Western governments and central banks together have contrived an economic and societal farce, but few are laughing

By Andrew Shouler

We are now well into what some call the silly season, denoted in Europe by August, when the financial sector and others literally or metaphorically head for the beach. Newspaper editors bereft of sensible stories to fill their pages accommodate various bits of fluff and nonsense that wouldn’t make the grade at other times of year.

But these days, when so much of what goes on in the Western world makes scant sense at all, would you actually notice the difference?

It might be said we are now well into a silly century in the West, let alone a funny month. It really isn’t difficult to spot the staggering naivety of the political class in allowing energy dependence on Russia (in respect of the currently indispensable fuels of oil & gas) by way of a blinkered green agenda and on China (in pretty much everything else) by way of remarkable establishment interpretation of realpolitik. Nor to identify the proliferation of revolutionary social policies that bear no relation to the conceptions and preferences of the mainstream public.

Right now, though, it is the cost-of-living crisis, with its roots in the mismanagement of economic policy on both sides of the Atlantic, that is gripping attention. That itself, of course, intertwines with the energy squeeze, prompting such a scramble for reliable fuel sources that not only are oil and gas very much reactivated, but also coal (lignite), as witnessed in Germany and Greece.

Somehow the absolutely obvious — namely that countries should simply not have sacrificed basic energy security — fell somewhere by the wayside, and yet somehow equally this fundamental point still evades scrutiny among mainstream media. Besides elevating traditional fuel costs by design to diminish consumption, Western countries managed to create a geopolitical vulnerability that led to war in Ukraine whereby conflict itself drives energy costs spiralling further. It’s some kind of genius that is responsible for that horrendous turn of events.

Under such aggravated circumstances, now we are beset with stagflation, resurrected from the 1970s. Generalized hardship is inevitable because of both soaring inflation and the belated attempt of the authorities to deal with it, tightening economic conditions – as many have noted: too little and too late. Moreover, the demise of inflation appears neither imminent nor without the possibility of severe social and political fallout in the meantime.

Of course it was due. When I made the observation previously in these pages, that economic misdirection was in-built and would lead to serious derailment, if not catastrophe, the ravages of Covid and related policy masked what was happening. Today the energy cost surge creates further disguise. So much so that in the EU, the US and the UK officialdom deflects its responsibility for the damage.

In fact, inveterately lopsided policies led us predictably into this floundering mess. The authorities are beached in another sense altogether, having lost their bearings, becoming stranded through their persistence with straying off course, so that some deus ex machina may be needed to extricate Western economies from self-inflicted distress.

Many do now recognize that governments and their central banks spent too much money, interacting with unjustifiably low interest rates which they controlled by edict or intervention (through official base rates and by financing government bonds effectively via printing money). Such behaviour, much augmented through the pandemic experience, has unleashed a vicious circle in cost and price escalation, akin to a dog chasing its tail.

At least in the US officials have conceded they underestimated inflation and have vowed to prioritize containing it. America’s famed supply-side resilience, not to mention its cultivation of energy self-sufficiency via shale gas development, has compensated to some extent for the overstimulus of demand by the Federal Reserve and Biden administration’s extraordinary budgeting reflex.

There is no such sense in Europe, where the ECB has yet to raise its key interest rate above zero, fearful of the scale of the energy meltdown ahead, and that the eurozone will be seriously stretched in these trying conditions. (Nor incidentally in the UK, where the Bank of England, devoid of credibility on several fronts, has described itself as helpless, switching from insouciantly describing inflation as transitory to hysterically predicting apocalypse.)

The euro’s descent to almost parity with the US dollar could presage further, potentially cataclysmic, turbulence. It is tough to see how the ECB can manage inflation, recession and financial dislocation all at the same time. The EU could be riven by disorder this winter if the energy shock worsens as it very much seems it will, while the plan recently announced to avert the fragmentation of the eurozone’s semi-sovereign bond markets is very uncertainly placed, whether in market confidence or treaty-related legal terms.

A number of points present themselves regarding the desperate state reached, besides the central case that state overspending eventually becomes the problem not the solution.

In particular, the silly Keynesian idea that the Phillips Curve (which mapped higher inflation as contemporaneous with lower unemployment and vice versa) provides a menu of policy choices. That really does need eradicating from the corridors of power. Although the delusion was totally debunked in theory and practice by the mid-1970s, in the past twenty years governments and central banks have revived the notion that they could lean continually towards having a bit more inflation (to be shared as a cost by everyone) so as to have a bit less unemployment (an outweighing benefit). It has taken two, albeit substantial, bumps in the road – the global health and energy crises – to demonstrate just how dangerous is indulging that technocratic conceit. And yes, we really have known this stuff for fifty years.

Another thought is to reject the misuse of terminology. Central banks coalesced in the idea that an inflation target of 2% represents price stability. Of course, it doesn’t, it represents a commitment to price drift, which at best is only inflation stability. By seeking to spur inflation where it didn’t exist (in consumer items whose costs were deflated by technology and globalization), other forms of inflation (in real estate and financial markets) were sparked that exacerbated inequality and created systemic financial risk, besides other ruinous effects.

Similarly when a politician tries to cast high tax-and-spend policies as fiscal responsibility, and describes tax cuts as socialist (as in the UK today), or as an inflation reduction enactment (as in the US), you know we are again being subjected to the realms of propaganda, where words lose their real meaning.

There’s a lot of that about today. It reminds this observer of the remarks by Cyprus’s former finance minister Georgiades who noted that much-quoted austerity was not the same as public sector spending restraint, but properly refers to the sacrifices made by people when taxes are raised to pay for past government overspending. Likewise, of course, when the inflation created by such excess deflates purchasing power and economic growth. Which is where we are now.

Another realization is the ordering of priorities. Quite how governments relegated energy security and maintaining economic activity among their concerns is a matter of conjecture, although the Covid pandemic and climate change policy agendas are notably globalistic and collectivist, which offers a resounding clue. It is telling how Western governments have respectively referred to Building Back Better with their expansive statist planning, which might instead be termed Making Matters Worse, thanks for nothing.

So to the outlook. Each day is uncharted territory, of course, but today’s environment does feel especially disturbed.

Getting out of an exaggerated economic elephant trap will be debilitating. Populaces now merely hot under the collar across Europe may feel cold fury as summer turns to winter, their living standards crushed.

Yet, noticeably, the same policymaking tenets and protagonists behind this sustained, monumental fiasco remain either in place or defining the mood music. We could perhaps agree that they are not in fact experts to whom ordinary people should defer. Indeed, let’s not mince words now. It is utterly moronic that central banks which argued to indulge inflation for the sake of prolonging growth now are reduced to hoping that recession will itself bring the deviating price trend to heel. Their tenures have been calamitous. The emperor is naked.

The danger zone we are entering now is not only retrenchment into recession but the insistence from the same elite that they need to control more, intervene more and spend more to fix the machine. For we have reached the penultimate part of the ten-point programme nominated here nearly 18 months ago, the stagflationary stage whereupon heightened taxes are imposed to pay for the consequences of ultra-low interest rates, adding insult to injury for most households.

And that means, arguably, we are approaching the culmination of a prospectus for undermining customary freedoms that was hypothesized. That’s when the scale of the societal chaos created is such that government escalates statism to profoundly systematic control. To take care of everyone, mind you; to make the situation safe, redistributing resources where they are needed. You know what that means. Sounds like a plan.

Andrew Shouler is a freelance writer and former banking economist