I'm going to break with convention for one blogpost and comment on economics. I'm no expert but in the last couple of years have realised that my economic geography degree seems to mean I know more than most national policy makers.
I can't say "I told you so" because I didn't share my economic thoughts in the early 2000's or ('naughties' as we are irritatingly encouraged to use) with many people... and those I did tell didn't pay much attention because when you are in a boom, the last thing you want to hear about is a bust.
I do however have a very unattractive grin of smugness about me because... I saw much of this current economic disaster coming.
Firstly, it was obvious that the level of personal debt and loans incurred by many families who were living well beyond their means would be totally unsustainable. Remember back 10-15 years and the amount of credit card application forms that would come with any magazine purchase - and the fact you only needed to be able to hold a pen and be able to scribble a cross in order to get this 'free money', and many went for it, racking up enormous debts as they went retail crazy. Why did they do this?
Keeping up with the Joneses is one explanation but there is a much deeper level to this addiction so many people have to shopping. Society judges us on how much money and stuff we have, like what type of car we drive and how big is our television. Don't get me wrong, until recently I was a part of that system but I never went out 'shopping' to make me feel better about anything. Anyway, somewhere along the line the spending would stop. And it did.
Then we realised that our economic growth figures in Britain were influenced in a major way (and being artificially buoyed) by consumer spending because with the exception of some 'invisible' services we sell overseas like banking and insurance, we don't make much stuff any more so how can we sell anything overseas and bring money in (which of course would have demonstrated REAL economic growth)?
In the meantime of course, the Labour government spent more and more money in public services until we could spend no more and we sensationally crashed...aided I believe by sensationalist headlines and media coverage at the time. Scaremongering the public just meant that people stopped spending their money thus making the economic problem worse.
The second reason for my smugness is the Eurozone crisis which we shouldn't underestimate. It may yet have a significant impact on our economy. My thoughts on this matter were crafted in Ireland. I made my first visit to 'The Emerald Isle' in 2000 and made many more throughout the 'naughties' (ugh! -sorry). My cousin lives near Galway in the west and I have friends in and around Dublin. During this time I saw a lot of building (houses/roads) and alongside every road development was the big blue sign indicating that this particular project was possible through E.U. money. Then house prices rocketed and for a while actually compared to high London prices. I asked myself the question why? London house prices are so high because of demand v supply and the high levels of income earned by top city workers. In Dublin in particular I just could not work out how house prices could be anywhere near to London prices. Sure, I can see how demand increases if there are more jobs created but there weren't a significant increase in jobs to warrant the house price increases.
I was perplexed. When I asked my my Irish friends why they fell over themselves to tell me "It's the Celtic Tiger Cookie!"
Of course we know why now. The euro membership meant incredibly cheap borrowing (for a while) so everyone wanted to buy property. Demand was indeed higher and they couldn't keep up the supply to meet demand...but it was not based particularly on enormous amount of new jobs or record breaking income rises... and the tiger has bitten their arses.
I see many problems with the Euro currency. Countries like Ireland, Portugal and Greece have long been poorer neighbours to other European countries through no fault of their own - it is down to geography. These countries are the furthest away from the 'core' of Europe, they are in the 'periphery'. In very, very, very simplistic terms it means that for example anything they make is going to have additional transport costs so they are always at a disadvantage .
The Core -Periphery Model (Ieft) can help explain some of the Euro issues. The 'vital axis' contains south-east England, Northern France, West Germany and northern Italy amongst others. It also helps to explain the fact that both England and Italy have a north-south economic divide only it is inverse. Italy's north (in the vital axis) is richer along with England's south.
It appears to me that membership of the single currency meant that all countries were suddenly treated the same even though they all have unique economies and propensities to pay any loans back. What we also understand now is that Greece significantly 'cooked their books' and according to one commentator on the news this week "have committed fraud".
The bitterest pill to swallow though is that it is public money that is now propping up the banks. These are banks that have cataclysmically failed to perform their fundamental roles in the pursuit of personal greed and making a quick buck. I remember learning about 'bank runs' in A Level Economics and that if it ever happened again we would be in serious trouble. It still amazes me that some people don't understand how banks work. At any one time they haven't got all our money in branch. They use our money to make money by lending it to other people or businesses by making 'sensible' decisions. Oh. I see where it's gone wrong.
The latest bail out involves Spain receiving £80bn for its' banks. How is it possible for these bankers to have received enormous bonuses? It is a complete joke but no one is laughing (except the bankers).
So why do I want to be German? Because they are sensible and look at long term growth rather than making the quick bucks. I've long admired the Germans on the basis that in contrast to the UK, they actually still have German owned companies. We sold most of ours...occasionally to the Germans. This Euro crisis has also given us glimpses into German economics. One particular programme I watched concentrated on a components manufacturing plant which was an integral part of the local community in which it sat. The owners looked at the long term strategy of growth and understood the importance of local employment. This was about sustainable growth and social responsibility - not greed and profits.
