#236. The monetary conundrum

LIMITS TO THE SCOPE FOR POLICY MANOUEVRE

Following the Fed and the Bank of England, the ECB has become the latest central bank to adopt QT (quantitative tightening) and to raise interest rates, though the ECB’s 0.5% hike still leaves its deposit rate at zero. The ECB has also unveiled a mechanism – the Transmission Protection Instrument, or TPI – designed to ward off sovereign debt crises in some of the bloc’s weaker economies.

The details of these developments are set out very well in this Wolf Street article. The aim here is to discuss what policy actions – if any – make sense for the central banks.

Raising rates – and, by extension, putting prior QE into reverse – are straight out of the standard play-book for combatting inflation. It’s noticeable that central bankers are moving pretty slowly along this orthodox path, with each much-delayed rate rise far more than negated by the next surge in inflation.

But should they be tightening monetary policy at all?

The wrong response?

Some observers contend that raising rates isn’t the appropriate response under current conditions.

The argument runs that inflation isn’t being driven by internal demand excess, but by external factors over which the monetary authorities have no control. Rate rises in America won’t increase the supply of food to world markets, this argument runs, and QT in the Euro Area won’t ease shortages of oil and natural gas.

The argument against tightening monetary policy can be made either optimistically or pessimistically.

The optimistic line is that action isn’t needed, because the inflationary spike isn’t fundamental, but the product of happenstance. Given sufficient patience – and sufficiently accommodative monetary and fiscal policies – supply-lines ruptured by the pandemic will return to normality, as will the flow of energy, once the war in Ukraine reaches some kind of conclusion.

To the pessimist, the whole situation is hopeless anyway, so there’s no point in pulling forward the unavoidable crisis, or piling on the economic pain, when orthodox tightening policies cannot work.

Getting it half-right?

The view taken here is that central banks are right to pursue monetary tightening, though they might also be right in doing this fairly slowly.

Three lines of argument support this view.

First, inflation may have started with external factors, but could all too easily turn into an internal wage-and-price spiral. This kind of spiral is exactly what happened in the 1970s, even though the initial inflationary impetus came from events – the oil crises – outside the control of domestic monetary authorities.

To be sure, organised labour doesn’t have the clout that it had back then, and labour shortages aren’t likely to prove lasting. But the upwards pressure on wages remains, propelled by the need to ensure that employees can at least ‘make ends meet’.  

Second, this is a matter of degree.

Ever since ZIRP, NIRP and QE were adopted – as avowedly “temporary” and “emergency” expedients – in response to the GFC, nominal rates have been, almost always, below the rate of inflation.

But real rates, though negative, haven’t been deeply so. There’s a world of difference between rates that are negative to the tune of -2% or -3% and allowing them to fall to -8% or -10%, which could all too easily happen if central bankers don’t respond.

Negative real rates are anomalous, and harmful, and the damage is proportionate to the extent of negativity. Setting the cost of money below the rate of inflation invites debt escalation, which in turn leads to instability, such that deeply negative rates can be expected to lead to a full-blown crisis.

The market economy requires that investors earn positive returns on their capital, so an absence of these returns translates an ostensibly capitalist system into a dysfunctional hybrid. Letting real rates fall to extreme lows can only make this worse.

No good choices

Underpinning the view set out here, of course, is the understanding that prior growth in prosperity has gone into reverse because the energy equation that determines prosperity has turned against us.

This equation involves the supply of energy, its value and its cost, the latter measured, not financially, but as the proportionate Energy Cost of Energy.

Mainly because of the depletion of low-cost resources, the ECoEs of oil, gas and coal have risen relentlessly, pushing the overall ECoE of the system to levels far beyond those at which stability, let alone further economic expansion, remain possible.

You might believe that the ‘fix’ for the ECoE problem lies in transition to renewable energy sources. Even if you do believe that this is possible, though, it’s clear that it can’t happen now. The contrary point of view is that renewables can’t provide a like-for-like replacement for the energy value hitherto provided by fossil fuels.

