"Everything’s just so expensive!"
This was from my South African friend, Alex, who was working out her household bills yesterday. She’s been in London for less than a year, and is still adjusting.
I was reminded of her comment this morning by something I saw on the Underground. A flyer which posed the question: ‘London more expensive than you thought?’ It was an ad for a loan company. "Ah," I thought. "Some people still trying to borrow their way out of trouble..."
New Londoners aren’t the only ones tempted to do this of course. Despite the mess the public finances are in, the temptation to spend more - and bung it on the credit card - must be overwhelming for the government right now.
You see, as the cost of living rises, voters get disgruntled. Incumbent governments fear nothing more than disgruntled voters. If they could drop some (borrowed) money into the economy... stimulate some ersatz growth, then, maybe, they’ll buy themselves some time... The temptation is surely there.
This wouldn’t work, of course. Sure, the money would filter down, and find its way into our wage packets. But it would also find its way into prices. We’d see the classic dynamics of a wage-price spiral.
Here are three, closely-related reasons to be wary of such a spiral:
1. Exogenous price rises
This is the rising price of basic commodities - like food and energy - which is caused by factors outside of our domestic economy. Let’s take the price of gas as an example.
A report by MPs today accuses gas retailers of conspiring to raise prices. This may be true. But it may be the case that gas retailers know wholesale prices are set to rocket. Each retailer knows its competitors can’t afford a price war, so there’s an incentive for prices to creep up.
Britain is in poor shape when it comes to gas. North Sea supplies used to offer some protection from volatile global prices. Not any more. Now we’re a net importer of gas. We’re particularly ill-prepared for a crisis - Britain has only 13 days’ worth of gas storage, compared to 99 days’ in Germany and 122 in France.
The upshot is that energy-poverty will become a reality for more and more Britons. As it does, expect wage demands to rise in tandem.
A report by MPs today accuses gas retailers of conspiring to raise prices. This may be true. But it may be the case that gas retailers know wholesale prices are set to rocket. Each retailer knows its competitors can’t afford a price war, so there’s an incentive for prices to creep up.
Britain is in poor shape when it comes to gas. North Sea supplies used to offer some protection from volatile global prices. Not any more. Now we’re a net importer of gas. We’re particularly ill-prepared for a crisis - Britain has only 13 days’ worth of gas storage, compared to 99 days’ in Germany and 122 in France.
The upshot is that energy-poverty will become a reality for more and more Britons. As it does, expect wage demands to rise in tandem.
2. The impotence of monetary policy
As touched on above, much of the inflation we’re seeing right now is exogenous. The price of food and fuel is soaring - but not because of an overheating domestic economy. Rather it is rising global prices that are causing the pain. This is something the Bank of England can do nothing about.
Of course, raising interest rates - the usual inflation remedy - would not be without consequence. It would still be felt in the form of higher mortgage repayments. But rather than dampen inflation, such action could actually stoke it further. Why? Because higher rates would add to the cost of living - and to the volume of wage demands.
Of course, raising interest rates - the usual inflation remedy - would not be without consequence. It would still be felt in the form of higher mortgage repayments. But rather than dampen inflation, such action could actually stoke it further. Why? Because higher rates would add to the cost of living - and to the volume of wage demands.
3. The unions’ hold over Labour
Of course, for wage-price spirals to happen, it’s not enough just for employees to demand higher wages. Employers also have to grant them. But since many people’s employer is the government, there’s a strong likelihood that such demands will be granted.
Just today we see that Labour has granted concessions to the unions. Among these are the extension of minimum wage to younger workers and increased parental leave.
And the unions are confident of wringing more juice from the orange. "This is only half time," said one union leader, "it is not the final whistle."
Unions have good reason to be confident - they effectively fund the Labour party. In the fourth quarter of last year, Labour raised £5.9 million in donations. Seventy-seven percent came from the unions.
Just today we see that Labour has granted concessions to the unions. Among these are the extension of minimum wage to younger workers and increased parental leave.
And the unions are confident of wringing more juice from the orange. "This is only half time," said one union leader, "it is not the final whistle."
Unions have good reason to be confident - they effectively fund the Labour party. In the fourth quarter of last year, Labour raised £5.9 million in donations. Seventy-seven percent came from the unions.
The one thing that could prevent a wage-price spiral is, ironically, the thing we fear most - recession. If it happens soon, and is sufficiently sharp, then it could jolt more of us into accepting lower living standards. The alternative to acceptance is a process by which we get more money in our pockets, but are no better off because of increased inflation.
Recession will bring many of its own problems. But they could turn out to represent the least of the various evils on offer to us right now.
[NB As well as writing Fleet Street Daily, I also edit our sister publication The Fleet Street Letter. Our latest report is about an investment opportunity that, despite the current malaise, offers excellent long term potential. Find out more here]
Britons urged - don’t have 3 kids
Doctors writing in the British Medical Journal have urged parents to have no more than two children.
The reason? To save the environment.
"Each new UK birth will be responsible for 160 times more greenhouse gas emissions ... than a new birth in Ethiopia." write the report’s authors.
A fair point, maybe, but their prescription is doomed to failure. Our commodities man, Garry White, has been looking at population.
"There’s no way the population train will be derailed, despite good intentions," he says.
Find out why Garry reckons the planet’s population problems are set to continue - and why they’ll have major investment implications
Until tomorrow
Ben Traynor
The Daily Reckoning - The whole world bobs on a frothy sea of cash
Readers unfamiliar with modern macro-monetary theory would probably like to stay that way. But that doesn’t stop us from limbering up in order to pitch the system at you.
Last November, Wachovia Bank of the Tar Heel State was worth more than $100 billion. Two weeks ago, it was worth $20 billion - after confessing a loss of more than $8 billion in the second quarter. But yo ho...last week it was back up to $37 billion.
What’s going on? Well, many people will tell you that the banks are coming back. Don’t believe it. The boom in finance is over. Two more banks failed over the weekend - First Heritage of California and First National of Nevada.
You can read the Daily Reckoning in full here
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