1 The current economic crisis was caused by China. In warfare, you can bring an opponent to devastation by dropping bombs. China didn’t need war or bombs, it had a Weapon of Mass Financial Destruction, which proved far more powerful. By keeping a low value currency and lending cheap money to the West, it brought western economies to their knees for at least a decade. Cheap money caused the wrong decisions: consumers and businesses had cheap money to push housing and other asset prices ever higher, bankers had cheap money to gamble, and politicians cheap money to buy votes. Now as alcoholics with hangovers, we blame each other for our drinking binge, while the barman stands smugly in the corner, having served us ridiculously cheap drinks all night. Was it a deliberate Chinese strategy? All I can say is that no economist nor economic theory would have predicted a poor country lending huge amounts to rich countries at about 4 per cent, while economic opportunities at home were over 10 per cent.
2 The UK economy was saved by the weakness of the pound. For a long time £1 bought €1.50, now it buys less than €1.20. Similarly, against the dollar the pound dropped from $1.75 to $1.50 over the same period. With the global financial crisis dominating events, the devaluation has largely escaped public scrutiny. If the UK government had made a plan to devalue the pound by 20 per cent, there would have been widespread debate and maybe even protests from importers and the rest of Europe. With a floating and weak currency, the UK has quietly enjoyed what countries like Greece are desperate for. It means that wages and prices have been slashed in global terms and have remained competitive. Thank goodness the UK is not in the euro, or it may have been worse off than Greece. I’m amazed the eurosceptics don’t make more of it.
3 The “Arab Spring” – the evolution or revolution that started in Tunisia, transformed Egypt and is surging in Syria – was not really sparked by politics. It was sparked by food. Global food prices doubled through 2006 and 2007, and hungry people are unhappy people. This is an incidence of what I see as a fundamental phenomenon: economics leads politics. Thatcherism, another example, was a dose of medicine that was only tolerated because the British economy was a basket case by the late 1970s. France needs a Thatcher, but won’t get one until things get worse.
4 Governments cannot be trusted to choose the size of the government deficit (or surplus). Instead, an independent, non-political board within the Treasury should set the levels of total spending and taxation, according to the prevailing economic cycle and without pandering to winning short-term votes. John Maynard Keynes taught that running deficits was an effective treatment for recessions, but governments have abused that in boom times. Gordon Brown’s worst achievement was his overspending, which left government finances perilously weak going into the current crisis. Brown’s greatest achievement came in 1997, when he gave the Bank of England complete freedom to set interest rates, free of political pressures. Now, the same should be done with the size of government. It would impose a new culture. No more “bottomless pit” and expectations that our kids should fund our lifestyle.
5 Wages will equalise around the world. It may take 20 years, 50 years or 100 years, but it is inevitable. With falling trade barriers and ever-greater mobility of production, finance and labour, it simply doesn’t make sense that workers will be paid dramatically more in one country than another. There will be an averaging of labour rates – real Western wages will fall relative to rising wages in the East and other emerging economies. With 2bn unskilled workers becoming “available” to the global economy, the gap between skilled and unskilled labour rates will widen. Expect more social dis-harmony, and make sure your kids are educated or entrepreneurial.
Richard Farleigh has operated as a business angel for many years, backing more early-stage companies than anyone else in the UK. www.farleigh.com