, in which all transactions are monitored and recorded (even though the Bank of England and the Treasury deny that the digital pound would replace cash). Another related issue is that of social manipulation, insofar as CBDCs are “programmable”, meaning that the money can be restricted in the way in which it is used; when, where, by whom — and even whether it can be used at all. This would confer governments a huge degree of control over the spending and consumption habits of citizens — for example to enforce ostensibly “green”, “climate-friendly” and “healthy” choices, or to blacklist certain companies, products and even countries (forget that Russian caviar!).

More from this author

The paradox of Degrowth Communism

By Thomas Fazi

Now, it’s important to note such tools could potentially be used for positive ends. Theoretically, they could be subject to democratic accountability and control, and could be used to track criminal syndicates and illicit activities such as money laundering, and to reduce corporate tax evasion, rather than to go after ordinary citizens. But the past few years have made it pretty clear that Western states are heavily swayed by the ruling factions of the capitalist class that make up the biopolitical lobby, the intelligence and security establishments, and globalist organisations such as the WEF — factions that have no qualms about using the repressive powers of the state to cement their rule, and discipline the masses.

In this context, it is perfectly normal for people to be concerned about handing over even more power to governments. The latter, let’s not forget, have already resorted to the kind of techno-authoritarian tactics that critics fear digital currencies will be associated with. Last February, for instance, Canada’s “progressive” government froze several bank accounts connected to truckers protesting the vaccine mandates in the country in order “to pressure protesters to leave the city’s streets”. Similarly, throughout the pandemic, Covid passports were used in several countries to deny millions of people access to a whole range of public spaces and services on the basis of their unvaccinated status.

It’s easy to see why many link the plans for CBDCs to the push towards the normalisation of biometrics-based digital IDs, which aim to make the enjoyment of basic human rights, such as the right to freedom of movement, conditional upon the positive scanning of digital passes. It’s tempting, of course, to dismiss such concerns as the product of over-imaginative minds that have watched one episode too many of Black Mirror — if only such policies hadn’t been implemented already.

Anyone with a basic grasp of economics knows that raising interest rates at a time of recession is bound to make it worse. Borrowing will become more expensive, while mortgage holders will face higher monthly bills — and all the while, the country is grappling with a devastating cost-of-living crisis.

Officially, the Bank’s actions are aimed at curbing inflation. But this approach would only make sense if the current inflation were being driven by excess demand — that is, if people had magically found themselves flush with cash and had started splashing out. Alas, anyone living in the real world knows that’s not the case: two years of lockdowns and restrictions have left many people poorer, not richer.

Only last month, a study by Bank of England staff confirmed what was obvious to most people, but apparently not to the researchers’ bosses. Current inflation has nothing to do with excess demand, but is largely driven by exogenous, supply-side factors: “supply bottlenecks along global value chains due to the Covid-19 pandemic (for instance, with microchips and used cars) and soaring energy and food prices related to Russia’s invasion of Ukraine”. Other studies have also emphasised the role of corporate profiteering, in particular, price gouging by large corporations with near-monopolistic market power, especially in the energy sector.

Neither is there any evidence of a Seventies-style wage-price spiral. On the contrary, real wages are not only failing to keep up with inflation — they’re falling off a cliff, in the UK and elsewhere. That’s because the bargaining power of workers has been severely weakened by decades of anti-labour and anti-union policies.

Even the Bank of England itself acknowledges that it expects inflation to fall sharply from the middle of next year — even below its target of 2% from late 2023. The reason is fairly obvious: inflation measures the change of prices from one year to the next, so this year’s rate accounts for the massive price increase caused by the conflict in Ukraine. Next year, however, prices are expected to remain relatively high, but not to rise significantly compared to current levels. In other words, we’ll almost certainly still be facing a cost-of-living crisis — especially if the Bank of England continues along this path — but not much of an inflationary crisis.

So if the current inflationary bout has nothing to do either with excess demand nor excessive wage increases, but is in fact driven by factors entirely beyond the control of the Bank of England, and in any case is expected to resolve itself by the beginning of next year, why is the Bank going out of its way to pursue a strategy that would lead to a recession and raise unemployment, and make the cost-of-living crisis even more acute?

