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Double-dip blues

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Stephanie Flanders | 17:59 UK time, Wednesday, 21 July 2010

There's a new drum beat running through the market jungle: ''double-dip, double-dip, will we have a double dip?"

Ben BernankeThe US Federal Reserve chairman will do what he can to soothe nerves today when he delivers his twice-yearly testimony to US legislators.

If you're only talking about the short term, the good news is that there's quite a lot Ben Bernanke can do to keep the US recovery on track. But for those that are worried about the long-term sustainability of the US and global recovery, there isn't much that he can say to help them relax.

People have been talking about the risk of a double-dip, almost since the recovery began - even though the pace of upturn, in most countries, has been on a par with recoveries in the past. That's because we are coming out of a major financial crisis, and the evidence of past such crises is that growth afterwards tends to disappoint.

Why are we worrying more about a double-dip now than we were a few weeks ago? One big reason is that the US economy appears to be growing more slowly than at the start of the year - and the growth in the first quarter has itself been revised down.

Retail sales in the US fell in June, for the second month in a row, and in the labour market, both average earnings and the number of hours worked have been going down. Most worrying, for monetarists - the money supply is still shrinking. That hasn't happened since the 1930s.

The other big fear is the eurozone: with so much talk of fiscal austerity, the worry is that if Americans stop spending, there even less scope for demand elsewhere to make up the gap.

That fear can be overdone - at least for this year. Greece, Ireland, Portugal have all announced bigger deficit cuts in the past few months - but they only account for less than a 1/6th of euro area GDP. Germany, France and the rest have really only fleshed out earlier fiscal plans - and their tightening doesn't really begin until 2011.

According to Credit Suisse, the extra tightening announced in the key euro countries in the past two months only amounts to about 0.2% of GDP over two years.

But we can safely predict that eurozone is not going to be a great engine of global growth. As I flagged at the time, the IMF now expects the euro area to grow by just 1.3% in 2011, compared to 2.1% for the UK and 2.9% for the US.

The UK has had its own version of the US debate in the past 24 hours, with the Treasury Select Committee highlighting that the budget has increased the probability of another downturn, and the news today that the MPC had discussed the possibility of extra measures to support the economy when it met in June.

I don't expect them to do anything any time soon - especially with inflation now likely to be above target for much of next year. But we can expect them to revise down their now far above-consensus forecasts for UK growth in next months' Inflation Report.

So, yes, it matters a great deal what happens to the US. In its last meeting the Fed's policy committee discussed the possibility of further measures to support the economy, for the first time in a while. Chairman Bernanke will surely entertain the possibility in his testimony later today.

If the bad news keeps coming, the US central bank has options. For example, it could go back into the market to buy mortgage-backed securities and/or US government debt; or it could say that it will not raise interest rates until inflation has reached a certain rate.

By all accounts, they would rather not do either: Kevin Warsh, an influential Fed governor, recently seemed to set a high bar for making fresh asset purchases. And when it comes to future rate changes, even the Fed doesn't want to tie limit its options too far in advance.

All that said, the record of the past few years tells us that the Fed will act if it has to. Those actions ought to be enough to prevent a double-dip.

But the Fed can't solve the basic problem, that the world is once again counting on US consumers - and spending in other deficit countries - to nurse it back to health.

Chinese exports are once again storming ahead. German exporters are doing well too, ably helped by the weaker euro. At the same time, the US - and British - trade deficits are once again going up.

None of this suggests a double dip is on the cards. But it does tell us that the global economy is struggling to learn new tricks.

Update 1817: As I mentioned earlier, many in the financial markets were looking for reassurance from the Federal Reserve Chairman in his latest report to US legislators. The US recovery has lost some momentum in recent weeks - investors wanted to know the US central bank will do everything it can to prevent a double dip recession.

In the event, Dr Bernanke acknowledged the fears hanging over the recovery in the world's largest economy but he did little to put them to rest.

He said the Federal Reserve was willing to take extra steps to support the economy - for example, by buying financial assets, or promising not to raise rates for a certain period of time. But he did not think they were called for yet - and he and his colleagues had not even decided which would work best.

US share prices fell on his remarks, but the dollar rose - and so did the price of US government debt. The yield on 10-year Treasury notes fell to 2.86, and the two-year yield hit a new low. However bad things get for the US economy, investors still seem to think it's safer there than anywhere else.

Comments

  • Comment number 1.

    !"Chinese exports are once again storming ahead. German exporters are doing well too, ably helped by the weaker euro. At the same time, the US - and British - trade deficits are once again going up."!

    Are we Brits and the Yanks so stupid? What on earth did anyone expect the long term financial health of our economies to become with all the outsourcing that has happened since China's succession to the WTO ten years ago?

    Our only hope is for the first ever import led recovery...don't hold your breath.

  • Comment number 2.

    I think that there is reason to be a bit more optimistic. China and Germany are not the only countries experiencing relative prosperity. Also many of the fiscal measures taken by the UK government have not yet kicked in so its hardly surprising that our trade imbalance is growing. 'Rome wasn't built in a day' and I suspect that the object lesson in all this is patience and crossed fingers.

  • Comment number 3.

    You seem very confident Stephanie that moves by the Federal Reserve can prevent a double dip. However there is a counterpoint to this as I read on the notayesmanseconomics web blog.
    "There is a lot of debate going on at the moment about how the Federal Reserve might implement a further round of quantitative easing or QE mark 2. I notice that there is very little debate about what I see as a fundamental point which is that as it would only be implemented if it is considered that QE 1 has failed than one has to in my mind consider first whether QE mark 2 is likely to do any better."
    I think that there is a clear point there,and am concerned about the shortening of the term of US government debt that is mentioned in the same article. It can be found on http://notayesmanseconomics.wordpress.com

  • Comment number 4.

    "..especially with inflation now likely to be above target for much of next year."

    Yes. So why no increase in base rates? The BoE is charged with handling inflation. That is their only target so we are told. So when are we going to get the increase...

    No chance of course, because the BoE brief is just a sham.

    Lets inflate our way out of debt at the expense of prudent savers.

  • Comment number 5.

    A market playing double-dip predictor, who having noted that QE has now ended, recently claimed that in every options expiration week shown on a list going back to July 16 2009 the Fed/Bernanke has pumped a lot of money into the market to try and stop it from crashing... I am no expert in these matters and would like to know what the possible consequences of this 'pumping' might be.

  • Comment number 6.

    Since the governments have been controlled by banking, big business and energy not much can be expected that would actually help. The self interest of the major power players is always counter to what needs to be done. Not a single action has been taken to shore up the middle class and the middle class is what drives the economic engine. The govenrments simply burdened the middle class with the bankers debts and higher taxes. The distance between the rulers and the people is very wide and their policies reflect an arrogance that has caused previous forms of government to collapse. They never do the right thing until they have tried everything else. People will get feed up with being robbed by the banks and by the governments to benefit the banks and things will change. How long will it take before they are willing to accept that making the bankers and their stockholders whole has little impact on the overall economic processes. The decisions by the governments have made things worse not better and as they continue to give the robber bankers back their guns to rob everyone again, the future looks desparate. They sit around with their figures crossed wishing things would get better. Pitiful governments, strangled by their own processes and detached from reality....shouldn't expect much form that. Call in the shamen economists and the banking fraud gang and I am sure they will propose some new tranfer of wealth to the bankers and assure everyone that it will work this time. More committe hearings, that's what needed! Might as well be giving hand grenades to children.

  • Comment number 7.

    Stephanie, I think people were talking about double-dip long before recovery began. A lot of the factors for that perfect storm are coming back into place - high oil prices, high property prices, falling incomes, inflation ...

  • Comment number 8.

    ToryLib = double-dim = double-dip = double-trouble.

    Bring back Gordon!

  • Comment number 9.

    4. At 7:08pm on 21 Jul 2010, NonLondonView wrote:
    ....
    "Lets inflate our way out of debt at the expense of prudent savers."

    Not a bad idea.

    The advantage is that it is those who did well out of the debt driven boom preceding the recession and were able to save and can afford to lose some of those savings, who will be the ones to lose most. Those who struggled to keep their heads above water and accumulated debts will have some of those debts wiped out.

    Much fairer than increasing VAT.

    David Cameron says that we must all take a share of the pain. Why, when some did not have a share of the previous prosperity. Like many rich people he forgets that not everyone is so lucky.

  • Comment number 10.

    "Yes. So why no increase in base rates? The BoE is charged with handling inflation. That is their only target so we are told. So when are we going to get the increase..." [NonLondonView]

    Well, the reason CPI will be high next year is because Osbourne is putting VAT up and this usually increases the underlying rate by about 1.5%. It is therefor an artificial rise, and nothing to do with the market-place or deficits. The underlying rate is 1.6% and looking shakey and might go down to 0%, so the BoE probably won't put rates up.

    Kind Regards
    Charlie

  • Comment number 11.

    The problem the monetarists are just begining to learn is this: stimulus is not there to kick-start the economy. If you treat the problem like this and take the stimulus away, the economy falls over again.

    Some stimulus has to be on-going and for as long as growth is desired. A recent report by Goldman Sachs says that ideally the US needs to run a coninuous deficit of at least 7%GDP just to get very modest growth.

    Until consumer's income rises with better wages or wealth distribution, the US and UK will have to run large deficits. If the balance can be corrected, and aggregate demand returns, the they will only have to run small deficits.

    Kind Regards
    Charlie

  • Comment number 12.

    Remember Black Wednesday and Lamonts 'Green Shoots'.

    Same old recession, same old policies, same old Tories. Why does anyone think it will work this time?

    Double Dip here we come!!!

    No ones talking about the elephant in the room (pickles). At least the cofees nice he! he!

  • Comment number 13.

    What double dip?

    We're still in the original first dip, the GDP growths would not have happened without the governments support in the form of bailouts and QE.

