Category Archives: Economics

The Great Lie and the Rise of Trump and the alt.right

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Economists have to shoulder their share of the blame for the dawning of the age of Trump, May and Farage. Their responsibility lies with the creation of the ‘Great Lie’ which led to the economic and social change which caused the current economic malaise. Governments longer seem to be in control, they seem powerless to arrest the decline in living standards. We now have government that operates on the Pontius Pilate principle, it shares the people’s pain, but it is powerless to anything to alleviate their suffering. In such circumstances when government claims to be helpless in the face of the current crisis, it is hardly surprising that those who claim to have a solution, no matter how wrong headed that solution are now gaining  power.

The ‘Great Lie’  is the one propagated by economists that they have discovered the economic model that if adopted will resolve all the economic and social problems that beset society, that is  the free market. A great lie can be easily identified, it is when economists claim that they have the answer to all society’s problems. Usually such optimistic solutions are called utopian, but economists have greater credibility and there claims are never subject to such scepticism. Economists never seem to accept that the economy as a human creation is as flawed as its makers, mankind. They will never admit that there proposed model for change is but an experiment that may contain as many or more flaws than the system it is replacing.  It is hard to explain why the free market model was so widely accepted, when the very failures of such a system had led to the Great Depression of the 1930s. Until the 1970s it had been accepted that the unfettered free market system was subject to extremes of volatility, whose worst manifestation were the periods of economic depression. Times whne unemploynent was high and people were impoverished. Overnight economists seemed to forget all the negatives of a free market economy and all began to speak from the same hymn sheet, the free market one. The deciding factor seemed to be the unending slow growth and high inflation crisis of the 1970s. A crisis whose origin lay in politics not economics, yet this fact was ignored by politicians desperate a for a solution to the current crisis. (For this particular economist the origins of the crisis were in the excessive demand for raw materials that the Americans required to fight the Vietnam war, which pushed up prices for steel to astronomic levels.)

Economics is pervaded by dishonesty, an unconscious dishonesty but dishonesty never-the-less.The free market or monetary economists never admitted that there would be any downsides to their free market model. Humility was the one quality lacking among these economists. They could make valid and reasoned criticisms of practice of social democratic economics, but were completely blind to the failures of free market economics. When such dishonesty is prevalent among government policy advisors, it should be no surpise that the dishonest claim made by the alt. right with its claim that immigration is the cause of all the problems is an acceptable a truth as the one that the free market works,when it it obvious to many that it does not. 

What these new economists failed to admit was that in creating a free market economy that the people would be exposed to the negative effects of adverse changes in the market. There would be many more losers in the free market. One such example comes from Sunderland, one of the areas that voted in large numbers to leave the EU. One of the main employers is  the Swan Hunter shipyard, which built merchant ships. In the 1970s it was failing to win orders because it could not compete with more modern shipyards in the Far East. The government realised that if it invested in re-equipping the yard with the latest in ship building technology, it could compete with other major shipyards. This would create many new jobs in an area of high unemployment. In 1979 a Neo-Liberal government came to power who thought any government intervention in the economy was wrong and they withdrew their support for the shipyard. All the new shipbuilding technology was sold to a rival shipyard in South Korea. Swan Hunter survives as a manufacturer of warships and equipment for the North Sea oil industry. However the people of Sunderland seem never to have forgotten the government’s betrayal of them and this year they could demonstrate their hostility by voting to leave the EU, against the advice of the government.

While the economists cannot be held responsible for the decisions of the government, they were the cheerleaders for the changes in economic policy making. One of the greatest of these new economists Milton Friedman supported the government of Pinochet when it tortured and killed its opponents, claiming that Chilean society would be better off without these people. A variation on the saying that you cannot make an omelette without breaking eggs, except that in this case the eggs are people.

One chilling example of the eggs being broken is housing policy. Increasing numbers of people, particularly the young are being forced into the private rental market. There they suffer from the twin problems of exorbitantly high rents and insecurity of tenure. When it has been suggested that the solution is to give private tenants security of tenure and to introduce rent controls, the social democratic party in this country has always rejected it as an unworkable solution. They claim that the introduction of such controls would reduce the number of properties for rent and so be against the long term interests of the private tenant. In reality a policy that did both things and which included measures to prevent a reduction in the number of rental properties could be devised. Yet this party clings to the Pontius Pilate principle of politics, vicariously sharing the pain of the private tenant while saying that bad as the situation is there is nothing they can do to improve the lot of the private tenant. When such is the official policy of this party it is no surprise that it is threatened with losing constituencies to the party of the alt. right that claims to have an answer.

There is little doubt that the adoption of free market economics has created an increasing number of losers in society and it is these losers that are looking to the alternatives for a solution. The only solution to the woes of society appear to be those  offered by the xenophobic right; as all the other political parties seem to adopt the same message which is that things may appear to be bad now, but they would be much worse if the government tried an alternative policy.

One solution to the current malaise is for politicians to accept responsibility for their actions, instead of looking for unreal solutions from the world of economics. While it was the unregulated financial markets that caused the crash of 2008/9 the slow recovery has been due to the governments adoption of an austerity policy. If the governments of the West had learnt anything from the 1930s it should be that adopting those economic policies to tackle non existent problems, they should take action to ameliorate the negative effects of the crash. Austerity programmes designed to do little more than cut government debt and increase and prolong the agonies of 2008/9. What is required is imaginative solutions to the crisis, usually not available from economists who are stuck with ‘Big Lie’, that the market will solve the current crisis if left to itself,when it quite obviously won’t.

Warning signs

Economics, Politics, United Kingdom, , , , , ,

Sometimes as an economist you notice things that others don’t. Today I visited the centre of the city in which I live and for the second time this week, I noticed that the cafes and shops were relatively empty. One reason is the belt tightening that invariably happens after the Christmas shopping spree. The other reason is more ominous and that is that the uncertainty generated by fears about Brexit which are causing people to be more careful with there spending. In times of uncertainty it is sensible to be cautious about spending, it makes sense to increase one’s savings to protect against future uncertainties. All the extra spending on credit cards that was recorded last year will come to a halt once people start to fea the future. They won’t want to saddle themselves with extra debts.

While the evidence I present is only anecdotal this is how economic downturns start. Consumers become more and more cautious with their spending  because they fear for the future. This action becomes something of a self fulfilling prophecy as failing consumer spending means that firms cut back on there spending on staff and purchases of stock. Gradually at first but then more rapidly people become poorer, because of falling spending by businesses and the down turn in economic activity can  within a short time develop into a recession.

These downturns occur because of flaws in the economic system,  as happened with the financial crisis of 2008/9 or because of misguided economic policy making. The second is happening now. There should be a golden rule in politics, that governments never take action that might be detrimental to economic welfare except in the most extreme circumstances. The problem about such actions is that there is no way of foretelling whether the action taken by the government will lead to an uncontrollable downturn in economic activity or whether it will result in a more modest adjustment.

There is a terrible warning that all politicians regularly fail to heed. When the Prime Minister Jim Callaghan returned to the country in 1976 from an overseas trip, there was a crisis developing in the financial markets. He made a foolish remark in response to a journalists question about the crisis, he said ‘what crisis?’ This gave the impression that the government was not in control and the financial crisis rapidly got out of hand.