More from this author

Rishi has set himself up to fail

By Thomas Fazi

One possible answer was alluded to by Andrew Bailey, Governor of the Bank of England, last week: “We have inflation coming back down to target; and going below target actually,” he said. “But we have one of the largest upside risks to inflation in our forecast that we’ve had in the 25-year history of the Monetary Policy Committee. A lot of that has to do with the tightness of the UK labour market.”

Such “tightness” — that is, the fact that there aren’t enough available workers to fill vacant jobs — is currently driven mainly by Brexit and by the fact that since the pandemic a great number of older workers (mainly 50- to 64-year-olds) have left the job market. But it is likely to become a permanent feature of Western economies in the coming years — a result of the de-globalisation and reshoring that will inevitably see countries bring home production lines and supply chains that over the past decades have been outsourced to far-flung countries. For Western workers, this is a welcome development, as it will clearly increase their bargaining power.

But for Bailey and the technocratic elites he represents, this is a terrifying prospect: even though workers aren’t yet strong enough or sufficiently well-organised to fight for better wages, a structurally tighter labour market is liable to make such struggles much more likely in the future, especially in a context of permanently higher prices. They fear this not because it might lead to a wage-price spiral, which is unlikely, but because it would signal a shift in the labour-capital balance for the first time in half a century.

As Adam Tooze has written, what really worries technocrats like Bailey “is that inflation will emerge as a macroeconomic and, one might say, a macrosocial phenomenon. All of that is code for a world in which organised labour is stronger and in which workers receive not gratuitous handouts from socially minded employers to help with the grocery bills, but proper cost of living adjustments”. This is about more than just capitalists having to give workers a bigger share of the pie: a more emboldened labour force is also more likely to start demanding a greater voice in the management of their country’s economic and political affairs — a technocrat’s worst nightmare.

According to this view, bringing about a recession and artificially raising unemployment could be seen by the likes of Bailey as a way to pre-empt a potential rise in labour bargaining power — not only by making borrowing harder, but also by providing a cover for fiscal austerity, which Sunak has already announced. This isn’t because higher interest rates make it any harder for the government to borrow from a technical perspective — a currency-issuing government can ultimately service interest payments in the same way it pays for everything else: by issuing new money via the central bank. Rather, higher rates give the impression of making it harder for the government to borrow, due to the myths we’re constantly fed about deficits and debt. As Larry Elliott has observed: “The idea that Britain is about to be sucked into a vortex because it is running a budget deficit is a fairytale. A country that has its own currency, as the UK does, can print money to cover its spending.”

More from this author

Why the Left shouldn't be celebrating

By Thomas Fazi

Maintaining that fairytale, however, is crucial from the perspective of the ruling class — if citizens understood how the system really worked, they would realise that austerity is nothing more than class war. In this sense, as political economist Richard Murphy put it, the Bank of England shouldn’t be seen as operating independently of the government in pursuing these policies. On the contrary, the Bank is likely “working very closely with the Treasury to create this artificial supposed public spending crisis”.

Bailey and Sunak aren’t alone in pursuing this project. Central banks across the globe are all raising interest rates — with the US Federal Reserve leading the way. And most governments are using this to justify austerity, to some degree or another.

Now, it is often claimed that if the Fed raises interest rates, other central banks have little choice but to follow in order to avoid capital flight. But this is only partially true. Allowing the value of currencies to slide — as most of them are against the dollar, not just the pound — is arguably a better option than engineered recession: the former might lead to higher imported prices, but the latter will cause much more widespread damage, without even resolving the problem of inflation. Besides, it’s unlikely that driving economies into recession is going to bolster “confidence” in their respective currencies — unsurprisingly, the pound slumped once again against the dollar after the Bank of England’s warning of an impending depression. So much for the Bank ousting Truss in order to save the economy. That said, if other central banks were being forced into these policies against their will, we’d expect some criticism of the Fed’s aggressive monetary tightening on their behalf, and yet we’ve seen none of that.

What this really calls into the question is the notion that we need “independent central banks” to protect us from irresponsible politicians. If anything, it’s irresponsible central bankers that we need protection from. But for as long as central banks and governments are able to shift the blame onto each other, the technocrats will always have the upper hand. So, perhaps the time has come to slay the dragon — central banks themselves. A possible solution would be to consolidate monetary and fiscal policy into a single government department. At least this would make macroeconomic policy wholly accountable to voters, instead of being managed by central bankers who are largely unaccountable and dominated by vested interests. The past month has proved that technocracy has failed. The time has come to give democracy a chance.

