#196. The price of self-delusion

MYTH & MONEY, TECHNOLOGY & PHYSICS

It can’t be emphasised too often that GDP, which is the preferred measure of economic output and “growth”, has become progressively less meaningful over time.

Essentially, GDP mistakes money for prosperity. It counts the spending of money as economic “activity”, drawing no distinctions between how the money is spent, or whether the money itself has been earned, borrowed, airily promised for the future, or simply created out of the ether.

Worst of all, GDP ignores the deterioration of the cost-value equation which determines how the economy converts the use of energy into material prosperity. It invites us to believe that the economy exists in complete isolation from physical resources such as energy, minerals, plastics, food and water. If we once let ourselves believe that the economy does indeed exist independently of natural resources, ‘growth forever’ becomes a plausible fantasy.

If we follow the logic of GDP, the complete destruction of the Earth’s ability to produce food wouldn’t be too serious, because it would leave the other 94% of the economy intact. If the economy really is independent of material resources, we could colonise Mars by sending nothing more than some starry-eyed pioneers and a printing-press. A more prosaic – as it were, a more ‘down to Earth’ – example would be that survivors of a ship-wreck could live indefinitely in a lifeboat, just so long as their supply of bank-notes didn’t run out.

You might be familiar with how the economy of money has disguised real trends in the underlying economy of material prosperity. In the twenty years preceding the coronavirus crisis, each $1 of reported “growth” in global GDP was the product of nearly $3 of net new borrowing. Even this understates the extent of our self-deception, because it ignores the creation of huge non-debt liabilities. These include both formal commitments and informal assumptions, the latter typified by enormous gaps in promised (but unfunded) pension expectations.

In America, manufacturing accounted for just 0.2% of all reported economic growth between 2000 and 2020. Even adding construction, agriculture and the extractive industries leaves the growth contribution of globally-marketable, ‘hard’-priced activities at only 5%. The remaining 95% of growth came from services.

These services can be important, and valuable, but they can also act as residuals, sinks for liquidity injected into the system. The FIRE (finance, insurance and real estate) sectors alone accounted for almost 30% of all recorded growth – but how much value do we actually derive from moving money around? – with a further 12% coming from government. Both FIRE activities and government spending are obvious conduits for the injection of borrowed or newly-created money into the system.      

The flip-side of this process is the creation of hugely inflated asset “values”, which are products (a) of the abundance (and hence the cheapness) of money, and (b) of the discounting to the present of forward streams of income which reflect expectations wholly detached from any realistic appraisal of the material economy of the future.

What this in turn means is that most asset “values” are no more than a function of our self-delusion about the true size of the economy of today and tomorrow. Many of them, including the aggregate “values” ascribed to equities and property, are purely notional, in that they can never be monetised. Even defined, committed assets – such as debts owed by others – are only as valuable as debtors’ ultimate ability to pay.

The joys of self-delusion

This situation raises two obvious questions. The first is that, as this is collective self-delusion, does it really matter? After all, we’re not trying to measure ourselves against alternative worlds where economic activity is reported more intelligently.

Second, can those of us who understand this situation – and who can, furthermore, put numbers on it – profit from this knowledge?      

The answer to the second question is that yes, we can.

The answer to the first is that, in economics as in so much else, self-delusion does matter. You wouldn’t expect to win a battle by lying to yourself about how many soldiers or warships your enemy had at his disposal. You wouldn’t expect to drive safely by lying to yourself about how much alcohol you’d consumed.

So why would we expect to become more prosperous by deluding ourselves about the size, shape and direction of the economy?

In economics, self-delusion matters because plans based on false information seldom, if ever, turn out well.

Here’s one example of the dangers implicit in economic self-delusion. Between 1999 and 2019, emissions of climate-harming CO² increased by 48%. If we believe official GDP numbers, economic output grew by 110% over that same period. From this, we can infer that economic output per tonne of CO² increased by 42%. Conversely, we could conclude that each dollar of economic activity now produces 30% less CO² than it did twenty years ago.

If we were to believe this, we could also believe that further such progress could, in due course, tame environmental risk, or even eliminate it altogether, without requiring economic sacrifices.

This sort of calculation helps explain why governments’ seemingly sincere (if belated) commitments to environmental reform aren’t accompanied by measures that, in purely physical terms, might appear necessary. We can, we’re told, overcome environmental risk without having fewer cars, limiting engine sizes, insisting on hybrid-only model slates, or rationing air travel.

