Sunday, 16 November 2008

The end of New Labour illusions

"For Britain's part, our openness has enabled us to benefit from low cost goods exported from Asia, while at the same time enabling us to expand our own strength in high value added industries and become the world's financial centre leading in exporting services to all parts of the world.

Our openness, alongside all our economic and labour market reforms - matching flexibility with fairness - have helped keep inflation low, while enabling the economy and employment to grow"


Alistair Darling, Chancellor of the Exchequer, speaking at the London Business School, July 2007.

It is now evident, some 16 months after Darling's speech that every illusion that underpinned his optimism have been blown away. The credit crunch has exposed the economic weaknesses that New Labour had accumulated after 10 years of inflating the UK bubble.

Illusion one - We can rely on Asia to provide us with an endless supply of cheap goods

Over the last ten years, Britain imported huge amounts of cheap tat from Asia. However, it wasn't through the miracle of comparative advantage and specialization that allowed us to do this; it was an overvalued exchange rate rate, foreign financing and a huge current account deficit.

The age of cheap Asian goods has just come to an end. Sterling is falling back and as it does, those imports are becoming expensive.

Illusion two - the current account doesn't matter

Yes, the current account really matters. With sterling on the slide and foreign financing evaporating, that huge external deficit is like a millstone around our necks.

Since our export capacity has all but disappeared, there is only one way that deficit will narrow. The UK needs to import less, and that means falling living standards.

Illusion three - the UK as a world's financial centre

Under New Labour, London attracted huge amounts of foreign capital, which was promptly re-exported back, with a narrow caste of bankers taking a slice. This tasty little wedge generated huge financial sector bonuses, pushed up the capital's property market, and led to a boom in expensive restaurants.

To be fair, those bankers did their bit in terms of tax revenues, allowing New Labour to build up a formidable degree of welfare dependence among the poor.

The credit crunch has turned our financial sector from being an dubious asset into a dreadful liability. The UK is about to shrivel and as it declines, it will take with it London's property market, the novelle cuisine and those tax revenues that have placated the welfare classes.

Our banks are, for the most part, now insolvent. New Labour has already committed billions of taxpayers hard cash to bail them out. The Bank of England also played along, offering countless billions in cheap liquidity.

Illusion four - We have conquered inflation

The credit crunch, despite the supposed lack of loans, ushered in a 16 year high for the CPI. Despite the surge in inflation, the Bank of England now worry about a phantom called deflation, and have cut the bank rate to a sixty year low.

Illusion five - No more boom and bust

The boom has gone and the bust is here. The economy is now in recession, unemployment is rising, and the property market is in free fall. The excesses of the past need to be purged. The UK economy has finally reached its day of reckoning.

Creating some new illusions

New Labour are now looking for an escape. Moreover, Brown and Darling think they have found one. They think that they can spend their way out of trouble, and buy off their banking sector problems. They also have some accomplices at the Bank of England, who see nothing wrong with negative real interest rates. Within a year, these illusions will seem as hollow as the ones that put us in this mess in the first place.

22 comments:

John Pickworth said...

What? No good news!

I agree though it is bad... while I'm certain that things will get better eventually, I'm worried about the lights going out in the meantime.

Oh well, that pamphlet on rabbit snaring and cave dwelling will come in useful now I guess?

Anonymous said...

A long view of history shows there have been long periods when Asian countries have been the most sophisticated technically. Remember the printing press, porcelain and gunpowder came from China.

If interest rates are soon to be at their lowest since the Bank of England was founded in 1694, then we may be at a turning point of which side of the world is going to be dominant, a return to the way things were when Marco Polo brought so much back from China.

Our present crisis shows we do not earn enough to pay fo the lifestyle we aspire to, and have been financing it with Asian credit.

The next phase may be that we cannot finance it at all, and China has the higher standard of living.

It's maybe just a very long economic cycle - say every 450 years a switch!!

That's what Bob Beckman claimed in the 80's, anyway, would happen. Was he right?

B. in C.

Anonymous said...

Totally spot on Alice, your short UK history lesson is very accurate but I think our road to ruin is deflation though.
I can't see any inflation around. I see poor people who can't buy things, that is not inflation thats just a new standard of lifestyle.

Stevie b. said...

Nice post.

Re anonymous 16.40 - a collapsing pound may soon help you see inflation - unless interest rates are forced-up along the curve to prevent it. Whatever longer rates are right now, my guess is they aint high enough given the weak pound allied to yet lower base rates, along with the expanding supply of debt issuance to come.

Anonymous said...

I agree - a collapsing pound will lead to inflation. We will get depflation - a kiss worse than death. This is what is happening in Iceland. Sure you will have deflation in property but imported food, etc, will rise - hitting the poor hardest.

Once GDP collapses in 2009 this will all be academic.

We are stuffed and heading to a B then an L.

C'est la vie!

Anonymous said...