As soon as it was made public, on September 23, Kwarteng’s “mini-budget” prompted a massive sell-off of “gilts” — UK government bonds — and also saw the pound fall to an all-time low against the dollar. Then, all hell broke loose: some analysts even went as far as saying that Britain was heading for a full-blown “currency crisis” and was starting to look like an “emerging market country”.

The reaction from international quarters was just as hysterical. The IMF launched a biting attack on the UK government, while Larry Summers, former US Treasury secretary, called the policy “utterly irresponsible”. Speaking for many, Jason Furman, former economic adviser to Barack Obama, wrote: “I can’t remember a more uniformly negative reaction to any policy announcement by both economists and financial markets than the UK’s policy.”

Was all the fuss justified? Is the UK really in danger of becoming the next Argentina or Zimbabwe? And was Kwarteng’s U-turn yesterday really necessary?

The mini-budget in question consists of a series of deficit-financed economic measures aimed at cushioning the effects of the energy crisis and boosting growth — namely a freeze on energy bills and various tax cuts, for a total cost of around £160 billion. Most of the criticism aimed at Kwarteng reflected the opinion of orthodox economists: that cutting taxes is the wrong policy when unemployment is low and there is little spare capacity in the economy for additional non-inflationary growth.

Yet for all the uproar, by far the biggest commitment in the mini-budget was found elsewhere: the energy price freeze, which is expected to cost around £60 billion. According to the Bruegel think tank, the UK is already the country that has allocated the most funding to shield households and businesses from the energy crisis — 7% of GDP. While more can and should be done, that’s more than double the EU average (only Germany has announced a measure of similar scope).

Now, one can debate whether capping the price of energy — which essentially amounts to a publicly funded subsidy for the profits of energy giants — is the best way to address the crisis, but if the alternative is hanging household and businesses out to dry, which is what most EU countries are likely to end up doing, the British approach is clearly far better.

Suggested reading

Hysteria has derailed Kwasi Kwarteng

By Will Lloyd

As for the revenue-side measure of the mini-budget, the biggest measures aren’t actual “tax cuts” but non-rises in National Insurance and corporation tax (for a total of £40 billion). Compared to these figures, the actual tax cuts, such as the scrapping of the higher rate of income tax, were rather trivial — just above £10 billion. All of which means that while the tax cuts were bad from a distributional perspective, since they would have mostly benefited the wealthy, from a macroeconomic perspective their impact would have been negligible, and the decision to reverse them will be just as negligible.

Even without the tax cuts, the energy price freeze will still entail a larger deficit. Rather than the tax cuts being at fault, then, it was probably the increase in the deficit itself that freaked everyone out. There seems to be a genuine concern among orthodox economists and financial institutions that the mini-budget will threaten Britain’s “fiscal sustainability” and possibly even cause the country to default.

But the notion that an increased deficit puts the British state at the risk of insolvency is ludicrous. Like all currency-issuing nations, the UK effectively spends by creating money out of thin air. This means that it can never “run out of money” or become insolvent. The fact that fiscal deficits are usually associated with the issuance of bonds, and that these are usually bought by the private financial sector, gives the impression that the latter are able to exercise control over government spending, by refusing to buy the bonds or demanding higher interest rates. However, this is not the case — because the central bank can always step in to buy the bonds itself, setting the yield at whatever level it wants.

Ever since the financial crisis, and especially throughout the pandemic, this has become standard practice. Indeed, virtually all the new bonds issued to support the economy throughout the pandemic were bought by the Bank of England itself. This is paradigmatic of the way in which modern states self-finance; and of the fact that “bond vigilantes” hold no power whatsoever over currency-issuing governments.

So overall, a widening deficit doesn’t represent a problem for the UK. In fact, it’s a good thing, insofar as it will help cushion the British economy from the effects of the energy and cost-of-living crisis. There’s also no reason to believe that larger deficits, even if “monetised” by the central bank, will further stoke inflation. Quite the opposite: if the government borrows money to cut domestic energy, that will likely reduce inflation. Injecting such large sums of money into the economy should also be expected to have a positive effect on growth.

The problem is that all this completely defies the economic orthodoxy, which is probably why mainstream economists are attacking the Government’s plan so vehemently. As Adam Tooze writes: “What the critics of the UK are performing is the role of gatekeepers, a function, which is at the heart of elite economic policy discourse.” This wouldn’t be so much of a problem if it weren’t for the fact that the flawed orthodox view is also shared by people who, unlike economists, have a direct impact on the economy — financial traders. And this can lead them to make some very bad decisions.

