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Stewart Hotston

Hope, Anger and Writing

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The coming crisis

This post contains my own personal opinion (I work in finance and this is neither official advice nor representative of what my employer thinks – caveats done with, let’s talk turkey). There’s been a lot of words spilled in the last few months over inflation and [interest] rates and energy prices.

I’ve become convinced that we’re about to see a change in the shape and nature of British society that we haven’t seen in 50 years. I won’t rehearse the arguments here about how much energy prices are going to rise or what inflation is doing to our paychecks.

I also don’t want to make this a doomsday post. What I want to do here is spell some things out clearly and then offer some help (mostly by signposting you to others who are much better at this than me). If you want to skip my longer discussion about what is going on, just go to the end where I’ll make some recommendations you might already know, but hopefully will provide some tools for managing budgets and thinking about insulating yourself against rising prices.

Inflation hasn’t hit us yet. Nor have rises in interest rates. We’re still only really just seeing the impact on housing of changes wrought first by Margaret Thatcher and then exacerbated by the Financial Crash of 2007-8 (It hit the US earlier than the UK).

Which is why I’m worried. An inflation shock like this – specifically because it’s driven by factors coming from outside the UK cannot be controlled – it can only be prepared for and survived.

There’s been lots of discussion over interest rate rises. So I’m going to do write a short 101 on why interest rates are rising (and will continue to rise, perhaps has high as 4%). Classical economics suggests that inflation is driven by people wanting to buy more things, by growth being such that the sellers can increase prices because people can pay more. In that scenario you raise interest rates to make people poorer. Simple as that. Poorer people buy less. If they buy less sellers can’t keep raising prices and hence inflation stops.

This is fine. It is also literally economics for toddlers.

Actual inflation comes in many varieties and the kind we have here isn’t the one I describe above. It’s what we call exogenous supply side inflation. Those fancy words mean the following: exogenous – coming from outside. Supply side – meaning that prices are rising not because people want to buy more stuff but because the goods themselves literally cost more to make and provide. So, if we put that together we see that this inflation shock is best seen as prices for the things themselves rising because of outside factors which are largely beyond our (and our government’s) control.

For instance, there has been a food crisis globally because of supply chains which, when Russia invaded Ukraine became a catastrophe. Food may be more expensive here but it can still be bought. In places like Egypt, there is literally no grain regardless of how much people are prepared to pay. This is a global problem and the food is being shipped to places who can pay more – like the UK. This means that prices go up because a shortage of supply means EVERYONE EVERYWHERE has to pay more just to get what they used to get. No one is trying to get more here, we’re all trying to get what we had before and discovering there isn’t enough to go around.

Into this scenario we have a central bank with a strange mandate and only one tool to achieve it. They have been mandated to keep inflation at 2% +/- 1%. Their only real tool is interest rates. This may sound ludicrous and it is. However, there are good [limited access link] reasons that this mandate and this tool sit with the (currently) independent Bank of England.

I’m not interested in rehearsing those arguments or those as to how we got here (hint: decades of exporting inflation). We are here, now. We discussed above why people often think raising interest rates cures inflation. As you’ve probably guessed, in this case it can’t work. Indeed, raising interest rates has literally no intersection with exogenous supply side inflation because no one who is involved in the rising prices is impacted by those rising interest rates. Even worse, if interest rates are rising where those goods are made/created then they are only going to make our inflation experience worse as those increased costs will be passed onto us.

Now, you could argue that this will necessarily make us poorer and so make us buy less.

Well. Yes. We’re being hit by rising inflation AND rising rates. So not only are goods becoming more expensive, but our own lives are becoming more expensive and hence we can buy less.

Except.

Except this doesn’t mean we buy less because for most people, in a normal environment, they aren’t running a profligate personal spending lifestyle. We buy what we need, we save and we plan for the future if we can/have the bandwidth.

