#101: The pay paradox


Though we’re past the #100 mark, there’s a string of topics crying out to be discussed. Future articles might look at what the market economy really is – and what it isn’t – and perhaps take in the “gig” or “sharing” economy as well. I’m also thinking about doing something rather outside normal parameters, looking at where businesses should (and shouldn’t) seek to invest.

Here, though, we look at a critical paradox. It’s critical, because it goes a long way towards explaining why countries like Germany prosper whilst countries like Britain don’t.

Economics is full of paradoxes. Perhaps the most famous is the “paradox of thrift”. If you save or I save, that’s prudent and commendable. But if we all save, and do too much of it, that’s bad, because demand will slump, to the detriment of the economy. Actually, what this really means is that we want a “Goldilocks” amount of saving. If there’s too much of it, we’re stifling demand – but if there’s too little, we’re not investing enough.

Here’s another paradox, less widely recognized (indeed, seemingly hardly recognized at all), but actually much more important. Let’s call it “the paradox of pay”. This is important, and certainly merits discussion, because it’s a major factor depressing performance in a number of Western economies.

The pay paradox

Here’s how it works. If you’re running a business, keeping down pay can be a good thing. As a business, wages are likely to be one of your biggest costs, indeed very probably the biggest of the lot. So, if you keep your wage bill as low as you possibly can, your profits will increase.

That sounds good.

If all employers do this, however, business, and the economy, are the losers. Small pay packets mean weak consumer spending, and the consumer typically accounts for 60-70% of the GDP of a Western developed economy. If you undermine wages, then, you undermine sales.

No so good.

Henry Ford famously understood this. That’s why he paid his workers more than the bare minimum. If he didn’t, reasoned Mr Ford, how would they ever be able to buy his cars?

There’s a revealing story about this, in a different car plant in a different era. A manager proudly unveils the first production robot, and says to a trades union leader: “try to persuade that to join your union!”

To which, of course, the union man replies: “try persuading it to buy a car!”

The truism, of course, is that workers and consumers are the same people.

Micro and macro

Actually, the “paradox of pay” really amounts to the difference between microeconomics (the economics of the firm) and macroeconomics (the study of the whole economy). Low pay can be good microeconomics, but is always bad macroeconomics.

It can make sense for a company to minimise its wage bill. But it is idiotic for a country to do the same.

There are, however, simpletons who think that an economy should be run like a business. So, if it’s good for businesses to minimise wages, it must be good for a country to do the same. The theory – a pretty half-baked one – is that, if we can keep down the wages of people making (say) cars in our country, we keep those cars cheap, thereby increasing our ability to sell them on the world market.

Actually, this theory is worse than half-baked. Observation reveals that low wages don’t make for national competitiveness or prosperity. If they did, Ghana would be richer than Germany, and Swaziland more prosperous than Switzerland.

In reality, there are perfectly good reasons why a high-wage economy like Germany is more prosperous than a low-wage country like Ghana. For a start, demand is stronger. The German worker has more money in his or her pocket than his Ghanaian counterpart, increasing his ability to buy goods and services produced by other German firms. Moreover, the higher the average level of pay, the higher both quality and productivity are likely to be.

From this, an obvious truism follows. A company like Mercedes or BMW can never turn out cars cheaper than a plant in a, say, Vietnam. If Germany’s car-makers (or any other German sector) tried to compete on price, they’d fail.

So, being sensible people, they don’t. They compete, instead, on quality. This is the obvious (indeed, the only rational) course of action for a developed economy. Competing on quality makes sense.

Trying to compete on price is, frankly, pretty crazy.

The price of a fallacy

Some countries – the obvious examples being America and Britain – don’t seem to grasp what, to a German, seems perfectly obvious. Instead, they assume that getting wages down must be a good thing. Pursuing this policy involves maximising the supposed “openness” of your economy, and backing “globalization” to the hilt. By all means ship out skilled jobs from Derby to Delhi, if profits increase. Go ahead and outsource work from Cleveland to Calcutta for a short-term boost to the bottom line. “What’s good for American (or British) business”, the slogan runs, “is good for America (or Britain!)”

It’s a persuasive slogan.

It’s also, in economic terms, drivel.

The point, you see, is that running a country isn’t the same as running a business. Businesses can benefit from low wages. A country can’t.

This said, a lot of businesses are too smart to succumb to the low-wage mantra.  Many enlightened firms recognize that getting good staff – skilled, innovative, productive, dedicated and committed employees – can’t be done on the cheap. The pay-off in terms of quality and productivity can far outweigh the cost of paying good wages to attract and retain the best.

A fool’s paradise

If a country follows the low-wage route, a string of adverse consequences quickly follows. It’s a chain-reaction process.

For starters, outsourcing skilled jobs undermines consumption. One seductively-easy way of countering this is to fill the consumption gap with credit. Countries that follow the low-wage mantra tend to succumb pretty soon to a policy of making credit both cheap and easy to obtain. This involves both low interest rates and “deregulation” of the lending industry. This in turn results in soaring indebtedness and escalating risk.

It also depresses tax revenues, and undermines productivity, whilst skewing the economy away from activities at the high end of the value-added spectrum. You end up with very little manufacturing, but plenty of pedicurists and pizza-deliverers.

What results is an economy with low skills, feeble productivity, and too much debt (does that remind you of anywhere?). You find yourself in a position where each incremental unit of GDP comes at a high cost in additional borrowing (say, getting on for £6 of new debt for each £1 of growth). Tax revenue weakens, resulting in big fiscal deficits and escalating debt.