Suggested reading

Is this the end for Liz Truss?

By James Sean Dickson

The recent gilt sell-off is a perfect case in point. While some traders might have actually been motivated to unload their gilt holdings through fears of an imminent default, much of the sell-off was actually an attempt to profit from the panic through a practice known as short selling — which consists in selling a financial asset in the expectation that its price will fall, thus generating a profit to the seller.

This is ultimately what economics textbooks say should have happened: a higher deficit will automatically lead to higher yields (and therefore lower prices), and scaring the government through a sell-off will convince policymakers to raise interest rates even more. Unfortunately for the traders, this is not how things work in the real world. In the latter, betting against central banks is always a losing game. They know that very well in Japan, where it’s known as the “widow maker” trade.

Which is why traders were completely caught off-guard when, on September 28, the Bank of England announced that it would be buying up a potentially limitless number of government bonds in order to ease market tensions. This immediately caused yields to fall and stabilise at the level they were at before all the mini-budget hoo-ha — thus thwarting the speculators’ plans.

It’s been said that the BoE’s intervention “saved” the Government from the consequences of its reckless decisions. This is also nonsense. The BoE was simply fulfilling its mandate — acting as a lender of last resort. Moreover, in a democracy, it’s perfectly normal for the central bank to accommodate the budgetary decisions of government. The alternative is the situation in the Eurozone — where democratically elected governments are expected to do what unelected technocrats and central bankers tell them to.

There has been much talk of the fact that the BoE was forced to intervene to save pension funds that would otherwise have faced “mass defaults”. This all sounds rather scary, and has been weaponised to attack the mini-budget — by implying that the Government’s actions risked sending the savings of millions up in smoke. In fact, the pension funds’ quasi-meltdown is entirely a consequence of the way pension systems, like everything else, have become hyper-financialised.

Simply put, today pension funds use safe assets such as gilts to raise large amounts of cash through complex financial instruments, which they then use to pursue high-risk investment strategies. The problem is that if the value of the gilts falls too sharply, the pension funds risk going bust — which is what happened last week following the gilt panic. The problem’s not the mini-budget — the problem’s the way in which we’ve allowed pension funds to gamble with people’s savings.

A similarly doom-laden tone accompanied warnings about a “currency crisis” in which the pound will supposedly keep sliding further and further down until it becomes so worthless that the UK will be forced to go cap-in-hand to the IMF. But this was never likely to happen. Countries that float their exchange rate, such as the UK, cannot experience a currency crisis in the traditional understanding of the term — unless they have large external liabilities in a foreign currency. As Paul Krugman observed, that was the story for Asia in the Nineties, the Argentine crisis 2001, and is part of the problem in Turkey now. But this doesn’t apply to the UK, whose external liabilities are overwhelmingly sterling-denominated. And this is why, following the Bank of England’s intervention, the value of the pound has already bounced back to the level it was before the panic.

Suggested reading

Liz Truss won't unchain Britannia

By John Oxley

Why did the pound fall in the first place? This was due to much the same reasons as the gilt sell-off: unfounded fears over the deficit, attempts to pressure the government into backtracking, and, first and foremost, speculators in the City and elsewhere hoping to profit by shorting the pound. As one trader said: “We were absolutely sure the pound was going to crash. Of course we are going to short the pound. This is what we do.”

The problem is that, unlike bond markets, the government’s options are more limited when it comes to quelling future currency speculation. One option would be for the Bank of England to prop up the pound by buying it on foreign-exchange markets, but that requires large amounts of foreign reserves, which the UK doesn’t have.

Another option would be to raise interest rates. After all, part of sterling’s weakness is simply the result of rising interest differentials vis-à-vis the US, which is hiking up interest rates in an irresponsible manner that is causing problems for the rest of the world, as central banks are forced to raise interest rates to stem the outflow of capital. However, raising interest rates won’t reduce inflation that is entirely driven by supply-side factors — namely the energy crisis and supply-chain bottlenecks — but will almost certainly cause huge pain to the economy, especially to the housing market, which is already in trouble. (Even the UN is now calling on central banks to halt interest rate increases.)

So, it’s a good thing that the Bank of England is still refusing to hike interest rates. After all, the pound has been sliding against the dollar for more than a year, indicating that this part of a longer-term adjustment which could actually help Britain move towards a less import-dependent and more self-reliant economy.

