MMT founder, Warren Mosler, summarises the current predicament in his usual pithy and succinct style in one of my favourite MMT quotes1:
Little or no consideration has been given to the possibility that higher prices may simply be the market allocating resources and not inflation.
MMT teaches us that we need to think in real terms, not monetary terms. Fundamentally, there isn’t a one-to-one relationship between money and stuff. The ‘veil over barter’ view of money is just wrong - plain and simple.
The problem the UK is suffering from at the moment is that there isn’t enough gas and there isn’t any available UK export capacity to exchange for more gas to meet the anticipated winter demand. Even if there were, there’s no guarantee that there would be any gas available to buy or that winter shipments wouldn’t simply be halted by gas export nations to protect their local populations.
Therefore if we don’t suppress demand, there’s a very good chance there simply won’t be the gas to supply into the UK market at any price. At which point we will be rationing by quantity whether we like it or not.
As MMT explains, it is never a matter of money. There is always the money because Parliament can just authorise the expenditure and it happens. The vital question is whether there is anything available for sale in exchange for the denomination. That’s where the proposals made so far, by both politicians and private entities, fall down.
None of the ‘funding’ mechanisms proposed thus far suppresses gas usage anywhere else in the economy so it can be transferred to the poor. Nor do they free up export exchange capacity so we can swap it for more gas. Instead, they pretend that money is scarce and that if we suppress supposedly scarce money somewhere that will ‘pay for it’.
Taxing rich people won’t work because money isn’t scarce, gas is. Rich people don’t have a secret supply of gas they are hoarding for winter.
Borrowing from banks via a ’tariff deficit fund’ won’t work because money isn’t scarce, gas is. Banks don’t have a secret supply of gas in their vaults. There is no difference between a ’tariff deficit fund’ and the government just subsidising the retailers directly - other than the banks earning a cut for creating the money.
Confiscating profits from gas production firms2 won’t work because money isn’t scarce, gas is. Gas production firms don’t have a secret supply of gas either. If they did they’d be selling it at these sky-high prices.
General business tax cuts won’t work because money isn’t scarce, gas is. Prices are kept down by competition between firms. If prices are rising, then there isn’t enough spare supply capacity for competition to work. Therefore tax cuts will likely flow to owners in higher profits, not customers in lower prices. Whatever does flow to customers will very likely just drive up the wholesale cost of gas further.
Government buying gas at Spot and selling at a lower fixed price won’t work because it will very likely cause the value of Sterling to collapse. Unless they also try to strengthen Sterling at the same time by tariffing or banning other imports to create export exchange space.
Putting up interest rates to try and export more Sterling savings would fast-track the UK to Turkey or Zimbabwe status. In an economy suffering from a supply shortage putting up the price of investment is frankly insane. There’s no more stupid policy than a Faustian pact with the carry trade.
An MMT analysis shows that we need gas demand suppression, or we need to transfer that gas demand suppression overseas by strengthening Sterling and pray markets continue to sell and supply to the highest bidder when the crunch comes.
But most of all we need to get new energy supplies online ASAP. Increasing the cost of investment funding by increasing interest rates won’t work. In fact it may cause an interest/price spiral.
“But what if we could transfer money around and the gas wouldn’t run out?” I hear you cry.
If we could do the money transfers without affecting anything, then there wouldn’t be a crisis requiring money transfers in the first place.
Gas prices have gone up because there is a shortage and the market is trying to suppress demand to rebalance it with supply. (It encourages additional supply as well, but that’s down the line).
The only direct temporary measure that will work is to stop one person in the economy from using as much gas so that somebody else in the economy can use more.
That’s what price does by default. The vast swathes of poor who can’t afford to pay high prices would end up using less power. When we initiate a transfer payment we are really trying to transfer the ‘using less power’ bit, not money.
If we transfer that to the rich, what will they stop buying that causes the same amount of power reduction, or sufficient strengthening of Sterling to allow us to increase supply?
If we transfer that to the middle class what will they stop buying that causes the same amount of power reduction, or sufficient strengthening of Sterling to allow us to increase supply?
Anything else will keep supply and demand out of balance - and will either force up prices or cause the supply quantity to fail to meet demand, probably via a collapse in the exchange rate of Sterling.
It’s a real Gordian Knot.
What options are there? Not many, frankly, but in order of preference we could:
Increase the cost of ’luxury’ foreign imports to suppress UK demand for them or ban/delay their import for the time being. Aiming at Chinese imports is probably best since that should have less blowback on UK exports, and we can leverage the Chinese peg to the US dollar. The result should be a strengthening of the pound which reduces wholesale gas costs in Sterling terms.
Limit the domestic price cap to a quantity of kWh per meter per billing period. If Rishi wants to keep his new swimming pool warm he needs to be doing it at commercial rates, not domestic ones. There is every chance here that richer people will just pay the price, which may impact the Sterling exchange rate unless it also reduces demands for other imports at the same time. That Labour hasn’t proposed a progressive price cap is just further evidence that it has been captured by metropolitan middle-class types with a Robin Hood LARP fetish.
Quantity rationing. If we stop price allocating the limited quantity of gas, then we need to replace that with another way of allocating the limited quantity of gas. Given that electricity is generated with gas at the margins, then rolling blackouts are the likely result, particularly if we have a cold winter. Of course the last Three Day week in 1974 resulted in the fall of the Conservatives and the rise of a lame duck Labour administration that ended up calling in the IMF, ruling over a Winter of Discontent and ultimately allowing the rise to power of a certain Margaret Hilda Thatcher…
Strap in. It’s going to be a wild ride.
Gas production firms are owned by pension schemes and therefore the confiscation is from the pension funds of people currently in work who will then end up with smaller private pensions in the future. A favourite trick of Gordon Brown acolytes. ↩︎