You can try to offset the deficit by cutting public spending, of course, but even a passing familiarity with Keynes should convince you that voluntary “austerity”, by depressing demand, is likely to be counter-productive. Some of the weaker Eurozone countries have had austerity imposed on them by their inability to devalue. Other countries have embraced austerity voluntarily, out of sheer folly or desperation.

As well as depressing the economy, too much austerity is likely to depress voters, the end result being that you’re out on your ear. Frankly, if you’ve been following the fool’s mantra of a low wage strategy, that’s nothing more than you deserve.

At some point, meanwhile, someone notices that people are struggling to cope with servicing their bloated debts, so you cut rates even further, now to levels that are a long way below inflation. Doing this might be unavoidable, but it’s still akin to handing a bottle of gin to an alcoholic.

One consequence is that, whilst asset prices balloon, returns collapse. This opens up huge chasms in pension and other provision, which can be impossible to bridge even with a high savings ratio, let alone with a savings ratio that has crumbled under the onslaught of impoverishment.

At this point, with foreigners wondering whether to go on bailing you out with capital infusions, and the locals beginning to wonder whether inflated house prices don’t amount to realizable riches after all, hopefully some nice people turn up with a waistcoat that laces up at the back.

Wisdom and folly

So there you have it. Paying low wages might, at the micro level, help you to make cheaper washing-machines (though whether it’ll help you to make high quality ones that people actually want to buy might be a different question).

At the macro level, though, low wages have a string of adverse effects. They undermine quality and productivity. They’re likely to push debt up sharply, inflate asset prices and depress returns. They’ll certainly undermine demand, stifle growth and undercut tax revenues, and they’re highly likely to degrade the value-adding profile of the economy.

The Germans, amongst others, clearly understand this. The British authorities, equally clearly, don’t. It will be interesting to find out whether Mr Trump and M. Macron understand it, too.

82 thoughts on “#101: The pay paradox

  1. Good article! In summary, the policies of the powerbrokers or the rentier class and their political lackeys in the US are actually running their nation into the ground. Contrary to their policies, Spending Creates Wealth. The sheer act of spending, even on a job guarantee scheme will pay for itself in the boost to the macroeconomy. It amazes few can see that in the fog of neo-liberal lies that so damage our economies today. It like that rubbish about being desirous of a “balanced budget” which is utter nonsense.

    • Thank you.

      What’s your view, if any, on monetary velocity? This is how often/quickly a given dollar/euro changes hands. Pre-GFC, people spent money as soon as it came in, as ‘there will always be more’. After the crisis, they became more cautious, i.e. monetary velocity or ‘turnover’ fell sharply. It could be argued that a fall in velocity made it possible to increase monetary quantity (as we did) without causing inflation – because effective demand = Q x V. If V picks up with Q still enlarged, though, inflation could take off (QV theory). Any thoughts?

  2. Dear Dr Morgan,

    As an IFA, I have been following your blog & thoughts for quite some time and I have been impressed by the content. You mention setting out some thoughts about where companies should be thinking about investment. How about individuals?

    Whilst not entirely bereft of ideas myself, it is exceptionally difficult to advise in these frankly weird investment conditions and I would appreciate your (clearly unregulated and entirely personal) views!


    • Thank you, Mark.

      Something I’m working on now might help shed a bit of light on this. According to a report from the WEF, the aggregate pension shortfall in 8 countries (Australia, Canada, China, India, Japan, Netherlands, UK and US) was $67 trillion at end-2015. In the US alone, this is growing by $3 trillion annually, roughly 5x the defence budget. For all 8, it is growing by $28bn per day.

      The WEF spreads the blame, but the biggest factor by far is the collapse in returns. In the US, for example, returns on equities have fallen to 3.45% from a historic 8.6%. Bonds are down from 3.6% historically to just 0.15%.

      This means that, to get the same pension return now, the savings ratio has to be 2.7x the previous level. If people used to save, say, 10% of incomes, that needs to become 27% to get the same outcome. That’s simply impossible. Returns on existing investments have collapsed.

      This isn’t accidental. Think of it as economic signalling. The signal is “don’t save – we’re so strapped for current consumption that saving has become an unaffordable activity for the economy”. It’s hard to fly in the face of signals this emphatic. The pensions chasm for the 8 countries is projected to reach $428 trillion (at constant values) by 2050.

      The deficits, nationally, are growing at rates of between 5% and 7.5% annually. For most countries, that’s 2-3x growth in GDP. Meanwhile, globally, each $1 of growth is coming at a cost of $3 in new debt. In some countries, it’s higher (UK, for example, is £5.80 per £1 of growth).

      So the profile might be sketched like this:

      – Growth: say 2% (optimistic, I think)
      – Debt: 3x growth = 6% of GDP
      – Pension deficits: say 4-5% of GDP, on rising trend

      This means growth of 2% versus aggregate “mortgaging of the future” of c10% of GDP annually. So we’re creating “growth” by destroying the future. (Yes, we can inflate debt away, and will probably try, but it won’t work with pensions). This is effectively what the banks were doing pre-GFC, when they were generating “profits” by selling MBSs (etc) to themselves via off-B/S SPVs. Now, whole economies are doing it.

      I can’t give investment advice, but I can say that I wouldn’t have all my eggs in one basket – especially if that basket is GBP.

    • I wouldn’t put my investments in one basket too. And certainly not in the cuckoos nest.

  3. Everything you said is true, but you neglected to link wages to energy. You, better than most, understand that wealth is proportional to energy consumption. How can a country like the UK increase its real wages without access to additional affordable energy? The Germans can do it for a little while longer because they dominate high quality high priced products that are sold to rich customers from counties that still have some affordable energy. The world does not need another BMW. It needs fewer people living within the means of the planet.

    • Totally agree. If I’ve learnt anything from Tim (and various others) “surplus energy” is the thing. All other economic considerations are just footnotes.

