Walesbusiness.org

The outcome of the 1984 Miner's Strike was a painful demonstration of how the economy had turned - is this recession a consequence of those changes?

BRACE yourself for Christmas. Not for the endless round of festivities, but for the aftermath. It’s never a good idea to start making predictions, but here goes: January will chill us all to the bone, and it won’t be down to the cold.

The signs have been there for months. What is remarkable is that no one is discussing why we’re not spending money – or, rather, the implications of this collective drawing up of financial bridges.

You will almost certainly notice it this Christmas. There will be fewer drinks receptions, and fewer people at them. Those who attend will pay appropriate tribute to those that aren’t (while silently hoping their jobs don’t go the same way). You’ll weigh up all your friendships. Will they survive if without presents? You’ll see the apologetic look from those same friends as you unwrap a pair of gloves and not a nice bottle of single malt.

Leaving aside these anecdotal experiences, as well as some consideration as to who does well out of your choices (not Penderyn in this instance, but let’s hope not), where will this leave us in January? Certainly not in the place where the Chancellor was banking.

Assuming that this picture is correct, and that UK retailers experience a terrible Christmas, will it lead to an honest appraisal at Number 11 of the Government’s plans to return to growth – meaningful growth, rather than the limp-along we’ve been seeing?

The problem for the UK Government is that every recovery relies upon consumer spending. If that doesn’t happen, as now seems increasingly likely, it rather paints George Osborne into a corner. He is unlikely to receive a helping hand out of there from economists, who are increasingly growing vocal in their desire to have the underlying causes of both the recession and this misfiring recovery properly and historically identified.

Much of this is being driven by debate from across the Atlantic, where US economists – including those that once preached from the high alter of monetarism – are joining the Occupy movement in focusing on, if not actually on the top 1% as the protesters are doing, then on the upwards shift of money that has ultimately resulted in millions of Americans bankrupt and homeless.

At the heart of this “crisis of capitalism”, so it is becoming ever more apparent, is stagnant wage growth, which has remained relatively flat (allowing for inflation) since the 1980s. You might expect left-leaning economists like Paul Krugman and Joseph Stiglitz to blame this on the twin evils of deregulation and the opening of global labour markets. But there are others, too. The economic historian Louis Hyman admits: “Capitalism has worked for us for 500 years, it’s worked against us for the past 30 years”, and “The top 1% won’t pay you for your work, but they’ll lend you the money to live”.

Alongside low wage growth, the past three decades have seen an explosion in credit. The reason for this appears to be self-perpetuating. The super-rich will spend small amounts of their income on luxuries and services, but the lion’s share of their wealth has been tied up in assets – investments that they want to see accrue in value, rather than goods such as Ferraris, whose value drop like a stone the moment they are driven off the forecourt.

In the past, investment focused on stock markets. But innovations in financial engineering (some of which have been around since the Great Depression but were only honed and brought into widespread use during the 1990s), allowed investors into new asset classes such as derivatives and loans-backed securities, where the (often leveraged) returns were that much greater. With so much money sloshing that had to be put somewhere, it would be used as the credit that has allowed BMWs, flatscreen TVs and million pound-plus homes would come within so many people’s reach.

This outcome, of households spending well in excess of their incomes, created a wrong impression of prosperity both here and across the Western world. Businesses, too, engaged in a near-frenzy of mergers and acquisition paid for overwhelmingly through debt, compounded this false picture.

Unfortunately, a globally interlinked banking system that had allowed an unprecedented rapid growth of wealth for its most senior players also turbocharged its crash. It had allowed local government pension holders in Scandinavia to draw their entitlements courtesy of mortgage repayments in the Mid West, but it left an entire system predicated on perpetual house price growth in the US dangerously exposed.

A booming global economy (and falling bond yields) had allowed governments to run large structural deficits and ignore longer term issues, like finding a place for relatively well-remunerated workforces in a world where offshoring presents a real threat to long-term prosperity in developed nations. A sharp drop in tourism and shipping markets as a result of the 2007-08 recession did for Greece, but its involvement in the euro is currently creating a contagion problem of a different kind.

Quite possibly still spooked by the speed of events that nearly took down Wall Street three years ago, investors are demanding far higher yields from government bonds. Poor old Spain has just sold 10-year debt at an alarmingly high 6.975% (at the time of writing), all because of exposure and because it’s next in line – although euro economist Megan Greene tweeted on Friday that she suspected Spain’s structural issues were worrying the markets more than Italy.

In a clever little video that did the rounds a few weeks ago, the anthropologist David Harvey posits the idea that each recession dictates the form of the next one, with the overwhelming strength of financial capital this time around replacing the excessive power of the trade unions in the 1970s. And, if Professor Harvey is right, and “capitalism never solves its problems, it just moves them around geographically”, then what form can we expect next time around?

It may well be that, come the New Year, Mr Osborne may have other fish to fry – particularly if investors continue to race around Europe, picking off one sovereign debt after another. And while it would seem unlikely that any kind of crisis might behove the Chancellor to consider Marxian logic, it may well be that our traditional month of austerity will require just a little more imaginative political solution-finding based on what is fundamentally wrong with the UK economy.