Boom Boom Boom Boom

Boom, Boom, Boom, Boom,

Boom, Boom, Boom,

Boom, Boom, Boom, Boom,

Boom, Boom, Boom.

The German Guns, by Private Baldrick

The above poem was, of course, recited by Baldrick in the seminal television series Blackadder Goes Forth - you might remember that Baldrick was notably surprised when Captain Blackadder guessed the final line. 

Captain Blackadder's comment on it could also probably be applied to the current government's run in office: "it started badly, tailed off a little in the middle and the less said about the end the better — but apart from that it was excellent." 

Anyway, why have I started this increasingly sporadic blogpost with it, apart from the opportunity for an early cheap dig? Well, back to that in a second.

Readers of this increasingly sporadic blog (and there could be as many as three in Northern Europe alone) will know that I am somewhat of a - let's face it - tinfoil hat wearing doom-monger. And with some justification, I feel - we are clearly not being governed by people who are entirely sane, and our fiat monetary system is, by its nature, not sustainable. 

Take the talk around inflation recently, as a random example of their tenuous grip on reality: our elites are firmly of the opinion now - and this has become a 'sophisticated' and grown-up thing to say - that wage growth is a bad thing for the country, and we need a recession to reign in inflation.

Apart from the fact that, in no sane system, should people on average earning more be a bad thing - it's also complete nonsense, if you think about it for more than about two minutes. The UK's Brahmin caste that run everything think that lower wages and a recession are good for reducing inflation, as they think that people earning less on average means prices dropping: take a factory with ten employees - one worker gets fired, now nine people chase the same amount of goods instead of ten, prices go down, job done.

Except - think about it - now only nine people are producing goods, so the supply of goods also drops in line with the drop in workers. Same amount of goods, same amount of wages to be spent = no drop in inflation. But one less employed worker.

Obvious. Inflation is a monetary phenomenon (ie related to money printing).

The news now is pretty bleak, I think we'd all agree. So, given the above...

...we're going to have a panic and everything - including house prices - is going to collapse now, right?

I actually think, erm, no - and not only because when you're a doom-mongering loon it's a bit unnerving when more and more people start agreeing with you, as it makes us feel uncomfortable and we change our minds. It's not this - don't panic - I still think our monetary system will collapse in the end - all fiat currency systems tried so far have, and we'll have to boil stones for soup in due course.

It's just that, with a now falling money supply as banks crush credit in a panic, and with massive, unprecedented debt levels and huge fiscal problems all over the place - I think we are now primed for some further money creation by government. The one thing indebted governments fear is deflation (as this increases the real size of their debt, and they potentially might not be able to print their way out of the death spiral) - and if this looks like it might even potentially happen, they'll open the money spigot. 

This will, I'd wager, lead to a short sugar boom as this money starts to hit the economy - maybe for two or three years - what is called by Austrian economists a "crack-up boom". Labour could well contribute to this.

Hence the poem.

Based on things like, say, the end of the current Kondratiev wave and the law of econonic rents (won't discuss this here, but they're spot on) indicating that there are probably two to three more years to go in the current real estate cycle, I'd say 2026 is a good bet for a crash. A bigee. A whooper. Schwerer Gustav-sized.

At that stage I might write another post - except it will actually be about the German guns.

Boom Boom Boom Boom.

Il y a une Couille dans le Potage

 

The title of the blog post comes from a French phrase I am fond of - it means: “there is a testicle in the soup”. This is I think a fairly accurate description of our economy - or there are at least testicles in charge of it. Ok, that’s the last time I’ll mention testicles. I think.

Anyway, where are we? Well, not that anyone remembers more than about 24hrs back these days, but everyone – and I mean, pretty much everyone – told you a year ago that inflation would now be at about 3% - 4% in the UK (everyone that is apart from me). But it’s still not far off 10%. In fairness, M2 money supply is, it appears, beginning to contract, so according to the Equation of Exchange*, inflation could now drop a bit.

But food inflation is 20% - and, perhaps most importantly, wage inflation is now 7%. Fascinatingly, junior doctors are asking for 35%, which could start a bit of a precedent. This is why I think the most important question at the moment is still – what will happen to inflation in the UK by the end of year?

I still can’t get round the fact that in April 2020 the UK became the first Western economy in history to directly finance the deficit using QE-like measures – ie print money for government spending. This is, quite exactly, what economic-guru Mugabe did (which, predictably, ended in hyperinflation). We then spent huge amounts of money subsidising wages. 

Consequently, we are now so much in debt that, were we to stop all government spending tomorrow – literally cease all new activity – we would still, according to my ciggie packet calculations, face a bill of approximately £6,000 per person, per year, just to pay the interest on the public debt we already owe.

So we now have inflation, but can’t make real rates positive to control it, as most of our debt is indexed, and this would quickly bankrupt the country. Combined with that, two thirds of mortgage holders have yet to feel the impact of the recent period of the fastest rate rises in UK economic history, and the Bank of England – definitely run by testicles (sorry) – are still putting base rates up and up, as they can’t distinguish between us at the US.