Either way, inflation is one symptom of a divergence between the ‘real’ or material economy of goods, services and energy and the ‘financial’ or proxy economy of monetary claims on the real economy.

The further these two economies diverge, the greater the pressures become for the restoration of equilibrium between them.

The following charts summarize this dynamic. As ECoEs have risen, surplus (ex-cost) energy has contracted, and this effect is now carrying over into a decreasing total supply of energy as well.

The mistaken idea that we can boost material prosperity by stimulating financial demand has driven an ever more dangerous wedge between the financial or claims economy of money and credit and the underlying real economy of energy value.  

Fig. 1

The Fed – a shift in priorities

The third factor which helps justify conventional monetary responses to inflation is that each monetary area has its own idiosyncrasies and, where the Fed, the Bank of England and the ECB are concerned, these idiosyncrasies support the case for orthodoxy.

The Fed has, in some ways, the easier task of the three. Hitherto, rates have been kept ultra-low in the US in order to prop up and boost capital markets. Former president Donald Trump was wont to say that a high stock market was, ipso facto, indicative of a strong America. Mr Biden hasn’t repeated this nonsense – he can’t, whilst markets are correcting – but what’s really changed isn’t politics, but the context of intentions.

At times of low inflation, what monied elites fear most is a slump in asset prices. Once inflation takes off, however, this ‘elite priority’ shifts. A billionaire has a billion reasons for not wanting the purchasing power of the currency to be trashed.

This is why rate rises and QT aren’t taking America back to the “taper tantrums” of the past. The Fed might also hope that a commitment – albeit a much-delayed one – to the inflationary part of its mandate might help restore some public trust in the institution.

Britain – staving off the day

BoE priorities are different. For a start, the British fixation is with property prices rather than the stock market. Whilst the stock market “wealth effect” is an adjunct to the American economy, inflated property prices play a central role in supporting the illusion of prosperity in the United Kingdom.

The harsh reality is that the British economy is a basket-case. America might want stock market appreciation, but can get by without it. Britain needs property price inflation to keep the ship afloat.

The British economy depends on continuous credit expansion to produce the transactional activity, measured as GDP, which supports a simulacrum of ‘business as usual’. Inflated property prices play a critical role, providing both the collateral support and the consumer confidence required if credit expansion is to continue.

Fundamentally, Britain lives beyond its means, resulting in an intractable trade deficit. For a long time, this was bridged, at least in part, by income from exports of North Sea oil and gas. Once Britain became a net energy importer again, the emphasis switched with renewed force to asset sales.

Ultimately, though, this makes a bad situation worse, because each asset sale sets up a new outward flow of returns on overseas’ investors capital. These outflows are part of the broader current account deficit, which is dangerously high, and has become structural.

Former Bank chief Mark Carney warned about dependency on “the kindness of strangers”, but no realistic alternatives exist. Asset divestment – muddling through by “selling off the family silver” – is, by definition, a time-limited process.

The nightmare that must haunt the slumbers of British officials is a “Sterling crisis”. If the value of GBP were to slump, inflation would soar, vital imports could become unaffordable, and the local cost, not just of foreign currency debt but of servicing that debt as well, could soon become unsustainable.

Put simply, the BoE needs to show FX markets some resolve, even if that comes at the cost of some domestic economic pain. The Bank undoubtedly knows about – as some politicians seemingly do not – the price that could become payable for fiscal and monetary recklessness, if that recklessness were to trigger a currency crisis.

It’s a point seldom mentioned that, if a future leadership were to enact irresponsible tax cuts, the Bank might, as a compensatory measure, have no choice but to raise rates more briskly than would otherwise have been the case.

Some in Britain have dreamed, unrealistically, of turning the country into ‘Singapore on Thames’. The real and present danger is of turning into ‘Sri Lanka on Thames’, where a weak currency makes vital imports prohibitively expensive.

