Richard Farleigh - Confessions

Confessions of a Serial Entrepreneur

Excerpts of Richard’s City AM columns. As he has been too busy to continue, these are now all archived here as blog posts

Strong thinking can sort out our global hangover

Posted on July 23, 2013 | in Confessions of a Serial Entrepreneur | by Richard

I like people with strong views, especially of course, when I agree with them. Here are a few of my own. They’re rather radical.

1.The current economic crisis was caused by China. In warfare, you can bring an opponent to devastation by dropping bombs. China didn’t need war or bombs, they had a Weapon of Mass Financial Destruction, which proved far more powerful. By keeping a low value currency and lending cheap money to the West they brought western economies to their knees, for at least a decade. The cheap money caused the wrong decisions: consumers and businesses had cheap money to push housing and other asset prices ever higher, bankers had cheap money to gamble, and politicians cheap money to buy votes. Now as alcoholics with hangovers, we blame each other for our drinking binge, while the barman stands smugly in the corner, having served us ridiculously cheap drinks all night. Was it a deliberate Chinese strategy? All I can say is that no economist or economic theory would have predicted a poor country lending huge amounts to rich countries at about 4%, while economic opportunities at home were over 10%.

2. The UK economy was saved by the weakness of the pound. For a long time £1 bought €1.50, now it buys less than €1.20. Similarly, against the dollar the pound dropped from $1.75 to $1.50 over the same period. With the global financial crisis dominating events, the devaluation has largely escaped public scrutiny. If the UK government had made a plan to devalue the pound by 20%, there would have been widespread debate and maybe even protests from importers and the rest of Europe. With a floating and weak currency, the UK has quietly enjoyed what countries like Greece are desperate for. It means that wages and prices have been slashed in global terms and have remained competitive. Thank goodness the UK is not in the Euro, or here may have been worse than Greece. I’m amazed that the Euro-sceptics don’t make more of it.

3. The “Arab Spring”, the evolution/revolution that started in Tunisia, transformed Egypt and is surging in Syria, was not really sparked by politics. It was food. Global food prices doubled through 2006 and 2007, and hungry people are unhappy people. This is an incidence of what I see as a fundamental phenomenon: economics leads politics. Thatcherism, another example, was a dose of medicine that was only tolerated because the British economy was a basket case by the late 70’s. France needs a Thatcher, but wont get one until things get worse.

4.Governments cannot be trusted to choose the size of the government deficit (or surplus). Instead, an independent, non-political board within The Treasury should set the levels of total spending and taxation, according to the prevailing economic cycle and without pandering to winning short-term votes. Keynes taught that running deficits was an effective treatment for recessions, but governments have abused that in boom times. Gordon Brown‘s worst achievement was his overspending, which left government finances perilously weak going into the current crisis. Brown’s greatest achievement was in 1997 when he gave the Bank of England complete freedom to set interest rates, free of political pressures. Now, the same should be done with the size of government. It will impose a new culture. No more “bottomless pit” and expectations that our kids should fund our lifestyle.

5. Wages will equalise around the world. It may take 20 years, 50 years or 100 years, but it is inevitable. With falling trade barriers and ever-greater mobility of production, finance and labour, it simply doesn’t make sense that workers will be paid dramatically more in one country than another. There will be an averaging of labour rates – real Western wages will fall relative to rising wages in the East and other emerging economies. With two billion unskilled workers becoming “available” to the global economy, the gap between skilled and unskilled labour rates will widen. Expect more social dis-harmony, and make sure your kids are educated or entrepreneurial.

155 Comments

Audrey de Witte

I too like people with strong views. However, people with strong views aren’t necessarily right. I like an open mind as well.

I find all your 5 points interesting and am once again reminded that in economic discussions I am kind of out of my depth. I studied Economics in High School (oh that was a while ago) but have never been able to get too passionate about it.

