The Bank of England wants to frighten workers into submission

What I can say with some confidence is that this move by the Bank will be about as effective as the 13 rate rises that preceded it. In other words, it will not help bring inflation down. Nor, come to that, will the further increases in Bank of England interest rates that the financial markets now expect have any such effect. They will fail, just as the last 13 have.

But rather more than that, I now think that these interest rates are profoundly counter-productive. I believe that the actions of the Bank of England to increase what is, in effect, the price of money is in itself inflationary. In that case, the reason why we have the highest inflation rates in any developed country now is not because the Bank of England acted too late, too slowly, or not enough. Instead, I think that the Bank did what it did to make inflation worse than it needs to be. 

Even more problematically because it is now intimating that there will be yet more increases, not only is it making inflation worse, it is virtually guaranteeing that the UK as a whole will go into recession when the Washington DC-based International Monetary Fund thought only a couple of months ago that we might avoid that fate.

All that needs some explanation. What is indisputable is that the Bank of England buys into the mainstream economic thinking that says that all inflation is the result of there being excess demand for goods and services within the economy.

To put it another way, they think that inflation is the result of the economy “overheating”. This claim is certainly being bandied about right now by economists who should know better, including members of Jeremy Hunt’s advisory team. 

I suspect there is not a single person in Scotland who does not shoot grouse who can find any evidence to support that claim. The reality is that the economy is already in the doldrums – and getting worse.

The number of households that are feeling better off right now are few and far between, but the Bank of England insists otherwise. It says we are all too well off and as a result must be penalised by having ever-bigger interest rate rises imposed on us.

We all know the impact of these rate rises on those who have had to renew mortgages recently.

It is disastrous.

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But those who rent are also suffering because we now know that rents move in line with interest rates since most rental property is now in the private sector and is heavily mortgaged. That is why rents have been increasing, significantly. This is quite unlike the situation in previous inflationary eras when most rental properties were provided by councils.

Significantly, this creates a fireback loop into inflation. Rent, which can easily make up 30% or more of the cost of living of those who rent, is an expense that is included in the calculation of inflation. So, every time the Bank of England puts up interest rates, that interest rate rise will feedback into higher inflation, and so the vicious cycle of interest rate rises will continue.

It is not just rent where this is happening. Most cars are now bought on leases of some sort. These reflect interest rates.

So, higher interest rates mean higher apparent car prices, and that too feeds inflation.

And many prices are set by regulators to reflect companies’ interest costs, gas and electricity among them.

What’s more, whilst the Bank of England rather naively thinks that companies will absorb increases in their interest costs as prices are, they assume, set by markets (because that is what economic theory says) this is not the case for the large companies with whom we might spend large parts of our budget, like supermarkets. They can and do pass on increased costs, including on interest, to their customers.

Mysteriously, however, most economists seem to think that it is only wage increases that create this upward price pressure. That, though, is nonsense. Take a simple example where a company spends half its income on wages and has given a 6% pay rise. That will increase its cost by 3% overall.

But if it spent just 5% of its income on interest on its debts before these rate rises, that cost may well have more than doubled by now, increasing overall costs by at least 5%, and maybe more. What that means is that if we have an inflationary spiral in price setting right now, it is very likely that in most companies that spiral will be led by inflation, and not wages.

This is never said by the Bank of England. Nor have I ever heard an economist mention it.

So, I wrote a Twitter thread about this on Wednesday. It has now enjoyed nearly one million impressions or reads. I have also been on the BBC rather a lot, talking about this idea (but not BBC Scotland, so far).

I now have no intention of stopping making this point. That’s not just because I think I am right. Much more importantly, I will do so because those who are demanding further interest rate rises are doing so using economically violent language. They are saying we might need a recession to frighten people into submission until they accept lower wages. Their language implies there is a war on wage earners now under way.

That worries me. Most wage earners I know are already stretched to their limits. The economists’ claiming otherwise work for banks and financial institutions that are doing immensely well out of interest rate rises.

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As an example of just how well they are doing, the UK’s commercial banks do, between them, hold more than £900 billion in deposit accounts with the Bank of England.

That’s not because they saved that enormous sum. It was the net outcome of what I call the QE (quantitative easing) process. That money was effectively gifted to the UK’s banks.

The latest interest rate rise does as a result make the UK’s banks £4.5bn a year better off now simply because of the additional amount they will now be paid by the Government each year.

The war on wage earners that is being waged as if it will solve the problem of inflation is, then, something much deeper and more sinister than it seems. It is a war that is meant to crush the working and middle classes by taking away their disposable incomes, leaving many in poverty.

At the same time, it is intended to make the wealthiest, our largest companies and those who manage them better off. The real aim is to move wealth upwards in society, and all that is being done behind a veneer of economic credibility that the supposed fight against inflation provides.

In summary, there is economic and class warfare going on in the UK, and so in Scotland, right now, and it might turn very ugly, not least for the innocent victims who the Bank of England wants to sink with ever-increasing debt burdens.