Yesterday the Prime Minister Theresa May had her Jim Callaghan moment. She stated that Britain will be leaving the single market, giving the impression to informed observers that she had little grasp of economics. The EU is the largest market for British exports and announcing that she intends to make it more difficult for British firms to access that market, is an act of supreme folly. Today two banks announced in response to her speech that they are moving some banking operations to Europe. There will be many more such announcements in the following weeks and months. This will generate fear and uncertainty amongst British consumers, leading to large cuts in there spending, as they save more and more for the expected rainy day. The consequence is that it likely that later this year  that the economy will tip into recession.

Unfortunately the folly of her decision is compounded by the school boy howlers  made by her ministers. Today the Foreign Secretary compared the attitude of the French President to Brexit to that of a Second World War prison camp guard. Such remarks will merely serve to convince the financial markets that this government has little understanding of the economic reality and has but a very weak grasp  of the essentials of policy making.

As I said in the second paragraph my evidence is anecdotal but the incompetence of this government makes me fear for the future.

How to survive in the age of Trump, May and Farage

Economics, Philosophy, Politics, , , , , , , ,

How do I live in a society in whose leaders values are totally alien to me? In Britain we have a Poujadist leader who seems intent on dragging Britain back to a country of her childhood imaginings. A country from which people with foreign sounding names with funny foreign languages are absent.The Britain which I love is fast disappearing before my eyes. EU nationals are now threatened with deportation because of their ‘EUness’, an alien virus which is seen to threaten the integrity of the English nation. To answer my own question I look to those who have survived with their integrity intact in more violent and authoritarian societies than mine.

One figure that has always attracted me is the Russian poet Anna Akhmatova, a women who survived the horrors of Stalin’s persecution of the intellectuals in the 1930s. She was one of the early supporters of the revolution or rather the revolution in social mores that was sweeping through Russia in the early twentieth century. What this change meant was that women were no longer confined to the domestic scene as wives or mistresses. They could live their own lives rather than a life according to established custom. When Stalin achieved power this independent minded woman was seen as threat to new puritanical work obsessed  world of communism. In Stalin’s world individualism of the type that was practised by Anna Akhmatova was seen as a threat to the collective. People should work for the good of society and exhaust themselves in the fulfilment of communist society’s goals. The individualism of Akhmatova was seen as bourgeois and as contrary to communist life and practice. Also she scandalised the puritanical Stalin by living what in the sixties would be termed a sexually liberated life.Women could take on traditional masculine roles that being a doctor, architect in Soviet society, but they should not transgress the traditional sexual mores.

The first act of persecution on her was the sending of her husband sent to a labour camp, where he later died. Then when her son had achieved adulthood he was sent to the camps on a trumped up charge. Stalin and his secret police then played a cat and mouse game with her. She would go to the camp were she thought her son was imprisoned with food and queue for an opportunity to meet her son. All to often she would be turned away on some pretext and was denied a chance to talk to her son or deliver her food parcels. This was an experience common to many mothers and wives of camp inmates. Yet despite this treatment she continued she take whatever opportunity she could to help her son. Somehow her son survived the camps and returned to civil society.

I cannot know what anguish Anna Akhmatova suffered because of her cruel treatment by Stalin, but I do know is that she retained her personal integrity. She continued to write poetry. It is this quality of personal defiance that I most admire, an intent of being herself and not communism woman. There is one of her poems  ‘The Crucifix’  which expresses her personal agony, in the manner in which only be achieved by a poet.

The Crucifix

Do not cry about me mother seeing me in the grave

I

The greatest hour was hallowed and thundered

By angel’s choirs, fire melted sky

He asked his Father ‘Why am I abandoned?’

And told his Mother ‘Mother do not cry’

II

Magdalena struggled, cried and moaned

Piter sank into stone trance

Only there, where mother stood alone,

None has dared cast a single glance.

Translated from Russian by Tanya Karshtedt

Edited by Dmitry Karshtedt, August 1966

What I take from Anna Akhmatova’s story is that even in the most cruel and corrupt of societies, it is possible to retain that independence of mind and sense of individuality, which represents the best of human life. In the end she triumphed over Stalin. The many tomes of his writing remain largely unread today, the only readers being those historians who need to understand Stalinism; whereas Anna Akhmatova’s poems are read by many thousands if not millions for pleasure. Her spirit lives on through her poetry, Stalin’s died at his death.

There is another story from Soviet Russia that sticks in my mind. A person who has been recently freed from a labour camp is given a $10 dollar note by a friend, who realises that they will need help now that they are trying to reestablish their life. However this man knows of friend in similar circumstances who he thinks is in greater need of the money, so he sends him the $10 dollar bill. The recipient of the money knows of a person who is greater, so he sends on the money. In the end the $10 dollar bill never gets spent as its sent from one person to another. People can it seems retain the best of human qualities in the most appalling of circumstances.

What I am not suggesting is that contemporary Britain is the 21st century equivalent of the Soviet Union. Instead I live in an increasingly authoritarian society in the leaders have values alien to me. It is a country in which the nastier of the Poujadist or Little Englander strain of politics has become mainstream. While our leaders may claim they are neither, their actions and the wording of their speeches betrays there true intent. How will I live in this new Britain? I will continue my friendships with my Iranian and Peruvian neighbours. Continue to patronise the Italian cafe where I regularly go for coffee. What I am trying to say is that I will try to live my life according to those qualities of life that the philosopher Kwane Anthony Appiah calls cosmopolitanism. I enjoy a life which I see as characterised by friendship with people of other culture. A cultivated open mindedness a respecting others for there differentness. Perhaps a feeling first stimulated on my first visit to France in the 1970 when for the first time in my life I could enjoy a good cup of coffee. This to a person brought up on instant coffee was a life changing experience.

I grew up in what many would consider ideal circumstances. It was a childhood spent in small rural village of native born English people. There was a strong sense of community mindedness. I could wander through the village and its surrounds knowing that I was safe. If I encountered any problems I could go to a neighbour. Yet now I could not return to a community of native born English speakers, as I love learnt to love diversity and difference. In the village of my childhood there would not have been a Mohammed with whom I could discuss Middle Eastern politics. Now my ideal world is the one centred on the urban coffee house, where I can engage in conversation with people who are not like me. One in which a secular minded Englishman can have a friend  who is a good Muslim who both share a liking for indulging in good conversation.

Why economics fails

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There is it seems a present a desire to doubt the validity of economics and the skills of its practitioners.  Just yesterday there was Chief Economist at the Bank of England issuing a mea culpa on behalf of the profession, in which he apologised for his and their failings and said that economists must do better in the future. He is just another ‘failing expert’, as Michael Gove would have said. When Michael Gove said in the EU referendum debate that the people were fed up with experts and were best of without them, one assumes that he was speaking about economists. However Michael Gove as with many politicians is adept at deflecting the blame for their own mistakes on to others. Politicians are those in charge and they make the decisions on matters of economic policy and not the economists. Yet whatever failures of government policy that occurred in the period 2010 to 2016, Michael Gove and his colleagues will never put there hands up and accept their share of the blame. Politicians such as him have a list of scapegoats to use to disguise their failings and another such favourite is the  EU. Teresa May’s disparaging comments about citizens of the world being citizens of nowhere can be paraphrased to describe contemporary government ministers, they are the ‘ministers of nothing’ knowing and caring little about their departments. Just sitting out their ministerial brief waiting for an upgrade to a more high profile ministry.

