Evading the Causes of the Current Cost of Living Crisis

We need a more open debate about the causes of the current cost of living crisis. The elites would like us to blame a pathogen and an alleged autocrat but this is far too simple. It is certainly not caused solely by Vladimir Putin’s alleged weaponisation of Russia’s immense gas supplies. In fact, despite the furore over the Nordstream explosions and the closure of the Baltic pipelines, Europe continues to be supplied with gas at rates not dissimilar to those that applied before the war. Supply chain issues related to COVID recovery and many other fundamentals have certainly contributed to price rises not forgetting the pressure on commodity prices from the disruptions involved in the Green Agenda and problems with food supply accentuated by climate issues. But the disruption to trade caused both by the economic sanctions on Russia and threats of sanctions on China are a significant contributing factor and these policies are those of our leaders.

The invasion itself need never have been much of a factor in itself - it is just that Western leaders (without much consultation with their own peoples) decided that the costs of economic warfare against Russia were a 'price worth paying' and then got suprised by just how open-ended that price would turn out to be. It is not only the effects on trade and inflation but also the ridiculously high commitments of capital being made to prosecute an unwinnable war (shades here of Afghanistan) and eventually to the reconstruction of a nation that has been encouraged to fight that unwinnable war. The Ukraine War had emerged from a failure of diplomatic dialogue between the West and Russia over the previous two decades and the fault for that lies as much in London and Washington as in Moscow. The UK must take part (though certainly not all) of the blame for that and so for the immensely damaging rise in the British cost of living which is to a considerable extent attributable to the disruption caused by its foreign policy priorities and its extremely poor understanding of the consequences of its actions. 

Over a year on from the invasion, we have to draw some distinction between the energy component of inflation and 'core' inflation - the underlying inflation in food and services that has triggered high interest rates. Energy inflation if it does not go on for too long is something one works through. European governments could deal with it by adding to their fiscal burden with what amounted to massive dole outs - another price that might not be worth paying as national debt levels, already burdened by COVID social cohesion doles and green agenda doles (soon to be added to with increases in defence budget expectations) reach levels that require austerity and high taxes under conditions of low growth, that is, if the Western system is not to crumble under the weight of its own debt mountain. But energy inflation has triggered core inflation so that as energy prices fall, the lag in wage and commodity inflation continues to drive prices and forces up interest rates.

Nevertheless, funds to deal with energy inflation could be regarded (like the Green Agenda), at least in part, as a debatably necessary adjustment and an 'investment' in future energy security. After another year of recessionary misery (or soft landing from an optimistic point ov view) everything will be fine and recovery from 2024 and after will allow the debts to be paid off and prosperity to return. Except that the game is not over. The Europeans (which includes us) have just shifted their energy dependence from being one on Moscow to one based on the US and Gulf dominated spot markets. Renewables are not managing to fill the gap left by the decline in hudro and nuclear energy. Europe is still vulnerable not only to increases in the spot price of LNG and OPEC+s determination to maintain fairly high oil prices in at least the $80-$90 band (Brent Crude) but to the Russians deciding to turn off the spigot for gas or oil directed at Europe because they have (eventually) an adequate market in East Asia and have just had enough of European insults and support for Ukraine. The Chinese are busy committing to long term Gulf contractual terms while dilatory Europeans sit and hope for pries to come down regardless.

In other words, the 'headline' inflation problem has not gone away - it has just been pushed forward to next winter if the Europeans in particular do not manage to sign their own long term contracts for energy, Chinese recovery sucks in energy from elsewhere, there is a cold winter, the spot markets rise and the alternative energy structures that are supposed to displace Eurasian energy are not in place. If conditions deteriorate between Russia and the West to the extent that Eurasian gas is no longer available in Europe at all and the grey market in Russian crude going to refined products that serve Europe dies off in favour of East Asian needs, then European governments may face a fiscally destructive demand for yet more social cohesion payments to protect the most vulnerable households and businesses and this will be ... inflationary. 