Much the same applies to the use of energy. Over twenty years in which GDP increased by 110%, consumption of primary energy expanded by only 54%. Accordingly, the economic value created by the use of a single unit of energy seemingly improved by 36%.

The inference is that, in the future, economic output can grow whilst our use of energy decreases. This where the fantasy of “de-coupling” the economy from energy use comes from, and remains persuasive even though experts at the EEB have described the case for de-coupling as “a haystack without a needle”.

It is, after all, surely obvious that literally nothing of any economic value (utility) whatsoever can be produced without the use of energy – so why would we expect to grow the economy without increasing our consumption of energy?

So any theory which postulates indefinite divergence between energy use and economic prosperity affronts the laws of physics. Suggesting that “technology” can somehow over-rule the constraints of physics simply produces ‘self-delusion squared’.     

Cold reality

When we step away from self-deluding convention (and starry-eyed faith in technology), and look behind the fallacy of GDP, very different conclusions emerge.

For starters, stripped of what we can call ‘the credit effect’, world economic output increased by only 40% (rather than by 110%) between 1999 and 2019.

This means that we delivered 5% less economic value for each tonne of CO² emitted, and 9% less economic output from each unit of energy consumed.

Nor is this all. The Energy Cost of Energy (ECoE) is the critical dynamic determining how much economic value we derive from each unit of energy consumed. Driven primarily by fossil fuel depletion, ECoEs have been (and are) rising relentlessly.

If we include ECoE escalation in our calculation, each unit of emitted CO² yielded 10% less material prosperity in 2019 than in 1999, whilst the relationship between prosperity and energy use worsened by 14% over that same period.

The latter point, in particular, is self-evident – if, from any given quantity of energy supplied, more has to be consumed in the supply process, less remains for any other economic purpose.

These inconvenient observations tell us, amongst other things, that we can’t overcome environmental challenges without changing our behaviour, and that we can’t shrink energy consumption without shrinking the economy.

If we factor ECoE into the equation, two further critical points emerge.

First, CO² emissions are a function of the total energy that we use, whilst material prosperity is linked to surplus (ex-ECoE) energy quantities. As ECoEs rise, they load this equation against us

Therefore, a sizeable – and rising – proportion of CO² emissions is tied, not to the economic value that energy use creates, but to the energy that is used only to make energy supply available. We’re never going to combat climate change and ecological degradation effectively until we take this ‘variable geometry’ into account.

Second, realistic appraisal also tells us that we’re nowhere near a point at which we can use renewable energy sources (REs) as a “fix” for the environmental and economic consequences of rising ECoEs.

Transitioning to technologies such as solar and wind power will require huge investment, which has been costed at between $95 and $110 trillion. The money involved isn’t that important in itself. But it corresponds to vast amounts of steel, copper, plastics, lithium and numerous other resource input requirements. Most of these can only be made available through the use of fossil fuels, meaning that the ECoEs of REs are tied to those of oil, gas and coal.

Western societies’ prior growth in prosperity goes into reverse at or below ECoEs of 5%. Less complex EM countries start getting poorer before their ECoEs reach 10%. The latter level of ECoE might, just, be feasible for REs, but the lower level of ECoEs required to maintain (let alone to grow) Western prosperity is a pipe-dream.

Here, once again, we encounter the chimera of technology. The technological progress of the past has enriched us by increasing the efficiency with which we use both energy itself and those other resources whose availability is energy-dependent.

Critically, though, the scope for technological progress is confined within the envelope of the physical characteristics of the resource itself, and, ultimately, is bounded by the laws of thermodynamics.

Simply put, far too many of our expectations for what technology can deliver in the future are based on a fallacious assumption that we can extrapolate technological progress to the point where it trumps physics.

Anyone who believes that to be possible would be better employed writing science fiction, or running a government department. 

Practical implications

If we once free ourselves from the alluring embraces of financial and technological self-delusion, we’re in a position to recognise fundamental challenges that won’t go away just because we bury our heads in the sand.

Our first observation has to be that prosperity consists of those material things – goods and services – whose provision is a function of energy, not of our ability to pour ever more money into the system.

This linkage to energy is particularly important in the provision of essentials, including food and water, housing, health care, education, necessary transport and, of course, energy itself.