    The propaganda machine is scared of the word Depression, that's why fool ourselves with dips. But let me promise you, we'll have triple and quadruple dips.

  • Comment number 14.

    Yet again economists look to the "great fraud" of American boom and Chinese/German productivity to stave off what in a sense is a creation of moneterist policies. Boy George entered the frey swinging his sabre willy nilly - depressing the world view of UK inc., Ms Merkel stepped in and further blighted the prospect of recovery by insisting Euro zone nations live within their means. Ooops, there goes the confidence, there goes the trade, here comes a debt driven American boom to be paid for by who knows, and a German manufacturing collapse as there will be nobody to buy their "foresprungtechnik" (unless of course they lend some of their wealth to enable those countries whose industries they out produced).

    An interesting article in the Guardian indicated the amount of UK production, and wealth creation, that is foreign owned, and presumably at risk of implosion when the good old trade barriers raise their ugly heads again, and as with steel production it goes the way of the parent company - i.e. abroad. But boy George and devious Dave and their PPEs tucked in their back pockets must have realised what their fiscal policies would come to - surely the economics module could not have been missed in its entirety will binging and trashing restaurants.

    As Sherlock Holmes would have asked "who benefits from the crime", why those with the present resources to buy into the slack, the Americans who hold the largest inflation proof resource in Fort Knox; the Arab oil producers who hold the largest stocks of "black gold"; the Chinese who have the largest "sweatshop and internal market" in the world. What worry double-dip or full blown depression when the stoke pile of wealth makes secure the ever increasing ownership of other nations means of production.

    Time to come clean, the game of roulette that economists play with millions of other peoples' lives needs to stop. Globalisation is a cover for the ever increasing centralisation of wealth within the limited few. What proportion of the almost 7 billion world population owns/controls 99% of its wealth and resources? If two businessmen who purchased an operating sytem; modified it to meet a computer company's desperate need (and set computer development back generations with their adherence to DOS, which still lurks in the background) own more wealth than nations - can this capitalist model be right, let alone moral. We have an increasing "spiv" attitude in corporate governance, the "loads of money" has progressed to "give me more", where an astronomical (need two lives to spend) salary has to be enhanced with perks and bonuses. All based on the very say so of the very "spivs" selling the fraud; beyond the control of governments, their own shareholders and those put in place to protect taxpayers money. Exampled by Network Rail where management bonuses were agreed by 37, vetoed by 31, while 9 abstained (what are these 9 individuals paid to do - make decisions surely). Again, by the board of RBS (80% owned by you and I) who took it on "advisement" when the shareholders throughout the directors pay and bonus package and proceeded with it anyway (wouldn't want to loose out and have to go to another bank).

    Surely as an economics corrspondent some reflection beyond the obvious is warranted, some review of the recent set of figures indicating all is as was forecasts for UK Inc., and that it is the actions of boy George and cronies that are threatening disater. It is interesting that the "coalition's" business minister's notion of tackling the costs of higher education have been thrown out by cabinet colleagues (so much for a coalition and ministerial responsibility). Of course it wouldn't be anything to do with the fact that the 7% who take the premium university places, and therefore the highest earning positions, will end up, by default, paying the most in tax. Well, there's a revelation to chew on while filling-in your benefit form.

  • Comment number 15.

    There never was a need to take the risk of a double dip. The UK doesn't need to rush to get the deficit down. It was caused by the Wall St crash, not by over-spending. Halving that deficit by 2015 is quite sufficient for a nation paying so little interest on debt: it's effectively nil after inflation.
    Investors have to put their savings somewhere and rich countries like ours have never defaulted. Ever. That's why talk of a serious loss of credit rating is seditious.
    ALL sovereign bond rates for the wealthy economies have fallen this year: savers are ever so eager to store their money somewhere relatively safe.
    What matters to investors' risk assessments is that national income growths are sustained. Because we know that nations with healthy growth rates will be able to pay off their bond holders from the proceeds of growth. We also know that nations in recession and mass unemployment are risky bets.
    Neither the Eurozone nor the current UK government has a safe prescription for true debt recovery. What we should we be looking for instead is less aggressive cuts and sustained income growths to pay off these 'Wall St' debts. I even suspect we'll end up with that moderate policy when our government finds it just can't get away with its threatened austerity measures.

  • Comment number 16.


    Ms Flanders you write :

    'Most worrying, for monetarists - the money supply is still shrinking. That hasn't happened since the 1930s.'. Please Madam, explain and discuss.

    And yet for me the quote is the most telling aside from your finger tapping today.(I trust you do not mean ONLY for Monetarists though!)

    How very eighties it sounds , almost quaint. Do the languid Summer days make the BBC's Editors suffer from acute nostalgia ?



  • Comment number 17.

    The US economy is on shaky ground and if it falls over again then so will we and so will Euroland. Unless and until the Yuan is revalued we will continue to suffer; answer - import duties by the US and EU on Chinese imports to the equivalent of a fair exchange rate. Isn't it time to get a little tougher with our competition? Perhaps a future of closer trading ties between the US and the EU is required; the North Atlantic Trading Economic Area?

  • Comment number 18.

    With Cleggmeron Micawber moneynomics double dip would be no surprise when the only feasible growth engine in present circumstances is public spending - especially on capital and infrastructure projects. Look for reduced growth or worse in six to nine months time when the spending cuts bite (assuming that redundant public sector workers dont spend their redundancy on setting up wine bars or pottery collectives!).

  • Comment number 19.

    The problem is that economic growth is needed to end the recession; however the uncomfortable reality is that a large surplus of cheap high net energy fossil fuel has been largely responsible for driving economic growth since the start of the industrial revolution. I suspect the near term decline in the rate of cheap global oil production will significantly reduce the potential for future economic growth and with it the ability of nations, their citizens, banks and commercial organisations to all pay down their debts. Colin Campbell sums the dilemma up (http://www.theoildrum.com/node/5970) in his reply to an article by the Guardians energy correspondent Terry Macalister, who reported on whistleblowers in the IEA claiming the organisation had been overestimating future oil production under pressure from the US government.

    “Given the central role of oil in the modern economy, the peak of production promises to be a turning point of historical magnitude. It seems that banks have been lending more than they had on deposit, confident that Tomorrow’s Economic Growth was collateral for Today’s Debt, without recognising that the expansion was fuelled by cheap oil-based energy. The Governments are now printing yet more money under Keynesian principles in the hope of restoring past prosperity, which may meet with a brief success. But if it does, it would stimulate the demand for oil that would again soon breach the supply limits, leading to another price shock and an even worse consequent economic depression.”

    It was the Rumanian born mathematician and economist Nicholas Georgescu-Roegen who demonstrated the thermodynamic foundations of the economic process in his book "The Entropy Law and the Economic Process". He explains how the second law of thermodynamics has a central role in production theory, which had implications for the continuation of economic growth. His concept of the "entropy hourglass diagram" to illustrate the relative contributions of solar energy to the earth’s biosphere and with fossil fuel energy, to the economy, combined with the recognition that the production process is not a closed but open system embedded in the earth’s biosphere, were as obvious as they were profound. Such an economic "open system" requires inputs of low entropy natural resources, with energy being the key resource, and in the process of transforming these resources into goods and services produces high entropy wastes (pollutants) that are discharged into the Earth's biosphere with its limited capacity for absorbing them. In effect, the economic activity of humans is greatly accelerating the normally extremely slow entropic degradation of the Earth’s non-renewable natural resources, with potentially grave consequences for future generations.

    The following three articles examine the linkage between energy flows within the the economy and their effect on economic growth.

    The first paper by George Mobus, (Associate Professor of Computing and Software Systems at the University of Washington Tacoma) is entitled "The Future of Capitalism - Profits and Growth". This gives an excellent descriptions of the relationship between net energy and economic growth and the consequences of a decline in the availability of high net energy (Energy return on Energy Invested) provided by fossil fuel (all energy alternatives, including nuclear, have much lower net energies).

    http://www.theoildrum.com/node/6374#more

    The next paper evaluates the impact of declining net energy flows throughout the global economy and the difficulties inherent in trying to address this resource limitation. This well researched paper written by David Korowicz is entitled "Tipping Point - Near Term Systemic Implications of a Peak in Global Oil Production: An Outline Review", concludes Peak Oil could induce a rapid systemic global economic collapse, and by extension a collapse of our civilisation.

    [Unsuitable/Broken URL removed by Moderator]

    This final paper entitled "Energy, Growth and Sustainability: Five Propositions", was written by Steve Sorrell (Senior Fellow, Sussex Energy Group Science and Technology Policy Research unit, University of Sussex). Proposition 2 states “the contribution of energy to productivity improvements and economic growth has been greatly underestimated”. But perhaps the final proposition, “a zero-growth economy is incompatible with a debt-based monetary system” identifies a major risk to the global financial system, which accords with Colin Campbell’s quote above.

    [Unsuitable/Broken URL removed by Moderator]

  • Comment number 20.

    Gordon put VAT back up - understandable given the deficit hysteria, but I would have left it at 15% - and stuck £10/week on Tax Credits too. Oh, and no pay restrictions on the public sector either - if the private sector can't compete on wages to get the workers....well they should know it's survival of the fittest.

    Kind Regards
    Charlie

  • Comment number 21.

    I'd be calling in the banks again and telling those we own that if they don't start acting in the national interest by the end of this week then their boards will be removed by force if neccessary and replaced by non City people who actually understand markets and technology and have run a real business that doesn't have a captured audience.

    We have to stop piddling around with these arrogant self centred bafoons.

  • Comment number 22.

    7. At 8:20pm on 21 Jul 2010, Up2snuff wrote:
    Stephanie, I think people were talking about double-dip long before recovery began. A lot of the factors for that perfect storm are coming back into place - high oil prices, high property prices, falling incomes, inflation ...


