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Britain’s Economy in Meltdown as Government Faces Collapse
By The Anglo American | October 1, 2008
Britain will be the only major economy to face the full force of a recession, according to the Organization for Economic Co-operation and Development. While all the G7 economies will slow The O.E.C.D. predicts that Britain will be the only member of the G7 whose gross domestic product will fall into negative growth. Since this will take place over at least two financial quarters, Britain fulfills, what economist like to call “the technical requirements” of recession.
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The chancellor, Alistair Darling, the government’s financial minister, has predicted that Britain is facing the worst economic crisis for more than 60 years.And, there is very little that the Gordon Brown’s government can do about it. Inflationary pressures remain high which prevents adopting the US approach of reducing interest rates and pumping billions dollars back into the economy. To do so would result in the Bank of England losing control of inflation altogether.
But even if there were no inflation the government’s hands would still be tied. In recent years the British economy has been built on the back of a lightly regulated financial services industry. Employing over 1 million people, the financial services industry accounts for more than 10% of Brtian’s gross domestic product. The government has pumped those tax revenues into expanding the public sector whereby 1 in 4 working people now work for the state.
It is proving unsustainable as the ballooning of public sector borrowing in recent years indicates. With declining tax revenues, public finances can only continue to deteriorate from their already perilous state.
Simply put, the government has no money to throw at the economy, even if it wanted to.
How did the British government get into this mess? Much of it is to do with the government’s flawed application of chronology towards the economic cycle. When chancellor, and financial guru of the Labor {Labour} government, Gordon Brown continually engineered forecasts of the economic cycle to fit with government borrowing requirements. Did he believe he had overthrown proven economic theory?
He had not. The inevitable economic wave of a downturn came on the horizon. Gordon Brown and his chancellor found themselves faced with economic reality. Their borrowing was far too extended for this moment in the economic cycle. As the British Conservative leader David Cameron put it, Gordon Brown had failed to fix the roof when the sun was shining.
The outlook is bleak for Britian. Food inflation is estimated to be around 40%. A gallon of gasoline costs over $8. Household gas and electricity prices have risen 20%. UK House prices are predicted to drop 25%.
Publicly, Gordon Brown puts Britain’s difficulties into the context of the world economic malaise. But he is fast becoming the economic equivalent of King Cannute. Food prices are the result of a failed national agricultural policy that has made Britain over-dependent on food imports and their volatile prices.While gas and oil prices may have spiked over the last year the government has also failed to deliver a coherent energy policy. Because of short-term financial requirements the government raised taxes on gas an oil flowing from the North Sea. It is now no longer viable for energy companies to explore and develop new fields in the region.
With no strategy for developing nuclear, gas or coal power stations, Britain is now dependent on Russia for its energy needs. The security issues were obvious to everybody, but not the people in power. Today Britain’s security is severely compromised as testified by the country’s timid response to the Georgian crisis.
The collapse of property prices, however, may prove to be a good thing. At least for those who buy a property to live in, rather than to make money from it. The property boom was the result of where city {financial} workers invested their bonuses {$11bn last year}, made from short-term financial opportunism, in other words greed. Other players were dubious foreign investors with hoards of equally suspicious cash, attracted by a favorable and unquestioning tax regime.
It is difficult to reconcile this Labor {Labour} government’s favoritism towards the wealthy when it is the party that, historically, represents the working classes. Fairness and opportunity are the present slogans for this government. But for first time buyers trying to raise ridiculous amounts of money and then having to pay punitive stamp duty charges may disagree.
And here lies the reality of New Labor {Labour}. It no longer represents the interests of the less well off in Britain. But neither does it represent the traditional wealthy aristocracy either. New Labor {Labour} represents a new class that it created itself - a plutocratic class. These plutocrats come, primarily, from it’s own elected members in Westminster. But they also come from the party’s wealthy investors who make up what is now called the Westminster village. And their court is made up from the army of private consultants who extract $5.5 billion from the taxpayer every year, giving poor value in return. Although there is no suggestion of improper behavior, it was not by chance that the former Prime Minister, Tony Blair, landed a senior job at Morgan Stanley.
New Labor {Labour} is primarily concerned with itself and its backers. And polls suggest that the British people have finally seen through the con trick. Not least because they are the ones who are made to suffer from the profligacy of others. A profligacy that New Labor supported at the expense of marginalizing their grass roots membership.
The feeling in the UK is that New Labor {Labour} needs to go and soon. Even Labor’s {Labour’s} elected members want the Prime Minister to go. This is possible in the UK as their leaders are not directly elected. Of course, it may prove only to be coincidence that electoral registration papers were sent out across the land this month.
For whoever becomes the British commander in chief, their job will be a grim one. The collapse of AIG from its credit default swaps may prove to be insignificant compared with what may yet happen. AIG represents the legitimate end of the insurance market that underwrote the collateralized debt obligations - the securities bundled with failing US sub-prime mortgage debt. The company’s exposure is estimated to be no more than $441 billion {Financial Times}. But the credit default swap market is estimated to be worth an unregulated $43 trillion. If these trades unwind then AIG’s losses could prove to be a drop in the ocean. Since credit default swaps are derivatives that are tradable, proving ownership of the debt will prove complex, lengthy and no doubt, litigious.
In this scenario it will not make any difference as to who is Britain’s leader.
Further reading on British government corruption: Peter Oborne : “Kick-backs, cronies and Labour’s love affair with the City spivs”
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September 18th, 2008 at 5:45 am
Cry my beloved country (Britain). The process of decline was evident when I returned from service overseas and lived there for a while just after WWII. I agree recovery is beyond the wit of any man.
September 18th, 2008 at 6:49 am
Just a little bit of mathematics on the crisis - as I understand money is being printed to meet the injections :-
If , for example , a country has $10T of money and it then prints - creates - another $10T ( ie. without any backing - eg. in man hours ) - this second $10T has no actual value . What happens is that it is added to the first $10T to form a total of $20T . Now technically that second $10T can be used to shore up the system - pay off debts etc. . However - internationally what it means is that the $ is only worth half it’s initial value against other international currencies . This can mean , for example , that the country moves from being a first World country to being a third World country in terms of exchange rates .