Even the most cursory examination tells us that, as prosperity continues to deteriorate in defiance of our economic self-delusion, so the proportion of our prosperity available for all discretionary (non-essential) purposes will diminish.

If, understanding this, you were in government, your forward planning would surely centre on ensuring the availability and affordability of essentials for everyone. This has already become a critical factor, as ever larger numbers are sucked into poorly-paid, insecure forms of employment, just as the cost of necessities continues to rise.

This is where plans for the universal provision of essentials should be front and centre of the policy process, much as – in some countries – universal provision for health care was the flagship objective for an earlier generation of political leaders. 

If you were in business, and applied this same understanding, you wouldn’t be banking on growth. Rather, you’d be working out how best to insulate yourself from a relentless squeeze on discretionary consumption, and how to safeguard your business from the coming technological disillusionment. 

Many people fear that an economic crisis will be brought about by the inflationary consequences of the endless injection of liquidity on the false premise that ‘money equals prosperity’.

They might very well be right.

It’s equally possible, though, that we might see markets brought down by a sudden, dawning recognition that discretionary consumption is destined to contract (as, excluding debt-funded purchasing, it already is); that perpetual growth in future income streams from consumers is a figment of self-delusion; that property prices must fall back into equilibrium with incomes; and that our fascination with technology has been blinding us to the laws of physics as they apply to prosperity, the economy and the environment.  

#195. The unrelenting squeeze

MONEY, CREDIT AND THE DECLINE OF DISCRETIONARY PROSPERITY 

Henry Ford may have said that “history is bunk”, but a glance backwards can sometimes help us to focus on the future. Though they are not the subject of this discussion, fiat currencies are an example of this.

The world monetary system moved on to a fiat or “command” basis back in 1971. For the following quarter-century, this worked reasonably well, and it seems likely that historians of the future will date the decline of fiat from the second half of the 1990s.

That was when we embarked on the financial excesses which culminated in the global financial crisis (GFC) of 2008-09. The rest – as the saying goes, and with apologies to Mr Ford – “is history”, with the ultimate fate of fiat determined from the moment when the world’s ‘market’ economies decided to turn their backs on market forces, and to ‘make it up as we go along’.

The aim here isn’t to revisit the subjects discussed in the previous article, but it’s worth considering why a monetary system that previously had worked pretty well then turned on to a dangerous path.

What, fundamentally, changed in the 1990s?

The answer, of course, was that ECoEs – the Energy Costs of Energy – reached what was, for Western economies, the climacteric zone that lies between 3.5% and 5.0%. SEEDS dates this ECoE climacteric to the period between 1996 (a global ECoE of 3.4%) and 2005 (5.0%).

From 1997, the prosperity of the average Japanese citizen turned downwards. The same fate overtook Americans in 2000, and the British in 2004, and most other Westerners by 2008.

Well before then, baffled observers had started to wonder about the phenomenon of “secular stagnation”, something which they could identify, but could not explain.

The rest is indeed “history”, because money-based systems of economic interpretation could propose only futile financial solutions for a trend rooted, not in money, but in energy.

Why, then, did the ECoE inflexion-point in Western prosperity put “the writing on the wall” for fiat currencies? The answer seems to lie in the flexibility that is at once fiat money’s greatest virtue and its fundamental weakness.

So long as the underlying economy keeps growing, fiat money can expand at a roughly commensurate rate, and that’s its virtue.

Once the economy turns down, however, a divergence begins, because fiat systems are incapable of a corresponding contraction, and that’s the system’s inherent vice.

Unless you understand the economy as an energy system, though, you couldn’t – and still can’t – see what’s happening.

Monetary expansion in a contracting economy can only create excesses of those financial ‘claims’ that, customarily, are called “value”. From that point on, the only real question is whether the instrument of “value destruction” is going to be a series of market crashes and debt defaults, or a hyperinflationary debasement of the value of money.

Here, history again provides a pointer, suggesting that decision-makers will almost always avoid formal or ‘hard’ default if the ‘soft’ alternative of inflationary value destruction is available.

So much for history, and the rise and fall of fiat. Turning to the future, here are some charts that ought to (but, of course, won’t) act as a wake-up call for decision-makers.

Fig. 1

Though extended out to 2040, these charts will be familiar to regular readers. What they show is the SEEDS calibration of prosperity per capita, set against the cost of essentials. The latter, defined as the sum of public services and household necessities, remains a development project, but the bottom line is clear enough.