    Amen.

    The steady smooth downward curve of te UK's economic decline will have the occassionaly step lurches down or up (psst, anyone for a consumer bubble).

    We are about to have downward lurch.

  • Comment number 23.

    Charles Jurcich wrote:
    "The problem the monetarists are just begining to learn is this: stimulus is not there to kick-start the economy. If you treat the problem like this and take the stimulus away, the economy falls over again.
    Some stimulus has to be on-going and for as long as growth is desired. A recent report by Goldman Sachs says that ideally the US needs to run a coninuous deficit of at least 7%GDP just to get very modest growth.
    Until consumer's income rises with better wages or wealth distribution, the US and UK will have to run large deficits. If the balance can be corrected, and aggregate demand returns, the they will only have to run small deficits."

    This is a fantastic idea except for one minor flaw. That is that if you continue to run deficits, eventually you owe so much money that all your tax revenue is used to pay interest on the existing debt. Then you can't run any more deficits. But way before you get to that point, you have to sack all your police, all your teachers and lecturers, and all your military folks. Oh, and all your politicians.

    You see charlie, running a deficit of 7% adds 7% of your GDP to your existing debt each year. So even if your debt is only 50% now, in 20 years you have 190% of GDP as debt. In 40 years you have 330% of GDP as debt. Heck, even if you were starting from scratch and had zero debt, in fifty years your debt climbs to 350% of GDP. And that is about the working life of one generation of folks.

    Now if you are eventually paying interest on that debt at 3%, which is far lower than historical averages over 50 years, that means you are paying 10.5% of the value of your GDP just in interest on that debt. And if you are paying 5% (just now I think 30 year treasuries are around 4%?), which is not a large amount in historical terms, then of course you will be paying 17.5% of GDP just to pay your interest bills.

    Now tax revenues are around 28.2% of GDP at the present time in the USA.

    So if they stayed at that level, you would be paying roughly 62% of your tax revenues in interest payments. So you would only have 38% of your taxes providing government services. The rest would go straight to the bankers.

    And, of course, that means having no security forces, no hospitals, no anything, really. You;d be classed as a failed state long before you got to that position.

    So you can see, this idea that 7% deficits are the way forward indefinitely are pure fantasy. It is mumbo jumbo, an insane belief that spending money you don;t have will make you rich.

    It will make Goldman Sachs rich, for sure. But it will turn the USA into a failed state.

  • Comment number 24.

    The following links should be ok and go to the last two articles referred to in my earlier blog (number 19), which were unfortunately broken.

    David Korowicz article

    http://www.theoildrum.com/node/6309

    Steve Sorrell article summary that contains a link to the pdf file

    http://energyandourfuture.org/tag/steve_sorrell

  • Comment number 25.

    8. At 8:44pm on 21 Jul 2010, onward-ho wrote:

    ToryLib = double-dim = double-dip = double-trouble.

    Bring back Gordon!

    ====================

    Gordon would have ensured no double dip

    It would have been nothing but down, down, diddle down

  • Comment number 26.

    #11. At 8:56pm on 21 Jul 2010, Charles Jurcich

    ----------------------
    I completely agree. I'm not sure many are listening ... or at least not yet wanting to admit to doubts about the current medicine being handed out to the UK population. OK some contributors do see the point you are making, but there are some wedded to the mainstream economic theories; ie we have to do what is currently being done by the government - the laws of economics prevail. OK, fine; but at what point will there be an admission that the current policies really aren't working?

    For me the evidence is already there that mainstream economics is a failure; we need something better. I've read about MMT and like it; I'm willing to listen to critism and will agree that the way in which runaway inflation might be controlled / eliminated is contentious, but clearly, some contributors here don't think it worth anything. Fair enough, its up to them. But are they at least willing to consider that the economic ideas they know and love might, just might be wrong? Do they have absolutely no doubts? Doubts are allowed, you know; that way there might be advancement of understanding. Having no doubts seems to indicate dogmatism.

    In scientific research, a theory is only any good until it is proven wrong. This is achieved by seeking evidence to support or deny a theory. It seems to work well in providing continuing advancement.

    So why should economics be any different? Are current main stream economic ideas frozen, never to be changed - no matter what the facts; or when it is seen that there evidence that is contradictory?

    Even if you abhor any particular alternate ideas/economic ideas, is it possible to at least admit that economics as a subject should be continually examined, tested and for it to be shown that ideas are truly supported by evidence. If the mainstream ideas are not supported, surely they should be, at least, questioned.

    Its liberating to take this first small step; the rest are easier. Who knows, you might even, from your questioning, develop a new insight into economics that enhances your reputation.

  • Comment number 27.

    Surely, there will be a dip every single time the banks take profit. With capital "leaving" the system as profit the result is another dip. The first dip arising from the failure of banks to lend to each other to finance the disbursement of profit and each subsequent dip some anniversary celebration.

    The banking system has a long term need to accumulate money. Without that need being fulfilled, dips are inevitable. Factor out the banking from the economy and there is a different picture. There is a long term need to circulate money. The behaviour of banking is, in general, more strongly supported by government and central banking policies. This is clear from the permissive state of fractional reserve banking.

    What is needed is a moratorium on bank profit for a few years. Instead of dividends to shareholder, banks should be cycling surpluses back into reserves. Loans for productive purposes with long date maturity should be encouraged. Then a double dip might be avoided in the general economy.

    The crisis - dips, double dips, annual dips - are a direct product of banking behaviours both now and in the past. This is nothing special about banks but banking behaviours. Banks, Savers, Pension Funds. To avoid the dreads of dips, banking need to be regulated to ensure that money flows.

    The austerity measures in the public sector do not address this. The measures cut the flow of money dead. Which promotes the same problem the banks already had. Which promotes deeper dips. China and Germany exporting their way out of recession allows the banks access to new money to accumulate - while David Cameron is asking us all to volunteer so that the existing money can be pulled into one place more easily.

    The result is not so much a double dip as a step down in the economy for those at the lower end of incomes where there is little disposable income to circulate and a lot of obligatory spending with organisations that bank the income.

    Cuts and Austerity only have short sharp shock value. They entrain dips into the economy and that will amplify over time. The next crisis can be bigger again because the banking behaviours are bigger again. Unless someone takes control of the relationship between banking interests and public interest then the future will always be dips.

  • Comment number 28.

    "OK, fine; but at what point will there be an admission that the current policies really aren't working?" [26 SlpeepyDormouse]

    Nice to speak to you again,
    Not many people have realised this (yet), but what we are about to go through is literally a once in 100 years event. If you look at the discussions, most people don't know what is coming.

    The cuts haven't hit us yet but maybe the homelessness and suicide statistics are going to shoot up! - I hope not.

    Hopefully this will finally prove that the neo-liberal monetarism is wrong, but I suspect people around the world will have to die first.

    I can't find the blog but I think that Bill has written (from his research) that by the end of this year, another 'hundreds-of-thousands' of families around the world will have been forced into abject poverty as a result of this recession - to us though it's still just an academic debate.

    Watching PMQs you would not know that anything important is happening.

    Ignore me, I'm depressed - I know we will experience it directly soon - if this government continues with its 'cut-the-deficit' madness.

    I'm sure I'll feel better in the morning.

    Kind Regards
    Charlie

  • Comment number 29.

    The question is the wrong premise. It suggests that the economy came out of recession.

    In nominal terms, it has. In real terms, it is far from the close. Insipid growth, maybe hitting 1%, with RPI at 5%. Last I looked that was negative real growth.

  • Comment number 30.

    Well, with trade deficits totalling at less than one percent of final household spending in the UK, what is the fuss?

  • Comment number 31.

    GCSE Economics tells you that taking OOM a Trillion pounds of demand out of UK PLC will significantly suppress our GDP - and with no serious prospect of an export-led recovery, the only question is how deep will the "dip" go? Come on Boy George, "do you really wanna hurt me?" Given the general state of the economy and our export markets, this is definitely going to end in tears - it is a "stimulus package" alright - a Negative One!

    Trade sanctions to restrict imports and stimulate domestic production are the only tactic left, but this would involve tearing up GATT commitments, rewriting EU treaties and would lead to a chinese economic implosion that would prompt severe retaliation by the chinese communist party - think a Chinese war with Taiwan and N/S Korea kicking off. It's also politically unthinkable for the ConDems and would hole their whole philosophy below the waterline.

    But sooner or later sovereign wealth funds are going to start dumping the $ - this will trigger another banking crisis that governments won't be able to shore up - in the end the "magic of the market" will sort it out - by recognising that all those squillions of greenbacks are good for is toilet paper: US debt and currency are effectively valueless.

    The only thing stopping the total collapse of the dollar is that it has been the reserve currency for so long so that too many nations and corporations can't afford to face the reality of ture value of the currency they hold, but in the end the dam will crack and the underlying lack of value in all this debt and over-issued money will show through.

    But given the sovereign debt problems in EuroLand and the UK's exposed position, would we survive a dollar meltdown? We'll be back to trading with gold coins shortly....

  • Comment number 32.

    #28. At 01:36am on 22 Jul 2010, Charles Jurcich

    Hi Charlie, I have the same sort of concerns as you. I find it depressing that so many contributors do not seem willing to wonder if there is an alternative paradigm on which economics might be based successfully. As you will have seen, I don't now think there is an easy answer but it seems wrong that the way the economic system works benefits the few and impoverishes the many. All the while the system isn't challenged intellectually, we will stay in our current slow motion car crash. MMT seems to me to be a basis for that challenge, but it does seem to have problems; not least of which is a poor reputation. Whilst I think I understand, I haven't yet found a good way of countering and writing about the charge of 'printing money'. I don't think it is; but those econonomists working in the field do not seem to have written it up in a useful way.

