Inflation -- an opportunity to make money!

Returning to a subject I covered a few months ago (Clarkson's Hammer), let's look at what interest rate rises will mean for the average person.

And when I say "the average person", I am, of course, excluding anyone who does not pay rent or for a mortgage.

(I suspect that means I'm excluding the people who actually decided to raise interest rates, i.e. everyone on the Bank of England's monetary policy committee. Do feel free to contact me if that's incorrect. In the meantime I'll continue assuming that they know this will cause suffering for others and they're quite comfortable with doing it anyway.)

Keep it simple

Let's think about someone who has borrowed £100,000 on their mortgage. Last time they fixed their interest rate, it was 2%. So they were paying £2000 per year in interest charges.

And now they need to remortgage, in order to avoid the dreaded 'follow-on' rate. They can either take a tracker (about 5%) or a fixed-rate (about 6%). So they will now be paying either £5000 or £6000 per year in interest charges.

The difference is between £3000 and £4000. Let's call it £3500 per year.

This year, they will be paying an additional £3500 to their bank, for nothing.

Rentals?

Anyone who is renting will be paying a landlord who could well be the person who just had to remortgage at a higher rate and is now paying an additional £3500 to their bank for nothing.

So let's assume that the annual rent will go up by £3500 to cover it. Because it will, won't it?

And where does this money go?

It's curious how difficult it is to find an answer to this online. My assumptions (again, do write in if you know better) would be that the bank has to pay a bit extra to the Bank of England for being allowed to create this loan money out of thin air, but that they keep the rest.

So let's work on the assumption that some of the extra £3500 goes to the bank, and the rest goes to the Bank.

But why?

To cure inflation, of course. In order to cure inflation, demand must reduce, which means people have to be poorer, which forces shops, businesses, etc to reduce their prices to get their customers back. Or go bankrupt, whichever happens first.

Even if we accept that (which I don't), why does the money have to go to the bank? Why can't it be gathered up by the government in a good old tax rise? Why can't it be taken as a compulsory charity donation?

Or why can't it be not taken at all? Inflation will fall anyway once the energy prices peak and (whisper it) this round of inflation wasn't actually caused by people having too much money and frittering it away. It's a mixture of gas prices, shortages because of the war and a bit of old-fashioned profiteering from companies using the current state of the world as cover for hiking prices way beyond what's necessary to cover their increased costs.

Maybe if people weren't poorer and didn't cut back on their 'discretionary spending', fewer businesses would go bust and it would actually be better for the country and prevent a recession...

But what do I know? I'm not on the monetary policy committee.

And what can we do about it?

Nothing. Pay up or get repossessed/evicted. Maybe buy some shares in your bank so at least you get some of it back in a dividend payout. (This is NOT financial advice, in case you were wondering.)

When budgets meet reality

On the excellent podcast "The Rest Is Politics", presented by Alastair Campbell and Rory Stewart, last week, Rory suggested that the NHS couldn't be expected to pay for everything. Drug prices are rising, people are getting older, etc, etc. Efficiency savings are required, etc, etc.

But why, Rory, why? And what happens to the people who now won't be helped because the budget of the service isn't big enough to include them?

What Is A Budget?

A budget is a best guess of what will be required. (Other definitions are available).

Some budgets will be very educated guesses. Some, sadly, will not.

Some will be surprisingly accurate and some will be surprised by an unexpected event that makes all the effort that went into creating them an absolute waste of time.

But budgets are not reality and never will be.

If the task is to build a bridge and the budget contains insufficient material to actually reach across the gap, very few would begin construction while imploring the gap to make efficiency savings so that the planned bridge will actually reach the other side.

And if the task is to look after the healthcare needs of a nation, what then?

Endless Need

Drug prices are rising, average age is increasing, conditions are becoming more complex -- the need is endless and you simply can't expect a health service to cover everything.

Why not?

If people have a health condition that can and should be treated in order to remove injury, restore function, reduce risk of imminent death -- it would be beneficial to them and to society for this treatment to happen.

(Of course it's good for society -- better health means the person can work, pay tax, spend money on other businesses, interact with other people for the common good...)

If the health service won't pay for it -- because it's a "won't" not a "can't" -- then our hypothetical person has two options:

• suffer
• pay for it themselves

There simply aren't any other options. And a huge number of people can't afford to pay for it themselves and so they will suffer. And maybe die prematurely.

Pay For It Yourself

Let's just break this down a little, starting with an extreme example:

• very rare conditions that are expensive to treat

Well, if they're particularly rare then we're talking about a very small number of patients. So if we split the cost of whatever they need across the country (i.e. fund it through the health service, paid for by central government), it's actually a surprisingly small amount each for us to chip in.

