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Tuesday, January 06, 2009
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chefdave
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Posts:481
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| 18/06/2008 10:17 AM |
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The general concensus over at HPC is that a wage spiral-inflation is off the cards, mainly because of globalisation i.e, if british workers start demanding larger wages then industry will relocate.
If it did happen then my understanding is that those that have speculated in housing or those with large debts in sterling will be compensated as the value of the debt diminishes. Those with savings meanwhile will be punished as value of their savings weakens, also, those that are holding UK debt assets such as gov't bonds lose out as their investment becomes worthless (student debt may be different though as it's inflation linked but this is a seperate matter)
A simple currency devaluation seems fairly straightforward, it'll push up the price of imports by x amount worsening the standard of living but in turn make us more competitive in the global market.
What I'm interested in is how wage increases change the value of the pound against other currencies. I'm assuming basic goods will still take the same % of our wage packet yet our previous dents would have been trivialised thus increasing the standard of living. How would this play out in practice though? One chain of supermarkets for example couldn't adopt this strategy as with competition they would soon go out of business, which would be deflationary. Furthermore, where does all the money come from? My theory is that it may encouarge people to offload their savings as it's purchasing power is diminished thus flooding the market with unwanted £'s, although the wage-cost increas would need to happen first.
Any pointers would be appreciated.
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Asteve
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Posts:930
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| 19/06/2008 5:56 AM |
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This is the trillion-dollar question that has the treasury scratching its head and is the principle question posed by the recent speeches by Mervyn King in presenting the opinion of the Bank of England. There is clearly no right or wrong answer to the question "Will UK wages spiral" - but there are a lot of relevant things we can say with some certainty.
First, global wage arbitrage is very real... off-shoring is a reality for affluent western economies - since, even if there are no productivity gains, two efficiencies can be reaped... Firstly, while Sterling is strong relative to emerging markets, labour will be desperately cheap in emerging markets when measured in Sterling. Secondly, emerging markets have lower taxes - hence a reduced burden on employers. If UK wages are driven up by unionised labour (as was the case in the 1970s) then we are sure to see an escalation of off-shoring of jobs. If we stop measuring UK wages in Sterling, but - instead - use a basket of world currencies, UK wages are definitely not going to rise rapidly.
From the above, I arrive at my expected outcome: stagnant (or, at the very least, below RPI inflation) wages resulting in a materially lower average standard of living. This is my personal academic view.
Two things could undermine this view if interpreted as a prediction:
1. A dramatic devaluation of sterling relative to the currencies of those foreign states with which we trade.
2. A dramatic reduction in taxation and bureaucratic overhead.
The first of these two possibilities would arise, in my opinion, if the UK follows the USA in dramatically reducing the central bank rate of interest. The cost of imports (significantly, for Britain, energy; food; manufactured goods) would escalate dramatically... doubling or trebling. The upshot of this would be a dramatic slowing of economic activity and a collapse of business. (N.B. Similar risks are not present for the USA since it can buy everything it needs in US$ - given that it controls the world reserve currency.) Should there not be a complete economic collapse, we'd see an exaggerated form of stagflation - like in the 1970s - which would decimate British interests. Savings would be wiped out; the indebted would play Russian roulette between clearing their debts quickly or becoming insolvent. This would cause a significant exodus of economic migrants - as those who need income to service UK debts would, effectively, be forced to work in states with a stronger currency in order to maintain strong earnings... This would be a political disaster - and not only would the government be blamed for a house price crash, but also for seeding the worst economic crisis in living memory.
A reduction in taxes is another possibility - and, for an ailing economy, this would seem a desirable option... but we have some major problems here. Government debt is already at its Maastricht limits - and continuing to expand debt will likely become exponentially more costly. The government has increased total taxation over the past 10 years by a considerable margin... yet is still running a deficit at the end of a monster-boom period. Tories argue that reducing taxation rates stimulates industrial growth - and hence economic output - and, in turn, tax revenues... Reducing taxation when the national accounts are in a mess, however, is a real gamble... something that needs nerves of steel... so it won't be something Brown tries. The analogy would be for a self-employed person, on finding themselves in financial difficulty, deciding to substantially reduce the rates they charge. It's not an easy choice to make.