While it is the politicians that have been responsible for the disasters of recent policy making, economists still share some of the responsibility, in that they have encouraged politicians to develop an almost papal like sense of infallibility. Neo-liberal or free market economists claimed in the decade 1970-80 to have discovered the holy grail of economic policy making. They claimed that at the heart of any economy there was a self regulating market which when left to itself produces the best results for all. This market mechanism was capable of outthinking any politician. If  left to itself it would settle on the natural equilibrium levels of growth, employment and inflation, which would in turn mean society would enjoy a level of prosperity that it would otherwise never achieved if the economy had been managed by politicians. All the politicians had to do was to create the optimum conditions in which to enable the market to work unhindered, which was quite simply a bonfire of regulations. They can maintain an Olympian disdain knowing that they know  the answers to everything and have to hand the one key policy measure, impose the free market on the seemingly intractable problem.

One thought  that never occurred to these politicians or economists is fallibility of human thought, never in history has mankind ever succeeded in creating the perfect social organism. They seem to have forgotten such schemes are referred to as utopian in the history books, because they are always hopelessly impracticable.

What cannot be said is that there were no warning signs. When with great enthusiasm the Conservative government of the 1980s followed the policy prescriptions of Milton Friedman, failing to notice that his major policy prescription was unworkable. He said that the government should be regulate the economy through control of the money supply. Unfortunately he had not done his homework, as in practice it proved impossible to define what exactly was money supply. The Bank of England came up with at least five possible descriptions of money supply. There preferred choice was description number 3, what was known as M3. The only reason for choosing M3 was that it was easier to calculate than the other possible choices. Then having settled on M3, they realised that it would be extremely difficult to devise ways of controlling this money supply. All possible solutions would involve interfering in how the banks managed their finances. Instead the government opted for controlling by money supply by controlling demand for money. If they changed interest rates this would either or lower the price at which people could borrow, so if they put up interest rates people would borrow less and the amount of money (bank deposits) in circulation would fall. Never once did it occur to the government that controlling interest rates was not the same as controlling the money supply. Interest rate changes could change the supply of money held but it was a very indirect and imprecise control. Unlike what Milton Friedman desired what the government used as a very rough and ready measure to control money.

Politicians were obvious to the problems of implementing this policy, is it because the economics of the time was encouraging them not to think and question. They cannot claim not to have any warnings of the volatility of the free market as there were many financial crashes from the period 1979 to 2008.Yet these politicians believing they possessed the holy grail of policy making were  able the collapse of the Asian tiger economies or the dot com crash.  In consequence the great financial crash of 2008 which should have been foreseeable became the catastrophe that came out of nowhere, a veritable economic tsunami.

What economists should also be blamed for is there willingness to overstate their abilities and knowledge of all things economic..The economy is one of the most complex of mechanisms developed by mankind and yet economists all to often suggest that they really do know, when they don’t. I as an economist take my lead from Socrates. The oracle at Delphi told him that he was the wisest of men, yet this was a man who claimed to know nothing. Was not the oracle stating that Socrates was wise because he was the only man prepared to acknowledge his ignorance? I always wished that as a teacher I had told my students that I really knew nothing about economics. Yet as an economist I know a thousand times more things about the economy that any politician. What I see Socrates as saying is not that he lacks knowledge but answers. He was I believe using his ignorance as ploy to unsettle  his rivals, as a reading of any of Plato’s dialogues does demonstrate that Socrates knew quite a lot. Any economist when faced with a problem should be prepared to state his ignorance, as with a rapidly evolving and every changing economy, yesterdays’ knowledge is never sufficient to provide today’s answers. As  an economist what I possess is a knowledge of problems that have occurred in the past which appear to have some similarities with the problem at hand. Using that knowledge I could suggest a variety of policy solutions and recommend that which I think would be most effective. However I know that in what is an ever changing economy events may happen to make my policy recommendations ineffective. Humility should be part of the economists weaponry. I know that I can’t give Michael Gove the definitive answer he craves, the world is much more complex than the one viewed from Westminster or his newspaper column. I do know that my answers are better than his on all matters economic, as some knowledge of the economy and its workings are always better than none.

The last word I leave to Erasmus, ‘only a fool boasts of their ignorance’ or should it be ‘that only a fool takes pride in their ignorance’. A faulty memory prevents me recalling Erasmus’s exact words.

Don’t dance with the devil, the tragic demise of social democracy

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This proverb which warns against dancing with the devil probably dates back to the early medieval period, when there was a strong sense of the presence of the devil in the world. While I don’t believe in the devil as such as I believe that mankind has sufficient potential to do evil without need of the help of a malign supernatural being; I do think it aids explanation to reduce  what is that nexus of  power and evil intent to a personified term the devil. I suspect the medieval users of this proverb were quite aware of the potential to commit evil within us all, but they saw the value of having one simple proverb to remind people of the perils of being complicit in evil. Complicity with the devil would mean either being burnt in this life as witch or suffering the fires of eternal damnation in the next.

What I am writing about is not the individual who acts with evil intent, the one who wishes harm on his fellow men. The serial killer now matter how appalling and frequent are their crimes, they can only hurt a small number of people. What matters to me is the people of evil intent who have the power to commit crimes on a much larger scale. People such as Chairman Mao, Stalin and Pol Pot were monsters and its easy to write them of as exceptions to general run of humankind.Yet there are those politicians of evil intent in the Western democracies that abuse power to cause hurt and pain to millions so as to secure some financial advantage for themselves and their friends. Usually these politicians claim a religious sanction for their actions. There is hardly one of these politicians that would not claim to be a good Christian. Yet they seem unaware of the religious injunction to treat your neighbour as you would yourself. To be fair they do have some sense of neighbourliness, there neighbours they understand are people such as themselves, the great majority, those outside their friendship groups don’t qualify as neighbours. These are the politicians that will impose punitive sanctions on the undeserving poor, while also give generous government contracts to their friends. A recent newspaper article claimed that £500 million was given in contracts to business to assess the fitness or otherwise of benefit claimants. Ministers felt £500 millions was better spent this way, than on the undeserving poor.

Evil may take many forms, but in this essay I am taking it to policies undertaken by politicians which impoverish or cause misery to thousands if not millions, as a means of securing some financial advantage for their friends.

What concerns me is the extent to which social democrat politicians have become complicit in this evil. They have ‘danced with the devil’ in the misguided belief that they can get some advantage by doing so, securing a benefit for the people that would not otherwise be available. Medieval man new that the devil never kept his promises and that all he wanted was to corrupt the soul of the innocent who sought his help.

