And You're Working for No-one but Us

 “And you’re working for no-one but me” is George Harrison’s sign off to the first song on one of the greatest British albums of all time, the Beatles’ Revolver. But compared to what follows it has always struck me as rather a damp squib – lyrically one extended whinge about how Surrey mansion dwellers pay too much in tax. I suppose to be fair to the author, Harrison was very anti-war and he objected to unwillingly paying millions in tax – at the time the top rate stood at 92.6% – so governments could bomb people.

Nonetheless it is quite sad that of all the sentiments the Beatles expressed, “in the end” it was those of Taxman that had the greatest longevity. You need a lot than love, and giving war a chance now seems to be the spirit of the age (alright that was Lennon). But thanks to Margaret Thatcher, Ronald Reagan, and the sprouting up of numerous tax havens around the world successful pop stars need no longer fret about governments getting their paws on their money.

But from the perspective of nearly sixty years, to sing “you’re working for no-one but me” with reference to His Majesty’s tax collectors seems faintly ridiculous. We’re definitely working for someone but there are people much further up the queue than HMRC. Perhaps their silhouettes need more light shone on them:

Landlords and Banks

The first thing we all need is somewhere to live. After rising above inflation for years, rents increased by 9% in 2024, the highest surge on record. The average rent now consumes over a third of renters’ income and more than half of it in London.

Though there are only 11 and half million renters in the UK, their numbers are inexorably rising. But they are still below the so-called “owner occupiers”. Except in many cases, while they occupy, they don’t own anything. The ‘owners’ are paying off a debt (which everyone calls a mortgage to avoid calling it a debt) to the actual owner of their property, usually a bank. And since interest rates have ballooned in the last few years – in the context of house prices inflating by 1,000% since the early 1980s – that debt has become much more expensive.

Banks, by the way, are sharing the pain by making record profits – HSBC amassed £24 billion in 2023, an 80% increase. This windfall results from the interest they receive on mortgage payments and loans being so much higher than the interest they pay on their savings accounts. Why this discrepancy should exist is a bit of a mystery. Theoretically, the two should cancel each other out and banks should not be laughing all the way to the bank because interest rates have been hiked. Maybe Sir Kier – who gave HSBC’s chief executive a knighthood in December – can enlighten us.

It’s good to know the people your monthly labours are paying off are having a hard time too.

Utility companies

Next on the identity parade are water and energy companies. In the past, these two public services were nationalized. But in our post-Thatcherite wasteland, sorry landscape, they are the play things of private equity firms who load the owners with debt and expect their captive customers – us in other words – to pay for the privilege of being compelled to use them. I just love the free market.

And when, as with Bulb Energy, these wealth destroyers experience liquidity problems, they can rely on the taxpayer, in the form of the government, to bail them out. Not that we have any say in the matter.

When the direct debits kick in every month, a lot of the damage to your balance is down to these two suspects. Energy bills are about 50% higher than they were pre-Covid. As with rent and mortgage payments, only in a semantic sense is this not taxation. Unless you want to live in a cave somewhere, or on the streets, you need a home and you need heating and water. Contrary to American monetarist proselytiser, Milton Friedman, we are not “free to choose”.

And it’s going to get worse. The average water bill will increase by 36% over the few years.

“If you get too cold, I’ll tax the heat,” Harrison sang in 1966. He meant, “I’ll raise the energy price cap”.

Corporations and things like eating

In common with all living beings, human beings need to consume if they want to continue living. But the cost of consumption keeps going up. If consumer inflation has fallen from its highs of a couple of years ago, that doesn’t mean prices will return to their former levels, just that they will continue to rise at a slower rate (although inflation seems going up again now anyway).

But the ever-increasing cost of essential goods is not solely due to ‘impersonal’ factors like the cost of raw materials. It is also down to the power of the huge corporations that dominate the market to increase costs above the ‘natural’ rate of inflation. For example, in the UK, “price mark ups” – price increases above the production costs to produce profit – rose from 58% in 2002 to 82% in 2020. The profits of the 350 largest companies on the London Stock Exchange have swollen by 73% since 2019.

This price gouging is symbolised by internet providers typically hiking raising annual broadband fees – now essential for doing most things in life, including work – by CPI (inflation) plus 3.9%. Why? Because they can.

