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 particularly serious. A year ago, a Euro cost 71 pence, 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 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, My guess is that the UK will get 11% inflation in the period of 24 months to June 2010.

Although the experts hardly ever refer to it, the key indicator of UK house price imbalance, I suggest, is rentals. Typically, in the south of England, houses that last year were priced at £390,000 are being let for about £15,000 a year, or even less, net of expenses. The important figure here is how much it would be necessary to invest in order to earn the same amount in interest. Since people will normally expect a lower rate from property, an interest rate at the low end of the range - say about 5%, is a good rule of thumb. This would make such houses worth about £300,000, around 30% too high. But if there is going to be inflation inflation at 11% over the 24 month period, the over-pricing compared with mid-2007 must be just below 20%, which gives a hint about how much further prices are likely to drop, though this will be subject to strong regional variation.

The general conclusion that the UK economy is in trouble seems inescapable. In truth, is 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 and if he could not do better than letting the UK economy rise up the wave on the rising phase of the cycle, leaving it to 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 theory with good predictive powers 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.