A Concatenation of Crises

The crisis summer

Wars normally start in late summer – but wars and other crises take decades to build. The new British prime minister – either Rishi Sunak or Liz Truss − will assume office on or before 5 September. And they will immediately be confronted with an unprecedented array of intractable crises which would challenge the greatest of world leaders.

Most politicians tend to see things in terms of electoral outcomes rather than long-term trends. The new PM will be expected to have an answer as to why the Tories lost one of their safest seats in Tiverton and Honiton (Devon) to the Liberal Democrats on 23 June – the sixth anniversary of the Brexit referendum.

The Lib Dems have targeted up to 50 Tory seats in southwestern and southern England. If they succeed in winning them, the Tories will lose power in 2024. No political party has won power in five successive elections in British political history, so a win in 2024 would be unprecedented. On the other hand, the Labour party has lost its historic fiefdom in Scotland, apparently for good, and even with 40 percent of the vote in England would be unlikely to secure a majority in the House of Commons. It would almost certainly have to rely on the support of the Lib Dems and the SNP.

One issue in Tiverton was a lack of access to GPs and NHS dental appointments. But that is the tip of the iceberg of an increasingly dysfunctional state. About six million Britons are waiting for operations. Ambulances do not come when summoned. People are living in fear of getting ill. Planes are leaving Gatwick and Heathrow with the previous passengers’ luggage still unloaded. And many can’t travel abroad anyway because they can’t get their passports renewed.

The economy – from inflation to recession?

Inflation in the UK is now running at a new 40-year high of 9.4 percent, driven by rapid increases in fuel and food prices. That is the highest level amongst the G7 nations.

Fuel costs are likely to slacken in the late summer. The oil price is on the slide and shipping rates from China to Europe are easing at last. Brent crude was trading at $107.30 per barrel this morning – down from the recent peak of $122.63 on 8 March. Prices of other key commodities such as wheat and copper are also on a downward trend.

On the other hand, food prices will surge again in late autumn and early winter because shortages will become apparent. As I explained here in May, farmers are not planting this season because they are cash-strapped. The price of basic foodstuffs such as milk, eggs and vegetables could double over the year. The age of cheap food is over. Rents are also still rising as are second-hand car prices. And the second hike in the energy price cap expected in October – possibly to £3,135 − will push up the cost of domestic-fuel bills.

Most commodity prices are denominated in US dollars. The pound has fallen against the dollar by over 11 percent so far this year, so imports have risen further in price in sterling terms.

It gets worse. There is a significant chance that the UK and our European neighbours will enter technical recession at the end of the third quarter of this year. The modern definition of a recession is two successive quarters of flat or negative growth. It used to be three successive quarters. In a period of protracted inflation there is little chance that growth will be positive in real terms.

Bank of England (BoE) governor Andrew Bailey said on Wednesday that a half a percent interest-rate increase was “on the table” for next month. Rising rates have already impacted government finances as debt interest payments surge.

Figures released this week show that public-sector net borrowing was £22.9bn in June − £4.1bn more than in June last year and the second-highest level for the month since records began in 1993. The budget deficit for the first three months of the current fiscal year hit £55.4bn − £3.7bn more than the OBR forecast back in March. Debt interest costs reached £19.4bn, more than double the previous monthly record, partly because much of the UK government’s public debt is index-linked to the Retail Price Index. This implies that almost one quarter of all state spending could be consumed by debt interest costs on our £2.7tn stock of national debt relatively soon. And yet Truss wants to borrow more to finance tax cuts.

The European Central Bank raised rates on Thursday for the first time in 11 years at a moment when Italy is under political and economic strain. The rate hike was higher than expected at 0.5 percent, bringing the key rate to zero percent. The Draghi government in Italy collapsed this week, plunging the country into further uncertainty. We can expect more perturbations in the eurozone as bond spreads relative to German bunds begin to widen again. On that, more soon.

On the plus side, Boris Johnson will leave office with unemployment at a record low of just 3.7 percent. That said, about five million people have left the labour market prematurely, thus limiting the upside for economic expansion. This week the governor of the BoE in his Mansion House speech said that the shrinkage of the UK labour market over the last two years – caused both by Brexit and the coronavirus pandemic – has contributed to inflationary pressures.

The rises in interest rates will finally spell the end of the ‘zombie’ companies which, highly indebted, have been allowed to survive for too long. That is not necessarily a bad thing; but in the short term there will be pain. The default rate will spike in the second half of this year as deferred liabilities built up during the lockdowns become apparent and lenders get tougher with delinquent borrowers.

A protracted period of near-zero interest rates has led to a mispricing of risk and thus to a misallocation of capital. That is one reason why the developed world, and the UK in particular, have suffered from anaemic productivity growth since the financial crisis of 2008-09. Low productivity means low growth and wider inequality.