    I have never understood how anyone could think a double dip is avoidable if the announced policies are pursued, particularly as there is now a high degree of coordination across G20 nations. In pursuing these policies, the Western nations will be impoverishing themselves at a time when we need significant government investment to maintain our populations at something like the standard of living to which we have become accustomed. Actions that will result in recession or depression seem to take us in the wrong direction.

    Oblivion's comment #30 is interesting. DEFICITS are important because we have been told they are by people who should know - so we believe it. Also, few seem to realise that debt and deficit are not the same. To many, the words are inter-changeable. To me they are very nearly the same in the context of the non-government area; but in the context of government spending they are different. Appreciation of that might just help a little

  • Comment number 33.

    #31. At 08:15am on 22 Jul 2010, richard bunning

    Reading this, I had better dig up my garden and plant vegetables and then guard them 24-7. Never did like sprouts though!

  • Comment number 34.

    Now where are all the posts from people saying "The only true wealth comes from the private sector and government just a greedy parasite etc etc". Come on there were loads of you just a few weeks ago. Honestly, there you all were saying how much Osbourne's budget was going to save us all as we marched forward to the sunlit uplands of private sector prosperity. Duh!

  • Comment number 35.

    Double-dip? Don't they mean triple-dip!

  • Comment number 36.

    Just like Gordon Brown's assertion that he had abolished boom and bust - the fools (for that is the only proper description of people who will not learn from history!) who have claimed that they have averted a depression are wrong.

    As soon a Mervyn King/Ben Bernanke ignored the housing related debt bubble (and inevitable crash) the only outcome was, and indeed still is, a depression. There is no support for any other historic parallel throughout economic history.

    This stage of the denial of the inevitable is also a historically paralleled stage in the development of the depression.

    The key to recovering from, and shortening, depressions is to get the cause out of the way as soon as possible. Unfortunately all depressions are marked by a stubborn refusal and arrogant insistence that this is either impossible or simply wrong - it is possible and is correct.

    Thus the key now is to de-leverage private debt - and that means house (and property) prices must fall in the UK by 50%. The non-operating secured debts must be collected and related assets repossessed and sold fro a much reduced price. History shows us that nothing can re-start until this happens.

  • Comment number 37.

    #36 John-from-Hendon: whilst I do regularly question the sanity of the people buying houses at the prices advertised round our neighbourhood, I think there is a big problem with house prices falling by 50%. As O level (yes I am that old) economics tells us, prices fall because there are more sellers than buyers.

    We know, or more accurately govt statistics tell us, that we have consistently as a nation build far less houses than the demand for additional houses. So we are faced with a situation where we will definitely have more buyers than sellers.

    That leads to the conclusion that prices can only fall if a large enough proportion of the buyers are unable to find the finance to buy at the prices asked. Now FSA is insisting (and not before time) that lenders do proper checks on people's ability to pay off their mortgages but with interest rates at record lows mortgages are a lot more affordable than when I started.

    My best guess is that house prices will probably stay flat for several years, maybe even drift down a little bit but I just cannot see a 50% or even a 25% price correction happening at least in the short term. Of course that is a national average, I am sure there will be areas of Britain where prices will collapse

  • Comment number 38.

    #26 SleepyDoormouse,

    I enjoyed this post as it has become quite rare on this blog over the last 18 months as it contains some quite simple truth.

    The drugs (sorry economic policies) aren't working anymore. We need to recognise that theories are just that - theories. They are not laws (in the scientific meaning of the word). They actually need to be continually challenged for their own good. Now I am not sure that MMT provides an answer to our present problems but I am prepared to listen.

    For me the core problem is one of sophistry. The whole financial environment has become far far too complex to the point where it has been divorced from the very purpose that it was created for. Hence, we have banks, markets, financial institutions and 'serious' investors (Soros, Buffett et al) taking actions in their own interests that are at variance with the wellbeing of the economies that give rise with the economies that feed them. When, financial institutions have to employ teams of 'experts' to create products that are only traded between themselves and then other teams of 'experts' to try and interprit them. It is just pure sophistry.

    We need to bring the financial industry back to reality and in so doing the economic policies that we try and develop on the back of their activity. This cannot be done overnight but it needs to be done as a matter of urgency. In the mean time, I have to agree with JFH. We cannot put off the pain indefinately and it will be better to get most of the pain out of the way sooner rather than later.

  • Comment number 39.

    'But we can safely predict that eurozone is not going to be a great engine of global growth.'

    This is growth in spending measured by adding up consumer spending, business spending and government spending and the difference between imports and exports.

    Is this an effective measure?

    SPENDING not a great balance of trade or full employment or income greater than expenditure - SPENDING some of which is on a credit card for stuff that won't last till next week, let alone 40 years.

    Why does it really matter if spending goes down if you import less because you buy less stuff made abroad?

    Why does it really matter if you turn down the thermostat or eat differently

    It only matters to governments who siphon off some of your income via various taxes to spend on stuff that might not be necessary, often hidden under the banner of worthy services.

    Somehow government spent in the region of a trillion more than it might have done in the last 10 years. GREAT, GDP went up.

    If you look at the UK, annual spending by government went up by 200bn per annum between 2001 and 2007 and 340bn PER ANNUM between 2001 and now. Annual spending doubled. GREAT for GDP, hurrah.

    Tax revenues went up by 130bn a year - the vast majority of which came from increases in Income Tax - 40bn, NI - 36bn, VAT - 17bn, Corporation Tax - 10bn. The tax take for 2009/2010 is still higher than it was in 2005/2006.

    Income didn't keep up. The rest came from borrowing - in so-called boom times. Never mind, GDP went up

    Since Spending measured by GDP includes government spending much of which is debt financed you might want to ask whether shrinking GDP is really a bad thing or just the consequence of realism.

    And before someone says cuts in government spending will be a bad thing, to be frank there are lots of metaphoric and real government lights that can be turned off without loss of jobs.

  • Comment number 40.

    I liken the present time to when you are on a beach with young children. You explain that the tide is going out, but they don't understand as the waves are still coming in.

    At the moment we keep getting naive reporters saying "look, that wave came in more than the last one" thinking that this proves the tide is not going out.

  • Comment number 41.

    #32

    You are correct

    Debt is OK if you can service it from revenue, you are just spreading the cost of something big over a long period

    If you have to borrow to service debt - you have a deficit of income compared to expenditure - you are in trouble

    If you have to keep doing so, you are in real trouble unless and until your income increases or you cut your expenses.

    Unfortunately, most individuals don't have much opportunity to do either, can't afford additional payments to the state in the form of higher taxes and can make some choices not to do so by buying less.

    Business can say, the cost of doing business here is too great if I want to sell my product - I'll set up elsewhere thus reducing income all round.

    On this basis, government has to be realistic about what it should do and how much it should cost, it can't keep borrowing to spend today on the basis that it MIGHT have more income tomorrow just as you or I couldn't either.


  • Comment number 42.

    34. Ian wrote: Now where are all the posts from people saying "The only true wealth comes from the private sector and government just a greedy parasite etc etc".

    Did you read yesterday about Tameside council spending £36,000 building a virtual town hall within Second Life? Do you REALLY think that people wanting to understand Tameside council services instead of using their website would use their Avatar in Second life to wander around a virtual world and find out what services were on offer (in the real world) ?

    This was only found out by a freedom of information request. How many more examples need to be dug up before you understand that there is some justification to those who feel abused by what local and central government have done with their taxes?

    Maybe those in Tameside could spend their own money on products and services from local businesses if they were not paying so much council tax.

    And by the way, that £36,000 is only the money paid out to 3rd parties. It doesn't cover all the salaries of the jokers employed by the council who were managing and running the project, while accumulating pensions that the local residents will have to pay for the next 30 years.


  • Comment number 43.

    #40

    did you ever notice that the weather always seemed to get a bit worse around the time that the tide turned?

  • Comment number 44.

    43.
    That reminds me of something I read a while back.
    The theory went that many of the worlds major economic crises happen (and are possibly caused by) low solar activity.

    And if you weren't aware, we are now in the midst of the deepest solar minimum for a 100 years or so.

    Could it be more than the tide that turns with the weather....i.e. the FTSE?

    I can see the logic, low solar activity, low crop yields etc, reduced income and subsequent depression....hmmm....think I'll start buying shares again when the sunspots come back out to play :)

  • Comment number 45.

    "Thus the key now is to de-leverage private debt - and that means house (and property) prices must fall in the UK by 50%. The non-operating secured debts must be collected and related assets repossessed and sold fro a much reduced price. History shows us that nothing can re-start until this happens." [John_from_Hendon]

    I agree with this. I understand there is alot of empty residential property as a result of property speculation by investors looking for an easy investment. If this was released onto the market, prices would fall maybe 10-20%. This could be engineered by councils charging high 'rates' on empty property (where no one is paying council tax).

    This would make investment in housing less attractive as these houses would have higher 'running costs'. Investors with poor cash flow would be forced to sell.

    In addition, the government can offer those mortgages with negative equity, government bonds in exchange for their second homes. The government could sell them, or give them to local councils.

    Kind Regards
    Charlie

  • Comment number 46.

    #37. Justin150 wrote:

    "prices fall because there are more sellers than buyers"

    Your economics supposes that buyers have the money to buy and that sellers are not forced. The fact is that buyers can't get access to the money and also should not be given access to the money as the value of the secured asset will fall. Only the lunatic bankers who have already destroyed the global economy through lack of regulation could possibly agree with you for entirely selfish reasons.

    Frankly, you are demonstrating exactly why the depression will take 30 years or more because of these precise attitudes. These same arguments relate to the 'economic crime' of affordability. It is not affordable for loans to be granted such that the global economy collapses - and that is exactly what has happened! (Through the 'criminal negligence' of the central bankers and regulators.)

  • Comment number 47.

