This black hole is sucking up your savings

Here’s a big conundrum for you. Why is it that over the last couple of years, employment figures are up, but the economy isn’t growing?

Odd isn’t it? In his Autumn Statement last week, Osborne was keen to point out that for every job cut in the public sector, the private sector has delivered two new jobs. And yet the economy shows absolutely no signs of recovering. What is happening here?

It’s actually a very interesting conundrum. Because there is a story here that very few people are talking about. And it could really suck the life out of the economy in 2013 – and your savings too, for that matter.

But don’t worry too much. Today I’ll show you how to escape this terrible black hole at the heart of the UK economy.

Everyone’s in a tizz

The way I see it, the big concern here is that the economy is becoming increasingly inefficient.

In engineering terms, efficiency is the ratio of input to output. If we apply it to the economy, you can say the ratio of hours worked to GDP (output) equals productivity. And with the stats telling us that work is on the up, but GDP is flatlining, then one can only conclude that we’re in a disastrous productivity slump. This isn’t supposed to happen in a modern economy!

Many explanations have been proffered for this conundrum. Some question whether employment has actually improved at all. There’s talk of ‘under-employment’; people may have jobs, but they’re doing fewer hours than they would like. Part-time work has been on the up and many have turned to self-employed status, trying to pick up bits of contract work here and there. Basically, the statistics are being contorted.

But maybe productivity really is falling. Though many employers don’t have enough work to go round, they’re ‘hoarding’ labour in the hope of an economic recovery. With good staff hard to come by (and expensive to recruit), they don’t want to lose their main asset – they may not have a chance to get them back. But without a full order book, staff are achieving less – productivity is down.

Or maybe employers are just getting conned. It was interesting to see new research out yesterday from Ofcom that says the UK is the keenest nation on earth when it comes to the latest online gizmos and gadgets. We spend more hours than any other nation surfing the web, using social media and shopping online. Perhaps these distractions are sapping productivity out of the workplace?

Well, that’s all very interesting – and, as I say, the conundrum has got both economists and the commentariat in a bit of a tizz.

But there’s one potentially cataclysmic factor that isn’t being discussed. Though it’s kind of obvious when you think about it.

The black-hole sapping productivity

According to Ben Broadbent (who sits on the Bank of England’s Monetary Policy Committee), the UK private sector is the most indebted in the world. Private debts make up more than four times our GDP. The boom under New Labour was built on a credit boom – new credit helped grow the economy and foster an environment for more credit creation.

The grim fact is that the majority of this credit is still in the system. And here’s the thing… the interest repayments on all this debt sucks money out of the economy. Basically, cash disappears out of the hands of consumers and into the banks.

I’ve said here before, the banks really haven’t passed on lower interest rates to non-secured borrowers. They’re grabbing more and more interest payments out of the hands of the over-borrowed.

Now, normally, this wouldn’t be a problem. The economy is a cyclical thing. What I earn from you gives me wealth to spend on another. But the problem today is that once the cash goes into the bank, it doesn’t re-emerge.

People that over-borrowed can work all they like. But much of the earnings head into the black hole that is the banking industry.

I’d say that this, more than anything else, reverses the simplistic equation that says productivity is equal to hours worked divided by GDP.

I guess the economists don’t want to accept this simple reality because that would be to question the very industry that most of them are a part of.

Welcome to Zombieland

This is all to do with ‘zombie’ firms, zombie consumers and a zombie economy. Oh, and, of course, zombie banks.

The time when credit growth (ie people taking on new loans) could mask the leaching effect of debtors’ interest is over. With a debt mountain equal to four times GDP hanging over us, we can’t expect the economy to recover any time soon. You should really read the MoneyWeek report on this. It’s absolutely required reading in my book.

In fact, now you can see why, in days gone by, it used to be illegal to charge interest on loans. It was called usury. In fact, such laws are still incumbent on much of the world today.

