UK Economic Update August 2018

Only three months ago, I gave evidence that we were close to the top of the cycle. I am now worried that the current combination of global events could create a perfect storm. Brexit is a side show but it increases the risk for the UK economy.

Donald Trump apparently has a degree in Economics, but this could be a fake Wikipedia entry! He should have learned three things.

  • Firstly, an economy is characterised by strongly positive feedback: a small change in one part of the system is magnified as other parts of the system react. Positive feedback is the mechanism which magnifies small changes to create boom and bust;
  • Secondly, the so called Prisoners’ Dilemma: a theory which shows why two completely rational individuals might not cooperate, even if it appears that it is in their best interests to do so. In trade, it always pays to cooperate; no one wins a trade war;
  • Thirdly, the role of the Federal Reserve is to ensure that inflationary expectations do not take off by raising interest rates in a timely fashion.


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