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These days you will hear very few economists talk publicly about inflation.  Their consensus view is that inflation has gone away and is unlikely to appear anytime soon.  As I wrote back in December  last year, to try and mitigate the effects of the financial crash of 2008, globally Central Banks pumped $12 trillion into economies, almost exclusively to major banks around the world.  Since then it appears that the accepted view amongst economists is that this great increase in money supply hasn’t resulted in inflation because of globalisation: more people in more countries producing things have kept prices low.  But it would be far more accurate to ignore “globalisation” and use a term like Chinafication, as many countries, including the U.S., Britain and much of Europe, now outsource most of their manufacturing to China.  In the last three months my wife and I have bought various domestic purchases including an exercise bike, some furniture, storage jars, some clothes, a wine bottle opener,  a computer screen and two new laptop computers.  These were sold under different global brands but they were all made in China. Beginning in the early 1980’s China went from being one of the poorest countries in the world to the second largest economy after the United States.  For twenty years China’s growth consistently exceeded more than 10% annually, an incredible achievement.  In that time millions of Chinese were lifted out of poverty as they became the low cost but high quality manufacturers for the rest of the world.  Simultaneously a huge transfer of manufacturing skills took place as businesses that made things were replaced by Chinese businesses that made things just as good, but cheaper.  In my lifetime I witnessed this phenomenon taking place: the economic stagnation of the U.S. and Europe matched by the economic success of China.  We have all benefited from buying goods at low “everyday” prices manufactured in China, whether they are hi-tech electronic devices like an iPhone or Android smartphone, the porcelain crockery we use at mealtimes and the plastic washing up brush and bowl we use to clean them after we have eaten.  Fifteen years ago I bought an electric shaver that was manufactured in China for an American company and I still remember marvelling at the craftsmanship involved.  The side effect of all this global free trade is that it has produced enormous wealth for the few and cheaper products for everybody.  It has also created what Alan Greenspan once let slip when he described the ”traumatised worker” whose position is too weak to ask for a pay rise. Previously the manufacture of the bulk of a country’s own requirements were produced within that country,  creating the wealth that could pay for public benefits like a welfare state.  Today those supportive public good works are being stripped back beyond the bare necessities for many people and quite naturally there is a strong public reaction.  Enter the era of Trump politics, a right wing bias around Europe, and the rise of economic nationalism which is currently horrifying the rich global elite who wish to maintain the status quo as well as liberals everywhere. It’s amazing that way back in the early 1990’s one man had the foresight to see that global free trade would eventually lower the developed world’s prosperity.  That man was the businessman, politician, thinker and environmentalist Sir James Goldsmith who communicated his ideas in the book The Trap published in 1993.  Goldsmith didn’t live to see how accurate his predictions were and, with much of what he forecast still playing out, this book still makes a riveting read today.  The book is available to download or view online and I would urge you to read it, especially if you are interested in the European Union and Brexit. Nothing in business and trade is static for very long: average wage costs in China have tripled  between 2005 to 2016 and are now higher than Brazil, Argentina and Mexico.  So now many of the goods we want to buy, particularly those in which China has developed specialist skills, are inevitably going to cost more.  Yet surprisingly, a lot of the resulting price increases of goods manufactured in China are not being measured in inflation figures.  If you regularly read my articles you will know that a continuing theme concerns the nasty side effects of Quantitative Easing that aren’t being discussed.  You can read other articles here, here and here.  One repeated thread is that economists don’t seem to use their eyes to see what is in front of them.  In reality we are all experiencing very high inflation, primarily in goods and services that aren’t manufactured in China but which matter to most people.  Official inflation statistics seem far from the truth.  Some personal examples: when our house insurance came up for renewal this year, it included a hefty 50% increase in the premium.  When I inquired why this was the case the answer came back that the insurance company had received so many claims for water damage, at an average claim cost of £8,000, that premiums were now calculated on how many bathrooms a house has.  Another example – train fares.  As a result of 23 years of privatisation, trains on British railways run just as inefficiently as they did when they were state owned, except that now the fares are far more expensive and safety is compromised.  Eight years ago a Government report found that British rail fares were 30% higher for the distance travelled than the European average and the situation seems to be getting worse.  According to the U.K.’s Trade Union Congress (TUC) analysis, season tickets for city commuting are six times as expensive as equivalent journeys in France, Germany, Italy or Spain.   This year rail fares in the U.K. were hiked yet again, by the largest amount for five years.  Some fares went up by 3.4% whilst others in the north of the country increased by 4.6% and 4.7%.  That may not seem draconian but in real terms, when inflation this month is officially 2.5%, these price rises really hurt regular commuters.  Another negative side effect of expensive travel costs is that it lowers economic activity: people don’t travel as much, whether its travel to work, or to go shopping, or just to visit somewhere different (tourism). In Britain we have a property tax which provides the money for local services.  