cost of living crisis - mass deflation in a couple of years?

how do you drop demand then, in the short term?

There is no way in the short term. You're assuming that gas will run out. Is that realistic? Last I heard only around 5% of UK gas comes from Russia. That doesn't insulate us from price fluctuations but it at least means we can maintain supply even if it costs more. The problem is not a shortage of gas, but the increasing cost of it. In the short term we need to address the cost, and in the long term diversify our energy generation so we don't end up in a situation where we can be held to ransom by profiteering suppliers.

There is no way in the short term. You’re assuming that gas will run out. Is that realistic? Last I heard only around 5% of UK gas comes from Russia. That doesn’t insulate us from price fluctuations but it at least means we can maintain supply even if it costs more. The problem is not a shortage of gas, but the increasing cost of it. In the short term we need to address the cost, and in the long term diversify our energy generation so we don’t end up in a situation where we can be held to ransom by profiteering suppliers.

we don't get much gas from russia, but we do get a lot from other northern european countries (like norway), who are also selling gas to the rest of the EU. lets assume for ease that the market is limited to that.

There isn't enough non-russian gas in northern europe to provide energy to everyone who wants it. Demand outstrips supply until the demand is surpressed, in this case by increasing the price.

Say demand is outstripping supply (after all the new shipments that can be done this year) by 10%.. Under the current model (massive price hikes) there will be an impact on gas consumption in the uk. Lets say this forces us to drop our demand by 10% as a result, as do other countries using a lot of gas in northern europe. All of a sudden, demand matches supply.

If our government blocked the price rises (by subsidising them, or whatever), our demand would not go down - it would stay flat. This means that on the open market, the price will rise by more than it is currently rising, as the demand is higher.

If every goverment in the market did this, and assuming their pockets are infinately deep, the price rises on the market would have no limit. Something else would have to be done to cap prices and reduce demand. This could be turning back to russia for gas (politically difficult), stopping heating\powering public buildings (being done in germany), or.. errr?? if demand is supressed and there's no increase in supply there just isn't enough product around.

we produce about half of the gas we consume. The only way we could completely isolate would be to nationalise those gas sources and half our gas use. We could do this over the course of a few years by spinning up coal fired power stations or renewables, and insulate more, but that doesn't solve the problem this year

If our government blocked the price rises (by subsidising them, or whatever)

Are you seriously suggesting that the govt should do nothing and allow prices to rise beyond a level which people and businesses can afford? Solving the problem of high energy prices by crashing the economy is obviously not a solution.

Something else would have to be done to cap prices and reduce demand.

Like nationalisation?

Are you seriously suggesting that the govt should do nothing and allow prices to rise beyond a level which people and businesses can afford?

I think he explained why quite well (at least to my laymans brain). The best result from gov. intervention is that we find the UK (and probably German) government pockets are deeper than the rest of Europe's and we starve them out of energy while we carry on hunky dory.
Alternatively we all come to some sort of continent wide agreement to limit our use with rationing or rolling blackouts to keep the price down... with I imagine similar economic fallout when businesses can't operate with no power for half the week, what do they do?

The high energy prices are a result of the war in Ukraine. If it was over in days and Putin won, Europe would be getting gas from Russia again. You can't sanction Russia and ask for cheap gas from them at the same time.

The best solution i've heard so far is to adjust income+corporation tax thresholds thus:

It's actually not households or businesses i'm worried about - it's the public sector. They just don't have the spare cash to suffer higher costs and I see no current political will to help.

It’s actually not households or businesses i’m worried about – it’s the public sector.

It's not an either-or choice. The entire economy is at risk. Economic activity is directly dependent on energy, and we're allowing the price of that to increase by a factor of 3 for households and factor of 10(ish) for everything else. No economy can survive that sort of shock. I really don't understand why there isn't greater alarm or urgency about this. We're literally staring into the abyss.

10 nuclear power stations would help. Can you get them done by Christmas?

Seriously though, watch the LBC video I posted. Adjusting income tax and corporation tax for a few years would bring in some serious $$ to give over to low earners.

It’s actually not households or businesses i’m worried about – it’s the public sector. They just don’t have the spare cash to suffer higher costs and I see no current political will to help.

Magic Money Tree.

Works for everything else.

Seriously though, watch the LBC video I posted.

I did. They're talking about raising 12bn. It's at least 100bn short of what is actually required. Whether we like it or not preventing economic collapse is going to cost 100s of billions.

