Economic Collapse II - Revenge of the Dark Overlord!

I think it would be fair to say I am a jack and not a master. I love to know a little bit about all sorts of things but end up only having a veneer of understanding about a wide variety of topics. There have been some exceptions. For instance, when I moved from hierarchical to relational databases I had a transition problem so ended up having to dig right down to the internals of the code, and with the kind help of Oracle at the time went on their employees only internals course, and once I'd understood the file structures and what the developers were doing I could understand everything further up the layers! But that was a long time ago.

I also studied economics to a reasonable level. After A level I kept on reading book after book and the more I read the more I appreciated if the fresh water and salt water communities could never agree then what hope was there for anyone else. So trying to help the average worker understand economics is no easy task. And, as I was, on four separate occasions and for four different unions, a trade union rep, I can see views from both sides of the table.

The simplistic way to look at a rep is, they are there to represent the views and grievances of their membership to the management and to seek a resolution that is agreeable to all! Unions have a number of obstacles placed in their way to try to minimise the effect they can have but at the end of the day unless you do what Churchill did and send armed troops in to force people to work, the membership can and will withdraw their labour to encourage a resolution. 

When a dictator in another country, say, Russia, has carefully worked over a decade or more to treat the rest of Europe like drug users and encourage their habit by supplying their drugs of choice in abundance, like oil and gas, until they are so hooked that they'll do almost anything to get the next fix. Well, then when he finally plays his hand and cuts off the drugs, the impact of going cold-turkey is always going to be bad.

So here we are. The drug dealer Putin has cut off the drugs that keep Europe happy and high and now the cost of energy is going through the roof! Some of the druggies are less able to cope with their withdrawal fevers (irony!) and cuddle up to Putin and lay at his feet and say 'we don't really agree with our neighbours and so please be kind to us' and maybe the drug lord will oblige and allow these weaklings to have a fix or two to keep them at his feet.

But in other place different approaches have to be tried. As energy prices on the open market fly higher and higher, the economic impact has many facets.

Everything relies on energy, well, pretty much everything. How about a pint of milk, as someone asked me recently! Well, what constitutes a pint of milk? It is just a product taken from a simple cow who munches on grass! How simple, where are the costs? How about, we've had a drought and so there is not much grass, so there has to be additional feedstuff for the cows to be able to produce milk. That feedstuff has to be produced and transported and that takes energy. 

Cows are routinely given additional feed anyway but the more feed the higher the input costs. Then there is milking the cows, that's a mechanical process, the process uses energy, that energy is costing more so is another input increase. And on it goes, the transportation of the milk, the cost of employing people, of feeding those people, of transporting those people, of vet costs and treatments, of the plastic that milk comes in, or glass, or paper! Of the cost of putting milk on shelves. All these things have a cost, all of them have an energy input and all energy is increasing in price, so, milk increases in price. 

And so does everything else!

And because everything increases, wages and salaries technically decrease. In real terms! Because a pint of milk cost 60p now it costs 70p! That's a big increase. When applied to everything it means person having £100 to spend on things, say food, per week can now buy less food, or cheaper food! Although even cheaper food will increase.

So the worker becomes agitated because a drug lord in a land far away has affected her standard of living! Although the average worker doesn't think too much about drug lords far away, they see a manager or company owner who needs to pay them more. Then unions get involved and strikes happen and either everything stops or the workers get more money and are happy again that a status quo has been reached.

But the status quo cannot last. Because if everyone is unhappy and everyone has the same grievance and everyone strikes and all strikes are settled with an increase, let's say 10% for all, then all workers pay has increased by 10%

Does that 10% just get magically found? Nooooo, either it comes from profits which means the dividends are reduced or investment in the company is reduced or the cost is passed on to the consumer of whatever service or goods are being produced. None of these are good!

If the dividends are cut well then future investment might not be forthcoming which can impact the growth of the company and the economy but also the dividends fund a huge number of pension funds and they tend to be the very funds the workers who got the pay increase are joping will fund their long and happy retirement! Not to mention, it can be risky to reduce dividends as investors do have some levers to change the management and find a management team that will protect dividends and find another way of dealing with disputes like shipping the jobs abroad!

If instead reinvestment is cut then that will hit future productivity and when productivity is reduced that also impacts the economy but will also impact the workers that got the pay rise because their future employment is at risk due to competition both at home and from imports!

More often than not the consumer will end up with the increased cost. And when that happens everywhere at the same time then it quickly becomes noticeable to the employees that the 10% they just got has been outpaced by everything they buy now costing 15% more. And so we do the dance again! And again, and again...

Meanwhile, in an oak walled office a far far away! The independent Bank of England, the central bank, are thinking about inflation. They think about an awful lot of different numbers and lots and lots of acronyms but basically they are most concerned about the 10% the employees all got as increases and the 15% impact that has had on the price of everything! Not because it will impact them very much, they do get paid rather a lot of money and they also get some bonuses and in a slightly different way they get pay increases or withdraw their labour, but in a more gentlemanly way. Anyway, they do worry about the 15% and they call it various things but basically, it's inflation. But that's ok, because they have some levers, knobs and dials they can pull, push, turn an observe!

Trouble is, they don't really have that many of these levers and knobs. they do have way more dials than they others, lots to observe, not many knobs and levers! The first lever they tend to pull, almost immediately, is the one marked interest rates! They increase the cost of borrowing for those workers that achieved a 10% increase who were the cause of a 15% increase in the price of goods and services. So not only did they see prices increase, wages increase, then prices increase again, they also find any borrowing they want or need goes up again. Increasing interest rates is a bit like a slap on the wrists. The bank says, things are going up in price because you are buying too much and borrowing too much money to buy stuff so we'll make it more expensive to borrow to dissuade you from borrowing and therefore buying!!!! 

