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UK Inflation: the only way is up, baby
Posted by Chris Vernon on June 18, 2008 - 10:00am in The Oil Drum: Europe
Open letter from Mervyn King governor of the Bank of England to Alistair Darling, Chancellor of the Exchequer. Click for full letter.
Open letter from Alistair Darling in response to King's. Click for full letter.
What can we learn from this exchange?
Starting with King. He reviews the situation noting that inflation has recently risen sharply from 2.1% in December to 3.3% in May. The increase driven almost entirely by the increased price of food, fuel, gas and electricity. In the year to May:This global situation is compounded by:
- world agriculture prices increased by 60% and UK retail food prices by 8%.
- world oil prices rose by more than 80% to average $123 a barrel and UK retail fle prices increased by 20%.
- wholesale gas prices increased by 160% and UK household electricity and gas bills by around 10%.
The depreciation of sterling, which has fallen some 12% since its peak last July, has boosted the prices of imports and will add to the pressure on consumer prices.The situation is only expected to deteriorate with recent increases in oil and wholesale gas futures prices.
As things stand, inflation is likely to rise sharply in the second half of the year, to above 4%.So far so good but now the letter becomes less clear. King suggests this period of "above-target inflation" is temporary (the target is 2%). This is explained by the inflation being driven by commodity prices rising relative to the prices of other goods and services yet the amount of money being spent in the economy not increasing quickly. To me this sounds like only a step away from stagflation, hardly a positive development.
From Wikipedia:
...stagflation can result when an economy is slowed by an unfavourable supply shock, such as an increase in the price of oil in an oil importing country, which tends to raise prices at the same time that it slows the economy by making production less profitable.Then against all expectations King suggests:
It is possible that commodity prices will rise further in the coming months – oil prices have now been rising for four years. But in the absence of further unexpected increases in oil and commodity prices, inflation should peak around the end of the year and begin to fall back towards the 2% target.Further unexpected increases? Unexpected by whom? For sure, if oil and commodity prices stop rising inflation will fall but I'd hardly call further rises unexpected.
The Bank of England sets the interest rate monthly. This is seen as the main tool for controlling inflation. With inflation running significantly above target one might expect action to be taken on interest rates. However King has this to say:
...if the Bank Rate were set to bring inflation back to the target within the next 12 months, the result would be unnecessary volatility in output and employment. So the MPC is aiming to return inflation to the 2% target within its normal forecast horizon of around two years, when the present sharp rises in energy and food prices will have dropped out of the CPI inflation rate.An admission that taking the actions required to lower inflation would damage the economy too much so all he can offer is to wait for the sharp rises to drop out of the rolling year and hope there aren't further sharp rises. Waiting and hoping doesn't fill me with confidence. And with no reason to believe current price trends will moderate, at least not before they have wrought havoc with the economy, we're left with an unchecked rise in the rate of inflation.
In chancellor Darling's response he added little but to agree with King's assessment and make some favourable comparisons with the Euro zone and United States.
Both men leave the impression that current events are unexpected, temporary in nature and won't have a long term or serious affect on the economy. On these three points they are wrong in my opinion. The trend (if not the absolute magnitude) in commodity price rises has been expected. There is nothing to suggest, as King does, that the rising trend will flatten any time soon and when compounded with the UK's declining energy production the situation can only be exacerbated.
Euan reviewed the UK energy situation in this post: UK Energy Security. It is clear that declining oil and gas production and corresponding increased imports at increasing prices will have tremendous impact on the national trade balance.
The right action to take given the situation as presented, is to find a way for the UK to operate on significantly less energy that it does today. Unfortunately this is not the course of action proposed in today's correspondence.
Euan's closing remarks last year are even more relevant today:
The alternative may be to face real energy shortages in 2 to 8 years time when the anticipated supplies of imported natural gas and oil do not appear. Energy shortages combined with spiralling energy costs and energy import bills may paralyse our economy.
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The ability to do simple arithmetic seems to be a skill totally lacking in both politicians and economists these days, alas.
This letter was written because the MPC allegedly failed to do what they are paid lots of money to do!
The MPC is tasked to control inflation of the money supply - this letter is about price rises which are the RESULT of inflation.
If they have done the job they are paid to do, because we will be spending more on energy and food we will have less for everything else - at the very least the economy will slow - plan accordingly!
I'm sure they can do math. There is just a problem of not looking at the sum and trusting that it should be taken as real, and not theory.
Just-In-Time planning. The boat isn't 'Really' sinking until my feet are wet. Then I can very quickly and clearly assess who apart from myself to blame.
But one cannot expect the ruling 'elite' to question the basic, fundamental, structure of society, after all they live by it. Simply put, according to current dogma, the free market is sovereign, and we live in the best of all possible worlds. There are of course problems, but they are in the detail, and there is nothing fundamentally wrong with the system. The market, left to itself, guided by the mysterious invisible hand, is close to being perfect.
People like King, Brown, Darling etc, do not believe in 'planning'. They beleive, ideologically, dogmatically, and almost religiously, that the free market system works, now and forever, regardless of historical circumstances or objective reality.
This is one of the reasons why we haven't really had an energy or transport policy for decades. The political elite have stepped back, and abrogated responsibility for the economy. They are managers on the board of a giant 'corporation' and the health and interests of the corporation come first. Indeed they appear to believe that the interests of the corporation are the interests of the country as a whole. This ideology negates the importance or even existance of conflicting class interests or inequalities of wealth and power.
At the moment what seems to be happening is that modern captialism is evolving into another phase. Here, the interests of the corporations that make up the 'market' and the state apparatus, are merging into a new whole. A kind of military, industrial and state complex. So that political power, economic power and military/security power, is becoming one and the same. It is a form of totalitarianism, a corporate state, the 'market' taking over and infiltrating all aspects of society. We end with a market economy, a market society and market democracy.
Perhaps the last postulate is the most disturbing - market democracy. What this means is that we as individuals have as much influence on the politics of society as individual consumers do in the ordinary marketplace for goods and services. This development has profound implications. Is market democracy even really democratic? Is the market democratic? Isn't what we choose to call the market really a mechanism for explaining and justifying elitism and inequality in the distribution of wealth and power? Aren't democracy and equality joined at the hip? Can one really have one without the other?
This is all too esoteric. Yet I think it's important to remember, or realize, that changing the road we're on is going to be very, very, difficult indeed, and the outcome is uncertain. Even if we succeed in convincing the majority of the need for reform or change, this does not mean that change will occur. We still have to impliment the will of the majority, and if this clashes with the interests, begins to question the distribution of wealth and power in society, then change will prove even more difficult to accomplish. Society is becoming less democratic, not more democratic. As growth slows and the 'cake' begins to shrink and scarcity becomes the norm, those with a disproportionate share of wealth and power are going to fight to keep what they've got, this is understandable and perhaps even 'natural' behaviour.
We are though, sooon going to have to confront the inequalities of wealth and power in society, and question whether the market really reflects the will and interests of the people. Overthrowing 'market democracy' and replacing it with real democracy, where the interests of the majority are paramount, isn't going to be easy.
The problem with this logic (the big corporations have no interest in peak oil or don't care) is false.
SOME big corporations don't care. Others do.
Take note of the actions of the major auto manufacturers.
They to a one are starting to move towards electric vehicles which is the only possible option they have to stay in business with the inevitable decline of oil supplies.
So I think it's unreasonable to say that ALL of the elites are unaware, just that they are behind the curve.
That's a variety of fascism, is it not?
The market, of course, is not the market (a bunch of roughly equal producers selling to a bunch of roughly equal consumers), but is dominated by a few very large corporations. And, as you say later, this isn't really compatible with democracy,
Peter.
excellent summary of the problem writerman. Some of the comments that follow are really missing the point which is that the interests of the government, the power elites and the corporations are congruent. They don't see that their interests and power concentrating behavior poses fatal risks to societal stability as the bulk of society gets poorer and they get wealthier. For their own personal survival it behooves them to use their wealth and power to benefit society or to have that wealth and power taken away from them. People who have nothing to lose are very dangerous. The corporations that have business models dependent on profligate energy consumption will contract to zero unless they change their model. Comments that the car companies now get it are ludicrous. The car culture is coming to an end and switching to cars that run on electrons or moonlight or pig farts misses the point. Any system that uses huge amounts of energy wastefully is doomed and that includes mcmansions in the exurbs as well as private auto transport. The political nitwits in the UK and the US look like cloned lemmings as they rush forward to the sea.