In the end, the best option for the UK’s authorities might to be accept there’s little they can do, in the short term, to rein in inflation that is largely supply side-driven, stop attempting to prevent the pound from falling in the name of some misconceived “strong pound” policy (which is what led to the government’s flawed response to the 1976 crisis) — and focus instead on protecting people and businesses through increased government spending.

This may or may not be inflationary. But the alternative — giving in to market pressure to raise interest rates and rein in the deficit — is almost certainly bound to be worse.

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.

More from this author

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.

Suggested article

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.

Suggested article

How the elites exploit inflation

By Thomas Fazi

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.

In the case of Britain’s bankers, I suspect not. After all, if the past year has taught us anything, it’s that they can provide something that the politicians will always want: money. 

There was a time when the function of a central bank was to regulate the wider banking system, set interest rates and keep inflation under control. Though an important role, it was a limited one.

But then, in 2008, the global banking system almost collapsed. The shock was such that slashing interest rates wasn’t enough to revive the economy. And so the central banks embarked upon a course of quantitative easing (QE) — i.e. creating money electronically and using it to buy up government debt and other financial assets.

This was meant to be a temporary measure. As soon as things went back to normal, the plan was to reverse the process of QE. The central banks would sell off the assets they’d purchased and electronically destroy the money they’d created. Job done; the balance restored.

But things didn’t go back to normal. By 2012, vast amounts of money had been created — £375 billion in the UK alone — but there was little sign of inflation and not much growth either. And so QE was never “unwound”. Politicians realised this was an endless fountain. In the wake of Brexit, the Bank of England conjured up enough funny money to buy a further £70 billion of government bonds.

Now with Covid, the QE binge has become an orgy. All the central banks are at it. In the UK, we’ve plucked another £450 billion from the magic money tree. To put it another way, our national debt now stands at over two trillion pounds, but getting on for half of that is owed to the Bank of England.

More from this author

Who will pay for this Covid catastrophe?

By Peter Franklin

It’s getting hard to deny that the central banks are printing money to finance government spending. The central bankers won’t admit to that, of course. They’ll say that QE is just the equivalent of an interest rate cut and intended to stop inflation from turning into deflation.

However, that alibi is wearing thin. Firstly, there’s not much risk of falling prices right now — quite the opposite in fact. And, secondly, one can’t help but notice that the more QE there is, the more the Government borrows.

But why worry? Isn’t owing money to the Bank of England better than borrowing it from the Chinese? And given the fragile state of the economy, isn’t borrowing preferable to tax hikes or spending cuts?

There is the risk of inflation, of course — a real concern right now. Then there’s the risk that the money markets might run out of patience — and start charging higher interest rates on government debt. When a government owes £2.2 trillion, like ours does, then every 1% increase in the interest it pays on that sum costs an extra £22 billion a year — or roughly half the defence budget. 

But there’s a more disturbing possibility: that economic gravity doesn’t reassert itself — and that the QE orgy continues.

Suggested reading

What if it's not the economy, Vince?

By James Kirkup

Ultimately, this would be terrible for democracy. When governments rely on their own citizens for money, they become beholden to them. The principle of “no taxation without representation” puts nations on a path to universal suffrage and keeps them there.

However, governments that get their cash from elsewhere — oil revenues for instance — can afford to ignore their people. As the absolute monarchies of the Middle East prove, “no representation without taxation” is also a potent political force. 

So what happens if central bankers replace taxpayers as the key source of government finance? We saw what happened in Greece, which ceased to be sovereign state as soon as it became dependent on the European Central Bank. The Greek people voted for a government of the populist Left, but extreme austerity was imposed anyway — and continues to this day. Similarly, Italy is controlled by the EU establishment — the Prime Minister is Mario Draghi: a former President of the European Central Bank.

In Britain, we can be thankful that Brexit has removed that possibility. But what’s the point of giving the Eurocrats the slip, if we replace them with a homegrown caste of over-mighty central bankers?

Take the Bank of England’s “net zero mandate”. The Old Lady of Threadneedle Street already interferes in the market by using QE money to buy up corporate bonds from the private sector. Purchases total £20 billion so far. This amounts to a major subsidy for the qualifying businesses — who are able to borrow more and at a lower cost. Deliberately skewing this to favoured companies would mean using QE to pick winners — a bizarre position in which to place a central bank.

