Bring back manufacturing
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I’m continually amazed at the number of people who still think that short-term policy fixes can deal with the mess our markets and economies are in.
They are convinced that a freeze on subprime mortgage rates in the US will end the horrible rise in foreclosures, that the creation of a super SIV will end the uncertainty about mortgage-backed asset valuations and that the new initiative from the US, UK, eurozone, Swiss and Canadian central banks to bump up global liquidity with a few new loan auctions and changes to collateral requirements will end the credit crunch completely.
They’re wrong, of course – beset by a collective delusion caused by two decades of bull market. In fact, none of these things can change the fundamental positions of the economies caught up in the collapsing credit bubble.
The newly agreed loan auctions will help a bit in the short term – keep a few banks out of trouble and the like – but they will do nothing to deal with the underlying problems.
They won’t stop the big banks worrying – quite rightly – about what new nasties might be lurking in their balance sheets and curtailing their lending as a result; they might not be big enough to push down the interbank lending rates that are causing the paralysis in the credit markets and making monetary policy so irritatingly redundant; but most importantly they can’t possibly stop house prices falling nor, as a result, consumers fretting. The chances are the US will end up in recession regardless of the many diversionary measures being chucked at markets.
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The same goes for the UK – it’s just that the risks here are even higher. Why? Because as CLSA’s Christopher Wood puts it, our “growth profile is so heavily orientated to finance, housing and subprime consumer financing”, all three of which are in trouble.
The US at least has a manufacturing industry of some sort left and hence some stuff it can sell to Asia cheap as the dollar collapses. We do not. In a speech given at Imperial College recently, Sir John Rose, chief executive of Rolls Royce Plc, pointed out why this matters: manufacturing actually creates real wealth.
There are three ways of doing this. You can dig something up, grow it, or take something and turn it into something else worth more – as you do in manufacturing (but not finance, which is about moving things around, not creating them).
Manufacturing also drives innovation and develops the skills of our young. It “penetrates the regions” and “delivers wealth at all levels of employment” (again unlike finance, which tends to employ a few people at the top and a lot at the bottom).
Finally, it brings the kind of global influence we wish we had with it: “Wouldn’t our ambitions to be a ‘thought leader’ be better realised if we had both the science base and the industrial base to legitimise our rhetoric?” asks Rose. There’s only one answer to that: yes. And our economy would be in much better shape, too.
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