Another day in the sterling crisis

Yesterday saw a government fight back on the economy savaged by events.

The pound dropped to a new all time low against the Euro – a Euro is now worth more than 81p, 14% more than at launch.

The pound dropped again against the dollar. It has fallen from $2 to $1.77 in les than a month, making all items priced in dollars more than 10% dearer.

The latest report on the jobs market said there had been a sharp contraction in jobs on offer.

Many people said that the government’s encouragement to first time buyers to buy properties when house prices are still falling at around 1% a month was bad idea

The OECD came out with a surprising forecast that only the UK of the major economies would plunge into recession in the second half of 2008.

The fall in the pound and the changes in the job market matter more than the forecasts and statements. The devaluation has made us all a lot worse off. It’s time to think of cancelling the holiday in the USA if you were planning one. It means dearer oil and food. It means a bigger squeeze on our spending power generally.Now we are imprting inflation, it will put the Bank off action to cut interest rates quickly enough.

The fall in jobs is not all bad news. Wages are under reasonable control, as I have been forecasting. There is not going to be a wage inflation against such a gloomy jobs background. The fall in jobs also implies companies are taking action to avoid financial disaster. It means more companies will survive the downturn.

Even the government’s housing package was mercifully small, and included some spending that was already in budgets. Is that the first sign that the government realises there are limits to how much it can borrow?

Unfortunately the government has already committed itself to unrealistically high spending plans, and will not come clean on how much worse the deficit now is, thanks to sharp slowdown. It remains vulnerable to the mauling given it by the OECD forecasts, because its own forecasts are so obviously wrong. No-one believes the government’s figures. If they wish to reassert any kind of authority they should re forecast now.

And whilst they are about it why not recall Parliament to discuss the various rescue packages? I am sitting in my office this morning, but as always in September the place is a building site. Whilst most MPs are away from the place, they just carry on spending!

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13 Comments

  1. no one
    Posted September 3, 2008 at 9:58 am | Permalink

    on a side issue watching the political conferences in the states play van halen and AC/DC really does show a much better understanding of how to do these things well than the stuffy middle class dominated dross approach to UK conferences…

  2. Acorn
    Posted September 3, 2008 at 10:53 am | Permalink

    John, shame on you, remember we are British. We are the band that played on as the Titanic was going down. We have the stiff upper lip, reinforced by Botox. My late great Mother always said, "son, if WW3 is going to breakout tomorrow, I'm getting my hair done this afternoon".

    "It’s time to think of cancelling the holiday in the USA if you were planning one". Not giving up yet John. My tour company tells me it buys its dollars forward to match its liabilities. I insisted they put me on an American airline – dollar based.

    Meanwhile, I am perusing the Big Mac Index for undervalued currencies to hold and watching the Gold price.

    Toodle-Pip old boy! http://www.economist.com/markets/rankings/display

  3. Tony Makara
    Posted September 3, 2008 at 11:23 am | Permalink

    There is now a very real danger that our import-dependency is going to lead to very damaging inflation. We, as a nation, that means all shades of political opinion, must learn from this. There has been a tendency, which has become dogma among some, that we can rely on imports to solve all our problems. This has led to us not utilizing our national resources, even to the point where we are not looking to feed ourselves, but are counting on imports to supply our needs.

    I wrote a piece on this for the Conservative Home website last year and include a link below. Britain must now undertake strategic planning to privately produce more of its own food, fuel and wares. As our currency collapses, as I have been predicting for some time, the cost of imports is going to saddle us with uncontrolable inflation, which in turn means we can never truly have a liquid economy as interest rates will have to stay permanently high to shore up our currency to protect us from even further imported inflation.

    A Conservative government must look at this issue and understand that the economic health of the nation cannot be measured simply in terms of cash generated by financial services, but by other factors such as the ability to produce and supply itself with food, fuel and other wares. Our nation is too service-heavy, with 76% of the entire economy based on the service-sector. This creates a problem because the service-sector cannot produce enough jobs for a population of our size, leading to more unemployment, cannot pay for better wages out of productivity, leading to people resorting to credit to improve their living-standards and so on. The retail service sector in particular has become little more that a sell-on point for imported goods, this has to change with a revived manufacturing and agricultral base providing retailers with British made goods, making us less dependent on imports and less prone to imported inflation.
    http://conservativehome.blogs.com/platform/2008/0

  4. APL
    Posted September 3, 2008 at 2:42 pm | Permalink

    Tony Makara: "Britain must now undertake strategic planning to privately produce more of its own food, fuel and wares."

    Sorry Tony, I don't wish to be thought to be picking on your comments, but they are a little like a red rag to a bull.

    First I would like to say, we cannot undertake strategic planning of any sort, we are constrained by the European Union CAP, DEFRA which is now the homuncolus within the UK acting on behalf of the EU, will enforce EU law. So, strategic planning is out of the window, unless the plans are hatched in Brussels, then they won't necessarly be what is best for the UK.