    Let's face it there hasn't been a real recession - all that happened is that in the 1990s the banks overvalued a load of derivative assets (mortgage and other asset backed securities) that they then had to write off when the world decided they weren't actually worth much (triggered by write downs of some dodgy US home loans). Then like a collapsing pack of cards the mark-to-market accounting and provisioning process wrote down even more assets in a self-fulfilling spiral. The loss of bank profits hit UK GDP into a technical definition of recession and to prevent insolvency as a result of the loss in banks' asset values, the government had to lend them money. Meanwhile, in the real world, people carried on making real things, farming real food...

    The rest was just press scaremongering which worried people into deferring big purchases such as new cars and encouraging people to repay their debts (helped by huge falls in mortgage repayments) or to save. How can a nation that paid off £3.2bn net mortgage debt in Q1 this year (£3.4bn paid off in Q4 last year) claim to be so badly off? Why are stupidly expensive restaurants in London full all the time? Why are airports still as busy with people jetting off on holiday when everyone claims to be so poor? What sort of recession involves endless reports of increased corporate profitability, of increased retail sales, of increased car sales and production, of reducing unemployment? How badly off are we when almost 300,000 English households have second homes abroad and 250,000 have second homes in England (and rising year on year)?

    Of course there is no question of increasing a progressive tax (such as income tax) to address the budget deficit because we're just so poor. Oh no, we have to slash public services and increase VAT, which is regressive and hits the less well off to a greater extent. Ah well, we voted them into government, I suppose, so we've only ourselves to blame...

  • Comment number 48.


    #41. At 10:53am on 22 Jul 2010, mrsbloggs13c2
    #38. At 10:28am on 22 Jul 2010, foredeckdave

    There are going to be contributors who will be tired of what I am about to write; if you are one of them, please skip this item. However, I am going to repeat myself using words perhaps arranged in a different order; maybe their meaning will sink in.

    First, I agree with #38. The financial markets think they are our saviour, but they are actually just a means to an end. That end is for the inhabitants of this planet to have as good a life as possible. (If any reader disagrees with this statement please reformulate in any way you wish and publish it here.) It is clear to me that the financial industry is, at the very least, in the way of this being achieved. This alone, indicates there is need for an evolution of the system to something better. And thanks for your comments mrsbloggs13c2, they triggered all this.

    In the Gulf, BP has accepted its responsibility for cleaning up the mess [no doubt, in time, the courts will pronounce on who is really responsible]. They are now paying.

    The current financial crisis can be laid at the door of many individuals, companies, institutions and governments. We have all in our own way contributed to a greater or lesser extent. Our personal debt can only be paid off if we have an income to allow us to do it – austerity measures go against this objective; they will produce hardship for the individual and those who provided the finance will just loose money as individuals go bankrupt. We need to maintain employment to allow personal debt to be reduced. Current policies are against this.

    Governments, by bailing out financial institutions have kept the 'show' on the road. It has bought us time to sort the mess out, but from media reports it appears that the financial industry are just going on as before. Surely they ought to be picking up their share [lions share?] of the tab. But they are fighting to maintain the status quo. Personally, I have little respect for those who cannot accept responsibility for their actions.


    There is a paper, written in 1998 by Stephanie Bell entitled 'Can Taxes and Bonds Finance Government Spending' It can be downloaded from

    http://ideas.repec.org/p/wpa/wuwpma/9808008.html

    I reproduce the Abstract here:

    “This paper investigates the commonly held belief that government spending is normally financed through a combination of taxes and bond sales. The argument is a technical one and requires a detailed analysis of reserve accounting at the central bank. After carefully considering the complexities of reserve accounting, it is argued that the proceeds from taxation and bond sales are technically incapable of financing government spending and that modern governments actually finance all of their spending through the direct creation of high-powered money. The analysis carries significant implications for fiscal as well as monetary policy.”

    Although written from a US perspective based on their organisations, I am told that in the UK we have an analogous way of working.

    To those who say that we have to borrow to finance government expenditure, please show where this paper is wrong [ a diatribe based on just reading the abstract is of little use, please provide a page reference] and also then take it up with Miss Bell

    If you cannot show where it is incorrect, please accept the implications that
    1 you perhaps do not really fully understand the subject
    2 you need to think further about how the finance industry and government finance actually interact
    3 policies based on governments selling bonds to 'finance deficits' just might need to be re-thought
    4 wonder why the government is buying all this debt when it doesn't really need to
    5 Mainstream economics might not have all the answers and needs to evolve into a paradigm that more nearly reflects the reality of the way our financial system is set up.

    Remember: It is too easy to ignore inconvenient truths; but when we collectively do, the majority of us will end up the loosers and poorer.
    Just ask, who benefits from this financial mess? Follow the money and wonder why they are in denial that mainstream economics is fractured.

    I know what conclusions I have drawn; what are your conclusions?

  • Comment number 49.

    #19 Richard

    I agree with the importance you attach to energy.

    Link this in with the concepts of use value & exchange value (Marx) & the accumulation problem (Luxemburg) & you can see that capitalism faces a much bigger problem than double-dip.

    More like falling off a cliff!

  • Comment number 50.

    Nothing to do with that nice Mr Osborne and his complete economic illiteracy, if you take purchasing power out of an economy you depress economic activity and if the same policy is being pursued on a regional basis you make a double dip a certainty. This wasteful public spending, that must be cut according to the ratings agencies, that rated much of the "toxic debt" as triple A,is with the private sector and the "dimwits" in the CBI are just beginning to wake up to this and the squeals are starting. so much not much chance then of the private sector taking up the slack. Oh dear!!

  • Comment number 51.

    # 14. At 9:11pm on 21 Jul 2010, honestgeraldinho wrote:

    As Sherlock Holmes would have asked "who benefits from the crime", why those with the present resources to buy into the slack, the Americans who hold the largest inflation proof resource in Fort Knox; the Arab oil producers who hold the largest stocks of "black gold"; the Chinese who have the largest "sweatshop and internal market" in the world. What worry double-dip or full blown depression when the stoke pile of wealth makes secure the ever increasing ownership of other nations means of production.
    ================================
    Nice Rant. I agree.

    BTW, I found theses fragments in an ancient document (written circa 90CE at the height of the Roman Empire) which now seems curiously apposite to the tone of these blogs.

    "Fallen! Fallen is Babylon the Great!
    ... all the nations have drunk the maddening wine of her adulteries.
    The kings of the earth committed adultery with her, and the merchants of the earth grew rich from her excessive luxuries."

    "The merchants of the earth will weep and mourn over her because no one buys their cargoes any more - cargoes of gold, silver, precious stones and pearls; fine linen, purple, silk and scarlet cloth; ...costly wood, bronze, iron and marble; cargoes of cinnamon and spice, of incense, myrrh and frankincense, of wine and olive oil, of fine flour and wheat; cattle and sheep; horses and carriages;

    and bodies and souls of men."
    ==========================

    Lets be REALLY careful out there today (I like that, so I borrowed it).

    :)

  • Comment number 52.

    27. At 00:16am on 22 Jul 2010, hubert huzzah wrote:

    Surely, there will be a dip every single time the banks take profit. With capital "leaving" the system as profit the result is another dip. The first dip arising from the failure of banks to lend to each other to finance the disbursement of profit and each subsequent dip some anniversary celebration.
    ===========================
    Not sure I agree with that...I believe the cyclical nature of boom and bust is inherent in the phase delay between lending and repayment. I had a grandstand view of the DRAM cycles in the 1990's and the inevitability of the whole things was maddening. When demand was short, prices were high, so investors got loans to build new factories. When the new factories came on stream, supply rose, prices fell, and the people who got to the party too late lost their shirts. It didn't help that a lot of those loans were capitalised by smaller loans...so that behind a billion dollar "bet" to build a new DRAM factory in time to milk the high prices, there might have been as little as a few hundred dollars of real collateral.

    I think the dip comes around each time loans go bad, and in the feeding frenzy of a gold-rush, there will always be bad loans.

    The only way out of this is much tighter regulation of banking and a change in the way "loans" are valued to include this "phase delay".

    Imagine if bank employees were given bonuses on the annualised repayments of their portfolios, rather than on new business? A simple change, but a worthwile one, methinks.

  • Comment number 53.

    44. At 11:30am on 22 Jul 2010, Economissed wrote:

    "That reminds me of something I read a while back.
    The theory went that many of the worlds major economic crises happen (and are possibly caused by) low solar activity."

    W S Jevons from Owens College (Manchester University) propounded this theory in 1878

    I suspect the crisis has a much greater longevity - something to do with the greed of bankers, the unregulated shadow banking system, and the nationalization of debt. In agrarian economies the link would be more tangible, but where energy, science, industrial organization and modern freight have been appplied to agriculture the causality is at best tenuous.

  • Comment number 54.

    #46 JOhn from Hendon
    You clearly only read the first paragraph of my post. If you had read all of it you will find that I also said that where would be buyers cannot raise the necessary financier prices will also fall (technically they cease to be buyers and so you end up in situation where there are more sellers than buyers so basic economics tells us prices fall). Now I may be wrong about saying house prices will drift sideways in the UK maybe even drop a little but not by 50%. Come back in 5 years and lets find out who is right.

    But then again I assume you are someone who believes that assets not income is what matters, you talk about the "crime" of affordability. Assets do not pay off loans, income does. The banking collapse was caused by many factors (no control over public spending in many countries being one of them) but where banks got it wrong was not because they were seduced by "affordability" dogma but because in far too many cases they did absolutely no checking on whether the loan ever had a hope of being affordable. For example the so called Ninja (no income, no jab, no assets) loans in USA are perhaps the high point of gross stupidity by both lender and borrower. The lender was not making a loan but a bet of house price rise.