    • Hi Rob – I fully understand your post and had asked myself the same question.

      We could at least move away from the energy wasteful process of building goods that simply fall apart after a few years of use. Cheap white goods come to mind.

      Now I don’t know how much more – if any – energy goes into making a Miele washing machine – but they do last a long time – and my particular model has a 10 year guarantee.

      My previous Hotpoint went up in smoke after only 3 years.

      Now I’m sure our overall energy usage would be greatly reduced producing quality – built to last products.

      As processors have come up against Moore’s law we might stop hankering over a new mobile every 18 months to two years – if it were not for the fact they are not very robust.

      Somehow we have to transform ourselves into a much lower energy usage society. I do have a car – but it is a necessity at the moment.

      Unfortunately the much vaunted ‘Fastrack’ bus service that came into being in my area about 10 years ago – complete with some new designated roads – has become so unreliable that you cannot rely on it to connect with the train service you need. It is run by Arriva who are owned by Deutsche Bahn.

      I would use it more and not my car if it would only run punctually. Yesterday two buses did not turn up so I was forced to take a service to the other side of town and walk to the station.

      I think this is the same all over the country in that we still seem unable to provide a joined up public transport system meaning that we are forced to rely on cars with all their energy requirements.

      Perhaps we’ll somehow muddle through with breakthroughs in battery energy density and the Government waking up to the fact that we need to secure our future electrical energy needs. I don’t see Hinkley Pointless as the solution.

    • I think Donald that our economic system is so complicated and interconnected that we need to focus on higher level actions if we are to have any positive impact on climate change and other dimensions of human overshoot.

      Tim Garrett showed that wealth is proportional to energy consumption. Specifically US$1 (1990) = 10mW.

      To reduce our CO2 emissions we need to reduce total wealth. We can do that through some combination of fewer people and/or poorer people.

      The simplest solution to climate change is to increase interest rates until the economy starts to shrink. This will of course cause the system to crash and we will need to reboot with a new full reserve monetary system, preferably backed by energy, that can function with a long term contracting economy.

      Very painful of course, but less painful than what our grandchildren will experience with our current path.

    • “We can do that through some combination of fewer people and/or poorer people”

      Hi Rob – well the UK is well on its way to creating poorer people – witness the gig economy and I don’t think – at least in the UK – that we can do much about population growth.

      Even if the Government put out a huge warning over all media – ‘Look we’re running out of energy – please aim for two or better still one child’ my guess is that it would be ignored.

      I agree with Tim about creating an economy where people are well paid – but of course there is the energy equation.

      Regarding energy – I was very disappointed to read – at least for Europe – that they don’t expect their fusion reactor to be producing power until at least the 2050’s. I may never live to see it.

      Professor Brian Cox had stated that there was only one way out of our energy problems – and that was fusion – but he optimistically expected us to be fired up by the mid 2020’s (he announced that around 8 years ago).

      Ever since the early 70’s – when we experienced a real oil shock – there’s been a worry about energy. Perhaps oil became far too cheap in the 1980’s and 90’s delaying investment in alternative energy research and giving people the security to have large families.

      Trying to get people to accept less is very difficult without wide scale discontent and disruption to the economy – but it’s exactly what the UK is doing by restricting pay rises in the public sector to 1% – well below the official rate of inflation.

      I still believe that better energy management would postpone the energy crunch allied with sensible economic management to produce the type of economy Tim would like to see. It could be that in the future we measure wealth in different ways – so that it’s not totally tied in with the energy equation.

      I’m not expecting the next 10 – 20 years to be anything else but choppy – but it will generate a lot more innovation – because when the chips are down – it’s what Mankind is good at.

    • There are many other dimensions to human overshoot than just climate change such as species extinction, soil erosion, fisheries collapse, mineral depletion, aquifer depletion, nitrogen imbalance, ground level ozone, etc.

      If we had abundant fusion energy I think it would only accelerate these other problems. In addition, fusion energy does not provide a practical substitute for the diesel that powers our critical life support network of tractors, combines, trucks, trains, and ships. If trucks stop running for any reason we will be in immediate and serious danger.

      We really need to implement a global one child policy. But we won’t.

    • Fusion energy is not the answer, as you suggest. We use energy to exploit resources and it’s about time the general population understood how finite they are. This locust species that humans are will simply destroy resources faster. We HAVE to understand energy has to be expensive and adjust accordingly in a downward direction. Not that we have the time left, but it would be nice to enjoy things a bit longer!

    • I agree but de-growth is a tricky issue. Without growth there will be MUCH less credit available which means it will be very difficult to maintain a society based on advanced technology that requires large amounts of up front capital for almost everything it does. Also we can forget about retiring or getting a 20 year mortgage with 5% down. Grandparents, parents, and children will probably share one house and all will be required to work.

    • No, de-growth quite anti everything we understand about our economy. The economy has to grow continuously to work. That is our conundrum. There is a solution, but it requires a sea change in economic understanding. Basically the government will have to take over the economy and run it as a co-operative. There can be no more mortgages [maybe reverse ones]. It’ll be a bit like going back to metal money days, except it will still all be fiat. The Gov will hand out money as coupons as rationing will be very important.The food supply will be closely controlled, so no runs on shops. Etc. You can just see Americans embracing such a scenario, but if they don’t failure will be the only option.
      Some think tanks need to get on the case. It won’t happen if it’s not organised in time.

    • Thanks. If you have a link that describes such a system I would be interested to read more. Sounds like a mix of Hubbert’s Technocracy and Hansen’s War Socialism.

