The great and the good have been trying to resolve the riddle
of rising employment with no GDP growth. This implied weakness in productivity is certainly a troubling and new phenomenon. There are a myriad possibilities that might be contributing factors, I have picked four: high government spending, low
productivity, poor tax receipts and poor private sector performance. The common threads that harness these 'four
horses of the apocalypse' are quantitative
easing (QE) and the associated low interest rates and high inflation.
Firstly, let's look at low interest rates. The Bank of
England has held rates at 0.5% for the last four years, given inflation has
been running at over 3% for most of this period we have had real negative rates
of interest averaging -2.5%+. Trying to
grow the economy when savers (people and businesses) are losing 2.5% of their
income and value every year, is going to be tough. These negative rates have been helpful in
some respects - propping up failing businesses and over extended families. But there has been a huge down side in penalising pensioners, other savers and well run businesses. This benefits equation is clearly out of
balance with low interest rates helping distressed non-contributors while
disadvantaging those who, ordinarily, would be the engine for growth. These secure businesses and private
individuals who are most likely to invest and spend must be the main components
for GDP growth.
The negative interest rate has had another significant effect
on the business world. Well run and
productive businesses looking to invest have had the distraction of having to
make increasingly large pension provisions as investment return dwindle to
nothing. Another bi-product of negative interest rates
has been an overvalued Pound, which has damaged our exports and sucked in cheap
foreign goods. The cumulative effect of
negative interest rates have had the
unintended consequence of creating a vast number if Zombie companies - I have
been banging on about this for a while. Zombie companies can't afford to make
the redundancies required and are in a permanent loss making position, only
able to pay the interest on outstanding loans.
I have estimate that these Zombie companies in the UK amount to over 3
million employees. These unproductive businesses and employees are soaking up
financial and human capital resources that other better run businesses
need.
So while negative interest rates seem like a good idea,
keeping mortgage payments low they also have put a massive break on the
economic growth.
The other consequence of QE has been stubbornly high inflation,
which has been running at 2-4% over the last three years. The cumulative effect of negative interest
rates and high inflation has been the killer blow that has forced savers to
hoard cash and business to shelve investment plans. The Government has been unlucky that the
Pound has been perceived as a safe haven, sheltered from the storms buffeting the
Euro and the Dollar.
These mistakes in economic
management were started by Gordon Brown in the aftermath of the credit crunch,
desperate to keep the economy afloat with an election looming 'Gordo' was not
planning ahead. The Coalition have,
under the guidance of The Bank of England, continued the process of QE, which
exchanges future government debt for short term monetary relief. In retrospect a more traditional approach to
maintaining low inflation (with all the pain and insolvency that would have
caused) would have made the 'dip' steeper but may have accelerated the recovering. The path we have chosen looks likely to offer a
stagnant economy for the foreseeable future, unless the government change tack.
To rectify the problem the
focus needs to be on lowering inflation, rewarding savers (not the over
borrowed), whilst maintaining the value of our currency (which is starting
to come under pressure). Oddly these are
complimentary medicines and we need to start now!
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