So, in summary, both mechanisms by which wage growth could be stimulated are extremely dangerous - maybe terminally dangerous - for the UK economy. Perhaps each strategy can be employed to some slight extent - but I can't see that it will have any where near enough of an impact to exceed the effects of commodity inflation and the increased cost of borrowing.
While I've meandered, I hope to have suggested that I do not see any scope for spiralling wages - and, if wages rise, these rises will more than be offset by other factors. However government reacts (excluding precipitating hyperinflation - which is the economic equivalent of Keyser Söze from "The Usual Suspects" - such a policy is so devastating that I can't imagine any western government entertaining it) we'll still see falling house prices in Sterling terms. They might fall faster if measured in Zloty or Euros - for example - but this introduces another set of uncertainties... I certainly can't reliably preduict the currency markets - if I could, I'd not be wondering about mortgages - LOL!
In spite of my academic view that wages will stagnate, from a personal perspective, I'm trying to hedge against the risk that I'm wrong by agreeing short contract terms - wherever possible. This means that, if wages rise, I'll be free to re-negotiate sooner rather than later; if the UK economy finds itself in massive problems... I can work abroad; if the price of oil collapses - and with it commodity prices and the stock markets (currently buoyed by mining and energy companies) crash... then I won't be tied to expensive contracts in future. I'm expecting further economic shocks - and am trying to make myself as flexible as possible in order to minimise my losses from them - or, ideally, to benefit. Only two things are certain:
1. We're in a massive economic mess that isn't going to disappear in a hurry - there are no viable quick fixes.
2. An attempt to intervene will almost certainly result in economic volatility.
You ask "Where does all the money come from" - and go on to talk about savings... The bad news: there are no (net) savings in Sterling to be spent. Money on a scale that matters, however, doesn't come from savings anyway... it comes from "investment". From ~1997 to ~2007 sterling money came from international portfolio investors who "lent" exponentially more cash into Sterling markets each year... they bought consumer/mortgage/student/auto-loan debts. This drove a consumer economy where pandering to (exploiting) those buying on credit was the most lucrative occupation. This is now over... while ~£200bn was "invested" as net loans to the British consumer in the year 2006-2007... (an equivalent of over £3000 per person, including children, OAPS etc.) after the credit crunch bit, investors in debt got cold feet and now want to unwind their trades... They want their money back! Portfolio investment, however, is not the only kind of investment... Direct investment would also inject money into the economy... If, for example, Dell decided to base its PC business in the UK rather than Ireland (It prefers the latter at the moment because it gets a whopping VAT incentive to base itself in Ireland) then it would have to pay English/Scottish/Welsh employees to run its operations (from its international profits) and this money would be re-spent within the economy over-and-over. The difference between direct and portfolio investment in a state is the balance of risks. With direct investment the money injected is wages; with portfolio investment, it is a loan. It should come as no surprise that with direct investment countries get richer, and with portfolio investment - they get poorer. Britain has been receiving huge sums in portfolio investment and making huge direct investments in foreign countries... as can be seen from our balance of payments. In the accounts these two balance (almost) but, in practice, it means that Britain holds all the liabilities in the event of a world recession... not only is value wiped off its international direct investments, but the risk of default drives up the interest rates it must pay on the portfolio investment it has received.
While this isn't my most lucid post, I hope I've covered a few of the bases?
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chefdave
Activist
Posts:481
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| 19/06/2008 2:10 PM |
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| Thanks! :) Nothing to add, unfortunately :( |
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Asteve
Activist
Posts:930
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| 20/06/2008 3:10 AM |
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The missing element that I consider most relevant are the recent comments by the BoE. To paraphrase, they say: "If wages look set to rise, we'll have to rise interest rates."
So, with that in mind, the inevitable push for higher wages is a distinct advantage to the priced-out crew as higher wages, paradoxically (it might seem to some) will lead to even lower house prices. |
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