    • I haven’t seen any plans [which is what worries me]. I have just thought it through and remember coupons and rationing from WW2. You have to stop any market from being cornered, especially food and energy and a national government will be the only power to do it. But it has to be primed, so called shovel ready. I don’t think any government is ready, but it would be kept secret, for obvious reasons, so just maybe there are plans.

    • Thanks. I agree rationing will be required but I have a feeling that there may be no substitute for the credit we currently rely on for our infrastructure. Perhaps Dr. Morgan can weigh in with thoughts on how investment will work in a shrinking economy.

    • No, I think credit [money credit] will be minimal as everything will be geared to the present time. You don’t need credit even today for infrastructure.That’s just the banksters calling the shots. The Monetary Sovereign government has no need for creating credit. It just buys debts as they occur.
      The private sector will be very primitive after the crash. Local and regional governments will just be kept solvent by their Central bank picking up all the bills. There will be no taxation [not required].

    • Of course, the energy component is critical. That’s why real “growth” is so elusive. Indeed, that’s the whole point of surplus energy economics.

      That’s one half of a two-sided pincer squeezing prosperity. The other half is sheer policy idiocy. The show is being run by loonies who make Soviet economic policy look rational. We’re destroying futurity – our relationship with our economic future – in an effort to buck the trend towards lower growth.

  4. There is also the drag on the economy caused by poverty, the growth in ‘in work’ benefit expenditure, and higher health and social expenditure.

    In addition to this of course it may result in civil unrest. As I sometimes say The (so called) Conservative Party are doing more to cause a revolution than anything the Judean Peoples Revolutionary Front have ever managed.

  5. Rob – I’m going to take a more optimistic view. Hydrogen fuel cells could certainly power tractors and haulage vehicles. More expensive than diesel power – but better than nothing.

    Yes we do have more problems to solve than just energy – soil erosion being one of the most serious.

    I’m hoping we don’t reach the type of future which was depicted in Soylent Green – we’re only 5 years away from the year it was set in.

    • Hydrogen is not an energy source on Earth because you first have to make it and that requires energy from another energy source first. It is basically a battery.

      It goes like this. Generate electricity from fossil fuels, nuclear or renewables. Use this electricity to produce hydrogen. Store the hydrogen until needed. Finally recombine it with oxygen in the fuel cell to recoup your electricity when you need it.

  6. We can’t all be savers. That’s a hard concept for most people because most people have no idea how money is created and destroyed.

    95% of money is borrowed into existence with a fixed term. It must be paid back at the end of it’s loan period. Money that is hoarded (saved) by definition is stationary, and therefore not circulating within the economy. eg. the velocity of money declines.

    The process goes like this. Money is borrowed into existence by the poor, this money gravitates to the rich that hoard (save) it. How do the poor pay back their loans if the rich have money? Answer: by having a constantly growing economy and constantly growing debt. The growth imperative. Every increasing debt (supported by increasing GDP) enables previous debt to be repaid and the rich get richer.

    …… Until …….. it can’t. Hyper Inflation or currency devaluation that wipes out debt and savings is the end game.

    • Should have read “rich have the money”, not “rich have money”. I’m so poor at proof reading my comments before pressing the reply button.

  7. Ed – I was well aware how hydrogen is produced – my only point was that it could be used to power trucks and tractors if need be – although at higher cost than fossil fuels as and when we run out of the latter.

    • Hi Ed – no problem – I just trying to think in practicals term although what I think and what Governments of the World would actually do in a crisis will probably be totally different.

      It would surprise me if the US build – or have already built -complexes to turn coal into oil.

  8. I’m now dealing, I think, with the last generation of individuals who will “retire” in the conventional way as the baby boomers, who rather cleverly lined their own nests with other peoples money via their defined benefit (“final salary”) pension schemes. As an IFA, I deal with the “moderately surprised” who suddenly find that through a combination of being debt-free, owning substantial financial and property assets, they end up in retirement with excess income over expenditure.

    The next generation(s) will not have a “golden future” at least in the context of securing a passive income stream in the context of an index-linked guaranteed income for life. They are only able to access defined contribution methods of pension saving and are prey to (perhaps very substantial) investment risk and running costs, unlike their parents. A mad rush to transfer out of DB schemes into personal arrangements is underway and this is controversial and very high risk – the transfer market has been distorted by ultra-low gilt yields and interest rates. I see “cash equivalent transfer values” of 40-50 times the DB pension and some individuals get $ signs in their eyes when they see the choice of £20,000 index linked pension for life or a transfer value of £1m available into a private plan. “It’s more flexible and my kids can get it when I die” is the mantra; but what happens when/if the markets drop by 50% or more? IFA’s might get the blame, but the so-called “pension freedoms” as introduced by the UK government in 2015 are, truthfully, a tax-grab manipulated by the “elite”

    I’m an optimist and I do think that humans are very innovative and “disruptive technology” will come along in the energy sector in the fullness of time, but we are broke as a nation and the level of personal debt I come across oftentimes can be scary – we shall see!

  9. “It would surprise me if the US build – or have already built -complexes to turn coal into oil”

    Sorry I meant – ‘It wouldn’t surprise me’

  10. Tim, last year you commented: ‘When you stand back and think about what’s happening, it’s not Adam Smith, or Karl Max or J. M. Keynes – but Lewis Carroll!’ That observation seems daily to be more and more accurate. I think it fair to say that the number of people that have genuine concerns about the fragile state and serious economic plight of the UK are few in number, in a minority and if my experience is anything to go by they are considered by friends and family as belonging to the lunatic fringe. Frankly there are times when I have trouble getting my head around the enormity of the dysfunctionality and absurdity of our economy, and I’m utterly dismayed by the failure of The Fourth Estate to sound the alarm – national, mainstream British journalism is failing the nation. I fear very much that we are going to have to endure an epic monetary crisis to jolt policy-makers and members of the national commentariat from their current state of delusion. Quite honestly the consequences of a full-blown financial crisis do not bear thinking about. Signals abound pointing to a political system that is under enormous strain and social fabric that is fraying at the edges. I am be no means convinced that the system could withstand the sort of crisis that may well be coming down the track.