The prevention of a currency crisis has to be the overriding priority of responsible decision-makers. The balance of risk – no less than the balance of pain – has to be tied to the demonstration of sufficient resolve to stave off any such crisis.

The ECB’s camel

A camel was once described as “a horse designed by a committee”. A similar phrase could aptly describe the Euro system, created as a political ideal, and built on the most dubious of economic presumptions.

To work effectively, monetary policy needs to be aligned with fiscal policy. The Euro system doesn’t do this, but tries instead to combine a single monetary policy with 19 sovereign budget processes.

One of the consequences of fiscal balkanization is an absence of the ‘automatic stabilizers’ which operate in currency zones where the monetary and the fiscal are aligned.

If, for instance, Northern England was suffering a recession, whilst Southern England was prospering, less tax would be collected in the North, and more benefits would be paid there by central government, with the opposite happening in the South. Money would therefore flow, automatically, from South to North.

Critically, such regional transfers within the same currency zone are automatic, do not need to be enacted by government, and certainly do not depend on agreements between the differently-circumstanced regions.

By contrast, transferring money from, say, Germany to Greece isn’t automatic in this way, but depends on political negotiation, which is likely to be fractious, even at the best of times – which these times, of course, are not.

To be sure, Scotland and Wales have independent budgetary powers, as do American States. But there are, in both cases, over-arching sovereign budgets, set in London and Washington, which set the overall parameters. No such overarching budget exists in the Euro Area.

There are parallel problems in the Target2 clearing system. If a customer in Madrid buys a car made in Wolfsburg, Euros have to flow between countries, being debited in Spain and credited in Germany. But there are severe imbalances within the Euro clearing system.

As of May, Germany was a creditor of Target2 to the tune of €1.16 trillion, whilst Italy owed the system €597bn, and Spain €526bn. The official line is that this doesn’t really matter very much, but it’s hard to see how Germany can ever collect the sums owed to the country, via the system, by Italy and Spain.

One might argue that Target2 gives poorer EA nations rolling credit to fund imports from Germany.

The danger with a ‘one size fits all’ monetary policy, when applied in the context of a multiplicity of sovereign budgets, is that national bond yields can diverge, because each country, being responsible for its own budget, borrows individually on the markets.

Italy is a case in point. Prior to the formation of the Euro, Italy had a history of gradual devaluation of the Lira. Whilst this made Italians poorer in relative terms, it protected both employment and the competitiveness of Italian industry.

Once Italy joined the Euro at the end of 1998, this ceased to be possible.

This, in large part, is why Italian debt has increased, as the authorities have endeavoured to find other ways to deliver the support that would previously have been provided by gradual devaluation. This could, and does, make markets worry about Italian debt, putting upwards pressure on Italian bond yields.

If these yields were to blow out, Italy would encounter grave difficulties, not just in financing its fiscal deficits, but in maintaining the continuity of credit to the economy itself.

The ECB, in a rather belated effort to counter inflation, is committed to raising rates, and to letting its asset holdings unwind. This, though, could cause problems which culminate in drastically dangerous rises in bond yields in member countries such as Greece, Italy and Spain.

TPI – which the ECB must devoutly hope will never have to be put into effect – is designed to counter this process by varying the composition of QT. If rates spike in, say, Italy, the ECB could buy Italian bonds, simultaneously increasing its sales of German or Dutch bonds within the overall composition of QT.

This, though, presupposes that the Euro Area has “strong” as well as “weak” economies, a point that is now debateable.

The ultimate ‘strong economy’ in the EA has always been Germany, but the energy squeeze is putting that strength to the test. Moreover, much of Germany’s economic prowess is the trade advantage that the single currency confers on it. France has a moribund economy and elevated levels of debt, whilst Dutch financial exposure is uncomfortably high, with financial assets standing at 14.5X GDP as of the end of 2020, the most recent reporting date.  

