‘The big education for me is that civilisation is fragile and can be destroyed in a heartbeat' - Jeremy Brade, former peacekeeper in Sarajevo.

Wednesday, January 22, 2020

National economic salvation: the task before us

Free trade of the sort the new government has vaguely encouraged us to welcome is potentially ruinous. The severe competition from globalism is made worse by a modern monetary system that cannot act as a self-correcting mechanism. As a result, we in the West see growing debt, inequality, creeping economic ruin and the potential for major social disorder. Instead of leaving the market to regulate itself, the political class must exercise control; Brexit is their teething-ring for learning to tackle the new world economy. Are our leaders sufficiently skilled, educated and motivated to save us?

In classical economics, free trade can be mutually beneficial even when one party is more competitive in all the things the other can do. David Ricardo illustrated his 1817 ‘theory of comparative advantage’ with a theoretical example of England v Portugal and the making of cloth and wine. When each country shifts some resources to the item it produces more efficiently at home, overall output is increased and the surpluses can be traded. Win-win!

But what if your competitor nation can make all your goods with labour costs 47 times lower – not to mention far cheaper land and equipment, currency-adjusted? Sir James Goldsmith spelled it out in a 1994 interview with Brian Walden:

Here is what he said about the effects on workers of two decades of trade liberalisation within the EU:

‘In France you had in 1973 420,000 unemployed. Between 1973 and 1993 the economy grew by 80 per cent, eight zero, almost doubling; and the number of unemployed went from 420,000 to five point one million. What can be the purpose of an economy which by doubling goes to 5.1 million?’

Globalisation and the GATT talks that enabled it threatened even – far – worse. Sadly, it was good for the blue suits and bad news for the boiler suits; the comparative advantage is now that of capital over labour. But “What,” asked Sir James, “is the purpose of the economy? It is to enrich us and therefore how do we have an economy which can provide jobs and prosperity?”

Yet even an enlightened employer may not be able to protect its workforce. In his book on the plight of the white American underclass, ‘Deer Hunting With Jesus’, Joe Bageant related (pp. 75/76) how a plastic goods manufacturer, the main employer in his home town of Winchester, Virginia was forced to succumb to globalism:

‘Wal-Mart sells by far the greatest volume of Rubbermaid products of any retail chain. Given such an advantage, in 2001 Wal-Mart’s executive management team heavied up on Rubbermaid, demanding ridiculously low prices despite an 80 per cent increase in the cost of raw materials and personal pleas by Rubbermaid CEO Joseph Galli.’

Forcing the issue, the retailer found an alternative supplier that made cheaper ‘knockoffs’ of Rubbermaid’s lines. The latter lost 30 per cent of their sales and caved in to Wal-Mart, sacking eleven thousand employees nationwide for the sake of survival. (And, I suppose, if Wall-Mart hadn’t done it, somebody else would have.)

However, when a company lays off employees, the costs (and there are many ramifications) are borne by society generally; the boost to the company’s profits and taxes may be outweighed by the burden it has thrown onto the community. And in a world where firms can reincorporate abroad, they can escape more completely (a move HSBC is rumoured to be contemplating.) Perhaps we should worry less about CO2 and more about UB40 (aka Jobseeker’s Allowance) - and PSNB.

Theoretically, the currency exchange market could help correct trade imbalances, as Investopedia explains. But China cemented its cost advantage against the USA by pegging the renminbi to the dollar in 1994, preventing the former from rising in value which would have made its exports pricier; even since 2005 it has allowed only a limited appreciation. Since the US dollar is also the world’s trading currency, the effects are not limited to America.

The wealth-sucking has continued, abetted by Western money-makers who are now beginning to fear for their own safety as society starts to collapse - some have started to buy boltholes in the Pacific.

China has recycled some of its surplus in massive purchases of US Treasury bonds, though it worries about the value of its holdings and the Americans worry about the plug being pulled suddenly (which could see damaging interest rate rises on the crippling amounts of US public debt.) She has also invested c. $180 billion in US assets, though again Americans fret – perhaps too late – about the security implications. Longer term, China is looking to urbanise fast and under President Xi has more than doubled electricity production, whatever Greta (our Joan of Aaargh!) may witter. They seem to be working on ‘endogenous growth’ of their economy in preparation to move out before the West’s roof falls in. When the dollar ceases to be the global means of exchange the flood of cash returning to the US could be greatly inflationary.

Traditionally, gold has been a hedge against inflation. The old saying is that an ounce of gold buys a handmade suit, and that’s pretty much true now. But it’s funny how while China and Russia have built up their stocks of gold, Canada has been selling off its own to the retail market and Britain’s stock, once 2,500 tons, has fallen to 310. Maybe we are going the way of Toronto, for – did you know this? - a recent (6 November) Privy Council meeting has authorised designs for a range of gold coins including one worth £7,000. I suspect that gold sales are to stop us – for a while - seeing inflationary reality. When the slowing velocity of money (how fast the cash turns round affects GDP) stops offsetting the money-printing by central banks, we may be up a gum tree in a forest fire.

That money-printing proceeds apace. The banks are still zombies, and in the US the Federal Reserve has been providing life support by hundreds of billions in the overnight lending system known as the ‘repo market.’The Global Financial Crisis is not over, it’s been monetised.

If we are to have a stable and just society, we need to get our people working. And since the money system can’t correct for globalisation, governments will have to intervene. Not that we should put down the shutters on international trade, but we should at least try to control the rate of change, to give our economies time to adjust. Otherwise many of us will have our enterprises disrupted as British weavers experienced two hundred years ago when the new spinning machines abruptly cut their livelihoods from under them.

The challenge is already daunting. The Daily Mail’s Alex Brummer wrote eight years ago about the growing foreign ownership of British businesses, and guess where the axe will fall when global recession bites? Not in the home countries of those overseas owners. Also, we are losing the capacity to rebuild: one of my clients was a firm whose business was exporting toolmaking machines from closed-down factories – selling our family silver, as Macmillan said, but not even to private British hands.

I hope Dominic Cummings’ think tank-cum-Civil Service SAS can work out a credible detailed plan.


Paddington said...

My eldest son spent a few months last year at our local Rubbermaid factory. Their current tactic is to class most workers as 'temporary', earning $11 an hour or less with no benefits, for years.

Paddington said...

This is a direct result of the attacks on the unions, which began under Thatcher and Reagan.

Sackerson said...

JD comments:

So many questions in this post and so many variables but I can have a go at dealing with the first one from Sir James Goldsmith: (Nothing against the man of course, he was a splendid thorn in the side of the establishment)

“What,” asked Sir James, “is the purpose of the economy? It is to enrich us and therefore how do we have an economy which can provide jobs and prosperity?”

Good questions but a less than satisfactory answer from Sir James.

Unlike Sir James I think I gave a different (better?) answer about the nature of work (i.e. jobs) in these two posts.-

But "the purpose of the economy" is a very slippery question. What exactly is the economy: Very often on TV or in the newspapers I hear or read that a 'one off' event is described as giving a boost to the economy, or more usually the local economy. I can see how such 'one off' happenings can provide a windfall for shops, restaurants, pubs, hotels etc but what exactly trickles down as a benefit to the ordinary workers? That much lauded 'boost' does not translate into permanent 'jobs and prosperity' which is what Sir James was envisaging. And don't forget that a lot of those shops, restaurants or hotels will be in foreign ownership, another one of your worries about the UK economy.

Having said that, I still don't understand economics!