A few weeks ago Common Weal published an article explaining that soon there would be an interest rate rise, that it would be based on phoney science, that many serious economists think it will be a mistake and that it clearly represents a class-based analysis of society based on the interests of those at the top.
That interest rate rise happened yesterday and the incredulity it is generating in many quarters goes well beyond a left or heterodox economic sectors of commentators and analysts. It is worth reading the full article above to get the theoretical background to this.
But in summary, 'excess demand' theory still dominates inflation policy, meaning the standard view of economics is that inflation results (roughly) from ordinary people having too much money and so sellers putting their prices up because they have more customers than products, causing prices to go up and so making workers demand even higher wages – the so-called price-wages spiral.
That is what Bank Governor Andrew Bailey is using as a justification. The reason this is being met with incredulity is that there is absolutely no evidence of a wage-price spiral. Household budgets are severely squeezed already but workers are not achieving above-inflation pay rises. There is an absence of demand in much of the economy.
Everyone also knows that the driver of inflation is a supply shock in oil and gas resulting from the Iran War. You can't remove a supply shock through demand-side measures; everyone also knows this.
In fact it is certainly not necessary to take Common Weal's word for it – that was the findings of the Office for Budget Responsibility, never knowingly a heterodox economics body. It has analysed the economy and found absolutely no evidence from the economy itself (rather than by looking at prices in the abstract) that would justify a rates rise.
It found that far from excess demand, businesses are still absorbing increased costs and tax rises. So are households. The Bank of England is behaving like there is excess demand when all the evidence points to a deficit in demand, particularly in certain sectors (hospitality is on its knees).
In addition, there are a host of negative economic headwinds in front of us. There is no sign of a fast return to stable global oil prices, there are currently routs in stock markets over fears that the AI gamble has gone too far, there is no let up in the tax burden and no evidence that workers are better able to afford to shop, easing economic pressures.
The economy is not in distress – it has proved more resilient than some predicted in the face of oil price spikes. But it is not in robust health either, and making both businesses and their customers poorer at this point in the economic cycle looks crazy.
We are now in a bizarre situation where the policy of the Bank of England is effectively to create a (comparative) recession to control prices while the policy of the government is to pursue economic growth. They appear now to be specifically working against each other. That is a ludicrous economic framework for a domestic economy.
So why is the Bank of England doing this? It is neatly explained by this quote from Yanis Varoufakis:
“Between 1952 and 1988, economic growth was behind nearly all the gains of the West’s stock market. From 1989 onwards, though, growth explains only about a quarter. The largest share, around 40%, came from income diverted from workers to shareholders. Another third came from cheaper money and lower perceived risk. This is not wealth creation. It is wealth extraction.”
Inflation caused by external shocks cannot be tamed with higher interest rates. But higher inflation erodes the value of assets. Why is this important? The rich make their money from assets; the rest of us make our money from wages. The Bank of England is punishing wage earners to protect the value of the assets of the rich.
It really is that simple. Your mortgage has to rise to protect the interests of the rich and the City of London traders who serve them. The Bank of England works for them, not you. If the left was crushing asset values to protect wages it would be called class war.
This is not different, just the other way round.