14 April, 2012

Politicians and Bankers - the harbingers of incompetence, hubris and humbug?

It is apparent that from about 1971 onwards our politicians in collusion with the British banking elites that bankrolled the economy, knowingly or unwittingly have brought our economy to the brink of a debt crisis abyss where the economy cannot grow because of the lack of capital for investment due to the ongoing credit crunch and new banking capital requirements. This led to dwindling consumer and then business confidence in the economy (as consumer demand evaporated) and a double-dip recession. In these circumstances, the government is beginning to realise that they may not be able to service the burden of debt interest payments and reduce the national debt. The risks and probability of default on the national debt will grow tenfold if the Euro-zone collapses as many pundits predict. Our credit rating is under scrutiny and may be adjusted downwards accordingly. How did this come about and why?

The old British Imperial way of doing things is no longer internationally acceptable, affordable or practicable, but old habits die hard as the last decade or so of resource wars has revealed. Our politicians have squandered the British National Wealth with “gun boat diplomacy” in partnership with NATO and US military forces creating in the process an astronomic Defence budget deficit and a debt-laden economy further burdened with a number of colossal failed IT and other White Elephant projects that are still being considered, much to my consternation.

Looking back on my life and with the benefit of hindsight, I vividly remember years of double-digit inflation, double-digit interest rates, energy rationing, social unrest, a three day work week and persistent high unemployment that encouraged me to consider and then take up job opportunities abroad; twice in the Middle East, Hong Kong, Canada and finally back to UK after twenty years or so. I suppose you could say I was a participant in a long “brain drain” period of UK history as many of my kinsmen became similarly disillusioned with UK prospects and tried to make a better life for themselves and their families abroad. Certainly, I did things and took on responsibilities that I never would have had the opportunity to do in UK, but those days are now well and truly over as we try to compete in a global economy with other more motivated, better educated and management skilled nations also with access to vast cheap labour markets.

Inflation, really began in earnest with UK money decimalisation in 1971 (which coincided with the ending of the Bretton Wood system of money management and shift to Fiat Currencies), the introduction of credit cards for the masses providing easy instant credit in 1972 and the 1973 entry to the EU. The following years were marked by double-digit inflation peaking at 24% in 1975 and wage demands to keep pace with the spiralling costs of living. House prices went through the roof and then crashed. By December 1973 the labour unions and miners’ strike had brought the UK economy to its knees and crippled power station coal supplies. This forced the Conservative government to bring into force energy rationing and a three-day work week.

Perceiving that matters were likely to get even worse in the years ahead under a Labour government, I started seriously thinking about leaving the UK with my then very young family and started my adventures abroad in August 1974. By 1976 the UK economic situation was so bad that the government had to request an IMF bailout. This was followed by the 1978-79 "Winter of Discontent" which led to the election of Margaret Thatcher as Prime Minister of a Conservative Government in 1979.

The Thatcher government had no alternative but to try and clear up the economic mess left by the Labour government (sounds familiar?) and pay back the IMF loan while unemployment reached more than 3 million by the early 1980s. The only way to balance the books was to impose austerity measures, sell-off government assets (council houses) and privatise nationalised industries such as British Steel, British Airways and British Gas amongst many other utility companies. For a short while, taxes of 90% on North Sea Oil & Gas revenues were the government’s saviour and a new source of wealth for the country.

To facilitate the sale of state-owned assets and industries as well as stimulate public interest in private investment in company shares, it was necessary to deregulate the Financial Markets. However, self-regulation by the financial markets resulted in the sell-off of 50% of UK companies to foreigners and culminated in the 2007-10 Financial Crisis after decades of reckless self-indulgent casino style investment banking and consumer debt fuelled economic growth made possible by the availability of easy credit by out of control fractional reserve banking that the government turned a blind eye to while massive profits and thus tax revenues were being generated by a few elites at the expense of the taxpayer that had to bail them out when the markets crashed. To this day and unlike in Iceland and the US, no-one in UK has been held accountable and prosecuted for this unforgivable mess, which is outrageous and absolutely unacceptable.  Reform  of the banking and financial sector is long overdue

From 1979 to 1983 inflation was rampant and incomes generally lost purchasing power by as much as 50%. MPs' salaries were equally affected but it was not politically acceptable to increase them during a period of austerity and wage restraint. However, to offset inflation and dramatically rising costs, MPs were encouraged to claim expenses and a much broader range of allowances were introduced that were not curtailed until the 2009 Parliamentary Expenses scandal when the self-serving culture of many of our elected politicians was made public knowledge. This destroyed public confidence and trust in the political system prompting a call for major reform that also remains long overdue.

The economy has gone full circle and once again we face the prospect of a long period of austerity and economic stagnation or deflation, as debt is de-leveraged - only this time without the benefit of any State owned assets or industries worth selling to reduce debts.  Meanwhile, rapidly diminishing tax revenues from North Sea oil and gas continues and we have become net importers of energy subject to global oil and gas price rises and international competition, rather than the exporters we were in the 1970-80s. Our energy supply chain is no longer securely under our control.  The government have been accused of a lack of strategy and long term planning.

