The fundamental question is where did all the money come from that allowed house prices to triple and the stock market to more than double? The derivatives market also exploded in the last decade so what made that possible? Where did all the money come from for people to borrow on their credit cards? The fact that the level of personal saving was falling throughout this period to a record low shows that it was not thrift on the part of some people that was supporting the spending of others. The answer has to be that money was being created by governments printing it and banks 'inventing' it. At the end of this long period of 'growth' all that there is to show for it is a massive level of debt and a lot of worthless investments such as property built in places that makes no economic sense. There is hardly a useful project that can be shown to have resulted from the expenditure of the last ten years. It was largely consumption for the sake of it. A whole decade of wasted opportunity, which is exactly what is to be expected from an inflationary bubble.
The Western Economies have not been engaged in real commercial growth for over a decade and in reality probably close to two decades. It has only been borrowing that has kept the Western World going for the last ten years. It was quite apparent five years ago that the level of borrowing was unsustainable and it followed that as soon as the money supply was checked or interest rates rose that property prices, commercial asset values and the stock market would have to collapse. In the case of the UK the largest single source of new employment in the last ten years has been the British Government. The role of the British Government is increasing and has to continue to increase for reasons that are discussed elsewhere on this site. The amount of money taken in taxation has increased under Labour just as the amount of useful work has decreased.
The British government has no interest in trying to re-establish the productivity of the British economy because it is now too late. The Government knows that it has to get borrowing going again as this will result in 'growth' in an economy that has no potential for real growth as it is based on the service sector and the State. Soon Britain will have State Managed Economy as the government component of GDP passes quickly through the 50% barrier. From this point on the course will very quickly downward. Already the economic downturn has cut the Government's income from Income Tax, National Insurance, VAT, stamp duty and company and capital gains taxes while driving up benefit costs. The number of people claiming unemployment benefit is now close on 2 million plus the 4 million long term unemployed giving a real unemployment figure of 6 million people. The widening gap between tax revenues and increased spending in November 2008 led Alistair Darling to borrow £16 billion to fill the gap. This was almost double the amount borrowed in the same month one year before, and the highest since monthly records began in their present form in 1993. The Government's monthly borrowing could be double this at the end of 2009. The unanswered question then is how this debt is to be repaid and the answer to that question is that it cannot. Inflation is the only option.
Investment has always been the cornerstone of economic development. It has always been vital for the formation of capital. Today the Government determines most investment policy so there is no longer any commercial logic. However, investment is only beneficial if it is good investment. With the Government in charge of policy the economic game is not about production but about employment. Today man does not work to produce but instead he works to work. The key point now is that any investment is now seen to be good if it produces employment. This means that investment is now an end in itself. It means that a whole range of methods are now employed to encourage indiscriminate investment. Since artificially low interest rates can only be achieved during a period of inflation encouraging investment means encouraging inflation. Having so much financial activity has made it possible for the British Government to hide a rapid growth in the money supply over the last 10 years. The amount of currency in circulation will eventually prove to be much more than treble that when Labour came to office.
A slavish commitment to the notion that all investment is good and all growth is good leads to a belief that no economic system can survive without growth. Talking about controlling population growth is pointless as the economy's 'growth' depends heavily upon population growth. Success is now just to do with increasing numbers and not long-term productivity. Ever increasing life expectancies is a good way of increasing 'growth'. One other easy way to increase GDP as a number and with no reference to value is to welcome ever more people into the country. This is one reason why the British Government welcomes immigration whatever it might say to the contrary. An expanding population means more consumption, which the government needs, rather than additional workers that it does not need. If a job can be found for each new immigrant then that is even better. More workers will be filling more jobs generating more turnover. Having fewer people working more efficiently would be much better than having a lot of people doing nothing useful but this is a concept that no politician could ever contemplate because the intellectual leap is beyond them and the bulk of the population. To most people the more people that are working the better. The popular notion that all that is necessary to support an increasingly elderly population is to have more workers shows an astonishing lack of commercial awareness on the part of most of the population. Quality is far more important than quantity.
There has been no real growth over the last decade, just borrowing to maintain an unsustainable undeserved life style for Britain as a nation. Borrowing by the public has to be restarted otherwise the political and commercial consequences will be catastrophic. If borrowing does restart then the outcome will still be the same in the long term as yet again it will be a case of having consumption today at the expense of tomorrow. However this will be a problem for another group of politicians to worry about.
Published: January 2009