There is one social democratic politician that exemplifies this tendency. This politician was one of the highest achieving students in economics at one of the countries elite universities. Yet when the Chancellor of the Exchequer made a pronouncement about economic policy, which any sane economist would recognise as nonsense, he instead of opposing the measure supported it. He claimed it showed responsibility to follow the governments lead and it would win support from the voters. He claimed that voters would never vote for a party that appeared irresponsible in matters relating to the economy. It is unfair to say that he was entirely responsible for the adoption of nonsense economics, as all the other senior members of the party agreed with him. (Although they were not as talented an economist as him, they had all secured good degrees at elite universities, which would have given them the analytical skills to identify nonsense when it was spoken by a government minister.) The consequence was that this party appeared indistinguishable from the government to many of its supporters. These disillusioned supporters drifted to other parties that appeared to promise those policies to which this party refused to commit. This party is now haemorrhaging support to those ‘irresponsible’ parties of the populist right and of the nationalist persuasion.

These politician’s who ‘danced with the devil’ thought by being complicit in one evil they could secure a greater good. The greater good they sought was the power, which would then enable them to implement a political programme to alleviate the suffering of the many. What is extraordinary about this saga is that these self same politicians had been involved in campaigning groups that sought to alleviate the miseries of poverty.  They were people who had campaigned for many good causes and as group were more probably more virtuous than any other group of people, yet these politicians as a group were willing to sign up a policy that was contrary to what they believed, because they though it would secure them some advantage.

Faustus sold his soul to the devil in exchange for securing the love of the most beautiful woman in history, Helen of Troy. Social democratic politicians throughout the Western democracies have sold their souls to the devil in return for the chimera of power. Unlike these politicians Faustus got a much better price for his soul, all they secured was the promise not the gift of power.

The vain glorious and useful idiots of Brexit

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Economists often seem afraid to use words in common circulation in their analysis, they will resort to made up technical words, when a much simpler phrase would have been more appropriate and useful. One little known book today is Erasmus’s  “The Adages”. In this book he demonstrates how the simple proverbs and phrases in common usage can conceal profound truths. One of the frequent themes of his essays are the damaging behaviors of vain glorious princes. These princes in their lust for glory start wars which damage their countries prosperity leaving them poorer and indebted. The only beneficiaries are the mercenaries they employ in their armies. These wars were so profitable for the mercenaries that one even took over a city state and made himself the Duke of Milan. What economics lacks is that despite being a science of human society are the terms to describe those irrational behaviours that have a major impact on the economy and society. Just as in renaissance Italy we have leaders that inflict significant damage on their economy in pursuit of vainglorious enterprises, that they believe will earn them a place in history. However what I cannot find in Erasmus is any reference to the ‘useful idiot’ a person that is now very common in our political classes.

A useful idiot is the one who in elieving that they are advancing their own interests are  in fact advancing the interests of another more powerful individual or group of individuals. This  group prefers to avoid attracting to much attention, as it would highlight the fact that their interests are damaging to the health of the wider society.

The most damaging to our economic prospects as a nation are the useful idiots in parliament, who have successfully campaigned for a damaging break with Europe. When one reads of the vast sums of money paid by the Brexit supporting billionaires to those politicians campaigning to leave Europe, it becomes obvious in whose interests they are operating. Senior politicians who supported the campaign are now being paid hundreds of thousands for newspaper columns and books by the very press barons who wanted to exit Europe. Do these politicians really think that their newspaper columns or books are really worth the hundreds of thousands that are paid for them? What can be said is the hundreds of thousands paid to these politicians are but the small change in the pocket of these billionaires? Only the politicians themselves can really think that their talent is worthy of such high salaries. What can usefully be said is the many books being written by these self serving politicians will the very books which will be the first to be pulped next year as most of them will remain unsold.

There are another group of useful idiots in our parliament, these are not the paid proxies of the billionaire class but those naive politicians who having spent a lifetime within the Westminster confuse reality with the world as seen from within the Westminster bubble. They over estimate their powers and the significance of their actions. They seem to have a naive Harry Potter like perspective take on the world, they believe that having access to the levers of power in Westminster gives them the power to change the world. What they despise is the mundane reality of power in which Westminster is but one player, a player that achieves it goals through negotiation and persuasion. They have no time for the mundanity of reality, they are lost in their own fantasy world.

One of the worst offenders are those on the left. They believe that by turning their back on reality they can create the just socialist society of their imaginings. If only they looked at the failing career of President Hollande they would be aware of the fallibility of their beliefs. He was elected promising to create a better France by increasing spending on the French welfare system and to reduce France’s high unemployment levels. To fulfil promises he would have to increase government spending, but this was in the Europe dominated by a Germany committed to an Europe wide austerity programme. Nothing he promised the French electorate could be delivered because his government was committed to the European programme of austerity. Now Hollande is the most unpopular of French Presidents, who if he wished to stand for President at the next election would be rejected by his party.

At present the leadership of the opposition party supports Brexit, because they believe that freed from EU regulation they can remake society according to their values. What they fail to realise is that a Britain shorn of EU membership will be but a small struggling country on the edge of Europe. They to solve what will be a problem of growing unemployment will be desperate to make deals with those businesses that can bring jobs to the UK. In such a situation the various multinationals will be able to dictate the terms on which they do business. What they will demand is a freedom from regulation, particularly employment regulation, together with cash subsidies of various kinds and infra structure  to benefit them. As demonstrated in Wales where the Labour government to persuade Amazon to locate a warehouse there was forced to spend billions on new roads to improve access to the new warehouse. Amazon is an employer noted for its use of exploitative working practices. This Welsh Labour government despite its socialist principles has turned a blind eye to this firms employment practices, so as not to offend a major local employer. A weak desperate government will sacrifice all its socialist principles to attract business to  the country in its desire  to create jobs. These people I class as useful idiots, because they will be doing exactly what the various rapacious multinational corporations want, creating a country in which they can operate largely free of regulation.

Those on the right seem to believe in some magical notion of Britishness. They believe that Britain really is some ‘spectred isle’ which will be restored to its former glory by breaking with Europe. One of their claims is that Britain will be free to trade with all those countries outside Europe, that they could not do as EU members. Again as with their left wing opponents they lack a firm grasp of reality. Unfortunately these dreamers dominate government and seem to think that by destroying all links with Europe, they will restore Britain to its past glory. If or when they achieve their break from Europe they will find that they become are reduced to governing a desperate vassal state, whose real governors are the multinational corporations.

The words Puerto Rico seem unknown to these ‘unrealists’. This country is independent and has a free trade treaty with the USA. Something desired by the ‘unrealists’, however any small weak country is at a disadvantage when negotiating with a powerful neighbour. In consequence  the free trade treaty has kept the country poor and impoverished. It is the location for American multinational companies who wish to operate in a low cost and regulation free environment, which of course is of little benefit to the people there.

What I am trying to suggest is that economics struggles to explain the why and what of human activity that is irrational and self destructive. Reading Erasmus’s explanations of the adages that explain the vain glorious actions of Princes, gives a far better understanding of the behaviours of today’s politicians than does any economic text.