Writerman's article is just Marxist drivel. he hankers after some kind of command economy, as in the old Eastern Bloc. There is no chance of a majority of the people supporting him in that.
Unfortunately, you will find an alarming amount of support for such notions. In the main, this seems to me to be trying to use a hammer to fix a broken window. The problems were in the main made by government and I find it unlikely that they will be solved by government. But that's just me.
It's also a fair statement that we have come far enough down the regulated (screwed) economic path that simply clearing the way for enterprise to try to fix it probably won't work. I suspect that if these problems are to be solved, they will need some government help. unfortunately, current world governments are singularly useless at actual solutions so...
A the risk of being labelled a 'Marxist' I'll try to clarify once more. As an aside, it's ridiculous to pretend that Karl Marx invented the concepts of 'social class' 'inequality' or that his critique of capitlism and the free market was unique to him or to socialists. It's perfectly possible to have read and appriciated Marx without necessarily turning into a 'Marxist', whatever that means.
All I was doing in my post was trying to confront what I perceive as a dangerous dogma, a quasi-religious faith, in the rule and effacy of the marketplace and it's solutions to the distribution of wealth in society. Or is the idea that wealth is unevenly distributed in society regarded as 'Marxist' too?
I am not against markets per se, markets are usful, but perhaps they should be confined to the 'marketplace', allowing them to swallow society whole and that the attitudes and values and practices of the marketplace should take over almost every aspect of human behaviour, is surely questionable and open to debate? Exactly how big and powerful should the market become?
My point about the role of government isn't that it controls the market, it's the reverse, that the market increasingly controls the government. That we are moving towards a form of corporate state, where power in society is being concentrated in the hands of those who benefit and serve market hegenomy. Surely no one can allege with a straight face that the UK is becoming more democratic and that power and wealth aren't being concentrated in fewer and fewer hands and that ordinary people aren't being 'screwed'?
If one believes that gross inequality is justified and massive disparities of wealth and power, can be defended in a democracy, then go ahead and try! Clearly there are always going to be differences in wealth in society, but it's the current scale of the differences that is so striking and has profound implications for democracy. And what is democracy historically? It's an attempt by the many to enter politics and attempt to introduce social justice and share in the wealth and power they create for society, or are we supposed to deny that historically it's the many who have created the wealth enjoyed by the few? Maybe it's so, maybe multi-millionaires who actually support the millions of people who work for them, in much the same way that the peasants needed the aristocracy to provide them with land and labour, is that what people really believe?
The real point of all this is, that if one has a society with huge disparities of wealth and power, and massive diffences in lifestyle, then it's going to be very difficult to introduce the changes required by the challanges of global warming and peak oil, because the consequences connected with these problems are also disproportionally distributed throughout society. When the rich and powerful, who rule the world, live lives so different from the great mass of humanity and their problems, what incentive do they have to promote change?
I will take that challenge. :)
Yes. The large scale discrepancies are necessary for the proper functioning of an economy. This is clearly evidenced in pretty much all functioning economies. In theory, the labor class "produces" products and wealth, however, lacking a "capitalist" class to provide the large investment long payoff facilities in which to do so, the working class lacks a place to work. Many many of the functions performed by the current world economy involve very large outlays of capital with large risk and long payback times. Those projects are simply not possible int he absence of the super-rich. It may be the case that the more technologically advanced a civilization gets, the greater the disparity must be between the highest income and the lowest in order to continue functioning smoothly.
This is not meant to imply that anyone need starve to death or be required to live in "unliveable" conditions, and in fact in the US and europe, the minimum living conditions are well into acceptable territories. It is only in the undeveloped world, primarily territories that lack any form of viable market economy due to the absence of the "wealthy" in sufficient numbers where you find wholesale starvation and real poverty.
Also.... I would challenge the notion that the lives of the wealthy are that different to the lives of the masses of humanity within a set. It is distinctly inappropriate to compare the life of bill gates to the life of a displaced farmer in Zambia. They are not part of the same game. To properly compare different wealth levels, you need to stay within a rule-set (for example the US). So a more apropriate comparison is between bill gates and joe teamster. Joe teamster has medical insurance, is able to afford a home, food, a car, tv, medicaal care, raise children, and essentially live his life. Bil gates has a larger home, but essentially he lives the same type of life. He survives within the same medical technology, eats the same food, grows old and dies just like the rest of us.
There are occasions on which mandatory redistribution schema are appropriate. One example of that is nations with large oil wealth. Oil has a very small labor requirement relative to the wealth it produces, so in the natural course of events it would result in ALL the money going into one bank account through no fault of anyone. This is one of the very few occasions where it is appropriate to redistribute. In an industrial society, such as the US used to be, redistribution is almost always a bad idea because it reduces the overall competitiveness of the nation on the world markets and thus reduces the overall wellbeing of every citizen in it. However, the impacts are slow, and are only now preparing to be felt.
fordprefect,
I hardly know where to start! Are you really sure you actually mean what you've written? I don't mean to sound partronizing. I'm just puzzled. You seem to be describing a kind of liberal, formally correct, simplified, economic utopia, that doesn't exist in the real world. Do you really believe you've accurately described the way the economy works? I'm sure you do, unless you're being satirical and pulling my leg? Are you just pulling my chain for fun as a kind of exercise?
There are so many assumptions in what you say and premises based on liberal ideology and dogma that only partially and narrowly explain and describe how the 'economy' functions. Honestly, I didn't really think people actually believed this kind of stuff anymore. I keep thinking your not really serious and playing Devil's advocate.
I wasn't really concentrating on pure economics, or what's good for the economy, at least I don't think I was?! I think I was attempting to draw an outline of changes and dangers to society of the evolution of a form of capitalism which is anti-democratic and totalitarian in nature. The state and capitalism merging into one all-powerful entity - a veritable Leviathan towering over us. I don't think I'd put the needs of the economy before the requirements of a democractic society.
You seem not only to be arguing that inequality is good for society, but that the the more inequality there is the better it is for society as a whole. That vast disparities of wealth are almost an indication of how economically successful a society is. Are you sure this is what you mean?
You also substantially underestimate the detremental effects of vast differences in wealth and power on society as a whole. In fact you don't deal with the thorny issue of power at all, almost as if it doesn't matter in a democracy. You seem to put great store on the economy and how it functions optimally, yet you don't seem all that interested in how democracy functions, are these two connected? Vast differences in lifestyle and wealth and power distort society on so many different levels, surely this is obvious?
However, you deny this, by bringing up the third world, which I didn't mention. I didn't compare Bill Gates to some farmer in Africa, where did you get that idea from? Isn't that the classic 'strawman' style of argument, where do people learn this stuff? You also then to support you're argument try to contend that the differences between the lives of the super-rich and the average person aren't that great after all. That the rich have lives pretty much the same as most other people in Western countries.
You can not be serious, surely? How do you know so much about the lifestyle of Bill Gates and what he eats and where he lives and his level of medical care, do you know him personally? How many super-rich people do you actually know? I'm not super-rich, and I don't want to be, but my lifestyle is vastly different from the average person. I eat far better and expensive food. I have better clothes. I will probably live ten to fifteen years longer than the average person. I have a secure and very generous pension plan. I have a substantial investment portfolio. I have three homes. I don't have to worry about what things cost. My children go to private school and are receiving a very expensive elite education. You are substantially underestimating the collosal differences between the wealthy and the average working man.
There's a basic contradiction in your argument, probably because it really doesn't have much to do with reality. One the one hand you praise and justify inequality as necessary for the proper functioning of the economy, yet then you put the breaks on for some reason, and argue that even the super-rich are pretty much just like most people in their habits and lifestyle, so the egaliarian principle sneeks in by the backdoor so to speak. So one then wonders why we even aspire to become super-rich if they really live mostly like the rest of us and they don't really exist as a distinct group apart from the rest of us. So what motivates them, why do they bother, if it isn't for the financial reward and the lifestyle wealth brings? So maybe we don't actually need a capitalist class at all then?
:) To some degree I was yanking your chain. Mostly in the phrasing and glib characterization as opposed to the actual point, but still. I don't believe the actual economy functions as I have laid it out, For one thing, the existence and over application of government throughout my lifetime has badly distorted any economic theory.
OH! BTW, it is conservative ideology and dogma, not liberal (at least here int he US, I don't know where you are from) :)
One of the most dangerous misconceptions is that government is an effective tool to reign in corporations. In practice, regulation *always* favors the existing big corporations by erecting barriers to entry for new smaller players. Case in point, the pharmaceutical companies, Pfizer could not be the monolithic corporation it is in the absence of the FDA and the draconian approval process required by it.
