Higher Interest Rates Already Appearing

Yesterday, I warned that the response to the COVID19 moral panic, in shutting down the global economy, would cause interest rates to spike, in turn causing a global financial meltdown that would make 2008 look like Halcyon days. The higher interest rates are already appearing. Governments around the globe are simultaneously creating an economic cardiac arrest by unnecessarily closing down economies in response to the panic, whilst attempting to compensate for the cessation in the creation of value and surplus value, by printing even more astronomical amounts of money tokens, and by borrowing impossible amounts of money, so as to nationalise the economy. The money printing is creating Weimar style hyperinflation, whilst the borrowing is creating a correspondingly high level of interest rates. 

In 2008, to bail-out the bankers and financial speculators, the UK government spent £2 trillion. It caused the UK budget deficit to spike to 6.9% of GDP, in 2010. But, the government is already planning to spend much more than that. As I set out recently, the government's commitment to pay the country's wage bill for the next year, commits it to paying out around £1 Trillion for wages alone. But, as its policies kill the economy, in the same way that the banking and financial sector was killed in 2008, the cost of buying up the rest of the economy will be much greater. The banking and financial sector accounts for a disproportionate amount of the economy. Bailing out the whole economy in the same way as happened with the banks and finance houses, in 2008-10, will cost around £20 trillion. That will balloon the deficit to over 70% of GDP, and will send UK government debt to over 500% of GDP. This will be happening at a time when that government debt will be matched by ballooning business and household debt, and with the consequent rise in interest rates, this level of debt will be unsustainable. It will mean that households, and businesses will go bankrupt, walking away from all this debt. Countries do not go bankrupt, but they do either print huge amounts of money tokens to pay off their debt, leading to Weimar style hyperinflation, as also seen in places like Argentina and Zimbabwe, or else they simply default on their debt, as happened with Greece, and with many South American countries. It means that all those people that lent to them, lose their money, and so means that all lenders become wary of lending, and charge much higher rates of interest before they will do so, in the same way as happens with pay day lenders. 

Paul Mason recently argued that the lending could be financed by printing money tokens and financial repression. As I set out yesterday, Marx explained more than 150 years ago why printing money tokens cannot reduce the rate of interest, and only causes inflation, and financial repression can only happen when there is a surfeit of loanable money-capital over the demand for that money-capital. Marx also explained why, in the conditions that are now being created, the very opposite of that condition arises. The people who resort to pay day lenders do not do so, because they want money to invest. They do so because they desperately need money to survive. They are prepared to pay any level of interest to do so, including up to 4000% p.a. The situation that is being created is the same as that, but for society as a whole. As Marx says, in these conditions, not only individuals must borrow from usurers, or pay usurious rates of interest in order to be able to pay their bills, but so too must businesses, and if the state simply becomes the proxy for all of these businesses, as a single state capitalist, then it too must pay these usurious rates of interest. That is the situation that the response to the moral panic over COVID19 is creating. It will cause many, many more deaths than COVID19 itself, and for many, many more years ahead. 

The only thing that has prevented such a collapse, already, is that many workers and businesses are ignoring the government demands to stop work. Near to me is an industrial and commercial estate. The businesses on it, continue to operate more or less as usual. Further away there is a brickworks that is also continuing in operation. And, of course, we still have electricity supply workers going to work, and so on, or we would already have descended into chaos as the electric went off plunging the country into darkness, cold, and helplessness in an age where everything from the TV to the hospital ventilators depend upon it. The only thing slowing down the process of the country descending into a chaos that its hard to see how it would get out of, is the fact that the majority of businesses and people are not abiding by the government diktat. 

Even so, the economy has slowed disastrously, and to a degree much worse than the global financial meltdown of 2008. As some workers said the other day, as they explained why they were still working, if they did not they could not feed and clothe their families, and risked being thrown out of their homes. As these workers said, if their families were thrown on to the streets, adding to the thousands of others sleeping rough, the damage to their health would be immediately real, as opposed to only a tiny risk that any of them would suffer serious ill-health or death (less than 0.1%) from COVID19. The IPPR reported that 130,000 people had died avoidably due to the deterioration of public health policy caused by ten years of Tory austerity. But, that will be minor compared to the effects that the current seizing up of the economy will cause, not just in the immediate future, but for decades to come. It will be far greater than the 20,000 deaths from COVID 19 that might have occurred if the economy had not been deliberately stopped, and which may still eventually occur, as a result of the spread of the virus simply being slowed down, rather than stopped altogether via the development of herd immunity. 