And now, predictably, there is a threat of credit contracting, as banking models are caput – ie they are lending long at low rates, and short term rates are spiking: so their entire business model no longer works. There’s just one small teeny problem: our system cannot sustain itself in a credit deflating environment.

Just a brief segue to Turkey: I remember when I was still working as a happily rich and moral-free (glorious days) banker, the moment 1 Turkish lira came very close to equalling 1 USD: since then the Turkish money supply has exploded, and the lira has accordingly sunk and sunk – and it’s now not far off 20 to 1 USD (although I haven’t checked for a while). So the obvious questions is: well, why don’t they just stop printing money?

Well, they can’t. Their system will implode.

Back to the UK: we have printed all this money, and inflation is now very high – so why don’t we just stop printing money?

Well, we, erm….well, we can’t.

And now we have a threat of credit contraction and a liquidity crisis: and that’s the thing about ending up with very high inflation – you need a very strong deflationary risk first, before the government and fiscal authorities panic and step in, to stop the system falling over: and once again provide massive monetary stimulus. Which will create the very high inflation - which is, inevitably, coming down the road at us.

This is only slightly complicated by the fact that CPI, the petard by which Sunak is in the process of being self-hoisted by, is produced by the government – ie the government has set itself a target to lose weight – but it also controls the scales. A bit like me going to Weightwatchers, and be able to say I have lost 2kg, each week, as I’m the only one who has access to the scales.

By the way, I lost 2kg this week. And also the week before. Hurrah! The only problem is, at some point people will notice I am just getting fat.

Oh testicles.

___________________________________________________________________________________

* "The equation of exchange shows that the money supply M times its velocity V equals nominal GDP. Velocity is the number of times the money supply is spent to obtain the goods and services that make up GDP during a particular time period."

Escape the Chains of Humanity And Let Madness Be Your Guide

One of the big questions this year, I think, will be what happens to inflation. I think it might dip in the face of credit destruction by banks, but watching it in the medium term will be fascinating.

Just a quick recap: the rate of inflation was rising, and we were told it was ‘transitory’ and would stop rising soon. Then it kept rising. Then Russia invaded Ukraine, and, a long time after it started rising, we were told that is started rising because of the invasion.

Everyone nodded, and now that’s the accepted original cause, even if the cause of what happened, happened after what happened. It all makes perfect sense. Shhh now, shhh.....there there...

The magnitude of its importance however is reflected in the fact it was one of the main points covered by Sunak today in his big speech. All in all, I thought it was quite an interesting speech by Sunak; in case you missed it – he basically set out the Government’s priorities.

It was quite interesting in the sense that he gave a speech, and it has been thoughtfully considered, and everyone is discussing the pros and cons etc, but no one is going “WHAT THE HELL! WHAT IS THIS? THIS IS MAD! WHAT HAS HAPPENED? ARGH!”.

Why should this have been the normal rational response, in a normal, rational world? Why is the reaction that has occurred proof that all of our elite are completely insane?

Well, its quite straightforward. The position of the government now is:

1.      The Bank of England is in charge of controlling inflation, and has an inflation target of 2%.

2.      The Government now also has an inflation target, but this is 5%.

3.      Inflation is also, according to the government (and the Bank of England) largely down to factors out of Bank of England or Government control.

All makes perfect sense, doesn’t it? It does if you learn to hide from the cold, harsh wind of reality…

This is like me on New Year’s day, possibly still quite drunk from the night before, saying:

“Right! I’m too fat. I have a plan. Weight loss is outsourced to a third party, and it’s their responsibility for making my weight loss plan. So, I will also set my own, different weight loss plan. Oh, and also, whether I lose weight doesn’t matter, as whether or not I lose weight is down to factors that are beyond my control.”

And everyone goes: oohh clever.

I suppose, if you were trying to insert some rationality into analysis, you could also say that it’s quite interesting that he listed various priorities - “the People’s Priorities” (or the Priorities of People's Hearts maybe, I wasn't really listening at that point) but mentioned nothing – NOTHING – in his priority list about housing.

From a certain section of the commentarial (any journalist under 40 who can't afford a house, basically), there comes the constant cry: build more houses! But now, interestingly, the average cost of building a new house is slightly above the average cost of a house, nationally, depending on your data source. So it becomes even more paradoxical if you think this is the only answer: the policy would be to set another target the Government won't control, and to ask house building companies to solve the problem by being in charge of building houses, at a loss on each house they build, and also to reduce the price of their monopoly product overall, but with no incentive to. Hence possibly why he ignored the topic completely. He probably thought: "yah know what? There's enough madness already for one day. Just right."

I would write more about the rising cost of construction now, but I mean, what’s the point? It’s 2023. It’s time to let go. Nothing is real now, the last glimmers of sanity have been extinguished in the rain of the first week of January.

I've said it before, and I'll say it again: it's time to sit back, have another biscuit, wave good bye to your loved ones, and set sail on the sea of madness.

Happy sailing.