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Editor's Blog
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10 Years of Declining UK Wages -and LESS to Come.

The latest UK Budget informed us that there has been a 10 year decline in real UK wages and that this is set to continue for the next decade. 

The blame for this unprecedented situation is almost universally attributed to the "Banking Crisis" of 2008.

If only.

The REAL explanation can be found elsewhere and goes back a whole lot further in time.

In the 1970's, China had a small economy which was growing at about 5% a year, on average. 5% of not very much is not a lot, so nothing there to shake the foundations of the Western Economies.

Since 1980, however, the picture has changed dramatically - and not at all to the benefit of the United States or Europe.

From 1980 onwards, the Chinese economy has grown, on average, by over 10% per annum. Such powerful growth has seen Gross Domestic Product increase 50 FOLD.

Meantime, India, a near-neighbour of China has also seen impressive growth.

The result? These countries, with 3 Billion citizens between them, have created significant "Middle Classes", a category of society that barely existed before 1980 in either nation.

There are probably around 750 Million nouveau riche people in China and India today. That still leaves two Billion or more in those countries living in poverty, but then that is a basic rule of the economics in which I trust. For anyone to do better than average, someone else has to do worse than average. Actually, the wealth:poverty ratio is, in my view, between 1:3 and 1:4 - but the detail of that is for another day.

Returning West, the United States and Europe really started to feel the impact of Chinese growth from the late 1990's onwards.

I recall vividly reading, many years ago now but after the start of the Millennium,  that over 60% of the non-food merchandise in supermarkets in the US was being imported from China. That immediately set alarm bells ringing in my head. How could such a huge bill for imports be sustainable?

Well, of course, it was only made sustainable through the printing of vast number of Dollars - and Euros and Pounds - and handing them over to China. Early Quantitative Easing, if you like.

As long as the Chinese simply sat on their stockpile of banknotes, all was well. The bits of paper were really IOUs, yet to be called in.

However, the Chinese saw that the value of their foreign cash mountain was being eroded by inflation, so they decided to spend it. Ironically, they used some to buy US Government Bounds, helping to keep interest rates low in that country.

Elsewhere, $ Billions have been spent by the Chinese, buying up natural resources and infrastructure around the globe.

One small example is Zimbabwe, where the Chinese have funded many Public Projects - and also an airstrip to take all the diamonds mined in the country direct to China.

In the UK, we have no diamonds available to be mined, so the Chinese are funding a Nuclear Power Station instead.

From 2000 onwards, the writing was on the wall for Europe. Basically, living standards had to fall for many here, because they were improving for others in China and India.

The "Banking Crisis" was a symptom of the problem, not the cause of it. The banks created loans to fuel their own and general economic growth, but they had to create so many of them, to fund numerous dubious "projects", that bad dead was inevitable, including that connected with the housing "bubble". There were not many sound projects to fund, because China had taken control of so many industrial sectors.

The collapse, both in the United States and Europe, was inevitable. Just the precise timing was in doubt.

There has been a recovery of sorts, but, essentially, that recovery depends on Mr & Mrs Average Brit accepting that they will go on seeing their wages decline in real terms for the foreseeable future.

There is no end in sight, because China must go on growing to satisfy their own developing and ultra materialistic Middle Classes. Even the seemingly All-Powerful Communist Party will surely fall, if this new class of citizen is not kept happy economically.

Donald Trump is, of course, seeking concessions on trade from the Chinese. He may even get some for the United States, which is his sole concern.

Remember, though, that every concession granted to President DT will be paid for by China's other customers, because, overall, China cannot accept being less well off. Europe, including the UK (Brexit or not), is likely to pick up most of the bill.

So you can blame the Banking Crisis or Brexit, if it pleases you, but the real problem lies in the power of the China.

To be honest, for the United States and Europe to continue to do well, China had to remain fairly poor.

Allowing China to grow so strong was a miscalculation of historic proportions.

In the 14th Century, China was the dominant force in world trade. The Black Death brought an abrupt end to both trade and their domination.

Today, there is an even greater trade imbalance but, thankfully, no Black Death in sight to end it all.

There are, however, Nuclear Weapons. It is to be fervently hoped, for all of our sakes, that the "Trade War" doesn't give any party the excuse to use an arsenal of weapons that would bring calamity to our planet much greater than any experienced in the 14th Century.

Friday, 24th November 2017

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