He thinks he'll be back after the next election. |
The UK
economy seems to be growing strongly. The GDP figure, for the second
quarter, was even revised higher, from an initial reading of 0.8% to
0.9%, 3.2% as a year on year figure. Unemployment has been falling,
and the number of people employed increasing. Inflation has been
below the 2% limit, and interest rates are at 300 year lows. The
Tories are able to crow about these facts, claiming that they are the
result of their illiterate policy of austerity, and are counting on
it to provide them with an election victory. They are going to be
very disappointed, as the UK economy is about to turn down sharply.
The apparent
rude health of the UK economy is a mirage. Let's look at the
background, and the components. First of all, as set out on this
blog many times, going back more than 200 years, the global economy
goes through an approximately 50 year long wave cycle. It boomed for
25 years after 1949, then it slowed for 25 years after 1974. It has
been in a long wave economic boom since 1999. The main beneficiaries
of that boom have been the new dynamic economies like China, and now
the developing sub-saharan, Africa economies, as well as those
economies that have done well from providing vast quantities of raw
materials to China. But, that boom has also benefited the existing
developed economies, like the US and UK, and more specifically
Germany. Germany has provided China and other developing economies
with advanced machine tools, as well as high quality goods such as
luxury cars.
That the US
and UK have not fared so well during this period is because they are
relatively declining economic powers, in the new global environment. Unlike Germany, in the 1980's and 90's, these two economies,
settled for trying to protect the interests of the inefficient, small
business sector of their economy. What they should have done is
restructure, to take advantage of the changing conditions, for
example, by investing in the education and training of their people,
and the development of new high technology industries, where they
could have a comparative advantage against economies like China.
That is more or less what Germany did. Even where the UK and US did
encourage people to go into higher education, they did so by
encouraging them to load up with vast amounts of student debt to pay
for it.
In contrast
to Germany, the US and UK introduced measures of deregulation that
exempted small businesses from having to comply with even the most
minimal requirements that should be expected of a business in the
modern world. An example, was the introduction of Enterprise Zones
by the Tories in Britain. Rather than encouraging quality and higher
value, it was an attempt to encourage a race to the bottom based on
being cheap and nasty. The Tories recent proposals for providing
cheap and nasty housing today, by encouraging builders to build on brown field
sites, where no one wants to live, and allowing them to cut corners on
basic regulations, is another example of that.
At the same
time, the state acted to weaken workers ability to defend their
living standards. Large numbers of workers from skilled jobs were
thrown on to the scrap heap, and in the place of these jobs, came a
load of low status, low paid jobs that were frequently either
temporary or insecure. That process has continued, and reached its
peak with the tens of thousands of people that are forced on to zero
hours contracts, that tie them down from taking on other employment,
but with no guarantee of any income.
As incomes
fell, the only means of maintaining living standards was to take on
huge amounts of additional debt. Thatcher and the Tories encouraged
that by also deregulating financial markets. Both the US and UK have
built up astronomical levels of private debt on mortgages, credit
cards, student debt, and much worse, in the following period. It is
about four times the amount of government debt the Tories keep
whining about. It was this build up of private debt, and the
deregulation of financial markets, carried out by Thatcher and
Reagan, that led, in the end, to the financial crash of 2008. It is
those policies of focussing on low wages, a failure to invest in
developing skills, and high value industries, and the encouragement
of debt that also explains why the apparent health of the UK economy
is a mirage, and about to be revealed.
Within the
context of this long wave boom, there is also a three year cycle,
during which growth rises faster for two years, and slows for about
a year. This is not necessarily a fall into recession, just that
growth slows down. This cycle can be seen going back at least thirty
years. It can easily be seen across, the globe, in slowdowns in 2002, 2005, 2008, and 2011. On this basis, I predicted some time ago, that
a new slowdown would begin in the third quarter of 2014. It has begun. Growth has noticeably slowed in China, across a range of
emerging market economies, and across the EU, including Germany. Not
only have the economies in these countries slowed, but the survey
data indicates that this slow down is set to continue and deepen.
Given that
the UK conducts 52% of its trade with the EU, its fairly clear that
such a slowdown in the EU will impact the UK. The US is growing
strongly at the moment. It had 4.6% annualised GDP growth in the
second quarter of this year, but the US is also likely to suffer from
the three year cycle too. The US is also responsible for another
aspect of the general background that will badly affect the UK.