The situation we’re in now means we find ourselves not able to even afford what we could buy yesterday. It’s not that we can’t afford these extras, it’s that we can’t afford to stand still. This is bad for us all – both individually and also as a society because this kind of stress has no real outlet or safety valve. Not least because the ‘help’ we’re getting from the system is to make our lives even harder.

As the pandemic showed – we’re prepared to put up with a lot as a society if we’re in it together and if we feel there are effective measure in place for us all to make it through. Raising interest rates at this point is literally the opposite of that.

So we’re falling backwards as a base case. Ordinary people hit on all sides.

And still interest rates are going to keep rising because when all you have is a hammer your problems tend to look a lot like nails. I have every confidence that the BoE understands everything I’ve written above. I also have every confidence that the current executive of the British government doesn’t.

This means that not raising interest rates is impossible for the establishment.

A couple of reasons why

  1. Politically, the reasoning is the simple (idiotic) version that we’ve just trashed. But the reasoning holds and so there is immense pressure to rein in inflation. Not least because people are (absolutely rightly) very frightened for societies where inflation runs out of control. There is a high tolerance towards suffering if it holds back the kind of political turmoil we saw in the 1930s.
  2. The bank wants to bring inflation down and believes that by making people poorer it can achieve this end.

Newflash – inflation will fall. Like the sun will come out after a storm. Neither the fall in inflation that will hit next year nor the reappearance of the sun after rain have anything to do with ANY actions taken by people. It may look like raising interest rates works when we look back, but let’s be clear – they will have had negligible impact. As an aside – in 2008 the BoE had a webpage where you could model the impact of changes to the base rate. Here’s a fun fact. It is generally assumed that a change to interest rates takes at least 18months to work its way through the system. Ie, if rates rise today it won’t be until 2024 that you see the real impact. It is the same with inflation The scary headline is today, but trust me, you won’t feel the worst of the impact for another 2 years. Yes. 2 years.

This is why I’m worried and why I’m writing this post now. The worst is very much still to come. It is unlikely that even a competent government who cares about the poor can do anything to help with this crisis. It can, however, make things much worse.

Opinions are divided on how to manage a high inflation environment that leads to recession because it’s been rare and so varied each time. Economists like to think they know the rarefied truth. They do not. (queue gnashing of teeth by amateur economists from across the spectrum with their own takes – they’re all still wrong)

However, one might think that investment in future industries like renewables would make sense. yes it would. But rising interest rates mean that the government can’t afford to be splashy with our cash even if they want to be because they too are paying more to borrow.

You could say that we hold off on raising rates. Except we can’t because central banks across the world are doing exactly the same as the BoE. There’s a complex relationship between exchange rates, currencies and what we call the risk free rates (basically the government cost of borrowing) of each of those currencies . If we leave our interest rate low while others raise theirs then guess what…yep, our currency depreciates relative to others and we get…inflation!!!

So we’re left with mitigation. Both at a societal level but also at a personal level.

So here’s my thoughts on that because this is the most important thing. None of the below is easy and none of it is necessarily going to fix anything but it may well help and I hope it doesn’t come to it but I know I’ve just refreshed by monthly budget and the changes in energy costs really frightened me.

  1. Create a monthly budget. Be really honest and look at what you’re spending your money on and figure out how much buffer you’ve got. This is just general good practice but right now it might be the difference between entering into debt and not. There are lots of good websites that offer FREE budgeting software if the idea of doing it yourself is too hard. Even the government has one.
  2. Where it’s a case of disposable income being mashed then look at turning down your boiler or radiators by a couple of degrees, about being fanatical about lights and turning off monitors and tvs and pcs at night.
  3. Where you can’t afford to live the lifestyle you have now (and I’m sorry if this is a euphemism for not being able to afford heating and lighting and food). Start talking to service suppliers, think about what can be binned (like TV subscriptions and gyms and, and, and.). Where that’s not enough start thinking more drastically about talking to landlords, electricity/gas suppliers about payment plans.
  4. Follow people like Martin Lewis and Jack Munroe on twitter and at their actual sites. Money Saving Expert was once a gimmick. Right now it’s essential reading.
  5. Think about how, for food and other items, you can club together with others to buy in bulk. For many people buying in bulk alone is out of the question, but we can do it as a team.
  6. Savings often go out of the window at times like this but please, save. Save to pay for bills, save for emergencies, because as sure as we don’t they’re going to come along and kick us up the arse anyway.

