Economics: trim our ship for storms

What are the lessons from the 15 March Budget; the collapse of Silicon Valley Bank, Signature Bank, and Credit Suisse; and the figures showing Feb-2022-to-Feb-2023 UK inflation a tad up on Jan-2022-to-Jan-2023, after three months of slight decline in those year-on-year figures?

The Tories saw some budget slack. They also felt confident to use it primarily to make a pension-schemes change for the best-off which is in fact an inheritance-tax cut. They have frozen fuel duty again and extended the subsidy to household energy providers, moves which help some working-class people but do so via helping fossil-fuel profiteers.

The government's biggest social-spending promise in the Budget was on early-years care, but it's for spending to happen after the next General Election - in other words, a promise to be kept or not by the next government, not this one.

The government has quietly licensed marginal concessions to rail workers and to health workers, and minute ones to teachers; may license some to civil service workers. But only marginal; and it's not even clear whether the overall NHS budget will be increased to cover the slight pay improvement.

The government has felt some pressure from industrial action, faltering though it has been; and pressure too from managers in those public services, anxious about recruiting and retaining staff and getting workers to cooperate. It will take sharper, bigger, faster industrial action to win anything like the pay rises won in the private sector.

The Tories feel confident because the world-market price in the EU of natural gas has been falling since August 2022, and in February 2023 was lower than in September 2021. The "energy price guarantee" has cost them less than they feared; overall consumer spending, and thus tax revenues, seem to have stayed buoyant (many better-off people still have "savings" from lockdowns).

The increases in official interest rates (US, from 0.25% in March 2022 to 5% today; ECB, from 0% in July 2022 to 3.5% today; UK, from 0.1% in December 2021 to 4.25% today), and "Quantitative Tightening" have aimed to slowing inflation. (QT is central banks selling off bonds they bought in "Quantitative Easing", thus sucking cash out of circulation: the Bank of England has ventured into it since February 2022, the US Fed since June 2022.)

How far those policies were going to achieve their aims was always doubtful. In the early 1980s high official interest rates in the US and UK damped inflation - but only very high interest rates, sustained for years, and via the channel of deepening slumps, i.e. reduced demand on markets.

Inflation has abated in the EU since October 2022 and in the USA since June 2022. With lower gas prices and the clearing of some blockages in world supply chains, I think inflation will decline over 2023-4. How much so is another matter.

The Tories and other governments see it as a victory that almost everywhere they have kept wage rises below price rises. Up to a point they are right that this will tend to slow inflation. If revenue is shifted from wages to profits, then less of it gets spent, and so demand pressures for higher prices ease off.

Since workers can't control inflation anyway, we should not defer to that calculation by holding back on wages. Lower inflation, but with wages falling behind, is worse than higher inflation with wages keeping up. Longer term, the effect of the Tories' wage squeeze is to shift the balance towards profits and away from wages.

Public sector spending remains relatively high despite wage suppression because of high spending on government IOUs (bonds, some of which in the UK yield payouts to bondholders increasing in line with RPI), and on the subsidies to energy providers.

The governments have all kept official interest rates and QT modest,aiming at a mild slowdown to ease inflation, a "soft landing", rather than a full-scale crash. So far they have succeeded. Unemployment remains relatively low by post-1980 standards in the EU, the US, and the UK.

But do the bank failures show a crunch coming?

Credit Suisse's collapse is complicated, but the issues with Silicon Valley Bank and Signature Bank seem simpler and more generalisable.

Banks take deposits (your monthly pay, a corporation’s daily revenues). They make their profits (and increase cash circulation in the economy) by holding only a fraction of the deposited money and lending out the rest at interest. If depositors rush to get their money back, it is always “not there”.

Bank hold US Treasury bonds as assets yielding interest (unlike cash), but relatively safe. You can be sure that a $1,000 US Treasury bond, at whatever coupon (interest) rate, repayable in ten years will get you exactly $1,000 when the ten years expire. But that doesn't mean that you can get $1,000 by selling that bond today, when the US Treasury is selling new bonds at a higher coupon rate. So some bank assets are especially "not there".

Bank regulation is supposed to control such risks. But banks always throw up new financial tricks to get round new regulations. On the eve of the 2008 crash, financial experts were priding themselves on having evolved the best and neatest system of bank regulation ever.

As Brooke Masters comments in the Financial Times (23 March), "benign financial conditions made it possible to believe that changes [since 2008-9]... had made banks safer if not actually nicer or culturally improved.

"Now we know better".

And as Megan Greene puts it, also in the Financial Times, "global banking is now inside Schrödinger's box [a thought-experiment box inside which, depending on quantum effects, a cat is alive or dead, but we cannot know until the box is opened]... We can't know if the past week was a series of idiosyncratic, containable issues or the start of a 2008-style banking crisis... We shouldn't assume the cat is dead and a banking crisis is upon us, but we will keeping hit pockets of market dislocation as central banks continue to withdraw liquidity [cash availability]".

The case for public ownership of high finance under democratic control needs to be restored to the prominence it briefly had after 2008. And workers should have no confidence in official forecasts of smooth paths to low inflation and better social provision. Class struggle is the way to win improvements.