You have it backward about the income disparity/health of economy thing. I wasn't saying that a high income disparity means a healthier economy, I was saying that high *technology* ventures require a high income disparity. High technology manufacturing plant is *expensive* and virtually impossible to construct without someone REALLY rich backing it.
As for the lifestyle differences, the advantages of wealth are not unclear. The wealthy get the best that society has. However, they still live in the same society, at generally the same level of technology. The difference in quality of life between joe teamster and for example... Alexander the great is far far greater(vastly favoring joe teamster) than the difference between myself and bill gates.
I never said that you compared gates to zambian farmer. You DID however compare the super-rich to "the great mass of humanity". The bulk of the people on the planet live pretty primitive lives, more comparable to the zambia farmer than to joe teamster. That's where I drew the inference that that was the lower endpoint you were using. However, since the zambian farmer does not engage in any meaningful commerce with any portion of the outside world, the separation is reasonable. If you had something else in mind by "the great mass of humainty" then I stand corrected.
INRE democracy/economy. Wealth in and of itself has very limited impacts on the functioning of a proper democracy if the citizens are being responsible citizens. However, we haven't had one of those in quite a long time. Democracies require several things from the citizens. For example,
a) Education on the issues under discussion... anyone think that's been being practiced?
b) Compromise on issues. YAH. Right, that's been happening.
c) Lead, follow or get out of the way. Democracy requires that the outvoted party STFU. Hasn't been happening.
Only when the requirements of citizenship are met by the bulk of the populace does it even make sense to discuss the impacts of wealth on democracy.
I DO however, certainly agree with you that when the capitalist institutions and the government start playing ball together it's all over. It seems to me that it is the responsibility of "we the people" to prevent that, or failing that, to press reset and get a new government.
Gotta say though that if the options are *either* democracy OR economy, I'd prefer to live in the nation with a functioning economy over the one with the functioning democracy. "we the people" are phenomenally stupid, and will frequently vote for measures that are simply stupid. Democracy is not the holy grail. Nor is a strong economy. The holy grail is "can't we all just get along?" and the answer unfortunately is "NO".
Im slightly concerened that I need to put effort into defending democracy against the obvious anti-democratic tendencies in our own society.
Whilst I can see the logic behind the few defending their position and interests against the many, and therefore they fear democracy, I have difficulty understanding why on earth ordinary folk, with ordinary incomes and wealth, support the rich and inequality. Is it because they really believe, against all the odds, that they too have a realistic chance of becoming rich themselves? But they'ed have more chance of winning the lottery than becoming rich. To accept inequalities for themselves and their families, for their entire lives, in the vane hope that they too one day will strike it rich, is delusional. That apparently significant numbers of ordinary people have internalized and accepted the values and attitudes of the rich and powerful has always puzzled me. That people actually seem to believe in 'trickle down' economics is beyond me.
There's also the 'paradox' that people seem to believe in two contradictory forms of incentives at work in society. Put simply, that the rich perform and contribute to economic growth if one 'pays' them handsomely, whilst at the bottom end, the opposite applies. But surely there is form of sliding scale at work here? That, in reality, the reverse is true. At some point the rich are saited and the benefits of pampering them begin to fall off, whereas directing the same portion of wealth towards the lower end of the scale will have a far more positive overal effect on society, or is that deemed 'socialism' too?
One could examine the current economic crisis in the United States as an example. Vast inequlaities have distorted the economy to almost breaking point. The super-rich, who, after all, are in charge, have run the country into the ground. This pattern seems to repeat itself over and over again. It is a myth that the elite know what they are doing and are more able and competent to steer the economy. What they do is follow their narrow 'class' interests over the cliff and drag everyone else with them. Why do they do this time after time? Simply because they can. The economic system in the United States disproportionally favours the interests of an elite in opposition to the well-being and interests of the majority of Americans. Now, I'm not sure this is a 'Marxist' analysis or not. Is it wrong to use the concept of social class and conflicting interests, is that it?
Surely one can't argue that social classes exist in the United States and people have hugely different lifestyles and access to resources? I can appriciate that one can argue that enormous inequalities in society don't really matter, and even that inequalities are positive and are what makes society dynamic; but to deny that inequalities of wealth and power exist is something else.
How then is the United States going to get out of the slump it's moving into? Well, it isn't, not unless one adopts a whole new set of solutions which are currently not even on the table. What's happened is that the United States has 'chosen' to saw off the branch it sits on. The corporations, what I call the super-rich or aristocracy, have moved American industry overseas to places wheere they can score bigger profits, fine for them, but not exactly beneficial for ordinary Americans who are forced to remain in the US, unlike their disappearing jobs and futures!
Just for starters what one needs is a fundamental tax reform, shifting the burden from ordinary folk and onto the wealthy. Ordinary Americans have seen their share of national income fall, now they are unable to borrow more, in deadly debt and can no longer afford to buy what's on offer. What's required is a type of New Deal. A massive programme of government financed public works to get people back into productive employment and put real and higher wages in their pockets, because otherwise the downward spiral will just go on and on and down and down. The American working-class and middle-class need support, not the rich, they have received more than their fair share over the last thirty odd years. Redistributing wealth to the lower end of society will have a far greater and more positive effect on the economy than pampering the rich even more. This is simply stuff. We need to rebuild the American economy from the bottom up. Unfortunately, this flies in the face of the dogma and interests of the elite minority that owns and controls the United States. The wealthy elite have the system 'sown up' and the democratic majority are disunited, fragmented, brow-beaten, hamstrung and without leadership, or anyone to fight for their corner and interests, the poor sods don't even have a political party to represent them. So implimenting the reforms necessary to get America moving again is going to be real uphill struggle and things are going to get a lot worse before they begin to get better, if they ever do.
You seem to be ignoring the chicken-and-egg nature of your argument. Maybe because it is convenient for you. But where did the "super rich" get their wealth in the first place. Maybe they stumbled upon a mountain of gold and claimed it for themselves, because God knows, if you find something, therefore you own it (sic.). If an individual swings a stick at a ball often enough, then invariably one is going to get good at it (most of the professional (sic.) sports people, movie stars, singers, ...) - the disparity in wealth is immoral.
Have you read at all, about all the people in the USA without health insurance, or maybe about the rate of home foreclosures and that the rate is increasing? The USA is going off a cliff, your comparison of "Joe Teamster" with Bill Gates is specious.
Chicken and egg nature of the argument: not ignoring it, just see no particular need to chase it back that far. Yes, the original capital came from somewhere. In many cases it was a criminal enterprise, an easy innovation, political favors from queen Isabella, or a lot of hard work. The fact still remains that a nation of joe teamsters will build no factories and mine no iron in the absence of a few capitalists to fund the ventures.
Yes, I AM one of the people in the US without health insurance. My business is purchasing and rehabilitating repossessed houses. My clientèle is primarily dolists. This isn't theory for me, it's my daily life. The dolists I rent to ALL have cable, health insurance paid for by the state, HEAP pays for 75 degree heating in the NY winter, the quantity of wal-mart plastic they leave behind when they move out is astounding. Their lives are crap, but that is most resoundingly their own decision making skills as opposed to lack of resources.
It is not a fact, it is your opinion. You are basically saying, that it is impossible to place an advert in a paper, or on TV, or rely on viral internet marketing, to raise substantial sums of capital - methinks that is exactly what Obama has just demonstrated. If you want to be beholden and kiss the ring of a 'few capitalists' then feel free.
So now your average 'Joe Teamster' has everything he needs in life, but you and the people you rent to, do not. Like I said, your comparison of 'Joe Teamster' to Bill Gates is specious.
Name one nation at any point in history that has or had a functioning industrial economy without a very wealthy class. The insistence that things that have never ever worked can work if we all behave better is one of the most dangerous in history and has been responsible for enormous evils throughout history. Capitalism works. It has always worked and it is the only thing that does. Periodically however, the tree of liberty needs water, and that's just life. The time to water the tree invariably comes about because government takes too much control and crashes the functioning of the nation. Whether it does so at the behest of the corporations, the people, or the spotted owls is irrelevant.
BTW, I have everything I need, as do all my tenants. The insistence that health insurance is a "need" is ignorance. The fact is that without health insurance, do you know what happens? You still get treated, you just don't pay the bill. It's as simple as that. It isn't your life that is in danger, it's just your credit rating.
I've given you one clear and substantive example where an individual has raised a considerable sum of money without reliance on a 'few capitalists'. You have ignored my line of reasoning and your argument has now changed to asking me to disprove a negative combined with an appeal to authority (the "tree of liberty" lol).
