Tuesday, 31 December 2013

Is there a recovery when only 2% feel it? (UK survey by TUC)

In a survey by the TUC (Trades Union Congress) in the UK, only one in fifty people feel that there is an economic recovery occurring. Makes sense: the UK governments have pursued two fallacious policies to create growth and to foster recovery.

The first has been to increase debt levels to extraordinary peace time highs. The interest on this has to be paid for. The interest is currently £828 per SECOND; the debt, if shared equally amongst all of the population including the children and the retired would be over £17000 each.

By driving into debt the government has created a situation where it must keep its interest rate payments low. It does this by the second terrible policy: quantitative easing or printing money.

By printing money, interest rates are pushed down below market rates (i.e., set by the supply and demand for loanable funds). In order to keep interest rates squashed below the market rate, increasing quantities of money must be printed: this follows Wicksell's law (a Swedish economist working a century ago). Printing money in turn creates a horrendous amount of distortions in the economy - some sectors profit indeed, and these sectors tend to be very visible - construction and large capital intensive projects for instance. But other sectors experience a drain of resources as the new monies flooding the economy attract workers and entrepreneurs into the inflated areas. Ultimately, only a few people benefit from what I call the inflationary tidal wave that is unleashed by the QE. The rest suffer from falling real wages - this is experienced in the UK's 'north-south divide' in which money, printed in London for the London capital markets supports an artificially inflated market there, while the rest of the country suffers.

The Bank of England recently commented that house prices needed calming...really?! Then stop QE.

Ah, but if the BofE does that, the government faces rising interest payments on its debt.

And that means pain.

So it's not surprising most people don't believe the statistics peddled by government (whatever colour of party). The economy's struggling in most parts of the country because people are still coming to terms with the fact that they are not as rich as the 2000s made them feel (through loose money). The government has yet to realise that it too has a duty to cut - to cut properly - its debts.

Dr Alex Moseley

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