Iain Macwhirter: Stagflation’s the word in 2022 as the funny money gets serious

It seems a reasonably safe bet that the Covid-19 pandemic is in its final phase and will fade to grey sometime in 2022. Barring a new virus, life will return to something resembling normality.

But we are likely to find that the economy is not back to normal, or anything like it, and not just because of the temporary dislocations caused by lockdowns and furlough. In 2022, people are going to feel a lot poorer as inflation combines with fuel prices, tax increases, mortgage hikes and Brexit-related dislocation. The party really is over, and not just in Number 10.

Fundamental changes have been taking place in the economic undergrowth which look disturbingly like a return to the 1970s and 1980s. The word of the year will be stagflation – inflation combined with low growth. GDP is waning while wages are rising at a faster rate than we have seen in decades, partly as a result of Brexit but also because workers, often white collar employees, are rediscovering bargaining power.

This is combining with an energy crisis as profound as the Opec oil price shock of 1973. And with tax increases which the Resolution Foundation says amounts to £3,000 per UK household.

Then comes the transition to net zero: the imponderable cost of scrapping a fossil fuel economy that has underpinned economic growth for the last century.

You may have thought COP26 was a non-event, but history will

see it as a turning point. This year – 2022 – will see the end of the climate phoney war as corporations divest themselves of fossil fuel stocks and a generation of politicians realise that they risk being held responsible for the consequences of global warming. Climate change is no longer about veganism and bicycles but investment and big science.

After years in which no-one really thought about the cost of money, we are likely to become obsessed with it in 2022. Inflation is currently heading for 6 per cent, even in powerhouse Germany, and will force central banks to rein in cheap money by raising interest rates. Increasing the cost of borrowing discourages investment and spending, depressing economic activity. It also increases the cost of servicing Government debt, just as an increase in mortgage rates increases repayments.

The Bank of England’s surprise pre-Christmas hike in the base rate to 0.25% is the harbinger of things to come. It will take much pain to return to “normal” interest rates of between 4% and 6%, and it won’t all happen in 2022. But it is dawning on economists and governments that, in the last decade, something very odd has been happening in the world of money. The emergence of Bitcoin, a purely fictitious currency with no basis in economic reality, is a symptom, a kind of metaphor, of the bizarre world that we have been living in.

Since the financial crash, banks across the developed world have been printing money through bond purchases or quantitative easing (QE). Deliberately seeking to undermine the value of their currencies by increasing the money supply and encouraging inflation. Britain has pumped nearly £1 trillion into the economy through QE. That anyone thought this was normal is going to be regarded as one of the grand delusions of the age.

The price of borrowing has, in real terms, been less than zero for over a decade. This is unprecedented in 300 years of the Bank of England’s existence. Ultra-cheap money has lured governments into making spending commitments based on an unrealistic expectation that somehow interest rates would remain at, or near, zero indefinitely. The result has been a huge expansion of public debt. UK debt is now approaching 100% of GDP at £2.2 trillion. The global debt pile is 100 times that. Yet, the total value of all the world’s stock markets, all companies combined, is only £70 trillion. Somehow, the debt will have to be repaid.

Supporters of what is called modern monetary theory (MMT), a kind of new-age Marxism, have been applauding this creation of money. It boosts economic activity so why worry? Yet, it is odd for the left to be riding this inflationary bandwagon, ignoring the huge increase in wealth inequality that has followed directly from quantitative easing. Cheap money simply increases the wealth of the top 10% who own assets. The most obvious sign of this is the ludicrously inflated price of houses riding on low mortgage rates.

UK property prices have increased by 30% since their pre-crisis peak in 2007 – an extraordinary development since it was house price inflation, underpinned by irresponsible lending on subprime mortgages, that caused the 2008 financial crash. In London and the south of England, prices have almost doubled. In many inner London postcodes, the average cost of a home is over £1 million pounds and in some over £2m.

This perverse allocation of societal investment priorities has excluded a generation of young people from the housing market. Meanwhile, the lucky ones who have seen house values rise faster than their incomes have also benefited from increased asset prices in the stock market feeding into pensions and ISAs.

QE is fool’s gold. It has brought back wealth inequality to levels unseen since the Edwardian age. A gilded generation of mostly middle-aged asset owners in the south of England have become a political force wielding extraordinary influence on Government. They are now bent on transmitting this unearned wealth to the next generation. Hence Boris Johnson’s capping of elderly care costs at £86,000, the most unjust single fiscal measure since the poll tax.

Yet, the Johnson Government finds itself in the most unconservative position of having increased taxes to the highest levels since the 1950s at the same time as increasing public spending to levels unseen since the 1970s. This Conservative Government has become more committed to tax and spend economics than Labour. Keir Starmer opposed both Johnson’s increase in corporation tax and the recent increases in National Insurance, even though NICs is a stealth income tax.

Boris Johnson has already borrowed three times what Jeremy Corbyn planned in 2019, and is still intending to “build back better” by spending and borrowing yet more. Moreover, the revenues from recent tax increases are mostly going to the National Health Service. According to the Institute for Fiscal Studies, some 44% of all public service spending will be on health by 2024. It is hard to believe that any Labour government would spend more.

There will be no return to austerity – the rigid spending cuts introduced by the Tory chancellor George Osborne in 2010. However, there will have to be a reckoning. Boris Johnson will stagger through 2022 battered and bruised by a cost-of-living crisis that will infuriate his red-wall voters. That was the real message of the North Shropshire by-election, the Tories’ worst by-election defeat since 1993.

No government can survive stagflation for long, certainly not one led by such an erratic and unconvincing leader as Boris Johnson. Indeed, about the only thing the PM won’t have to worry about is an independence referendum. Scottish voters will have too much on their minds in 2022 to contemplate any Brexit-style constitutional upheaval.

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