Currently, as Europe struggles to pay their debts, focus has been removed from the UK’s massive deficit and inflationary pressures. Price Inflation in the UK is being driven by the high cost of energy production which in turn is passed on to the production of food and other goods. The price increases are built in to the cost of production and transportation. Our economy is a high energy consumer and without increased inputs of energy we will not have economic growth.
Energy increases can be offset to some extent by efficiency measures which allow us to temporarily offset energy costs in order to lower production costs. This is a temporary solution due to Jevons paradox, a subject you can read more about at your leisure and maybe the subject for a later blog post, but basically it means the more efficiently we consume a resource the sooner it gets exhausted.
What we may find is that if a number of European economies default on their debt, and the Euro survives is that this will strengthen the value of sterling, allowing us to import energy and resources for a lower cost in real terms. If the Euro collapses, and the UK banking infrastructure survives then trust in our financial institutions will be strengthened in the long term further increasing the value of the pound. It seems the relative strength of the Euro today must be due to some demand from somewhere. I would suggest that governments around the world are merely buying up Euro’s in order to save the Eurozone as its collapse would inevitably be disastrous to the world economy. In simple terms, if everyone in Europe becomes poor then demand for goods produced globally shrinks dramatically, making all those goods worth less in real terms and therefore the people producing them also become poorer.
I predict a massive adjustment downwards in the financial value of the west as demand for the cheap goods that will be flooding the market is picked up by the east, not because of the Euro crisis but triggered by it. The underlying cause remains the cost of energy and our total dependence (economically speaking) upon it being cheap.
Ladies and Gentlemen, I would like to introduce you to the next global power, China, as we see the departure from the world stage of the old Imperial powers.