In the UK as the election approaches the main thing the most political parties agree on is that the economy needs to grow and grow fast to give us all a “better” standard of living and to pay for the social services (including the NHS).
What is the economy? I’m sure to many it is something they’ve hear of, but have paid very little attention. They may think they even know what it means. However, in a straw poll amongst some friends the most consistent view was its about how much money the country makes selling it goods and services to other countries.
Surely that is international trade? Part the economy but not the whole. The dictionary defines economy as “the state of a country or region in terms of the production and consumption of goods and services and the supply of money.”
There would appear to be three elements then: Production, Consumption and The Supply Of Money.
Money Supply first
(this basically shows that the government has almost no control over the money supply, so if you can’t be bother skip to the next section)
In the UK (and most other countries) you may think the government controls the supply of money. Well you are wrong. The Government controls how much money is printed/minted but most money exists as numbers in the computers of commercial banks.
The reality of how money is created today differs from the description found in some economics textbooks:
So the government (via the Bank of England) can at best influence the supply of money through interest rates and quantitative easing (QE).
Interest rate theory
By lowering interest rates people and businesses can borrow more as their income enables them to afford the repayments. These borrowings enable them to buy more or invest more. Well what if you don’t want to buy more? Your job security maybe uncertain, or perhaps you have most of what you need (I have one suit why do I need another?). As a business it’s about what I can sell. If my market does not offer me growth (saturated or competition) why am I going to invest? More efficient machinery maybe. That machinery needs to earn its keep and has to be paid for even if I can’t sell more or if the market shrinks. People are on a salary and can be “let go” if the market shrinks keeping cost in line with revenue.
The upside of lower interest rates, buying more or investing more, would grow the economy, but that is not what is happening. It affects savings, my bank pays 1% on savings. It’s not hard to find share dividends that pay 4% (and that’s without growth in the share value). So what is happening people are investing in shares and the stock market is rising.
It is mainly the young that are trying to accumulate “assets” house, washing machine, car etc and they have the least savings and least job security to borrow against.
Quantitative Easing Theory
QE is about putting more money in the economy. This too (like low interest) is intended to encourage spending and investment. However, unlike interest this is not given to everyone but given to large financial companies. These companies suddenly have a lot of cash. They could lend it but those that could afford to pay it back don’t want it and those that need it are too risky to lend to so … they put it in the stock market, for the same reasons as all savers (those with more money than they need to spend). This is not even close to rocket science!
Production
Production in the UK has (since Thatcher’s time) been switched from Goods (physical products) to Services. There are some manufacturing businesses, but these (with some exceptions) rely on brand reputation rather than innovative. Many of the larger brands are owned or have major share holdings by overseas companies or investors that take the profit out of the UK. Our water industry, telecommunication, energy, rail and lately NHS are all leaching money out of the UK economy.
There is a scheme to sell your property and still live there. It’s called “equity release”. Now the companies that give the money need to make a profit so they give you less than the house is worth (even if you only have 24 hours to live). They reduce that amount depending on how long you have to live and may take into account that prices will go up. Whichever way you look at it you get back less than if you kept it and passed it on to your descendants. Why would you do it unless you had no choice! Yet the government has sold of tax payer assets to companies that gave a windfall to the exchequer (that has long been spent) and the tax payer now has to buy the services form private companies. These may have been poorly run nationalised business but they now produce huge profits which leave the country. What was needed was better management not sell them off. With improved management these profits would be surpluses that would feed into the exchequer year after year. Whether the costs of these services was reduced or the tax burden was reduced it would put more money in the economy, just like low interest rates and QE.
Consumption
Several things have depressed consumption. Uncertainty about the future for people and businesses as well as the insecurity of jobs and low pay. On the individual basis this has affect the young and the poor far more than the rest. The young have usually been the ones aspiring to own their own car and house. The ones that buy transient fashions to look good. The old (over 45) buy functional and probably already have it. They have a mortgage that they can see the end of, if not already paid off. They have a house that may need decorating every 4-7 years, but they also have DIY skills. They have saving and investments. They don’t need to borrow even if something major happens. What they do consume more of is health and care services. So on the one hand you have a group that can’t spend and a group that won’t spend. When it comes to businesses these people are their market. With the exception of HDTV and smartphones little new “must have” new technology has evolved in the last 10 years. Cars, white goods, brown goods etc have all become more reliable. I’m using a word processing software that is not the latest but does more than I will ever need. Why change it? The main growth area for the old and rich is entertainment, leisure, pleasure and experience. Sadly that doesn’t equate to buying UK “production”
In conclusion
The economy may be hugely important to getting richer (that doesn’t mean happier). The current theory (shared by all the major parties) is flawed. Even if it wasn’t flawed there seems little that they can do. As they cut back spending they increase uncertainty and risk. As they deprive the poor and the young they starve the very people that will buy the economic growth. Personally I think a sustainable, cooperative and more equal society would correct the economy as a by-product.
