1.9% GDP and The Economic Fractionating Column

Sorry for the delay beause the GDP report came out on 28th January and it didn't leave me much time to respond. Alright, I forgot. What a result eh? GDP growth rate came out at the top of expectations i.e. 1.9%. Admittedly, the forecasts weren't mine but it's nice to know that others have joined me in this - it's a sign of trust.

I set a target of 3% for 2014 and 4% in 2015. At the time they sounded far fetched but now they're within reach. The American economy grew by 3.2% in 2013. We can duplicate that. In the past, I remember telling the Government of the day that whatever happpens in America, expect it to happen in the UK 6 months later. Now it's taking 12 months and people are still complaining. Could it be that the financial crisis hit the UK hardest or is it government policy? I believe it's a bit of both. Remember that the City of London was labelled as the financial capital of the world. So when the financial crisis hit, it was bound to affect the UK the worst.

I noticed that everytime there was a failure, the Chancellor would use the "structural imbalances"as an explanation for the failure. I got sick and tired of this and googled it and I was given two pdf reports published in May 2012 and May 2013 and they all said the same thing about the structural imbalances:

1. Household debt
2. Commercial debt
3. National Debt
4. Poor productivity, losing market share of the global economy, widening balance of payment deficits.

Item 4 is worrying in that Poor productivity leads to losing market share of the global economy which leads to widening current account deficits. But this can be alleviated by reducing imports which would have a knock on effect on growth. So, industry has to be weaned off imports albeit reduce depedence. Another way of tackling it is to improve exports. This can be done by improving productivity, quality, and after sales service. Not to mention a concerted effort to promote British goods and services overseas.

When I was in secondary school in the 1970s, our science teacher explained to us how crude oil is processed by petroleum companies. They use a fractionating column where crude oil is heated by a furnace at the bottom and the vapours rise to the top of the column. By allowing them to distill, the lightest gases are taken off the column at the top and the remaning ones allowed to settle in fractions with the lightest ones at the top and the heaviest ones at the bottom. Actually, the top few fractions are gases like propane, the middle ones are liquids like petrol (octane), and thebottom ones are solids like tar and bitumen.

My plan is that the structural imbalances should be placed in an economic fractionating column with industry as the furnace at the bottom which gives the people the chance to create wealth. This wealth would rise up the column and settle in fractions.

The first fraction is the household debt. This means that industry should create enough money so that the people can pay their way, save for a rainy day and have enough to pay down their household debt.

The second fraction is the Commercial debt. This means that indusry should create enough money to pay the people plus enough money so that businesses can pay their way, save for a rainy day i.e. the capital reserve, and have enough to pay down their commercial debt.

The third fraction is the National Debt. This means that indusry should create enough money to pay the people and the businesses plus enough money so that the people and businesses can pay enough taxes so that the govenment can pay their way and have enough to pay down the National Debt.

There would be no 4th fraction as improving productivity is a necessity for creating that value to pay all those debts as well as pay for our lifestyles. If the goods and services are produced to a high standard of quality, the exports should increase. In fact, the external factors describe above should be implemented to increase the chances of regaining our market share of the global economy and reduce those balance of payments deficits. The more money that stays in the UK the easier it gets to pay down our debts.

I can't give time-scales as the amount of value industry can produce is limited and it depends on the domestic and global demand for it. Although we can build capacity to meet the demand, this would put pressure on the natural resources and the pollution levels which may mean the UK breaching internationally-set pollution targets. These restrictions will mean a longer time-scale than normal.

The unknowns, as far as I can see, are:

1. domestic and global demand
2. internationally-set pollution targets
3. availability of natural resources
4. the rate at which we produce that value

It's easier for me to say than for you to do - that's why I like my advisory job.

So, we have encouraging growth rates but, as some economists have commented, wage growth is well below inflation which means that people's spending power is subdued and that cannot sustain the growth as the falling wages don't create enough demand let alone pay down any debts.

Look out for wage rises in the near future. If it doesn't happen, this growth would peter out and we'll be back to square one.

I just want to add one last comment about the repossession rate. The WPM has set a target of 9,000 within 5 years. So in January 2019 repossessions will be in single figure thousands. I had a heated argument about it being impossible. Then I reminded them that at the end of 2009 there were 46K repossessions and at the end of 2013 it's likely to be 29K that's a reduction of 17K in 4 years of recession.

All I'm asking is for a similar reduction of 20K in 5 years in a recovery and possibly strong growth if I have my way. Some people agreed with me and said why have repossessions at all. That means that when the 9,000 target is reached, our next target is <1000 - it's impossible to have zero repossessions.