The other thing I don't understand is despite all the bluster and bravado about 'standing up to Putin', they're rolling over and allowing him to destroy the entire economy. Why?

No economy can survive that sort of shock

I t already has several times. Have a look at the oil price graph through the Suez crisis, early 70s, late 70s, Gulf war... . Brent crude is cheaper today than it was 10 years ago.

Are you seriously suggesting that the govt should do nothing and allow prices to rise beyond a level which people and businesses can afford? Solving the problem of high energy prices by crashing the economy is obviously not a solution.

afford as easily? yes. this is required. afford enough to stay safe? no.

Something else would have to be done to cap prices and reduce demand.

Like nationalisation?

nationalism wouldn't reduce demand, so wouldn't solve the problem. It works great in countries like norway, which are net exporters. We import half our gas.

Brent crude is cheaper today than it was 10 years ago.

cheaper in dollars, sadly way more expensive in GBP.

I don't know the answer then, sorry.

Seriously though, watch the LBC video I posted. Adjusting income tax and corporation tax for a few years would bring in some serious $$ to give over to low earners.

Income tax takes money out of the economy. Why would you want to do that?

Do people still believe income tax pays for things?

The reason to tax is to reduce surplus money in a overheating economy. We are so far from that.

Magic Money Tree.

Works for everything else.

Government spending is a big part of the solution. And it will come. There will be no choice.

It will probably be mess of support though.

afford as easily? yes. this is required.

We’re already at that point. Yet now we’re told bills are going to double again. So should we let that happen? Millions of businesses are going to go bust. Millions of households are not going to be able to pay their bills. Schools, hospitals, councils and other energy intensive public sector organisations are not going to have the money to operate. When all these consumers fail to pay their bills the energy companies will go bust. Then when the depression kicks in property and share values will collapse. Then the banks will go bust. Then the currency itself will collapse and people’s savings will be wiped out. So I ask again, is the risk of economic collapse a price worth paying to uphold free market ideology?

Without massive state intervention we're about to encounter the apocalypse.
Energy prices are out of control; retail sales are falling; brexit benefits are non-existent; post coronavirus recovery is weak, at best; uk manufacturing is almost non- existent.
Add this to the complete absence of political leadership; two candidates pandering to the perceived wishes of 160k tory members.
The british public deserve this as it's the ultimate expression of how too many have voted too often.
It's also a damning indictment of those who don't/didn't vote - it won't change anything, don't understand, don't care.
Coming to your area soon - civil unrest, mass protests, more burglaries/thefts/robberies, more shoplifting.

Not enough people are going to vote for a govt who’re honest about restricting car use.

this is a major issue. it seems that very few people are going to voluntarily inconvenience themselves to slow the demise of the environment. the is means that the damaging things need to be legislated against.

unfortunately very few people want the inconvenience (including the legislators) and won’t vote for it and the country can’t afford to provide the alternatives to private cars and reliance on fossil fuels.

then you consider that in the usa and canada many many people drive pickups and huge SUV’s as family cars that have 5 litre engines (often a couple per family) and have 3 kids per family you realize that what happens in the uk is hardly going to change anything.

then you think about the pollution coming out of the factories that make everything we buy/need and that lots of places in the world use their rivers as dustbins because the people in those countries don’t know about garbage island or global warming, or perhaps because there is no alternative available to them.

then you remember that there are people in the developed world who think that global warming isn’t man made and carry on as normal or believe it is their right to have a load of children/consume excessively/whatever.

we are doomed. i feel that our leaders (locally and out there in the rest of the world) know this which is why they do nothing. they can’t be as stupid and as greedy and as corrupt as they appear, can they?

oh, and rich people aren’t going to pay for the changes needed.

Exactly. Saving the environment is incompatible with our capitalist way of life. It’s a luxury few can afford when a family needs two cars to work multiple jobs to pay for astronomical rent/mortgage/energy bills. May as well look after this generation rather than make it miserable for everyone for longer. That ship has sailed. Bin off net zero, print off loads of money and let’s all party for the next fifty years until the whole shithouse goes up in smoke 🤠

Easy for me to say though as I don’t have kids. But then, isn’t it a bit mean to have kids now knowing they’ll be living in an apocalyptic hellscape.

Easy for me to say though as I don’t have kids. But then, isn’t it a bit mean to have kids now knowing they’ll be living in an apocalyptic hellscape.

who knows? it is pretty much too terrifying to contemplate.