What is the economy? I’m sure to many it is something they’ve hear of, but have paid very little attention. They may think they even know what it means. However, in a straw poll amongst some friends the most consistent view was its about how much money the country makes selling it goods and services to other countries.
Surely that is international trade? Part the economy but not the whole. The dictionary defines economy as “the state of a country or region in terms of the production and consumption of goods and services and the supply of money.”
There would appear to be three elements then: Production, Consumption and The Supply Of Money.
Money Supply first
(this basically shows that the government has almost no control over the money supply, so if you can’t be bother skip to the next section)
In the UK (and most other countries) you may think the government controls the supply of money. Well you are wrong. The Government controls how much money is printed/minted but most money exists as numbers in the computers of commercial banks.
The reality of how money is created today differs from the description found in some economics textbooks:
- Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.
- In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits
So the government (via the Bank of England) can at best influence the supply of money through interest rates and quantitative easing (QE).
Interest rate theory
By lowering interest rates people and businesses can borrow more as their income enables them to afford the repayments. These borrowings enable them to buy more or invest more. Well what if you don’t want to buy more? Your job security maybe uncertain, or perhaps you have most of what you need (I have one suit why do I need another?). As a business it’s about what I can sell. If my market does not offer me growth (saturated or competition) why am I going to invest? More efficient machinery maybe. That machinery needs to earn its keep and has to be paid for even if I can’t sell more or if the market shrinks. People are on a salary and can be “let go” if the market shrinks keeping cost in line with revenue.
The upside of lower interest rates, buying more or investing more, would grow the economy, but that is not what is happening. It affects savings, my bank pays 1% on savings. It’s not hard to find share dividends that pay 4% (and that’s without growth in the share value). So what is happening people are investing in shares and the stock market is rising.
It is mainly the young that are trying to accumulate “assets” house, washing machine, car etc and they have the least savings and least job security to borrow against.
Quantitative Easing Theory
QE is about putting more money in the economy. This too (like low interest) is intended to encourage spending and investment. However, unlike interest this is not given to everyone but given to large financial companies. These companies suddenly have a lot of cash. They could lend it but those that could afford to pay it back don’t want it and those that need it are too risky to lend to so … they put it in the stock market, for the same reasons as all savers (those with more money than they need to spend). This is not even close to rocket science!
Production
Production in the UK has (since Thatcher’s time) been switched from Goods (physical products) to Services. There are some manufacturing businesses, but these (with some exceptions) rely on brand reputation rather than innovative. Many of the larger brands are owned or have major share holdings by overseas companies or investors that take the profit out of the UK. Our water industry, telecommunication, energy, rail and lately NHS are all leaching money out of the UK economy.
There is a scheme to sell your property and still live there. It’s called “equity release”. Now the companies that give the money need to make a profit so they give you less than the house is worth (even if you only have 24 hours to live). They reduce that amount depending on how long you have to live and may take into account that prices will go up. Whichever way you look at it you get back less than if you kept it and passed it on to your descendants. Why would you do it unless you had no choice! Yet the government has sold of tax payer assets to companies that gave a windfall to the exchequer (that has long been spent) and the tax payer now has to buy the services form private companies. These may have been poorly run nationalised business but they now produce huge profits which leave the country. What was needed was better management not sell them off. With improved management these profits would be surpluses that would feed into the exchequer year after year. Whether the costs of these services was reduced or the tax burden was reduced it would put more money in the economy, just like low interest rates and QE.
Consumption
Several things have depressed consumption. Uncertainty about the future for people and businesses as well as the insecurity of jobs and low pay. On the individual basis this has affect the young and the poor far more than the rest. The young have usually been the ones aspiring to own their own car and house. The ones that buy transient fashions to look good. The old (over 45) buy functional and probably already have it. They have a mortgage that they can see the end of, if not already paid off. They have a house that may need decorating every 4-7 years, but they also have DIY skills. They have saving and investments. They don’t need to borrow even if something major happens. What they do consume more of is health and care services. So on the one hand you have a group that can’t spend and a group that won’t spend. When it comes to businesses these people are their market. With the exception of HDTV and smartphones little new “must have” new technology has evolved in the last 10 years. Cars, white goods, brown goods etc have all become more reliable. I’m using a word processing software that is not the latest but does more than I will ever need. Why change it? The main growth area for the old and rich is entertainment, leisure, pleasure and experience. Sadly that doesn’t equate to buying UK “production”
In conclusion
The economy may be hugely important to getting richer (that doesn’t mean happier). The current theory (shared by all the major parties) is flawed. Even if it wasn’t flawed there seems little that they can do. As they cut back spending they increase uncertainty and risk. As they deprive the poor and the young they starve the very people that will buy the economic growth. Personally I think a sustainable, cooperative and more equal society would correct the economy as a by-product.