So, we are in a position where markets are convinced that recessionary tendencies must mean that interest rates have peaked and are buoyant but a) the continuing rise in 'core' inflation means that, even if interest rates peak, central banks may be obliged to hold them at near peak levels for a considerable period of time while the mounting costs of all this to governments, households and businesses starts to unwind the viability of at least some of all three in a slow-burning creative destruction that weakens confidence and contains multiple political risks while b) the current relatively beneficial state of the energy market could simply be the eye of the hurricane, vulnerable at any time to a whole number of political grey swans and risking, if things go down hill, significant fiscal interventions for which there may no longer be united national political consent (or the cash) as the costs mount.

Looking at the world before February 2002 and after that date, we can see only one major trigger for a polycrisis that was probably waiting to happen on many other fundamentals - an ill-thought-out sanctions approach that was supposed to bring Russia 'to its senses' or even trigger regime change and Russia's economic collapse. It has clearly not done so nor is Russia isolated. At best, sanctions may achieve their ends only at immense cost to the poor and vulnerable at home and overseas, to working households and to those small businesses who may not survive beyond the doles they have been given to survive the next round of energy price hikes. A lot of the damage caused by COVID and sanctions is silent. About a year into COVID, I produced a list of local Kent and Sussex small breweries and put it to one side. This week I went back to it to see what had happened to them. Roughly a quarter seem to have crashed and burned as independent businesses. Walking around our mid-sized Kentish town, we see the gaps where shops used to be.

Inflation driven by huge fiscal inputs to deal with both crises and ideological convictions (such as Net Zero and the insanity of increased weapons expenditure) and by incompetently drawn up economic warfare policies, added to COVID-related supply chain problems, have meant interest rate rises. Short term subsidies to the population have meant high borrowings. High borrowing has meant weakened currencies against the dollar. Weakened currencies mean imported inflation which means yet more interest rate rises. Interest rate rises eventually mean recession. Recession means job losses and business failures. High borrowing eventually means high taxation yet recession means lower tax take. Increased taxation to deal with this and high interest rates mean a drag on growth. And so it goes ... a spiral of failure. All this is, at root, not down to Putin but to our collective paranoid and hysterical reaction to Putin led by a bunch of loopy ideological Tories and their fellow travellers in the Labour Party.

These have been many serious failures of policy derived from poor analysis and intelligence. We know this now whereas a year ago we only surmised that this might be so. Exactly how bad Western analytical intelligence has been perhaps only became clear with the release of the latest batch of Pentagon Papers. It is said that the professional foreign policy and intelligence community in Washington are distraught at the poor quality of their own political masters who are driven by simplistic ideological seat of the pants policy-making. Western democracies are, in any case, no longer fitted for the sort of long-range planning that seems to be the norm in Moscow and Beijing. A 'price worth paying', seen originally perhaps in terms of eighteenth century type war subsidies (wasteful but not critical to our own economy), has been transformed into a massive price for war and the reconstructive integration into the European and Western system of a basket case of a state riddled with corruption .

This is a price certainly not worth paying, incurred at the expense of national populations, long term economic prospects and future generations yet a reversal of policy is no longer acceptable to elites not for simple ostensible moral reasons but because back-tracking will shatter confidence in them. Like Macbeth, they are so steeped in metaphorical blood they may as well go forward as back but their doubling down constantly increases the risks that a serious situation could become a critical one. The financial technocrats remain extremely worried about more bank failures and so should we be, The system is under enormous strain and yet there is no way forward for Western leaders to do anything more than carry on being as stupid as they were in the far less critical situations of Iraq and Afghanistan. As in those two cases, the end game is now predictable - defeat or a victory earned at such cost as to be Pyrrhic.

