fredag 20 juni 2008

The fallen £

The fallen value of the £ is very noticeable. It has dropped from 14 Swedish kronor last year to 12 now, which is a decline of 14%, and matters are worse than that because the Swedish economy has also had its problems.

But it gives the lie to the notion that Britain's difficulties are due to things like "world inflation", higher world food prices or higher energy prices. How come Britain has been affected so much more, when, unlike Sweden, it has its own oil and gas?

The real worry is that there seems to be little understanding of where the present bout of inflation has come from - not that I would claim to know.

The fall in the value of the £ against other countries has meant that all imports from the Eurozone and many other countries have risen just because of the adverse exchange rate. What has also happened is that the UK, amongst other countries, has experienced a classic land price boom, fuelled by over-liberal lending and borrowing. This has driven up land prices and promoted a building frenzy. The large housebuilding companies are now left with properties on their hands that they cannot sell at a profit, based on the price paid for the land plus construction costs. That is an actual financial loss and a real misdirection of materials and productive resources. Strangely, however, although there are a lot of houses that are difficult to sell, they have not become "affordable" and there are still calls for the provision of affordable housing. Clearly, the housing (land) market is not working as the free market advocates claim that it should.

It is also the case that since the Bank of England has no means of regulating the economy other than by altering interest rates, it has only the options of reducing interest rates and allowing inflation to take hold - which goes against its remit - or of keeping interet rates high and taking the risk of precipitating a recession.

A possible explanation of the current bout of inflation is that large amounts of money have been created by banks through allowing people to re-mortgage their homes and spend the proceeds on consumer goods and services. But those loans will have to be paid back and then the forces for recession will be accentuated.

So much for Gordon Brown's claim to have banished the boom-slump cycle. Such cycles are an inevitable part of the economy. However, they are worse than they otherwise might be due to the positive feedback loop built in to the land market, which can only be eliminated by the right sort of land value taxation. Which is not going to happen in the UK.

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