In the final analysis

Ultimately, the challenge facing the ECB – and other central banks too – is to prevent two things from happening.

The first and most obvious is to guard against inflation taking on its own momentum, which could easily happen in a climate of apparent official indifference or resignation.

But the second is to ensure that the damage – and the crisis-risk – caused by a negative real cost of capital does not escalate, as it could if central banks allow real rates to slump into lethally deep negative territory  .

#235. The affordability crisis

WHAT’S REALLY HAPPENING

What might be called the ‘consensus narrative of the moment’ is that our near-term economic prospects depend on the ability of central banks to tame inflation without tipping the economy into a severe recession. There are numerous complications, of course, but this is the gist of the story.

What these officials need to find, we’re told, are Goldilocks interest rates (‘not too hot, not too cold’), and all will be well if they succeed. If they err too far in one direction, inflation will run higher, and for longer, than is comfortable. If they lean too far the other way, a serious (though, by definition, a time-limited) recession will ensue.

Inflation itself, the narrative runs, has been the product of bad luck. First came the pandemic crisis, which impaired production capacity and severed supply-chains. Before we’d finished dealing with this, along came the war in Ukraine, disrupting supplies of energy, food and other commodities. There are some who add, sotto voce, that we might have overdone pandemic-era stimulus somewhat.

Our hardships, then, can be put down to a run of bad luck. Those in charge know what they’re doing.

It’s conceded, in some quarters, that we might face some sort of crisis if these challenges aren’t managed adroitly. This, though, shouldn’t be as bad as the GFC of 2008-09, and certainly won’t be existential.

We’re navigating choppy waters, then – not going over Niagara in a barrel.

The affordability reality

There is some truth in each of these propositions, but explanation in none.

What we’re really encountering now is an affordability crisis. The aim here is to explain this, without going into too much detail, and with data confined to two sets of SEEDS-derived charts at the end of this discussion.

The economy, as regular readers know, is an energy system. Nothing that has any economic value at all can be produced without the use of energy. Take away the energy and everything stops. Decrease the supply of energy, or put up its cost, and systems start to fail.

Energy isn’t free. Whenever energy is accessed for our use, some of that energy is always consumed in the access process.

This ‘consumed in access’ component – known here as the Energy Cost of Energy, or ECoE – has been rising relentlessly, mainly because depletion is forcing up the costs of oil, natural gas and coal.

This rise in ECoEs reduces the surplus (ex-cost) energy that is coterminous with prosperity. This equation reflects the fact that surplus energy determines the availability of all products and services other than energy itself.

Because ECoEs are rising, prosperity is decreasing.

At the same time that surplus energy prosperity is deteriorating, the costs of essentials are rising. This is happening because most necessities – including food, the supply of water, housing, infrastructure, the transport of people and products, and, of course, energy used in the home – are energy-intensive.

The material components of this equation – energy itself, supply costs, prosperity and the essentials – are translated, using the SEEDS economic model, into the financial language that, by convention, is used in economic debate.

We need to be absolutely clear, though, that money has no intrinsic worth, but commands value only as a ‘claim’ on the material products and services made available by the energy economy.

Money is an artefact validated by exchange. A million dollars would be of no use at all to a person adrift in a lifeboat, or stranded in a desert. A million euros would be worthless to someone who travelled to a distant planet where the euro is unknown.  

We are at liberty to create monetary ‘claims’ to an almost unlimited extent, but we can’t similarly create the material goods and services that are required if those claims are to be honoured ‘for value’.

Central banks can ‘print’ money (digitally), but they can’t similarly print low-cost energy. The banking system can lend money into existence, but we can’t lend resources into existence.

We can’t, for that matter, fix our environmental problems by writing a cheque to the atmosphere.