What is now hitting home is that, contrary to the advertising, the Thatcherite revolution did not enthrone the consumer as king. Everyone knew that workers would have to suck it up, but the customer was felicitated. But that’s not how things have turned out. All regulators have a duty to protect the consumer but, as evidenced by the failure to compel banks to pay interest on savings in line with hikes in interest rates, this is just honoured in the breach. And with Reeves’s drive for deregulation, such a responsibility is going to become even more threadbare.

 You have to crane your neck to see the real beneficiaries.

Only in the perverse universe we now inhabit, could a privately educated ex-stockbroker who claims to be “keeping the flame of Thatcherism alive” and controls a company masquerading as a political party be the one to take advantage of this situation.

It’s enough to make you gently weep.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inflation – what a Hout!

As I write, Britain is bombing a former colony – one of the poorest countries on earth, the scene recently of the “world’s worst humanitarian crisis” according to the UN, which was caused by a war inflicted by the medieval limb-severing Saudi Arabian regime with British weapons. But trying to stop the genocide in Palestine is crime enough to resume the sorties. And they want ordinary people to actively help out with this never-ending war for civilisation!

But pause for a minute and consider the reason for ‘Operation Prosperity Guardian’. The fear is that any continued obstruction to shipping routes in the Red Sea, which accounts for 15% of global sea trade, will reignite inflation, the bogeyman western governments and central banks have been trying to slay for the past two years or more.

I don’t want to minimise the problem of consumer inflation, to give it its proper name, which given that it causes massive rises in the cost of essentials like food involves real misery. This is exacerbated in an era when collective bargaining has been reduced to a rump of the economy so that wages can’t keep up with the price rises.

However, consumer inflation is not the only kind of inflation. Over many years, western countries have also been subject to asset price inflation – basically huge rises in the prices of shares and houses. In Britain, house prices have risen by about 1,000% since the early 1980s. And despite some ups and downs, the stock market across the western world keeps hitting record highs. In America it has enjoyed some of its best returns since the 1880s.

It is a basic axiom of our Thatcherite political mind-set that, in total contrast to consumer inflation, asset-price inflation is not something to dread. Quite the opposite, it is positively benign.

But, as we are now seeing, this is a travesty of the truth.

The inflation we like

So, unlike consumer inflation, the authorities have not tried to fight asset-price inflation. They have, by contrast, endeavoured to boost it at every turn and, if it seems to be flagging, to rekindle it with blatant forms of state intervention (despite the propaganda we don’t live in a ‘free’ market economy).

House prices in Britain have been deliberately stoked by restricting supply. It is a basic law of economics that if the supply of any good is suppressed, its price will increase.  This happened first through Thatcher’s ‘Right to Buy’ policy and was then reinforced by simply banning local councils from building new council houses. More recently, more direct forms of buttressing house prices have been necessary, for example the government’s ‘Help to Buy’ policy which is a simple subsidy to housebuilders.

The rise in share prices was first underpinned by legalising the process of share buy backs, banned in the aftermath of the Wall Street Crash of 1929. This has led to an internally-generated rise in share prices, caused by companies being pressured by their shareholders to ‘retire’ some of their shares, thus increasing the share price and the dividend payments to existing stock-holders. This practice has now become routine in the corporate world – according to economist Michael Hudson, publicly-listed American companies have, since 1985, retired more stock than they have issued.

Since the 2008 financial crisis, share prices have also been massively boosted by the artificial method of (electronic) money printing known as Quantitative Easing (QE). QE works by creating a huge mass of money, and by reducing the yield on government bonds, ‘incentivising’ investors to place it in the stock market or with other assets such as housing, or financing corporate mergers. According to investment manager, Kate Rogers, at venerable asset manager Cazenove, “Quantitative easing certainly stimulated asset markets. The billions that went from the banks to investors to buy the bonds was soon recycled into more attractively valued equities and property-boosting prices.”

This flagrant state intervention, practiced simultaneously in Britain, America, and Europe, is what lies behind the thriving stock market performance of the last decade or more (15% returns compared to an average of 9%). It is nothing to do with a healthy economy pushing up share prices. GDP growth, as we know, has been consistently poor for many years.

Of course, central banks are now pursuing the opposite policy to Quantitative Easing. ‘Quantitative Tightening’ involves selling assets to reduce liquidity in the financial system. This hasn’t (as yet but more on that later) produced a collapse in share prices. The conventional interpretation is that large companies are finally able to stand on their own two feet. But possibly QE under Covid was so huge – the creation of $834 million per hour – that the subsidy is still having an effect.

