When Britain’s brightest economists gathered last week, they set themselves a straightforward task: to decide what to do about the UK’s high rate of inflation. Eventually, after much brain-racking, they came up with a solution: to crash the economy.
It seems almost inevitable that the Bank of England’s recent decision to raise interest rates for the 13th consecutive time since the end of 2021 will push the UK economy into recession by the end of the year. Simply put, raising interest rates means that homeowners have to devote a bigger chunk of their disposable incomes (as much as 20%, according to estimates) to paying back their mortgages, potentially pushing 1.2 million households into insolvency. Renters, too, are likely to see their payments increase as buy-to-let landlords pass on higher mortgage repayments. Meanwhile, businesses will fail, workers will be laid off, and, with less money being channelled into the economy, the latter will ground to a halt.
What’s worse, this catastrophic scenario isn’t the result of the Bank’s economists not realising the consequences of their actions; among Britain’s policymaking elite, it’s the desired outcome. As J.P. Morgan’s Karen Ward, who is also an external adviser to Chancellor Jeremy Hunt, said: “The difficulty for the Bank of England is they have to create a recession. They have to create uncertainty and frailty.” Asked if he agreed with the idea of the central bank doing whatever was needed to bring down inflation, even if that could cause a recession, Hunt himself responded in the affirmative.
In this, however, he was merely channelling Andrew Bailey, the governor of the Bank of England, who said: “We’re not desiring a recession. But we will do what is necessary to bring inflation down to target” — even if that means causing a recession. Rishi Sunak has also expressed unwavering support for the Bank’s work, though no-one is more explicit than the Financial Times’ Martin Wolf, who went so far as to call for an engineered recession: “The question is not whether there will be a recession; it is rather whether there needs to be one, if the spiral is to be halted. The plausible view is that the answer to the latter part of this question is ‘yes’.”
If the idea of wealthy politicians, journalists and bankers (Bailey earns $575,000 a year) casually talking about the need to plunge millions of people into poverty makes your blood boil, good for you: you’re still human. But there is, of course, a logic to their madness. Their argument is that the British economy is facing a wage-price spiral, where workers demand higher wages to compensate for higher prices, to which companies respond by raising prices even more in an attempt to defend their profit margins, causing workers to push for even higher wages — and so on, in an inflationary feedback loop.
In this context, Bailey and his peers argue, the only way to break the inflationary spiral and put an end to the “unsustainable” wage demands of workers is to raise unemployment through an engineered recession, thus recreating a reserve army of labour and weakening the latter’s bargaining power. If such a policy sounds crazy, or wicked, it’s because it is. For starters, even if we were actually witnessing a textbook wage-price spiral, you would have to be particularly callous to blame ordinary workers for trying to protect their living standards and feed their families in the face of a cost-of-living crisis which they did nothing to create. Even the former deputy governor of the Bank of England, Sir Charlie Bean, has acknowledged this, criticising the Bank’s interest rate hike.
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