It does work, but it has expected consequences such as reducing overall output and sales which impacts gross domestic product which is the pretty much the everything a country produces in a big wicker basket and a pretty red bow! But in normal times that can be quite manageable and temporary!

When the increase has been caused by a malicious drugs overlord far far far away, it really does not have a hug effect. The drugs baron cuts back further, energy goes up more, autumn and winter start to turn up and everything goes up again, regardless of interest rates!

Meanwhile the BoE, somewhat one step removed from reality, increase interest rates again to punish people for buying, well, drugs! Anyway, put that to one side!

Inevitably the price increases, now joined with higher borrowing costs, like mortgages,are likely to lead to another round of discontent, strikes and pay rises and we'll leave that spiral running as there is no stopping it here!

Then there is the government, not that the UK has one at this time, but lets pretend there is a competent government just about to wake from their summer slumber to leap into actions. What can they do! One thing they can do is take back control of the BoE because they don't like the levers being pulled because it is adding to the pain of the people that vote for them and that isn't a good thing.

Well, that sounds simple, take back control of monetary policy and no longer have an independent central bank! What could possibly go wrong with that?

One thing that can go wrong with that is the BoE isn't just focussed on what happens in the internal market they also have to be seen to act appropriately (whatever that might mean) by an international audience. That international audience being a mix of countries, central banks around the world and gamblers, albeit legit gamblers betting on countries, mainly their relative value!. 

And if all these people/countries think the BoE is doing a good job (according the economic best practice nothing to do with human impact) then they value the currency of that country better than if they had no faith! And this materialises as a country's borrowing cost because just like workers, all countries borrow money, and they borrow by making an IOU that gives sets an interest rate and other countries lend money to the country with an expectation of an interest rate being paid regularly and the money loaned being returned in a few years time! 

But the rate of interest they demand (how they demand is slightly convoluted but no worries, they just do lol) depends on how well they think the economy is being managed. If they think it is being well managed, the rate is relatively good and if they think it is being badly managed they want more interest as the loan is more risky!

So what I hear you cry! Well, couple of things, first, if they think the economy is being badly managed they demand more interest and that means more cost to the country borrowing money and that money has to be repaid and the only way it can be obtain to repay is via taxes. Guess what, we are back to another charge on those workers who got the 10% pay increase, to see a 15% increase on goods and are now back on strike!

But that also has another impact. If the outside world thinks the economy is being well managed it means the country is seen as strong, in an economic sense, and that impacts the relative value of the currency. It strengthens it if it is good, weakens if bad... mainly! If stronger it means it is cheaper to buy things abroad in another currency but makes exports more expensive. Sounds odd but such is life eh!

If and when a government starts tinkering, especially if they take back control of the central bank, that is almost always seen as a bad thing resulting in a weaker currency, more expensive imports, higher country borrowing costs, higher taxes to pay it back...but easier to export!!

Anyway. While all of this is going on. Let's say the cycle of inflation and wage increases stops (it won't but let's pretend for fun) then goods have become relatively more expensive compared to earnings. So there is less money to go around, so less stuff will be purchased simply because of less money being around (and most being spent with your friendly neighbourhood drug dealer) and when that happens it means less businesses are required to service the needs of the people buying stuff and ultimately that leads to less businesses and more people unemployed until an equilibrium is achieved, or another cycle starts where more and more businesses collapse and unemployment becomes more serious!

Not to mention, savings! They tend to start being used to pay for stuff as the cost of stuff is increasing and earnings are not, so savings will be called upon to pay for stuff. That said, it's not always the case. If people feel insecure about the economy they stop buying things and that means less businesses are required and more people become unemployed etc. And those that stop buying, if they are able, save money for rainy days, only with interest rates going higher the interest paid on savings will always lag but it will be nothing compared to the erosion of savings because of inflation! That is, if you are getting 2% interest on your savings and inflation is at 10% then every £100 you have saved is worth £92 by the end of the year, in relative terms, that is, what you can buy with £100 at the start of the year will cost you £108 by the end of the year. The numbers are a little off mathematically but roughly its about right. Also, in the UK, you have to declare the interest you earned and then the government takes a cut of it, so, even less!

And those two things also have an impact on the faith of international observers on the economic viability of the country and that will impact the countries cost of borrowing etc etc etc

Even if the government steps in and puts a cap on the price of energy to forestall inflation/wage increase spirals, it still has to be paid for and there is only one realistic way of doing so, that's for the government to borrow money from abroad to pay part of the cost of energy. But that borrowing will still have to be paid back some how at some point and that will be via taxes and that comes right back to workers. Not to mention the cost of borrowing that money will increase as foreign lenders will see this as poor economic management (remember, economists don't take feelings into account, just numbers).

So where are we... fucked basically! The only way out is to move at pace to a sustainable energy plan and a massive retrofit plan to insulate the housing stock to reduce the cost to heat homes. These things generally take decades to do. Retrofitting homes would take tens of thousands of workers who simply do not exist as things stand, so without a massive change the chances of doing the retrofit is verging on zero! As for sustainable energy policies, they also take thousands of highly qualified people to create and they simply do not exist!

During the financial crisis I was a pension trustee and got to watch at first hand as the worlds whole fiat currency infrastructure came as close as possible to complete collapse! This time has potential to be worse, different, but worse. If energy costs stabilise, that would be something, but even then it will lead to a reduction of all other goods being sold and that'll be a recession. But not only a recession, there is also stagflation, sounds innocuous but it means higher prices, lower growth and higher unemployment. That will not happen immediately, but 2023 is going to be a bad year. Sometimes there are ways out of the problem, this time the problem will persist and we'll have to find a way to live with it!

Ho hum, have a great weekend lol!!!!