When the BoE was founded in 1694 it set the interest rate at six percent. That was cut to five percent in 1714 (the year that George I of Hanover succeeded Queen Anne) and remained so for a century. At the end of Queen Victoria’s reign (1837-1901) prices were lower than at the start. In contrast, during the reign of Elizabeth II (1952-now), prices have risen by an average of over five percent per year. As I have argued here before, interest rates were always going to regress to their historic mean at some point.

Even though the UK base rate currently is just 1.25 percent, the average rate charged on credit- card debt in April was 26.6 percent, according to Moneyfacts. Hence many people are already struggling to service their monthly credit-card payments – and that struggle will only intensify.

It took nearly a decade for western economies to defeat the entrenched inflation of the 1970s – and two savage recessions (1973-76 and 1980-82). Inflation might persist for some time to come.

Energy – the prospect of rationing

On Wednesday, Vladimir Putin threatened to slash gas supplies to Europe via the Nord Stream 1 pipeline that conveys Russian gas to Germany by 80 percent. The European Commission requested member states to cut gas consumption by 15 percent between now and next spring. In the event, the pipeline was reactivated on Thursday but only at 40 percent capacity.

Neither the UK nor the EU has an energy policy that can evade the snare that Putin has set for us. If, as now seems likely, Russia cuts off the gas entirely in due course, then Europe will face a very bleak winter. This comes at a moment when numerous European governments, the UK at the forefront, have committed to unrealistic targets around carbon emissions (net zero by 2050) which are pushing energy prices higher anyway. And if heat pumps were as convenient and affordable as gas boilers, sensible citizens would have adopted them already, just as millions of canny people have already had their lofts insulated without being waylaid by Insulate Britain protestors on the M25.

Successive UK governments have obfuscated on energy policy and security. Unless the net- zero carbon target – which was debated in the House of Commons for just 90 minutes in 2019 – is modified, there may have to be a regime of compulsory energy rationing. UK governments have run gas-storage capacity into the ground and have supposed that a network of interconnectors (with France, Belgium, the Netherlands and now Norway) would assure our energy supply in a crisis. Nobody considered that all those countries might simultaneously be experiencing an energy crisis too. Happily, on Thursday, Centrica indicated that the Rough Gas Storage Facility in the North Sea might be reopened later this year.

Without abundant energy, you get poverty. Thus far, the UK government has sent no message to the public about the need to cut consumption of energy – but that will have to come soon.

Defence – feeling vulnerable

There is a high risk that the UK will come under cyber attack very shortly from known adversaries. It is quite surprising that there has not been a cyber emergency already for which we should no doubt thank the National Cyber Security Centre.

Meanwhile, the British Army is still scheduled to lose 9,000 soldiers. General Sir Patrick Sanders has spoken of a “1937 moment”. But back then, Britain spent over 3.6 percent of GDP on defence; now it is about 2.2 percent, though Johnson promised 2.5 percent by the end of the decade. In 1937, the Royal Navy had over 1,000 vessels under its command; now it is 74 – though that includes two of the most lethal aircraft carriers in the world.

In the current, high-risk, challenging geopolitical environment, the UK must rearm and expand the head count of the armed forces. That could only be financed by driving down the welfare and health budgets which have come to dominate state spending. The starting point will be by means testing certain state benefits, as Kemi Badenoch MP has proposed. Why should Lord Sugar and the Prince of Wales receive the £300 Winter Fuel Payment this December? As Badenoch’s intellectual hero, Thomas Sowell, once observed: “Many of today’s problems are the result of yesterday’s solutions”.

The Ukraine War has exposed the inadequacy of western-defence stockpiles, especially artillery shells of which Ukraine is still short. Much of the western defence strategy over the last 20 years has been oriented towards counterinsurgency rather than readiness for large-scale tank and artillery battles. If, as Sanders says, we must ready ourselves for war with Russia, then that must change.

Russia’s war in Ukraine could yet escalate into an existentially dangerous conflict. And the continued solidarity of the NATO allies could yet come under severe strain.

Hating ourselves – the culture war rumbles on

If you don’t get the pronouns right at the Halifax, then, apparently, they don’t want your custom. If you are uncomfortable with gender fluidity, you are not welcome to save a nest egg or to get a mortgage.

This was why Badenoch was such an outstanding contender in the race for the Tory leadership. She alone articulated what true conservatism is: conserving our best traditions and defending and promoting the core values that define British society and hold it together. The two remaining contenders think that the culture war is just background noise. When it is in fact, as the economist and thinker Charles Gave argues, an attempt to undo the Enlightenment. The English philosopher John Locke (1632-1704) argued that personal freedom depended on the rights of the individual and – critically – respect for property rights. These fundamental ideas are now under attack.