    • I become more and more convinced, almost by the day, of two things. The first is that the UK is going to pay a horrible price for two decades of economic madness. The second is that GBP has become the likeliest trigger for the next crisis.

    • I hope the day of reckoning is not for a few years yet. One thing though – if the Government is slowly inflating our savings away – how can we pay for care in our old age?

      Will the government expect us to sell our homes and move into rented accommodation so we can pay for the private care the Government can’t afford? Obviously you’ll have to sell your home if you want to go into a care home.

    • Obviously there would be huge advantages to staying in. It’s not just tariffs, but product compliance – without this, UK goods could require inspection, so would need to be warehoused for several days, which would be serious “grit in the wheels” of trade. Services could be very badly hit over compliance.

      The immediate problem is that the British public voted for “Brexit”, and want border controls. I can’t see UK politicians, or the EU, backing down over this. The negotiating positions are unbalanced. The EU is confident, and its economy is doing moderately well – the UK side are a political shambles and the economy is deteriorating badly.

      Even beyond that, there are fundamental differences. Take the “gig economy”. The UK, like the US, seems to think it’s a good thing – I expect the EU to see it very differently. I’ve never believed that the UK and the EU are compatible.

      Finally, 2 years (and it could be more) is a long time, and a lot could happen. For example, there could be another financial crisis, which the EU could probably survive, and the UK probably wouldn’t. If my hunch is right, this autumn could see GBP implode. If that doesn’t happen, my guess is the UK and the US will stick with neoliberalism and its consequences, whilst the EU, China and others move on.

    • Thanks Tim – I personally dislike the gig economy and the long hours – insecurity and low pay it can bring to workers.

      Your forecast about the EU and China moving on sounds rather ominous. I’ve never liked the way big business operates in the US (Walmart for example) – and it looks like their financial sector have been given the go-ahead by Trump to create carnage again.

      I noted our borrowing went up in June – goodness knows what will happen if there’s an interest rate rise to protect sterling – although given what happened in 1992 I doubt any rate rise would be effective.

    • The UK government should never have to borrow. All they are really doing is marketing Gilts to cover their spending, as required by Lisbon Treaty. There is NO arbitrary limit to spending. In fact if spending is cut the economy shrinks. This is where Neo-liberalism is so poisonous. Paying decent pensions, without forcing the public to spend their own money on make up the difference actually grows GDP, and therefore the economy.
      Since I seem to be be having trouble getting across this message take a look at blogs by Rodger Malcolm Mitchell, though from a US perspective, uses plain english to tell it like it is;


    • For reasons which I don’t entirely understand, the UK seems intent on economic suicide. It seems to me that a point of no return has now been passed. It”s only a matter of time. A GBP crash is now the single likeliest trigger for a global financial crash. If GBP crashes, interest rates are forced sharply upwards and house prices implode, it’s ‘game over’.

      In the US, being an outsider doesn’t mean Trump won’t continue with failed economic policies. The UK and the US seem detemined to carry on with crazy economic extremism.

      Essentially, “deregulation” unleashed a tide of debt so big that ZIRP was the only possible response. But that has inflated assets, and destroyed returns on investment. Global pension saving has been all but destroyed. In the US alone, the shortfall in pension provision is growing by $3tn annually (see WEF report on pension deficits).

      My expectation is that Europe, China and others will ditch the failed “liberal” economic policies. The world will then divide between a majority determined to adopt more rational policies, and a rump which will follow existing follies to the bitter end.

    • When the refugee flow starts to swell like a bad currency derivative, the UK might be well positioned. The EU can blow up on issues like that.

      Better 5 years early than one day too late. In my opinion its better to frontrun currency collapse and bite the dust while the grid is still working. Maybe i’ll migrate to the UK as soon as pension plan reform chatter comes out of the Brussels atomic shelter. Don’t think in currencies anymore. They’re done. Finished.

    • Houtskool

      I don’t know where you are now, but can you be serious about moving to the UK? I ask because Britain and the US are addicted to economic policies that seem, to me, barking mad.

    • Hi Tim
      I’m not sure I’d agree with you about the US and the UK sticking with neoliberalism. In the UK most of the popular vote is for left wing parties; the Tories have never achieved a majority of the popular vote (certainly not for many years) even if you include the DUP. For all of her undoubted success most folk did not want Margaret Thatcher; it is only the quirks of the electoral system that gave her the power.

      Politically, if we start to get trouble with areas like the NHS and social care and the economy in general – which I agree with you is inevitable – then sentiment will turn away from neoliberalism and we will get a much louder call for outright interventionist policies; after all the austerity policies promoted by GO were only “faux” austerity and the attempts to shrink the state have been a resounding failure.

      I also see the EZ as a fertile breeding ground for crisis. In my view the EZ can never work as currently constituted and sooner or later this will have to be admitted. The Germans will never agree to debt mutualisation and, unless this is forthcoming, the EZ must fail; it requires political union and the EU countries will never agree to this.

    • Bob J

      Starting with the UK, there is certainly a very big public backlash against neoliberalism – we saw that in the vote for Labour under a leader whom much of the mainstream media had demonised ever since he became leader. Yet just today Liam Fox has been talking about a “liberalising” trade deal with the US. Until 2010, both main parties subscribed to neoliberal ideals. The result has been enormously damaging. Regulation has been weakened, the public ethos has changed, and the economy now looks to be in very big trouble. We also cannot know how long it may be until the next election. I don’t want to sound alarmist, but neither should we buy into the complacency of the political elite. I’m not sure Mr Corbyn’s answers are the right ones, or how long the UK has left before a crisis. Mrs May could cling on for six months or a year – yet a crash could happen sooner than that.