I don’t have any moralistic beef here. I just want to make the point that we’ve got a big problem on our hands – one that’s going to keep us from serious growth any time soon. And with the authorities deliberately misunderstanding what’s going on, their misdiagnosed tinkerings could lead to serious trouble down the line.

Still, let’s look at the bright side – we can always invest elsewhere. Did you see my update on that African agri play earlier this week? It’s certainly cheered me up.

So too has The New World – the new email on investing outside the UK. That’s a great read – you can sign up here for free.

• This article is taken from the free investment email The Right side. Sign up to The Right Side here.

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  • Lupulco

    There is a simple answer. Growth v Inflation, there is a difference.

    In the west we have a population that is now mainly 50+. They are retired or are established/settled call it what you will.

    Both groups are only in the market to buy replacement goods. ie, if it breaks down replace it, if it still works why change it.

    This group are also trying to raise capitol, and pay down debt before they retire or have retired and are hanging onto their hard earned capitol. Because of the ZIRP Policy are receiving NO % on their savings. Hence no spending.

    The below 50+ are paying down debt in case a] they lose there jobs or b] MLR rises to its historic norms.

    This is what the Government cannot or will not understand.

  • Iain

    It strikes me that when you talk about productivity you are actually talking about labour productivity. But that can be very productive if its cheap enough as the Chinese and others have proved. Are we in Northern Europe not just on the other side of the Chinese miracle? Our labour costs have to fall until we are competitive and the more our population grows the further they have to fall if we want anything approaching full employment.

  • John Brittain

    Could it be that GDP is not growing because manufacturers are being screwed down to the point were profits are virtually zero? Hence no cash to reduce debt, and all the other consequences become mere logic.

  • David N

    My guess is that previously highly paid people are moving to lower paid or part time jobs and using the income to keep pace with or pay off debt. Maybe this is post-industrialism or maybe it is just the result of chronic inefficiency.

    I think you should distinguish real zombies like RBS for example, from many smaller operations which are dealing with debt issues and becoming more efficient in the process. A general bankrupting of indebted companies will only enrich asset strippers. In the Thatcher era many large industrials were broken up in the belief that new more efficient successors would rise in their place. What actually happened was that Britain’s industrial capacity was broken up and the valuable bits were sold to foreign companies.

  • Stitcher

    Over one million new Immigrants. Where do they spend their money? Of course they send it home. If it was spent in the UK then our GDP would be much higher. And what of the underground economy which is no doubt employing illegals? All that money going back to their homeland . The politicians know this but are unable or unwilling to talk about it. What a total mess. I suppose we should say thank you to Blair & Brown for allowing the immigration which has effectively taken jobs from UK workers.

  • Euromess

    Bengt, I like your articles but when you say ‘But don’t worry too much. Today I’ll show you how to escape this terrible black hole at the heart of the UK economy’ I fail to see where your escape route is!
    P.S. Well said Stitcher, I know this is going on e.g. far better to get 6% interest in South Africa.

  • Peter

    I would like to comment on the Money Week article Bengt directed us to in his blog posting. Whilst I consider the persons who contribute to Money Week to be the genuine article, I find the format of these letters/reports to be most unprofessional. They are sensationalist bordering on hysterical with a clear eye to securing a subscription. Why does Money Week cheapen its brand and the writers who contribute to it in this way? The answer, I suspect, lies in the ownership of the publication. The owner (agora) also peddles the most rediculous ‘trading’ systems which seem so at odds to the insightful and prudent advice one can expect from the Money Week team. Bengt, I suspect you are obliged to refer us readers to whatever Agora behests, but I wish you were able to say NO and spare all those with half a brain from such over cooked rubbish.

  • Andy

    A good example would be IT consultancies, that don’t have enough for work for their staff, so instead of making them redundant are offering one year sabbaticals on 25% of salary

  • terry

    Hadn’t realized Agora owned Money Week, that’s a worry, no wonder you can’t read an article without some ad interupting.

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