Andrew Bailey, the Governor of the Bank of England, has inflicted an awful attempted cure on the British economy which will cause death, hardship, unemployment and recession while doing nothing to help. Unless you work for a bank, in which case it’s all good.
The Bank of England makes money out of thin air – that is its most impressive conjuring trick. It then deposits that money in accounts in the names of banks. It then pays credit interest on that money to those banks.
So the first beneficiaries of interest rate rises are those banks who are receiving unearned money on cash balances they did nothing to produce. Where is this money going to go? Why is it being paid? And why is it helpful to pay more than was paid last week?
The government could state that interest will no longer be paid on these balances – and yet it hasn’t. So it has effectively chosen to pass huge amounts of money to banks for them to do with as they wish. How is this helpful to anyone other than the recipients of this year’s bonuses?
Another effect of interest rate rises is to provide cover for mortgage lenders to hike their interest rates, which will generate more revenue for banks in return for literally no extra effort or productivity on their part. It is simply a money transfer from borrowers to banks.
So far what do we have? The Bank of England is paying banks extra money for no obvious reason. And it is giving banks an excuse to charge their customers more money, similarly in return for those banks doing absolutely nothing.
The knock-on effect of this is that people will be poorer. They will simply have less money. And we haven’t even considered rising prices for energy and food yet. Why are food and energy more expensive? It’s certainly not because people have had massive pay increases because they haven’t. So it’s insulting even to suggest that wage increases are necessary for inflation – we have the inflation and we haven’t had the pay rises.
Inflation is caused by price rises, not pay rises. And price rises are, predominantly, caused by profiteering, price gouging, greed – call it what you like.
Most energy in the UK is not generated from burning Russian gas and oil. Quite a substantial proportion is generated by solar, wind, tidal and nuclear means. None of those have become more expensive. However, the price of electricity and gas is pegged to the international price of gas which has the sole purpose of inflating the price for customers while giving vast unearned profits to the energy wholesalers.
This is a regulatory choice. There is no need for solar energy to be sold at the same rate as gas. However, there is a background whinge from energy company apologists (sorry, lobbyists) who are very keen to collect this money while the going is good. Perhaps the going should stop being good.
And food prices are going up because transportation costs are going up (see energy prices) and because a handful of large multinationals produce a huge proportion of the food in this country and they have discovered that people are tolerating their inflation busting/causing price increases. Look at the profits these companies are making and then tell me that they are simply passing on their increased costs. Because, if they were, their profits would be the same as last year’s. Are they?
The overall effect will be a transfer of money from some of the poorest in society into shareholder dividends, together with some free money from the government going into that pot too. Interest rate rises suck the lifeblood out of the economy, just as leeches used to suck the blood out of afflicted patients. Painful, weakening, pointless and ugly to watch. But it is a choice. And Mr Bailey should stop choosing it.
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An obvious rejoinder would be to ask me what I would do.
Firstly, I do not need to offer a better idea to suggest not using a bad idea. Literally doing nothing would be better than causing harm.
Secondly, how about no longer paying interest to banks for holding onto money that the Bank of England gave them?
Thirdly, how about pegging energy prices to the actual price of generating the energy rather than the theoretical price that energy could be sold at on the open market? If a household has barely enough food to eat, it would be foolhardy to sell it to the neighbours just because they could get a good price. Similarly, the UK should not be selling its energy on the international market instead of using it domestically at cost, or pricing it as though it could/would/should sell it internationally. This might disadvantage the shareholders of the energy companies but, then again, given the desperately low level of investment they are making, I’m not convinced that would damage the nation.
Fourthly, an investigation into food price fixing might stir up the so-called free-market a little. Not everything that is going up in price is doing so because of raised costs.
Fifthly, the government could invest in environmentally useful enterprises, e.g. windfarms, solar farms, home insulation, etc, etc. As a nation we’re going to have to do this sooner or later so why not start it now? It will bring down energy prices and usage and will support skilled employment in growth areas that won’t destroy the planet. Where will the government get the money? They could start by using the money that the Bank of England will no longer be paying other banks for holding onto money.
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