      The election of Mr Trump was certainly a revolt against the US establishment. But Mr Trump, even more than his predecessors, is extremely wealthy, which colours his views. He seems to be extremely pro-“liberalisation”. The US economy isn’t as weak or in as imminent risk as the UK, but the likelihood of ditching neoliberalism seems even more remote.

    • I’ll wait until after a currency collapse. I don’t want to be in a foreign country when things go south. Maybe GB is a region that will adopt a local economy before the EU. If that is the case, maybe i’ll move before the rest collapses to avoid the worst consequences. Who knows. I’m watching.

    • I believe that Britain leaving the EU was a mistake, but in saying so I must confess that the EU itself is a mistake. I also believe that Brexit will be reversed at the last minute and that Britain will stay with the Eu. But it is all to late anyway, so it does not really matter.
      Am I contradicting myself here ? Let me see if i can explain better what I mean.
      The EU is a mess. Walking away from the mess is not the right way to deal with it.
      Nothing gets resolved.
      Let us be clear about this, we are in this mess because of the decisions made by successive British governments. Not because of rules imposed upon us by the EU.
      British membership of the EU was only ever half hearted but in any case, regardless of any positive aspects of the EU, its obsession with social policies and ever closer integration has been its undoing.
      It should have stayed as a Common Market, with visa free travel, and rights for all citizens to settle in any member country.
      As far as the future is concerned, the EU is just as doomed as the UK is, the only thing is that the UK will get there first, because Britain is very soon to experience a financial melt down. In the EU, Germany, as ever, will backstop the slide into oblivion until a point comes when it too will be forced to throw in the towel and then the EU will be no more.
      I do not know where I want to be when this all comes crashing down.
      The UK will be a battlefield. Disenfranchised benefit recipients will be maurauding the streets in search of anything to plunder.
      In Europe immigrants avoiding deportation will be maurauding the streets in search of anything to either rape or plunder. Even when our financial systems break down, and there are no longer any benefits being paid to anyone, it will still be better for these immigrants to stay and live in Europe as scavengers, than it will be for them to return to their homes.
      In the Uk, once economic reality bites and welfare of any kind ceases to flow, then it will descend into anarchy. We will see racial violence errupt on an enormous scale, because as we all know, “it was the immigrants who stole our jobs”. The fact that Steve Lagerlout and his live-in partner Chantelle Asbo would rather get benefits for watch Eastenders on TV, than to dig leeks in the morning dew on a farm in Lincolnshire, is not up for discussion. What happens in the Uk will also happen in Italy, France, Spain and Germany. With the massive numbers of refugees now “re-settled” in my area, I no longer feel safe here. There is at present no imminent threat, but I feel the potential for a rapid reversal of this.
      We are in a gas filled room, just waiting for a spark.
      The future of the UK is equally uninviting, I see ration cards, total surveillance and martial Law as becoming part of the daily routine.
      To be honest if I were a younger man, I would take up Vladimir Putin’s offer of free land in Russia’s far east and take to homesteading with a few fellows of like mind.

  11. Thanks again Tim – I don’t know why our politicians can’t see the danger we’re in. As mentioned in a previous post – I did write to my MP about my worries based on your expert analysis – but I never recieved a reply.

    Quite unusual in fact for him – as in the past he’s responded to all my letters.

    • Most politicians in the UK and the US are fanatical adherents of neoliberal economics. They “deregulated” to the point where debt nearly brought down the system, then responded with monetary policies that have all but destroyed pension provision as well as saving more broadly. The respective publics are sick of them – hence the “Brexit” and Trump votes. But they won’t stop swinging the economic wrecking-ball any time soon. America might dodge the next bullet – maybe.

    • Thanks Tim – perhaps my letter made him feel uncomfortable for a few seconds – then he just went back into his usual ‘safe’ thought patterns.

    • If you go through the sequence, the logic and the stats, some conclusions become inescapable. The fact that MPs can’t see it is hardly surprising. The recent decision to persist with Hinkley Point(less), despite a dramatic increase in cost and continuing technical uncertainties, shows how politicians prefer to compound their mistakes rather than admit to them.

      The “gig” economy is another example of this myopia. We regulate taxis and hotels for very good reasons. When you get into a licensed taxi, you know the brakes work and the driver hasn’t got a criminal record. When you check into a hotel, you know that fire precautions and food hygeine standards are inspected regularly. You don’t know that with ride or room “sharing”. Who but an idiot would strip away such protections?

      “Gig” workers don’t get sick pay or paid holidays – is that the model any sensible country would aspire to for its people?

    • Tim – yes you’re right – regulation is there for a purpose which is another reason why I’m fearful of Trump’s drive to deregulate everything.

      It’s not just the financial sector in the US but heavy industry that may come up against less red tape. Regarding industry we could go back to the bad old days of the 70’s where firms can just dump all their waste into local rivers.

      Here in the UK I’ve tried to imagine what it’s like working in the gig economy. Probably very unpleasant for most. Jobs created in this sector are not what I’d call high employment which our politicians crow about – rather it’s a low paid miserable existence.

      Perhaps the Government should publish a quality of work and life index.

      On BBC news this morning they’ve been talking about ‘shrinkflation’ – how many confectionary products are getting smaller so that the manufacturers do not have to increase their prices.

      Given the obesity rates in this country I don’t see this as altogether a problem. I also notice that British Airways are adopting this in terms of their seat room. Perhaps in a few years time of consuming less calories – we’ll actually be able to fit in them.