This year the Government has set a maximum price increase at 5.99%, over twice the current rate of inflation.  Most councils are going for the maximum increase they can, and as a consequence our local tax bill has increased by £162.  Last year our power supplier, nPower, put up our electricity bill by 15% and gas by 4.8%.  I don’t know what this year’s price increase will be but on past performance I’m expecting an above inflation rise because the six large utility providers in the U.K. all have form.  In the 19 years between 1997 to 2016 utility prices rose by 139%, and because of this years cold season most people will be paying significantly more than they did last year.  This explains why in a survey 60 per cent of British pensioners reported rationing their heating this winter, and 42 per cent of them have considered cutting back on food so they can afford to keep warm in what has been the hardest winter for many years.  My wife and I are fortunate that we live in the mildest part of Britain, the beautiful south west county of Devon, better still we chose to live on the warmer southern coast.  Yet we have had two bouts of snow, the first seen in this part of the world for well over 20 years.  All over Britain, this year’s utility bills will be significantly greater not only because of the prolonged extreme weather but because of inflation.  Even the cost of postage stamps have risen this year more than the rate of inflation and are double last year’s price increase.  Price rises are not the only way that we can see inflation at work:  we can pay the same money but simply get less of whatever goods and services we are buying.  This is what has been called “shrinkflation.”  Some examples: Andrex toilet rolls shrank from 280 sheets in a roll to 240, then down to 221 sheets; coffee, fruit juices, sausages, beer and chips have all been reduced in size or quantity whilst maintaining the same price.  In the last five years the British Office for National Statistics (ONS) discovered that no fewer than 2,529 products, mostly food and drink packs, have decreased in size whilst the prices have remained the same.   Even the tinsel used for Christmas decorations shrank when the supermarket Tesco reduced its two metre roll down to 1.7 metres, claiming it had improved the quality.  I could go on but you get the idea, local taxes have risen, travel costs have gone up, insurance premiums have dramatically increased, utility bills are inflating and the real price for food and drink is increasing.  Inflation may officially be meant to be running at 2.5% but by anyone’s reckoning, it’s a lot higher than that. Like it or not, one way or another every one of us is having to pay towards those rising incomes for Chinese workers, the quantitative easing caused by the banking crisis and the extra costs associated with the de-industrialisation of our own countries.   We really are in a trap.  As Sir James Goldsmith put it: “One of the defects of modem culture is that we are taught to believe that every problem can be measured in economic terms. But when society's principal tool is measurement rather than understanding, great mistakes follow.” February 2018  
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The Trap.

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The Trap.

These days you will hear very few economists talk publicly about inflation.  Their consensus view is that inflation has gone away and is unlikely to appear anytime soon.  As I wrote back in December last year, to try and mitigate the effects of the financial crash of 2008, globally Central Banks pumped $12 trillion into economies, almost exclusively to major banks around the world.  Since then it appears that the accepted view amongst economists is that this great increase in money supply hasn’t resulted in inflation because of globalisation: more people in more countries producing things have kept prices low.  But it would be far more accurate to ignore “globalisation” and use a term like Chinafication, as many countries, including the U.S., Britain and much of Europe, now outsource most of their manufacturing to China.  In the last three months my wife and I have bought various domestic purchases including an exercise bike, some furniture, storage jars, some clothes, a wine bottle opener,  a computer screen and two new laptop computers.  These were sold under different global brands but they were all made in China. Beginning in the early 1980’s China went from being one of the poorest countries in the world to the second largest economy after the United States.  For twenty years China’s growth consistently exceeded more than 10% annually, an incredible achievement.  In that time millions of Chinese were lifted out of poverty as they became the low cost but high quality manufacturers for the rest of the world.  Simultaneously a huge transfer of manufacturing skills took place as businesses that made things were replaced by Chinese businesses that made things just as good, but cheaper.  In my lifetime I witnessed this phenomenon taking place: the economic stagnation of the U.S. and Europe matched by the economic success of China.  We have all benefited from buying goods at low “everyday” prices manufactured in China, whether they are hi- tech electronic devices like an iPhone or Android smartphone, the porcelain crockery we use at mealtimes and the plastic washing up brush and bowl we use to clean them after we have eaten.  Fifteen years ago I bought an electric shaver that was manufactured in China for an American company and I still remember marvelling at the craftsmanship involved.  The side effect of all this global free trade is that it has produced enormous wealth for the few and cheaper products for everybody.  It has also created what Alan Greenspan once let slip when he described the ”traumatised worker” whose position is too weak to ask for a pay rise. Previously the manufacture of the bulk of a country’s own requirements were produced within that country,  creating the wealth that could pay for public benefits like a welfare state.  Today those supportive public good works are being stripped back beyond the bare necessities for many people and quite naturally there is a strong public reaction.  Enter the era of Trump politics, a right wing bias around Europe, and the rise of economic nationalism which is currently horrifying the rich global elite who wish to maintain the status quo as well as liberals everywhere. It’s amazing that way back in the early 1990’s one man had the foresight to see that global free trade would eventually lower the developed world’s prosperity.  