In essence, the prosperity of the average person in America, in Britain and – now – even in China is deteriorating. The cost of essentials is continuing to rise. Accordingly, the scope for discretionary (non-essential) expenditure, within the parameters of prosperity, is eroding fast.

People will still undertake discretionary spending in excess of this shrinking capability, of course, as indeed they are doing now. But they can only do this by resorting to borrowing for this purpose. Discretionary consumption within the affordability of prosperity is undergoing rapid contraction.

More worryingly still, there seems to be every likelihood that the cost of essentials will, in due course, rise above prosperity per capita. As you can see, this might not happen until some time in the 2030s, but that doesn’t mean that we can ignore it until then.

For one thing, these are average numbers, not medians. For every person whose discretionary prosperity remains comfortably positive, there’s another who’s already near, or at, the point of reliance on credit to pay for the essentials.

Here is where we’re entitled to ask some questions. Are governments aware of this situation, as they continue to plan on the basis of rising revenues, and carry on investing in sectors geared towards discretionary consumption?

Do they, and central bankers, really think we can somehow overcome these fundamental, energy-driven trends by pouring yet more cheap credit and cheaper money into the system? Do businesses selling discretionary goods and services realise that they’re becoming hostages to the fortunes of credit expansion? And do those companies and investors reliant on assumed increases in consumer income streams understand the dynamic that is squeezing consumer discretionary prosperity?

In most cases, the answer, very probably, is “no”.

Have political leaders looked ahead to the very different agendas that will concern voters once the gravy-train of cheap credit either hits the deflationary buffers or crashes off the inflationary rails?

Again, probably not.

 

#194. Where hyperinflation really threatens

NOT GROCERIES, NOT WAGES – SYSTEMIC EXPOSURE

Right now, the outlook for inflation – or, conversely, for deflation – is one of the hottest topics of economic debate. Some observers contend that the sheer scale of financial intervention triggered by the coronavirus crisis has made soaring inflation inevitable. Others argue that, on the contrary, the weakness of the underlying economy makes deflation the greater risk.

The real threat, without a doubt, is inflation. This isn’t, though, going to be a re-run of the world’s last brush with hyperinflation in the 1970s and early 1980s.

Back then, soaring oil prices triggered sharp rises in consumer costs and an associated surge in wages. The problem now is that the financial system has out-grown the underlying economy to a dangerous extent. This means that hyperinflationary risk lies not in consumer prices, or in wages, but in the matrix of assets and liabilities created by an increasingly financialised economy.

What this also means is that conventional measures of inflation aren’t going to provide much, if any, forewarning of inflationary risk. This in turn is going to give policymakers every reason for not courting unpopularity by raising interest rates.

Rates will have to rise, of course, and the real prices of traded assets will fall, but it’s likely to be a case of slamming the policy door after the inflationary horse has bolted.

Two economies, one problem

This is an unusually complex issue, so we need to follow a clear analytical path to reach useful conclusions. The best way to start is by drawing a conceptual distinction between ‘two economies’ – a real economy of goods and services, and a financial economy of money and credit.

These ‘two economies’ have grown dangerously far apart. As we’ll see when we get into the numbers, the economy of goods and services had, even before 2020, been growing at barely 2% annually, whilst the financial aggregates of assets and liabilities had been expanding at rates in excess of 6%.

Prices act as an interface between these ‘two economies’, so it’s likely that inflation will mediate the restoration of equilibrium between the financial system and the underlying economy.   

The fundamental issues are simply stated, and involve three essential principles.

First, nothing of any economic value or utility can be produced without the use of energy. This means that the economy is an energy system, and is not, as is so routinely and so mistakenly assumed, a financial one.  

Second, whenever energy is accessed for our use, some of that energy is always consumed in the access process. This ‘consumed in access’ component is known here as the Energy Cost of Energy (ECoE). Because this fraction of accessed energy is required for energy supply itself, it is not available for any other economic purpose. This means that surplus (ex-ECoE) energy is the basis of economic prosperity.

Third, money has no intrinsic worth. It commands value only as a ‘claim’ on the material or ‘real’ economy of goods and services.

With these principles understood, we can examine the ‘real’ economy (of goods, services and energy) and the ‘financial’ or ‘claims’ economy (of money and credit) independently of each other.