The meaning of compression

Whether we think in energy or in financial terms, what’s happening now is that the economic resources of households, and of the economy itself, have ceased to expand, and have started to contract, whilst the costs of essentials are rising.

This is what is meant by an affordability crisis.

An affordability crisis does what it says on the tin, and has two main effects.

First, consumers who have to spend more on necessities have to cut back on purchases of discretionary (non-essential) goods and services.

Second, households suffering from affordability compression struggle to “keep up the payments”.

Traditionally, these payments were largely confined to mortgages or rents, plus, perhaps, insurance premia collected door-to-door.

Now, though, these outgoings include credit servicing, car loans, student loans, subscriptions, purchase instalments and the plethora of other income streams created by an increasingly financialized economy.

Though they can’t be expected to like doing so, it’s possible for households to cope with affordability compression. Discretionary purchases are, after all, things that people want, but don’t actually need. People can cancel subscriptions, cut back on instalment purchasing, and cease using – and, in extremis, default on – various forms of credit.

To say this isn’t to minimize, in any way, the very real hardships being experienced by millions of households. The ‘cost of living crisis’ is the biggest challenge that has confronted households, and governments, in decades. As these problems worsen, the public are likely to get increasingly angry, and to demand redress, part of it through various forms of redistribution.

But an affordability crisis is much more serious for the system than it is for the individual.

Customers can decide to holiday at home rather than abroad, but the outlook for airlines, cruise operators and travel companies is grim if they do. Households can get by without entertainment subscriptions, but the providers of these services cannot survive if this happens. Motorists can hang on to their current vehicles for longer, and put off buying a new car, but the automotive industry is at grave risk if this happens.

These are what we might call the ‘industrial’ effects of affordability compression. Serious though these are, the financial effects are much worse.

The financial system depends on people “keeping up the payments” and, to a significant extent, increasing those payments over time.

The ability of the system to cope with defaults – or even with payment contraction – is severely circumscribed.

Perhaps the biggest single risk of the lot would be a wave of ‘can’t pay, won’t pay’ reaction by the public.

Getting to grips

When trying to navigate our way through the coming crisis we need, first, to understand what it is. Inflation, whether in prices or in wage demands, is a symptom, not the disease itself, and the root of the problem is an affordability crisis.

Second, we can’t borrow or print our way through an affordability crunch. Any attempt to do so just makes the problem worse.

Third, none of this is going away. An outbreak of peace and conciliation between Russia and its opponents, welcome though this would be, wouldn’t alter the fundamentals, which are that the ECoEs of energy supply are rising, reducing the affordability, not just of energy itself, but of all energy-intensive resources and products.

Fourthly, there’s no “tech fix” for structural affordability compression. As we’ve discussed in previous articles, renewables are vital, but they aren’t going to stem, still less reverse, rises in overall ECoEs. The ability of technology to somehow over-rule the laws of physics is one of the foundation myths of the age.

There’s no merit in finding new ways to use energy when the supply and the affordability of energy itself are getting worse. Electricity doesn’t come out of a socket in the wall, in unlimited quantities and at an ever-decreasing price. The expansion of renewables is imperative, but they are even less likely than nuclear to produce power “too cheap to meter”.   

It’s worth remembering, in this context, that energy sources must precede applications. The Wright Brothers didn’t invent the aeroplane first, and then sit around waiting for someone to discover petroleum. Cars weren’t invented until after gasoline had become available. Our ancestors didn’t build carts until they’d tamed their first horses.

Technologies are optimised to the energy sources available, not the other way around.

The big question now isn’t whether an affordability crisis is going to happen – because it already is – but when this reality is going to gain recognition as a feature of the system, not a glitch.

Hype springs eternal, and nobody is yet prepared to recognize that economic growth, previously powered by fossil fuels, has gone into reverse, because fossil fuels are becoming costlier to supply, and no alternative of equal economic value is available.

