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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.

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11. The wealth of Britain

China only started to develop as an industrial powerhouse in the last two decades and only in a major way in the last decade. China still has 700 million rural poor who expect to see their lot improved and the Chinese Government knows that it has to demonstrate that this is possible otherwise there will be social unrest. In the 19th century Britain underwent a rapid industrial revolution. Britain had a strong industrial base well into the 1970s. In the 1980s Britain started to move into a self-indulgent non-productive phase. This process has continued at an accelerating rate until today. There is no way that Britain can compete with an energetic society where the labour costs and taxation rates are a fraction of its own. With time the Chinese and to a lesser extent the Indians will learn to draw more and more functions into their society to secure the wealth that they need to feed the demands of their population. If China is to gain hundreds of millions of jobs and to build a whole new social infrastructure then the wealth has to come from somewhere and that means the Western economies.

The historical analogy would be the Opium Wars where western traders wanted to purchase finished goods from China but found that the Chinese had little interest in what they had to offer in exchange. From the 16th century through to the 19th Century the only way that the western nations could achieve a balance of trade with China was to create opium addicts. Unfortunately for the West this option is no longer available and as manufacturing is not longer the cornerstone of the Western economies the balance of trade has to be impossibly weighted in favour of the Chinese. Today the Chinese might still require a few highly specialised items like aircraft from the West but they have successfully launched a man into space so building the equivalent of an A380 will not be beyond their capability in ten years time. There is plenty that the West wants from the Chinese but not a lot that they want in return. Providing that they can access raw materials from around the World they can do almost everything else by themselves. They can pay for raw materials that they need with the money that they obtain for their exports to the West. In the last four centuries not much has changed.

In the 19th and for most of the 20th century Britain imported raw materials, processed them and then exported the finished items. It was the wealth created by this process that built the canals, the railways, the road system, the schools and the hospitals. It also paid for the mains water supply and sewage disposal systems that were installed in all the main cities. Additionally it paid for the construction of millions of homes to provide accommodation for the workers who fled the poverty of the countryside. Britain no longer imports raw materials, refines them and then exports the end product to the World. As a result there can be no major construction projects in Britain. This is the same mechanism that the Chinese are using. The Chinese will be building more than 100 cities the size of London over the next twenty years as well as a whole new infrastructure. They will do this from the wealth that they get from the West.

It is now technically impossible for any Western company to compete with a Chinese company based in a brand new factory, with state of the art equipment, a willing low cost labour force and little in the way of social costs. The outcome has to be that all activities that can be relocated outside a high cost environment will be. The result is that all the Western Economies will eventually collapse as there is little that they can produce that anyone in the World will be able to afford to buy. Ultimately trade is still a question of barter and if a country has nothing to sell then it cannot buy anything. The wealth that has been accumulated in the western nations will be transferred abroad and ultimately a position will be reached where a country, like Britain, will be unable to import the essential raw materials that are needed to sustain its population such as oil, gas and food.

The Chinese are securing the rights to natural resources all over the World. They are not particularly concerned about the nature of the regimes that they do business with as long as they can secure the resources that they know they will need in the long term. This will always be a problem for countries that believe in free trade. No western nation can operate like this. The principles of democratic government will never allow forward planning on this scale. Instead they believe that private companies should exploit natural resources when it is commercially viable to do so. Such an approach does deliver the lowest prices in the short term and has worked for centuries. However most of the World's resources are now under pressure and no western company will ever be able to compete with the financial muscle of the Chinese in twenty years time. Natural resources are always limited as are a nation's wealth. Any competition for resources will come down to one simple fact - who is able and willing to pay the most money for them.

Reference is often made to China and India competing with the Western Nations for oil and gas. There will be no competition even in the medium term. The hydrocarbons will go to the countries that have something to trade for them. All the Western Nations have are a massive number of unemployed and under employed people, plus a huge retired population that will only get larger. This means that there will be even higher levels of tax which in turn means that no domestic manufacturer can compete. The outcome has to be that ever diminishing quantities of raw material will enter the UK economy. Ultimately less and less finished goods will also enter Britain.

A large amount of the infrastructure constructed by the Victorians is still in use today. The Embankment in London, the railway system and a large part of the underground system are examples. Even in the 1920s and 30s there was a huge increase in the size of London with the building of Metroland. During the Second World War a large amount of construction took place. By the end of the 1960s almost 400,000 houses a year were being built and new factories were being constructed. Major infrastructure projects like the motorways were still under construction in the 1970s. Britain was still able to export its way out of a recession. Today there is little industry left to make things to export. Exporting the UK out of this current recession will be impossible this time. This recession is permanent. The nation's accounts will have to be fiddled to hide its presence. Thankfully for the British Government all the Western Nations are in the same boat. Providing the Dollar, the Euro and Sterling are compared with each other the overall decline will not appear too great.

The 'growth' in the British economy in the last decade has been entirely funded by borrowed money. The general level of borrowing by individuals, business and the State has been at very worrying levels for years but there are many vested interests who want it to stay that way. The Government, the pensions industry, the banks and big business all stand to gain by ignoring reality. After all when an individual borrows money it is sent spinning around and profits taken. More importantly everyone within the system gets their annual bonus. Recently the markets have dropped and yet it was obvious five years ago that house prices could not go on rising forever. A viscous adjustment was inevitable yet now there is surprise that it has actually happened. The worrying question has to be why anyone is surprised and why supposedly responsible organisations like banks did not anticipate the inevitable consequences of their actions. The answer has to be herd behaviour. No one was going to stand aside when others were making money if only because the bank's main shareholders would never stand for it. A classic case of 'The Emperor's New Clothes'.

Much of the debt in Britain is based on false property prices. In many ways it is like the tulip frenzy that gripped Holland in the 1600s. The bulbs were only valuable as long as people believed them to be valuable. When confidence finally collapsed so did the market. It is only necessary to look at the size of personal borrowing and liabilities. It has been estimated that the average person in the UK has a personal debt of over 30,000 excluding mortgages. Why mortgages are excluded from this total is unclear as they are a borrowing. However this is a huge sum that in theory has eventually to be repaid - except of course that inflation is always working in favour of the borrower and against the lender. The runaway housing market is the biggest single reason why consumer debt in Britain has spiraled to over 1,344,750,000,000. Out of this the debt on personal loans and credit card debt alone total 214 bn. It has been this increase in the level of borrowing that has kept the UK economy running since 2000 and not 'growth' in the commercial sense of the word.

The British Government has official borrowings of 500 billion but there is a large amount of debt that is creatively hidden off the balance sheet. The finance used for PFI and PPP projects and the debts of Railtrack are just a couple of examples. There are many others and together the Government's debt is well in excess of 750 billion. With all the other undisclosed borrowings of the businesses sector the total British debt accumulated since Labour came to power is over 2.5 trillion or an average of 250 billion per annum. If GDP is taken to have been in the order of 1,000 billion over the same period then it puts the scale of this borrowing into its proper context. What individual could manage to borrow 25% more than their salary each year for 10 years and then pay it back.

There has not been true commercial growth for the last decade purely an economy kept running on the back of ever increasing debt. Very little of this money has been put into anything useful. It has been frivolous waste that has kept a bankrupt system running. There is no way that a sum this size can ever be repaid so either financial collapse or rampant inflation can be the only outcome.

Published: August 2008