Grasped Brexit Straws Sink

In the aftermath of the EU Referendum, Brexiters, seeing the Pound tank, grasped at a series of straws to argue that the predicted economic calamity that would result from Brexit hadn't happened. It was, of course, nonsense. No serious person was suggesting that the economy would collapse immediately after simply a Brexit vote. Moreover, even the predictions about economic woes that were made were based on the idea that Article 50 would be triggered soon after the vote, not that it would take nine months, even for the process to be started. Like many of those who voted Labour in the General Election, in the belief that Labour would prevent a hard Brexit, and might even prevent a Brexit at all, large sections of the business community, having seen the delay, has seemed to work on the basis that a hard Brexit would be avoided, and that even a soft Brexit based on some kind of continued membership of the single market and customs union would be negotiated. So, it's no wonder that, so far, none of the major economic ill effects of Brexit have been felt. Even the fall in the Pound flattered the overseas profit figures of large British companies, which boosted their share prices.

At every opportunity, the Brexiters chirped up that UK economic growth was strong, and so on. The truth was that even that was a mirage. UK economic growth has been based, to an extremely unhealthy degree, on consumer spending, and, even more unhealthily, that consumer spending has been based not on rising incomes, but on rising levels of private household debt. That economic model was set in place by Thatcher in the 1980's, as she built a low-wage, low-skill economy designed around the needs of inefficient small businesses, and around the interests of the landed and financial oligarchy whose wealth resides in continually inflating property and financial asset prices. It was that economic model that led ultimately to the financial crash of 2008, just as that same model developed by Thatcher's co-thinker, Reagan, led to the same consequences there.

But, now, even those straws grasped by the Brexiters, to try to deny that Brexit will cause economic chaos, are being dragged beneath the water, as the arguments of the Brexiters begin to drown. One of the consequences of the low-wage/low-skill economic model developed by Thatcher was that it created the dynamic by which productivity growth is undermined. In a slave economy, productivity levels are always very low. For one thing, the slaves have no reason to work harder or more effectively; they tend to misuse the tools and equipment they are given, and that means that less efficient, but more resilient equipment has to be used. The same thing was seen in the USSR. But, also with available low wage labour, employers have no reason to invest in new technologies. David Ricardo pointed out that wages have to reach a given level before it becomes worthwhile firms introducing labour-saving technology. Marx describes how, at one point, labour-power was so cheap that employers used women workers, rather than horses to pull canal barges.

And, we see the consequences in the arguments of the Tories. They continually talk about the high levels of employment. But, in a slave economy there is always full employment; it doesn't benefit the slaves, but the slave owners. That is the case today, we have high levels of employment, but it is very low paid employment, very insecure employment, and those that benefit from it are not the workers, but the employers who thereby make the profits from the labour performed by all those workers. Yet, although that benefits the small scale employers, and may benefit all employers in the short-term, in the longer term it is clearly destructive. The reliance on this low paid, low skill labour has meant that British industry has become less and less productive, and when it comes to global capital, that means increasingly uncompetitive, and increasingly unprofitable.

Historically, productivity in the UK has risen by around 2% p.a. From 2010, that has slumped to around 0.2% p.a., but now, productivity has even started to fall. It fell by 0.5% in the first quarter of 2017, and by a further 0.1% in the second quarter. Britain is now considerably less productive than other economies in the rest of Europe, and its position is deteriorating. It means that UK workers must work longer and harder to produce the same amount of value as their EU counterparts. The reflection of that is also to be found in the falling value of the Pound, which is just another way of saying that an hour of UK labour produces less value than an hour of EU labour. It means UK workers' living standards are set to decline further, and it is why in order to maintain consumption, they have again been led into increasing their level of household debt.

And, the inevitable consequence of this systemic weakness of UK productivity is that UK economic growth has also now started to slow down, more or less to a standstill. UK workers were already massively overburdened with household debt. It has already risen to the kinds of levels it reached before it exploded into the financial crisis of 2007/8. And, today, an increased proportion of it is held in the form of credit card debt, and debt to pay day lenders, let alone the amount of debt that is hidden from view because it is in the hands of the back street loan sharks, as increasing numbers of the population have found they cannot get loans from other sources, or need to resort to these high interest lenders, just to be able to pay off their interest payments to other lenders. Huge amounts of income for an increasing proportion of the population now goes not to finance their consumption, but simply to be able to pay off these huge amounts of interest. Its no wonder, therefore, that with wages falling further and further behind inflation, not only has the level of debt risen even further, but the level of consumption has also begun to fall back. That means the main leg upon which the growth in the UK economy was shakily based, has been kicked away.

UK growth has slowed to just 0.3% in the last two quarters. Its unlikely that the UK will grow by more than 1.5% for the whole of 2017, and the trajectory is steadily downwards. This is at a time when global growth is on a strongly upwards trajectory. The UK now has the slowest growth in the EU, and in the G20. And the IMF and World Bank are both forecasting increased global growth for this year, and for next year. One reason that global primary product prices has started to rise again, is that Asian economies are again growing strongly. The UK economy is moving, under pressure of Brexit, in the opposite direction to the rest of the global economy.

That too has devastating consequences for the UK economy. Firstly, increasing global growth, and rising primary product prices means that Britain, which has to import many of those products will find itself having to pay those higher prices for its imports, pushing up domestic inflation, at a time when slowing productivity is pushing up domestic prices. That is on top of the inflationary consequence of the falling Pound, due to Brexit. Either UK workers living standards will fall further, or else UK profits will have to fall, which will mean less capital accumulation, less available for dividends, rents, interest and taxes.

One consequence of that has, indeed, already been felt. On the back of previous economic growth, the Tories claimed the Chancellor would have room to be able to increase government spending. But, the rapid slowdown in the economy, with the consequent reduction in the government's revenues, means that the government finances are now again tight, with two-thirds of his £26 billion war chest wiped out.

And, higher economic growth in the rest of the world is leading to higher global interest rates. The US Federal Reserve is already reducing the size of its balance sheet, and is raising its official interest rates. Those official interest rates have little effect on the market rate of interest paid by businesses to borrow, but they do affect the prices of bonds, with a consequent effect on other financial assets, adjusting the calculation between the benefits of investing in real capital, as opposed to speculating in financial assets. With central bank support withdrawn, the advantages of investing in real capital accumulation, rather than speculation in financial assets increases, which creates conditions for economic growth to rise further. The ECB is set to cut back its QE by 50% in January, and that is likely to have to be speeded up, as global growth and inflation rises, and market rates of interest rise with it.

The UK facing rising prices, a falling Pound, reduced government revenues, at a time it needs to increase spending will also see interest rates rise. The Bank of England seems set to raise rates as early as next month. That comes at a time when the Bank of England has become increasingly concerned itself at the level of household debt, and has told commercial banks to tighten down on their lending to households. Yet, its clear that most households are not at all prepared for even such minor rises in interest rates. But, we know also that it is at such times, when people find that they cannot cover their repayments that they go in desperation to the higher cost lenders. When people and businesses only want money to use as capital or to finance some increase in their consumption, they can easily respond to higher interest rates by cutting back their plans, but when people and businesses need to borrow money purely as money, as currency, to pay their bills and stay afloat, they are led to pay almost any price to do so, and that leads to interest rates spiking higher, and then to credit being cut off, as lenders increasingly fear not getting paid back.

These are the conditions that Britain is facing in the coming months, even before Brexit actually happens.