Energy prices are out of control; retail sales are falling; brexit benefits are non-existent; post coronavirus recovery is weak, at best; uk manufacturing is almost non- existent.

You can add to that forecasted interest rates of 4% which are going to cause mass repossessions. If the energy prices rises don't get you, your mortgage might.

I just did a quick back of the hand calculation and with projected energy prices and interest rates, when my fixed mortgage rate expires in a year or so's time (and assuming energy doesn't go up even more) I'm going to be paying at least £900 a month more than I was at the beginning of this year.

https://twitter.com/RichardJMurphy/status/1562840369087164417?s=20&t=lt-46fGpi15ElSWhsYcxZg

then you consider that in the usa and canada many many people drive pickups and huge SUV’s as family cars that have 5 litre engines (often a couple per family) and have 3 kids per family you realize that what happens in the uk is hardly going to change anything.

There's a slight difference in that we'd cut down every tree in the country to fight the French/Spanish, run an empire or just to burn by 1900.

Whereas parts of America larger than the entire UK still look like this

So, whilst it would be nice if they all drove a Prius didn't drive at all (because that really should be the goal), their "net carbon neutral" is going to look different to ours.

snip...print off loads of money...snip

There's no need, we've been increasing the value of money in circulation by around £13bn in the last couple of years thanks to low interest rates and QE
This thread is really about economic confidence and interest rates. If we have economic confidence then higher interest rates won't necessarily lead to deflation

You can add to that forecasted interest rates of 4%

Don't bank on it. Governments have traditionally underestimated necessary interest rates and compounded that by easing off on them too early

Interest rate moves are supposed to target inflation. Economic establishment has no good answers for these dire times.

The whole thing is wrong headed.

Let's keep an eye on on what Powell says later at Jackson Hole.

We tend to teeter just behind the USA.

Don’t bank on it. Governments have traditionally underestimated necessary interest rates and compounded that by easing off on them too early

Are you suggesting they should be higher?

Don’t bank on it. Governments have traditionally underestimated necessary interest rates and compounded that by easing off on them too early

There's nothing traditional about the current situation.

It's normal for them to be a ittle bit higher than inflation, it's just the last ten years which have been weird, but we seem to have come to think that's how it is.
Historically most people would have loved a 4% mortgage rate!

So I ask again, is the risk of economic collapse a price worth paying to uphold free market ideology?

what alternative can you offer for surpressing the demand in gas use? what we have is not a good solution, but its probably the least-worst one

what alternative can you offer for surpressing the demand in gas use? what we have is not a good solution, but its probably the least-worst one

Government intervention across lots of sectors is needed. This sort of thing has been signposted for 10 years or more.

It's up to them to come up with a plan but clearly leaving things to the market is not a good solution.

I can get you a plan from Richard Murphy if you want - he's drafted one.

The plan is currently not the issue like covid they need to do something *quickly* at least in the short term.

It’s normal for them to be a ittle bit higher than inflation, it’s just the last ten years which have been weird, but we seem to have come to think that’s how it is.
Historically most people would have loved a 4% mortgage rate!

That's probably because the arbitrary target of 2% inflation is founded on nothing.

Are you suggesting they should be higher?

I'm not suggesting what the rate should be

There’s nothing traditional about the current situation

There is tradition in the way that Governments react

rone - you are richard murphy and I claim my £5.
If you aren't why do you push his posts and proposals incessantly?

I can get you a plan from Richard Murphy if you want – he’s drafted one

Is this the Professor of Accounting Practice? While I don't know what his plan entails I can think of other people that I'd speak to first, e.g. Professors of Economics

So, whilst it would be nice if they all drove a Prius didn’t drive at all (because that really should be the goal), their “net carbon neutral” is going to look different to ours.

a good point. there are a lot of trees. and the entire population of canada is similar to the south east of england.

Is this the Professor of Accounting Practice? While I don’t know what his plan entails I can think of other people that I’d speak to first, e.g. Professors of Economics

Fair point, but he's mostly a political activist and did co-auther the green new deal and knows the country's financial system inside out.

If you lean too hard with classical economists I assure you - you will get the wrong answers.

does QE risk devaluing the currency at some point?

does QE risk devaluing the currency at some point?