There always seems to be so many conflicting views on why things have gone so wrong in the economic world which has brought on this global crisis. I get lost. Over the years there is one economic voice I have found myself listening to more than others, it comes from an Australian called Ross Gittins, he makes sense to me (he writes for the Sydney Morning Herald). He also seems to have a heart, which I sometimes find missing in all the economic talk I hear.

August 9, 2013 at 2:24 am

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Garry

Hi Richard,

I too like people with strong views if I agree with them. At the moment I agree with the Murdoch press here in Australia that a change of Government is necessary.

You have presented some great points of view here, and I really hope you continue with these big picture themes in your posts because I am very interested in your comments. Not the least because you get it right.
Of particular interest is your view on what caused the GFC. So much has been written on this, and yet you have summed it up in a couple of paragraphs. Makes sense to me. I am interested to know your view on how the Chinese economy will perform over the next few years.

I have heard a bit more about Thatcher recently and I have to say she achieved a lot for the UK.

August 30, 2013 at 4:27 pm

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Sean

Interesting analysis. As for the the advantages of strong thinking I think you’re overplaying your hand. I was at university in Newcastle when Mrs Thatcher was in power and saw at first hand what strong thinking about the pound shadowing the Deutschmark did to manufacturing. Newcastle fared ok as it is a regional centre for retail and services — lots of shops, accountants and lawyers– but industries in the surrounding area were pulverised. And that negative legacy remains. A service- dominated economy without a strong counterbalancing manufacturing sector — as in Germany –will tend to struggle in the new global economy. Perhaps we would have fared better if we had followed the great British tradition of muddling through. It’s different for companies of course. Strong leadership often works well. But national economies are not companies — nor as Mrs Thatcher believed do they work like households.

September 18, 2013 at 8:03 am

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Matt

Hi Richard,

I enjoyed your views and sort of agree with 1) and 3) and don’t know enough to discuss 2). I think point 4) should just read “Governments cannot be trusted”!

I agree that some of the current economic crisis has been caused by China but don’t think that cheap lending is the only reason, particularly bearing in mind the bulk of that cheap credit was at the business not personal level.

For many years China was accused of exporting deflation. Over the past 7-8 years I think it has exported inflation.

China’s urbanisation process has caused massive demand for resources and also changed eating habits causing a shortage of food in China, and a massive structural change in tradeflows of these products. Its unprecedented demand for both basic materials and food has caused a significant increase in the price for all related commodities which has had a knock on effect around the world. I do not see this ending in the near-term either. Even in the recent relatively weak growth environment food and material prices have remained at elevated levels and I reckon that as soon as China finishes this current period of consolidation we are in for another leg of price rises. The increase in material prices ran through the economies of other countries translating into relatively high inflation despite the fact that those economies may not have been growing rapidly. Over time this eroded affordability for consumers and eventually caused Western World consumers to pull in their horns causing the WW consumer-driven economies to slow. This may have presaged the collapse in the US construction sector but to make that connection is reaching quite a lot.

At the end of the day though much of the financial crisis was caused by greed – the consumer became over-leveraged, banks became over-leveraged and the house of cards came crashing down. The magnitude of that collapse is at least as relevant to the current weak economic growth than China.

As to your other point on food, I really agree about the link between economics and politics. I grew up in the 70s and 80s and for me its no coincidence that the last period of widespread global politically-linked unrest coincided with the recessions of the late-70s and early-80s. When people do not have jobs, can’t afford basic necessities and life seems hopeless it is much easier to lash out than when they are financially comfortable.

Anyway, quite a long reply, but that’s my tuppence worth!

October 10, 2013 at 6:21 pm

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James Davey

Hi Richard,
Interesting comment re having an independent, non-political board within The Treasury to set the levels of total spending and taxation. I agree with this absolutely. No political philosophy will ever solve economic problems as economics and politics are two different fields. It was Marx who married them up and thus gave a terrible tool to suppressive men.

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August 18, 2014 at 4:49 pm

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Garry

IMF have just said they overestimated growth – could be stagnant in developed economies for another 5 years.
Richard told us that in this post over 12 months ago (See point 1 ‘…at least a decade’).

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