British Inflation & The Labour Party

British Inflation &
The Labour Party

© Martin A. Armstrong

The boom which has been underway in Great Britain can only be described as impressive. By any logical political reckoning, the opposition Labour Party ought to be starting to climb back to its former greatness on such issues as inflation, rising interest rates and the largest trade deficit in history. Nevertheless, some of Labour’s most cherished beliefs – state ownership of industry, government control of the marketplace and unilateral nuclear disarmament – have become as unfavorable to the majority of British citizens as the dreded AIDS disease.

Yet Prime Minister Margaret Thatcher’s Conservative government does seem to be more vulernable lately than ever before in recent memory. Mrs. Thatcher’s new local taxation program is widely unpopular, and the deterioration of the National Health Service as a few others quite concerned.

The parties which once claimed nearly half of the anti-Thatcher majority are weak and divided while the Labour Party’s left wing has been virtually obliterated by the mainstream. After its third straight defeat in recent years, Labour remains so far behind the Conservatives, most are beginning to question whether or not the Labour Party itself has been virtually disarmed as a political force.

In the northern seaside town of Blackpool, the leaders of the Labour Party gathered to assess their positions. The often colourful Neil Kinnock, stood before the crowd and delivered these words.

“Those who are afraid of developing the alternatives that will gain the support of the British people, those who say they don’t want victory at such a price had better ask themselves this: If they won’t pay any price for winning, what price are they prepared to pay for losing?”
Indeed, political parties which have been so left are starting to take on a different mantle in many nations. Even within the United States, Dukakis has been forced to say he is for defense. He has even stated that he would fund Star Wars but only to the sum of $1 billion because he doesn’t think it would work. Politics is a dirty game and the trends within the mainstream are forcing a lot of wolfves to dorn sheep’s clothing just to gain power.

Mrs. Thatcher has done an excellent job in turning Britain around from the demoralizing blow of watching the pound drop to US$1.03. But the problems of inflation, rising interest rates and the largest trade deficit in history could hurt the conservative cause in the years ahead.

To Mrs. Thatcher, we offer this advice. Your inflation is rising because of the rising confidence in your administration. Capital is flowing into your land from around the EC group. As that happens, all assets begin to rise as your money supply swells due to rising foreign investment. If you allow the Bank of England to raise interest rates, this will not stop the trend. It will only attract additional capital into Britain due to interest rate differentials given the current confidence in your nation.

As to the record trade deficit, in fact you are looking at a record flow of capital as well. Interest and dividends flow out through the Current Account while Capital Accounts reflect capital investments. You are not actually suffering from a trade deficit in terms of goods, but instead, the Current Account deficit is being caused due to payments flowing out of Britain for interest and dividends. That will only increase as long as the Bank of England thinks it can control inflation domestically by curbing domestic demand. The foreign demand is only enhanced by those measures as long as confidence remains high in your Administration.

Take care not to allow your Bank of England to misread the signs of the times and shift into overkill next year. All the hard work you have done to turn your economy around will be undone in one swift blunder by your central bank. In the end, it you be you are your philosophies the people will blame.