  12. Hi ejhr well as long as there is the available energy for the economy to grow and raw materials etc – otherwise you’ll have an awful lot of money and nothing much to buy.

    • That should go without saying, Donald. Right now being in deflation mode the economy is a long way away from fully utilising its resources.

    • I’m not so sure about deflation. For starters, we tend to look at retail measures (RPI, CPI etc) and ignore asset price inflation.

      Second, some of the methods used to calculate inflation look iffy.

      Third, money creation could feed into inflation if the velocity of money increases (velocity fell sharply during the GFC when everyone turned cautious). If you think (as I do) that the effective money supply, determing inflation, is quantity of money x velocity (how quickly we spend money coming in), then a recovery in velocity would be inflationary.

    • The velocity of money just affects how long it takes a dollar to end up back at the Fed [orBoE] in its entirety. It is a sort of reverse fractional reserve tax pathway. Usually 9 x is the number of times to get back to near zero. If the money is not continuously replaced by deficit spending the economy will crash as it almost always does when tax receipts exceed government expenditure. – the so-called “budget surplus” So I’m not sure what you mean by a “recovery in velocity”?

  13. Tim, when I look at the same data as you and consider your analysis I ask myself why we’re not having a GBP (£) currency crisis now?
    Given that we’re not what would be the trigger for such an event to start?

    • Well, GBP is already under downwards pressure, and sometimes recognizing the previously unthinkable takes longer than hard facts and logic might suggest. Also, this is a relatively tranquil seaso – crises seldom happen in July or August, but have often occurred in September or October.

      There are many potential catalysts. Some really bad economic data could do it, as could a really damaging setback in “Brexit” negotiations. Neither can we rule out some major market turmoil coming from elsewhere. I see a “window of risk” opening by the end of September.

    • Well I bought my SFR and Euros sometime ago so I’m ready to go. Just hoping for nice hiking weather in Grindelwald in September. I won’t be reading the news and perhaps will only find out if something dreadful has happened if the channel tunnel is shut.

    • I agree with Tim – as with my own experience in the financial sector – a lot of traders will be off sunning themselves and drinking cocktails in some exotic country (or perhaps stuck in a traffic jam with two screaming kids ‘enjoying’ the persistent rain over here)

      Either way GBP won’t be in the forefront of their minds – and anyway – why sink it before they fly off?

  14. Over the years I have noted several differences between Germany and the UK, ( having lived and worked in both countries ).
    Here are some random musings that I have, in no particular order, but I think that some of them play into why Germany is successful, and why Britain is collapsing.

    – Germany is expensive, but wages are high so you can still afford to live there.
    – The “Germans”, work more productively than their British counterparts. They have a stronger “work” ethic.
    – In Britain there is a ( for me incomprehensible ) fascination for Celebrities and celebrity lifestyles.
    – In Germany people generally tend to be more down to earth about their aspirations, and do not see winning x-factor as being their only way to success in life.
    – In Germany, Professional Engineers are repected in society alongside lawyers and Doctors.
    – In Britain, most peole do not know or understand the difference between a Professional Engineer and a washing machine repairman.
    – In Germany people expect value for Money. In the UK quality is low, prices are still high. Nobody does anything about it other than grumbling.
    – German Beer is very good. Each town has its own brewery.
    – In the UK it is difficult to get away from mass produced p***, that is produced by the small monopoly of brewers.
    – The same goes for Bread. German Bread = Good; British Bread = very, very, very Bad !

    Of course, since the massive influx of refugees entered Germany in 2015, things here are no longer the same. I sense that “change” is on the horizon. Social change, not economic.
    I think that Merkel’s coat is hanging on a shaky nail, despite what the mainstream news say.

    • These are some very perceptive observations. In particular, I’ve never understood the widespread British obsession with celebrity. But I think it is related to an obsession with status.

  15. I’m an American who has been to UK several times and always enjoyed it. But it now seems to me that they are a country that is continually having to save face, so to say.
    Having lost their empire and most industry, they are now in the position of having leftover legacy financial and cultural influence which may be on the wane. They also have a strange subservient role to both America and the EU.

    Interesting situation to be in. Great place to visit but I’m not sure I’d actually like to live everyday life there.

    • The UK has never seemed comfortable with its post-imperial role. There was a fascinating period of change between the Suez fiasco (1956) and the Profumo case (1963). This also embraced the final, hurried withdrawal from Empire, the start of large-scale immigration (1957), rapid cultural change (note John Osborne’s ‘Look back in anger’, 1958), the spy scandals and the Great Train Robbery (1963).

      I observed a second, depressing period of change starting in the early 2000s. This was when Britain started criminalizing people for saying or writing anything that disagreed with the official line, and installing more CCTV than the rest of Europe combined. Attitudes changed, towards greater selfishness and suspicion of others. The UK now seems a very angry place.

      My impressions of the US (from many working visits) is one of greater resilience and self-reliance, but it’s now a long time since I was last in the US, and there seems to be increasing public anger there, too.

  16. Tim,

    How likely do you think it is that we could have significant civil unrest in the UK?

    • John

      It’s hard to say. In the period 1800-20 (during and after the Napoleonic Wars), unrest was endemic – a PM was assassinated, and there was the Peterloo Massacre.

      After that, however, the establishment learned to give way in time, which they did in 1832, 1846 and 1867-68. The tradition since then has been peaceful protest, and reform. The General Strike (in which one of my forebears played a significant part) was notably for its moderation. Probably the worst that’s happened since then was the mining strike in 1984. Nasty, but localised.

