Wednesday, 19 January 2011

Misery Index Set To Surge

A few weeks ago David Cameron said he wanted to create a “Happiness Index” to show how much people's lives had improved or worsened, rather than simply relying on GDP.
Living up to its reputation as the “miserable science”, Economists have their own equivalent called the Misery Index, which adds together the Unemployment Rate and Inflation Rate as the two most significant economic statistics which affect the lives of most people. The data on these two fronts in the last couple of days indicates that Misery is about to surge.

Dr John Philpott, Chief Economic Adviser at the Chartered Institute of Personnel and Development (CIPD) said,

"The latest jobs market figures are disappointing albeit that the underlying trend in employment and unemployment toward the end of 2010 suggests a modest rather than drastic deterioration in market conditions. Nonetheless, it is clear that the combination of a jobs market in the doldrums, slow pay growth and sharply rising price inflation was already driving up the UK's 'misery index' well before the impact of this year's cut in public spending and the hike in VAT and other taxes start to be felt.”

See: Misery Index Rising

Yesterday, data on Inflation was released. It showed that CPI had risen to 3.7%, which is nearly double the target rate that the Bank of England is set by the Government to achieve. In fact, in 30 of the last 36 months, CPI has been above that target rate.
If any ordinary worker failed to meet their targets they would be sacked, but the Capitalist State bureaucrats at the Bank of England, continue to draw their huge salaries despite failing miserably to do their job for the last three years. As usual, the RPI measure of inflation was even worse, coming in at 4.8%. In reality, for the majority of ordinary working people the true figure for inflation is much higher than that, because the majority of ordinary workers spend a larger proportion of their income on those things, which tend to be more susceptible to price rises.
A look in the supermarkets, shows that some of the biggest rises have been in the “Value” ranges, because of course, if you have already been reduced to buying them to save money, there is nowhere else to go, for anything cheaper.

Today, the other component of the Misery Index came in and showed even more reason for concern. It showed that over the last three months unemployment had risen by 49,000. Worse than that, contrary to the assertions of the Tories, and their pet Office for Budget Responsibility, that the private sector would create hundreds of thousands of new jobs to replace those lost in the Public Sector, not only had Unemployment risen, but Employment has fallen, by 69,000 according to the ONS.
In fact, a look at the shape of the graph for the Employment Rate is quite worrying, because having fallen sharply from the end of 2008, as the recession caused by the Financial Meltdown set in, it had begun to rise again from the end of 2009, and into the middle of 2010, as Labour's Financial stimulus measures began to feed through, but the slope of the decline that has now set in is even sharper than that during the period after 2008! If anything, the Employment Rate is more significant in economic terms than the Unemployment Rate. Over time the size of the labour force tends to rise as population growth feeds through into more workers. If the number of people in Employment remains constant, the Unemployment Rate would then naturally rise. But, a rising population, usually means more potential demand for goods and services within the economy, and people are employed to produce them. It is usually the case then that in even a moderately growing economy, the number of people in Employment rises, even if Unemployment also rises. In an economy growing above its trend rate, or recovering from a recession, it would normally be expected that not only would the number of people in Employment rise, but the Employment Rate would also rise, prior to the Unemployment Rate falling.

But, as the CIPD and others have pointed out, this is now, this reduction in Employment is only a reflection of the fact that after May, the Liberal-Tories talked down the economy, scaring people into economic inactivity with their scare stories about the deficit, and painting a picture of a Britain on the brink of bankruptcy like Greece. Very little, of the real damage to the economy that the Liberal-Tories economic mismanagement will once again inflict, as it did in the 1980's and 90's, has begun!
Only after April of this year, will the cuts to Local Government really begin, those cuts will continue throughout the next three years, and things will get even worse in 2013, and after, when the bulk of the Liberal-Tories' cuts to Benefits and Welfare (which is to take the lion's share of the Cuts) start to take effect. Its no wonder that a number of economic think tanks are once again discussing the likelihood of a double-dip.

