The media are applauding the G20 rescue plan even before it's been announced - heralding the "sheer scale" of the stimulus which amounts to less than one trillion dollars.
The big surprise today will instead be the sheer scale of the extra sums made available in new loans and other liquidity boosts, particularly to kickstart growth in the emerging markets of China and Latin America.
Like China has a big problem! Sure their growth has been cut by half, but they are still growing - unlike Europe or the USA. I have to admit that one trillion dollars sounds like a lot of money - but it isn't in the context of this financial crisis. It is the merest drop in the ocean of debt - it amounts to roughly one third of the debt owed by the UK alone. When you consider it in the context of global debt it amounts to sticking a plaster over a gaping bullet wound.
This isn't going to rescue anything - it might stave off the inevitable for a few more months, but it will not prevent the world slipping into depression and it is a depression that will hurt Britain more than most - because we no longer make enough of anything to sell to ourselves or the world.
Only one thing will work to revive our economy - protectionism. Nothing else will stop us becoming an economic basket case and remaining one for some years until we start to produce something ourselves. The trouble is, we've become so used to our ever improving living standards that we can not conceive the possibility of them declining significantly - but they will.
I really don't think many people actually understand the potential decline that we're going to suffer, but it will be massive. There will be 4-5 million unemployed (on top of the 4-5 million already not working for various reasons) and average incomes will halve unless we start now to take steps to prevent it.
Showing posts with label Capitalism. Show all posts
Showing posts with label Capitalism. Show all posts
Thursday, April 02, 2009
Wednesday, March 25, 2009
You can not buck the market
In the post I referenced on Iain Dale's blog yesterday, I left a comment about the fallacy of "capitalism with a conscience" which someone replied to. Their reply was the standard "head in the sand" response and full of holes. Here is what they said.
"Yep, the law of comparative advantage. Excellent isn't it? Country A can use its comparative advantage to get wealthier by making trainers and country B can move on and make higher value added products which it can sell to country A because it is now wealthy enough to buy them. Free trade. Doncha just love it?"
First of all, the "law of comparative advantage" is not a law. It is a theory based on bilateral trading agreements between nations. It assumes that each of the two countries trading have things that the other can either not make at all or can not make at reasonable costs. It works very well when you have something that another country does not - like oil, as the Middle Eastern nations know only too well - but when you don't, it sucks.
Secondly, the author forgets that there is a basic law of markets which is that a market will always work to find a level. In other words, market distortions have to be eradicated and an equilibrium reached. Globalisation creates market distortions - so the market has to adjust to eradicate those distortions.
Using trade tariffs and restrictions we can compensate for that, but without these things in place there is only one way that the market can find a level - production costs. Either theirs has to rise until it balances with ours or ours has to fall to balance with theirs - and it has to balance quickly.
As good an indicator of production costs as any is GDP per capita. In the UK this is around $37000 per person per year. In China it is $6400 per person per year and in India it is $2900 per person per year.
Just as a company producing trainers can not compete against another company with considerably lower production costs, neither can a country. In the absence of trade restriction, the market has to find a balance.
The person who responded to my comment suggested that we move on to selling "higher value added products". They didn't say what these were, but it is either a stupid or an arrogant suggestion. It is stupid because, in a globalised economy, companies will move their production to wherever it is cheapest whatever it is they are making. If costs are broadly similar then there is also some sense in moving your production to wherever the market for your goods is. If the market is also where production costs are considerably cheaper there is absolutely no point whatsoever in retaining a high cost production facility in the west when you can do it cheaper in China and the Chinese are the ones buying what you make!
It is arrogant because it assumes that those emerging economies are too backward to produce those "higher value added products" - it is saying, "don't worry, we're just go on to making stuff they can't". Who says they can't? Nations like China and India are churning out hundreds of thousands of high calibre graduates every year - with degrees in technical skills - and they all get jobs. Here, meanwhile, the relatively few graduates we produce struggle to find enough graduate placements for their skills. We have the most highly educated bar staff in the world, but something tells me that isn't going to be enough to base our economy on.
