A Warning for 2018/19

 

WEEKLY COMMENT 4-01-2018

By Barry Edwards

A Warning for 2018/19

With most stock markets around the world at record levels and the majority of countries experiencing growing economies, looking forward over the next year, it looks very promising for the world economy. But somehow it does not feel like everyone is convinced that we are in a period of long-term growth and good fortune. In fact, many commentators and economists are uncertain how to predict the outcome of Brexit, the tax cuts in America and other life changing events occurring worldwide.

Looking at the medium term from a UK perspective for companies varies substantially depending upon which kind of business activity is being undertaken. Clearly, if you are dependent on mainland Europe for supplies and sales, it must be difficult to decide what to do now. However, if your business is not relying on the EU, the growth worldwide will be a big advantage in helping to improve order flow. This is the reason that we see the variety of responses to the research about Brexit and how it will ultimately affect the UK.

Reports from around the world reveal confidence has returned for those involved in commercial activity but it has not filtered down to all the employees, especially at the lower levels of responsibility. There has been a lot of research by the think tanks around the world exposing this inequality and the consequences that may result from it if it continues much longer. Therefore, it appears we have a situation where there is a lot of resentment about working opportunity and living standards generally which are beginning to be reflected politically.

Every continent around the world has been affected in some way by the financial crisis which has suppressed the reaction to lacklustre growth by many in societies worldwide. Now growth is returning to all regions of the world the divisions are being exposed and it has the potential to cause serious problems within all societies. In my view, this is where the real threat to world growth will come from and it is probably the reason that some people have doubts about the optimistic outlook for 2018.

Some economists are beginning to group together to look more thoroughly at the fundamental problems they see around them and are trying to devise better ways of analysing the economy. Current theory does not seem to provide the answers to controlling a rapidly changing business environment with technology progressing at the pace it is. Companies are developing their techniques to provide services and manufacture products which do not require as many staff; these days the more mundane work can now be administered by computer software entirely. This is forcing many people who used to work for these businesses into the position of having to find other jobs that tend to be part time and sometimes less rewarding. The benefits of secure employment are gradually being dissolved except for the largest companies.

What we have is a rapidly changing working environment that does not respond to the traditional methods of governmental influence to control the process creating an unfamiliar social experience that no one is quite sure how to manage. It leaves many people unsure about their role in life and not able to see clearly how their future will unfold. The classic comparison is the industrial revolution in the nineteenth century which transformed society but while it was happening it caused tremendous upset to the living standards of most people.

The current welfare system protects everyone from the worst effects of those times but while the change is taking place it can stimulate reaction against those that are better off and able to manage their affairs both socially and financially. We are beginning to see this in many nations worldwide and it could get out of hand if the politicians do not address this problem before the swell of resentment becomes uncontrollable.

This is what the forward thinking economists are trying to resolve but currently there is no framework for the politicians to implement to counteract the inequality problem. There are some things being done such as the gradual increase in the minimum wage to reduce the cost to the tax payer of making up the difference to a living wage. New laws are being introduced to provide some protection for those working in the new economy and minimum payment for those in contracted employment. This is all very new and is yet to be fully tested in the real world.

The structure of this new economy, especially for those without secure employment, is where the problems could occur if growth begins to fade away because of Brexit. Most of these new jobs have materialised during the last five years as the UK became the fastest growing economy in the developed world. That is now being reversed and if unemployment starts to rise the government may struggle to control the backlash while it seems to be solely concentrated on the Brexit negotiations. The political framework is particularly weak at this time which could lead to sudden change that nobody expected. This may send the economy into recession which almost certainly would lead to calls for an election.

The medium term outlook for the UK is uncertain in my view and events could unfold that no one has foreseen making life very difficult for government and the nation as a whole.

That’s all for this week, more observations next week.

1 thought on “A Warning for 2018/19”

  1. Yes there are definitely more socail / political problems around the world that are creating uncertainty expceially in the developed economies.

    The only thing which I have in my armoury to counter this is my course on Macro-economic Design and Management in which we look at reforms to the lending and savings sector in particular but also at the entire economic design and management.

    Tim Hosking studies causes of social breakdown. Having studied 40 different schools of economics this is what he says about mine:

    he following are key economics models taught at universities. They all have some well-considered logic. But when you take into account Behavioural Economics they all contain fatal flaws.

    1. Keynesian Economics – an excellent understanding of managing economic cycles. My concern was that the human behaviour has a narrow pattern of normal – going between exuberance and panic and requiring a control tighter than what governments were capable of and politicians willing to react to. An easier, quicker adjusting model, along clearer defined parameters, would be the Ingram Model.

    2. Laissez Faire Capitalism – uncontrolled competition consumes wealth with most of the competitors drained and few very well off. Wealth stripping means that the consumer base is impoverished and fewer of the competitors survive. A restricted field would mean more can healthily compete and grow themselves and the economy. The Ingram Model is not a complete solution but aids the prevention of wealth stripping.

    3. Monetarism – The Ingram Model would replace this in a more controlled and less volatile fashion.

    4. Marxism – The goal of social sharing of resources was raised during the period of vast wealth differences. Unfortunately, this was only partly resolved by revolution. Behavioural Economics was replaced by desire and ignored the fact that people want more. Marxis­­­m replaced the obstructions of the Nobility with that of their system. By curbing wealth stripping the Ingram Model moves in the right direction.

    5. Game Theory, Zero Sum Games – John Nash (Beautiful Mind), John Neuman amongst others. These brilliant models are corrupted in a Macro environment by political interference, slow reaction times and Dualism. In a sense they work when their scope expands to include these interferences but they become less relevant to the problem. The Ingram Model will curb the interferences allowing the Macro Economic scope to be reduced to the immediate problem.

    6. Positive Money – This influential UK group is looking at what some people call ‘QE for the people’ whereby money is created and given to the government or the people to spend rather that using the Keynesian ‘borrow and spend’ approach or reducing interest rates. The Ingram Model is significantly better thought out but is little known in the UK. It acts faster, protects small businesses better, has a better balance, better control, is less complicated, and has a damper which automatically protects the economy and savings if too much money is created.

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