Most of us believe that the present recession will end. They always have done in the past.
It will be a longer-than-usual process. Which means we must now turn our mental clock back. And think about the reverse of how the economy grew in the past.
For maybe 25 years after World War II, growth in the domestic economy was limited to essentials. Discretionary (non-essential) spending was almost non-existent. Except for those who were well off.
Then consumerism burst upon us in the late 1960s. Discretionary spending gradually grew until it was about half of the UK’s total spending. We bought cars, wined and dined and had holidays in faraway places.
Growth occurred in cycles of recession and recovery – decline and growth – within a process of overall growth.
In the 2000s, growth became dependent on government borrowing (quantitative easing).
Gradually, a gap of about 40 per cent developed between the financial economy propped up by QE and the real economy of goods and services. As a result, a misleading impression of economic growth was created.
The financial economy, boosted by lending, was growing. Yet the real economy of goods and services was shrinking.
The economy is now in distress. Inflation is outpacing wages. It is beginning to be realised that wage settlements can only be paid for by further QE. Otherwise, employment shrinkage cannot be avoided.
These are all symptoms of the shrinking economy.
According to CBI director general Tony Danker: “Britain is in stagflation – with rocketing inflation, negative growth, falling productivity and business investment.”
So, what now?
Quantitative Tightening (QT) will probably be applied.
According to Wikipedia: “Whereas QE (quantitative easing) caused the substantial rise in asset prices over the past decade, QT may cause broadly offsetting effects in the opposite direction.”
The value of assets will now gradually decrease. By up to about the 40 per cent, referred to earlier.
We don’t know how long this reconciliation between the two economies will take. It will be hidden within the overall shrinkage of the economy.
To understand how the process of shrinkage may develop, we must think back to what happened during the growth of the economy.
We are now approaching the end of a period dominated by essential spending, with discretionary spending, and associated employment now in decline. It is the precise opposite of 50 years ago.
The costs of essentials are increasing and families are reviewing their discretionary spending. Which is becoming increasingly unaffordable.
Further economic shrinkage and declining wages will worsen the current mêlée.
The reality of what is going on is confused by inflation.
And yet, at the grass-roots
Migration from top-down jobs, especially from discretionary markets, will generate new grassroots activities.
All kinds of activities. Employment, self-employment, undeclared work, unpaid caring and bartered activities.
New individual and collaborating businesses will develop.
Local economies will develop and grow. Mostly in essential markets. Food growing, processing, selling and distributing and related support services.
Wages for those coming down from top-down jobs will be much lower than they had before. And yet the consumer culture of the industrial era will not exist.
Think back to 60 years ago when average wages were about £1,000 per annum and new houses cost less than £4,000. That is where we are heading.
My experience of life in the UK when the economy was much smaller than today, was that it was much nicer!