Execution by Accounting | Samuel Turnball

This month the Bank of England recently announced a rise of interest rates by 0.75%. What has been touted as the fastest interest rate rise in 30 years of UK economic history, is in essence a rise in the interest rate from 2% to 3%. The history of global economics, where post-industrial interest rates can vary all over the board, including a rise from 5% to 16% in a period of 5 years seems to make a mockery of this.

Why are economists worried about this rise in interest rates? Surely credit-soaked girlboss millennials are just going to have to “grab themselves by the bootstraps” and get to grips with a slightly steeper repayment schedule for that silly car loan she took out in order to drive herself to her depressing marketing job?

Data Source: Bank of England

Well, in a twist of fate for the current track record for expert predictions, I’m going to make the case that a rise in interest rates, which in previous economic climates would have been tough but sobering, could very well be disastrous this time round. In fact, while the inflation crisis (read: “costalivin”) we’re facing may be bad – a dry, over-cooked porkchop of reduced living standards – the interest rate rise will be a carbonated Christmas dinner.

Because you, dear reader, have not actually been given twelve years of ‘common-sens’ economic leadership. You weren’t even given six under David Cameron. No, what I’m telling you today, is that the past twelve years of economic management have been nothing short of disastrous, short-termist number-fudging. A trick done by smart conmen to fool laymen and economists alike into thinking things are okay or indeed improving; and when it’s not, simply gesture at the carved-up pumpkin with a canard written in marker on its side called “Brexit” or “Covid”.

Since 2010, the Tories have held the card of stern but prudent economic stewardship. After 2019 and until April 2022, voters considered the Tories better at the economy than Labour. The Tories triumph themselves for this reputation. “Strong and Stable” was Theresa May’s campaign slogan (which, it bears reminding, despite losing seats did increase Tory vote share) and can anyone else remember the Cameron premiership? The 2015 manifesto opened on the economy with great pride in saving the economy which was: “reeling from the chaos of Labour’s Great Recession”. Aside from the inability to understand the global nature of the housing bust, it looks like, on the surface, they were correct.

If you ask the typical person how much the economy has grown in the past twelve years, you’d likely get some mixed answers. My hedge is that your modal response will be “a bit” and I wouldn’t blame anyone for thinking that. Unemployment has never been higher than it was in 2008, average growth between 2010 and 2021 was meagre, but not terrible. When including the drop of 2020 and the bounce back of 2021, the UK economy averaged a 1.54% growth rate in those eleven years (not counting 2022).

Data Source: World Bank

The problem is that the entirety of this growth is a complete and utter sham. It is fiction. Fake. It doesn’t exist. A flight of fancy used by smart people who are good at bamboozling to make politicians think all is well.

This might be a small exaggeration. Growth does exist but it’s not substantive. The growth that has been witnessed these eleven years has not meant that more people are consuming more stuff individually. In fact, even before the inflation crisis, the average worker at any given age likely produced and consumed less than a worker of the same age and experience in 2008 (with possible exceptions in technology and manufacturing, which make up a small portion of the UK economy). Alas though, the line has gone up! But how did it go up? Where did all this new money go? In a phrase: a bucketload of debt.

Backing up for a second to macroeconomics 101. When an individual uses their money in any way, a macroeconomist (such as myself) would say that this has fed into the demand in the economy. GDP is the sum of this demand. Every time you buy a steak bake from Greggs that contributes just as much to the GDP as when Greggs then uses that money to go towards buying a new furnace to make more steak bakes. This is all fine, understandable, run-of-the-mill macroeconomics that economists have been doing since 1950.

The problem now is that not everything you spend money on may produce tangible things. Sometimes you can spend money on a house which no one will live in, which you may hold until its price goes up and you can make a return. Sometimes that money can go into your savings, and instead be used to start a loan by a bank. And this is okay – within reason. Investing is good and price speculation can indicate a supply shortage. When prudently done, borrowing money can be fantastic and put into areas that will net more production for the economy as a whole, like a factory. Borrowing money can allow both the lender to make a nice return and the economy as a whole to get more investment than simply sitting on interest.

But from 2008 to 2021, interest rates never rose, not even once, above 1% for banks. Credit has been insanely cheap, and there has been little punishment for putting credit in non-productive places, such as housing or cars or student loans for non-productive skills. And so, rational consumers reacting to an artificially low price have borrowed a lot of money.

Conservative readers will be aware of the government’s prolific borrowing habits. The UK Government’s debt is now approximately 100% of GDP and we don’t know exactly how much has been borrowed since 2020 so it’s hard to get precise figures (yikes).

This is bad enough as the savings of the country are being holed up in borrowing for the “ennaychess” – sorry NHS,  new arrivals, an exploding pensioner population and all the rest. These savings, otherwise being invested by private individuals in opportunities to buy and research new capital, upskill and all that good stuff which may raise the UK’s dire productivity levels. Per unit of capital, the average worker is considerably less productive.

Source: OECD

But, dear reader, this is a tiny fraction of the story as the UK government can tax you out of a disaster (and believe me they will if they have to). But public debt is a part of the total debt picture. The private sector can also borrow money in relation to the productivity of the economy. Household debt stands at around 187% according to OECD figures which renders the UK at 287% of GDP.

To put this in as clear words as possible: the last twelve years of economic growth have been dependent on borrowing and backing that borrowing. Not meaningful investment (unless you consider educating younger people with Art History degrees as opposed to work experience ‘meaningful’) or sustained productivity growth. Interest rates have been set low in expectation of an economic comeback that never came, and now the UK is saddled with a ticking time bomb of debt shackled to her leg. And the cost to service the debt has tripled in a year.

In other terms and if I’m correct, we may well witness the evaporation of a large part of the last twelve years of “growth”, and in this circumstance, the Tories will have egg all over their face for lying to us about their economic management. This is not to say that left-wing solutions given to us prior would have been much kinder. But it is to say that the Tories lied to you about balancing the books. Economic stability was actually duct-taping a waterlogged raft.

But don’t worry, the chattering classes have already got a reason for this problem: “something something Brexit. Something something Ukraine”. But the data is here, and we are in for one almighty ride of pain caused by short-term borrowing, and I don’t see an easy way out of this one.

Photo Credit.

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