    I particularly liked "The fact is that buyers can't get access to the money and also should not be given access to the money as the value of the secured asset will fall". Now I would agree that many (not all) buyer's can currently not get access to finance - I said as much in the earlier post. But I am intrigued by the idea that people should not be given access to money to buy an asset if it is going to go down in value. So presumeably no body should be given loans to buy cars, furniture in fact virtually anything?

  • Comment number 55.

    39. At 10:28am on 22 Jul 2010, mrsbloggs13c2 wrote:

    'But we can safely predict that eurozone is not going to be a great engine of global growth.'

    This is growth in spending measured by adding up consumer spending, business spending and government spending and the difference between imports and exports.

    Is this an effective measure?
    ============================
    Assuming this is rhetorical, I agree with you that GDP is a pathetic measure of "growth". It would be hard to think of a better one, though, since if people grow their own food and hide their money under the mattress, nobody is going to know how much better off the country has become.

    Ideas anyone?

    How about percentage change in [(Net Assets - Net Debts) * (1 - RPI)]?

    TTFN

  • Comment number 56.

    The ConDems (and all the deficit reduction hawks) have kept up the mantra that if we do not aggressively reduce the deficit then the markets will punish us. They cite Canada, Ireland and Sweden as examples of virtuous pain and testosterone-fuelled austerity. So we would expect the markets to love these guys and reward them right?

    Well Ireland has cut so deep is has pushed its economy off a cliff (see Stephanie's blog http://www.bbc.co.uk/blogs/thereporters/stephanieflanders/2010/04/irish_lessons_for_the_uk.html). Never mind, all that pain will be worth it because the markets will love us won't they? Erm no! Moody's downgraded Ireland's debt again this week (http://www.bbc.co.uk/news/business-10681046). What a kick in the teeth.

    What this is starting to illustrate is that the central tenet of the ConDem mantra is probably wrong. It's not the size of your debt and how fast you can cut it that is the main issue, but where you stand in terms of debt default compared with other countries. Ireland shows that by cutting back on spending to the extent that you harm growth (and therefore increase the risk of deafult) is as likely to get you a rating kicking as doing nothing. Or put it another way - is the best way of tackling your own personal debt to take a cut in wages?

  • Comment number 57.

    # 19. At 9:37pm on 21 Jul 2010, Richard wrote:

    It was the Rumanian born mathematician and economist Nicholas Georgescu-Roegen who demonstrated the thermodynamic foundations of the economic process in his book "The Entropy Law and the Economic Process". He explains how the second law of thermodynamics has a central role in production theory, which had implications for the continuation of economic growth.
    ===================
    I had been coming to similar conclusions but am not clever enough to write a book about it.

    Thermodynamics for dummies...
    1. You can't win
    2. You can't break even
    3. You can't opt out of the game.

    Profit - for everyone who gains, there is a commensuarate loss.
    Closed systems - wealth can neither be created nor destroyed.
    Open systems - All input to the biosphere comes from Solar Energy. The world economy therefore has an upper limit, which is when the rate of consumption equals the rate at which sunlight is converted into "useful work".

    Technology can provide more efficient mechanisms for that conversion (such as hybrid wheat or solar panels), but burning off millions of years of accumulated solar energy in the form of fossil fuels in just a few decades is short-term madness. (We don't care, we'll be dead by then! Is that what we really think? Is that the legacy we want to leave on an impoverished planet?)

    We should be using the good times to develop sustainable technologies for the future, not just burning bigger bonfires in pursuit of bigger bonuses.

    Have to go get a copy of that book.

    Bakson. C Robin.

  • Comment number 58.

    In a DEPRESSION and it started Sept. 2007 on the collapse of Bear Stearns and N/Rock. No "dips" only a downward slope for the next twenty or thirty years for 90% of Britons.
    Euthanasia will be legalised within the next 10 years and Martin Amis type booths opened in the High Street for those that cannot face the New Realities of grinding poverty i.e. the Poor, Diposessed, Disabled, Elderly.

    It does not need to be like this.

    A Social Wage of £200 p week could be given to all over 18years of age (without exception) and all earned income then taxed at 30% flat rate over and above £200. "Quantitive Easing" for the People, as it should have been, and not for the Banks and bankers bonuses.

    RBS and Lloyds ,85% and 40% Public owned ,should have been totally Nationalised by the previous Government and re-named the "State Bank "
    and offered loans to Business and Individuals at reasonable non- ursurious rates.

    The Railways, Elecricity,Gas and Water Companies should also have been Nationalised (either without Compensation or compensated with QE money.)

    The "Great and the Good" are not listening and still continuing to do Satans work and enriching themselves.

  • Comment number 59.

    #56. At 1:39pm on 22 Jul 2010, Jaundiced_Eye

    Seems a fair assessment to me.

    CONCLUSION we need to do something different; but our politicians and civil servants don't understand, so they are bound to make the wrong choices.

    [See my previous blogs for some ideas, they may not be right so what about some alternatives?].

  • Comment number 60.

    Ilfeston Tim @ 17.

    "Unles and until the Yuan is revalued we will continue to suffer."

    If the Commissars of China do that we will suffer even more. Imagine if they doubled the value of their currency overnight. No more cheap manufactured goods, a devalued Pound, rising inflation thus Interest rates rocketing, jobs destroyed and Families losing their Homes.
    With the immensely strong "New Yuan" they would buy Britain up lock, stock and barrel, its Companies, Factories and People. They may employ some of us in their Sweatshops however.

    It will come eventually anyway, but do not wish it upon us just yet..

  • Comment number 61.

    #58. At 2:37pm on 22 Jul 2010, honestgradgrind

    Have you been reading about modern monetary theory, or is this marxism

  • Comment number 62.

    51. At 1:20pm on 22 Jul 2010, PuzzledMushroom wrote:
    -----------------------------------------------------
    V. interesting post, incl. quotation.



    Lets be REALLY careful out there today (I like that, so I borrowed it).

    :)

    -----------------------------------------------------------------------
    You are very welcome! I borrowed it too - from Sgt Phil Esterhaze. ;-)

  • Comment number 63.

    "The banking collapse was caused by many factors (no control over public spending in many countries being one of them) but..." [54 Justin150]

    I'm not sure what you mean by this. If you mean some Eurozone countries then that may be true, as their currency system wasn't working properly at that point.

    If you mean that any of, UK, US, Japan etc had spending out-of-control, then I would dispute this. The only fundamental type of irresponsible government spending happens when price stability cannot be achieved by the encumbent government. As I understand it, from a (macro)economic point of view, a high level of deficit-spending is not a problem given the sovereign fiat nature of the currency. How the money is spent could be relevant to causing a problem, if for example HMG does not spend enough in the right places to support the non-government sector. At the moment HMG should be spending in a way that allows the indebted part of the private sector to repay their loans - so helping the banks to recapitalise.

    Maybe I'm wrong, or maybe you didn't mean this anyway.

    Kind Regards
    Charlie

  • Comment number 64.

    57. At 2:26pm on 22 Jul 2010, PuzzledMushroom wrote:
    # 19. At 9:37pm on 21 Jul 2010, Richard wrote:
    =========================================================================

    To Quote - "Utilising thermoeconomic principles thus enabling us to formalise the concept of economic evolution as the development of structural complexity to harness available energy from the environment to avert degradation gradients" So we conclude that speculatively, as much as life is an inevitable consequence of the reformulated entropy law.

  • Comment number 65.

    re #48
    Well worth repetition. Not because I agree with most of it. Thoughtful and cogent rather than the 'Bankers are evil, let's string them up' sort.

    With ref. to #48 and #51, my short term feeling is that the UK could sleepwalk into a revolution (Communist? Marxist? Otherist?) if we are not careful. Would be kinda ironic, if in, say 2017, we go in that particular direction, with all of its guaranteed pain and failure and loss and upheaval and in completely the opposite direction to the rest of the world.

    Yep. Capitalism is broke. It's not a good system but it tends to be better than the alternatives, some of which may also eventually be on the way, not just for the UK but for everyone.

    So I appreciate any attempt to think about practical attempts to fix things. And in difficult times as well as good, looking beyond 'gold' tinted glasses to the more important things of life is good for all sorts of reasons.

    Hang on in there!

  • Comment number 66.

    56. At 1:39pm on 22 Jul 2010, Jaundiced_Eye wrote:
    The ConDems (and all the deficit reduction hawks) have kept up the mantra that if we do not aggressively reduce the deficit then the markets will punish us. They cite Canada, Ireland and Sweden as examples of virtuous pain and testosterone-fuelled austerity. So we would expect the markets to love these guys and reward them right?
    ==============================
    Ireland are not quite in the same league as Canada and Sweden as I have previously posted. Strange you did not go on to look at Canada and Sweden rather than just focusing on Ireland.
    ===========================
    What this is starting to illustrate is that the central tenet of the ConDem mantra is probably wrong. It's not the size of your debt and how fast you can cut it that is the main issue, but where you stand in terms of debt default compared with other countries. Ireland shows that by cutting back on spending to the extent that you harm growth (and therefore increase the risk of deafult) is as likely to get you a rating kicking as doing nothing. Or put it another way - is the best way of tackling your own personal debt to take a cut in wages?

    ====================

    Firstly - Ireland's debt is continuing to grow €85,157,030,420 as of 15:35;42 to €85,157,109,859 as of 15:36;02. The Cuts they have started to make have not yet kicked in and are yet to be fully implemented. They are also seen as just the start of what is needed.

    Secondly - If you are running your own company and it is in trouble what do you do;
    1. Give yourself a pay rise
    2. Stay the same
    3. Try and make economies

    Or you are working for a company who is in trouble and needs to make savings, do you;

    1. Ask for a pay rise
    2. Stay the same and hope you are not one of those made redundant
    3. Take a cut in pay to save your job

    Ireland's debt now stands at €85,157,423,606 as of 15:46;08.

  • Comment number 67.