Your thinking appears stunted - "at any point in history" .... "industrial economy", tell me how many years have we been standing erect, and how long is recorded history, and how many hundreds of years have we had an industrial society (in the west)?
You might as well ask for an example of one nation that has a law where everyone wears pink on Monday.
Further, I have made no "insistence that things that have never worked, can work if we all behave better", and even if I had, your comparison that this "is one of the most dangerous in history and has been responsible for enormous evils throughout history" is outrageous. Hitler was evil, a line of reasoning is just that. Do you seriously think that your staggering exaggeration and inflammatory language constitutes a line of reasoning?
"Capitalism works", lol, today there is news that the FBI has arrested over 400 people in connection with the sub-prime crisis. These people were not colluding on some game-the-system forum. A large number probably have no knowledge of each other. This, Enron, et al. is an example of the system you are attempting to defend. Before your very eyes it is falling apart. How safe are savings when, on the one hand, the true rate of inflation is likely double that reported by the Government, and on the other hand, we have the Federal Reserve continually diluting the US dollar and setting base interest rates in low single digits. Seriously, how does this very broken version of capitalism help the ordinary saver? This is also happening in those other fine examples of 'working Capitalism' the UK and Europe.
Following your example of lets not argue the facts, lets try colorful metaphors; your reasoning appears to be flip-flopping on the deck like a fish out of water.
Weatherman,
A few facts. I am not a Marxist. I am not even a socialist. I have not in my critique of controlled and managed 'market democracy' postulated any alternative based on a 'command economy' like the old Eastern Bloc. So the idea that a manjority of people would support me in that venture, or not, is absurd, as I have not advocated any such remedy. Do show me where I do so in my post and I'll gladly concede!
Either you can't read, or you choose not to understand what you read. I'm perfecdtly capable of stating that an Eastern Bloc type of centrally controlled command economy is the answer to all our problems, if that's what I believed, only I don't think that. Is that clear enough for you?
I was writing about democracy as opposed to rule by an anti-democratic market state. It's bizarre that when one writes about defending democracy against the march of totalitarianism, one is accused of spouting 'Marxist drivel', a rather sophisticated choice of words!
Ironically I think we do live in form of command economy already, only it isn't 'socialist', it's totalitarian and anti-democratic, and increasingly so, as we in the West increasingly adopt the attitudes and strategies of empire to maintain our way of life.
Hugo and Peter,
It's difficult in mere comment to cover all the ground, and one has a tendency to simplify things too much. However, I do think we are moving towards a new type of totalitarianism and anti-democracy. I don't really want to define it as a variant of 'fascism' because that conjures images of marching, uniformed, legions carrying torches. It's so 20th century.
I don't think we are living in form of militant, militaristic, fascism, like that. Our evolving form of totalitarianism is different from the classic forms, it's more subtle, and probably more dangerous, as we seem to have forgotten what democracy really means, have become merely consumers in glittering marketplace, and have accepted that we can be bought and sold and that somehow this is right and proper.
I think, at the very least, we should question these assumptions and the ruling dogma we all live under. After all what if, just for the sake of argument, captialism and real democracy are incompatible? What if captialism and the free market, with the emphasis on unlimited growth and progress, more and more and more, are impossible on a planet with finite resources? What if the free market is just another impossible utopian construct like 'socialism' or 'communism' or even 'fascism', and we all know where they lead us! Is our faith in the market really justified and sensible given the limited size of our planet? Or are we to believe that it's the destiny of capitalism to leave this solar system and launch itself into the rest of the galaxy?
What concerns me is the idea that 'there is no other way'. Is this a mere statement of an obvious fact, or is it at heart a form of totalitarianism? Surely one cannot argue that corporate capitalism has always existed? Surely something that came into existance in a particular historical period and under particular circumstances, can also cease to exist at some time? Has history suddenly ended and current model of society is destined to continue for ever? Personally I think this is philosophically and intellectually absurd.
I fail to see why some people seem to think that questioning capitalism and the free market is so dangerous and simply wrong, almost a kind of sin or heresy. What if capitalism, for want of a better word, is destroying our planet? Is it rational to just sit back and say and do nothing? Do we really sacrifice ourselves and the planet on the alter of the free market? Wouldn't this be regarded in other circumstances as form of insanity and delusional behaviour?
There are currently around 800 million cars in the world, most of them in the West. There are 1.3 billion people in China, we'll leave the Indian multitude aside. Given Chinese growth rates and justified aspirations, in a couple of decades there could be, in theory, another couple of hundred million cars in the world and that's just China! Does anyone really believe that China can have a standard of living comparable to the United States? What are the environmental consequences for the planet of China and India entering the modern, consmer world? Yet the free market tells us this is the way it has to be, not only that, it is also a good thing. But we'd probably need four extra planets to accomodate China and India reaching Western standards of living. How is this possible? Where will these four new, extra planets come from? How will we build them with the limited resources we have on our one, small, planet? How can we possible accept such a 'message' from the marketplace, a message which is so obviously and clearly insane?
Maybe it won't come to that. Maybe corporate capitalism is doomed to disappear along with the age of cheap and plentiful energy, and maybe that wouldn't be such a bad thing for the planet or for us. Though a forced return to the type of society we lived in before the industrial revolution isn't on my personal wish list.
I think that, when one says "for want of a better word" in the centerpiece of an argument, one should reconsider one's conceptual framework. I doubt you'll find a better word so... how about using several?
Clearly, some aspects of what we often call "capitalism" (I do it too, it's a useful shorthand) are much older than the others, more sustainable than the others and have a greater likelihood of outliving the current crisis. In general terms: trade, the growth imperative and accumulation are real old and resilient while the specific political arrangements that support and limit them are fleeting.
I hate to side with the yankee troll (this is TOD Europe dude!), but it's not totally unfair to call you a Marxist: I think that lumping it all together was a problem with Marx's analysis as well. I like to think that we have a better understanding of economic history now and that we are better equipped to distinguish the stuff that can and must be reformed from the stuff that only communism (better known as anarchism nowadays) could address.
As for the rest, you ask many important questions but I but you know the answers already, right?
Just one thing: the market, be it the really-existing one of the free one, does not, can not speak! It has no voice and no message of its own: what you hear are oracles, mere humans. As an agnostic, I won't concede that their god actually speaks to them without some evidence.
Hfat,
I wasn't merely asking questions as rhetorical device in a debate. I do not know and I'm not sure about what the answers are, if there are any. I'm still considering and thinking. Many I'm having difficulty combining the dogma of infinite growth within the confines and resources of a finite planet. I just don't see how we are going to pull it off over the long term, without resorting to 'science fiction' solutions.
I'm not sure what you mean by 'lumping it all together' and what exactly is the problem that Marx and I share? Is the 'lumping together' the idea that one cannot really seperate 'economics' from politics and the distribution of wealth and power in society?
If I knew the answers to the 'important questions' I wouldn't hide them from anyone. To be honest I'm not certain there are 'answers' or solutions to the challenges we face, but that is a very pessimistic almost fatalistic stance. I'm afraid that we may, as a civilization, have gone too far down the wrong road and time is running out for us, that our civilization is doomed and we've permenently damaged the biosphere beyond repair. That we may have started a process that will turn the planet into a barren moon. Looking at the massive and accelerating destruction of life on this planet that we are responsible for doesn't make one feel particularly optimistic.
writerman,
I assumed you knew the answers because they seemed obvious to me... sorry about that.
You seem to see contradictions... and I think you see them because they're really there. You need to trust yourself a bit on this one! Capitalism as we know it is indeed incompatible with democracy and can't handle limits to growth in an acceptable fashion either. And I don't think we should have faith in the market: we should know it for what it is instead. And yes, it looks insane because willfully driving into a wall really is insane. I'm not going to go on like this telling you my answers (if you wonder why, check the Bad Religion song).
What I was referring to with 'lumping it all together' are the various bits and parts of what we call "capitalism".
Of course, the point is not to defend economic concepts from reality! The kind of analysis Marx (and you too, presumably) wanted to do is fine by me... I'm just saying that totalising concepts like capitalism are not very useful to understand history or to change it. They're great for book titles though.
For instance, saying that "capitalism" is going to endure isn't the same thing as saying that history is over... unless you have a very narrow definition of "capitalism". Some bits are going to endure and others are going to change... that's what history is about: change and continuity.
