Thursday, 15 October 2009

Happy days are here again?

Writing for the Cobden Centre, Equity Strategist Ewen Stewart warns that despite signs of recovery in the FTSE and the housing market, the UK economy remains fundamentally weak:

"This country that has been living considerably beyond its means for a very long time. Artificial efforts to prop this up, through printing money or inappropriately low interest rates, at best are a short term delaying tactic and at worst risk stoking a loss of confidence and ultimately inflation."

In summary:

  • Government spending has increased dramatically, "from £364bn in 2001 to £583.3bn in 2007/8", diverting resources "from the productive private sector ... to the less productive state sector"

  • This increased spending was funded by tax receipts that were "greatly boosted by the growth in 'the City' and real estate prices"

  • "The population, banks and the Government forgot that these ever increasing tax receipts ... were cyclical"

  • Throughout the boom, GDP was inflated by "one-off factors" such as immigration from Eastern Europe

  • Despite the booming economy, the National Debt sky-rocketed, "from £311bn in fiscal year 2000/01 to a staggering £806bn today or from around £20,000 per family of 4 to £53,000"

  • Servicing this debt is not cheap: "debt repayment will rise from £31m in 2008/9 to around £70bn in 2013/14 or more than twice the current defence budget"

  • Despite attempts at spending cuts, "the total accumulated State debt will within 5 years be likely around, on a best case scenario, £2,300bn or over £150,000 a family of 4"

  • Faced with artificially low interest rates, consumers stopped saving, and took on debt: "the savings ratio has traditionally been in a range of between 8-12% ... since 1997 it has fallen and even went negative in late 2007"

  • In the short term, Quantitative Easing (printing money) "allows the Government to maintain ... its highly imprudent spending policies"

  • In the longer term, QE presents "a substantial risk to the further depreciation of sterling"

Time to emigrate? Though I love this country, I'm thinking about it. My decision rests on two questions:

  • who will win the next election?

  • will they have the courage and far-sightedness to radically reduce spending, overhaul the financial system, and introduce Sound Money?

Stewart asserts that "it is critical that we re-create a sustainable, lower leverage, small state entrepreneurial economy", and provides some specific recommendations:

  1. "the deficit must be controlled with massive cut backs"

  2. "an end to QE"

  3. "much more prudential control over bank lending"

  4. "encourage saving to re-build wealth in the future"

He concludes:

While my modest proposals above will result in short term austerity they will help provide the building blocks for longer term renewal and greater sustainable growth.

The current policy won’t. It is short term, imprudent and misunderstands the nature of true wealth creation.

I wholeheartedly recommend the full article.

No comments:

Post a Comment