As soon as the money supply was checked house prices had to fall
and there had to be a recession. If property prices collapse
so will the UK banking sector.


Executive summary

The British media is full of stories about the World economy, rising prices, inflation, the value of property, and the shortfall in the pension industry. These are not a collection of problems that unfortunately came along at the same time. They are closely interwoven - it is just that they are considered in isolation by the media and by governments. Over the last twenty years successive governments have been able to point out to the electorate that their standard of living has been improving faster than it has ever done because they have had more material goods than ever before. What the Government has never stressed is that this was due to more and more goods and services being imported, and more and more real jobs being sacrificed at home. In other words people's standard of living has improved but only because cheap consumer goods were being imported, and service jobs transferred abroad. It did not come from the industry of the British people. No UK manufacturing company can now compete with a company in China that has very low costs. This is a downward spiral that has to have serious consequences.

In the early 1980s the Conservative Government transformed the British economy by creating the conditions whereby British heavy industry lost its effective monopoly position in the UK market. The immediate effect was that prices fell and as a result there was extra spending. This was only acceptable because the Government was prepared to ignore the loss to the economy of recycled tax revenue and to ignore the fact that wealth was being transferred abroad. This process started slightly before the opening up of China and just before the Internet revolution started. From that point on manufacturing in the West became pointless. It was apparent that there was a problem as soon as the Conservative Government under Margaret Thatcher announced the first PFI project, broke the link between pensions and the average wage, and started to reclassify unemployed people as being economically inactive. Once the economy of Britain was opened up to the 'free market' (meaning imports from countries with low social costs) the decline and ultimate collapse of the British economy was inevitable. This was the beginning of the end. Eventually the Chinese and others like them will siphon up the bulk of the World's resources and wealth. If they want to earn more money as time passes then they can increase the prices of their finished goods. Once the Western domestic producers have been eliminated the Chinese do not have to worry about competition. China has already reached the position where it can increase its prices so that its own inflation is passed on to somebody else.

For decades successive British Governments have accepted modest inflation and enforced unrealistically low interest rates as a way of keeping the economy moving forward. However for the average person it was still worth putting money in a bank or a building society. Since 1990 the data on inflation and growth in the economy has been progressively more creatively managed. As soon as the current Labour Government took office the first action that Gordon Brown took was to establish the Monetary Policy Committee. This group was tasked to maintain 'growth' and to 'control inflation'. Growth and inflation are in reality the same thing. It is just a matter of where the line is drawn. There is nothing in their remit about maintaining the value of money placed in a bank account. The notion of protecting the savings of the individual was abandoned years ago which is why private individuals are saving less now than ever before. The fact that all the financial authorities in the World see nothing wrong in lowering interest rates purely to stimulate an economy has to be a reason for concern as it makes saving pointless.

The real level of inflation ever since the MPC took control of setting interest rates has been between 7% and 10% which is comparable with the mean level over the previous twenty years. However the committee set the official interest rates at a very low level because the rapid influx of cheap manufactured goods from China and cheap food from the Third World allowed the British Government to claim an artificially low inflation rate. Low interest rates resulted in massive borrowing and high levels of debt. It caused house prices to rise dramatically. The benefit of these trends has ended and prices are rising as the wealth of the West is dissipated. The point is fast approaching that the cost of goods from China and the cost of food imported from the Third World has to increase because their costs have also been rising and their populations expect more.

Keeping down interest rates encouraged borrowing and so stimulated financial activity. People were able to borrow at an official inflation rate that was less than half of reality and for a while a third of reality. If inflation was officially 3% but in reality was 6% then the Government could claim a 'growth' rate of 3% even if no actual increase was taking place. If inflation was officially 3% but was in reality 8% then 'growth' could still be officially 3% even though the economy was slipping back by at a rate of 2% per annum. This is the situation that has existed since Labour came into office. The British economy has been in recession ever since 2000.

Nowhere in the Western World have interest rates come close to matching the true level of inflation since 2000. As soon as the money supply was checked there had to be a recession. If the official inflation rate was acknowledged by the British Government to be say 10% then the interest rate would have to be set at 12%. The financial system of the West depends upon public confidence. The governments of the Western Nations have been dependent upon their people borrowing more and more as their manufacturing capacity has been lost. Already there are serious problems for people who have borrowed so much money that they cannot support the interest payments let alone repay their loan. At least half the mortgage money borrowed within the last eight years could be lost if interest rates went back to their historical level. If the value of homes in Britain were to drop by say a third the banks and building societies would have so many repossessed properties to dispose of that homes would drop to half of their current value. The knock on effect of this would mean that the banking sector would easily lose 700 billion. The whole of the UK banking sector would then collapse and there would be nothing that the British Government could do about it. In turn it also means that the British Government can never acknowledge the real rate of inflation. It also means that interest rates can never be used to control inflation. Quite how the British Government will continue to explain away an 'official' inflation rate of 4% or 5% against a background rate of 10% to 15% has yet to be seen.

The economies of all the Western Nations stalled several years ago. It is just that their governments have been using creative accounting methods to hide the truth. The Western Nations are all living on borrowed money and this cannot go on for very much longer. There are many professional groups who need to play along with these false numbers and the bulk of the population do not understand what is happening and will accept whatever they are told.

All democratic governments have an interest in making the voting population feel increasingly wealthy - more leisure time, more foreign holidays, more cars, more consumer goods, more processed food and all with less effort. Few people seem to wonder how ever increasing levels of consumption in Britain can continue when fewer and fewer people are engaged in productive work. Taking a hypothetical case it would be possible to have a country where one third of the population spends all their time doing nothing other than looking after the other two thirds of the population who are retired, unemployed, students or Civil Servants. The employment figures would look good. The gross domestic product numbers would look wonderful but the country would not be able to import raw materials as it would not be making or exporting anything with which to trade.