The other option is that the person who picked up this condition in the lottery of health will have to pay an eye-watering amount of money in order to be looked after.

Whereas the person who (for want of a better example), broke his leg while skiing, requiring a long, complex and expensive operation to put the shattered bone back together, will pay nothing. And he chose to go skiing...

I'm not suggesting that those who have an accident doing something they love shouldn't be covered. I'm also not suggesting that those who find they have a rare and difficult condition should be left on their own.

At the other end of the scale, we have:

• extremely common conditions that are cheap to treat

Multiply the number of these by the lower cost for each and you could well end up with a far higher bill than for our 'very rare conditions' example above. But of course you'd cover these people -- there are so many of them that it would make no sense to exclude them, wouldn't it?

So if you're not trimming from either end, where will the axe fall? Somewhere in the middle? Thus leaving quite a lot of people with moderately expensive bills? Is that meant to be better?

And, while the drug bill for the health service might be startling:

• the health service will be getting a good price due to economy of scale
• and what's the alternative? (The answer you're looking for is 'suffering'.)

What Good Is A Budget?

So what good is your budget? Are you going to arbitrarily stop spending once you've hit this budget-number which was just a best guess made some time ago?

What will happen when reality meets fantasy (i.e. this budget)?

Do you start telling reality that it's wrong? Do you tell the patient to make efficiency savings in the severity of their condition?

Because there are only two options, ignoring the budget and doing what's needed, or abandoning someone at their time of need because an Excel spreadsheet thrown together the previous year says so.

A budget is a useful way of estimating what's going to be needed to get something done. It is a terrible way to decide when to stop doing what is needed.

Because if the bridge is worth building, then finish it. The valley isn't going to get any narrower to help you.

Heads You Lose, Tails... actually, we don't have a tails

The Great British Energy Price Off (Part... I dunno, I lost count some time ago)

For those concerned about escalating energy prices, whether the UK government's support package is sufficient and whether 'we' will be paying off this 'debt' for generations to come... here's something else to worry about.

Businesses.

Phew, you might think. I don't run a business. I'll cross that off my list of stuff that keeps me awake at night.

But do you ever buy anything from anyone? If so, increases in business expenses will have to be passed on to the customer. You do realise who that is, don't you?

It seems that energy companies might be massively profiteering from the 'differently' regulated tariffs for businesses. (I only said 'might' because I don't want to unfairly malign them here by jumping to conclusions. I'll leave you to jump to your own conclusions.)

Also, we're not talking about 'unworthy' businesses (whatever they are). No, the Chief Executive of Care England (which represents care homes amongst other things) has said “We believe there can be no justification for charging such horrendous and financially crippling rates."

The owners of care homes, together with the owners of pubs, restaurants and, presumably, many other businesses, are aggrieved that the wholesale price of gas has gone way, way down recently. But their bills are continuing to reach for the skies.

(Read the full story here.)

The key line I'd like to bring to your attention is this one:

"Suppliers have argued that uncertainty over the future price of gas and electricity has made determining the price of contracts difficult."

And this is the territory of 'heads you lose, tails... actually we don't have a tails'. Yes, I know I made that joke in the title. I thought you wouldn't mind a bit of recycling.

So businesses are being asked to pay far more than the current 'market' price at the moment, just in case the price goes up in a month or two (or six or twelve or twenty or whatever). Let's look at the options here:

• Right now, the energy company will be making a nice healthy profit as they're charging significantly more to supply the energy than it's costing them to acquire it.
• If the price does go up, the energy company will be fine (phew!) as they won't be stuck with having to supply at a loss (just have to put up with a smaller profit -- boo!)
• If the price instead goes down, it's bumper bonus for the energy company (double phew!) as now they're making an even bigger profit.
• If the price goes up even further than the energy company predicted, they might make a loss. But...
• (a) they've probably set the contract price so high that this is vanishingly unlikely (from the article -- "companies were being charged 25p to 40p per kilowatt hour, far higher than spot prices of about 3p")
• (b) by the time this vanishingly unlikely high wholesale price kicks in, they'll have made so much profit from their customers that this won't be an existential threat to their business anyway.

I'm going to assume that owners of care homes, pubs, restaurants, etc have thought of the following and that neither would work:

• Just move to another energy company. (Ha ha ha ha ha ha. Let's not kid ourselves that one of them is missing out on this feeding frenzy by trying to actually compete on price to gain customers.)
• Don't take a contract -- just buy at the 'spot' price (i.e. current variable rate). This isn't really an option because energy users can't buy from the generators and have to go through a (leach) energy supplier company.

Overall -- fake competition is driving up prices

Real competition between rival suppliers would drive down prices.

