The Economy

The current state

At this time of writing while we are heading for a general election, the government wants us to believe that the economy is improving and we are well on our way to recovery. Sadly, the reality is very different.

I think many people are worried about the underlying parameters of the economy. We continue to have extremely low interest rates, low inflation, verging on deflation, and huge levels of debt we cannot service and consequently continuing to grow uncontrollably. Just as for any domestic or business economy the sums just do not add up and this can only be delaying the inevitable.

This country has for some time now degraded its ability to create genuine wealth, which has to be at the very heart of the economy. Without wealth generation we cannot justify the value of the money we have. Too many people are engaged in moving money and wealth around, while too few are actually generating the wealth through making things and providing genuinely valuable services.

The economy, at every level; personal, corporate, national, is so dependent upon credit. Much of this is just postponing the problem to later generations. Whether it is student loans, mortgages, or state borrowing which cannot be supported by today's taxation, the problem has become critical. All this leads to us living to a standard which is beyond what is genuinely affordable for us, which is why we are experiencing a change in our standard of living as the realities force us to come to terms with our true wealth. Unfortunately, as is often the case, the burden of this change is borne disproportionally by the poorer members of our community.

Very few if any of the major problems within our economy have been resolved, meaning that we simply haven't addressed the fundamental issues. The banks in particular have not corrected their approach and the government, so desperate to convince us to give them our vote, make promises to us all they simply cannot afford. However, by borrowing yet more they can postpone paying for these things until well after their political careers are ended and they can be judged.

But, this is not something that can go on indefinitely, and those of the younger generation who face the bill in the future should wake up to what is happening and realise they will not escape the cost of today's excesses by their parents.

Is there any possibility of correcting this situation? Is the economy so fundamentally flawed that we can never expect to resolve it and return to a more stable and equitable situation? Can we raise taxes or build the wealth generating parts of our economy? Can we get people to accept a standard of living that is much more realistic? Can we do all this in the context of a democratic process which sets out to provide people with what they want today rather than what is right for the future?

Economists will always give an argument that the economy is working well and we just need to get used to these occasional violent swings that will occur from time to time. They will cite examples of other nations that have an even worse position than we do, with higher levels of debt vs GDP as if that is adequate evidence that we are doing alright.

There will be no resolution unless and until we have a more radical approach to the economy and we can force through changes that many will find unpalatable. We need to look at real wealth generation and our ability to keep the results of it here in our country. We need to look hard at what we can genuinely afford and make some very tough decisions about how our social society works and how it is funded. In particular, we have to move away from this huge dependence upon credit to fund everything we want or need.

House prices

There is a lot of debate at the moment about house prices. First time buyers in particular are unable to afford the basic price of a starter home and the general consensus is that we are not building enough houses. There are two major issues here.

Firstly, if one looks at how people in other countries live, the idea of owning your own home is a true luxury and what we need to acknowledge is the need for large scale, low-cost housing in the form of flats and apartments. Although our history of such property is woeful, having built so many blocks of flats which rapidly turned into high-rise slums, we still have to look hard at proper, workable housing solutions in high-rise accommodation, which is not automatically seen as low-standard. There are many examples of good practice in places like China and Hong Kong at least. For many young people a small flat or apartment is a much more suitable start to their home ownership.

The second point is that house prices have risen significantly because people have been able to pay. Since the deregulation of the financial services sector pioneered by earlier conservative governments, people have been able to borrow absurdly large sums to buy properties, securing mortgages at many times their annual incomes and resulting in them having unmanageable levels of debt. This just makes it possible for them to pay the higher prices and this just pushes up house ‘valuations’. The old model which severely restricted people’s borrowing ensured house prices could not rise too rapidly, especially in relation to incomes.

Building more houses or reducing stamp duty will not bring down prices or making it easier for young people to get on the housing ladder.

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