If, through monetary expansion, we create present or future financial claims which exceed what the underlying economy of today or tomorrow can deliver, the result is an overhang of excess claims. Since these excess claims cannot be honoured, they must, by definition, be destroyed.

Of assets and liabilities

Before we can get into the mechanics of where we are now, we need to be clear about the meaning of ‘assets’ and ‘liabilities’.

Let’s start with the ‘real’ economy, comprising governments, households and businesses. From this point of view, assets can be divided into two categories.

Defined or ‘formal’ assets are monetary sums, such as cash holdings, and money owed by others.

Equities, bonds and property are undefined or notional assets. Their aggregate ‘valuations’ are meaningless – these asset classes cannot, in aggregate, be monetised, because the only people to whom they could ever be sold are the same people to whom they already belong.

In fact, the prices of traded assets of stocks, bonds and property are an inverse function of the cost of money, so rises in these prices are a wholly predictable consequence of pricing money at low nominal (and negative real) levels.

Unless the authorities are prepared to countenance the hyperinflationary destruction of the value of money, its price – meaning rates – will have to rise.

This, in turn, must cause asset prices to plunge.

It’s axiomatic, though scant comfort, that the bursting of bubbles doesn’t, of itself, destroy value. Rather, it exposes the destruction of value that has already taken place during the period of malinvestment in which the bubble was created.

Furthermore, if the value of a house slumps, or a company’s share price crashes, the house and the company retain their underlying value or utility. The real problems created by an asset price crash are problems of collateral.

This is why our focus needs to be on liabilities rather than assets.   

The nomenclature here can be a little confusing. Debts and other financial commitments are the liabilities of the government, household and business sectors, but they are the assets of the financial system itself. This is why, during the 2008-09 global financial crisis, non-performing or at-risk debts were known as “toxic assets”.       

The crisis in figures

With these basics clarified, we can analyse trends in the ‘real’ and ‘financial’ economies. For this purpose, we’ll be looking at a group of twenty-three countries for whom comprehensive information is available. Between them, this group of countries accounts for three-quarters of the global economy, so can be considered representative of the overall situation.        

As you can see in fig. 1, energy used in these economies increased by 49% between 2002 and 2019. Over the same period, however, their trend ECoE rose from 4.5% to 8.3%. Accordingly, surplus energy increased by 43%.

This was mirrored in a 39% increase in these countries’ aggregate prosperity. Throughout this period, rising ECoEs steadily undercut the rate of increase in prosperity. Accordingly, annual rates of growth in aggregate prosperity have fallen below the rate at which population numbers have continued to increase. This, as the centre chart shows, has resulted in a cessation of growth in prosperity per capita.

This has happened despite the inclusion in this group of China, India and ten other EM countries. In more complex, more ECoE-sensitive Western economies, prosperity per person turned down a long time ago. The average American has been getting poorer since 2000, the inflexion-point in Britain occurred in 2004, and Japanese prosperity per capita stopped growing back in 1997.   

Critically, though, aggregates of financial claims have grown much more rapidly than the pedestrian expansion in aggregate prosperity. Between 2002 and 2019, when prosperity increased by 39%, debt grew by 136%, and non-debt financial assets by 234%.

The result, as shown in the right-hand chart, has been the insertion of an enormous wedge between financial claims and the underlying economy. If you wanted to find hyperinflationary risk on a map, this chart gives you the co-ordinates.

At constant values, the increase in prosperity during this period was $19 trillion. Debt expanded by $116tn, and total financial assets by $262n. In effect, then, each dollar of incremental prosperity was accompanied by $6 of net new debt and $7.60 of additional other financial assets.

This is a good point at which to remind ourselves that these ballooning financial “assets” are the liabilities of the ‘real’ economy of governments, households and businesses.   

Fig. 1

 

 

The following charts amplify the picture by showing rates of change, in the real economy metric of prosperity, and in the debt and assets components of the financial economy. Annual growth in prosperity averaged just under 2% between 2002 and 2019, and has been on a declining trend. Financial assets, on the other hand, expanded at an annual average rate of 6.2%.

Fig. 2

 

To be sure, we haven’t – yet – seen a replication of the dramatic rates of expansion in financial commitments witnessed during the GFC. Now, though, the response to the coronavirus crisis is likely to have accelerated the pace at which we’re taking on financial obligations at the same time that prosperity has taken a beating.