There are limits, though, to the capability for self-delusion. Risk will reach its apogee when investors, lenders and the public tumble to the reality that discretionary consumption has entered an irreversible decline, and that the economy, just like millions of households, is struggling to ‘keep up the payments’ required by an increasingly financialized system.

#234. Britain on the brink

THE PRICE OF EXTREMISM

Whether the country’s leaders know it or not, the United Kingdom is now at serious risk of economic collapse.

We must hope that this doesn’t happen. If it does, it will take the form of a sharp fall in the value of Sterling which, in these circumstances, is the indicator to watch.

A currency crash would cause sharp increases, not just in the prices of essential imports such as energy and food, but also in the cost of servicing debt. In defence of its currency, Britain could be forced into rate rises which would bring down its dangerously over-inflated property market.

This risk itself isn’t new. Rather, it results from a long period of folly, and can’t be blamed entirely on the current administration, inept though the Johnson government undoubtedly is. What we’re witnessing now seems to be a government on the edge of panic. The official opposition doesn’t offer a workable alternative programme, and mightn’t be electable if it did.

We need to be clear that the root cause of Britain’s problems is long-term adherence to an increasingly extreme ideology sometimes labelled ‘liberal’.

It’s one thing to recognize the merits of the market economy, but quite another to turn this into a fanaticism which judges everything on its capability of generating short-term private profit.

Extremism is divisive, and creates winners and losers to an extent that moderation does not. If solutions still exist for Britain’s worsening problems – and that’s a very big “if” – there are two reasons why such solutions mightn’t be adopted.

The first is that these solutions would anger a very vocal group of winners under the existing system.

The second is that those in charge would have to make a public admission of the failures of extremism.     

The practical problem

There are two main structural problems in the British economy, both of which are simply stated.

First, the economy operates on the basis of continuous credit expansion.

Even before the onset of the pandemic in 2020, Britain had spent twenty years adding £4 of new debt for each £1 of reported “growth” in GDP. The mathematics get even worse if we add broader financial liabilities, and unfunded pension commitments, to the equation. Where Britain is concerned, these broader liabilities are enormous.

Even this 4:1 ratio understates the grim reality, because the injection of liquidity creates transactional activity – measured as GDP – rather than adding value. SEEDS calculations indicate that, within recorded “growth” of £715bn (at constant 2021 values) between 1999 and 2019, only 30% (£215bn) was organic expansion, with the remaining 70% (£500bn) the cosmetic effect of borrowing at an annual average of 7.2% of GDP through this period.

This process is underpinned by the over-inflation of the values of assets, and principally of property. High and rising property values provide both the collateral and the confidence for perpetual credit expansion.

This is why successive governments have sought to promote, rather than try to tame, house price escalation.

Every initiative branded as “help” for young buyers has, in reality, been a device for propping up or further inflating the real estate market. At the first sign of a wobble in house prices, transaction taxes (stamp duties) are suspended. A property price crash is one of the nightmares that haunts the slumbers of British decision-makers.

It might even be contended, not without justification, that what passes for an “economy” has become, in reality, just an adjunct to an over-inflated property sector.

The second structural weakness is the permanent and worsening current account deficit. The United Kingdom consumes more than it produces. The system incentivizes people to make money – preferably through asset price escalation – rather than to produce goods and services.

A concept which has been described here before is the distinction between globally-marketable output (GMO) and internally-consumed services (ICS). In Britain, GMO has become dangerously small, such that excessive reliance is placed on ICS.

Hitherto, the structural current account gap has been bridged by the sale of assets to overseas investors, a process which has seen major companies, utilities and even football teams sold into foreign ownership.

This trend has become particularly acute since Britain ceased to be a net exporter of oil and gas.

Current account deficits, once embodied in the system and funded by asset sales, have become an autonomously worsening problem, because each asset sold to an overseas buyer sets up a new outflow of returns on capital to the new owners.

Self-created risk

The dangers implicit in this structure are clear.