The headline UK inflation figure shows that inflation dipped slightly, but that was almost entirely due to sharply falling oil prices. Anyone trying to buy in essential items knows that not only are they disappearing from shelves, but, where they are available, they are only available in their more expensive varieties, that the prices of all basic items are rising, and the various means of cutting the cost, such as multipacks, and buy one get one free offers, are disappearing. That hits poorer households with larger numbers of children harder than single households and more affluent households. With millions already dependent on food banks that can only increase poverty levels further with the inevitable result for health, and mortality. 

Millions are expected to need emergency food aid in Britain within days, and yet supplies to food banks are drying up. In the US, already, food banks are closing down for lack of supply to meet rising demand. And, in Britain, despite government assurances that there is adequate food supply, it is becoming obvious that there is not.  As I wrote several days ago, the empty shelves are not caused by panic buying, but by a collapse in supply, as the government deliberately shuts down the economy. 

In the next week or so, the effects of that lack of supply will be manifest not just in empty shelves but in rapidly rising prices, as the gap between supply and demand widens, and inflated monetary demand causes prices to balloon. If the government was going to close down the economy, it should, weeks ago, have instituted a system of rationing, as happened during wartime, with each household given a ration book based on its needs, and it should have ensured that the vulnerable households, in the 20% of the population, were provided with their supplies directly, so that they could quarantine themselves. Better still, the government should not have closed down the economy in the first place, and should have just enabled the 20% to effectively self-isolate. 

We are not yet even in the foothills of this crisis, and yet its effects are becoming manifest. Bloomberg reports that UK banks are charging businesses 12% on loans to enable them to stay afloat, despite the government again extending huge amounts of largess upon them to supposedly facilitate such lending. The banks are also demanding personal guarantees and collateral from such borrowers to be able to obtain such loans. That is despite the billions of additional money printing, and reductions in official interest rates that have been undertaken. So much for the potential for financial repression under such conditions. The truth is that under these conditions cash is king. Interest rates are set to soar. As interest rates rise, so asset prices, the prices of bonds, shares, land and property will collapse. The bounce in stock and bond markets is merely a short term blip due to a sugar high caused by even more unsustainable money printing and government stimulus. Its already resulting in the crash that comes after every sugar high. That will reverse the hyperinflation of asset prices that has been built up over the last 40 years.

It is a classic mean reversion, and as with all such mean reversions, it requires that there is an overshoot in the fall in prices to compensate for their previous overshoot. Expect asset prices to fall by up to 90% as they did in 1929, or as in Japan in the early 90's. Otherwise, it will mean a smaller fall, but one which last for a much, much longer period, before it starts to reverse. 

But, the reversal of the asset price hyperinflation, will have its mirror image in a rise in commodity price inflation, as the price of necessities rises as demand exceeds supply, supply disappears, and black marketeering appears. The Pound has fallen significantly because of the damage to the UK economy that Brexit is doing. It is falling further as a result of the current crisis. That fall in the Pound, will itself cause UK inflation to rise, as the prices of its imported food, energy and raw materials rise, along with imported manufactured goods. That will not happen overnight, and depends on how much the government and Bank of England does actually follow through on its current policy of turning the currency into worthless bits of paper. A few years ago, the value of the copper in some 2p coins was greater than the value of the coin itself as a money token, because the price of copper had risen. At the present trajectory, the value of £1 coins will fall to less than the value of the base metal used for their production. If the government continues down the road of Weimar, then the value of the paper in banknotes will become greater than the value of the note itself! 

But, we are not there yet. At that point cash in the form of fiat currency, certainly would not be king. We would be back to the scenario I discussed back in 2007, in which, as in Weimar, the sound advice would be to buy gold and baked beans. The problem currently is that gold is increasingly unavailable to be bought, and baked beans are rapidly headed in the same direction.