Billionaires and the Scrooge Factor

Economics, Philosophy, Politics, , , , , , ,

Dickens’ Scrooge is treated as an agreeable story to be told to children at Christmas, yet this is to misunderstand Dickens intention. This was a book for adults one that was intended to show the destructiveness to the human personality of acquiring money for money’s sake. There was a real life Scrooge, a John Ewles who went so far as to sleep with the horses in the stable as he used the warmth generated by the horses so he would not have to light a fire in his house. There is no doubt that the CEO’s of the largest business corporations have read or at least are familiar with the Scrooge story, but what they fail to realise is that their behaviours mirror that of Scrooge.

A friend told me that the largest business corporations in the world have cash assets totalling three times the world’s GDP. Checking with the internet I find that the cash reserves of Apple and Microsoft combined exceed those of the British Treasury.  Apple has the world’s largest cash reserves of £95 billion. Although I cannot confirm my friends figures, I know him sufficiently well to know that he has not made them up. (The source I think was Oxfam but I could not find the figures I wanted on their website). The usual reason given for these huge holdings of cash being stored in overseas  tax havens to avoid losing their cash to the taxman. Not paying tax is one of the moral imperatives of the new Scroogian morality.

(The following text only makes sense with an economists understanding of money. Money has no intrinsic value, it is only a claim on wealth and its value is determined by how large a share of wealth can be claimed by each unit of money. If the total sum of money to spent is greater than the monetary value of the goods and services produced in an economy, then when that  money is spent those who have the greatest sums of money will outbid those who have least for the available goods and services and so push up prices. This is in essence is inflation, if the price inflation is modest people will retain their faith in money and will continue to treat it as a store of value. If as in Germany in 1926 if price increases are high and of ever greater frequency, people lose faith in the currency and a hyper inflation develops as money becomes increasingly worthless.)

However what I want to suggest is that such holding such vast sums of cash is an act of stupidity.  The first thing to realise is that these companies can’t use this money in any productive way. The sums held are so vast that if these companies decided to spend that money, it would significantly increase the rate of inflation and reduce the cash value of their holdings. The London property market until recently demonstrated this effect, it was a market where billionaires and multinationals seeing it as a safe haven for their money have successively bid up the price of London properties to astronomical levels. If they started to spend their cash piles other sectors of the world economy would experience similar levels of inflation.These businesses are trapped by their piles of cash, they cannot do anything that would reduce their value. If Apple for instance spent £10 billion from its vast cash pile on investing in a new business venture, the shareholders would be up in arms, as that reduction in the cash reserves would be matched by a reduction in the value of their shares. Apple, Microsoft and the other cash rich multi-nationals are held prisoner by their money, they can do nothing which might diminish their cash stock piles as in doing so they would risk the wrath of their shareholders. Rather than these CEO’s being the giants of the world of business, they are reduced to rather pathetic figures do all they can to protect their cash hoards. They are held captive by their money.

I do wonder if this practice of hoarding and nurturing their cash piles does not make the owners more risk adverse. I own an Apple Iphone but instead of planning to upgrade to a newer model at the end of the contract, I might just instead keep my current model. It does seem that the innovative flair that made Iphone a ‘must buy’ is now lacking in the company. Has the desire to hoard cash diminished the funds for innovation?

When this cash is spent it not only devalues the currency but also the politics of a country. One example is the Koch brothers, millionaire oil traders who have spent billions backing those candidates who do their bidding or who have an agenda similar to theirs. In consequence in the Koch influenced US Congress the majority of the Congressmen oppose any action that would effective ameliorate the effects of climate change and reduce oil sales. It is possible to say that the melting of the Arctic ice is a consequence of the action of the Koch brothers. What happens when this occurs is a narrowing of the political agenda to such an extent that Congress and other political institutions come to represent the views of their financial backers rather than the people.

One consequence of this is that these companies spend some of their cash pile on ‘economic toys’. Such toys have very little productive value but whose ownership brings status and prestige to their owner, they do little for the companies bottom line. However the sums spent on such toys are but a minuscule proportion of their cash piles. Nobody ever made money from owning a Formula 1 racing team, but the money squandered on such an enterprise is merely the small change from these huge cash piles.

The problem for the owners of these vast money mountains is that they dare not risk moving them out of their havens for fear of devaluing the value of these cash reserves. The Bill Gates foundation that does so much good in the developing world, is a ring fenced fund, quite separate from the Microsoft business, which has its own huge cash pile.  The Dicken’s solution to the Scrooge complex is for the rich man to give his money away. While such a move would be welcomed because their cash holdings are so vast, any such spending would risk destabilising the world economy. They just have too much money for their own and the world’s good.

Unfortunately just as with Scrooge their desire to protect their money forces them into many anti-social acts. The British press barons have campaigned relentlessly to leave the EU. One of their main motives for doing so was to prevent any future European wide body from organising a more effective system of tax collection. It was said by the IMF that Britain is the largest tax haven in the world and these group of anti social men will do anything to prevent any action that would lead to them paying more tax. The fact that leaving the EU would do tremendous damage to the British economy is of no consequence to them. Even the threat to their wealth from a fall in property prices  consequent of Brexit is a price worth paying to protect their tax exemptions. Just like Scrooge these men care only for their money and little for their fellow men. Aristotle said a nation governed by the rich was a plutocracy, however that term does not do justice to spirit of meanness that prevails in contemporary Britain, a better word to describe the country is a Scroogocracy.

There is a solution to this problem. When I first studied economics in the 1960s the top rate of income tax was 79%. Now it a wealth tax of a similar rate was applied to these cash piles they would be reduced to an amount that was insufficient to destabilise the world economy. It would also reduce the attractiveness of acquiring these cash piles. One curious fact that would result is that the governments of the world would face restrictions on how they used this cash. They could spend some to alleviate their budget problems, but if they spent all this windfall at once, hyper inflation would result and there would be a major destabilisation of the world economy.  Most of that money would have to sit untouched in the treasuries of the world’s central banks.

One objection to my proposal is that all this money is hidden in tax havens beyond the reach of the world’s governments. However these tax havens are little more than the foreign branches of the major banks. The money might appear on the balance sheet of a Bahama’s bank, but in reality it is banked in London. If the banks and the owners of these cash piles wanted to keep up the pretence that this money was really in the Bahamas, capital controls could be imposed preventing this money being transferred to London or New York. There is little that the vast sums that are banked in these tax havens could be spent on locally. They would just harmlessly rot way.  What I am recommending is the destruction of these cash piles, as they do little for the world economy and they create a risk adverse culture among the super rich, which means economic growth rates are much lower than would be otherwise. I would recommend a policy in which either the holders of these vast cash piles adopted a voluntary ‘potlatch’ in which they destroyed their useless cash piles or they surrendered them to government where they could stored as part of the national reserves, where they could do little harm.

A REPLY FROM AN ECONOMIST TO THE ANTI-INTELLECTUALISM OF DONALD TRUMP AND MICHAEL GOVE

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(There were many errors in my first draft, it was written in anger and published without  a thorough checking for error.)