If you lump it all together, then revolution is the only solution as they say. It's not that revolutions are necessarily bad, it's just that it's hard enough to end up with something better than you started with when you have a plan... the way I see it, having the destruction of "capitalism" as one's only objective is asking for trouble in a big way.
Oh, and something else I forgot to mention you have in common with Marx (it also ties in with 'lumping it all together') is to contrive a radical difference between industrial and pre-industrial... I think a forced return to the past would bring us farther back. That or we'd still be saddled with corporate capitalism as that's a good bit older than industrialisation by any reasonable definition.
The situation for real people is far worse than is implied by the Government figures , and is going to be much worse for the coming years,
This is because the figures have been fiddled to systemically understate inflation by omitting major elements of real expenses, hence the Telegraph is now publishing a Real Cost of Living Index:
And:
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/17/bcninf...
The official cost of living index is heavily biased to show an improvement in costs if your new computer has a few more Mhz or your new car is more powerful than your old, and is a far better reflection of costs for the very rich than for the poor, or indeed people on average income.
In Britain and likely in America the real purchasing power of people is not static but falling, and is likely to fall sharply in the coming years.
It's also age dependent as purchasing habits obviously vary with age. The BBC presented this data:
Aged under 30 - 3.3%
Aged 30 to 49 - 3.7%
Aged 50 to 64 - 4.1%
Aged 65 to 74 - 4.3%
Aged 75 and over - 4.8%
Dave,
Yes, people are going to be spending a greater percentage of their income on anything related to energy such as heating, light, transport, food that they have done for many years. Thus the percentage available for "other" spending must go down and this will impact those with lower incomes much more than higher incomes.
A simple example to illustrate, just in case it is not obvious;
Lower income.
If my "energy related" spending takes say 25% then I have 75% left over for everything else, once the energy related doubles to say 50% then I have 50% left over, a decrease of one third 75->50 of my "other" income.
Higher income.
If my "energy related" spending takes say 5% then I have 95% left over for everything else, once the energy related doubles to say 10% then I have 90% left over, a decrease of about one twentieth 95->90 of my "other" income.
Very true, but the Government has also allowed the system to be heavily loaded against the poor.
Much higher rates are levied on those who use key meters as against direct debit, and low users are also penalised, neatly hitting both the poor and those who seek to conserve.
Someone should found a socialist party in this country, but it would never catch on.
Chris,
It is interesting to compare the alarming list of world items rising in price with the relatively rosy world view of the UK Cabinet Office report
Realising Britain’s Potential:Future Strategic Challenges for Britain downloadable from
http://www.cabinetoffice.gov.uk/strategy/work_areas/strategic_challenges...
or directly at
http://www.cabinetoffice.gov.uk/strategy/work_areas/~/media/assets/www.c...
(its 4.5 Mb!)
It is difficult to believe that this document was produced in February of this year even as oil prices had zoomed past $100 a barrel. Are they worried? Don't seem to be. Can't be much of a Strategic Challenge then.
You might like to sink your critical Peak Oil/Peak Gas/Peak Fertiliser teeth into it.
Page 31 - chart shows costs of sea freight and air transport at an all time low - yet the chart ends in 2000!
Page 50 - UK road traffic is expected to increase by 31% by 2025.
but
Page 157 - Global greenhouse gas emissions must peak around 2020 to keep global temperature rise below 2 deg C.
Lots of nice diagrams to ruminate over.
Happy reading,
BobE
With the minutes of the last MPC meeting just released, it looks like interest rates will be going up next time round.
Although the vote was 8-1 (David Blanchflower being a contrarian), the committee "considered raising rates to counteract inflation", but "decided that an unexpected rise might exaggerate the level of MPC's concern".
So next time there is no "unexpected"...
Couple that with the plaintive calls of "we know inflation is high but don't ask for pay rises" and the general rising bank rates anyway; it looks like interest rates will be going up.
Stagflation and union unrest, here we come!
Unemployment is likely to be shooting up like a rocket soon anyway with the arrival of full blown recession.
Under those circumstances an inflationary spiral is unlikely as most will have a problem hanging on to their jobs even though their real incomes will be declining.
Powerful groups such as Shell tanker drivers and civil servants who have greater job security will strike, and the Government looks likely to cave in, as their political authority approaches zero.
Rising unemployment and reduced tax receipts should make the budget deficit and balance of payments unsustainable and the only answer will be an emergency budget savagely cutting Government expenditure.
Raising interest rates when cost pressures are imported and not due to wage inflation would likely jut lead to a more rapid collapse in Government finances, although perhaps a quarter point rise would indicate that the route of hyper-inflation was not going to be taken.
From the article:
From garyp:
Staglfation isn't the half of it. Can you say 'contractflation'?
after peak oil -> contraction + inflation
In other times it was called depression.
Actually there is a worse scenario.
That's when the interconnections that make up the economy start breaking down. The system no longer works, and eventually there is no system at all.
A scenario where there is no oil at any price, where exporters will only sell to some, where barter replaces currency and value it mutable on the basis of how you can work together (or not).
Not sure if the economists have a word for it (probably its a personal armageddon), but I'd call it 'dissolution'.
There's a word for that - collapse.
Probably dumb questions, but maybe someone can enlighten me:
What would be the point of raising interst rates when it is international commodity prices, not consumer spending, that is driving inflation? Surely, in a stagflationary environment, demand will be cut through economic necessity (ie inability to afford) and therefore not have to be artificially constrained through interest rate policy.
Higher interest rates would simply further reduce the amount of disposable income we have and therefore make us all relatively poorer without having a significant impact on global commodity prices or our real cost of living.
As per Euan's post below, the bigger picture is probably the sterling exchange rate. As the economy goes into recession, the tax take falls, and the government will need to borrow more (because it failed to build up a nice big surplus during the boom). That means convincing Johnny Foreigner to lend us money; and JF will only do that if he sees himself getting a good return, which means that he will like relatively high interest rates.
Failure to provide that, and with our structural trade deficit set to worsen (again, see Euan below), the pound will fall, because no one will want it. So, even if commodity prices do stabilize or fall generally, they might still rise for us, if the pound falls enough. That is, the "wait and hope inflation falls" strategy may fail for us, even if commodity prices do stabilize in the future (in other currencies).
I am pretty sure that Mervyn King has talked about needing to raise interest rates to defend the pound within the last year, but don't have a link, and I could be wrong on it,
Peter.
An alternative to going cap-in-hand to Johnny Foreigner.. producing what we consume within our own borders to the extent we can and creating policies and fiscal stimuli to encourage this.
I find it ridiculous that we have amongst the biggest per capita wind resource in the world and yet have not one single UK-based manufacturer or manufacturing plant of utility-size wind turbines (at least not that I know of).
We have unemployment blackspots and unused or under-used shipbuilding yards all round our coasts. These locations are ideally suited for the construction of offshore wind turbines to take advantage of our huge resource - why is no one doing this?
The potential workforce is there, the facilities are largely there (manufacturing sheds, dock facilities, heavy lifiting equipment, etc), in many cases the steelworks are next door, the wind resouce is adjacent, the demand and need for such energy is clear.
It's only one small part of the solution, but it appears to be as close to a "no-brainer" as I can think of.
You mean strategic interference in the marketplace to align investment with long term vision - by a government.
Sounds positively socialist. Which political party would champion that?
PS building large tidal generation capacity is also a key area, as is wave.
The more I think about what I believe in, the more I understand that only "strategic interference in the marketplace to align investment with long term vision - by a government" will solve the problem.
I would go further and propose that the wind-turbine manufacturing industry should be a nationalised business, run on a not-for-profit basis and paid for by hypothecated taxes on imported fossil fuels and petroleum products
I would go exactly the same way with tidal (and to a lesser extent wave as it is not yet mature enough as a technology).
I would over-rule objections to the building of pumped-storage hydro faciltiies in our more mountainous areas to cater for problems of wind intermittency.
I would also negotiate directly with the Icelandic government to build a nationalised HVDC link from Iceland to northern Scotland to import their excess of geothermal and hydro-power.
I would re-nationalise British Energy and engage on a very rapid build-out of new nuclear plant, using, to the extent possible, the locations and grid connections of exisiting decommissioned plant.
I would renationalise both the power and gas grids.
These are just for starters.
All I need is for someone to elect me as benign dictator of the UK....
Thing is that it's pretty much a rule that private concerns are more efficient than government. There are exceptions and there are a few occasions when the inefficiency of government is worth paying due to other factors, for instance the water and sewer systems. Possibly the gas and power grids are examples of that as well, but it should be considered int he light of the added total cost to society.