More from this author

Do you know where money really comes from?

By Peter Franklin

I’m all in favour of green government policy. But these are decisions that should be made democratically in Parliament, not by unelected central bankers picking winners. 

Meanwhile, the central bankers could become more powerful yet if the Chancellor goes ahead with a scheme to introduce what he calls “Britcoin” — a digital currency overseen by the Bank of England. This could have all sorts of benefits — from reducing transaction costs to ensuring that our national currency isn’t displaced by a cryptocurrency or Facebook’s Diem system.

But there are dangers to Britcoin too. For instance, a digital currency administered by the Bank of England could be used to monitor our purchases and transfers, thus ending the privacy that comes with using cash. In theory, the Bank could also apply its climate mandate to our transactions — for instance, imposing a penalty on purchases deemed to be unsustainable. 

And then there’s the risk that a central bank digital currency (CBDC) would destabilise the banking system. 

At the time of the last financial crisis, governments moved fast to prevent bank runs. With a few exceptions, they succeeded. That said, their job was made easier by the fact that most of us don’t want to empty our accounts and store our savings as banknotes under the mattress. However, if we could withdraw our money in the form of digital cash and keep it in a safe with the Bank of England, that would present fewer obstacles. Conceivably, the entire private banking system could collapse within minutes if enough people went online to transfer their bank balances into their Britcoin accounts. 

Suggested reading

Covid-19 has exposed our financial fragility

By Jonathan Tepper

I’m presuming these possibilities will be anticipated, and preventative measures put in place before an official digital currency is launched, but there’s no doubt that any such move would further expand the role of the Bank of England. 

How can we stop this? Ideally, our elected representatives would be dealing with this stuff on our behalf. But I doubt that most of them are capable. The next time you meet a politician, ask him or her to explain quantitative easing to you. Or ask them where the money that banks lend to their customers comes from. If they say “from savers”, then they haven’t got a clue. 

If we can’t rely on our politicians to provide effective oversight, what can we do? One solution would be to end our addiction to QE — though I’m not convinced we’re willing to endure the austerity that would entail. Another would be to end the independence of central banks. But this would mean putting politicians in full charge of the QE printing press — and do we really want to risk that?

Unless there’s an inflation crisis that brings the whole pack of cards crashing down, the most likely scenario is that the central banks continue to grow in power — until we stop thinking of them as banks at all, and instead as parallel governments. 

Carney, of course, is a near-perfect specimen of homo financicus, a recent offshoot of common humanity that seems to sleep less, read more, earn more, do more than the rest of us. Among other things, Value(s) could be a field-guide to the subspecies: its PhD-holding author runs marathons, gets up before dawn to meditate and read the Classics. He analyses international finance with penetrative intensity. A father of four, he’s 56 years old but doesn’t even have the grace to look it. Some people think he looks like George Clooney. If he sometimes sounds a bit pleased with himself, we should remember that he has quite a lot to be pleased about.

But if Carney himself is relatively easy to describe, his book is much less so. Several famous names have had a go. Subtitled Building a Better World for All, it comes larded with glowing quotes from the likes of Bono (“a radical book that speaks out accessibly”) and Christine Lagarde (“Indispensable”). These endorsements are a pointer to the worst thing about the book: Carney’s namedropping. He frames the entire narrative as the result of a slightly over-written lunch with the Pope, and his cast of characters comes from the upper slopes of Davos. Not that Carney is wowed. Most super-famous people are disappointingly normal, he declares, though he admits to being impressed by Emmanuel Macron, the Grand Shiekh of the Al Azhar Mosque, Bono himself, and Greta Thunberg.

Unlike some of the names thus dropped, Thunberg’s walk-on part in this book makes sense. The author meditates long and hard on the greatest problem facing twenty-first century politics: climate change. He’s impressive on the technical and intellectual challenges involved in making huge changes now to avert a disaster that could still be several decades and many electoral cycles away. But can a matinee idol technocrat with a big brain and sharp suit take the people with him? Is Value(s) Carney’s first step into real politics?

He certainly likes to talk about “leadership”, dedicating page after page to the topic. But sadly, it turns that out what he means, most of the time, is “management”. Cue endless lists of the sort of bland wisdom familiar to anyone who’s ever set foot in a business school:

“Leaders are different in that they have to decide. In the end, to lead is to choose… When you take decisions as leader, it will obviously help greatly if they are the right ones… People will respect a leader who has integrity and who is benevolent, but they won’t always follow them if they are not deemed to be competent.”

