Thursday, June 30, 2011

We are poorer than we think....

I will start this post by jumping back in time. In June of 2008 I wrote a post called 'The Cigarette Lighter Problem' and a sharp commentator argued that we (in the UK) were not poorer than we thought. I responded to the comment as follows:

You correctly identify that exchange rates are out of line with PPP. In this case I could change £1 and buy several lighters if I took that money into a Chinese shop.

This has been one of the consistent arguments of this blog. Exchange rates are going to have to shift.

You suggest that is that there is not much difference in the value created by our cheap labour and that of China, so we will not be poorer in the future. However, it is evident from your own argument that our purchasing power is being significantly subsidised by China (and I would add - many others).

The imbalance in the exchange rates means that we have not been paying the full value for the goods that we purchase. We have had our purchasing subsidised by China.

If we take away that subsidy (exchange rate corrects), then our purchasing power will diminish significantly. This, by any reasonable definition, means that we will be poorer. At its most simple, the lighter we bought for 59p will go up in price.
Right from the commencement of the blog, I have made similar arguments, and proposed that the UK will see a fall in the general standard of living as illusory forms of wealth disappear, in particular illusory wealth founded in debt accumulation. Over the last year, the illusion of wealth has finally started to fade in the most visible way - through inflation outstripping earnings:

For the regular readers of this blog, this inflation rate will only surprise in that it is not much higher. However, expectations of further rises in inflation are coupling with severe declines in consumer confidence. If you would like to see the reason for the fall in confidence, it is apparent in the following chart:

Interestingly, the rate of personal insolvency and house repossession has ameliorated, but it seems to be reasonable to question whether this might continue.

The reason for why we can expect these trends to reverse are explained in the Wall Street Journal:

U.K. households' disposable income fell for the second consecutive quarter in the first three months of 2011, forcing consumers to eat into their savings to maintain their lifestyles, official data showed Tuesday.

The weakness of consumer spending is one of the major headwinds facing the U.K. economy and reduces the likelihood the Bank of England will raise its key interest rate in the near term.

In its final reading of the economy's first-quarter performance, the Office for National Statistics said gross domestic product grew an unrevised 0.5% between January and March after shrinking 0.5% in the fourth quarter. However, the ONS lowered estimated GDP growth on an annual basis to 1.6% from 1.8% due to a revisions in previous quarters of 2010.

The ONS said household real disposable income fell by 0.8% in the first quarter after a fall of 0.9% in the fourth quarter of last year. The drop in real disposable income is a result of households being squeezed between inflation of 4.5%—more than twice the Bank of England's 2% target—and stagnant wage growth.

The household savings ratio fell to 4.6% in the first quarter from 5.1% in the fourth quarter. The drop in savings came despite an increase in wages—which grew by 0.9% in the first quarter compared with a 0.5% increase in the previous quarter—indicating that consumers are having to dip into their savings to maintain their lifestyles due to high inflation.

It seems that the answer to the reduction in real income is to pull out the credit cards and supplement income with debt. From the Bank of England (here), they chart the growth in consumer borrowing, and it is notable that whilst growth rates for credit card debt declined for a while, there is a new upwards trend. Of particular interest is that other forms of unsecured lending seem to be increasing even more dramatically, and also secured lending is on the increase. Some of this might be explained by higher university fees, but I do not have the statistics to hand to see the impact of this factor. As a note, for those who look at the figures at the BOE, note that this is changes in growth of borrowing. Needless to say, the savings rate is also in decline.

Overall, what we are seeing is a real decline in the ability of people to live to the standard of living to which they are used, and the response is to use borrowing as crutch for their standard of living. What should be happening is the opposite. With ongoing uncertainty, consumers should be rebuilding their balance sheets, and preparing and adapting to tougher times. The problem is that this is all taking place in an environment of astoundingly low interest rates and an ongoing massive government fiscal deficit. This from Liam Halligan in the Telegraph:

Yes, I know the entire political debate has shifted and the Conservatives seem to have won reasonably wide support for their “austerity” programme. This doesn’t surprise me. Some of us argued for years that if the Tories abandoned their misguided pledge to “match Gordon Brown’s spending plans” and actually admitted that UK borrowing was far too high under Labour, and Government expenditure out of control, then they would win popular support.

What does surprise me, though, is that despite the broad support the Tories have received since taking office, and despite endless rhetoric about “living within our means”, UK fiscal policy is actually becoming more profligate. Far from insulating ourselves from systemic dangers, we are making the UK even weaker.

During April and May, the first two months of this fiscal year, the Government borrowed £27.4bn according to figures released last week, up from £25.9bn during the same months in 2010. That’s right, we’re borrowing more – despite all the Treasury’s tough talk.

