Why the Bank of England's measures will not prevent catastrophe
By JAZIR MOHAMMED
Andrew Bailey and now former Chancellor Kwasi Kwarteng discuss economic measures with the IMF Managing Director
Let’s be clear about one thing: the crisis facing Britain’s economy was not caused by the long-lasting impact of Covid-19, or the blockages and barriers caused by the war in Ukraine, let alone the laissez-faire ideological fantasies of the current government. This disaster was several decades in the making and not only does it expose the rotten structural foundations that have persisted within the British political system, but it also exposes the very disastrous if not ironic relationship that Britain has had with capitalism.
From its peak of ruling 1/5th of the globe, to being the “world’s workshop”, to then being one of the most economically stable countries in the 21st century, Britain’s love affair with capitalism has birthed one nasty little brat of a child. That is in the form of surging energy prices - crippling inflation that could reach 22% - and the sterling falling to the same value as the dollar. It is easy to look at this crisis as a mere outcome of “bad politics” where outdated ideas and dogma still pervade over sensible thinking, which in turn damages the lives of several innocent people. But if we dig beneath the surface, there are clear cut class interests at play here. This crisis of capitalism is a result of the bourgeois layers sticking to the pursuit of profit over public need, even in times of crisis.
One ought to feel sorry for the Bank of England and the Treasury in the midst of this looming crisis. After all, they are trying hard to mitigate financial disasters by raising interest rates to tackle the rising inflation, and borrowing money to purchase an eye watering £65 billion in government bonds - which are meant to be financial bonds with a low rate of default. That scheme was largely in response to the market madness that ensued after Liz Truss and Kwasi Kwarteng’s bogus mini budget which sought to cut stamp duty, lift the cap on bankers’ bonuses, as well as ditch the 45% income tax bracket for the top earners. It was soon clear enough that the wide host of reforms would lead to less tax revenue - which in turn simply worsens an already humongous budget deficit and adds more to the pile of debt; which has now reached 100% in terms of the debt to GDP ratio. Another reason for this market volatility is the pre-existing cost of living crisis. That depresses demand, later contributing to worsening market confidence.
The emergency measures that the technocrats at the Bank of England have taken may calm things down. But it is merely a temporary painkiller rather than the medicine itself. It is worth even considering if they are part of the very same problem that plagues our economy and society, where the representation of the interests of the rich take precedence over wider society. After all, Andrew Bailey, Governor of the Bank, sheepishly urged workers to take it on the chin and accept lower wages, warning that pushing for pay increases would worsen inflation. But if that were the case, then where was his voice when the Treasury were bailing out the rich during the immediate aftermath of Covid, as they did in 2008? As former-banker-gone-rogue Gary Stevenson brilliantly put it in an interview, it “give[s] ordinary families a bit, and the rich a lot”. This constant scheme of enriching wealthy individuals in the aim that it would correct the market, he says, is in itself self-defeating. The more they are bailed out unconditionally, on top of accruing more ownership of the government debt from bonds, will lead to a driving up of inflation, in turn hurting most of society. And despite the Bank of England’s actions, more and more assets are being sold by pension funds, which will clearly hurt many in our current generation who may not even have enough pensions to retire.
Raising interest rates will not solve anything which, funnily enough, Andrew Bailey admitted himself last year. Corporations are raking in record profits, with the top 10% of firms have seen their profit rise from 58% to 82% between 2008 to 2020. If prices are rising yet people’s wages are not, then clearly someone is hoarding more wealth. If raising interest rates is supposed to deter people from borrowing and spending too much, then clearly this would have no effect when the most wealthy are still becoming richer and richer. Rising interest rates will simply cripple most ordinary families, worsening the aspirations of many to get on the housing ladder because of the effect it has on mortgages. Is this simply the dominance of mainstream economic thinking as to why, yet again, these policies are being taken? Or could it be because those at the top are waging class conflict? Because it often seems like that.
Image: Flickr / HM Treasury