    Next "strategic planning to privately" anything is an oxymoron. Anyway, strategic planning – you are really talking about a planned economy. Yesterday you advocated planned exchange rates, today you are advocating a centrally planned agricultural sector. I anticipate you will launch your centrally planned industrial policy tomorrow?

    Really, you only have to look at the state of the economy to see what central planning has done to us! We are in this state *because of* continual government meddling. To ask for more is a bit like marrage after divorce – a triumph of hope over experience.

  5. Tony Makara
    Posted September 3, 2008 at 3:26 pm | Permalink

    APL, firstly l think we can agree that the EU presents economic hurdles that hinder us as a nation. We would be far better off out of the EU, but if we were out of the EU we shouldn't replace dependency on EU food imports with depedency on food imports from the wider world as UKIP advocate. We must begin to supply our home market where possible and import when necessary.

    On the matter of strategic planning to help British business capture the domestic market, this can be done by government allowing a special-tax-status to British-based and British-owned producers who supply the domestic market. Reward such producers with significantly low levels of taxation to spur incentive and abolish some of the red-tape on wages and working hours etc. I do not advocate a planned economy but rather that Government recognize the importance of British producers who supply the domestic market. There should also be a selective 'wage-equalization' tariff imposed on those nations in the East who undercut wages here in Britain. How can British business compete when a British government and the EU allow Asian competitors to undercut wages here with sweatshop labour?

  6. AndyRich66
    Posted September 3, 2008 at 5:12 pm | Permalink

    Tony,

    I read your article on Conservative Home and the "Lively" exchange that flowed from it.

    I understand your concern but feel that your argument is flawed on the grounds that the UK domestic market is actually quite small in
    global terms.China and the USA will always have economy of scale advantages due to the sheer size of their local market. When Britain was the workshop of the world the empire was our market but those days have gone. The supposed idea of joining what was then the EEC was to open up a new "domestic" market for British goods and services(although Ted Heath's real agenda may well have been different).

    To be fair your many critics have failed to answer the key question
    of how UK PLC is going to pay it's way in the world. There was a time when the trade figures were headline news but now our trade deficit is that bad that we seem to have given up and just try to ignore it. It must be obvious to anyone that we can't carry on buying imported goods and foreign holidays with borrowed money,
    sooner or later the credit will dry up and the bill will have to be paid.

    Am I the only one to notice how modern "regeneration projects" seem to consist of overpriced flats , shops and tourist attractions?
    We do desperately need wealth creating enterprises that can export, earn money for the country and employ ordinary people in real jobs, the trobule is that the record of central government in
    this area isn't exactly great.

  7. APL
    Posted September 3, 2008 at 6:02 pm | Permalink

    Tony Makara: "but if we were out of the EU we shouldn’t replace dependency on EU food imports with depedency on food imports from the wider world as UKIP advocate. "

    Interesting. Ok, to an extent I agree. But I anticipate and hope for a peaceful cooexistance with other countries, so I have no problem trading with them, frankly I don't care where the carrots I buy come from, do they taste as good and are they more or less the same price? Each of those things being equal, I would probably prefer British produce ( My wife likes French butter, recently I have prevailed upon her to buy English instead).

    I think a lot of problems in the agricultural sector arise because they are encouraged to grow this, or that crop by government subsidy. The crop is then bought by intervention (within the EU) in an attempt to support the price – usually simply because a beauracrat thinks this or that crop is a 'strategic' requirement. Then in order to avoid for example; a butter mountain, or a wine lake they then dump this produce in the 3rd world, destroying the subsistence livelyhood of the farmer in those poorer countries. Not to understate it, such behaviour is evil.

    In my mind this leads to a distortion of the demand signal. That farmers respond to this is understandable, but undesirable. I have the greatest respect for farmers, but they should be farming the land, not the subsidy machine.

    Tony Makara: "On the matter of strategic planning to help British business capture the domestic market, this can be done by government allowing a special-tax-status to British-based and British-owned producers who supply the domestic market. "

    Yes, I think that is a good idea (obligatory remark about the EU resenting 'Unhealthy tax competition', aside) , I would go one step further and advocate a ultra low tax reigeme for UK domiciled buisness – not a special government dispensation. Just low tax.

    I guess my problem with the concept of 'strategic planning' is that it sounds too much like a government quota to produce 'x' number of motor cars this year regardless of demand. A little too soviet for my taste.

    Tony Makara: "There should also be a selective ‘wage-equalization’ tariff imposed on those nations in the East who undercut wages here in Britain."

    I rather favour free trade, it is a much better mechanism to build international relations than for example the EU, so am against trade tariffs. Whatever you choose to call them.

    In the end a company can survive if it stays lean mean and nimble. We in the UK cannot compete against for example India when 48% of the UK GDP is gobbled up by the state. I would much rather see 75% of GDP in the private sector, and only 25% consumed by the Public sector.