Contention

Economists don’t always have the right answers, they can be wrong at times, but their answers to problems are better than those of ill-informed politicians and journalists. There are plenty of never-never land politicians selling an unreal picture of the world to the electorate. There are many fewer such economists because there work would have undergone informed scrutiny by their peers and much that is dubious would have been discarded. The overwhelming majority of economists believe that Brexit will inflict significant economic damage on the economy, while a significant number of politicians and most journalist believe the reverse (who are lacking any evidence apart from their misguided optimism in the rightness of their beliefs).

Confession of interest

I am one of those experts that Michael Gove spoke abouto he said people are fed up with and who they should be ignored by the people  when making decisions about the future, such as how to vote in the EU referendum. I am one of those people who following Aristotle’s advice  have dedicated the best part of their life to study. What Michael Gove is trashing is the value of learning, I cannot accept that my years of study have been wasted. How can such small minded person go against centuries of a tradition that values learning? He is a graduate of an elite university but he seems to dismiss the value of what he learnt there. I can say to Michael Gove that when teaching in a tough secondary school I never demeaned myself to pretending that I lacked learning. What young people can identify is the phoney, the teacher that pretends to be like them. Michael Gove’s attempt to pretend to be one of the people is as phoney as my colleagues who adopted a fake working class accents and mimicked the words and manners the young in an attempt to win their favour. Behaviour as phoney as that of the Dad who to tries to impress by claiming a knowledge of and love for garage music and rap.

The dangers of contempt for learning

If Michael Gove’s lead is followed as experts such as myself as regarded as just another self interested individual with an agenda to promote, a lot is lost. Economists such as myself are in possession of or can access a body of knowledge about the economy not available to others. Acquiring and understanding the store of economic knowledge takes years and to be honest a life time of study, because the subject is always changing and developing. What Michael Gove is saying is that my learning is of no consequence. I cannot accept that the anti intellectualism of todays politicians will stand future scrutiny. Without wishing to be too unkind Michael is an insignificant figure compared to Adam Smith, Ricardo, Keynes, Hayek, Polanyi and Robinson. With time his anti intellectual populism will be a but a minor blip in the progress of humankind. In studying economics I developed a critical faculty which makes it possible to make reasoned judgements about government policy, rather than relying up prejudice and common sense on which to found my judgements. Paraphrasing a much greater thinker than myself who used this phrase in the context of religious belief, those who don’t believe in God are likely to believe in anything; similarly those who don’t believe the truths of  economics are likely to believe any nonsense about the economy.

One such nonsense is the current belief that there is a real knowledge of the world, which is only possessed by men of business, who deal every day with the complexities of the real world, as opposed to the unreal world of academia. One such person held to possess this knowledge is Donald Trump, the next President of the United States. I would question the breadth of his knowledge, he is a real estate developer. Yet one who has failed in several business ventures and has only been saved from bankruptcy by the protection afforded by US law to such people. If you wished to buy and develop a property you would go to a real estate agent or property developer, but one with a better track record than Donald Trump. Apart from his deal making in which he has a very mixed record I cannot see how Donald Trump has a better understanding of the world than me. As a teacher I would be criticised for living and working in an unreal world, which is a silly phrase as the school is as real as the boardroom. One other silly untruth is that teachers lack the toughness to cope with the real world, all I can say is that these people who say that have little understanding of the difficulties of teaching a group of adolescents. One of the most telling examples of the falsity of this stance is a video on Youtube, where Michael Gove is addressing a group of teenagers. They show complete disdain for his lecture and indulge in all the behaviours of disaffection typical of teenagers. What I am saying is that my experience as  teacher of economics is as valid as Donald Trumps as a property developer, although if I’m honest I think mine is the superior knowledge of the world.

When politicians deny the truths of learning they became prey to the teaching of messianic and charismatic charlatans such  as the  novelist – Ayn Rand author of ‘Atlas Shrugged,’ whose followers include Sajid Javid and all politicians of the Neo-Liberal persuasion. Her book paean to billionaires who she believes are the heroic figures that make our civilisation great. The central figure of the book John Galt a man of independent means who is puzzled as to why billionaires keep disappearing from society. He is taken to a mysterious canyon remote from Washington, where the billionaires are hiding, seeking sanctuary from a rapacious Washington. These  billionaires are fed up with being oppressed by a government that so taxes and regulates them, that they are denied their role as the creative driving force of society, a rapacious government has reduced them to impotence. It does not realise that without their enterprise, society would fall into stasis and decline. When these billionaires go on strike society collapses and thousands of the useless poor die as a poor and weak government is forced to withdraw the income on which they depend for their survival. Eventually a discredited government is forced to welcome back the billionaires on their terms and these billionaires put society back on its feet and society develops and prospers. Many politicians of the new right are followers of Ayn Rand and her influence can be seen on government welfare policy. The Ayn Rands in government believe in a policy of brutalising the poor to the extent that they are forced to work at any price for anybody. It’s a cure for the wasteful culture of dependence, to such as ‘Sajid Javid’ homeless and misery is a just punishment for the useless poor. When governments ignore the truth tellers they are prey to the charlatans and other paddlers of fantasies and falsehoods.

Economists do possess a knowledge of the economy which is invaluable  for the effective running of government. One such economist is Anne Pettifor who is constantly ignored by governments because she tells them truths they don’t want to hear. Economists such as her can be compared to the Old Testament prophets who were constantly ignored by the rulers of Israel.

Anne Pettifor -is the author of ‘The First World Debt Crisis’. While most politicians are aware that economic growth is driven by consumer spending and debt, such as the popular car leasing system, they have little awareness of the dangers of this policy. The growth of consumer debt is so large that it has created a credit or debt mountain of unsustainable proportions – UK bank debt in 2009 – 586% of GDP it falling to around 400% of GDP in 2009 (Dominic Raab), but has since risen. Even Germany has similar problems the collective debts of its banks are over 300% of GDP (much of the money lent to Greece was recycled back to the German banks who had made too many ill-judged loans to the Greeks, so as to prevent them experiencing a liquidity crisis).The UK vies continually with Japan for the title of most indebted country of the industrial developed world.

David Cameron was right that Britain was maxed out on its credit card, he was just wrong about which credit card.

Rather than tackle the problem the government spends billions on quantitative easing to provide the cash to keep the banks afloat. At the height of the financial crisis in 2008/9 Gordon Brown was willing to spend a sum equivalent to the almost the total national income to keep the banks afloat. The official policy is to kick the problem can down the road leaving it to a future government to tackle the problem.

Why do governments fail to tackle this problem? They fear the electorate reaction, if they brought the credit boom to an end. Loans of various kinds account for a significant proportion of people’s spending and to reduce lending would in effect to reduce people’s incomes in that they would be unable to spend as much as previously on various consumer goods. What they are most scared of is cutting spending in the housing market which would lead to a fall in house prices. The belief amongst politicians is that falling house prices equal lost election.

The best informed of politicians know that the risk is that the whole financial house of cards will come tumbling down in a crash as bad as that of 1929, yet they prefer the risk of a future catastrophic crash to taking action now.