First, a heavily indebted and credit-dependent economy is extremely vulnerable to rises in interest rates. This vulnerability has become acute now that the global rate cycle has turned upwards.  

As well as increasing the cost of servicing debts, rate rises threaten to crash asset markets, thereby taking away the collateral and confidence props required for the continuous credit expansion upon which the British economy relies.  

Second, overseas investors might start to wonder about Britain’s ability to cope with a steadily worsening structural current account shortfall, reasoning that there are limits to how long any economy can survive by “selling off the family silver” or relying on “the kindness of strangers”.

Additionally, of course, FX markets might fear a descent into chaos. The UK authorities’ approach to inflation looks – to put it charitably – like a product of blind panic.

Problems cannot be fixed by appointing a “tsar” and starting an ad-and-slogan campaign. There’s not much point in urging companies to hold down or even cut their prices when those companies’ own costs are soaring. Workers are unlikely to pay much heed when highly-remunerated officials urge the virtues of wage restraint.

It’s rumoured that, at the same time as increasing state pensions by 10%, the government plans to limit public sector pay increases to as little as 3% or even 2%. If this does indeed turn out to be the plan, chaos can be expected to ensue.

Britain could, of course, adopt what might be called a ‘5-5’ programme, setting 5% as a pay and pensions norm for the current year, with the rider that a further 5% increment will follow in the next year.

Funding this, though, would require major fiscal reforms which, whilst benefiting the young, would anger the (generally older) beneficiaries of the current system.

The clear and present danger now is that markets might decide that the dubious attractions of Sterling are far outweighed by the risks. A “Sterling crisis” would force the Bank of England into raising rates, crashing the property market to which the economy is, increasingly, an adjunct.

A crash in the value of GBP would trigger runaway inflation by increasing the cost of essential imports, including energy and food. Debts denominated in overseas currencies would soar, to a point where Britain could no longer afford to service these debts, let alone repay them.  

The ideology trap

Some, indeed many, of these problems and vulnerabilities are replicated elsewhere.

But what sets Britain apart is its long-standing adherence to an increasingly extreme ‘liberal’ ideology.

We’ve seen this over decades, with a succession of initiatives designed to translate taxpayer funds into private profits.  

Even those of us who favour the market over the state-run economy surely realize that there’s a balance to be struck between private incentive and the role of the public sector, and that any form of economic extremism tends to be both harmful and divisive.   

Taken to extremes, this version of ‘liberalism’ becomes the same system that sent small children up Victorian chimneys. That probably wouldn’t pay in the 2020s, but its modern equivalents – the “gig” economy, “zero-hours contracts” and the relentless undermining of security of employment – have all been warmly welcomed in Westminster and Whitehall.

Extreme liberalism has made the British economy, and British society itself, increasingly dysfunctional. The system is biased in favour of those generally older people who already own assets, and loaded against the generally younger people who aspire to accumulate them. It favours speculation over the creation of value.   

Perhaps the biggest problem of all is the extent to which the public has swallowed the propaganda of liberal extremism, an extremism which states that anything motivated by private profit must be superior to anything managed on the basis of the general good.

The problems of the 1970s are painted, not, as they in fact were, as the consequences of two global oil crises, but as the failures of Left-leaning governments and the malign behaviour of organized labour.

This is the same kind of myopia which remembers the Defeat of the Spanish Armada in 1588, but forgets the Defeat of the English Armada in the following year.

This becomes more pertinent when it is recalled that the debacle of 1589 resulted from efforts to turn a military expedition into a profitable enterprise. Floating a naval campaign as a quoted joint-stock company must have seemed as bizarre at the time as it does now.

If you’re interested in military history, you’ll know that the best of Britain’s trio of wartime heavy bombers were the Avro Lancaster and the Handley Page Halifax.

The danger now is that the name of the third one – the Short Stirling – might sound like an increasingly good idea to international investors.