For years,
the US has been pumping trillions of dollars into the global economy
via QE. It is now reducing that QE, and will stop altogether next
month. As a result the dollar rises in value. That has already had
an effect on many emerging market economies. Their currencies have
fallen sharply against the dollar, pushing up the prices of their
imports, causing inflation to rise. Fairly large economies like
Russia, India, South Africa, Brazil and Turkey have been hit badly.
That means they have had to raise their official interest rates.
Whilst official interest rates, in the US and UK, are near zero, and
crucifying savers, official interest rates in these other economies
are between 9% and 12% and rising. At some point money-capital is
attracted by these higher rates from elsewhere, which means the
economies it has come from themselves suffer falling currencies,
rising inflation, and have to raise their own interest rates. Its a
process I've described as volley-firing.
That is just
official interest rates. Market rates, the rates that borrowers
actually have to pay in the market, are rising across the globe, and
sooner or later that will feed back into the weaker economies in the
EU, like Greece, Spain, Portugal, Italy, that are still mired in
massive amounts of debt. That debt presents a life threatening risk
for European banks, who hold it. Again that is a big problem for the
UK, because of the size of UK banks and their massive exposure to all
of this European debt. It is also a major threat to the UK, because
its economy has continued to depend upon individuals going into
massive amounts of debt, and the blowing up of bubbles for property
and shares etc., and that can only last for so long as interest rates
stay low.
The final
part of this picture is that as the value of the dollar is rising
against the pound, that pushes up the price of UK imports of things
like oil and gas, raw materials and food, which are priced in
dollars. That means that where the UK has benefited from a weak
dollar in the last couple of years, which pushed down inflation, that
is going into reverse. Wages are already lagging way behind price
increases. The problems faced by Tesco, and Sainsbury's and other
big supermarkets are an indication that underlying costs are rising,
whilst sellers are trying to hold down their prices, causing profits
to be squeezed. At the same time, the pound is rising in value
against the Euro, which means that it becomes harder for UK firms to
export to the EU.
So, looking
at the elements of the UK economy in the context of this background
shows just why the economy is really weak, despite the appearance,
and why that means it is not in a good state to deal with the three
year cycle.
If we look
at the actual GDP figure, its apparently strong performance can be
seen to stand on weak foundations. For one thing, although the UK
economy rebounded strongly in 2009, as a result of the stimulus
provided by the Labour Government, when the Liberal-Tories took
office that sent that recovery into reverse. Their threats of
austerity were enough to scare consumers and businesses into cutting
back their spending. When, later in 2010, they began actually
cutting spending themselves, that sent the economy back into
recession. The UK economy performed worse than the US, and most EU
economies as a result. A large part of the growth over the last
year, is simply a matter of catching up for the poor performance the
Tories imposed on it, as a result of austerity after 2010, and of
being in the up phase of the three year cycle!
There are
also other shaky factors that explain the growth. For one thing,
faced with a housing market looking like it was about to crash again,
despite record low interest rates, they threw even more money and
bribes at it, to keep it afloat. For a few months, that worked to
pull a few more bigger fools into a massively over priced housing
market, and stimulating a slight increase in construction. But, even
that has run out of steam. In most of the country house prices
continue to fall, and now, even in London, asking prices for houses
are falling. The UK property market is totally zombified. Its only
a matter of when it collapses.
Another
aspect of the shakiness of the GDP figure is shown by the role that
Payment Protection Insurance compensation payments have played.
Around £12.5 billion has been paid out in PPI compensation, and
these payments have boosted GDP by as much as 0.7%! But, the
majority of those payments have now been made, so that is money that
will no longer be funding consumer spending, in coming months. When
your economy grows because of one off things like compensation
payments, you know its on shaky ground. Its just like the ambulance
chasing, compensation culture the Tories have encouraged in general.
Perhaps the Tories could encourage a few more claims for whiplash as
their next means of boosting GDP.