Sometimes this stuff is sprinkled with some erudition and cod humility: “When I worked at the Bank of England, I would remind myself each morning of Marcus Aurelius’ phrase ‘arise to do the work of humankind’.”

Frankly, the classical references are easier to swallow than some of the jargon. Carney’s thoughts on the nature of the company, corporate purpose and how to encourage businesses to behave better — and make a profit by doing so — are genuinely impressive. If politicians engage with them, we may end up with a better, fairer and more sustainable capitalism. But Carney’s editors haven’t helped him welcome new readers to the subject. See, for instance: “IIRC is working with IASB, GRI and SASB to create a cohesive interconnected reporting system (though the IMP work).” To which even readers who like to think they’re au fait with corporate governance reform might say: WTF?

More from this author

What if it's not the economy, Vince?

By James Kirkup

Carney’s lapses into impenetrable jargon are understandable; he’s never really had to communicate clearly to the masses. Yes, central bankers talk in public, but generally as opaquely as possible. Among his global colleagues, Carney was a chatty charmer, but the bar was low. He talks a good game about always remembering the need to win and maintain public confidence — and even makes a stab at claiming deep legitimacy for independent central banks by invoking Magna Carta. But the truth is that, while those banks are given considerable autonomy by politicians to take decisions that have profound effects on the lives of voters, they are not directly accountable to those voters.

Carney is no rabble-rouser. His idea of the BoE getting down with the people is updating the portraits on bank notes. More telling is what he doesn’t mention. Nowhere, in almost 600 pages, does he find space to discuss quantitative easing — the “extraordinary” monetary policy that continued on his watch. Creating new money to buy bonds, and lower interest rates, had a profound social and political impact. It saved businesses and saved jobs; without it many people, especially younger and poorer ones, would have suffered significant hardship. But the side-effect was pumped-up asset prices. Effectively, central banks made people who own property much richer, and made it much harder for people who don’t own property to buy it. Voters are owed more of an explanation for this than Carney offers.

But when you have a hammer, problems look like nails. If you’ve worked as a carpenter, you tend to want to make things out of wood. And so Carney is keen to take the model of independent central banking into climate change policy, proposing “independent Carbon Councils” that would make quite profound decisions about the price of carbon emissions. He’s careful to maintain that, in the end, elected leaders must sign off big distributional decisions, but makes no bones about trying to find ways to keep those decisions away from voters: “Delegating responsibilities helps insulate decisions with significant long-term implications from short-term political pressures.” Never mind addressing such pressures, let’s just duck them — a novel approach to “leadership”.

Suggested reading

Do you know where money really comes from?

By Peter Franklin

For all that, Carney’s book is still good — and the best bits are very good indeed. Unlike some global-minded liberal types, he recognises that the nation still matters. He sees patriotism as not just legitimate, but a way of actually helping countries work together on big problems. He understands that markets haven’t worked for everyone and won’t without sensible state action. He offers a lot of ideas about things like skills, education and employment that would make economies more productive and societies fairer. And his critique of “market societies” in which common values have been eroded, and individualism trumps social obligation, should be read and absorbed by every technocratic centrist wondering why those terrible populists do so well despite their terrible policies. “Building social capital requires a sense of purpose and common values among individuals, companies and countries,” Carney says.

That might sound like an uncontroversial statement of post-liberal orthodoxy — but remember that Carney himself is no post-liberal. He’s not just a Goldman Sachs-educated archduke of Davos: he’s a potential Liberal Party prime minister of Canada. And whereas the current holder of that title, Justin Trudeau, has largely embraced the identity politics that is rendering liberalism illiberal and unattractive, Carney’s book has no time for any of that — or for Trudeau himself. Other technocratic leaders get approving namechecks, but there’s not a single word about Canada’s current PM. Subtle, eh?

Suggested reading

The technocratic tedium of modern politics

By Dan Hitchens

Value(s) has enough ideas to fill a manifesto, but gives no overt sign that Carney is plotting a political career — an omission that suggests he wants to keep his options open. Could homo financicus make a sudden evolutionary jump to become a full-blooded politico? Less accomplished men have done so before him: Macron is an ex-banker who had a fraction of Carney’s experience when he took the Elysée; Trudeau, on the other hand, was a supply teacher. Barack Obama a law lecturer.