The financial support provided by governments is only one part of the crisis picture. At the same time that governments have incurred enormous deficits to support the incomes of households and businesses, the granting of interest and rent ‘holidays’ has created enormous deferred financial obligations, which in our terms are ‘excess claims’.

Back in 2002, financial assets equated to 298% of prosperity. By the end of 2019, this ratio had expanded to 598%. Taking together both the pandemic hit to prosperity and the rapid expansion in financial commitments, it would be by no means surprising, pending final data, if this ratio was now in excess of 700%.

Ultimately, what we’ve been witnessing is a dramatic escalation in financial claims on what is now a contracting economy. This, rather than consumer price or wage pressure, is the source of the inflationary pressure that jeopardises the system.

How will we know?

As we’ve seen, then, inflation risk isn’t going to be flagged in advance by conventional measures such as CPI and RPI. These measures are sometimes criticised on the grounds that innovations such as hedonic adjustment, substitution and geometric weighting result in the understatement of changes in the cost of living.  The big problem with these indices, though, is that they exclude both changes in asset prices and the effects of asset price changes.

The conventional broad-basis measure, the GDP deflator, is really no better than these consumer prices indices. In theory, system-wide inflation is meant to be captured by comparing a volumetric with a financial calibration of economic output. Like GDP itself, though, this deflator is subject to the cosmetic inflation of apparent ‘activity’ by the expansion of financial claims.

In an effort to measure comprehensive inflation, a system is under development, based on the SEEDS economic model and known as RRCI.

Preliminary indications are that RRCI averaged 4.1% through the period between 1999 and 2019, markedly exceeding a GDP deflator of just under 2%. This differential (of 220 bps) may not sound huge, but its application to a global economy said to have expanded at 3.4% through this period leaves precious little “growth”. Last year, estimated RRCI inflation worldwide was 5.5%, markedly higher than the GDP deflator (1.2%).

Preliminary data for 2020 indicates that RRCIs moved up dramatically in a small number of countries, such as Britain and Ireland, which also happen to be ultra-high-risk in terms of the relationships between their financial exposure and their underlying economies.

More broadly, RRCI suggests that systemic inflation has been rising markedly, both in the sixteen advanced economies (AE-16) and the fourteen EM countries (EM-14) covered by SEEDS.

Fig. 3

 

 

What and how?

Even RRCI, though, isn’t likely to give us a clear warning about the true magnitude of hyperinflationary risk. To get a handle on the scale and possible timing of this risk, we need to think about two issues. One of these is spill-over, and the other is futurity.    

Where spill-over is concerned, the risk is that rises in the prices of traded assets may induce consumers to increase their recourse to credit in order to boost their spending to levels commensurate with their perception of increased wealth.

If someone’s home has increased in theoretical value from, say, $400,000 to $600,000, is there any reason why he or she shouldn’t ‘cash in’ part of that gain’ using secured or unsecured credit, which, in any case, remains cheap?

Likewise, is there any reason why a company whose stock price has soared shouldn’t go on an acquisition spree, preferably buying lower-rated companies to enhance ‘growth’ perceptions, and boost earnings per share?

These spill-over risks are additional to the basic risk of supply and demand imbalances in the market for everything from stocks and houses to classic cars and works of art.

The more fundamental issue, though, is futurity, which for our purposes means our collective or ‘consensus’ picture of the economic future. This is far too big a topic for detailed examination here. What it means, though, is that investors might favour seemingly costly stocks if they anticipate brisk growth in earnings; house-buyers may be prepared to bid up prices if they anticipate perpetual expansion in property markets; and lenders might be relaxed about extending loans to borrowers whose incomes, they assume, are going to grow markedly. 

Despite the coronavirus crisis, faith in a ‘future of more’ seems unshaken, and there are assumed to be ‘fixes’ for all issues. The consensus assumption remains that everything from vehicle numbers and passenger flights to corporate earnings and automation are poised to go on growing indefinitely, and that there are technological solutions even for environmental risk and energy constraint.

Looking ahead, it isn’t difficult to see asset price inflation carrying over, first into consumer prices and then into wage demands. This is the point at which policymakers realise, belatedly, that policies of ultra-cheap money are, by their nature, inflationary.

The real risk, then, isn’t just that reactive (rather than anticipatory) rate rises cause asset prices to slump, but that these blows to confidence simultaneously expose the delusions of false futurity.