Economics -- what actually is it?
An attempt to model the big, hairy world of finance and business using a mixture of gross simplifications and guesswork?
As useful to the way the world works as astrology is to astronomy?
Regardless of the situation, there's normally an economist to argue convincingly for one solution, another to argue for the opposite and a third to explain why they're both wrong.
And yet here we are. The Bank of England's economists have told us that we must all pay more money to the banks in order to prevent inflation. (See previous post.)
Error 1 -- inflation follows wage increases
This is the reason given by Andrew Bailey at the Bank of England (salary estimated to be somewhere over £500,000) why wages must not go up because otherwise there will be inflation.
This seems plausible. After all, if businesses think you've got some extra money they're going to try to grab it by hiking their prices. And what does a price hike mean? Yes, it's inflation if it happens in too many places at the same time.
But there's a flaw in the reasoning, Andrew, isn't there? We currently have inflation and the vast majority of people in the UK have had no (meaningful) pay rise in a very long time.
So what you're saying is that we shouldn't have the bad inflation where people can continue to afford to buy stuff. Instead we should have the good inflation in which people go hungry. Thanks, Andrew!
Error 2 -- interest rate rises are necessary to tackle inflation
The argument that people need to be poorer, by being ordered to give more of their money to banks, in order to reduce demand in the market in order to force prices down in order to reduce inflation doesn't stand up to the slightest breeze.
Even if you accept the idea that demand must drop to beat inflation and so people need to have less money for discretionary spending, interest rate rises are the actions of a sadist on a suffering population.
Because people are already poorer. The cost of living has already risen catastrophically.
The ludicrous rise in energy prices (in which we are forced to give vast profits to fossil fuel companies for no reason), coupled with rampant profiteering from other companies using the energy crisis as a smokescreen, means that people have less money to spend. Demand will drop anyway.
The rise in energy prices was like being mugged by the fossil fuel companies. But the interest rate rise is being kicked by your own government when you're lying on the ground after the mugging, then them stealing your shoes.
Error 3 -- interest rate rises are necessary to preserve the value of the pound
Interest rates have just gone up.
The pound has just fallen to its lowest level against the dollar since March 2020.
I don't think we need to go any further with this one.
It's all gambling anyway
The Bank of England is gambling that the economy can be saved by pouring money from the population into the banks. To match the money being poured into the fossil fuel companies.
With the political will, we can fix the fossil fuel problem. (Obviously we'd need a functioning government that actually wanted to help, but that's a different problem.)
But the interest rate rise requires a different approach. How about the Bank of England actually cuts us in on their wager?
Rather than forcing the population to give the banks bigger profits, how about putting the extra money they're draining from people into special ring-fenced accounts?
If inflation then goes down, and the Bank of England can prove that interest rate rises helped, that money can go on its merry way to whichever bankers' yacht it would have gone to anyway.
And if it doesn't, then the banks can give it all back. With interest (preferably at the new higher rate, just before it's scrapped).
But how can they prove it?
Yes -- my suggestion is based on the idea that the Bank of England might be able to prove that the rise in interest rates reduced inflation.
How can they prove it? Good question -- I don't know.
But if they can't come up with decent proof, then what on earth makes them think there's any link between the two things? Surely they wouldn't inflict economic catastrophe on so many people without a good body of evidence? In which case, they can show it off and the money can be kept in the banking sector.
By the way, 'proof' does not mean that they put up interest rates and inflation then fell. That's just two things happening. We need proof that one caused the other.
If you're happy with the idea that one thing happened after another means that the first thing caused the second, then I'm going to tell you that the sun only rose this morning because I did a little dance in the garden just before sunrise. And unless you pay me a squillion pounds, I won't do the dance tomorrow and the sun won't rise. Are you prepared to take that risk?
Is the Bank of England prepared to take the risk that people might get a refund of their extra interest charges? If not, it means they're not confident it will work -- in which case how about not doing it at all?
If so, bring it on! Come on Andrew -- roll the dice and see if you get lucky.
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