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.

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* "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."