These borrowing rises happened despite higher tax receipts in April and May – up around 8pc on last year. But spending was also higher, not only on benefits and social services, but debt interest too. Interest payments, in fact, were up a staggering 18pc on last year, even though gilt yields have been kept artificially low by so-called “quantitative easing” – that is, creating money from thin air in order to buy your own government bonds, an activity the UK has practised to a greater extent than any other major economy on earth.

In addition to the 2011 borrowing increase, a further borrowing rise was also sneaked through last week, when the 2010 total borrowing figure was revised upwards from £139.4bn to £143.2bn.

Add to this that the UK is still in trouble with the current account balance (which is just not as bad as before), and we have a picture of an economy that is sliding to further ruin. The government and Bank of England are both trying to lift the economy out of the doldrums, but the only result is an ongoing slide in real standard of living. Has it not occurred to either the government or the BoE that they seem to be, at best, holding the country on the brink, but doing so at such an astounding cost? Surely, this must lead to some change in thinking? The situation is not improving, and there are still external shocks still to be fully felt. For example, the Euro-Greek crisis still has yet to really bite.

I do not often post now, so I must by necessity be broad in my approach. As such, I will end the post with a single point. We have now watched governments managing to keep plates spinning, and prevent an all out collapse of the economy. They have expended all their ammunition, and do not have anything left in their dubious armoury. I did not believe that they could possibly keep the plates spinning this long, but they have done so. However, as much as they try to magic the ongoing crisis away, it just keeps coming back. And the longer they delay, the more they tinker and seek to direct the economy, the greater the accumulation of problems. The one thing that nobody wants to do is to acknowledge that the world has changed.

The world that was taken for granted by countries like the UK started to evaporate a decade ago. The world is now one of hyper-competition, and it is a competition for a finite supply of resource. The economic fight is over the distribution of the finite resources. There is only one solution in such a situation, and that is to reform and make your economy lean and efficient. That is the one thing that is barely addressed....and no amount of expenditure of magic bullets will fix this.


  1. Extract from

    Introduction of Professor Carol Quigley's book Tragedy and Hope 1965.

    By Michael L. Chadwick

    "In 1965 one of the nation's leading professors quietly finished the last draft of a 1311 page book on world history." End quote.

    I don't know how many of you who regularly frequent this blog have heard reference to this book, if you have, then you'll know what it's mainly about. To those who haven't heard about it, then I offer you the chance to peruse.

    The book contains over a thousand pages and I do not claim to have yet barely scratched the surface of its content, but I do know what it is about.

    Is the book true? Is the book genuine? I don't know, there is so much disinformation out there it's a minefield. I leave it up to you to decide.

    Here's a snippet....Remember this is 1965...

    " ....There really is a "world system of financial control in private hands" that is "able to dominate the political system of each country and the economy of the world." I call this system the World Trade Federation. It is an ultra-secret group of the most powerful men on the earth. They now control every major international institution, every major multinational and transnational corporation both public and private, every major domestic and international banking institution, every central bank, every nation - state on earth, the natural resources on every continent and the people around the world through complicated inter-locking networks that resemble giant spider webs. This group is comprised of the leading family dynasties of the Canada, United States, Britain, Germany, France, Italy, Japan, Russia and China. This self-perpetuating group has developed an elaborate system of control that enables them to manipulate government leaders, consumers and people throughout the world. They are in the last stages of developing a World Empire that will rival the ancient Roman Empire. However, this new Empire will rule the entire world, not just a goodly portion of it as Rome did long ago, from its ultra-secret world headquarters in Germany. This group is responsible for the death and suffering of over 180 million men, women and children. They were responsible for World War I, World War II, the Korean War, and Vietnam, etc. They have created periods of inflation and deflation in order to confiscate and consolidate the wealth of the world. They were responsible for the enslavement of over two billion people in all communist nations -- Russia, China, Eastern Europe, etc., inasmuch as they were directly responsible for the creation of communism in these nations. They built up and sustain these evil totalitarian systems for private gain. They brought Hitler, Mussolini, Stalin and Roosevelt to power and guided their governments from behind the scenes to achieve a state of plunder unparalleled in world history. They make Attila the Hun look like a kindergarten child compared to their accomplishments. Six million Jews were tortured and killed in order to confiscate billions of dollars in assets, gold, silver, currency, diamonds and art work from the Tribe of Judah–a special group of people. The people in Eastern Europe suffered a similar fate as the armies of Hitler overran these countries, murdered, enslaved, robbed and plundered the unique people who resided there. For the last two and one half centuries wealth and power have been concentrating in the hands of fewer and fewer men and women. This wealth is now being used to construct and maintain the World Empire that is in the last stages of development. The World Empire is partly visible and partly invisible today...."