Similarly,
with wages continuing to lag way behind price rises, a large part of
additional consumer spending has once more been financed by increased
borrowing, at a time when the astronomical levels of debt, previously
built up have not been reduced. Although the government brags about
the level of official interest rates, that of course, only affects
the rate people can get on their savings or annuities, and that the
Tories friends in the banks have to pay. It has no resemblance to
the interest rates that ordinary people pay to borrow money. To be
able to take advantage of the Government's “Help To Buy”
scam, for example, you have to be prepared to pay 6% p.a. mortgage
rates. Credit card interest ranges from around 12% to 30%, with
store cards even worse. Millions of families only survive by relying
on such debt. Millions more are in an even worse state, dependent on
pay day lenders charging up to 4000% p.a. Even the better off
sections of the middle class are being squeezed, and are borrowing
through providers of “posh pawn” shops.
All of this
is borrowing consumption from the future. The more people go into
debt now, the more they have to pay back with interest later, which
means the less they have to actually spend. With global interest
rates rising, the three year cycle about to cause unemployment to
rise, more pressure on wages, and these massive levels of debt, this
is a disaster waiting to happen.
This is made
worse by the reality of the employment situation. An indication of
the problem is given by the fact that the Government now takes into
account things like prostitution and illegal drug trafficking. Its
not that this amounts to a fiddling of the figures. Its that the
increase in these kinds of activities reflects the reality of
employment as increasingly shaky. The reality of Tory employment is
that huge numbers of people, unable to obtain decent full-time work,
have been forced into taking on these kinds of twilight occupations
in order to survive. Large numbers of others are forced into taking
on poorly paid, part-time and temporary work. That is only just
about possible, because the Tories continue to provide subsidies to
the small inefficient, small businesses via the welfare state.
But, rather
like the situation with credit, there is a limit before this
zombified economy explodes into a pile of dust. People can only
continue to pay debt, by taking on more debt, until such time as they
can no longer make repayments. When that happens, on a large scale,
not only will the pay day lenders go bust, but those banks that have
lent to them, in the money market, will take a big hit too, as will
consumer spending. The recent case of Wonga's profit being wiped
out, by having to wipe off the debt of 330,000 of its customers,
amounting to £250 million, is an indication of that.
But, also
the Tories plans to attack welfare benefits risk backfiring in this
respect too. If you have taken on a part-time job, or become a
“self-employed” window-cleaner, because you can then just
about scrape by, with Tax Credits, Housing Benefit etc., the effect
of the cuts to benefits will be likely to push you over the edge. At
that point, large numbers of such self-employed people will flood
back on to the unemployment register. What the Tories have created
is something similar to what existed in Eastern Europe, a false
impression of low unemployment that simply hides huge levels of under
employment.
The
indication of that under employment is the appalling performance of
the UK economy in terms of productivity. Productivity measures the
value of output of the workforce, against the amount of work done.
As a result of the polices adopted in the 1980's, the low level of
skill, and low level of value added by UK industry, means that
productivity levels were in any case low, when they needed to be high
to compete. But, with an increased number of people, working long
hours, to produce goods and services, with low values, and many
people under employed, that productivity has declined further.
On the one
hand, the low productivity and low value of production is the reason
that wages are low, which in turn is why income tax receipts have not
grown, and the Tories have been unable to reduce the deficit, despite
the austerity measures. On the other, as Marx and Adam Smith point
out, low wages encourage those firms that rely on low wages to
continue to exist. That is it encourages those small firms that are
inefficient, and in low value areas. It discourages innovation to
save on labour and raise productivity, and prevents capital moving to
those areas where productivity and profits are higher.
So, we have
a global long wave boom that provides a level of support for growth,
but the UK is one of those old economies that is in relative decline,
so it does not grow like a China, or an Ethiopia. We have a three
year cycle that has already caused growth across the globe to slow,
and is set to continue for another year. On top of that, we have a
UK economy that did not take the measures to restructure and invest
in skills and high value production, which is why, in those areas
that are growing, it faces skills shortages. We have an economy
where consumption has only been maintained as a result of huge levels
of private borrowing that has grown to such a limit that millions are
forced into debt slavery, borrowing from pay day lenders at huge
interest rates. Defaults of payments are on the rise, and likely to
result in an avalanche of bad debts.
On top of
all that, we have an economy where a lack of previous investment
means that productivity levels are low, and so profitability suffers
compared with other countries. We are set for GDP to go sharply into
reverse, in the next few months, for unemployment to rise, inflation
to rise, interest rates to rise, debt defaults to rise, and for the
prices of houses, shares and other such assets to crash.
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