The Bank of England Chief Economist, has provoked a furore with his comment that UK households have to accept that they will be poorer. Part of his comment is an attempt to defend the Bank against the charge that it has created the current inflation as a result of its policy of QE, particularly during lockdowns. He has instead tried to claim that the higher prices are for things like natural gas, and food, which Britain imports, whose prices have risen by more than things that Britain exports, creating a trade deficit, leading to people being poorer. Some, but not much of that is right. What is more, its quite clear, as its been profits that have also been rising that, already some households have not accepted they should be poorer. Nor should workers.
I've set out in numerous posts that the argument that QE, and all the previous 40 years of liquidity injections into the economy, did not cause inflation is simply unsustainable. For millennia, every time that states devalue the currency it has led to higher prices. It is bound to do so, because the currency (standard of prices) is the unit of measurement of the value of commodities, in the same way that a yard or a metre is the unit of measurement of length. If you make the measuring stick shorter, then the thing you are measuring increases in proportion to it, even if it has not itself changed. A look at hyperinflation, wherever, it has occurred, has happened only when states have printed more and more money tokens, and it has been ended, when they have withdrawn them all, and introduced a new higher standard of prices.
A look at the astronomical inflation of asset prices (shares, bonds, property etc.) during the 1980's, 90's and 2000's went along with the increases in money tokens and credit that central banks pumped into economies, particularly from the mid 80's onwards. Indeed, given the huge rise in productivity that occurred, as a result of the microchip revolution of the 1980's, and other developments, which massively reduced the value of commodities, those prices should have fallen, had the value of currencies been held stable. Instead, they continued to rise, even though nothing like the huge rise in the prices of assets, whose prices rose as a result of huge levels of speculation, in the hope of obtaining large capital gains.
Also, a look at the spike in the prices of commodities that occurred after the ending of lockdowns, a period when huge amounts of liquidity had been pumped out to households, in the form of furlough payments, leaves little doubt that its cause was this ocean of liquidity that was now released into the economy, as soon as those households were enabled to use it. And, contrary to Pill's argument about it all being down to the rising prices of imported goods like food and energy, the area where prices are now rising fastest is in services, which are produced domestically. Its true, of course that the prices of food and energy, globally, has risen, but that can't explain a rise in the general level of prices.
The rise in global food and energy prices is itself in part due to the inflation caused by devaluing currencies. If those global prices are measured in Dollars, then the fall in the value of the Dollar, resulting from printing more Dollars, is one cause of those rising prices. For Britain, that is made worse, because the value of the Pound also fell relative to the value of the Dollar too. One big reason for that was Brexit, and so, yes, its quite true for Pill to note that, as a result of Brexit, and the fall in the value of the Pound that followed it, Britain, as a whole, became relatively poorer. It means that it has to sell more of everything, in order to get the same amount of foreign currency it received before, and which it needs to buy goods and services from overseas. But, also, one reason for the Pound being devalued was itself the printing of additional £'s, and creation of additional credit.
But, the other reason that global food and energy prices have risen is that NATO and the G7 introduced sanctions and boycotts on Russian oil, gas and grain exports. That caused energy prices in Europe to soar, as the EU had to source oil from the US, instead, at much higher prices, and natural gas, via expensive LNG, from global markets, and for which it did not have the infrastructure to deal with. So, it was not necessary to simply accept those higher prices. Much like the austerity that governments imposed after 2010, it was a political choice made by governments, and the British government was at the forefront in demanding the imposition of those boycotts and sanctions against Russian energy exports! Those higher energy prices also impacted the price and availability of fertiliser, which again caused higher food prices globally. That was made much worse by the fact that Russia is the largest exporter of grain into the world market, and all of the sanctions and boycotts introduced on it, reduced that supply, pushing global prices much higher. Again, not something out of the control of governments, but a direct consequence of their political decisions.
So, yes, its quite true for Pill to say that the prices of that imported food and energy is not mainly due to the BOE's QE, but it is not true to say it is something we have to accept, because it is mainly a consequence of political decisions made by the British government, and its allies. But, also those higher food and energy prices, cannot explain the general rise in prices that has occurred. Take four different commodities A, B, C and D. A has a value of 10 hours, B of 20 hours, C of 40 hours and D of 60 hours. If the value of A rises to 20 hours, this does not change the value of B, C and D. What it does do is change the proportional relation of A to B,C and D. Previously, 2A = 1B, 4A = 1C, and 6A = 1D. Now, 1A = 1B, 2A = 1C, and 3A = 1D. In other words, the prices of B,C and D have all fallen relative to A. Their prices relative to each other are unchanged 2B = 1C, 3B = 1D.
The only way that, with a fixed amount of currency in the economy, a general rise in prices could occur, would be if the rise in the value of A, also impacted the value of B,C and D, for example being an input into their production costs. That is certainly true of energy, but, as an input, it only forms a small fraction of the value of most other commodities, and so cannot explain any large rise in those prices. That can only be explained by the fall in the value of the standard of prices, i.e. by the currency being devalued by increased amounts of it being thrown into circulation. Of course, what that rise in production costs does do, even when its passed on into a higher price of the commodity, is to reduce the rate of profit.
If, production costs are £100, and profit is £10, giving a selling price of £110, the rate of profit is 10%. If production costs are £110, and profit is £10, giving a selling price of £120, the rate of profit falls to 9%. In order to keep the same rate of profit, selling price would have to rise to £121, and that is what businesses have done, as all of the excess liquidity in circulation has allowed them to raise their own prices. In other words, those households of capitalists have not had to simply accept that they have become poorer, and nor should workers.
The Bank of England has contributed to that. On the one hand, its policy of QE, especially at a time of austerity, led to a massive inflation of asset prices that really did make workers households poorer. As house prices soared, their wages could no longer pay for those houses, and as more of them then had to go into rented property, that pushed rents higher too. As the prices of bonds and shares soared, their monthly contributions to pension schemes bought fewer and fewer of those bonds and shares, meaning they produced less and less interest/dividends, especially as the yields on those shares and bonds also fell, and so either workers were faced with using more of their wages to save now, or else would face lower pensions later.
Now, the Bank of England is still engaging in QE to bail out the pension funds and finance houses as seen last September, and yet, its policy of raising its interest rates, contributes to the fall in asset prices that created problems for those institutions, as well as raising the cost of workers mortgages. In other words, as I set out some time ago, it, like all other central banks, is responding to inflation with the wrong tools, if it really wants to reduce it. Instead of raising its interest rates, it should be engaging in more QT. That would prevent firms raising prices, so easily. But, it will not do that, because, in current conditions, of labour shortages, wages would rise relative to profits. Current policy is designed to allow prices to rise ahead of wages, and interest rate rises are intended to slow the economy, and demand for labour, to slow the rise in wages and demand for capital, so as to boost profits and asset prices.
Again, those are policy decisions designed to ensure that whilst some households, i.e. workers households have to accept becoming poorer, other households, those of capitalists and speculators certainly do not.
There is no reason why we should accept that. If the Bank of England will not rein in the excess liquidity it has thrown into circulation, and continues to do, so as to reduce price rises, if the government persists with its policy of boycotts and sanctions against Russian exports that has caused global food and energy prices to spike, then workers can only respond by demanding that their wages, benefits and pensions rise, at least, in line with those rising prices, and other costs imposed on them. We need a sliding scale of wages, so that wages are increased, each month, in line with that rising cost of living, which we should calculate ourselves, using committees of workers and labour movement economists. The TUC, should coordinate such action, and ensure a response from all unions to ensure that all employers comply, and that the government is forced to comply in relation to pensions and benefits.
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