As soon as the money supply was checked house prices had to fall
and there had to be a recession. If property prices collapse
so will the UK banking sector.


5. Has there been growth?

British voters have been repeatedly told that Gordon Brown managed to give Britain the longest period of sustained growth in history. Things may be going badly now but things did appear to be very good until a year ago. In fact all Gordon Brown did was encourage people to feel good because the value of their homes was increasing, which in turn encouraged them to borrow. This was exactly the same approach that the American administration used but then the USA has run a massive trade deficit for decades due to its size and its special place in the World economy. By combining this massive freedom to borrow with the distraction of Afghanistan and the Gulf War the losses that rocked the stock market when the dotcom bubble burst in 2000 were overlooked by the bulk of the population. People are now trying to cut their borrowing and so Gordon Brown's long period of 'growth' has come to an end. A recession that is postponed is always nastier and deeper than one that occurs naturally. The current financial problems are just another notch down on the way to national bankruptcy

Establishing the Monetary Policy Committee was hailed as a great breakthrough in the management of the UK economy. Interest rates were once supposed to reflect the level of inflation. This link ended a long time ago. The MPC were never briefed to set interest rates to maintain the value of money placed in a bank account but rather to set rates which maintained 'growth' and to control 'inflation'. If the rate of inflation is misrepresented then the outcome is very dangerous. Growth and inflation are in reality, the same thing. It just depends upon where the Government cares to draw the line.

Ever since the introduction of the Euro people across Western Europe have been complaining about the increase in property prices and the rising cost of living. After the Euro was introduced the economies of Western Europe stagnated and have remained in that state. There are many reasons for this one of which has to be that the indirect taxes applied by every European Government had to interact with those in other countries. However the main reason for the problems that the Euro Zone has encountered is that the European Central Bank took over the task of setting interest rates across several countries. The prudence of the Germans was diluted by less careful Governments. From that point onwards the true level of inflation in Europe was manipulated to ensure that 'growth' was maintained in even the weakest country in the Euro Zone. A number of States that form the Euro Zone, notably the Italians, had to manipulate their economic data before they were able to join the currency. As soon as they had been accepted into the 'club' these falsehoods had to impact on the other countries that were also in the group. The only advantage that the Euro countries had was that land for development was not in such short supply as it was in Britain and so property prices did not rise to quite the same extent. Any downward adjustment in the property market in the Euro countries will not be as painful as it will be in Britain but will harm those areas that rely upon tourism, like Spain, and could still cripple their banking sector as is already happening in Germany.

It cannot be a coincidence that problems occurred at the same time that the EU expanded eastwards. Expanding the EU eastwards was supposed to give Europe a new manufacturing base. However the peoples of the new EU countries want the same standards of living as say the Germans and do not want to do any manufacturing for anyone. Companies, like Fiat, who rushed to establish plants in Poland found few of the benefits that they were expecting. As a result the major manufacturers have jumped over the new EU countries and gone straight to India and China.

Transferring 'real' money out of the economies of the old EU into the dilapidated economies of the new EU countries was a massive drain on the real resources of the old economies. This is no different to the strain placed on the West German economy when it absorbed East Germany twenty years ago. Of course the European Commission could never admit to such an effect as the eastward expansion of the EU was supposed to be of benefit to all. The logic behind such an assumption was never clear. It had to be largely a political gesture and a way to secure a young hard working labour force on the cheap.

The total amount of money that has been borrowed by the general public in the last decade is close to 1,4000 billion. The additional amount of money that has been borrowed by the population of Britain in the last eight years is well over 800 billion or more than 100 billion per annum. The mean GDP of the UK has been about 1,000 billion per annum over the last decade. This is a rate of borrowing of 10% per annum. The British Government has also been borrowing very heavily in the last few years. The British Government admits to a borrowing of 500 billion. If the British Government admits to this number then the real figure is much higher. Businesses have also borrowed very heavily in the recent past because money was so cheap and readily available. Combined these borrowings represent a total UK borrowing level of well over 2,500 billion. This would give a borrowing rate of over 20%. This will prove to be about the same as the real gross rate of inflation between 2000 and 2010. This shows where the 'growth' in the UK economy has come from since Labour came into office. There was never any growth, there was just borrowing. The question now has to be how this money will ever be paid back. The simple answer has to be that it cannot. As a result many companies will have to go bankrupt and there will have to be a massive level of inflation as the economy corrects itself. Prices will appear to rise on a regular basis and the true reason for the increase in the cost of living will never be explained to the general public.

There are many ways of defining the prosperity of a nation. The one that is most commonly used is Gross Domestic Product or GDP. Every year the British population are told that the country's GDP is increasing but these figures are so heavily doctored as to be almost meaningless. With the British economy being almost entirely service based the very notion of GDP is flawed. Probably the most serious shortcoming with the idea of Gross Domestic Product is that it assumes that all expenditure of human energy is beneficial. In reality any effort that is expended unnecessarily is a loss and not a gain. The doctors, nurses or social workers who tend a person who is not engaged in full time employment are not making a contribution to the economy. This also applies to anyone who supports these carers. Few people that work directly for the State make a real contribution to the economy. At the most there are only a few million people out of a population of 61 million who make a real contribution to the British economy that the rest of the world sees. The official increase in GDP is supposed to have been about 2% to 3% per annum for the last ten years. This has to be seen against the real level of inflation and a decreasing number of people who are being employed doing something productive. In reality there has been no increase in GDP just a loss disguised behind inaccurate inflation rates.

