Politics: economic woes

By Richard North - October 13, 2022

When it is clear that none of the players can agree about who (or what) is to blame for the current economic crisis, ordinary mortals really don’t have a chance of getting to the bottom of what is happening.

No matter how carefully crafted the explanation of how we got into this situation, there will always be a raft of “experts” to offer alternative ideas, pointing to different sets of culprits and causal factors.

However, at the bottom of the turmoil in the pensions industry, which has had the Bank of England shelling out billions to save “big name” fund managers from collapse is a variation of the Lehman disease – the excessive reliance on “dodgy derivatives”.

In this case it is the financial instruments known as liability-driven investments (LDIs) which seem to be at the heart of the problem, with the fund managers caught out by a sudden increase in government bond yields.

Given that yet another train-wreck economic situation has been engineered by yet another raft of over-paid “experts”, one wonders whether there is any particular merit in entrusting the management of our economy to such people, when the results are predictably the same, no matter who is in charge.

Sooner or later – and these days it seems sooner – we see periodic crashes, the net effect of which is to have the perpetrators standing in line with their hands out, demanding to be bailed out by long-suffering taxpayers so that they can continue living high on the hog until the next crash, when we see the cycle wash and repeat.

Certainly, there cannot be any confidence in the prognostications of the so-called experts when we see headlines such as: “UK economy shrinks unexpectedly as recession fears return” – this one in the Telegraph but repeated elsewhere by many other media outlets.

No one living in the real world – where charity shops are closing down for want of stock and the free classified ad site, Gumtree, is booming, and M&S is closing 67 high street stores – could possibly assert that this shrinkage is unexpected, or that August’s fall of 0.3 percent in GDP adequately represents the state of the economy.

Only those living in the rarefied atmosphere of economic “experts” such as Yael Selfin, chief economist at KPMG UK, could make a statement like August’s outturn leaves the “UK economy teetering on the edge of recession”, and actually believe it. The real economy has been in recession for months.

In this context, one would have thought that the reliance on an unmodified GDP figure as the sole determinant of an economic recession might be rather less than sound. There is an endless debate on the value of the GDP as an economic marker, but even traditionalists should be able to recognise that we are living unusual times, where GDP is of even less value than usual.

If one takes, for instance, energy costs, even without this October’s rise, we have seen domestic charges double, while commercial and industrial charges have multiplied to an even greater extent. Yet, in the nature of economic orthodoxy, the resultant increased payments will feed into the GDP calculations as increased consumption.

The reality though is anything but. As prices increase, consumption decreases and, where energy is a component of a value-generating process, that activity will decline, although the downturn will be partly obscured by the increase in energy costs.

Then, as far as domestic consumption goes, there is also plenty of evidence that people are seeking to reduce consumption. But also – and especially those on fixed incomes – increased charges are being met from savings rather than income, representing an overall drop in wealth. The GDP figure is sending a signal which bears no relation to the actual state of the economy.

That much was surely evident before even the headlines were dry on the few print editions that are now sold, even as Reuters was reporting that the energy crisis could cut Europe’s car output nearly 40 percent.

For the UK, where car manufacturing has been the success story of the last decades, the industry has become a bellwether – not least because of the enormous “tail” of supporting businesses which rely on the healthy state of the automotive trade to provide their base earnings.

There again, when increasing numbers of second-hand cars are increasing in value, this again must be sending a false GDP signal, suggesting increased consumption of a product which is actually a finite quantum.

What, of course, will drag down the headline figure is the Bank of England raising base interest rates higher, which is expected to drive down house prices, with at least a 10 percent fall predicted for next year.

Yael Selfin, the KPMG “expert”, thinks that this could see GDP falling by as much as 1.6 percent – enough to bake in a recession that is already well-established, with even that under-representing the real fall as increased mortgage and rent payments will be treated as an increase in GDP.

In this, we see an overarching problem, in that the primary tool for measuring the health of the economy – and the prosperity of the nation – is not only fundamentally flawed but flawed in such a way that the signals are increasingly unrepresentative of the behaviour of the real economy. We can’t even rely on the doctrine of constant error to give us some indication of relative movements.

Significantly, back in the Brexit year of 2016, the august Economist was complaining that GDP was increasingly a poor measure of prosperity. It is not, the magazine said, even a reliable gauge of production.

Even then, the influence of a change in the price of a product on how much of it people buy was noted, yet the massive increases in energy costs seems to have passed by the present GDP compilers. No real (or any) attempts have since been made to address the inherent deficiencies of this measuring tool.

Small wonder, therefore, when Miss Trussed came stomping into No.10 with her IEA-inspired dogma on growth, she was always going to come a cropper. With the real economy already in recession, suffering structural stresses which were largely undetected, the very last thing that was going to have an impact was a dose of trickle-down economics.

Now, after a car-crash PMQs, she has to contend with the front page of The Times conveying a message from “her most senior advisors” telling her that she needs to “rip up last month’s mini-budget” and raise corporation tax as the price of restoring market confidence in her government.

Officials, it seems, have warned The Replacement that it is “no longer credible” to press ahead with tax cuts without risking a financial crisis that would further drive up the cost of government borrowing and mortgages.

Damning enough in its own right, this narrative nevertheless fails to convey the simple fact that the financial crisis is already upon us. And while “market confidence” is an issue as the population at large is rapidly losing confidence in the government’s ability to govern, while also realising that the “market” is not their salvation.

Having tied her fate so firmly to the reform of the economy and botched it so comprehensively at the first hurdle, it cannot be any surprise to find that she has lost the support of her own MPs, and her very administration is in peril.

Alarmingly, though, we are probably past the tipping point, where the mess is so profound that the economy is beyond salvation. Combined with the political turmoil, the unpredictable effects of the war in Ukraine and the global downturn, and there seems no real prospect of avoiding an economic tailspin.

We can, however, rest assured that when whatever happens actually arrives, it will be “unexpected” by the experts. It always is.