The technology gap closes very quickly - particularly when those emerging economies have become industrial giants in their own right - and you can not buck the markets. Recessions happen when a market becomes distorted and has to correct itself. Depressions happen when this happens on a global scale and the market distortion is even more marked. The market correction we are seeing now is as a result of the disparity between the per capita wealth of the emerging economies and our own - the market has to find a level.
This can not be stopped by pumping money (which you don't have) into an economy that produces nothing the world wants in the global market or that it can not produce itself for less. It can only be stopped by employing mechanisms to compensate for the market distortions and that - whether you like it or not - means protectionism.
"Yep, the law of comparative advantage. Excellent isn't it? Country A can use its comparative advantage to get wealthier by making trainers and country B can move on and make higher value added products which it can sell to country A because it is now wealthy enough to buy them. Free trade. Doncha just love it?"
First of all, the "law of comparative advantage" is not a law. It is a theory based on bilateral trading agreements between nations. It assumes that each of the two countries trading have things that the other can either not make at all or can not make at reasonable costs. It works very well when you have something that another country does not - like oil, as the Middle Eastern nations know only too well - but when you don't, it sucks.
Secondly, the author forgets that there is a basic law of markets which is that a market will always work to find a level. In other words, market distortions have to be eradicated and an equilibrium reached. Globalisation creates market distortions - so the market has to adjust to eradicate those distortions.
Using trade tariffs and restrictions we can compensate for that, but without these things in place there is only one way that the market can find a level - production costs. Either theirs has to rise until it balances with ours or ours has to fall to balance with theirs - and it has to balance quickly.
As good an indicator of production costs as any is GDP per capita. In the UK this is around $37000 per person per year. In China it is $6400 per person per year and in India it is $2900 per person per year.
Just as a company producing trainers can not compete against another company with considerably lower production costs, neither can a country. In the absence of trade restriction, the market has to find a balance.
The person who responded to my comment suggested that we move on to selling "higher value added products". They didn't say what these were, but it is either a stupid or an arrogant suggestion. It is stupid because, in a globalised economy, companies will move their production to wherever it is cheapest whatever it is they are making. If costs are broadly similar then there is also some sense in moving your production to wherever the market for your goods is. If the market is also where production costs are considerably cheaper there is absolutely no point whatsoever in retaining a high cost production facility in the west when you can do it cheaper in China and the Chinese are the ones buying what you make!
It is arrogant because it assumes that those emerging economies are too backward to produce those "higher value added products" - it is saying, "don't worry, we're just go on to making stuff they can't". Who says they can't? Nations like China and India are churning out hundreds of thousands of high calibre graduates every year - with degrees in technical skills - and they all get jobs. Here, meanwhile, the relatively few graduates we produce struggle to find enough graduate placements for their skills. We have the most highly educated bar staff in the world, but something tells me that isn't going to be enough to base our economy on.
The technology gap closes very quickly - particularly when those emerging economies have become industrial giants in their own right - and you can not buck the markets. Recessions happen when a market becomes distorted and has to correct itself. Depressions happen when this happens on a global scale and the market distortion is even more marked. The market correction we are seeing now is as a result of the disparity between the per capita wealth of the emerging economies and our own - the market has to find a level.
This can not be stopped by pumping money (which you don't have) into an economy that produces nothing the world wants in the global market or that it can not produce itself for less. It can only be stopped by employing mechanisms to compensate for the market distortions and that - whether you like it or not - means protectionism.
Tuesday, March 24, 2009
Conscience, my arse!
Iain Dale supports Cameron's call for "capitalism with a conscience" over on his blog.
To be honest, I've not read either the Cameron speech or the blog entry, but the mere post title drives me into one of my rants. Capitalism with a conscience? It doesn't fucking exist, sunshine.
Capitalism is NOT nor has it ever been a political ideology. It is an economic system based on supply and demand, managed within markets and which performs best with light regulation. It is an economic system which is widely used by liberal western democracies, oppressive dictatorial regimes and totalitarian governments regardless of political ideology. Stop confusing capitalism with conservatism or any other political ideology - it isn't one and it sure has hell doesn't have a conscience!