Despite the ridiculous attempts to talk up the housing market by the Daily Express, its almost certain that this increase in misery through higher unemployment, lower employment, and higher inflation, squeezing people's living standards, and making them retrench for fear of what the future holds will feed through into the housing market.
The Bloomberg chart showing the likely course of house prices in the next few months based on the Nationwide Consumer Confidence and House Price Index shows that a sharp fall in house prices, just as happened in similar conditions in 1990 under the last Tory Government, and as has happened in Ireland over the last year, is almost inevitable, and that in itself will add to the feeling of despair of many people in the country, which will itself feed through into lower consumer confidence, and depressed economic activity. Yet, the misery does not end there for homeowners, and those with large mortgages. The markets are now pricing in early rises in interest rates too. In 1990, it was a rise in interest rates which sparked the initial fall in house prices that quickly snowballed into a 40% collapse.

The official argument for keeping interest rates at 0.5%, despite the fact that inflation is double the target rate, and has been way above it for most of the last three years, is that the economy is still weak, and a rise in interest rates would choke off the recovery. In fact, last year, as with the US, which introduced a similar fiscal stimulus as that brought in by Labour, growth had begun to rise sharply. In fact, it was above trend growth and rising. The biggest threat to that recovery strengthening has not been the possibility of higher interest rates, but has been the potential for not only the removal of that fiscal stimulus, but the serious talking down of the economy by the Liberal-Tories, and their declared intention of introducing a severe fiscal contraction!
Had the latter not been the case, then probably growth would have continued to strengthen in the last half of last year and into this year, and a stronger economy would have been easily capable of absorbing a gradual rise in interest rates, particularly if it was accompanied by continued Quantitative Easing, to ensure that sufficient liquidity was available for those who wanted to borrow to invest.

But, the argument about why interest rates are kept low is bunk. In reality, businesses and individuals cannot borrow at the official 0.5% interest rate set by the Bank of England.
Large businesses borrowing in the Bond Markets have to pay between 3-4%, small businesses where they are able to borrow from their Bank, are paying more like 5-6%, and so are people looking to take out mortgages. These interest rates are determined not by the rate set by the Bank of England, but by the interest rates set in the international Bond markets, where these Banks actually borrow long term funds. And rising inflation is already pushing those rates higher. If the Bank of England raised its rate from 0.5% to 1% tomorrow, it might even have the effect of reducing those long term rates, because it would be a signal to the international Bond markets that an attempt to bring inflation under control was underway.
And as a long term Bond investor it is inflation, which is your main concern. If your money is tied up for ten years, it is no use earning 4% on your money during that time, if inflation averages 5%, because it would mean you have lost money. The real reason that the Bank of England has kept its interest rate low is for the reason let out a couple of months ago by Charlie Bean – See: Why Charlie Bean Could Be Disappointed - which is that the Bank wants to discourage saving, and thereby promote people with savings to spend it in order to keep demand afloat.
The immediate beneficiaries of the 0.5% Bank of England rate are the Banks themselves, who can borrow money for short durations at this rate. It puts liquidity into the Banks, and enables them to make bigger profits in order to bring about the recapitalisation, and rebuilding of their Balance Sheets, that became necessary after the Credit Crunch, and which continues to be needed as the continuing crisis of the Irish and European Banks demonstrates.
At the same time, it acts to rob ordinary working people of their money, because it means that in reality with inflation at around 5%, the interest they are getting on their money, means they are paying the Banks and Building Societies to hold it and use use it!!!

There is also some unwelcome news, for the Liberal-Tories, hidden in the data released by the ONS. That is in relation to wages. The data shows that in the last year, wages in the private sector rose by just 1.9%, whilst wages in the Public Sector didn't fair much better rising at just 2.4%. In both cases this amounts to a cut in wages of around 2%. But, the concern for the Government must begin with the trend. The average for wage rises for the whole of 2010 was, just 2.1%, but for the three months to the end of November the figure was 2.3%.
That increase may not appear much, but in reality the 0.2% increase in the rate represents a 10% increase in the rate of change. Given that this was also at the end of the year, when economic activity itself had slowed, this must be even more worrying for the Government. It suggests that workers in the Private Sector, having faced wage cuts and freezes for the last couple of years, have begun to seek compensating increases. That seems to be born out by an increasing number of wage disputes, such as those described by the BBC, and the recent decision by UNITE to ballot Oil Tanker drivers on action over pay and bargaining arrangements. Inflation has been persistently high now for some time, and there is every sign that it will continue that way. With Bankers paying themselves millions of pounds in bonuses, with the CEO's of companies paying themselves 55% pay rises in the last year, and with the Royals preparing to spend millions of pounds of our money just for a couple of weddings there is no reason that workers should believe the guff from Cameron and Co. about us all being in this together.

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