Yes, it can. We've increased the money in circulation by some £13bn over the last couple of years due to a combination of QE and low interest rates.
Exports become more competetive but imports become more expensive and an increased money supply can increase inflation

No economy can survive that sort of shock. I really don’t understand why there isn’t greater alarm or urgency about this. We’re literally staring into the abyss.

I agree with dazh.

MP's telling people to put a jumper on isn't going to cut it.

Although the domestic energy situation is terrible for some, the real issue is the commercial energy situation.

It is going to destroy businesses that are not protected from the increases.

The whole situation is crazy. The price rises will be simply unaffordable.

Any business that has energy as it's largest overhead is simply finished.

Also the energy market is broken, if you need to charge more for your product than your customers can afford, then you are also finished.

does QE risk devaluing the currency at some point

No. People keep spouting this stuff.

Q/E is bond purchasing by the BoE to match deficit spending by the government.

It is in no way directly linked to a fiat currency's value despite what is being said. A fiat currency is floating and not pegged.

A Fiat currency's vlaue is determined by a market place that is a complex interaction of factors.

Yes, it can. We’ve increased the money in circulation by some £13bn over the last couple of years due to a combination of QE and low interest rates

Firstly I'm here to tell you 13bn is nothing in terms of money supply.

And on your Q/E point the BoE did 450 billion of Q/E how did 13Bn of money end up swilling around magically from bond purchases?

If there is too much money swilling around the government can delete it through taxation BTW.

However given there's no growth or negative growth I think there's not enough money in consumer circulation.

This is a really great summary of government 'debt'. And money creation.

https://twitter.com/RichardJMurphy/status/1564541342843371523?s=20&t=USmB4MKshFM7tu9DQ_uVdw

The Guardian - 2017's socialist nationalised sausages and communist broadband is this year's take back control.

https://www.theguardian.com/commentisfree/2022/aug/29/the-guardian-view-on-broken-markets-time-to-take-back-control

Firstly I’m here to tell you 13bn is nothing in terms of money supply.

Another example of the brainwashing/conditioning that comes from classical economics and how it is reported in the news. Honestly I get so bored of hearing about Weimar Germany, Zimbabwe, the pound-dollar exchange rate etc. If all the scare stories about QE and/or govt debt were correct then the economy would've crashed post-2008, and again during covid. Some people are even pushing the fiction that the problems we see now are due to the covid QE and 'debt' when it's obviously nonsense.

The problem is that across multiple sectors of the economy, and most critically energy (because it's fundamental to everything else), the market mechanism for setting prices and regulating demand, and the govt mechanisms for regulating inflation (ie fiscal and monetary policy) have completely broken down. We live in a world of monopolies and cartels who can hold the world to ransom, and governments who have completely failed in their duty to regulate and tax these monopolies (or break them up). The result is a collapsing economy and increasing social disorder.

Honestly I get so bored of hearing about Weimar Germany, Zimbabwe, the pound-dollar exchange rate etc. If all the scare stories about QE and/or govt debt were correct then the economy would’ve crashed post-2008, and again during covid. Some people are even pushing the fiction that the problems we see now are due to the covid QE and ‘debt’ when it’s obviously nonsense.

Drives me crackers. It takes 10 minutes to look at Weimar or Zimbabwe doesn't it? And yet opinions come thick and fast as though they've scored the bullseye ... "we will soon be Zimbabwe."

John Redwood is a brilliant example - he's all over with printing money, Q/E and inflation without understanding anything about the way his own government finances things.

The problem is that across multiple sectors of the economy, and most critically energy (because it’s fundamental to everything else), the market mechanism for setting prices and regulating demand, and the govt mechanisms for regulating inflation (ie fiscal and monetary policy) have completely broken down.

This bit scares and excites me - because the knowledge is there to re-model the way things work, but in reality our establishment (Centrists and all the way to the Right) can see Neoliberalism as the only game in town and will do whatever it takes to keep it on life-support.

It's like being stood on a collapsing bridge where the ground the bridge sits on is crumbling but you're still trying to fix the bridge - when you simply could just get off it.

A range of quotes here:

"does QE risk devaluing the currency at some point
No. People keep spouting this stuff.
Q/E is bond purchasing by the BoE to match deficit spending by the government."

"If all the scare stories about QE and/or govt debt were correct then the economy would’ve crashed post-2008, and again during covid. Some people are even pushing the fiction that the problems we see now are due to the covid QE and ‘debt’ when it’s obviously nonsense."

