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Thinking the unthinkable

Despite Gordon Brown’s notions of saving the world – let alone Britain – the pound is now falling to its lowest-ever levels against the Euro. It is currently trading at 1.04 euros to the pound at some bureaux de change. Things are so bad that insiders are thinking the unthinkable – jettisoning Sterling and adopting the Euro!

The dollar too is falling at the rate of 6.6 per cent a year as new data revealed serious declines in household worth and mortgage borrowing. The dollar slid to its lowest in 13 years against the yen this morning as the Senate rejected a £14 billion bailout for General Motors, Chrysler and Ford. Unprecedented interest rate cuts, gigantic taxpayer-funded bank rescue packages and promises of government infrastructure spending – including the biggest in the US in half a century – have done nothing to stop the financial and economic meltdown in Britain or the US.

Production in the US is forecast to shrink by 4.1% this quarter and by another 3.4% and 0.8% in the first and second quarters of next year. "The news from the economy is bad. The recession that we had previously hoped to avoid is now with us in full gale force," says one report. By late 2009, the US unemployment rate is predicted to reach 8.5%, compared with 6.7% in November, as employers shed an additional two million jobs over the next year. In the UK, the CBI reported a five-year-low in export orders despite the advantages offered by the decline of the pound.

The worldwide collapse in demand has turned the economy upside down – from commodity speculation producing inflationary price increases in food and energy, to prices falling across the world. This side of the pond, current forecasts are suggesting that unemployment across Europe may rise from 17 to 21 million next year. In a debate organised by the Financial Times Friends of Europe group, Poul Nyrup Rasmussen, president of the Party of European Socialists, said he feared that there would be “a further dramatic increase to the other side of 25 million”.

The crisis is so deep and UK trade union leaders so short-sighted that they are offering to cut their members wages by 10% in the remnants of the UK steel industry – adding to the downward deflationary spiral. Former TUC leader John Monks, now head of the European Trade Union confederation, and steel union leaders instead of standing up for workers’ rights, are prostrate before the employers. The three steel unions have offered pay cuts of 10% on behalf of their members. What a curious state of affairs when the employers’ spokespeople are less gung-ho about wage cutting than the union leaders!

The Daily Telegraph – not known as a campaigner for workers’ rights – warns against widespread pay cuts:

Should [pay cuts] become widespread, they could contribute to a deflationary spiral as employer after employer cuts their workers’ pay. A 3% pay cut, if extended across the entire population, may not necessarily mean lower real incomes, but it does mean a higher debt burden. Debt, after all, retains its nominal value, regardless of our ability to pay. Given that the mountain of borrowing is precisely at the heart of the current crisis, such an outcome would be truly terrifying.

Even the bosses’ very own newspaper, the Financial Times, argues caution: “No one should pretend that a pay cut is a panacea”, its leader says today.

Meanwhile, with interest rates approaching zero, the authorities, doing whatever it takes to save the system, are obliged to open up the next Pandora’s box. In case anyone is paying attention, they call it ’quantitative easing’, to throw you off the scent. It means increasing the money supply. Printing money. It’s been tried before. Many times. It doesn’t make things any better. Look at Zimbabwe. Or Germany in the 1930s.

Gerry Gold
Economics editor
12 December 2008

steko 1892 says:

A pay cut is certainly not the answer; in fact it is because of the relative stagnation of wage levels that most people require to take on unsustainable levels of debt in order to survive. The elephant in the room is a fairer redistribution of income, a raising of the minimum wage to at least double its current level and a ceiling on wages.

Dulwich Daisy says:

One of the key reasons the deal to prop up the three US auto giants failed is because the Republicans in the senate said they would not vote for it unless the Auto Workers Union publicly stated they would accept pay cuts. The Auto Workers Union told them to get lost - unlike the unions operating in steel making in the UK!

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