Many people today are trying to make sense of the many disparate stories that are to be found in the media about the economy and society in general. Yet everything is interconnected. Nothing happens in isolation. It is just that increasingly matters are addressed in a piecemeal manner to create media bites and because of a lack of joined up thinking on the part of Government. It then becomes a case of not being able to see the wood for the trees. The behaviour of the World's leading economies, the behaviour of multinational businesses, social development and foreign policy decisions form part of a single complex web. As a result any changes are easy to predict once the nature of the web has been mastered.
It is clear that all the Western Governments are finding it increasingly hard to meet their obligations to their electorates. A lack of real economic growth, the increase in the price of fuel and food, a lack of good quality jobs, an increasingly elderly population, rising crime, increasing congestion, a shortage of basic resources and a looming energy crisis are all symptoms of a single fundamental problem. Once the underlying causes are understood the effects are easy to anticipate, and newspaper reports and Government press releases all fit into a pattern. For example the collapse in house prices and the problems of the banking sector were an inevitable result of the global monetary policies and the desire of the management of all financial organisations not to miss out on profits that were to be made when the true level of background inflation was ignored. A rise in fuel and food prices was inevitable as a by product of global trade. Developments over the next twenty years are predictable and will occur despite what any government does.
Allowing low cost goods to flood into Britain allows the Government to claim a low inflation rate. Exactly the same principle applies to welcoming cheap foreign labour. It is a good way to hold down the level of wages in Britain. However the downside of this policy is that eventually the country has to bankrupt itself. Politicians are not in power for more than a few years and so their interest in the long term wellbeing of the country is limited. They just want their moment of glory and a place in the history books.
In the early 1980s the Conservative Government transformed the economy by arranging for British heavy industries to lose their effective monopoly position in the UK market and where possible forced them to compete with the rest of the World. This did exactly what it was expected to do. The old industrial bases like the docks and the coal industry were destroyed. Why mine coal in the UK when it is cheaper to import the material? The immediate effect was extra spending but to do this it was necessary to ignore the loss to the economy of recycling tax revenue and to ignore the fact that money was being transferred abroad. However in the short term the solution was wonderful for most of the population and throughout the 80s and the early 90s there were a lot of opportunities for businesses to make money. This attitude encouraged the desire for cheap goods which stimulated countries in the Far East to develop industries to export cheap goods to the West. This coincided with the opening up of China and the improvement in telecommunications. From that point on manufacturing in the West became pointless. This was the beginning of the end.
To gain and to retain power a politician has to pamper to the wishes and aspirations of the majority of the electorate - if that means sacrificing the productive wealth-creating part of society then so be it. Providing the destruction is slow and controlled then there will be little or no outcry. If the State can create sufficient jobs to keep pace with those lost in the private sector then even the GDP will not be affected.
In countries like France and Italy there is growing unrest with young people worried about their future and people in State occupations worried that their pension rights might be eroded. The young are right to be concerned that there will be no jobs for them in the future and the older workers are also correct that their benefits will be restricted. This is inevitable because their economies are in decline.
The British Government routinely manipulates the official data about the economy so as to create the impression that society is always getting better and that the standard of living of the bulk of the population is improving. For example the political establishment always boasts that the British education system is improving year on year because exam results are always improving. The underlying inference is that the population is getting more intelligent and the education system is continually improving yet the educational competence of young people is so obviously falling. The improvement is put down to better teaching methods which is a weak argument as it presupposes that teaching methods and teachers are capable of a sustained year on year improvement. The reality is that the Government, the Civil Service, the examination apparatus as well as the schools and colleges all have a vested interest in making everything look better, year on year, so they lower the threshold to create the impression of improvement. This is the same approach that is adopted in every field of Government.
The State is finding it increasingly hard to meet any of its major long term commitments e.g. the funding of the Health Service, the care for the elderly and pensions. More than 80% of the expenditure of the National Health Service already goes on caring for people over 60 and this figure is going to rise significantly in the next ten years. The number of Government projects that are funded by private finance is at a seriously high level. The British Government's unfunded pension liabilities are also very high. The sheer scale of all the British Government's liabilities when combined is far too great for the British economy to support in ten years time let alone thirty. The IMF highlighted this impending difficulty in a report that was published in 2006 but it was rejected out of hand by the British Government.
The media is always reporting the relative value of the Dollar, Euro and Pound. However the best analogy is to think of these currencies as three men who have fallen from an aircraft without the benefit of parachutes. Sometimes one of them will be in front of the other but they are all heading towards the ground very rapidly. Making judgements on a set of fluctuating reference data is not helpful in understanding anything. The key feature is that these currencies are falling in value which is expressed in the form of inflation.
The economies of the Western Nations stalled in 2000. It is just that these governments have all been using creative accounting methods to hide the truth. The Western Nations are all living on borrowed money and this cannot go on for very much longer. There are many professional groups who need to play along with these false numbers and the bulk of the population do not want to face reality and will accept with whatever they are told. As long as they can consume more every year and providing that the politicians keep telling them that everything is all right then the game will continue for a little longer. However it was apparent that there was a problem as soon as the Conservative Government under Margaret Thatcher announced the first PFI project, broke the link between pensions and the average wage, and started to reclassify unemployed people as being economically inactive. From then on the economy of Britain was in terminal decline.
Published: August 2008