The right and wrong of economics

Although I can as an economist make more accurate predictions about the future than any politician there are limitations to the usefulness of my predictions. I cannot say exactly when a predicted event will occur or how great will be its impact on the economy. The economy is a dynamic social institution that is constantly changing and changes can maximise or minimise the impact of the predicted event.

Last year The Observer published one of my letters in I which predicted an economic downturn in 2017. I made my prediction on the basis that all free and largely unregulated markets are liable to exuberant booms that always end in a crash. Past history shows that such crashes occur every nine years, that is 1990, 1999 and 2008/9.

This contention is supported by the economist Hayek. What he stated was that there is a period when the benefits of innovation are exhausted and economic growth falls and the economy falls into recession. This has happened to the UK as the benefits from the mass production of consumer goods begin to tail off. Since the mid 1980s there has been too many car manufacturers in Europe, making cars that were needed. The consequence was retrenchment in the car industry and in Britain the disappearance of the native car industry. When industry fails to deliver alternative sources of income need to be found. In the UK, USA and Western Europe that has been the development of the speculative industry, increases in income no longer come from employment but from the increase in the value of assets, such as houses. A speculative economy is particular prone to booms and busts, as there become periods when it is generally believed that prices have peaked and they can only go down. These downs are quite spectacular and cause widespread distress.

However although I can predict with confidence that a downturn will occur, there are a number of proviso’s that I must make about prediction:

There is no iron law that states a downturn will occur every nine years, but evidence from the past shows that this is likely, it is events that may change the date of the crash.

Brexit – if Teresa May calls an early  election the uncertainty generated by that can bring the date of the crash forward to whatever she makes that announcement.

Events may occur that halt the downward trend – if the government panics at the thought of there being held responsible for the negative effects of Brexit and states that it will do whatever deal is is necessary to ensure that Britain remains in the single market, this could result in a boost to business confidence with businesses now rushing to make the investments that they had postponed due to the uncertainties of Brexit. This rush to investment will lead to a temporary boost to the economy that will delay the economic downturn. However it will only postpone the crash.

Conclusion – Economists are not infallible but they are closer to infallibility that most politicians. What economists possess that politicians do not is an understanding of the workings of the economy.

Xenophobic and racist behaviours as understood by an economist

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Neo-Liberalism or the practice of free market economics is claimed to be responsible for the decline in living standards, but it is not usually blamed for the decline in public behaviours. In the UK ever since the vote to leave the EU there has been an increase in racism and xenophobic behaviours. (A policy decision desired by NeoLiberal and Libertarian politicians.) What I want to suggest is that the adoption by Western European governments of Neoliberalism and in particular by Britain, has been one of the main contributory factors in the increase in racism and xenophobic behaviours.

One of the great economists but who is rarely read today gives an insight into the processes by which the practice of Neo-Liberalism gives rise to anti social behaviours. This economist is Micheal Polanyi and any reader of his book ‘The Great Transformation’ on reading the first chapter would think that he is describing today’s society, whereas in fact he is describing that of the 1930s. The great insight that he reveals in this book is that the unregulated free market is destructive of social order. He demonstrates that this was a fact known to rulers in the past who insisted on regulating the market to minimise its most destructive effects. Although he does not quote this particular example, the biblical story of Joseph shows that the Pharaohs of Ancient Egypt were all to well aware of the destructive effects of an unregulated market. Joseph interprets Pharaoh’s dream to as a warning that there will be seven years of plenty followed by seven years of famine. Then Joseph and the Pharaoh store grain during the good seven years to distribute to the people in the years of need. The Pharaoh’s understood the importance of controlling the market, they knew that food shortages and their exploitation by the merchants who took the exploit the situation to raise prices for the scarce  supplies of food could lead to food riots and possible threats to the rule. A careful reading of folk tales shows that good rulers regularly opened the warehouses of the greedy merchants to the hungry people.

Evidence seems to suggest that the great Greek dynasties of the era of the Trojan wars and Agamenon, were overthrown by internal revolt. One possible cause is the shortage of food caused by adverse climatic changes, a problem worsened a self indulgent aristocratic elite failing alleviate the hunger of the poor and preferring to spend the wealth of their society on conspicuous consumption by creating ever grander palaces.

When reading Polanyi’s book I noted uncanny resemblances between the England of today and that of the 18th century. He writes about the plight of the workers in the cottage based textile industry, as they lost work and income to the large cotton manufacturers who employed the latest technology in weaving and spinning. These people were reduced to a life of misery, having to rely upon handouts from the parish  to feed their families. Their contemporary counterparts are those workers in the so called ‘gig economy’. The development of the mobile phone has made it possible employers no longer to have workers on site or in situ, as its possible to call them in for work when they are needed. No longer does business have to keep a large staff team on site to deal with those busy periods, instead they can be called in when needed.

These workers are also disadvantaged by the lack of employment protection legislation, as ever since the Neo-Liberal revolution of the 1980s, successive governments whether of the centre right or left have seen as it as their task to remove as many as possible of the labour protection measures. These measures it was believed hampered the efficient operation of the labour market. What this legislation did was to leave the worker increasing defenceless against the actions of the exploitative employer. The gig economy is made possible by two things, the mobile phone and the lack of legislation to protect the rights of the worker.

Not surprisingly this was paralleled in the 18th century when legislation removed workers access to common land. Prior to the 18th century workers in the countryside had access to the common land on which they could keep cattle and raise crops. This meant that in time of hardship they could rely upon this as a source of income and food for their family. These people were often the workers in the cottage based textile industry, who when trade was bad could rely on the produce from the common land to keep the family fed. A series of enclosure acts deprived rural residents of their rights to common land. When the collapse of the home based textile industry happened these people were deprived of two sources of income and reduced to abject misery. (These hungry and desperate people were the workforce of the new textile mills willing to endure the most dreadful of working conditions as the alternative was going without.).

When society falls to deliver people look to alternatives. In the 18th century  it was to France where the  revolution had otherthrown the old exploitative landlord class and promised a fairer society. In England many revolutionary societies were formed and the aristocratic government was in constant fear of revolution. They were only able to suppress the revolutionary instincts of the poor through repression and through a system of regional handouts (the Speenhamland system) which prevented workers being reduced to that state of despair that would make them resort to dangerous measures. The Speenlandham system was not unlike our current tax credits system.

The depressed poor not only turned to thoughts of revolution, but also to xenophobia. There is the story of the monkey that was cast ashore from a shipwreck in Yorkshire. This unfortunate monkey was then hung as a French spy. Whatever the truth of this story xenophobia thrives when people are in need and society appears to be failing them. They look for scapegoats to blame for their misery, then it was the French, now its immigrants. When resources such as housing are scarce, its easy to see it as being caused by the foreigner who has taken the house that by rights should have gone to a native born citizen. Politicians have used this xenophobia as a means of winning popular support. They have constantly used the EU as a convenient scapegoat to blame for the nations economic and social ills, ills which were often of there making and so it was no surprise that when people were given a choice they would opt to leave the EU.