This is how it feels

The only way in which this asset-price inflation is commonly seen to have a downside is in terms of housing. The enormous rise in house prices – from an average of £26,000 in 1983 to £280,000 today – is regarded as a boon for the majority of people who already ‘own’ houses (or have mortgages on them). They can sit back and see their asset rise in value without having to do anything. But for young people who want to buy their first house – to ‘get on the housing ladder’ in common parlance – it’s a disaster. They frequently can’t even afford the deposit and are forced into permanent renting which, for those who have experienced it, is a distinctly unpleasant and insecure existence, apart from the fact that it soaks up most of your disposable income.

The last time houses were this unaffordable in Britain Benjamin Disraeli was Prime Minster.

However, with the resumption of consumer inflation and the central banks’ response of raising interest rates, the majority are no longer so content. They are, belatedly, seeing at first hand the malevolent side of asset-price inflation. Because house prices, with official blessing, have risen exponentially for decades, mortgages are a lot more expensive. And when interest rates rise above the minute level they have occupied for years, so do mortgage interest payments. This has resulted in huge increases in mortgage payments for many people. More than anything else, this lies behind the haemorrhaging of Conservative support in Britain. The private renting experience is going viral.

The share-owing oligarchy

What has happened to house prices might have its downsides, a defender of the status quo might argue, but surely there is little to object to in shares rising in value, the other main form of asset-price inflation? In fact there is. Undoubtedly some people benefit but the windfall accrues to a very small minority of share owners, including corporate executives who, these days, are all partially paid in share options. The original Thatcherite promise of a ‘share-owning democracy’ is now just a bad joke.

We now live in a resolutely two-track economy in which the stock market prospers while the real economy flounders. But given that rich people, who own shares, largely control the manufacture of public opinion, this experience doesn’t truly hit home. Thus the official opposition can come out with ludicrous non sequiturs like “when business profits, we all do” and are taken seriously.

The share price boom also comes at the cost of spiralling inequality. Since 2009, as the stock market has enjoyed nearly unprecedented gains, the wealth of the top billionaires in Britain has grown by 281%. In 2021, as actual economic activity was mothballed but massive amounts of QE ensured asset prices went skywards, the planet’s wealthiest people saw their balance sheets swell by $5 trillion. In Britain, since the pandemic, in the midst of the cost of living crisis, the number of billionaires has risen by a fifth.

Another trusted method of ensuring share prices go on rising – share buy backs – also damages the real economy. Because often the money companies use to buy back their shares (thus decreasing their number and raising their price) comes from funds that could otherwise be spent on business investment, they work to enrich their shareholder owners at the expense of wider economic health. Anaemic investment in production is a problem all over the western world.

The share price boom is not a win-win situation. It’s more like they win, you lose.

The economic trapeze

Central bankers – those who twiddle the dials of the world economy – are in a real quandary because of the actions of the Houthis. They believed they had, through historically moderate interest rates rises, solved the problem of the re-emergence of consumer inflation, as prices were heading downwards. They could then return to their prime function – ensuring that asset prices go on rising.

However, if global trade is impaired because of attacks on shipping in the Middle East, consumer inflation may return with a vengeance. If that happens, central bankers might feel they have no choice but to increase interest rates again, risking pricking the multi-asset bubble they have so carefully cultivated for the last decade or more.

It is a little appreciated fact that the 2008 Global Financial Crisis was sparked after a rise in interest rates. In America, they rose, incrementally, from 1 per cent in 2003 to 5.25% in 2007. Really large rises in interest rates do cause recessions, as evidenced by the experience of Britain and America in the early 1980s when, to prepare the ground for the Thatcher and Reagan ‘revolutions’, rates were increased to 17/18% in full knowledge of the carnage that would – and did – follow.

Given that western economies are much more indebted than they ever were when John Lennon was murdered, much more modest rises could have a catastrophic effect. 

According to economist Radhika Desai, if the Federal Reserve raises interest rates to “required levels, the US can expect a recession that will make that of the 1980s seem like a boom”. The alternative to not doing so is, if the projected effect on world trade comes to pass, the return of chronic (consumer) inflation. “Both paths,” she says “will damage working class incomes and wellbeing”.