Day 30: Preparing for a Recession

The inflation in UK has reached 3.8%, almost double the inflation target of Bank of England. The petrol and food prices, despite a few cyclical drops in the last couple of weeks, are showing no signs of weakening. At this rate, the inflation is bound to surge, especially when this is a worldwide phenomena and UK can not remain immune.

The Bank of England, as recently as last week, chose not to raise the base interest rate from 5%. This is because they fear an economic slowdown, which is already around the corner, would be accelerated if they did so. Their principal worry, of course, was the falling house prices, which has fallen about 10% from its peak last autumn, and are slated to go down even further. Besides, mortgage approval rates are down by more than 50% year on year, and these days, getting a good mortgage is akin to getting lottery in UK.

The problem, however, is that when the Bank is more concerned about House Prices than Food prices, it not only hits the poor people more than the rich [or house-owners and builders], it weakens the fundamentals of an economy. Keeping interest rates down is keeping money cheap, and at this time, this is in fact distorting the 'invisible hand' of the capitalist economy. For all the talk of abiding faith on capitalist enterprise, the powers-that-be subverts its course all too often. This is one such scenario. We obviously have a problem if at the existing interest rates, we have a 'credit crunch' - the banks are not prepared to lend money since they think risks are too high. Letting the interest rates rise at this time will, of course, correct that situation somewhat, by rewarding the lenders enough for their risks. By holding it down artificially, and by letting inflation rise at the same time, the policy-makers are pushing us down the path of long term weakness.

One wonders why, though. For years, central banks have viewed inflation as their enemy number one, because it erodes the value of money, destroys competitiveness and weakens the economy. Also, Inflation hits poor people first, and most. Particularly the current kind of inflation, which is being driven by a worldwide food shortage and a rampant speculative hold on petroleum trading. This is indeed a Malthusian world reigned by greedy opportunists - not dissimilar to Upton Sinclair's Chicago - we all are back to 'Jungle' days. I keep feeling while Soviet Union indeed grew up to become an 'evil empire', its dissolution led to this strange world where the poor were complete disenfranchised despite their vote. As I see, various nationalist oligarchic formations came to rule the world, and a consensus, funded and approved by these formations, has been achieved and fed to everyone. So, we still have the have-nots, but they are in an opinion-vaccuum, and are kept happy with Binge Drinking and Prozac. It is a different world from the sixties or seventies, much more akin to Huxley's vision of Brave New World, where everyone talks the same language, well, almost. [I have noticed all the labour ministers these days talk like Gordon Brown, but that's beside the point] So, the central banks today care less about inflation these days, and they are far more concerned about house prices going down and hitting the property speculators.

I know I am going to be hit with the big stick here - rising mortgage interest rates will indeed hit the poor too and create homelessness. But we all know the answer there - the Government. We may or may not face a situation like 1929, but we have many instances of great rebuilding efforts like the New Deal, and I have a feeling that we are going to need one when this current crisis is over.

Someone said this before, Malthus was largely neglected in modern economics because all of us were convinced about unending prosperity. But our views are as wrong as Marx's vision of Revolution within our lifetime. As Marx should have been more patient, we should be prescient - we can see that the foundations of our economic system weakening, and we face a Malthusian reality in key factors, like energy and environment. It is time that we start questioning the modern economic consensus yet again, and bring back some sense of perspective in our planning for future.


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