    Regards

  8. Tony Makara
    Posted September 3, 2008 at 8:12 pm | Permalink

    Firstly, I must say that I'm pleased to see this issue debated openly and with sensible considered comments. My idea in rasing these points is to get senior politicians to look at the dangers of import-dependency, ranging from imported inflation, the effects on liquidity and the social consequences of unemployment. I believe politicians should help British business to dominate the British market, after all this is our market and its a sad situation when a British entrepreneur won't invest because he knows he/she will be undercut by sweatshop wages in the East.

    I have to make clear that I am not against trade, but rather wish to see British business able to compete on a level playing field. We need investment in Britain, so the conditions have to be right. We need to make supplying the domestic market profitable, so profitable that business acumen will flourish. We should even go so far as to offer British citizenship to foreign entrepreneurs who want to settle here permanently and ply their skills and money into our nation. We cannot continue to exist as a 'sell-on' nation, we need to become a nation of producers again, a nation that supplies its own market and corner niche markets to export to the wider world.

    Economic policy must centre on letting business keep more of its money. The more business can make, the more it can invest, creating more jobs, more goods and services for all. I think John Redwood is defintely on the right track in promising to get rid of the suffocating regulation that holds business back, but I'd like to see even more, including a commitment to scrap the minimum wage, which if anything actually pulls wages down, and an end to the truly bizarre tax-credit system which leads to people becoming trapped in a half work/half benefits culture, never fully being able to live independently of the state.

  9. Bernard Johns
    Posted September 3, 2008 at 8:13 pm | Permalink

    John,
    I notice that you have not replied to to any of the above comments. I always think this is a bit like the baseball ref. who throws the ball in the air for the teams to scrabble over and then retires a few paces back.
    My reason for commenting, is that a large , maybe a very large, section of the British public, myself included, want to know where you and the Conservative party stand. We see very little opposition, alternative views, plans to scrap/repeal laws, the very things the British people are crying out for. There is a very low turnout at elections because there are not positive things to vote for. The days are gone when we voted as our parents voted. Please, please tell us where you stand and what you stand up for, if we like what we hear, we will vote for you.
    There is an old saying, "That in dangerous times a wise man is silent" but I think it is now time for that "wise old man" to stand up and speak his mind. (PS ,an excellent blog)

    Reply: I have set out on this blog the action the government should take immediately to deal with the Sterling crisis and Credit Crunch. If you want my fuller views on dereg and less spending please see the download "Freeing Britain to compete" on this site.

  10. Adrian P
    Posted September 3, 2008 at 11:24 pm | Permalink

    But Global Communists do not Believe in Nation states.
    http://www.youtube.com/watch?v=XRLPG_HplrA

  11. adam
    Posted September 4, 2008 at 3:57 am | Permalink

    Currency markets are still a mystery to me. They are all worthless anyway arnt they(?)
    Why would anyone want to own currency rather than real assets.
    I feel it must all be speculators and hedgers.

  12. APL
    Posted September 4, 2008 at 11:07 am | Permalink

    Tony Makara: "I have to make clear that I am not against trade, but rather wish to see British business able to compete on a level playing field. "

    How can there be a level playing field when the UK government penalises our own industry by charging tax at an extortinate rate on the most fundamental commodity, Energy?

    We know that around 80% of the price of fuel is taken by the government. That represents a HUGE ecomonic drag on the economy, it means that in the one area a company cannot avoid, its basic running costs are already inflated when compared to India or China.

    If you want a level playing field, then first 'remove the beam from our own eye', before we start looking at unfair competition in India and China. These markets do not represent a threat, but an opportunity.

    Our own government is the threat, with all due respect to our host, they sit back make reckless decisions and retire on solid gold pensions, they are the architype for the 'fat cats', authority without responsibility or accountibility. Yes we can occasionally dispatch the worst of them at the ballot box, but what happens then? They are bumped upstairs to the Lords, or across the channel to Brussels.

    If you don't believe me, Neil Kinnock is in the Lords. How in a sane world did that happen??

  13. Tony Makara
    Posted September 4, 2008 at 6:05 pm | Permalink

    APL, I think this is a question of perspective. I don't see the likes of India and China as trading partners but rather as competitor nations who, like ourselves, are fighting to corner markets, including our domestic market in the UK. So, I'm always going to look at economic policy from a pro-British perspective. Competition means having economic opponents and beating them to the economic bounty, thats the way capitalism works, and the job of the British chancellor should be to ensure that British business gains an upper hand over foreign concerns.

    I certainly share your disgust at the way government adds to the cost of living through taxation. Of course the government has to raise money but so much is wasted and certain people are consciously targeted, such as motorists, successful entrepreneurs and the like. The ideological drive to punish people for making money runs through the heart of Labour policy. The very term 'making a profit' is portrayed as something negative, when in fact wealth-creation creates the conditions for economic growth, more investment and jobs etc.

    As regards your point about the bureaucrats, I have been calling for some time for the next Conservative government to appoint a 'Wastefinder General' dept and his/her sole remit should be to audit the entire structure of government and make it accountable, where a govt body exists and it is shown to be failing, or being of no practicle purpose, it should be closed down. Conservatives often talk about rolling back the state, so lets see that happen, make govt departments accountable to a wastefinder general who will examine the books and demand results.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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