"Yes, it can. We’ve increased the money in circulation by some £13bn over the last couple of years due to a combination of QE and low interest rates
Firstly I’m here to tell you 13bn is nothing in terms of money supply.
And on your Q/E point the BoE did 450 billion of Q/E how did 13Bn of money end up swilling around magically from bond purchases?
If there is too much money swilling around the government can delete it through taxation BTW.
However given there’s no growth or negative growth I think there’s not enough money in consumer circulation."

"This is a really great summary of government ‘debt’. And money creation."

"If all the scare stories about QE and/or govt debt were correct then the economy would’ve crashed post-2008, and again during covid. Some people are even pushing the fiction that the problems we see now are due to the covid QE and ‘debt’ when it’s obviously nonsense."

"John Redwood is a brilliant example – he’s all over with printing money, Q/E and inflation without understanding anything about the way his own government finances things."

The BoE view of QE is different to the House of Lords Economic Affairs Committee who published a report in July 2021, “Quantitative easing: a dangerous addiction?” https://publications.parliament.uk/pa/ld5802/ldselect/ldeconaf/42/4203.htm
I'd suggest that the summary is worth reading to compare informed opinion with the opinions above, especially when you consider that Mervyn King is a member of the House of Lords committee. Some will remember that he was Governor of the BoE from 2003-2013, a Member of the BoE Monetary Policy Committee, which instituted quantitative easing in 2009. He’s also a School Professor of Economics at the London School of Economics and Professor of Economics and Law at Stern School of Business and School of Law at New York University

Richard J. Murphy, a Professor of Accounting Practice, seems to be a better source of facts for some and John Redwood has been changing his view on QE at intervals ever since 2010

Some will remember that he was Governor of the BoE from 2003-2013

It is hard to forget since for a period of time the Bank of England and Mervyn King were constantly in the headlines, as the result of a banking crisis which many claim was totally predictable.

It is hard to forget since for a period of time the Bank of England and Mervyn King were constantly in the headlines, as the result of a banking crisis which many claim was totally predictable.

The banking crisis that started in the US because of US laws deregulating banking, the US Fanny Mac and Fanny Mae agencies and the bankruptcy of the US Lehmann Bros?
All of which led to a European debt crisis where Chancellor Gordon Brown "made a "big mistake" over the handling of financial regulation in the run-up to the banking crisis of 2008" https://www.bbc.co.uk/news/business-13032013 and plans for more power for regulation were later handed to the BoE under Mervyn King. That crisis?

Yeah the crises caused by deregulated UK banking which led to the collapse of Northern Rock, that crises.

As Ernie says anything Mervyn King says is discredited by the fact that on his watch the banking system came within a few hours of collapse. Danny Blanchflower was a member of the MPC at the time and was warning of a sub-prime debt bubble long before it burst, and Mervyn King ignored him. Danny Blanchflower also happens to be in agreement with Richard Murphy on macroeconomic issues, especially QE.

Just because someone managed to manoevre themselves into a powerful job doesn't mean they are right in what they say. If you want any more evidence of that look no further than Boris Johnson and Liz Truss.

...deregulated UK banking which led to the collapse...

It wasn't deregulated, but under Gordon Brown, his 1997 "light-touch" policy (before Mervyn King was appointed) and regulated by the FSA.
Google it.

https://twitter.com/RichardJMurphy/status/1564851935202738176?s=20&t=GxMMcttK7b3fiJtMLKCjkw

@dazh FT letter from Murphy / Blanchflower

It wasn’t deregulated, but under Gordon Brown, his 1997 “light-touch” policy (before Mervyn King was appointed) and regulated by the FSA.

Okay the crises caused by the FSA re-regulated/light touch UK banking which led to the collapse of Northern Rock.

https://www.lbc.co.uk/radio/presenters/ian-payne/david-blanchflower-mervyn-king/

"I don't think Mervyn King is a credible source on this. If we look back there are three huge mistakes that he made. First of all he was the Governor of the Bank of England and never spotted that Northern Rock was going to fail.

"I don't think he's a credible source on any of that and we shouldn't actually believe a word he says in terms of his forecast. I think that's the problem. If you miss the big one and you're in charge at the Bank of England."

The belief that Mervyn King's opinion is particularly valid doesn't appear to be universal.

Just because someone managed to manoevre themselves into a powerful job

plus Rachel Reeves