But those leaders are not the real comparators here, not least since they have all, in different ways, failed to live up to expectations. The liberal centre, the tribe of just-do-what-works technocrats, has lacked truly successful leaders since Bill and Tony were taken from us. Clinton and Blair were policy wonks and globalists who could still instinctively feel the mood and priorities of people who loved their communities and their countries. They have had no true heirs. Obama talked the talk, but in the end couldn’t hide his scorn for “bitter” people who “cling to guns or religion”. David Cameron put on a decent act but lacked conviction or spine. Even his greatest fans wouldn’t claim Joe Biden will define an era in the way Clinton and Blair did.

Could Mark Carney take the good ideas from his impressive book and try to make them work in the messy world of politics?  If he did and it worked, he’d be the closest thing the real world has seen to the West Wing’s Jed Bartlet: a liberal intellectual technocrat with a devout Catholic’s social conscience — every sensible centrist’s political fantasy. But then, fantasies are fictional for a reason.

Then the prosaic reality of Windows and FaceBook kicked-in, and we realised that the internet was basically just an electronic version of our filing cabinets and photo albums – useful or even addictive, but hardly a world of its own.

But that is changing fast. Piece-by-piece we are building a parallel world in truly remarkable detail. And it’s no game. For instance, you wouldn’t expect much mucking about in a German factory – but as an Economist report from a Siemens facility makes clear, virtual reality is being put to productive use:

“…there is another factory, a virtual version of the physical facility that resides within a computer system. This digital twin is identical in every respect and is used to design the control units, test them, simulate how to make them and program production machines. Once everything is humming along nicely, the digital twin hands over to the physical factory to begin making things for real.”

Using this technology, one can modify the digital twin to see how changes to its real world counterpart would work out. Assuming enough computing power, one could also fast-forward the simulation to predict what might happen to the original at a given point in the future – for instance, which machine parts might malfunction first.

Furthermore, components within each simulation could be copied and incorporated into other simulations:

“The spread of digital twins could shake up supply chains. For example, suppliers could be asked to submit a digital twin of their product so that it can be tested in a manufacturer’s virtual factory before an order is placed.”

Presumably, there must come a point at which the exchange of content merges the individual simulations into one giant simulation.

For the moment these digital twins are of objects – from simple products to complex machinery. But what about digital twins of real people?

In a feature for the Proceedings of the National Academy of Sciences, Mitchell Waldrop writes about the use of ‘agent-based models’ – computer simulations of human societies:

“These artificial societies contain thousands or even millions of subroutines, each representing individual people moving through virtual landscapes while behaving in more or less human ways. Modelers can simulate real-world geography and transportation networks; realistic populations that have the right distribution of ages, genders, and jobs; and details about who comes into contact with whom: ‘the entire social structure of households, hospitals, and workplaces’ says Ira Longini, a statistician and modeler at the University of Florida in Gainesville.”

Waldrop’s main focus is on the use of agent-based models to predict and combat the spread of highly infectious diseases like ebola. However, agent-based models are also being used closer to home – for instance, by the Bank of England:

“In November 2016, Andy Haldane, chief economist at the Bank of England, took his discipline to task for failing to anticipate major events, such as the financial collapse of 2007-2008: the economic analog of a global pandemic. A big part of the problem, he said, was that his colleagues typically modeled swings in the economy using equations that focused only on global factors such as interest rates, while ignoring… individual human differences and interactions. Instead, they should be building on decades of academic research that has produced agent-based models of issues such as innovation, inequality, and the stability of the financial system.”

The Bank has already developed two agent-based models – one for the housing market and one for the bond market.

As things stand, the sub-routines representing the individual humans within each model are fairly simple. After all, the purpose of such models is to predict broad outcomes at a population level. But what happens as programming techniques become more sophisticated – allowing the sub-routines to develop into digital twins of real people, informed by data pulled in from social media sites and public sector records?

In an agent-based model owned by a prospective employer, your digital twin would be like a walking, talking CV (or résumé) with a mind of its own (or, rather, the semblance of one). How would you like to have your virtual self tried-out in a simulated workplace? Or what about an agent-based model operated by a crime-fighting agency? What if your ‘twin’ starts misbehaving in one of those?

One would hope that that the predictive limitations of such models would be understood. But the real issue isn’t whether they should be believed, but whether they are believed.