Now there is a situation in which a government refuses to acknowledge its culpability for the increasingly dire economic circumstances, and instead relies on scapegoating the other (the foreigner) to distract from its failures of governance. It has boxed itself into a corner and now the only policy measure that it can offer to alleviate the misery of the people is the limiting of  immigration.They promise that no longer will the European immigrant take the council house or job that should have gone to the native born Englishman or woman. What they fail to realise or the brightest and most cynical politicians fail acknowledge, is that their anti immigrant policies will make the situation much worse for the so called ‘just managing class’. Even when the negative effects of abandoning the EU become apparent the politicians will be unable to acknowledge there policies are failing. What instead they will do is to to adopt more and more extremist language to disguise their policy failings. Economic decline will be blamed on those opponents of Brexit who have talked down the economy. Already one Conservative party councillor has suggested that the people and politicians that oppose Brexit should be charged with treason. The only hope for a xenophobic government is to turn up the volume of abuse directed at their opponents in the expectation of silencing them. This of course is the policy pursued by the current government, when any reasoned criticism of Brexit is answered with abuse. The opponents are the ‘Bremoaners’ or whatever catchy phrase of abuse that they can conjure up.

When the government’s sole claim to legitimacy is that it embodies the xenophobic instincts of the people, it language will be that which both implicitly and explicitly gives sanction to racist and xenophobic behaviours. The government will not act effectively to discourage such behaviours or to  condemn them without fear of alienating its most xenophobic supporters. Next year when the negotiations start in earnest and the impact of the uncertainty accompanying those negotiations will cause increasing unemployment, increasing inflation and falling house prices, what can be expected is an increase in the abuse directed at those who dare to suggest that these are a consequence of Brexit. Incidences of racism will increase as the government’s abusive language towards its opponents will seem to give a green light to their extreme behaviours. A government that suggests the actions of its opponents is bordering on the treason will be seen to sanction violent racist actions, as they can be described helping the government cleanse the nation of that element that is responsible for the ills that beset society.

Brexit myth 2 – that despite all the evidence of the naysayers the economy is performing well

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Government and its supporters in the media are constantly claiming that the economy will benefit from leaving the EU and constantly point to economic indicators that seem to demonstrate the correctness of their beliefs. They have the evidence of continued economic growth and the rise in the value of the FTSE 100 index (a measure of the value of the top 100 companies registered on the Stock Exchange). Their  constant trumpeting of good economic news suggests a certain nervousness, as people don’t need to be told that things are good, they know it for themselves. What they ignore is evidence that suggests the contrary, such as a slow down in the construction industry. Members of the building trade are asking for government financial help with the aim of increasing the number of housing starts, hardly an example of the success.  This is a story which will only be found in the quality press, it will be ignored in the popular press which as backers of Brexit detest any news that would suggest that Brexit is a mistake.

Any reader of the popular press will realise that the one measure of economic prosperity that they value is ever rising house prices. House owners can use their houses as a cash machine, using the ever rising value of their property to secure loans to finance the purchase of such as cars and foreign holidays. In doing this they can avoid the painful reality of living with stagnant or slowing rising incomes. They are living in what can only be called an economic fantasy land, as the speculative bubble that is ever rising property prices cannot continue for ever. There will be a crash which brings to an end this bubble and it is quite likely that Brexit will be the object that punctures this speculative bubble.

One journalist wrote that the falling pound will be good for the London property market as it will attract lots of well off foreign buyers into the market. However this ignores one fact, it is ever rising prices that attract foreign residents to invest in this market. Even today there was a report of a fall of 56% in the demand for luxury homes in London. This is a trend that can only increase as foreign residents seem London as a less safe home for their money. What they want is a market in which prices are constantly increasing as means the money they have invested in London will be constantly increasing. Any risk that the value of their investment in London properties means that they will shy away from the London market. A depression in the London housing market will fed outwards into the country as a whole depressing prices there.

Even right wing economic think tanks such as ‘The Adam Smith Institute” have expressed concerns about the impact Brexit on economic growth. Outside Westminster there are few economists that don’t think the long term effects of Brexit will be damaging for the economy. House prices will not continue to rise in a declining economy, they are more likely to fall. British home owners are increasingly unlikely to be able to use their homes as a cash machine.

The property market is inherently unstable and liable to experience shocks such as a rapid decline in prices. It is a market built on the belief that property prices will constantly rise is liable to panic once it is realised that prices are not going to go on increasing and rather than prices rising month by month, they will fall month by month. Not a welcome prospect for house owners, particularly if the falls are as spectacular as recent increases.

The British economy is driven by debt, whether it is money borrowed to invest in the property market  or money borrowed to finance the purchase of consumer goods. Private sector indebtedness is rising rapidly towards 200% of GDP (national income) and this is made possible by borrowing at what are historically low interest rates. It is no exaggeration to say that the British economy is afloat on a huge debt bubble. A lot of the borrowing that makes this bubble possible is done on very low interest rates. If interest rates rose many would find that they were unable to repay their loans, and debt defaulting on a large scale with a consequent popping of the debt bubble and a horrendous economic crash. Mark Carney the Governor of the Bank of England is aware of this problem and has for that reason pledged to keep interest rates at their current low level, even if inflation rises to 2.5%.

However Mark Carney’s hand could well be forced, there is a possible situation in which this could occur. Ever since Brexit the pound has continued to fall in the foreign exchange markets and at present apart from the prospect of rising inflation due to rising import prices, the falling pound has caused no other concerns. However the governor cannot forever ignore the fall in the value of the pound forever. The pound could fall to such low levels that it would pose a serious threat to living standards, as would happen if the pound fell much below the rate of £1 to $1. Even before that the governor could be forced to act if the fall in the value of the pound threatened to fall so fast that it threatened to make foreign trade impossible, this occurs when foreign buyers are unwilling to accept sterling in payment for goods because they fear that the pounds they received today will be worth substantially less tomorrow. Any central bank governor would be derelict in their duty if they allowed this to happen. The only means of reversing this downward movement is to increase interest rates, as if foreign residents thought they could earn more on their deposits of money in London than elsewhere, money would flood into London, so pushing up the foreign exchange value of the pound. Unfortunately other financial centres would be forced to follow suit and rather than there being a modest increase it could be quite substantial.

This would present Europe with a substantial problem, as the countries of Europe also have substantial private sector debts. These debts can only be sustained if interest rates remain low which will not happen if the above scenario occurs. In the very worse of events, Brexit could cause a European wide crash. Hopefully it will not happen, but if I was a European central banker I would be suffering many sleepless nights.

The cause of what could be a horrendous economic crisis is a group of poorly educated politicians making decisions about an economy of whose workings they appear be in ignorance of. Michael Gove a prominent leave campaigner stated during the campaign that people were fed up of experts and wanted to hear nothing more from them. If political leaders such as him had listened to the experts (economists) the government would not be in its current mess. All the political leaders of the leave movement can do is to abuse their opponents who correctly point out that the emperor has no clothes and try to close down the debate on Brexit for fear that it will expose their own inadequacies.  If I said the new minister for external trade was the minister for trade with cloud cuckoo land, it would not be unfair as the ministers seem to have little idea of what is required to negotiate trade agreements with real countries and not those of their imagination.