The wind turbine manufacturing plant you describe could be instituted at enormously lower cost to the british taxpayer by a 2 step process.
1) Accelerated regulatory approvals. The construction permitting costs and delays on a project like that are an enormous cost to the plant operator. In total they almost double the cost to construct the plant.
2) An assurance of government support in labor disputes. There is simply no way that a manufacturer paying $75/hr in total labor costs can compete with a chinese factory paying $.20/hr. So you have the choice of outsourcing ALL your manufacturing over time or backing down the cost of labor in the UK (and US) to the point where some level of competition becomes possible. This has the tangential effects of lowering the fuel consumption of the "average" person.
Over-ruling the pumped storage objections... There you have hit the nail on the head. It has simply been too long a time during which any tom dick or al has been able to block construction on vital infrastructure at minimal cost to himself for years based on objections only tenuously correlated to reality. That more than anything else is why we find ourselves in the straights we are in. Same goes for nuclear plants.
Most wind turbines nacelles used in Britain are manufactured in Germany and Denmark, not China.
yet.
The trade is the other way, in fact, with China importing a lot of well-built nacelles from Europe.
With their present plans for production they are not going to have spare capacity for years, and those plans are likely to be increased with oil expensive and coal and gas scarce.
Here are the Chines wind plans:
http://www.renewableenergyworld.com/rea/news/story?id=52764
China's Wind Power Industry: Blowing Past Expectations
As the rest of the posts in this thread indicate Britain's labour costs are unlikely to stay above China's for long - IOW living standards are about to nosedive.
Yes. I am aware of all that. But since we were talking about new rather than existing plant, the current arrangement is irrelevant. Capital goes where it is treated well, that means that new plant is far more likely to be built in china than in the US or europe.
Thus the "yet". Give it a few years (<5) and you'll see what I mean.
Fact is, the only reason there is any manufacturing plant at all in the US or europe is that china and india haven't gotten around to moving into those industries yet. Expansion takes time, even at 10%+ growth. And taking different industries away from the developed world takes growth.
however, for a preview of coming attractions,
http://www.treehugger.com/files/2006/07/ge_china_wind.php
Or for another example,
http://solveclimate.com/blog/20080128/heads-china-be-1-wind-turbine-make...
If you were aware of it your previous posts did not make that clear.
In any event your case is based on global trade remaining vigorous.
Since shipping costs are rising vigorously and it seems that we may be moving to a more mercantilist world then your premises would not then be valid.
In addition it is not clear what, in Britain's case, would be used to trade for the turbines, once the financial services industry goes the way of all flesh.
The only countries in Europe which have concrete goods to trade are Germany, France and a few of the smaller countries.
None are exactly bastions of laissez-faire economics, and in futre seem likely to be even more protective of their manufacturing industry.
I am not responsible for your selective inference of what I write, only for what I actually say. In this case, I was writing about the construction of future plant, as was obvious from context. The fact that you failed to infer that is not my issue.
Shipping costs are rising dramatically, but they are a rather minimal cost to begin with, so they have a lot of room TO rise. Global trade will in all probability remain robust until civilization collapses. Total cost will be minimalized and labor represents an enormous fraction of production of any low volume production effort. This favors the developing world to such an extent that transport costs become nearly irrelevant.
As for the protectionism... well, that only works internally. France will keep most of the export business in europe due to the nuclear grid, but any nation that attempts to "protect" their industry by efforts other than improving aspects of competitiveness is doomed to throw money down the toilet and STILL fail to keep the jobs. Evidence the US auto industry.
You started by arguing that with labour costs more expensive in Europe there was no way it could compete with cheaper Chinese labour.
When it was pointed out that in fact it more than competes in the field in question, wind turbines, at present, you then switched to projecting a future where more favourable treatment of manufacturing in China would lead them to out-compete Europe.
If that is the case, then the wage differential you pointed to will not last long.
Until I pointed it out, if you were aware that China has all it can do for many years, enough for wage differentials to substantially narrow, to produce enough for its own needs you did not clarify this.
So I can't see much selective inference in pointing out that you simply had not mentioned a lot of things, and appeared unaware of the size of the challenge China has in just meeting its own turbine needs.
Your overall points on competitiveness I would agree with, whilst pointing out that differences in labour costs may be partly made up for in the coming energy short years by the much higher penetration of nuclear in the European energy mix, as it seems likely that increasing costs and supply shortages of coal will form a not-inconsiderable challenge to China.
I also agree fully that obstructionism in building energy supplies must be swept aside, and likely will be in the coming crunch.
Regards,
Okay. So you assumed that I was poorly informed without grounds. Given the overall quality of internet correspondence I can understand that.
The second article I posted stated that in 2009 china will be the largest exporter of wind turbines. That rather flies in the face of your projections that they will be unable to meet their internal needs for an extended time frame.
Also I should point out here that china is shorthand for "rapidly developing asian economies" india can be substituted just as easily.
The wage differentials have a long long ways to go before they even begin to approach a point of even competitiveness. Certainly the relative wages won't have changed that much before 2009.
The energy supply crunch coming up will most likely impact the developed world much more forcefully than it will china. We use far more energy for non-productive uses. This will have a 1 off impact on china, as their exports of useless goods dry up, but in the main I would expect them to come through it better than us.
Hi,
Just to be clear I make no assumptions about your or any other posters awareness of particular pieces of information - I just respond to what is written, so if a point is not shown I may seek to clarify it.
That was an interesting link to China's export ambitions of turbines.
I would be somewhat reluctant to order them myself, as China is often deficient in quality control, and difficulties have been experienced in the longevity of wind turbines on many occasions in the past (I am not referring to Chinese manufacturers)
Regards,
"...the more I understand that only "strategic interference in the marketplace to align investment with long term vision - by a government" will solve the problem..." ROTFLOL
Perhaps the same strategic interference that has just stopped Lotus from installing wind turbines?
Plans for three wind turbines at car manufacturer Lotus' facility in Norfolk have been put on hold after the proposals were rejected by a local planning committee in a move that the company behind the turbines described as the " worst example yet of a planning system that is not fit for purpose".
The planning application was for three 2MW turbines, capable of providing power for the Lotus facility as well as approximately 1,000 local homes. The official planning officer's report recommended the proposals be given the go ahead. The report claimed that "while I fully appreciate Members' concerns as expressed in the refusal of the previous application I don't consider that a refusal on visual intrusion could be sustained at appeal". South Norfolk Council's own 2005 study into potential wind turbine sites had also specifically referenced the site as an area suitable for supporting a small group of two to six turbines.
Yet the North West Area Planning Committee again voted by five to three to block the proposal, citing "visual intrusiveness".
"Onshore wind energy is our New North Sea oil, with enough untapped energy to power the whole country three or four times over..The one thing holding it back is this archaic planning system."
Now, as a businessman please tell me why i should invest in manufacturing something in the UK when it will be blocked by local government presumably acting to "align investment with long term vision"?
What hope do we have of keeping the lights on in the future if we can't even build wind turbines on an industrial site surrounded by farmland?
There is something that no-one has talked about yet, probably because it is so radically politically incorrect.
If 2 companies produce the same product and the product produced by both companies is identical in quality, but there is a public perception that the work force in one of the companies has a better work ethic and therefore produces a higher quality product, then the company with the perceived higher quality will sell more product.
Might there be the possibility that there is the perception that the all European work force in the Nordic countries would produce a superior product than that produced in England with its high level of third world immigrants? Could this perception lead those invsting in production to go to Finland to build a new shipyard or buy a new ship rather than go to England?
I have no isea how much impact the idea of perceived quality due to the makeup of the workforce might impact the decisions of buying and building products and plants, but it is, unfortunately, a real world factor that someone needs to look at.
Would you rather invest your money building a plant to build wind turbines in Sweden where there is very little probability of business interrupting riots in a severe recession or build the plant in England, France or the USA where there have already been riots - And will likely be more and bigger riots as the recession hits and deepens?
This MAY be PART of the problem of why Englands shipyards are underutilized compared to Finlands and why Sweden produces windturbines and England does not?
Hi, I hope you don't mind. I sent this comment to my MP as I thought it an excellent idea. I don't suppose it will do any good but I try to write to him once a week and include a link to a relevant thread at theoildrum. I thought this thread particularly apt.
Mark
Hi Bunnyonhead you just beat tme to it in asking the exact question I was going to post . Can any economists out there explain in plain English how rasising intrest rates is going to bring down oil /fuel/food the main drivers of the inflation.?