The situation has been exacerbated by a flood of immigrants over the past decade that I believe the government has consciously allowed to enter UK in an effort to stimulate economic growth and maintain demand for housing which traditionally has been a catalyst for economic growth. If we had stopped the flood of immigrants entering this already over-crowded small island nation, I firmly believe we would not have a housing problem, unemployment would be lower, welfare and social services would be less of a drain on national resources while house prices would have fallen after the financial crisis to a level that would be much more affordable, particularly by first time buyers in the settled population. However, this would neither suit the banks with massive toxic loans already on their balance sheets nor high volume house builders and property developers with large land banks on their books that would be devalued overnight leading to further bankruptcies in both the banking and construction industries with deflationary consequences for the property market generally.

Unlike property bubbles in USA, Ireland and Spain, the UK property bubble has not yet burst.  It has been artificially maintained by a combination of restricted land supply (planning land use) and restricted credit in conjunction with historically low interest rates and by allowing so many immigrants into the country to maintain demand for housing in competition with the settled population of first time home buyers or renters. Rental accommodation is similarly afflicted and both home rental and purchase price bubbles will likely burst as and when interest rates go up, which they must do sooner or later. Higher interest rates will trigger the sale of distressed home owned and investment rental properties as creditors desperately offload toxic loans on properties with negative equity which is created as and when debtors find they can no longer afford to service the loans on these properties.

Unlike the boom and bust years of 1970s and 1980s, the government and Bank of England this time reduced interest rates to an historic low of .05 % in a bid to increase demand for goods and services that stimulate economic growth and raise tax revenues to reduce past deficits. However, British industry, which is the only producer of wealth in real terms, has been allowed to decline in response to fierce global competition to such an extent that it has lost market share world-wide and has become too focused on trading with EU nations that are themselves in economic dire straits.

Meanwhile, the public sector has become bloated with bureaucrats in an attempt to soak up the unemployed laid off in the private sector during previous economic downturns when industry was allowed to decline and in many cases collapse – particularly in the north of England, Midlands and Wales. This is no longer sustainable. This time around, the austerity measures are centred on reducing public spending by reducing the size of the public sector which can no longer be funded at current levels by rapidly dwindling private sector tax revenues.

The government is now trying hard to create a more balanced export orientated economy trading with emerging growth economies such as those in Brazil, Russia, India and China, in order to become less reliant on tax revenues generated by profits from the financial markets which, coincidently, are also responsible for most of our debt. This strategy, however, is flawed as it assumes we are still ahead in most scientific and technical fields and can recover lost market share. Many of these emerging economies are more motivated, competitive and better management-skilled with a superior ingrained work ethic and "can do" attitude, are better educated having attended many of our Universities, and increasingly are taking the lead in innovation, science and technology. How can we compete with them now when we have lost the required industrial skills and collective experience with the collapse of various UK manufacturing industries over the past 30-40 years.  We have done too little too late to provide strategic direction and re-skill the working population to achieve these aspirations. That is not to say we shouldn’t try but that we should be aware of what we are up against.

My generation has experienced some of the highest income tax rates ever ranging up to 83% as well as the untold costs of double-digit Inflation and double-digit interest rates during their early years of wealth accumulation, which meant that it took longer, was much harder and considerably more expensive to acquire sufficient wealth to retire on, particularly if you worked in the private sector where private Money Purchase and  Defined Contribution pension plans prevail (unlike the the public sector where Defined Benefit plans are prevalent). This was followed by the current period of high volatility in the financial markets as well as the lowest savings interest rates and annuity income rates in history caused by Quantitative Easing, just as many "Baby Boomer's" are about to retire. Now who do you think gained the most from all of this – yes, the bankers but there is no end to their avarice as they continue to award themselves colossal salaries and bonuses while we pay the price for their folly and try to grow our way out of the quagmire they created in the first place.  

Consequently, the next generation will have to work even longer to accumulate enough wealth for retirement, partly because we are living longer which requires greater amounts of capital to derive income from especially when savings or annuity rates are so low, but mainly because discretionary income for long term financial planning purposes will be substantially eroded by higher taxes to pay down the colossal national debts created over the past decade or so and by huge personal debt elimination requirements including five figure student loans, six figure mortgages and credit cards etc. Moreover, the government State Pension changes that increase the State Pensionable age also rather presumes that there will still be meaningful and worthwhile jobs available for people in their late 60s and 70s before they become eligible for the State Pension,  So far I haven't come across any - unless you want to stack supermarket shelves into your 80s, for example.

It is time to let the bankers bury themselves in their own mess and start afresh as the cost of delaying the inevitable collapse of the Euro and breakup of the euro-zone, the ensuing collapse of the EU and our own economy becomes greater than allowing the collapse to actually happen now so we can start the painful process of building a new low-carbon Steady State economy with a clean balance sheet while we transition to more sustainable local community based lifestyles - without the debt loads that enslaved us to enriching the one percent of the population that have brought us to this abyss. Nearly all of this debt has been created out of nothing anyway and is virtual debt.  There simply is not enough money on planet earth to bail out the banks.

Let’s also get out of the EU ASAP so we can control our own destiny free of the burden of onerous EU counter productive regulations created by unelected and unaccountable bureaucrats, thereby relieving us to concentrate on establishing or improving trade with our Commonwealth nations and the rest of the world before it's too late and other less regulation burdened countries beat us to it.