This is how it works. Country A has an industry making trainers. It has a dozen or so companies all competing for business in country A and as they all have to comply with the same employment laws and regulations the production costs of their products are all within a few pounds of each other - say £30 - and a retail of around £40.
Country B has an industry making trainers, but few employment laws, a low wage economy and no qualms about either using child labour or making them work 80 hours a week. They have a dozen or so companies making trainers and as they all work within the same regulation the costs are within a few pence of each other - say £3 - retailing at £4.
For years and years country A refuses to allow country B to flog their trainers in country A and both nations have decent industries. Then along comes "free trade" and fuckwits like Cameron.
Country A removes trade barriers and cheap imports from country B start flooding in. Instead of selling them for just a quid profit they can now sell them at a £20 profit. Country B's training shoe industry thrives - country A's dies.
Country B now has a hundred companies making cheap trainers, still has bugger all employment law and still doesn't give a toss that 8 year olds are working 80 hours a week for tuppence an hour because it is earning shed loads of money from flogging trainers to stupid western nations. Capitalism doesn't have a conscience - it really is beggar thy neighbour if you let it. In fact, that is the whole fucking point of capitalism! When was the last time a BMW dealer suggested you check out the local Audi dealership instead of buying one of their motors?
That's capitalism for you. The whole point is to get an advantage over your competitors - whether that is in business or as a nation. It's great as long as you keep it inside your borders, but once you start trying make it work globally it really fucks your economy up big time - as we're discovering.
If we want a conscience with anything it is with our government - a conscience that demands that they govern according to the needs of their own people rather than anybody elses. Yes, that means British jobs for British workers and protectionism - because that means we stop importing dirt cheap products from foreign countries where they don't give a toss about employment law, child labour, human rights and oppressive government.
Anyone think Cameron is prepared to do it?
To be honest, I've not read either the Cameron speech or the blog entry, but the mere post title drives me into one of my rants. Capitalism with a conscience? It doesn't fucking exist, sunshine.
Capitalism is NOT nor has it ever been a political ideology. It is an economic system based on supply and demand, managed within markets and which performs best with light regulation. It is an economic system which is widely used by liberal western democracies, oppressive dictatorial regimes and totalitarian governments regardless of political ideology. Stop confusing capitalism with conservatism or any other political ideology - it isn't one and it sure has hell doesn't have a conscience!
This is how it works. Country A has an industry making trainers. It has a dozen or so companies all competing for business in country A and as they all have to comply with the same employment laws and regulations the production costs of their products are all within a few pounds of each other - say £30 - and a retail of around £40.
Country B has an industry making trainers, but few employment laws, a low wage economy and no qualms about either using child labour or making them work 80 hours a week. They have a dozen or so companies making trainers and as they all work within the same regulation the costs are within a few pence of each other - say £3 - retailing at £4.
For years and years country A refuses to allow country B to flog their trainers in country A and both nations have decent industries. Then along comes "free trade" and fuckwits like Cameron.
Country A removes trade barriers and cheap imports from country B start flooding in. Instead of selling them for just a quid profit they can now sell them at a £20 profit. Country B's training shoe industry thrives - country A's dies.
Country B now has a hundred companies making cheap trainers, still has bugger all employment law and still doesn't give a toss that 8 year olds are working 80 hours a week for tuppence an hour because it is earning shed loads of money from flogging trainers to stupid western nations. Capitalism doesn't have a conscience - it really is beggar thy neighbour if you let it. In fact, that is the whole fucking point of capitalism! When was the last time a BMW dealer suggested you check out the local Audi dealership instead of buying one of their motors?
That's capitalism for you. The whole point is to get an advantage over your competitors - whether that is in business or as a nation. It's great as long as you keep it inside your borders, but once you start trying make it work globally it really fucks your economy up big time - as we're discovering.
If we want a conscience with anything it is with our government - a conscience that demands that they govern according to the needs of their own people rather than anybody elses. Yes, that means British jobs for British workers and protectionism - because that means we stop importing dirt cheap products from foreign countries where they don't give a toss about employment law, child labour, human rights and oppressive government.
Anyone think Cameron is prepared to do it?
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