Tag: credit crunch

Devaluation – not such an easy option for most of us.

August 16, 2008 17 Comments

Readers of this site will know that I expect the squeeze on people’s incomes to intensify this autumn and winter. The government has decided that it is not going to make any of the adjustment in the public sector by reducing its spending – on the contrary it is boosting it in the most irresponsible way, to pay for its state pensioners like Northern Rock. As the country has borrowed too much on a grand scale that means individuals and families have to tighten their belts even more.

We all know that part of the belt tightening is forced on us by higher Council taxes, higher tax from petrol and diesel, threatened higher Vehicle Excise Duty and the abolition of the 10p band. We all know another part of it comes from rip off government, with endless increases in fees and charges for government “services”.

This week we are witnessing a third part of the squeeze – devaluation of our currency. In recent months we have got used to devaluation against the Euro. We have had a 10% devaluation compared with its starting rate, meaning that if anyone does want to buy a German car or a bottle of French wine it costs 10% more. Now we are having to get used to devaluation against the dollar. The government has presided over a 7% devaluation in just the last couple of weeks.

Labour governments have a habit of devaluing. In the days of fixed exchange rates there was drama, with a government trying to “save” the pound, only to give in in the end. Labour took us down from the $4.03 rate to $2.80 on 14th September 1949, and devalued again on 18th November 1967 from $2.80 to $2.40. Now they are in the process of taking the pound down from over $2 where it had reached in the early 1990s and again last year, under a regime of floating rates. There will be less drama, but the effects on our living standards will be the same.

I prefer floating rates to fixed rates, and recognise just how much damage was done to the UK economy in the past by trying to defend silly rates. The devaluation we have had recently against the Euro will help our exporters. However, if a government uses floating rates to remove discipline over its own budgets and finances, it will end in tears. If a government spends, borrows and inflates the public sector too much the currency will give too much, helping fuel the inflation. This government had better be more careful, now it is embarked on this slippery path. Currency falls can run further than the authorities might like if they remain careless about them and their causes.

What we can be sure about is that people are getting poorer because the government is determined to stay richer. The devaluation of recent days against the dollar, and the devaluation of recent months against the Euro has cut the value of the “pound in your pocket”. Many commodities and products are priced in dollars on world markets. They are suddenly dearer thanks to the fall in the pound. That means we can buy less of them.

So pull in that belt a bit more. Living standards are falling and have further to fall. An overborrowed government has no intention of tightening its belt, so that means the rest of us have to do so even more.

The lies about the EU economy and the Credit Crunch

August 14, 2008 22 Comments

Today we will learn whether the Euroland economy is already in decline, or whether its growth has merely slowed to a standstill. The briefing in advance of the figures implies we are being readied for bad news.

Over the last year we have heard a great deal from the Uk government and from the supine parts of the media about a US recession, and how the world problems emanate from across the Atlantic. We often have to hear lectures about the importance of the EU to our economy, and even about the superiority of the EU model. If any of this were true we should by now be saying “Thank heavens we are so dependent on the EU and not on the US, for we can ignore recessionary winds from across the Atlantic”. Instead the Bank of England Governor had to warn yesterday that the UK authorities have been misleading us for some time about the likely growth rate in the UK this year and next. He himself did not even rule out a recession here in the UK. Today we will learn that the motor some want us to hitch to more completely, the Euroland economy, is once again performing less well than the US.

The truth about our economic relationships with the US and the EU is more complex than the idiot soundbite that we depend for 3 million jobs on the EU owing to more than half our trade being with the EU. It always left open the question of what about the 90% of our jobs that on their own admission do not rely on the EU, wrongly implied jobs in exports to the EU would not exist if more people had voted No in 1975, and ignored the trade in services and flows of investment and interest where the EU proportion is much lower than the 50% ish share they have of our trade in physical goods. The relationships you need to trade in services are often deeper and longer term than the relationship to buy manufactures, and tend to be with fellow English speaking countries with common law systems for obvious reasons. A British legal or accountancy firm is more likely to do work in the US or Australia than in Austria or Germany.

The current situation also shows how wrong the spin has been about the sources of our present discontent. The so called US made Credit Crunch is a credit crunch in many parts of the world where Central Banks and Regulators have made similar mistakes to the US, but where they made their own. Northern Rock did not go down because it had US sub prime mortgages, or because the US banking regulators fell down on the job. It went down with North eastern UK mortgages, under the supervision of the UK authorities. Similarly, the Euroland economy is slowing owing to stupid policies of high tax, high spend, high regulation and poor Central banking in Europe, not because of the mistakes made by the Fed.

So today we will learn if the spin is right that whilst the US economy continues to grow despite the endless declarations of a US recession by all those US haters out there, Euroland either is now going backwards or is on the edge of declines in output. In which case the UK strategy under this government of hitching us more firmly to the EU governmental bandwagon is doubly foolish, being bad economics as well as bad politics.

Not that this gap in performance between the US and EU economies is anything new or a surprise. The EU is a consistent underperformer. As far as I am concerned – and as far as many Labour MPs claim – the prime aim of our economic policies in the UK should be to give as many people as possible an opportunity to earn and enjoy more income. In the decade 1987 to 1996 the US economy grew by 32.9%, compared with the EU economies growing 11%. In the 20 years to 2006 the US grew by an impressive 82.5%, despite being richer than the EU to start with, whilst the EU limped to just 41.6% growth.

Over the long term, as well as over the short term, the US economy has outperformed the EU one by a wide margin, growing twice as quickly for 20 years! Looking at individual years the US outperformed in 16 of the last 20, and even in the two years of the hi tec collapse which pro Europeans enjoyed as an opportunity to condemn the US model, the US economy still did not have a down year.

The government needs to amend its rhetoric. This is not a downturn made in the USA or a Credit Crunch unique to Wall Street. A series of problems have emerged in the way central Banks, governments and banking regulators have done their job in most major markets. The UK has a bad version of the problem, with its own mistakes at home adding to the gloom. The Governor yesterday was right to warn the government not to relax its controls over public borrowing, but he will not be heeded. The UK government is determined to make it worse by borrowing even more. Meanwhile, the cavalry that are meant to arrive from the EU to help us in time of need have lost their horses and will not be riding to our aid. Their economies are already deeper in the mire than the American.