The way to look at it is like this: do you remember Mr Greengrass from the hit TV series Heartbeat? The incorrigible little country spiv was always stealing things and working little scams to get by. He survived, and judging from his fat belly, was not starving. He did not need cheap Asian imports to survive. But most aspirational middle class types would not want his lifestyle.

We want ipods, travel, nice food, sex-on-the-net, DVDs, flatscreen TVs etc. And all of that comes from Asia. Eat rabbits and drink ale? Be happy. Look like an extra from an Apple ipod commercial: suffer.

electro-kevin said...

John Pickworth - stick around this blog, buddy. It's my favourite.

Alice - feel free to delete me if ever I'm devaluing your cred, I'll understand and I really have no ego to offend.

Brown's latest ? 1k to the poor in time for Chrimbo. An election soon ? Or is it scorched earth ?

Either way - win-win for Nu Lab. I think the Tories have blown their cookies.

PS, Do you agree with tax cutting at this juncture ? I seem to recall that Maggie put them up in her first term of office, along with taking a hatched to nationalised industries (the equivalent would be state employees nowadays) It worked. What precedent do the tax cutters have to go by ?

electro-kevin said...

Hatchet, obviously.

Markbaldy said...

The sad thing is that the polls show New Labour GAINING popularity... the UK must be full of very thick people with very short memories.
Personally, I wouldn't trust Gordon Brown or any New Labour morons to take the dog for a walk !!!

Markbaldy said...

The sad thing is that the polls show New Labour GAINING popularity... the UK must be full of very thick people with very short memories.
Personally, I wouldn't trust Gordon Brown or any New Labour morons to take the dog for a walk !!!

Mark Wadsworth said...

That's an excellent summary, but I'd query this: The UK needs to import less, and that means falling living standards.

To a large extent, we've been importing consumer durables (iPods, cars, flat screen TVs and so on). If we stopped importing them for a few years, it wouldn't make that much difference to us, we could just make do with replacing our TVs every twenty years again rather than every five years.

Anonymous said...

mw, not for the first time you are dead on the money. The new LCD screens merely show up the lack of quality on your downloaded divx torrents, and widescreen just fobs you off with less screen.
Much better to buy an old style tube tv on ebay.

Anonymous said...

more seriously, 20 years is a bit excessive for tv replacement. They usually break after 4 or 5 years.

John Pickworth said...

electro-kevin said...

John Pickworth - stick around this blog, buddy. It's my favourite.

Mine too... sharing the honours with Mark W and Wat Tyler's blogs. My daily first ports of call.

John Pickworth said...

Ooops! Forgot to add my comment...

Meant to say a huge thanks to Alice (not sure if I've said that before?) for my daily fix of graphs, facts and figures. There's a very real risk you might me a little smarter ;-)

Alice wrote: "New Labour are now looking for an escape..."

I have a theory. While accepting its not necessarily by design, I wonder if the current troubles might create the opportunity for Gordon Brown to take us into the Euro?

Over the past couple of weeks the Euro question has started to rise a little above the background static. I'm not talking about some internet crazies running their mouths off, but in otherwise quite considered articles?

New Statesman: Brown's euro ambition

FT/maverecon: How likely is a sterling crisis

My own personal view is that Brown would if he could. But what are the chances he'd seize upon taking us into the Euro to carve his place in history?

Anonymous said...

The FT today is peddling the benefits of going into the Euro in this crisis. It's coming very SOON. Once we hit par by xmas (we will), it will be time to join the Euro to get stability and remove our financial future from the hall of mirrors that is the House of Commons.

Stevie b. said...

@ anonymous 8.24

This would certainly crystallise our recent impoverishment, but the outcry would be so great I doubt it will happen. I also doubt we could get into a position where joining the euro would be the only option left - despite destructive Gordie Brown's delusional mindset.

AndyD said...

Have to take issue with Illusion 3 -

The big mound of the unemployed was first really created by Thatcher in the early 1980s, financed by our North Sea windfall. It never really went away, especially if incapacity benefit is included.

Electro-kevin - how did hacking away at nationalised industires actually help, apart from demolishing our manifacturing base and creating mass unemployment?

electro-kevin said...

There wasn't any choice, Andy. Much of British industry was failing - though I fundamentally agree that not enough was done afterwards to make Britain hi-tech/hi-skill. I also believe that Europe has ruined much of our food producing capability and the allied employment associated with it.

Do you not agree that a hatchet needs to be taken to public sector employment ?

Stevie b. said...

A hatchet needs to be taken to public sector pensions as well.

Nick von Mises said...

"The big mound of the unemployed was first really created by Thatcher in the early 1980s, financed by our North Sea windfall. It never really went away, especially if incapacity benefit is included."

No.

Thatcher was the messenger who said that worthless uncompetitive industries cannot be kept on life support by screwing the good industries.

The 1980s is when we realised Britain had been destroyed by the 60s and 70s "post-ware consensus"

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