    48. At 12:21pm on 22 Jul 2010, SleepyDormouse wrote:
    http://ideas.repec.org/p/wpa/wuwpma/9808008.html

    ----------------------

    I read through the paper, and I can accept the conclusion that taxation & bond sales are used to reduce the reserves in the system, and government basically 'creates' money to spend. I may well have missed something, but I didn't see an alternative to taxation & bond sales outlined as a better means to remove reserves from the system? There will need to be one, or the currency will rapidly devalue.

  • Comment number 68.

    31. At 08:15am on 22 Jul 2010, richard bunning wrote:
    Trade sanctions to restrict imports and stimulate domestic production are the only tactic left, but this would involve tearing up GATT commitments, rewriting EU treaties and would lead to a chinese economic implosion that would prompt severe retaliation by the chinese communist party
    =====================================

    Spot on, all be it that certain countries are already practicing import restrictions in the form of import levies. Both the US and the EU have been utilising these for some time now. And do they need to tear anything up, No, they just ignore them. It would only be fools like us who follow the letter of the law.

    And by the way the Chinese are in a very difficult position, they have been buying US debt for some time are are very exposed at present, so if the dollar was to crash so would their economy. What a predicament to find yourself in.....

  • Comment number 69.

    I know the banking sector is regarded as a very important aspect of the UK's economy, but that is only true if the sector as a whole is functioning with due respect with the rest business economy, and is not allowed to play by different rules of failure. My concern is that we're are all still content to build a future on the still very shaky foundations of a financial system that still continuing to practice in the same way as it as done for far too long now.

    Some of the big investment corporations; Morgan Stanley, Wells Fargo, have been reporting figures this week, all in profit, resulting in huge employer bonuses. Goldman Sachs was latest one I read, it saw profits hit by tax, fines and poor trading, it sounds like it's been having a bad year, yet still for the first six months of the year was their average employer salary and bonus was $273,000. How does that sit with the ordinary man in the street, knowing what this sector of the economy as done to the rest of economy

    My feeling is that these colossal financial institutions are still too big fail, and if any do, I wonder if they will now suffer the same fate as any other mismanaged business and simply become insolvent. I'm quite sure all of the banks who have been bailed out, still intend to brutally bring down the axe of bankruptcy on any business that they currently support if they were to default beyond redemption. I wouldn't expect a responsible bank to do anything less. It's a fundamental business principle, and therefore there should be no qualms from any of them if they were to default beyond redemption, that they too should be allowed to fail like any other business: That way, we could all have faith in self-regulation actually working, as the mercilessness of market forces would marshal their business practices to the point of responsibility like any other business if they want to survive:

    Something radical as to happen with financial system, cause at the moment I still feel we're writing it a blank cheque.

  • Comment number 70.

    "Firstly - Ireland's debt is continuing to grow €85,157,030,420 as of 15:35;42 to €85,157,109,859 as of 15:36;02. The Cuts they have started to make have not yet kicked in and are yet to be fully implemented. They are also seen as just the start of what is needed.

    Secondly - If you are running your own company and it is in trouble what do you do;
    1. Give yourself a pay rise
    2. Stay the same
    3. Try and make economies"
    [66 Chris London]

    Why is Ireland's debt growing? Is it the fact that they have a large deficit? Is the deficit going to get smaller as a result of austerity? - no!. The lack of government spending (to support the private sectors need to save or pay-off debt) will mean less income; more private debt-defaults; higher benefit payments; and therefore, higher budget deficit.

    Second, comparing a country to a company or person is not valid - macroeconomics is fundamentally different to economics. If the Eurozone currency system can be fixed to imitate regular sovereign fiat currencies, then like them, the Eurozone will have no financial or revenue constraints, except the need to control price stability.

    Austerity never works.

    Kind Regards
    Charlie

  • Comment number 71.

    @Chris London

    'Strange you did not go on to look at Canada and Sweden rather than just focusing on Ireland.'

    That would be the Canada that has just posted the worst deficit in its history and which, because of its 1990s debt reduction programme now has nothing left in the cupboard except its health service which looks as if it will be dismantled to pay for the mess its in. No a good example of the long term stability resulting from gung-ho debt reduction.

    'Ireland's debt now stands at €85,157,423,606 as of 15:46;08.'

    Nice data, but meaningless. What is this as a proportion of GDP? Last I heard, Ireland's economy is in such a mess that they are having to cut even more just to keep the deficit stable (because of the effect of the plummeting GDP)!

  • Comment number 72.

    Having studied economics for more years than I care to remember and moving on to take up a number of positions in both the public and private sectors prior to my current role as one of those damned consultants / advisers I would now like to say just one thing.

    It would appear that we are all still looking for the painless fix. Academics produce a paper stating one course of action while another produces another contradicting the first. We like sheep follow looking for the panacea of life.

    Well I hate to say it but there is no panacea, In theory many of the thesis put forward make sense. They only fall down as soon as you try and implement them in the real world. In its simplest form Communism works until you try and implement it. I have had the honour of working in Russia, China and Cuba. Only to see the varied levels of equality. As it was once said some are more equal than others.

    Economics to me has now come down to the theory of supply and demand coupled with the ability to pay. This would appear to cover most things we are experiencing at present.

    To revert back to the question in hand - will we suffer a double dip, well I feel we have not yet got out of the first one along with rest of the world. We introduce a substantial amount of liquidity into the market via QE. Our growth over the same period did not matched that amount, hence we have not yet, in reality climbed out of recession. The same goes for the rest of Europe and most os the developed world. Even China is suffering, it has issues with inflation and is under pressure open its currency to the markets.

  • Comment number 73.

    I need to respond to a couple of comment Charles Jurcich raised.

    1. He said "I understand there is alot of empty residential property as a result of property speculation by investors looking for an easy investment. If this was released onto the market, prices would fall maybe 10-20%. This could be engineered by councils charging high 'rates' on empty property (where no one is paying council tax)."

    This is an interesting idea and as long as it did not kick in immediately (and maybe not at all where the reason for the property being empty is death of owner as probate can take a while) to allow time for a normal sale. My one concern would be that this was tried on commercial property and was set so high that all that happened was a lot of commercial property was knocked down (and still is). Certainly worth a closer look.

    2. "The only fundamental type of irresponsible government spending happens when price stability cannot be achieved by the encumbent government. " I think this is where you and I stop talking about the same things. The UK, being overly dependent on financial services was always going to suffer more than many other countries, but Lab made a bad situation much much worse. Govts can run deficits from time to time as a means of boosting the economy in a downturn but when times are good they should be reigning in expenditure (even running a budget surplus) to ensure they build up a cushion to spend in the inevitable downturn. What we had in the period 2004-8 when alledgedly we were all in good times was a Lab govt running the sort of deficit that are only normally experienced in rescessions. That is why I say it was out of control and why we are so deep in a hole. Of course you could argue (and I think this is your argument) that you agree with me that Lab made a bad situation worse not because of the deficit spending but because they spend public money in a way that made price stability worse (pushing up the property bubble). Not sure - are we agreeing on the same conclusion but by different methods or are we disagreeing on the conclusion?

  • Comment number 74.

    The only reason the banking sector is now so important is because the lack of support provided by the banks and other bit of the financial secto for other sectors has been so low that they are now on the critical list.

    Banks are continuing to invest in themselves and damage UK interests. For example RBS has just spent £5bn on its own aircraft leasing business buying up a bunch of Airbus and Boeing aircraft. Boeing and Airbus are therefore benefitting from UK taxpayer stupidity.

  • Comment number 75.


    Times are going to get tougher,the fact that bankers on average get paid 237,000 only increases the anger its 150,000 taken away from firms that could be used to invest and produce more goods.

    Not since King john, has corruption and greed been so rife
    We need a Robin Hood but could end up with a Stalin or Hitler

    All contracts should be scrapped they were made by corrupt men and allowed to be by corrupt men and continue because of the corrupt men

    otherwise they have only themselves to blame

    I repeat the simple truth
    One item costing $7 billion creates less growth than 7 billion items costing $1
    And collapse is close and getting close, when, does it matter, just hope their is time to change and put it right for no one knows what is next

  • Comment number 76.

    70. At 4:16pm on 22 Jul 2010, Charles Jurcich wrote:
    Why is Ireland's debt growing? Is it the fact that they have a large deficit? Is the deficit going to get smaller as a result of austerity? - no!. The lack of government spending (to support the private sectors need to save or pay-off debt) will mean less income; more private debt-defaults; higher benefit payments; and therefore, higher budget deficit.
    ============================
    Ireland's Debt is growing because they are spending more than they are receiving. The total public expenditure was 47 per cent of GDP in 2009, 13% points up on the total public expenditure figure of 34.5% in 2007.
    A Quote from the former chief economist of the IMF, 'The remarkable success of this tax haven, Ireland, means that roughly 20 percent of Irish gross domestic product is actually "profit transfers" that raise little tax for Ireland and are owned by foreign companies. Since most of these profits are subject to the tax code, they are accounted for in Ireland where they are lightly taxed; they should not be counted as part of Ireland's potential tax base. A more robust cross-country comparison would be to examine Ireland's financial condition ignoring these transfers. This is easy to do: a nation's gross national product excludes the profits of foreign residents. For most nations, gross national product and G.D.P. are nearly identical, but in Ireland they are not. When we adjust Ireland's figures accordingly, the situation is dire. The budget deficit was about 17.9 percent of G.N.P. in 2009, and based on European Commission projections and assuming the G.N.P.-G.D.P. gap remains the same it will be roughly 14.6 percent in 2010 and 15.1 percent in 2011, while the debt-to-G.N.P. ratio at the end of this year is expected - by our calculation - to be 97 percent, and 109 percent at the end of 2011.
    So what you are saying is that they need to spend more and increase the share of the GDP further, well I suppose it will increase the GDP...
    ===================
    Second, comparing a country to a company or person is not valid - macroeconomics is fundamentally different to economics. If the Eurozone currency system can be fixed to imitate regular sovereign fiat currencies, then like them, the Eurozone will have no financial or revenue constraints, except the need to control price stability.
    =====================
    However if they can't, which it is looking likely that they wont, what happens then. The Euro is only as strong as the weakest link. The ECB has little or no control over member states. It makes threats which are usually ignored. So if one of the PIIGS fall will there be enough left to support the others. That is the question the IMF has been asking with reference to Portugal and Spain.

