SENILE PARANOIA?

I must be getting old. I find myself looking at current situations, seeing what I believe to be gross flaws in policy and detecting no signs that anyone shares my views. Is this a function of the media and the ‘communicators’ of this world or is it simply a sign that I am becoming detached from the main stream and what I see as wisdom gained by experience is actually senile paranoia.

I noted the euphoria this week when the French realised that there was a miniscule increase in manufacturing activity, I think it was one third of a percent and immediately announced that the recession had bottomed out. (I would have thought that the prudent thing to do was wait until a trend had been established, how accurate is a figure as small as this?) At the same time the UK manufacturing sector is still shrinking but by much larger amounts.

My understanding of the basics of economics is that wealth is created by adding value. This applies right the way through human activity, a farmer plants a seed and it multiplies, smoke stack industry takes raw materials and adds value, whether it be making cans or building ships, the medical profession uses capital inputs to cure human ills, surely an added value.

Contrast this with the profits made by the banks in their investment arms which have ensured that despite the economic indicators for the base economy still being in free fall many of them have announced enormous profits. Is this adding value or gambling?

There has always been a need for a system which ensures that capital flows in the system to support the business of adding value. I regard this as the core purpose of having a banking system and in its own way this is as much part of the value-adding process as planting a field or running a machine tool. My problem is that I cannot see how the shuffling of pieces of paper to make profit from the vagaries of the market is in any way a value-adding process.

Surely the situation would be clearer if there was a clear division between core banking and gambling. What is being reported is the overall profit and not the losses being made in the banks and at grass roots level. The number of bankruptcies and repossessions of houses is increasing, unemployment goes up, we see more and more empty shops on the high street. Where are the grounds for optimism?

I said right from the start that supporting the banks and in effect rewarding them for failure was a mistake. If money was going to be injected into the economy it should have been directly into the core activities like construction, large infrastructure projects and supporting existing manufacturing industry. The multiplier effect of the capital passing through the economy would vastly increase its effect, skills and manufacturing assets would be preserved ready for normal trading activity and people would be kept in work and earning money.

Instead we have seen an enormous sum of money pulled out of thin air and thrown at the top of the food chain. They invented a new name for it, ‘Quantitative Easing’, in other words printing money. I always though that this was the route to damaging inflation. Common sense seems to dictate that something as easy as this cannot be the answer.

So, my fear is that all we have done lately is support the system that allowed us to get into trouble in the first place. Bonuses to traders are the headline and quite rightly so but the underlying problem is that we allowed an enormous structure of debt to be created and as far as I can see, this position has been made worse. In round terms we started with £1trillion of personal debt on credit cards and added another £1Trillion in bail-out money. Have I got this wrong? If this is the case we are using the same tried and trusted methods that got us into this mess in the first place to try to rectify the situation. Can you see why I am worried?

SCG/15 August 2009


Stanley Challenger Graham




Barlick View
stanley at barnoldswick.freeserve.co.uk

Some of you may remember me writing a piece earlier this year when I forecast that the burgeoning expenses scandal in Parliament was the result of a larger shifting of the tectonic plates of politics and our institutions.

I may have been closer to the truth than I thought. I heard this morning that a group of MPs and some union leaders are promoting the establishment of a High Pay Commission along the lines of the existing Low Pay Commission. The reason given for the need for such a body is that it has become obvious that the prospect of virtually unlimited reward was one of the factors that drove the financial industry to get into more and more questionable investments driven by the chance of short-term profit and subsequent high bonuses. This is the first time I can remember when pay at the top has been cited as a damaging factor rather than pay at the bottom of the wage scales.

I have puzzled for years over the paradox that high wage economies such as the US seemed to manage perfectly well whereas in this country for years a low wage policy was pursued combined with a low food cost derived from Empire trade. I could never see how a working man’s wage could be a threat if they had more to spend. At long last it looks as though the higher end of the pay scale is coming under serious scrutiny with things like the ratio of highest wages and lowest in an organisation being examined. There is also talk of a special bonus tax of perhaps 90%.

It remains to be seen whether this comes to anything. Expect howls of anguish from the higher echelons. All I can say at the moment is that it is an encouraging sign and perhaps indicates a long term trend.   


Stanley Challenger Graham




Barlick View
stanley at barnoldswick.freeserve.co.uk