A recent NHS policy review commissioned by Sajid Javid used the phrase “equality, diversity and inclusion (EDI)” and “decolonisation” more often than the term “patients”. There was no mention of waiting lists, whistle-blowers, cover-ups or value for money – and just one cursory reference to “efficiency”. There was no mention of the ghastly clinical failures at Mid Staffordshire, Morecambe Bay, Shrewsbury and Telford NHS hospital trusts. This tells us much about what is wrong with the NHS.

Climate change – feeling the heat

On Tuesday (19 July) record temperatures were recorded in both England and Wales. The mercury surpassed 40C at Heathrow airport for the first time. For climate catastrophists this was an I-told-you-so moment, even though extreme temperatures were recorded in the summers of 1911 and 1976 (when for 15 consecutive days from 23 June to 7 July temperatures exceeded 32C). What is evident, however, is, once again, how unprepared the country was for a weather phenomenon that had been foreseen.

Few people would argue that we don’t have to increase energy efficiency to reduce our carbon emissions – though whether getting to net-zero carbon is either a feasible or desirable target is something I have previously questioned here. Yet there has been very little focus on the matter of climate adaptation – that is how to cope better with higher temperatures. Andrew Montford of the Global Warming Policy Foundation argues in a recent paper that we could have built robust sea defences with the money we have been spending on subsidising windfarms.

The rail network was plunged into chaos on Tuesday in parts of England because Network Rail’s track was not designed for high temperatures. Other countries have rail track that is more resilient to heat. Ours could be upgraded, but that will be costly and could take decades. The government urgently needs to formulate a climate-adaptation strategy. Even if the UK were to get to net-zero carbon by 2050 that would not put a stop to global climate change – we shall have to learn to live with it.

“Whitehall is broken”

The above was Penny Mordaunt’s campaign slogan which I quoted last week. She is not the only person to believe that the aftermath of Brexit has exposed deep flaws in the way that the UK is administered.

Mike Clancy, the General Secretary of Prospect, the trade union which represents many civil servants, has led a campaign to retain the benefits of flexible working – that is working from home and balancing work around ‘life events’ such as the school run. ‘Work is not a place’ is the new mantra. Large parts of the public sector and the wider civil service live in a ‘La-la land’ where we can live beyond our means indefinitely. ‘Wellness’ culture prevails.

This is not confined to the public sector, of course. The number of HR managers is up by 57 percent since 2009 as progressive corporations pursue their ESG KPIs (environmental, social and governance key performance indicators to you and me). Diversity and inclusivity training trumps customer service and efficiency.

The Home Office, the UK Border Force and other agencies have been denounced in recent weeks as being systemically incompetent. Illegal entrants have been absconding from detention centres without having the most basic biometric details recorded. How many illegal entrants are now working in the black economy? Nobody seems to know. And yet the wage bill for the Home Office and its agencies now stands at £2.035bn – up almost eight percent on last year.

At the ‘fag-end’ of the Johnson premiership we seem to be heading for what Margaret Thatcher called “inevitable socialist mediocrity”. And there is no plan to address it.

Societal collapse

If you want to know what societal collapse looks like, observe how the economic devastation in Sri Lanka is unfolding. This is a beautiful country with a rich cultural heritage which has sadly been mismanaged in the era of globalisation by a self-serving elite. It is now a pseudo-failed state.

Protesters ransacked the presidential palace last week because they have been driven to despair by food and fuel shortages. Millions of people are living in poverty that most of us cannot imagine. The meltdown began when tourists stopped coming during the coronavirus pandemic and foreign-exchange reserves dried up. The Rajapaksa government could have gone to the IMF; instead it went cap in hand to China. There was no countervailing fiscal discipline: the country last month became the first in the Asia-Pacific region to default, in two decades.

Sri Lanka might soon be followed by Zambia, Ethiopia, Laos and Cambodia which are all in hock to China. Could it happen here? It’s not impossible.

Mutiny on the Tory ‘Bounty’

The crew of the good ship Tory Bounty have done Captain Boris Bligh a favour by lowering him overboard into a rowboat at a moment of maximum uncertainty. He will paddle to a palm-fringed, white-sand beach and will make merry with the locals – and no doubt write a best-selling book about it. The new upstart Captain, however, will face a concatenation of crises that even the greatest of our prime ministers, such as Pitt the Younger, Lord Liverpool, Gladstone, Disraeli, Lloyd George, Churchill and Thatcher – could not have endured or survived.

Whether it be ‘Davos Man’ (who can always join Nick Clegg in California if it doesn’t work out) or ‘Norfolk Woman’, the new PM will struggle.

Even people who have a decent income and a tidy asset base are going to feel the pinch over the next two years. But many people who are “just about managing” (remember Theresa May’s mission statement in July 2016) are already underwater.

The UK, Europe and the US are now reaching an era of crisis in which our societies could be transformed in highly adverse ways. I’ll share some thoughts on what kind of transformation that might entail soon.