Tuesday, July 22, 2008

Why Brown’s rule-breaking is great news for trade unions

Why Brown's rule-breaking is great news for trade unions

Gordon's Golden Rule – always more of a guideline – is to be 'revised' and the unions expect the extra cash to come their way in higher pay. That's good news for them, but very bad for the rest of us...

Posted by damien @ 12:09 PM (850 views)
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6 thoughts on “Why Brown’s rule-breaking is great news for trade unions

  • stillthinking says:

    GBs rule breaking may be used to support public payments, however, government debt is set to increase anyway. Increasing social security costs and lower tax revenue will force additional borrowing. Also, the government will potentially have to back UK banks ( I think they will but further down the line).
    In so far that the union members have mortgages, increasing government borrowing at some point will increase union members repayments, rather neatly making the pay rises pointless, which is the point that Darling has failed to make clear.
    I still think we end up in deflation, however, I am recently of the opinion that there are timescales for these events.
    I think that the government wish to allow the inflationary period to last as long as the housing slump, so the key point would be, given that we have this inflationary flare off, at what level of inflation will the government act? For, if you accept that the BoE rate setting affects prices two years down the road, then the deflationary effect of credit contraction occurring now will start to be seen in 2010. So we might have high inflation for the next two years.
    The government have unequivocally announced that they are about to start borrowing past the 40% rule. This is already said and they have to, and everybody knows. This whole thing always comes back to that idea of problem 1 needs interest rates to go up while problem 2 needs interest rates to go down. For the poor unfortunate UK borrower they will either pay more for their mortgage or they will pay more for living costs, so we are going into a recession for certain. So for people saving for a house how to continue? I don’t know. Sterling has already fallen so getting out now seems a bit late. I suppose my open question, given the state of the dollar and euro, and potentially problems globally (which I have no idea about), what is going to happen to sterling ?

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  • Does anyone know how this 40% rule compares to other EU/OECD countries…? There seems to be no mention of this.

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  • beartil2010 says:

    Sterling will suffer very, very badly, but not as much as the dollar, so no-one here will notice. We are all going to be a lot poorer.

    It’s not too late to get out as we have not yet really seen the impact of the problems. FTSE still has a long way to go down (who on earth was saying ‘buy’ last week? ‘Oversold’ my a*se. Sell sell sell!), unemployment has only just started to uptick, companies are feeling pessimistic but haven’t yet had to report the numbers for their poor quarters.

    It’s still early doors. Buy defensive stocks and commodities. I’m not going to suggest you buy a rifle and a load of tinned food like some people on here, but stop spending now so you can watch everyone else spending and panicking!

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  • I wouldn’t go rushing off to dump Sterling. Europe cannot afford the Euro to go any higher as recession looms. Indeed I would lean toward the opposite. Sterling is holding pretty steady even with the catastrophic economic predictions in mainstream news.
    IMO The Euro has peaked and is now damaging the Eurozone, but it’s helping their banks—– and don’t forget the interest rate is still lower than in the UK.
    European banks are taking a hit from the US subprime market and the Euro/Dollar ratio is helping to dampen the effect. Looks a bit pre-ordained to me— like a reward for joining the party. I don’t trust the present scenario, there are more shocks to come. It simply isn’t that simple.

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  • beartil2010 says:

    It’s never simple I would agree… different eurozone countries are going to suffer differently so it’s quite mixed. imo UK will suffer worse than eurozone overall due to i. our level of personal debt being much higher, ii. our property market being more inflated than most in eurozone (Spain is our equal), iii. service sector focus, and iv. our banks are much mroe exposed to mortgage CDO purchases from US banks.

    However ST is asking about whether sterling will suffer, not what the change is relative to the euro. Many currencies will suffer, reflecting the economy and the government they represent.

    In answer to Maddison @ 2, some euro countries are as leveraged as us, and some like Denmark have no national debt, so they operate very differently to our government!

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  • The pound is a deficit currency. We buy more than we sell. This is funded partly by us taking on debt sold to us by surplus countries, largely Japan, China, Russia and Arab states, and partly by the sale of UK assets to non sterling interests (e.g. sale of Abbey to Santander or Park Lane to an Arab prince). It all depends on the sentiment of these nations and what happens in the global economy in the future. If they continue their policy of funding UK debt the pound will be safe. If they don’t, the pound will fall. In the much longer term, the UK deficit MUST narrow, no nation can run an increasing deficit indefinitely. This will probably be achieved by a fall in imports through lower consumer spending and a rise in exports. If the adjustment happens in an orderly way the pound will be safe. If the Russians, Chinese etc. suddenly decide to stop buying UK debt then the pound could tank, however. That wouldn’t be in their interests either, though, since they have so much invested in sterling. In short – nobody knows where this is going, but my feeling is it will not be too bad for us. Nothing like, say, the Argentine devaluation in 2000.

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