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The International Writers Magazine: Comment

Turning Back the Clock
• Tom Kilcourse
Critics of the present state of Britain’s economy and society are frequently advised that ‘we cannot turn the clock back’, or told that what is happening is somehow ‘natural’. So, let us be clear, there is nothing natural about the direction our society is taking, nor is regret for past changes an attempt to put time into reverse.

The state of our society and economy is entirely the result of policy decisions made by politicians. Though time cannot be reversed, those decisions most certainly can be. Indeed, today’s conditions resulted from such reversals.

Following the crisis of 1929 the Americans introduced the Glass-Steagall Act in 1933 which forbade any bank accepting customer deposits to also underwrite or sell any kind of financial securities. As Charles Ferguson points out in his book ‘Inside Job’, “As late as 1980…Commercial banking, investment banking, residential mortgage lending and insurance were distinct industries, tightly regulated at both the national and local levels…”

The barriers between commercial banks and speculative investment institutions were scrapped in 1999. Ferguson also remarks that “…the Clinton government created the regulatory environment that gave us the financial bubble and crisis of the 2000s.”

America was not alone in ‘turning the clock back’. Similar changes were engineered in Britain under Margaret Thatcher’s leadership. Barriers in Britain were removed in what became known as the ‘big bang’, and with the demutualisation of many building societies that transmuted from simple mortgage lenders into banks. One of my clients was Abbey National, an organisation very familiar with its role as a mortgage lender, but it chose to move into banking, which it barely understood. Abbey National no longer exists today. So, the conditions under which our economy labours now were created as recently as the 1980s.

It is perhaps worth noting that until 1980 it was common for journalists and others to express concern or satisfaction about the balance of trade. ‘The Economist’ magazine was certainly focused on the trade balance as a measure of Britain’s economic health. Today, it is never mentioned and we are asked instead to be cheered by changes in the GDP (Gross Domestic Product), a figure that reveals very little about our economic health, or lack of it. Why should this be? Well, the government boasts loud and long about the growth of GDP, selling it to the public as evidence of a strong economy. It is no such thing. Before the crash of 2008 in America a very significant proportion of GDP growth there was accounted for by inflation in house prices, due in no little part to irresponsible lending by the banks. Does that not resonate with what is happening in today’s Britain?

The switch of focus from the trade balance may owe something too to the fact that it has been in deficit since 1983, year after year. Britain is not paying its way in the world by exporting either goods or services. The gap in trade is covered by funds flowing into Britain for investment. Much of our privatised ex-public sector is now owned and operated by foreign organisations. Foreign ownership may not matter where the investment is in manufacturing industry, making goods for export or import substitutes, but in other areas it can work to our disadvantage. If profits from ex-public services are repatriated abroad the trade balance is weakened further.

One of the things that Britain does export is property ownership, particularly in London, much of it in the form of buy-to-let housing. The consequent inflow of funds has several detrimental effects, and is potentially very dangerous. These investors are not buying something newly created, in the main, but property that already exists, which explains much of the huge increase in London property prices. These increases contribute to the rising Gross Domestic Product of which the government is so proud. So, to draw an analogy between the nation and a citizen, we are enriched not by having productive work, but by selling the family’s furniture. As in America before the crash, a high proportion of our growth is due to rising property prices.

One negative effect of all this is felt, of course, by young families who cannot afford to get onto the ‘property ladder’. Instead, they find themselves having to rent a home, perhaps from a foreign landlord. Many are now fleeing London to settle in other cities, but if the process continues, the provinces will eventually be equally blighted. This is another example of ‘turning the clock back’. In the early 1960s a great many working people could not afford to buy their homes. Whatever happened to Thatcher’s dream of a property owning democracy?

How might this situation be considered dangerous? When foreigners buy property in Britain they do so with British pounds, bought for the purpose with their domestic currency, the yuan perhaps. In effect, those funds are being borrowed by Britain. If the foreign landlord repatriates the rent paid by tenants, (s)he exchanges the tenants’ pounds for yuan, say, which is a drain on our trade balance. In itself, that is not a major problem. The danger arises when the property bubble, and it is a bubble, is expected to burst. When that happens, those investors will all try to get out of the market at once. As they exchange their pounds en-masse for other currencies the run on the pound could have catastrophic consequences for the British economy going way beyond the property market. Businesses that have to import raw materials or goods, such as my local wine merchant, could find themselves unable to afford fresh stock as the pound collapses.

Many years ago a Cambridge University economist named Pigou wrote a book called ‘The Veil of Money’. In that book one can find the phrase ‘money is a veil behind which the action of real economic forces is concealed’ (This was not Pigou’s personal view). By focusing on Gross Domestic Product and claiming that its rise is evidence of a ‘strong economy’ both the Chancellor and the Prime Minister are using GDP as a second veil. Indeed, their political posturing more resembles the ‘dance of the seven veils’, than it does solid economic achievement. As the veils fall we shall eventually see the naked truth. Perhaps then we shall go back to a more balanced approach to economics.

© Tom Kilcourse December 3rd 2014

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