Just like the USA with the dollar, since the UK runs a significant current account deficit
http://www.statistics.gov.uk/cci/nugget.asp?ID=194
the UK needs the pound to be strong to reduce the costs of imports and costs of borrowing from Johnny Foreigner. In particular it needs to be strong relative to the dollar since oil is priced in dollars.
As Mervyn King says in his letter, the pound has fallen in value by 12% since its peak last July - only higher interest rates relative to other countries can put that right. The effect of raising interest rates on things like house prices might just counteract the price rises in food and oil!
Mervyn is only tasked with keeping core inflation at around 2% - whether you can even afford to pay 2% more or have a job is your problem not his.
One of the possible additional effects from increased interest rates for the public is that it reduces consumption (also from oil and nat gas) thus creating a possible demand reduction that could affect oil prices. Just look what Paul Volker, former chairman of the US FED, did back in the early 80’s as oil prices sky rocketed. After some time with high interest rates, above 15 %, (and recession) oil prices started to come down. In the US oil consumption dropped by approximately 20 % during the early 80’s.
I'm not an economist, nor do I pretend to be one. However, I can play-think the role of markets for a while :)
Any real world economists or financial analysts feel free to rip the below apart. It's probably on ways I have no idea.
1. Assume market fundamentals (aka supply/demand) is driving up energy/commodity prices.
2. Further assume that on top of that, we are now to c. 4-7th year of a commodity INVESTMENT boom. That means there is an investment bubble on top of the fundamental price rise in energy/commodities.
3. Acknowledge that there is very little you can do directly to fundamentals for many commodities. Even if you use less, it's a small drop in the bucket worldwide. Further, Asian countries with their fast growth rates are the price setters, not the declining OECD countries.
4. Acknowledge that there is some leverage within a tight market for one to deflate some part of the commodity bubble by making money more expensive. Money is already very expensive due to the international loan fiasco (mortgage backed securities and other derivatives and the consequential asset pricing lies by banks).
If in such an environment key central bankers acted in co-ordination to make money more expensive, a lot of M2-M3 money aggregates might flush out of the system, hence reducing the amount of speculative money raising the price of commodities. Again, this would do very little on it's own the fundamental rise. However, there are secondary effects.
5. Acknowledge that if 4 were to be successful enough, it would also probably cut into other areas of corporate spending and thus general economic growth in the productive sector (i.e. non-financial). This would act on top of the current slow-down trend due to the expensive commodities themselves. Less economic activity -> less need for commodities -> prices of commodities would potentially diminish.
6. Understand and fear, that if 4/5 was successful enough, we might go into a recession of the kind that most do not want. This in turn would require pumping lots of cheap money into the market in order to rejuvenate the economies, thus creating a potential for an even bigger bubble in several asset classes (commodities probably amongst them, at least once productive sectors were well on their way to recovery).
Xeroid already posted above how currency exchange rates / imports play into this.
Doing nothing will likely result in the markets playing it out themselves: economies slow down, slowing economy needs less commodities (base industrial price of commodities would go down), investing risks grow bigger, money is pulled off the commodity investments (financial premium in commodities shrinks), etc.
However, whether this market-play is then orderly and system cleansing, or chaotic and extremely disruptive, is a different matter altogether. I think opinions on that still divide along ideological, rather than scientific lines.
Chris,
This is slide 57 from a BERR ppt presentation that landed in my mail box yesterday. BERR (department for Business, Enterprise and Regulatory Reform) advise HM government on UK oil and gas production and forward expectations.
The slide shows an expectation that we will be importing 80 million tonnes of oil equivalent of oil and natural gas by 2013. Converting this to barrels by multiplying by 7.33 we get annual imports of 586 million barrels of oil equivalent per annum. Assuming the very, very conservative price of $135 per barrel gives an annual charge to the trade balance of $79 billion. The large surpluses of the pre-2005 era are converted into a massive deficit which neither Sterling or the UK economy can withstand - IMO.
(this is a back of envelope calculation assuming oil and gas prices have converged)
This is what Mervyn King (Governor of the bank of England) has to say:
Now I'm told from a trusted source that Mervyn King is a very clever man. But he, and The Chancellor, really need to explain to the British people how the UK economy is going to survive importing ever larger amounts of energy at ever higher price without this igniting an never ending spiral of inflation, strikes and unemployment.
The BERR forecast of course will never come to pass (no criticism implied) since crippling energy costs will slash demand throwing the UK into energy poverty. And it is highly unlikely that the forecast import volumes of natural gas and oil will actually be available on the international markets for us to import (the flip side of exponentially rising price destroying demand). We are in the early stages of a full blown national emergency and the sooner the government and the BOE awaken to this fact the better.
I might add that the BERR presentation on UK Oil and Gas is the best summary I've ever seen.
Euan, I couldn't spot the report on their site - have you got a title or a direct link?
Thanks.
I'll post it Monday.
Spot on Euan. We know what's going on. They know what's going on. So why oh why won't our elected and appointed officials drop the charade so we can try and do something about it?
Relying on the market is their chosen strategy, devolving responsibility. Fair enough but the one thing markets need is information! Matt Simmons calls for more oil field information... in the UK we need our government to tell it how it is for the same reasons. Hiding the problem and hoping it'll go away is to guarantee that it will bite us, hard.
"Spot on Euan. We know what's going on. They know what's going on. So why oh why won't our elected and appointed officials drop the charade so we can try and do something about it?"
They only care about making money.
Given that in the Anglo countries, most of the economy is based around finance they make money no matter what happens. They can go long or go short. In both cases they make profit.
Until the interests of the banks and ALL of the large corporations align with those of the working masses they have little incentive to mobilize in a direction that would benefit all. So far it seems that the only ones moving are the alt.energy companies and the automobile manufacturers. Some supermarkets show signs of moving.
The key factor will be the speed of the descent and how well the recession is weathered.
Hi Euan,
Your posts are always exciting and your comments profound.
We (and They) keep using the misleading term Inflation. This is maybe the establishment 'Red Herring" preparing us for their "big-lie".
We do not need ever increasing buckets of money to buy less and less goods as is the traditional Inflation model.
The CPI is only a political tool
Fed and CEB Interest rate changes are marginally useless with what we have, which is Higher-prices, intractably beyond the manipulation of Governments. I am of the Mish school. We are in a temporary, price increasing, deflation.
I have a small property in Bulawayo in Zimbabwe if anybody wants to buy it real cheap, ONLY Z$23,000,000,000,000
Blixen (or is that Graham?) - I am no economist and am driven in short spells at least by what I see happening around me.
• The cost of energy is currently rising relative to other goods and services.
• This will eventually work its way through to core prices rising.
• Rising food, energy and other goods (cos of falling £) will lead to widespread unrest among public service workers this year. Will the Government be able to resist higher wage claims - I don't know.
• The value of property is currently falling relative to cash (at long last)
The only way we can get out of this mess (debt mountain) created by Gordon Brown is through inflation. So it is time to shaft pensioners and prudent savers once again to reward the profligate borrowers who spend more than their share of earth's resources without paying for them.
What happens next - I don't know.
Euan
Hi Euan,
Graham it is.-- I was a Baby boomer, so the society has finally paroled me to to live my days out in poverty. But I fooled them
I am in the Philippines living like a god, reliving my teenage years with girls and motorbikes and all on 500 pounds a month.
My worst nightmare is having to return to a First World country.
Gr
Euan, Financial Services (City of London) is the biggest source of foreign currency earnings to partly offset what has become, even without energy imports, a deep-seated UK trade deficit. This sector is already feeling pain due to the global credit-crunch and I strongly suspect we'll see a sizeable downturn in currency earnings from financial services.
Energy imports, as we've long talked about, is going to be 'the straw that breaks the camel's back' and this BERR chart pretty well confirmes your 'stuff of nightmares' chart a year or so back.
There maybe, however, one optimistic spot in the trade balance - currently tourism has an estimated £19bn pa deficit due to a great extent to the volume of 'cheap' flights taking UK citizens overseas for holidays, trips to 2nd homes etc. These flights are about to become anything but cheap at the same time as their passengers' budgets are being stretched by higher food, energy and mortgage / borrowing costs. Widespread route cutbacks are already being implemented by airlines in US and I'm sure UK is about to see the same thing. Of course even if the tourism deficit were to halve is would only offset a year or so's growth in energy imports.
Hi Euan,
Now i have an official graph to back up what i have been telling our politicans. My guesstimates working from the BP statistical review and extrapolating were between £3-4 billion per month. i look forward to getting the BERR link on Monday to review the whole document.