Here, in the UK, the Government, the media and the political class are all in denial about these truths because are fully complicit in February's blunders and the even worse blunder of not using British influence to encourage peace talks back in April. We all know Boris was a chancer but his gambling sucked in everyone around him. Now our political addicts think that just one more throw of the dice (presumably this time it is the touted Ukrainian counter-offensive) will win back the shirt they are losing off their back. They now have no way out of the hole they have dug except to dig ever deeper and then cross their fingers, hoping that if they do so vigorously enough they will come out in Australia and all will be well. It is now no longer theoretically possible that Russia, clearly backed by a China throughly alienated by the incompetents in the State Department and in Brussels and Berlin, will collapse, be forced to withdraw from Ukraine or the Putin regime be replaced. Even if these events happened, none of them are likely to take place within the time frame required to avert serious damage to the Anglo-European economy and social cohesion. The cheap and hitherto reliable Eurasian energy resources in question are Russian and not ours so we cannot seize them any more than we can seize its massive mineral resources (much of it vital for Western industrial development) and grain output. They, not us, decide what is to be done with these assets of global importance.

It will take years for Europe to put in the infrastructure necessary to restore permanently lowered energy and commodity price structures in a global context. Europe will be competing with Asia for both sets of input and its competitive advantage in having cheap Eurasian energy to hand is now lost, almost certainly forever. Germany, apart clearly from the unstable coalition that rules it, has begun to fear de-industrialisation and has just, with immense stupidity, managed to undo all Macron's good work in China ten days or so ago. The German Foreign Minister alienated China under the massive illusion that its opinion on the Ukraine matter actually matters to Beijing. Macron to a great extent and Orban to a complete extent 'get' what is at stake for Europe and 'get' that it (and we in Britain) have been played by Washington. The embarrassment of watching Sunak kow-tow like all his predecessors to a President who touts a united Ireland tells us all we need to know about national decline. A nation has liberated itself from Brussels only to be a vassal to Washington.

The confrontation between Putin and Western liberal elites is likely to last years as Russia pivots to Asia while a Trump victory and growing European resentments and fragmentation could leave us Britons high and dry in any case. We could take the economic hit now only to see the rug pulled out from under us later. Whatever short term wheezes are being promoted by this Government to take the heat off itself and secure its position for an election, the huge damage to our economy of yet further tranches of borrowing (following the COVID experience) and to social cohesion from the inevitable austerity and increased taxation in the long term are certainly not 'prices worth paying' for the bulk of the population. It is as if (surely not) Government continues to undertake every wheeze to protect the asset rich middle classes in the rather stupid belief that they are the majority of voters and the rest of the electorate has no choice other than to vote for a variant of the liberal establishment that protects that class. This is true in a world made up of Red, Green, Orange and Blue 'Tories' but all four are skating on thin ice. That world may collapse under sufficient economic pressure.

These are all self-inflicted wounds on the British nation not so much by the Government alone but by an entire political class that continues its arrogant neglect of its own population in order to meet the needs of moral philosophy (as interpreted by Oxbridge, the media and the liberal intellectual class) and its own self-serving class interests. The media is wholly complicit. The butterfly minds of the elite have left an apparently powerless population to do what it can to get by - the Government has simply stopped inflation becoming intolerable for the middling sort but pushed those costs forward in time. Huge numbers of the Crown's loyal subjects will face a serious loss of living standards regardless. Perhaps the assumption of the liberal establishment that they are too stupid to see this and who is responsible will be its eventual downfall.

For a brief moment (maybe this coronation) we will now get to see what our nation can be at its most romantic but we note that the strong national engagement in respect for the late Queen Elizabeth has already diminished for her successor in opinion polls. We are seeing how national decision-makers are divorced from the condition of the people as much now as in the age of Victoria. The open debate we need may never happen - evasion of the conditions under which power is exercised may be what holds this nation together as it sinks slowly but steadily into penury. But never mind ... perhaps the upper middle classes think they can survive and since this is their Kingdom more than ours, then we must judge that all is good in the world. Why question such good order, they may ask. Why not, we should reply.