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Economics

Imagine that the Crisis was a Shortage of Bread

One day in October 2008, the UK’s banks all collapsed.

Perhaps it would be more accurate to date stamp the collapse one year earlier when Northern Rock failed and was rescued.  UK Banking, in a commercial sense, ended on that date.  We now have a state sponsored banking system.  Some would disagree because banks such as Barclays have not actually grabbed the lifeboat, but I beg to differ.  If the Government removed support from the banks it has underwritten then Barclays too would fail, so the entire UK system is effectively nationalised.

Most politicians and media commentators appear to have accepted the state bailout as a reasonable response to the banking collapse.  We are asked to believe that the lifeblood of the economy, bank lending, is flowing again.  However, data supporting this contention is hard to find.  That which does exist is artificially enhanced by the Government’s injection of artificial, printed money.

The media soothe us with frequent assertions that the bailout and its sister policy, QE,  are working, but they are clutching at straws.  The banking bailout combined with the printing of money taken together is the single worst economic decision ever made by any UK Government.  Let me prove this  by way of simple analogy.

Just for one moment let us imagine that October 2007 did not portend the banking crisis that would shortly unfold, but a different and even worse catastrophe.  Let us pretend that we woke up that autumnal morning to discover that there would be no more food.

We all listened in silence as our tearful Prime Minister announced that Al Qaeda had won.  All of the world’s soil had just been contaminated with a terrible and genocidal bug.  There was no antidote to, nor means of arresting the spread of, this terrible bug.  There was no hope of killing it.

We could no longer eat anything grown in the ground. Nor could we ever consume farm animals, because they of course graze on land.  An emergency measure dictated that we put our pets to death to conserve precious food supplies.  We could eat them now, but this would only delay the inevitable starvation for a few days.

We were all certain to die if we ate any food harvested from October 2007.  All our international trading partners had been similarly infected.  No other country would send us any food, they all had the same problem.  A raft of worldwide emergency measures would ensure that no food would be imported to the UK.

Happily there was one exception, one strain of produce that was immune to the bug -  wheat.  There was one food we could still eat, bread.

Ironically the bread baking industry was going through its own mini crisis as this news broke.  The bakers were all on the verge of bankruptcy because, a month earlier, the UK’s dominant retailing business, Tescopoly, had decided to sell bread at 1p per loaf in order to rid the nation’s high streets of the few remaining shops that were preventing its continued expansion.

The Government had not worried about the strangulation of the high street baker when Tescopoly had launched that attack, but the new food crisis brought an immediate change of policy.   Every baker in the UK was to be bailed out by the taxpayer.  The practical measures were in three parts.  The Government would immediately and indefinitely:

  1. Service the rents and business debts of every bakery in the UK;
  2. Pay senior bakery staff their base salaries plus substantial bonuses in return merely for agreeing to keep their bakeries open and turning up for work;
  3. Fix the price of all bread to be produced.  Prior to the Tescopoly assault bakers were selling standard loaves at an average price of £2.  Even at that price they only made a 10% profit, or 20p per loaf.  The deadly bug was hardly likely to lower the costs of wheat, and yet the Government decided to fix the price of a standard loaf at 40p, a reduction of 80%.  [Sharp readers will note that by October 2008 UK interest rates had been fixed at 1%, an 80% reduction from the pre-crash level of 5%].

The Government anticipated difficulties in selling this policy to the public.  It easily persuaded the bakers (in return for the free money they would enjoy) to issue statements to the effect that they would make “every effort” to bake as much bread and feed the starving population.  However these palliative words were accompanied by the stark warning that, of course, the Government could not actually run the bakeries nor guarantee levels of bread production.

How much bread do you think the bakers produced after this bailout?

As soon as the disappointing news about continued bread shortages broke, the Government announced that it was surprised that the rate of increase of bread production was disappointing.  Swathes of the population were starving to death.  The Government spin machine turned on the bakers who were castigated as socially irresponsible.  The press reported a new era of zombie bakers, and the nation’s patience was further tested when it was reported that many bakers were stockpiling wheat, not even turning their ovens on in the mornings, yet ordering lots of new Ferraris.

Desperate to defend itself the Government dreamed up another wheeze designed to confuse the public and mask the problem: falsifying the wheat accounts.  Because the original emergency measures had provided that the Government was now the sole auditor of the wheat supply, the Chancellor of the Wheat Exchequer decided simply to pretend that we had twice as much of it.

Eminent economists and nutritional experts were wheeled out to explain that “cooking the books” made sense.  The public were brazenly told that the exercise was simple false accounting, but they did not object, so desperate were they for any hope of increased bread production.

To maintain the pretence, the virtual wheat was treated as if it were real.  It was manufactured on a computer overnight by the Chancellor and was kept in a virtual cold store.  The policy was given a fancy name – “Quantitative Freezing”.

Incredibly this policy boosted morale for a year or so and was presented as working.  The Government basked in the glory of saving the nation from starvation.  However the burial grounds were filling rapidly and the emperor’s true nakedness was exposed when the crematoria sought permission from the Department for Climate Change to burn bodies 24/7.

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