You may have seen that the euro politicans are starting to call for tax cuts to VAT in order to ease the pain of high oil prices:-( Luckily to reduce VAT on oil would require unanimous support among member states to go ahead (I think) so probably won't happen. Andris Piebalgs has criticised French President Nicolas Sarkozy's proposal to cap value-added tax on petrol and use the proceeds of higher oil tax revenues to help sectors worst hit by high energy prices.
Maybe we should stop using the word "Inflation" and use what most people perceive as inflation, namely "cost of living increases". The cost increases we are seeing aren't necessarily due to monetary inflation and are due more to the effect of supply shocks.
I actually believe we are heading into a deflationary depression. So do these people by the look of it:
Britain's lonely monetarists fear Bank of England may trigger severe crunch
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/17/bcnmon...
I don't think they regularly publish official M0, M1 ... M4 data any more, maybe you can see why!
New Star is an asset management company (e.g. investor, speculator, debtor, non-producing entity).
It would be surprising if they were not scared shitless about loss of access to cheap money and the risks of further coming margin calls. If they are anywhere near as leveraged as everybody else, their existence depends on higher money aggregates growing and cheap money flowing, not stagnating/shrinking.
Therefor and IF the above is correct (I'm not a banker either), I would read very skeptically anything Mr Congdon has to say.
A generic investment banker's interests are 100% those of his own and his shareholders (to some extent clients). He couldn't care less what happens to a particular economy, UNLESS it significantly reduces his chances of making a killing.
Whether this applies to Mr Congdon, I don't know as I don't know him personally, but as a statistical rule of thumb I doubt he's any different from the rest.
Then again, this doesn't mean his wrong. It's just that his motives are to me personally highly suspect.
I argued above that we were already entering a deflationary environment and that therefore rate increases were unnecessary.
However, around 12% of imported inflation is caused by the devaluation of the pound, and so it can be argued that a rate increase is needed to stabilise the pound.
This would however cause unemployment to rise, enlarging the budget deficit, which might weaken the pound meaning that further rate increases were needed, and so on.
We are entering the crux period of peak oil with a large budget deficit, around 3.5% of GDP, and a balance of payment deficit of around £50bn and getting worse, and with the housing stock grossly overvalued.
The banks are, sleight of hand aside, likely to be bankrupt within the year as their asset base is a highly leveraged dodgy mess.
It seems to me that the decision on whether to keep rates the same, raise them, or lower them may have about as much effect as turning the steering wheel in different directions would do after already having driven off a cliff.
A farming side issue ...?
A very recent comment below from a farming acquaintance (large arable farm, who produces a lot of wheat at 4t/acre)in reply to an over optimistic take on food prices.
Farmer T knows what he is talking about.
Phil H
Would it/could it get so bad that he wouldn't actually plant a crop?
Peter.
Yes. Farmers are business men just like any others. Their business has to make a profit.
All business is risky - if your costs (which you know ahead of time) are more than your income (which you won't know until you sell your product) then you will go out of that business.
This also impacts on livestock farmers.
Some years ago an acquaintance received around 20p (40 US cents) per lamb (yes per whole lamb) at market and decided that although he loved farming he was going to get out.
Over the last couple of years grain prices have doubled but hogs/pigs have not increased by anywhere near as much. So it is very easy to lose money and farmers will not lose money for long before they either go out of business or change what they are doing. After all it's a busioness like any other.
Often farming is finely balanced, right now farmers are deciding whether or not to vacinate their animals against bluetongue. This costs around 60p per shot and cows need two shots.
Once you understand the true natue of money, banking and inflation, it becomes clear that our politicians actions don't entirely align with the best interests of the electorate.
The uk has been inflating it's money supply and correspondingly, it's debt, at around 14% for a decade. That is always going to hit retail prices somewhere.
The same UK Farmer T once told us that in the past he ploughed in a potato crop because the price he was going to get would not cover the expensive business of harvesting the crop.
That's farming. He has to guess in advance whether crops are worth planting. He spreads his risks where he can to allow for getting it wrong. He will plant different amounts of crops each year according to his forward judgment.
Phil H
UK home energy bills are likely to go up by 40% this winter:
http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article4160856.ece
If they do the same as they did last time they will load this differentially against low users, penalising the poor and conservation conscious, who have already had rises of up to 70%
And:
Those numbers are enough to get people on the streets.
Gordon is going to have to get himself some wriggle room by cutting public spending soonish. Something big is going to have to go, but I can't spot what's a viable target.
What are the odds on an election within 12 months?
Odds on an election within 12 months are practically zero in my opinion. Brown will lose, and he's more interested in his ego than he is in the longer term prospects of the Labour party. It would probably suit the Labour Party as a whole to call an immediate election in the sure knowledge that they will lose, thus allowing them to pin the blame on the forthcoming economic meltdown on the Conservatives - unless, of course, they believe that the recession will be short and relatively painless....!
The only way that an election could happen in the short term is if Brown is ousted and Labour use that as a mechanism to get themselves out of power before the real madness begins.
Politicians being the power-obsessed egomaniacs that they are, I very much doubt this will happen. Labour and Brown will hold on to this parliamentary term to the bitter end.
I was thinking more of not having the choice. A vote of no confidence following unrest and power cuts during the winter could force things before 2010. Should be good odds, since everyone thinks Gordon will delay as long as possible.
And what then?
The Labour party as it currently is is going to be destroyed by the present mess as it worsens into 2009-10, and since the Conservatives will not be able to affect a cure they will be minced too.
What will arise from the ruins of these two parties will, perhaps, more closely resemble continental parties in the 30's than present parties.
When in trouble people look for who to blame.
The Labour party are likely to mutate into died in the wool Trotskyists, blaming speculators for the troubles, and the Tories into a Fascist organisation, on similar lines to those in South America.
Likely the choices will be between the collective and the latifundia, with large pockets of warlord control.
I see an emergency budget, likely by around November.
It depends just when the wheels actually fall off.
Dunno about an election - Labour MPs may decide to hang on at all costs, as they may still dee further opportunities to complete the looting of the British economy and arrange lucrative parachute deals.
Rioting by the spring, perhaps, and they get thrown out.
Thank God David Cameron fully realises the situation, and the Tories have a consistent plan to deal with the circumstances!
Good one, Dave. We are blessed in the UK with such a wide choice of political parties who have fully considered, planned and budgeted for the consequences of the dive off the energy cliff we have just taken!
The machines are poised to take over. The UK will be governed by SuperG from "his" server room on the 320th floor of a sky scraper in Boston.
Soon we will have the power to control SuperG in his quest to control us.
GB Satesmen?
Do not underestimate GB.
We were able to persist in the claim there would be no war with Nazi Germany right to the last. Hitler in his final bunker is said to have raved that the idiot with the umbrella had even managed to fool him.
Is it not true that British branch of international oil were selling the stuff to Nazis in 1939? Clever ploy, eh, keep 'em guessing?
We got into a successful Falklands war using similar misleading signals. Never accuse our guys of not liking to take the high-wire risks.
Only this morning our dear chancellor was telling all how sound the UK economy is.
I'm not sure what's going on in Saudi at the moment, but if they promise to deliver oil they may not be able to deliver it may do more harm than good, and send oil price sky high. We live in intersting times! I'm not predicting doom, though it can't be ruled out, but readjustment to a more sensible lifestyle may be on the cards. You have only got to look at recent human behaviour in response to high energy prices to see where the problem lies.
I always assume that when politicians tells us that the economy is 'sound' they mean the nervous whistling noise they make when walking past a graveyard at night - hope triumphs over reason.
You only have to look at UK official BERR data to know for sure that things in the UK are not particularly sound - eg: by 2020 80% of UK energy will be imported, and how will we pay for that since we don't pay our way in the world now?
Why is it considered so bad for a politician to tell us the whole truth - just the official statistics would do for now?
xeroid,
That the UK's situation is not that robust, I do fear. As an industrialist myself talking to other industrialists, I/we have always thought the foundations of an economy based increasingly on the service/finance sector may be a little quicksandish, but as an industrialist, I'm biased I suppose. That the uk will be importing 80% (the figure you quote) is deeply worrying. The politicians of today will be long gone by then so they may not care that much about the defecit that will result.
Can anyone provide some information on the state of the UK banking system?
IOW, they have had the first round of the housing market being improperly financed, what is the exposure to the airline industry, for instance?
Or hotels and property in tourist hot spots dependent on cheap flights?
Or Boeing and Eurobus?
So my question is, how do the banks and building societies fit in the picture?