Since Labour came to power the Government has employed about one million extra people. These people not only appear in the employment statistics but they also boost the gross domestic product figures. Taking a hypothetical case it would be possible to have a country where one third of the population spends all their time doing nothing other than looking after the other two thirds of the population who are retired, unemployed, students or Civil Servants. The employment figures would look good. The gross domestic product numbers would look wonderful but the country would not be able to import raw materials as it would not be making or exporting anything with which to trade.

When the increasing level of general taxation and manipulated financial data are taken into consideration then the total amount of real wealth has been getting smaller every year. All the liquid funds that are available to the British Government are used to support current account expenditure rather than capital projects. In the 1980s the Conservative Government found that the only way that they could carry out most of the major projects that the electorate had been promised was by the use of PPPs and PFIs. These are a very expensive way to build, operate and maintain hospitals, schools and roads. Over the life of a typical PFI project the total cost is three times what it would have been if the State had paid the full cost of construction and the subsequent operating costs. They are no more than a leasing mechanism - a way of transferring liabilities out of the capital account and into the current account. The use of PFIs and PPPs to fund projects will eventually have to cease as there will be insufficient money to make the repayments. It is like having an ever increasing credit card debt. Eventually a point is reached where there is not enough money to pay the interest on the existing bill let alone to take on more liabilities. Already many schemes are being cancelled at the last minute because the funds are just not available to meet the repayments as many construction companies have learned to their cost. Fortunately for politicians there is usually public protest when any new development is proposed which is a good way of avoiding the need for action. Encouraging 'public debate' is a useful way of distracting people from the fact that the Government cannot afford to execute more than a small number of new projects.

The European Union is trying to end payment of the Structural and Cohesion Funds that it has been making to the Spanish and the Irish Governments to release money for the new Eastern European member states. The Spanish and the Irish Governments realised the seriousness of losing these subsidies and have resisted strongly. The Spanish and Portuguese have another serious problem which is the danger of losing the vast amounts of wealth that were being transferred from Germany, England and Ireland into their economies to purchase property over the last twenty years. The Germans started to drop out of the Portuguese and Spanish holiday home market in 2000, but the British went into a borrowing frenzy and bought almost anything that was available. When these sources of income dried up the Spanish property market had to collapse. Spain is a good example of how a relatively small but steady inflow of cash can make all the difference between a booming economy and an economy that is in recession.

At the other end of the scale it is countries like Romania and Bulgaria that are booming. And so they should if the theorem is correct. Romania and Bulgaria have massive amounts of money flooding in from the World Bank and the European Union. There are also speculators who have bought vast areas of land and are now waiting to make a profit and there are large amounts of cash that need laundering. All the major multinationals have been taking money out of the older economies and transferring it to these new member states as they put in their distribution networks to secure their place in these new markets. None of these companies seek to gain financially as a result of their own industry but purely from distributing consumer products. When the multinationals have their infrastructure in place this inflow of money will cease and cash will start to flow out of these countries to repay the capital investment. The European Union may decide that controlling money laundering in the old EU countries is a waste of time if the 'back door' is wide open and close that loop hole. Finally the World Bank and the European Union will not have the funds to go on boosting these economies forever and so these sources of income will disappear. The result will be the same that has recently happened in Spain but in a more vicious way as the economies of Eastern Europe are not anchored in anything tangible. Similarly the new EU member states will experience further improvements in their economies that then levels off as the inward flow of investment is reduced and then a collapse when their construction sectors nosedive. All the millions of men that are engaged in construction projects will be unemployed. The collapse will mean that the individuals and companies who have borrowed money will be in difficulty. The speculators who bought land will have no one to sell it to. These countries will have problems that are far more serious than they can ever imagine. At the moment the money is flowing and profits are easy to make. When the cycle turns a collapse is inevitable. The benefits to these countries of joining the EU will therefore be real in the short term but catastrophic in the long term.

The 'growth' in the new EU countries will be paid for by the population of the older countries. Not only will people come from these new member states into the old EU to work at rates that the indigenous population of the old countries cannot or will not accept but when the wealth has been earned part of it will be repatriated. The new countries will benefit but to nothing like the extent that they expect. Overall the effect will be that some wealth is redistributed across the Euro Zone with older countries losing and the younger gaining. Spain and Ireland will experience another sudden and unpleasant drop in their economies when they finally lose their EU subsidies.

The Portuguese economy has benefited considerably from the amount of money that was invested in holiday villas and retirement homes by the British, Irish and Germans. The Germans dropped out of the race to buy in 2000. The EU support for the Irish economy will have to stop fairly soon and that will take them out of the market for property around the Mediterranean. As the value of pensions fall, the number of wealthy pensioners declines and the cost of aviation fuel rises, places like the Algarve will feel the pinch. British people who have the benefit of a good pension will continue to use their villas but when their health starts to fail they will return to the UK for the benefits of the Health Service. Certainly the Spanish, Portuguese, Italian and French authorities will not be willing to care for and support the large numbers of retired British people who currently live in their countries.

Until recently many of the newer Mediterranean holiday destinations were enjoying the prosperity that came from having millions of villas and apartments built to accommodate northern Europeans. However the recent problems with the mortgage industry will mean that the number of northern Europeans who are able to play in this market will reduce significantly. A simple change like a budget airline deciding not to fly to a particular airport and an area will no longer be a popular holiday destination and property prices will fall. The locals who are engaged in construction will then be unemployed. A large number of ancillary jobs will also be lost. The problem is that the indigenous population will not want to go back to farming and fishing and will decant to the cities to maintain their standard of living. How the Governments of the Mediterranean countries will handle such mass migration is unclear.

Published: August 2008