Yesterday I posted a warning about the nature of the economic recovery in the UK. Today it is worth looking at the issue at the heart of the failure, since the end of WWII, to establish sustained economic renewal not characterised by boom, bust and most recently, crash. It is the over valuation by markets, working to a tradition rooted in the British Empire and the Sterling Area, which still treats the pound as the world’s largest currency unit. It is always how many to the pound and never how many pounds to something else.
There may have been a wealth base for such a tradition in the past, but in the era of printed and electronic money, the wealth base of the UK does not justify such a valuation. Money is a measure and it is there to measure output and wealth. Broadly speaking if you go to America and spend $10 you will get about as much as you would expect to pay £10 in the UK. Likewise with the euro. Yet the pound now stands at$1.66 and euro1.22. This means that British goods exported are expensive and foreign goods imported are cheap. To the extent that manufactured goods depend on imported raw materials, it can be argued that the outcome of a strong pound is more neutral than at first it appears. The problem is that completed foreign consumer goods are also cheap to import and this has eventually led to the imbalance; no longer is the economy founded on industry but on consumption. Most of what is consumed is imported.
The wealth and jobs created by manufacture has gone overseas and with it the foreign exchange earnings. The UK economy is driven by debt and deficit and the finance industry, which once served, now dominates. The rich grow richer and the gap between rich and poor grows wider. Worse, the rich grow rich at the expense of the poor. Even where there should be universal benefit for the less well off from the high pound, from cheap imported energy and oil, there is none because energy is a major taxation platform for successive governments, making high energy costs one of the major drivers of poverty. Meanwhile the basic rate of income tax is the lowest in seventy years. Even Thatcher had a basic rate of 25%.
The solution is to engineer a steady devaluation of sterling until it reaches parity with the dollar. Exports would become cheap and imports expensive. Tax would have to shift away from energy and back to income. Huge opportunities for home produced goods and food would boost the economy and create new wealth, rather than re-cycled debt. Trade deficits would become surpluses. Foreign exchange would again be earned. Employment opportunities from new local industries would increase. The economy would start to grow not from consumption, but from wealth creation. The UK would become, once more, a surplus country.
How could this come about? The Government needs to stop borrowing and start printing, not through the Bank of England, but direct from the Treasury. Watch this space.