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Wednesday, December 1, 2021

Catastrophic elite failure is destroying the economic foundations of the West

There is a sure-fire way to destroy a civilisation, and that is to debase its currency. It’s an essential lesson of history, yet one that our financial and political establishment have forgotten in their desperate, demagogic quest to pretend that we can go on living beyond our means.

In Britain and abroad, years of monetary vandalism, fuelled by hubris, neglect, economic amnesia and incompetent short-termism, are destroying capitalism’s ability to function efficiently and equitably. An obsession with near-zero interest rates and QE is engineering a vicious redistribution, propping up washed-out politicians and empowering a zombie class of unproductive private-sector bureaucrats.

The latest, appalling manifestation of this doomed bid to defy economic gravity is the jump in consumer prices. Savers are being mugged: over the past year, at least 4.2 per cent, and perhaps even 6 per cent, of the value of bank accounts was stealthily confiscated by resurgent inflation, and the average worker is being subjected to a real terms pay cut. For all of the talk of “levelling up”, and the genuine rise in relative wages in some sectors such as lorry driving, tens of millions of workers are witnessing, to their growing fury, the salami-slicing of their purchasing power, even before the National Insurance rise.

A quarter of a century ago, scorched by the experience of the 1970s and 1980s, Tories and Labour alike embraced sound money, culminating in the Bank of England’s independence. That agenda, it is now clear, has failed: as in every other area of economics, we have regressed. The orthodox view was that the Bank couldn’t by itself generate economic growth. It could mess things up, and it could smooth out bumps in the road, but it couldn’t enrich us. That was the private sector’s role, and of government policies on tax and spend. The Bank’s best bet was to keep inflation low and steady.

Three things have changed this calculus, replacing it with a new, toxic groupthink. Low rates and money-printing, until recently, didn’t seem to push up consumer prices much, encouraging a misplaced consensus that globalisation and technology had permanently tamed inflation (helpfully overlooking the fact that prices of goods and services are up by some 90 per cent in Britain since 1997). Second, the ideologically rudderless Tories no longer have a clue how to boost GDP per capita – centrally planned decarbonisation and spending more in the North don’t cut it. They believe growth has naturally slowed, failing to recognise that massively increased regulatory burdens and dysfunctional, crippling tax, education, welfare and, yes, monetary policies may be to blame. Finally, politicians realised during the financial crisis that they could rely on central banks to print money to bail them out, while central banks managed to avoid the blame for their calamitous mistakes, portraying themselves as heroic, world-saving figures.

The result? Politicians and central bankers are colluding to turn a blind eye to the surge in inflation, opting to pump-prime the economy with cheap money to eke out growth, keep tax and spending flowing and grow asset values to dupe the majority into thinking they are becoming wealthier. The Bank doesn’t want to be blamed for crashing the economy or forcing cuts in public spending. A Treasury hooked on low rates pretends inflation isn’t any of its business, well aware that the Bank of England saved its bacon by creating so much money during the pandemic.

Yet, overshooting inflation is merely the most visible sign of the pathology eating away at our societies: the shared self-interest of our politico-technocratic ruling class has led to a series of catastrophic, self-reinforcing consequences.

Cheap and easy money is destroying conservatism and liberalism, and shifting Britain to the Left politically, morally and culturally. On the one hand, work has become less rewarding; on the other, ultra-low mortgages and QE have dramatically enriched the 65 per cent of the population who possess their own home these past couple of decades, while the 35 per cent who don’t have fallen far behind. Owners of certain financial assets have also done very well from cheap credit, as have those with index-linked pensions; other savers are being hammered. Creditors are losing, debtors are winning.

This isn’t genuine, free-market capitalism: it is a warped, corrupting ersatz that is destroying the social compact. It undermines family formation. It sends a debilitating signal that the only way to become rich is to be rich in the first place, that thrift and hard work are a waste of time, that delayed gratification is for fools, that debt-financed hedonism is the answer. It will also fuel a disastrous class warfare, and embolden the hard Left to call for mansion taxes, all-out wealth levies, higher minimum wages and enhanced trade union powers, destroying what is left of the economy.

Easy money has already convinced politicians that they no longer have a budget constraint and it is safe to turn on the spending taps. People’s QE, which started as a fringe hard-Left idea, is mainstream; many “experts” now argue that we should increase our “excessively low” national debt by at least 50 per cent.

Cheap money is even behind the rise of the woke corporation, including the emergence of an unproductive yet highly paid segment of the middle class devoted to virtue-signalling. Inflation, by damaging risk-free savings such as cash and gilts, has encouraged riskier investment in stocks and shares, helping big fund managers, especially those that operate tracker funds, to tighten their grip. Because these funds don’t seek to beat the market, they have embraced an alternative role as woke enforcers, forcing private firms to sign up to endless green and social targets.

Cheap money has also encouraged companies to pursue low-profitability projects and to become lazier and less efficient. This has empowered the worst kind of corporate bureaucrat, sapped the dynamism of many firms and encouraged them to self-indulgently put wokery before profits.

This madness must end. The Bank of England must increase interest rates. We need to wean ourselves from QE. Governments must rein in spending. It’s either that, or wait until what is left of our societies is eventually taken down by the greatest financial reckoning in history.

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