Fake competition between suppliers acting as though they were a cartel drives up prices to the highest possible point, then a little higher. Oh, and then higher again when it turns out they can get away with it. (Yes, I know they're not really a cartel but it sure looks, feels and acts like one.)

Where next?

The initial days of the energy crisis caught the smaller suppliers with their supply trousers down. They had agreed fixed price contracts with too many customers at prices that turned out to be unaffordable when the wholesale price rose.

Without some money in the bank to keep them going over this period, these small companies went backrupt, unable to fulfil their supply obligations. Any profit they had made previously had been safely tucked away as dividends, directors' pay, whatever -- and so the company ceased to exist, fell off its perch and the supply of all their customers had to be picked up by other, less bankrupt companies.

Interestingly, the cost of continuing to supply these customers at below market rate fell to the general public. Part of your higher bill is to subsidise those whose fixed price contracts bankrupted their supplier. Ah, you say, wouldn't it be fairer to claw back the profits those companies made in happier times since they should have prepared for this eventuality? Ah, you say, wouldn't it be easier just to bail out the company without driving it to bankruptcy? Yeah, neither of those was ever going to happen.

And now it's happy times for energy supply. Prices continue to go through the roof thanks to the 'free market' approach of ensuring the maximum price is charged at all times.

The customer doesn't see this though, thanks to the 'price cap'. This is a maximum amount that the energy suppliers can charge. Well, it's the most they can charge the customers. But they then work out the difference between that figure and what they wanted to charge the customers -- and they collect that from the government instead. (Bumper cash bonanza!)

Where does the government get that cash from? From you, of course. They've gone to the money markets, taken a massive loan in your name and will expect you to repay it over as long as it takes.

So where is the money going? Energy suppliers and banks.

And for what?

Trapped in a game of "Simon Says..."

So how's it all going?

Interest rates are going up.

Taxes are rising.

Prices are rising.

The school buildings aren't getting repaired.

The hospital roof is near collapsing.

And what have we got to show for it? Apparently, the markets are not as 'spooked' as they were and our grandchildren won't have to pay back our 'national debt'.

Yes, but what have we actually got to show for it?

Why are we so concerned not to spook the markets?

Which is better from the following two choices...?

• Economic collapse, mass unemployment, rising home repossessions and millions turning to foodbanks.
• Spooked markets.

Would you risk a bit of market spooking to avoid the first list? After all, what does a spooked market actually lead to? And why is it bad? And is it as bad as the first list of catastophes?

Because if a spooked market might lead to the first list of catastrophes, then isn't it a risk worth taking to avoid definitely causing all that pain and misery?

Simon Says

Otherwise, we're trapped in a game of "Simon Says...".

Anything that might 'spook' the market has to be avoided.

So the market says you've got to have austerity...

 -- great, let's cut everything to the bone, then start to starve people.

The market says interest rates have to go up...

-- fantastic, let's force businesses to go bust and people to lose their homes.

The market says we know best about pricing

-- brilliant, we're sure you won't engage in any price gouging.

Alternatively, we could actually try to repair the country and ignore the fact that 'Simon' is telling us to punch ourselves in the faces. Do you see 'Simon' punching himself in the face? Do you? As whatsisface said in Shrek over twenty years ago, "Some of you may die, but it's a sacrifice I am willing to make."

National Debt

This is an imaginary construct that has been around for hundreds of years. We owe it to ourselves because the government owns the Bank of England. It hasn't been repaid and probably never will be. Suggesting our grandchildren will be repaying it is an absolute pile of piffle.

Money

Because, after all, what is money? It's an imaginary construct too.

When the government wants to spend money, it does not have to raise tax to do so. It literally asks the Bank of England to create it from thin air.

In order to make sure we don't have too much money, which actually could lead to inflation, some of it is recalled and destroyed. This is known as tax. So the best way to reduce inflation is to increase tax because that will actually, literally, really take money out of the system.

When you go to the bank for a loan, they don't give you money that someone else has deposited. They literally create the money out of thin air. And, when you repay it, that money no longer exists. Ah, but the interest still exists -- and that's where the bank's profit comes. It has created something from nothing, and charged you for giving you the result of the magic trick. Must be nice, running a bank...

So, when interest rates go up, money is taken out of the system, sort of, except it isn't really. You're poorer and the bank has earned more money.

Effectively, it's like taxes have gone up except, rather than taking money out of the system to effectively counter inflation, money has been taken out of the wallets of 'normal' people and moved into the profits of banks, where it will potentially be moved off-shore in order to be tax efficient.

Overall

The government is using a variety of crises to pump up the profits of banks and multinationals, to downgrade the health and education services to encourage people to lose faith and pay for private treatment, and as an excuse to deregulate various industries in order to reduce the responsibilities of large companies to respect and look after the country in which we all live.

Have a nice weekend.