I am ALWAYS happy to help think through what you can do and I hope the above has been even a little useful. As a I started – there are many who are better at this than me – but right now I’m so nervous about what’s to come I wanted to say something no matter if it only helps one person.

The price of free

I decided last week in discussions with Matt at AR, that we should put the kindle version of my debut novel up for free at Amazon for 72 hours. That 72 hours runs out tonight. This post is about what’s happened and my feelings about it.

The first consideration was this: lots of people, including a not inconsiderable number of friends, have stumped up proper money for either a physical or ebook copy of A Family War. A decent number of those have then gone on to post very kind and honest reviews about the story they experienced.

I have been really concerned that they’ll feel a little bit cheated that the book has gone for free for a short period. I worry that it might put them off buying anything more of mine in the future because they’ll think ‘I can get it free later on anyway’.

I also worry because they’ve bought the fricking thing, have been supportive and have given me great feedback.

However, at the same time, I’m a fledgling author who’s is trying to establish an audience not just for this novel but for its sequel and all the other ideas that are trapped in my skull screaming to get out. I want this book to get to as many people as possible and create that market that an unknown author like me simply doesn’t have through the machinations of a massive marketing department.

So we come to the event itself – the book has been free since Saturday morning. In that time at least 2,000 downloads have occurred – definitely more as I’m still waiting for today’s numbers to come in. I have NO IDEA how people have found it, I have NO IDEA how it’s got to where it is in the charts – #1 in US Sci Fi, #1 in US Sapce Opera, #111 on the whole kindle store while in the UK it’s been #4 or 6 in the same categories.

I truly don’t understand how people found it at that point or how it’s propelled itself up the charts among other authors who’ve written lots of novels and have well oiled marketing programs. I’ll be trying to figure that out in the coming days with Matt as getting this kind of attention was exactly the kind of outcome I was dreaming of (even though not expecting in any way). It’s something to learn from, to understand and then to figure out how to make it work for me when book 2 comes out.

At the same time, I’m waiting to see if any more reviews pop along, if people continue to buy it when it returns to the heady heights of two bucks a copy and if this does actually help build an audience over time.

I’m an author – loving writing. However, I’m also an author who wants to get his work out there, selling for real money preferably, but also who has just enough self belief to think my work is, on a good day, worth reading. So I wrestle with the idea of creating something and then having to think about how to present it in the best way over time (and by time I mean weeks and months) in order that my secondary wish of getting it in the hands of as many people as possible bears fruit.

The free offer has paid dividends in terms of getting my work out there to literally thousands of people. I have been really tempted to make it permanently free, to ride this wave of people downloading the story to see how far it will take me – the heart gibbers madly, saying thousands could become tens of thousands or even more. Yet I’m listening to those around me who have advised ending the promotion as planned and seeing what happens…Part of me thinks it’s about momentum and that it should stay free, but in the end the argument that it’s actually worth something wins out. We’ll see if readers agree.

Free is tough. I love the people who spent their own money to buy a copy, (I don’t see book 2 ever being free). I truly hope they’ll stick with me as I continue to write and hopefully get published. However, I also really hope that as more people find my work, as some of them even like it, that they will, in future, also think it’s worth paying out their money too!

It’s not that I don’t appreciate anyone who takes the time to try my writing out – trust me I’m humbled that among all the choice out there, you’ve taken the time to pick my stuff up. But I’m trying to figure out how to make this all work and how to ensure that Matt as Alternative Realities thinks it’s worth publishing the next one I send to him.

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