  2. It seems to me that making our economy lean and efficient will not be easy. In part, it will depend on raising productivity. Aside from taking up spare capacity (spare capacity, that is, to produce something saleable), that needs investment. But savings and investment seem set to be low for many a long hard year, as government and households struggle to service, let alone pay off their debt. I recall reading that the UK corporate sector now has the cash to invest again, but of course they'll only do so if they foresee demand. And where will that come from? Conclusion - 10 years' hard, at least, before UK resumes sustained growth.

    So what about inflating the debt away? That may work for government, but not for household debt whilst earnings rise more slowly than prices. Households will find their burden increasing. They'll get poorer, as you have predicted.

    Further devaluation will obviously make us more competitive and poorer. But will China not resist or limit our devaluation, by simply buying up UK government debt and thus supporting sterling? Likewise US and EU debt, for the same reason? I know they have recently said they intend to rebalance their economy towards consumption, but they aren't under the same imperative to do that as we are to do the reverse.

    Please keep the posts coming, by the way. You still have an eager audience.

  3. So you smell blood again eh Mark? Your timing might be right this time... Although I still favour 2012 for the showdown.

  4. Hi Cynicus,

    It's good to have you back!!

    Have you looked at the concept of Financial Repression?

    Here is an article on the subject:

    Prolonged financial repression

    04 Jul 2011

    At any point in time, the engine of economic growth depends on the strength of the four cylinders on which it is driven; the household sector, the banking sector, the government and the non-financial corporate sector.

    The stability of each of these four cylinders will determine how healthy the overall economy is. If you have one cylinder impaired, then the economy can still progress. With two cylinders impaired, it becomes much harder. With three cylinders impaired, there is a major problem.

    In the UK, we have a major problem. The banking system is severely impaired, sitting on substantial bad debts and in many instances housed in the intensive care unit of the government sector. Banks do not want to lend because they are, justifiably, very risk averse having (technically) gone bust.

    The government sector must thank its lucky stars it can print its P&L. With one of the largest budget deficits in the OECD, a rapidly rising debt/GDP ratio and a schizophrenic government torn as it is between the left-wing need to keep spending and the right-wing desire to reduce the deficit, the government sector is without question impaired.

    The household sector has it tougher than any. Reinhart’s financial repression sees a prolonged period of negative real interest transfer wealth from savers – stealth theft.

    Unemployment remains high. Stagnant nominal incomes get eroded by high and persistent inflation. Taxes are being raised. House prices are falling. Yes, households are definitely impaired.

    Yet, as Reinhart shows, financial repression is a tried and trusted method for a government to extricate itself from a debt debacle. In this instance, it is being applied at a time when households and banks are also severely impaired. While Europe’s weak links show up via widening bond yield spreads, the UK shows its fragility through a persistently weakening pound. Compared with pre-credit crisis levels, the trade-weighted pound now stands over 20% weaker.

    Read more:


    All the best

    Death to Bubble Addicts

  5. Unfettered capitalism, also known as (neoliberalism, globalism, transnationalism) has funded the unfettered socialist (cultural Marxist) spending junket.

    The West is broke. Some say deliberately so.

    The European Union is the template for the new to be totalitarian global government, (sustainable development UN, IMF, WTO.)

    America is in the process of being taken down in preparation for absorption into NWO. Trouble is, most Amrican folk don't know this.

    Will Russia, China, play ball?

    Dark clouds are gathering.

    Hey! Don't worry - just kidding. I'm a conspiracy nut making it up as I go along.

  6. At Anonymous:

    the risk is that we move into a situation where one big guy starts to collapse, and then it’s over with free capital flows and then we enter a new world that is highly dirigiste (economic planning and control by the state)....

    “They (governments) change the rules, they change the law, etc., etc., and we will be a totally different world that has more resemblance of what was the case in the old communist block. That’s my big fear.

    It won’t happen that you see a meltdown in the so-called free market or Western world and they will let it happen, that won’t happen. I think the governments will interfere, they will change the rules and you will have a highly government dominated economy with very little freedom for the individual and it won’t be a very pleasant world, that’s for sure.”


You are more than welcome to comment on the posts, but please try to stay on topic....I will publish all comments, excepting spam and bad language, and my moderation of the comments is just to exclude these.

Please allow up to two days for the comment to appear.

I have had a request for an email address for the site and have created the following:


I have ommitted the @ symbol to avoid spam....

For general purposes I would suggest using the comment form, but will occasionally look at this email account. Please be clear what is for publication and what is not, though I will also not guarantee publishing of email comments, unlike the comments through the form! Thanks.