Wednesday 31st October 2007: 8pm
Gold is knocking on the door of $800 ($795.30 on Kitco right now) following another currency-debasing rate cut from the Fed (1/4 point this time). Also at £382.18 Sterling, it is close to the above the 1980 high in Sterling (about £374); not quite at last year's all time high of about £384 - but close!
Happy Hallowe'en! We have inflation like in the 1970s but here's a reason why you won't get a wage-price spiral; we'll just get a price spiral.
Q: Why, Dave?
A: This isn't the 1970s.
It might be like it in some aspects but not in all.
In the 1960s the British Pound was devalued, much to the disgust of the British public. It was seen as a humiliation. A similar thing almost happened when Britain was squeezed out of the European Exchange Rate Mechanism (ERM) in 1992 when the then British Chancellor was alleged to have been singing in the bath in celebration. The public didn't like it on either occasion, because they correctly saw it as debasement of their own savings. As we move ever further from the time of the Gold Standard, people are ever less aware of these mechanisms. This is why US politicians can get away by saying that the devaluation of the US Dollar will be good for the economy, when in fact it will turn it into a banana republic full of impoverished people who cannot afford anything if they ever get to travel abroad.
Differences between the 70s and now:
1. Inflation figures deliberately exclude food and energy costs (e.g. 'Core Inflation' figures in the USA), calling them 'volatile' when in truth lately they haven't been volatile - they have just been going straight up. Some of the public will still buy the lie of low inflation economy Many times on the UK media you hear of "prices of this and that going up more than the rate of inflation" - never less. This is puzzling unless you conclude that the inflation statistics are lies. Ha! Everything is going up faster than the rate of inflation!
2. We are in the midst of a huge mass immigration into many countries, including the UK, legally and illegally. The purpose of this government policy, is, as ever, to lower labour costs and tighten the jobs market, to benefit the corporations that sponsor the governments, to 'buy votes' and to increase the number of taxpayers, exploiting the immigrants and those already resident in the country. Don't get me wrong, because some of my best friends are immigrants; in fact, my best friend is a Filipino. Well, actually, he's British now and I went to his family's citizenship ceremony only last week. It just amazes me how government can exploit us all and stifle all debate about the issues affecting our country, for the most cynical of motives. Therefore people coming from "poorer" countries (often with relatively weak domestic currencies) who may be willing to take lower wages will keep wages low whilst prices are rising. I say weak domestic currencies because these people often send currency to their families in their country of origin, where its buying power is greater. So on a moderate wage in the host country, they can send a fraction of it home to buy property, etc. and have a chance to retire wealthy in their country of origin. Results of the mass immigration: lower wages for the reasons mentioned above, tighter jobs market due to more supply of workers and therefore, lower wages again.
3. Labour Unions have nowhere near the strength that they did in the 70s. In fact they are almost non-existent by comparison. In the 70s, the labour unions were very powerful in the UK and were always being invited around to Number 10 Downing Street for beer and sandwiches with the Prime Minister. The were famous and appeared on national TV news almost daily. They dictated large wage increases - demands often backed up by mass strike action in the huge and inefficient nationalised industries of the railways, the mines, the car industry, the steel industry, etc.
4. The 'small guy' in the private sector didn't have this privilege, though he still might be a union member and might be able to attempt to use these large public sector wage deals as an example to follow. So it might have helped him to secure a better deal, but not as good a deal as those in nationalised industries. After all, nationalised industries could make losses at the taxpayers' expense; trading losses in private industries meant bankruptcy for the company and redundancy for the workforce. Of course, the longer term consequences of large percentage public sector wage rise deals were higher taxes and higher inflation for everybody.
5. The existence of the National Curriculum in State schools means more tight micromanagement of everything that children learn and therefore, worse, more restrictive education, leading to a homogeneous mass of propagandised young adults. The government surely wouldn't encourage anyone to teach anything that might jeopardise the growth of government. Time available for teaching and discussion of the problems caused by oversized governments and their policies is likely to be close to zero. Any economics taught will be Keynesian, to back up the policies of the Government. This includes funding for teaching and research at Universities. Dissenting ideas will be strangled, as they already are.
This is why a wage-price spiral is unlikely: mass immigration, suspect government statistics and propaganda, poor education, weak labour unions, low membership of labour unions and lack of large nationalised industries to lead 'worker power.'
So, we will just get a price spiral. Consequence: most people will get poorer by 1% for every 1% of real 'inflation' in the cost of living, with no compensating mechanism.
Tough. This is what we voted for in our proud 'democracies' and that's what we will get.