Britain is not alone in the breakdown of its political economy: there are similar breakdowns happening all over the developed world. Each country breaks down in its own way, but ultimately they are all being fractured by the same irresistible force.
Britain’s water supply isn’t breaking down because its hot. Britain’s energy supply isn’t breaking because Putin invaded Ukraine. Britain’s housing market hasn’t broken ‘suddenly’. Britain’s broader price-gouging inflation isn’t even happening simply because ‘there’s too much money’. Britain’s administrative capacity hasn’t vanished because the civil service is working from home (though it probably doesn’t help).
Britain’s economic policymakers in the Treasury aren’t clueless because the problem is impossibly difficult to identify. (Though Sir Tom Scholar wouldn’t try to engineer a ludicrously unqualified mandarin onto the board of Bank of England if he thought economics actually mattered.)
Britain’s mainstream politicians aren’t all suddenly fantastically more stupid than their predecessors. They are, however, fantastically stupid in believing that doubling down on the solutions of the last 30-40yrs will rescue the situation.
The central overwhelming fact that is forcing the discovery of decades of mal-administration and mal-investment is this:
The 30 Year Bull Market in Bonds is Over; Attempts to Sustain it Have Collapsed; and Quite Probably we are At The Start of a 30 Year Bear Market in Bonds.
This is, without exaggeration, the most important chart of our time:
I’ll get to why this is happening in a minute. But even more important than the economics, is the philosophical message it carries. For bond yields put a monetary value on time itself. (And for each of us, time is the one commodity we really are going to run out of. )
When there’s no time left, bonds are worthless. At the end of the world, bond yields will be severely negative (though doubtless you’ll still find some deluded trader somewhere willing to buy it). When there’s no expected reward for delaying an action, bond yields are zero: you don’t buy a 10yr bond if you want to spend that money now.
From the debtors point of view, zero bond yields essentially mean the world is consequence-free. You can borrow to build an absurd property-oriented business like ‘WeWork’ and get away with it. You can engineer a market in which NFTs have value.
Ironically, the genius of the ‘Bored Ape Club’ NFT is precisely that it presents to us a compelling picture of the zero-interest rate world:
Now, crucially the economics. The important dynamic of a bond bull market, where yields always tend to come down, rather than to rise, is this:
Today’s problems will tend to look easier to solve . . . . tomorrow.
Shall we build reservoirs, pumping stations, a less-leaky piping system? Cheaper tomorrow, and anyway I want that money now. Hinkley Point or HS2 looking stupidly expensive? Hey, you’ll find out it won’t be as bad as it looks on paper right now. Build an aircraft carrier (or two) without being able to fund the aircraft they’re meant to carry? Doesn’t matter, we’ll fix that later. No housing supply? Why bother, as prices go up ‘the market will fix it’.
There was a time when this financial/philosophical complacency was understandable. Between around 1980 to the global financial implosion of 2007/08, bond markets really did provide ever-lower rates. But the implosion of 2007/08 was its logical terminus.
A quick explanation: when bond yields are coming down, all a financial institution has to do to make money is to buy a bond and wait, because as the bond yield comes down, the price of your comparatively high-yielding bond goes up. ‘Ride the curve and book the profit’. Even if you’re really bad at your job, a bond bull market will almost always bail you out.
It’s a lovely lucrative game for those involved. But there is this problem: it gets less lovely as yields come down: holding bonds paying you 10% feels better than, say, 3%.
The industry response was to up the yield by buying riskier bonds, and more of them. This first meant emerging markets, which resulted in the 1997/98 financial collapse of dollar-linked emerging markets. So on to Russia: same story, but this time with added US-hedge fund collapses. And so, eventually, to the wonderful invention/discovery of ‘credit default swaps’, which, it was said, you could buy as insurance for if your higher-risk bond went bust. All the yield with none of the risk!
It was the discovery that they didn’t work as advertised that resulted in the 2007/08 financial crisis. Because by the end of 2007, a small number of banks had written/bought credit default swaps with a notional amount of $62.173 trillion. The US sub-prime property market got the blame, but it hardly mattered - it could have been anything (an Italian milk-producers, for example, was the canary in the mine). No financial institution in the world would possibly survive the exposure of $62.173 trillion in fraudulent CDS promises.
This was a genuine collapse of the global financial system, and it ushered in a world of generalized quantitative easing and the associated world of zero interest rates. Since 2008/09, an endless series of crises have been discovered in order to perpetuate the world of quantitative easing. All the while, the regime itself was creating the multi-faceted collection of crises we are now discovering.
No-one fixes the roof whilst the sun is shining . . . if you believe you have the power to make the sun shines all the time.
Also: Cakeism.
Why has it come to an end now? Well, we can point to the way globalization has beggared much of the West (see Kaleckian profits distributions) whilst rewarding primarily asset-holders and the Chinese workforce. Eventually that becomes politically unacceptable and a threat to profits (since a beggared middle class eventually slows its buying). The ensuing de-globalization necessarily introduces inefficiencies, ie, it means higher prices and yields.
But that’s only the start, as we now discover, because it gathers its own irresistible dynamic. For quite suddenly, the under-investment and mal-investment of decades is discovered, and correcting that will mean more aggressive investment spending all round. Predictions: water companies will be compelled to build reservoirs, pumping stations, pipes; power companies will be compelled to build extra ‘safe’ capacity; the rate of house-building will have to double or treble; and all this at a time when spending on health and defence will also have to rise.
Why? Not only because the weaknesses so dramatically discovered are intolerable, but because, when bond yields rise:
If you don’t do it today, the problem will be worse and more expensive to fix tomorrow.
And so a world which believes it has a structural ‘savings surplus’ will discover it has to compete for resources.
Truly, a mess like this has taken decades to arrange. The first challenge will be to survive. The second challenge will be to muster the courage and imagination to embark on the re-build. It’s a long march, folks.
(PS. Those of you interested in economics can find more of my economics work on https//www.coldwatereconomics.com, or look up my sister substack page, Coldwater Economics.)