      This said, we’re into new territory now. First, the level of generalised anger seems to have risen – I’ve been shocked by the recent spate of abuse, including death threats, aimed at the staff of Great Ormond Street Hospital, just as I was shocked by the sheer nastiness (on both sides) of the “Brexit” debate.

      Second, the UK could be going into unprecedented economic territory if there’s another banking crisis.

      Third, there’s been a steady erosion of trust in institutions, not just government but Parliament (expenses), the media (phone hacking), banks, the police and even the courts.

      So my instinct (and hope) is that unrest is unlikely, but I’m less sure about that than I once was.

  17. Some time ago we had a discussion on this forum regarding electric vehicles and the demise of diesel and petrol cars.
    It seems we were ahead of the curve with Volvo, many other car manufacturers and the Government coming to a similar conclusion.
    It’s good to know that there is real, thought provoking discussion taking place on this forum.

    • Well the UK has forbidden the sale of petrol and diesel cars from 2040 to improve air quality.

      A pretty disingenuous announcement as they know that easily recoverable fossil fuels are running out – but obviously can’t say ‘Quick switch to electric vehicles as we’re running out of oil.

      To be honest I think market forces will push the change to electric – even hydrogen vehicles long before 2040 – but hey the Government needs to look good as in ‘We said it first’

      If we stick to lithium technology for our batteries then recycling will be critical as there are only finite supplies – especially if you’re going to change the whole World’s fleet of combustion driven cars.

      I guess we’ll have to start worrying about the extra electrical generation needed a bit later. Looking at the mammoth decommissioning costs EDF face for their old reactors I’m not sure nuclear is now the way.

  18. Tim, the UK is not in a good place politically and socially to face the economic challenges that lay ahead. The observation about the national obsession with celebrity is, I think, valid. There are, of course, other obsessions that are unhelpful. Two that spring to mind are our obsession with house prices and consuming. I hope that I do not sound like a ‘broken record’ when I say that all of this is driven, reinforced and reflected by and through a thoroughly disreputable and misguided MSM. I would have greater hope for the future if I saw evidence of practitioners in the MSM stepping-up to the plate and doing a better job, but frankly I’ve given-up completely on virtually all national newspapers as I consider them to be failing the nation in so many fields.

  19. I agree, it can appear that lower wages leads to lower spending; requiring companies to lower prices in order to keep selling products. But the root cause is how easily it is for Western countries and peoples to get into debt, which is only possible because the World’s Reserve Currency is backed by debt (i.e. money printing). Return the global monetary system to a gold backed system and this is a non issue.

    • Forget about a Gold Standard. It failed to keep up with the expansion of the world economy and we can’t go back to it now. Remember gold has very little use. In prehistory flint was worth more than gold. There is way too little gold available to match the economy wealth today, unless it was in 7 figures per oz. Then it would also be useless and skewed away from reflecting nations’ true worth.

    • John Harris is a fellow parent at my childrens school. While I only get to exchange a few words with him, his observations of the current scene are well worth listening to

    • This touches on something I’ve been working on, but am finding hard to condense into a short-ish piece.

      Basically, “capitalism” is splitting into two divergent camps. On the one side is the hard-line “laissez-faire” camp – minimal regulation, small-as-possible government, and little emphasis on ethics. On the other is what I call “popular capitalism” – plenty of regulation, strong ethics, and acceptance of a substantial public sector as part of a “mixed economy”.

      Europe champions the latter, whilst the US supports the former. This hasn’t reached a trade war situation yet, though it could.

      But it could mean that the UK could get a trade deal with the US, or with the EU, but not both.

      My hunch is the UK will get a deal with the US, but not a meaningful agreement with Europe.

      I also think that Britain and the US are mis-reading EU intentions over financial services. If the EU sets up tough regulatory hurdles, the Anglo-Americans would be effectively squeezed out. Then the EU could handle almost all its banking (etc) requirements internally – plenty of scope for growth for Frankfurt, Paris etc. The UK and the US see finance as a self-standing profit centre and an important part of GDP – but the EU sees it as secondary, a service needed by business. I don’t think the US/UK understand that, yet anyway.

  20. Thanks for your replies – I hope we don’t see much needed produce rotting in our fields next year.

    I was wondering about Carney and debt – he does seem to be very irresponsible given the UK personal debt levels are reaching 2008 levels.

    • With agriculture, if the issue is cost, the business model is wrong – a developed economy and a cheap labour economy aren’t the same thing. If it’s work ethic, that’s a problem but, ultimately, the voters have opted for “Brexit”, a reducing unskilled immigration.

      As for debt, the problem really is that the only part of the UK economy that is still growing at all is household consumption – and that has become dependent on credit. Take away debt-financed consumption and there would be no growth at all. No absolute debt level is dangerous in itself – it depends on (a) the strength of the borrower’s income, and (b) what the debt is used for.

      Mr Carney, I think, likes low interest rates – he’s never raised rates since he’s been at the BoE, but I don’t know whether he ever did in Canada. Cutting rates after the “Brexit” vote was a wrong, knee-jerk reaction, and a deteriorating exhange rate deserves more attention than it gets.

      Britain (and the US, despite Mrs Yellen) are locked in to a cheap-money fixation. That’s why the next crash, when it comes, is likely to hit America hard, and could well blow Britain out of the water.

    • Perhaps time to start raising the base rate in increments of 0.25% with an aim of getting them to 2.5% by the end of next year.

  21. Keep hoping for growth, aren’t we? The facts do not show ‘growth’. Not tomorrow, not in the coming decades.

    Not in Keynesianism, not in communism, not in cultural Marxism, not in the new and improved Silk Route.

    Net energy declines. Period.

    Hopium feels good, but it ain’t a cure.

  22. Pingback: #102: The great divide | Surplus Energy Economics

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