In the main I think they've got it right. Plus they love a beer. And of course they can win penalty shoot outs... most of the time.
I can't say "I told you so" because I didn't share my economic thoughts in the early 2000's or ('naughties' as we are irritatingly encouraged to use) with many people... and those I did tell didn't pay much attention because when you are in a boom, the last thing you want to hear about is a bust.
I do however have a very unattractive grin of smugness about me because... I saw much of this current economic disaster coming.
Firstly, it was obvious that the level of personal debt and loans incurred by many families who were living well beyond their means would be totally unsustainable. Remember back 10-15 years and the amount of credit card application forms that would come with any magazine purchase - and the fact you only needed to be able to hold a pen and be able to scribble a cross in order to get this 'free money', and many went for it, racking up enormous debts as they went retail crazy. Why did they do this?
Keeping up with the Joneses is one explanation but there is a much deeper level to this addiction so many people have to shopping. Society judges us on how much money and stuff we have, like what type of car we drive and how big is our television. Don't get me wrong, until recently I was a part of that system but I never went out 'shopping' to make me feel better about anything. Anyway, somewhere along the line the spending would stop. And it did.
Then we realised that our economic growth figures in Britain were influenced in a major way (and being artificially buoyed) by consumer spending because with the exception of some 'invisible' services we sell overseas like banking and insurance, we don't make much stuff any more so how can we sell anything overseas and bring money in (which of course would have demonstrated REAL economic growth)?
In the meantime of course, the Labour government spent more and more money in public services until we could spend no more and we sensationally crashed...aided I believe by sensationalist headlines and media coverage at the time. Scaremongering the public just meant that people stopped spending their money thus making the economic problem worse.
I was perplexed. When I asked my my Irish friends why they fell over themselves to tell me "It's the Celtic Tiger Cookie!"
Of course we know why now. The euro membership meant incredibly cheap borrowing (for a while) so everyone wanted to buy property. Demand was indeed higher and they couldn't keep up the supply to meet demand...but it was not based particularly on enormous amount of new jobs or record breaking income rises... and the tiger has bitten their arses.
I see many problems with the Euro currency. Countries like Ireland, Portugal and Greece have long been poorer neighbours to other European countries through no fault of their own - it is down to geography. These countries are the furthest away from the 'core' of Europe, they are in the 'periphery'. In very, very, very simplistic terms it means that for example anything they make is going to have additional transport costs so they are always at a disadvantage .
It appears to me that membership of the single currency meant that all countries were suddenly treated the same even though they all have unique economies and propensities to pay any loans back. What we also understand now is that Greece significantly 'cooked their books' and according to one commentator on the news this week "have committed fraud".
The bitterest pill to swallow though is that it is public money that is now propping up the banks. These are banks that have cataclysmically failed to perform their fundamental roles in the pursuit of personal greed and making a quick buck. I remember learning about 'bank runs' in A Level Economics and that if it ever happened again we would be in serious trouble. It still amazes me that some people don't understand how banks work. At any one time they haven't got all our money in branch. They use our money to make money by lending it to other people or businesses by making 'sensible' decisions. Oh. I see where it's gone wrong.
The latest bail out involves Spain receiving £80bn for its' banks. How is it possible for these bankers to have received enormous bonuses? It is a complete joke but no one is laughing (except the bankers).
So why do I want to be German? Because they are sensible and look at long term growth rather than making the quick bucks. I've long admired the Germans on the basis that in contrast to the UK, they actually still have German owned companies. We sold most of ours...occasionally to the Germans. This Euro crisis has also given us glimpses into German economics. One particular programme I watched concentrated on a components manufacturing plant which was an integral part of the local community in which it sat. The owners looked at the long term strategy of growth and understood the importance of local employment. This was about sustainable growth and social responsibility - not greed and profits.
In the main I think they've got it right. Plus they love a beer. And of course they can win penalty shoot outs... most of the time.
Hmm, not sure about your analysis of the relationship between EU funding and over heated property markets in the periphery. Where did the cheap money to buy houses at inflated prices come from? You seem to suggest that in some way the EU was enabling this. I might be wrong, but I didn't think the EU were in the lending business. Doesn't the picture you paint ignore the other, non-European, economic systems across the globe? Weren't the changing fortunes of newly industrialising India and China playing some part in all this?
ReplyDeleteay up Ian, how are you.
ReplyDeleteJust trying to paint a simplistic picture - of course global economies involved and EU membership meant cheaper borrowing in Ireland and all over EU countries. I only commented on Ireland too - regarding the periphery I merely point out that these countries have always been the poorest in Europe and that the model goes some way to explain that. The fact remains that there has been far too much spending beyond means and membership of the EU actually gave these countries and the residents in them a false sense of security.