That man was the businessman, politician, thinker and environmentalist Sir James Goldsmith who communicated his ideas in the book The Trap published in 1993.  Goldsmith didn’t live to see how accurate his predictions were and, with much of what he forecast still playing out, this book still makes a riveting read today.  The book is available to download or view online  and I would urge you to read it, especially if you are interested in the European Union and Brexit. Nothing in business and trade is static for very long: average wage costs in China have tripled between 2005 to 2016 and are now higher than Brazil, Argentina and Mexico.  So now many of the goods we want to buy, particularly those in which China has developed specialist skills, are inevitably going to cost more.  Yet surprisingly, a lot of the resulting price increases of goods manufactured in China are not being measured in inflation figures.  If you regularly read my articles you will know that a continuing theme concerns the nasty side effects of Quantitative Easing that aren’t being discussed.  You can read other articles here, here and here.  One repeated thread is that economists don’t seem to use their eyes to see what is in front of them.  In reality we are all experiencing very high inflation, primarily in goods and services that aren’t manufactured in China but which matter to most people.  Official inflation statistics seem far from the truth.  Some personal examples: when our house insurance came up for renewal this year, it included a hefty 50% increase in the premium.  When I inquired why this was the case the answer came back that the insurance company had received so many claims for water damage, at an average claim cost of £8,000, that premiums were now calculated on how many bathrooms a house has.  Another example – train fares.  As a result of 23 years of privatisation, trains on British railways run just as inefficiently as they did when they were state owned, except that now the fares are far more expensive and safety is compromised.  Eight years ago a Government report found that British rail fares were 30% higher for the distance travelled than the European average and the situation seems to be getting worse.  According to the U.K.’s Trade Union Congress (TUC) analysis, season tickets for city commuting are six times as expensive as equivalent journeys in France, Germany, Italy or Spain.   This year rail fares in the U.K. were hiked yet again, by the largest amount for five years.  Some fares went up by 3.4% whilst others in the north of the country increased by 4.6% and 4.7%.  That may not seem draconian but in real terms, when inflation this month is officially 2.5%, these price rises really hurt regular commuters.  Another negative side effect of expensive travel costs is that it lowers economic activity: people don’t travel as much, whether its travel to work, or to go shopping, or just to visit somewhere different (tourism). In Britain we have a property tax which provides the money for local services.  This year the Government has set a maximum price increase at 5.99%, over twice the current rate of inflation.  Most councils are going for the maximum increase they can, and as a consequence our local tax bill has increased by £162.  Last year our power supplier, nPower, put up our electricity bill by 15% and gas by 4.8%.  I don’t know what this year’s price increase will be but on past performance I’m expecting an above inflation rise because the six large utility providers in the U.K. all have form.  In the 19 years  between 1997 to 2016 utility prices rose by 139%, and because of this years cold season most people will be paying significantly more than they did last year.  This explains why in a survey 60 per cent of British pensioners reported rationing their heating this winter, and 42 per cent of them have considered cutting back on food so they can afford to keep warm in what has been the hardest winter for many years.  My wife and I are fortunate that we live in the mildest part of Britain, the beautiful south west county of Devon, better still we chose to live on the warmer southern coast.  Yet we have had two bouts of snow, the first seen in this part of the world for well over 20 years.  All over Britain, this year’s utility bills will be significantly greater not only because of the prolonged extreme weather but because of inflation.  Even the cost of postage stamps have risen this year more than the rate of inflation and are double last year’s price increase.  Price rises are not the only way that we can see inflation at work:  we can pay the same money but simply get less of whatever goods and services we are buying.  This is what has been called “shrinkflation.”  Some examples: Andrex toilet rolls shrank from 280 sheets in a roll to 240, then down to 221 sheets; coffee, fruit juices, sausages, beer and chips have all been reduced in size or quantity whilst maintaining the same price.  In the last five years the British Office for National Statistics (ONS) discovered that no fewer than 2,529 products, mostly food and drink packs, have decreased in size whilst the prices have remained the same.   Even the tinsel used for Christmas decorations  shrank when the supermarket Tesco reduced its two metre roll down to 1.7 metres, claiming it had improved the quality.  I could go on but you get the idea, local taxes have risen, travel costs have gone up, insurance premiums have dramatically increased, utility bills are inflating and the real price for food and drink is increasing.  Inflation may officially be meant to be running at 2.5% but by anyone’s reckoning, it’s a lot higher than that. Like it or not, one way or another every one of us is having to pay towards those rising incomes for Chinese workers, the quantitative easing caused by the banking crisis and the extra costs associated with the de- industrialisation of our own countries.   We really are in a trap.  As Sir James Goldsmith put it: “One of the defects of modem culture is that we are taught to believe that every problem can be measured in economic terms. But when society's principal tool is measurement rather than understanding, great mistakes follow.” February 2018  
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