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UK economy – no silver lining

The news on the UK economy gives no indication of any silver lining to the cloud. All is talk of recession, a house price crash, a falling exchange rate and inflation.

The falling exchange rate is more serious than usually acknowledged. A year ago, a Euro cost 71p, whereas now it is nearly 80p. But the Euro itself has also been losing purchasing power, and all these changes will feed through into higher prices for all imported goods. The only people to benefit are exporting companies who provide services with small inputs of imported products.

Precisely what will happen is impossible to predict as much depends on how the government and the Bank of England deals with the situation. Unfortunately, there is little evidence that the response will be coherent; when the Governor of the Bank of England blames external causes, one can have no confidence that there is any intention even of bringing the situation under control. In any case, most of the inflation for the next two years is probably already in the pipeline, A reasonable guess is that the UK will get 11% inflation in the period of 24 months to June 2010.

The likely future consequences for house prices have been discussed elsewhere on this site, but the general conclusion that the UK economy is in trouble seems inescapable. In truth, it has been mismanaged for years, certainly since 1945, and nobody in charge knows how to get out of the problems. Ed Balls, Brown’s economic advisor from 1997, was the best qualified of his generation. If he could not do better than letting the UK economy rise up the wave on the rising phase of the cycle, primed for collapse on the down side phase, there must be something wrong with the theories that UK academics are propagating.

The analysis underlying the theories of the economist Henry George seem to give a reasonably convincing explanation and at least at the level of economics are almost certainly somewhere near to being a true description of what is going on. But the student who wants to dig deeper is left with the question of why a seemingly serviceable explanatory theory with good predictive record is so consistently ignored both by those in authority giving and by the established economists who decide what the succeeding generation of politicians and ecomists will be taught. It is as if the knowledge had been buried.