One of the great untruths of the modern World is that free trade will somehow result in increased wealth. All that happens is that goods will be made in the cheapest place which will usually mean the country with the lowest tax regime and with poor social conditions. This is the only way that a small part of the World's population can have a totally unsustainable standard of living based on borrowed money. The ability to manufacture goods is ultimately limited by the natural wealth of the planet and the ability of people to pay for finished goods. There may be a lot more apparent activity as materials and products are moved around but overall there can be no useful gain from having free global trade. The concept of free global trade might appear to be wonderful but ultimately the money will flow to the countries which have the lowest costs of manufacture and the most plentiful supply of natural resources. No resource is unlimited and eventually free trade has to fail when the financial reserves of the main consumers are exhausted.

The manipulation of the official financial data means that someone who saves will find that there has been no real growth in their savings during their lifetime. There can never be a good State pension for today's young and even the healthiest pension schemes will have to fail in the medium term let alone the long term as they can never keep up with the real rate of inflation and the increase in life expectancy. The few companies that are still struggling to operate pension funds will eventually be driven out of business by Government regulations. Of course no one is going to admit officially that saving is pointless.

The Western Nations are dependent upon countries like Russia, Saudi Arabia and Kuwait for their gas and oil. It would only take one of these major suppliers to take a more pragmatic approach and to worry about the future comfort of their own people for these supplies to be cut back. A ruler who decided to create a place for himself in his country's history might well decide that his country should extract just enough oil to buy just the consumer goods that his people need today and no more. To have the last major oil reserves on the planet would leave any country in a very strong position.

Alternative energy sources are a Holy Grail which helps to distract people from the reality of the situation. If there were cheap and easy ways to obtain energy from nature is it likely that they would not have been perfected before now? Society cannot support the cost of going green today and certainly will not be able to in ten or twenty years time. The reality is that the world is running out of cheap energy. Explaining the consequences of this to the population of a democratic country will not be easy for any politician. The screw is only just starting to turn and many in Britain are finding the consequences hard to accept.

There are a number of problems that are effectively unsolvable if only because of the reality of the democratic process. Global warming could be stopped but it would mean the Western nations reverting to a lifestyle reminiscent of the 1930s. This is politically unacceptable so the consequences of global warming are unavoidable. Instead of designing accommodation that can house people when energy costs become impossibly high for the average person the State is increasing the density in cities and creating a society that is ever more dependent upon cheap energy. Life in a city like London without electricity and gas will be impossible. It will only register with the bulk of the population when energy gets too expensive for them to heat their homes or to drive a car, and when they can no longer afford to buy the cheap consumer goods that they have got accustomed to. In the meantime instead of focusing the population on the imminent problems of living without energy and wealth the Government is still focusing time and effort on the global environment, civil rights and social issues.

China is planning to build more than 100 cities the size of London. Few people in Britain question where the wealth and materials that are needed to build these cities will come from. The answer has to be trade with the West who have financial reserves to draw upon. Eventually these reserves will be exhausted and at that point the West will be left with a huge number of unemployed, unproductive and elderly people to care for. Being democracies the politicians will have to keep as much of the infrastructure running as long as they can and so taxes will keep on rising. The cost differential between the West and the World norm for businesses will have to increase until Britain is bankrupt and then it will implode upon itself. Before that happens there will be a large number of social problems caused by overcrowding, poverty and racial tension. In some areas care for the elderly is already breaking down and this is a problem that will only get worse as resources become more restricted.

The UK is already technically bankrupt. If it was a company the British Government would not be allowed to continue trading as its liabilities exceed its ability to generate the income to discharge its liabilities. Provided that cheap goods are available and provided that energy prices stay reasonably low there will be no real problems for the political establishment. However as soon as the consumer goods that are available on the World market start to rise relative to disposable incomes then people's apparent high standard of living will fall. Energy prices look set to increase by 10% per annum above the 'official' interest rate from now on. As food and fuel costs rise the quantity of consumer goods that can be purchased will have to decline. At that time a major permanent recession and downward spiral in the economy can be the only outcome. The point at which the system finally fails is when the Chinese cause the price of oil to rise due to their consumption, when the number of elderly people in the western democracies reach a level where the medical services fail and when the savings of these nations are exhausted. It will be impossible to persuade a population that has become accustomed to a soft gentle existence to return to the world of manual labour. It only means winding back the clock to 1930 but this will be an impossible task. The great advantage that the Chinese have is that they are not a democracy. Their government can always make pragmatic decisions based on common sense. They do not need to even try to appease a raft of special interest groups.

Eventually all the ways of hiding the truth about inflation, government debt, the State's pension liabilities, the real magnitude of State expenditure and the consequences of high personal borrowing will be exhausted. A new generation will then wake up to a stark and unwelcoming future. Without products to trade for food and fuel it will be a very cold and uncomfortable world for people who are accustomed to the easy life. When the final stage is reached it will be quick and take no more than a decade. No empire lasts forever and the Western Nations are now in the final run up to economic collapse. It happened 1600 years ago when the Roman Empire collapsed. It happened several times during the history of Egypt. It happened to the Chinese Empire. In fact human history is littered with examples of civilisations that simply ran out of money and so were unable to support their infrastructure. When it happens the end always comes very fast.

Published: August 2008