    And please don't think I am a supporter of austerity, I am not. However I feel that there has come a time when we need a global realignment of the world economies.

  • Comment number 77.

    Justin150
    My conclusion is that Labour didn't correct the underlying problems caused by the monetarists. This includes the property bubble; variable rate mortgages; other housing related problems; consumer credit; bank de-regulation etc etc

    Labour did make some improvements - they kept unemployment lower, and they spent more to boost aggregate demand, but it just wasn't enough of an improvement. Perhaps they made it worse in some ways. Inflation wasn't too much of a problem during that period. I would only worry if CPI 12 month rate(excluding VAT etc - (i.e. CPIY)) exceeds 4% for more than a year.

    Running too small a budget deficit is dangerous, and running a surplus usually causes recessions, as it takes money out of the economy, particularly if like the UK you have a trade deficit as well.

    The only time the UK budget can be close to balance normally is if the economy is running at full capacity, which we are not, and have not been since the 70's at least. The reason for this is that if you inject money into an economy at full capacity, it inevitably causes accelerating inflation. This fact is misunderstood by people who say something like 'deficit spending causes hyperinflation', which is only actually true when the economy is at full capacity. If unemployment is above 2.5% then there is no real chance of this, except through 'supply shocks'.

    This is how I understand it.

    Kind Regards
    Charlie

  • Comment number 78.

    71. At 4:23pm on 22 Jul 2010, Jaundiced_Eye wrote:

    That would be the Canada that has just posted the worst deficit in its history and which, because of its 1990s debt reduction programme now has nothing left in the cupboard except its health service which looks as if it will be dismantled to pay for the mess its in. No a good example of the long term stability resulting from gung-ho debt reduction.
    ========================================
    Yes that is the Canada that has just posted a growth of just over 3% for the quarter. And a quote just released on the wire - Why Canada Is Leading Developed Countries In Economic Recovery
    Published on: Thursday, July 22, 2010 Written by: Jason Simpkins
    Ample resources, minimal public debt and a solid financial system make Canada a paradigm of sound economic practice. All this has helped Canada post the strongest GDP performance in the developed world. While a US slump inevitably impacts trade for its neighbor to the north, employment in Canada is nearly back to pre-recession levels, proof of its resilient economy.
    Canada's economy has consistently outperformed that of the United States since the beginning of the financial crisis. And while it's showing signs of slowing down, Canada's pending decline will be far shallower than that of the United States, and its rebound more dynamic.
    Canada's gross domestic product (GDP) expanded by 6.1% in the first quarter of the year - the highest rate of growth among developed nations - and the country is expected to lead Group Seven (G7) nations in economic growth for at least the next two years.

    Yes that Canada
    ===========================
    'Ireland's debt now stands at €85,157,423,606 as of 15:46;08.'

    Nice data, but meaningless. What is this as a proportion of GDP? Last I heard, Ireland's economy is in such a mess that they are having to cut even more just to keep the deficit stable (because of the effect of the plummeting GDP)!
    =====================================

    Ireland's GDP last year was over 171 billion down 13% since the start of the reason. But I would agree that the GDP figures are not useful data. The national Debt is forecast at being above 97% of GDO for 2010 and over 107% of GDP by 2011.

    By the way the debt now stands at 85,161,489,409 Euro as of 17:34;28

  • Comment number 79.

    I realise now Flanders I have been wasting my energy getting upset with you in the past. I had the wrong end of the stick, its not your fault at all. All those accusations of sitting on the fence and avoiding the pertinent questions. This article today only goes to prove you are reading the same sources as anyone else who has half an interest with their ear to the ground.

    I appreciate now that you are catering for the masses and the masses dont know squat. Thats a nice easy salary you are earning. Well done.


    So no more attacks and questioning your competence its money for old rope and who can blame you right?

    Oh and bloggers, readers, inquisitor's .. a word from someone who scours the internet on this topic. It aint hard and you will find out a lot more and a lot sooner than this "hot-off-the-blog" news.

  • Comment number 80.

    4. At 7:08pm on 21 Jul 2010, NonLondonView wrote:
    ....
    "Lets inflate our way out of debt at the expense of prudent savers."

    Not a bad idea.

    The advantage is that it is those who did well out of the debt driven boom preceding the recession and were able to save and can afford to lose some of those savings, who will be the ones to lose most. Those who struggled to keep their heads above water and accumulated debts will have some of those debts wiped out.
    [stanblogger]

    I didn't "do well" out of the debt driven boom. I didn't take part in the debt driven boom. I saved hard instead towards my retirement...

    Why can I "afford" to lose some of my pension?

    Those who "struggled" to keep their heads above water...are they the ones that bought buy-to-lets and fitted kitchens and new cars and houses in France? Why are they being saved at my expense, let them reap what they sowed but don't move their problem onto me thank you...

  • Comment number 81.

    Just to correct my previous statement in #77 :
    Injecting money into a an economy running at full capacity does not inevitably cause accelerating inflation, but it is likely to cause sustained higher levels inflation.

  • Comment number 82.

    #72 Chris London,

    "Economics to me has now come down to the theory of supply and demand coupled with the ability to pay. This would appear to cover most things we are experiencing at present."

    If economics were merely supply and demand plus the ability to pay then that does not even go near to explaing our present position. Your vision has to be much wider and not limited to 'mere' economic theory. If your view is not informed by the politial and social inter-play then you cannot really understand the effects upon supply and demand.

  • Comment number 83.

    #54. Justin150

    I did read your #37 but felt that you were getting off on the wrong foot from the start.

    Here is why 'affordability' inevitability leads to the collapse of the economy and is an economic 'crime':

    First interest rates fall and people are given bigger loans because they can 'afford' them. Then when interest rates need to rise these same people can no longer afford them and have to default. So to prevent this interest rates are lowered to absurd levels (lowest rate in over 300 years). The consequence of this is that debt balloons and money becomes worthless - the present position. Sooner or later inflation kicks in or the currency collapses and interest rates do rise and the inevitable happens those affordable loans cause a banking collapse. This is why 'affordability' is and always has been an economic crime of the worst type. When it started being used as a criterion for housing loans the crash became inevitable and so did the depression. (see my #15 on Robert Peston's blog)

    What we need is to engineer a transition as painlessly as possible to an economic condition where people can afford housing at 7 to 8 percent rates and where in all parts of the country the average wage permits the purchase, after saving for a 10% to 20 % deposit, of the average house. Then and only then can our economy revive.

    Affordability is an appalling economic crime and economic weapon of mass destruction - it is far far more dangerous than anything Saddam Hussein might have had and it was brought to you by bankers!

  • Comment number 84.

    "...

    That's because we are coming out of a major financial crisis, and the evidence of past such crises is that growth afterwards tends to disappoint.

    ..."

    Oh dear Steph, it hasn't even got interesting yet. House prices are going to fall by as much as 40%, in the US the figures point to 50% ..50%!!!!. Why? The retiree's wanting to sell up for that old peoples habitat with spa baths wont be able to .. the current gap between house prices and incomes is ...HUGE!!! I mean HUUUUGGGEEEE!! Bigger than it has ever been before. Their is no historical precedent. This is unchartered territory and the authorities are rightly avoiding the subject.. why panic everyone now. Drip feeding is apparently less dangerous.

    The 70yr olds who have enjoyed parking their german limousines in the disabled parking at tesco are going to get a wake up call from this manipulated cost of homeowning of the last 10 years. And the only people who will profit are of course the $cum of the earth, the money lenders.

  • Comment number 85.

    Most governments operate debts and deficits but the current debts and deficits are too large for the UK with an unbalanced economy.

    - Japan is the case in point ... has operated large deficts arguably successfully for 20+ years and is able to do this because of the unique high quality structure of its economy being inextricably linked to the cohesive nature of its socio-economic business culture.

    - Germany is another case in point although much reduced deficits and debts

    The UK does not have these internal 'structures' - does not have a resource backed currency and its major financial sector is the target of the EU ECB as a major systemmic risk to the region.

    The result is that the current UK austerity drive is very necessary and the UK has to try much harder than its former international 'peers'/current competitors ... to live within its/our means.

    The UK can only recover economically by having discipline over its consumption and imports and by finding the sovereign freedom and know how to invest substantially at 'grass roots level' and bypass the multi-nationals and hold that investment in the UK and somehow create the huge numbers of viable UK jobs that are needed.

    The UK moved past its intial industrial phase into a service and financial buoyant economy phase supported by a credit boom... and the next phase is ?

    The UK government has to create this next phase and get it right ... hoping that an export led recovery will take hold is not going to happen soon or substantially; as our succesful foreign competitors are already implementing what I am writing and have import restraint and which means producing and buying more products and commodities in their own domestic market/economy.

    This means that the UK has to achieve the virtual impossible ... to cut the deficits and invest in the UK and create large scale, regionally targeted job schemes at the same time. This can be done ... but will take political courage and radical policies of the like we have probably never seen before in the UK.

    The key issue is that the more the UK government 'cuts' ... the more it has to invest in real UK job schemes ... even if this means persuading some to move and take viable but undesirable jobs.

    There is no alternative ... this is it ... this is reality.

    We 'try' or 'die' (economically).

  • Comment number 86.

    82. At 7:30pm on 22 Jul 2010, foredeckdave wrote:
    If economics were merely supply and demand plus the ability to pay then that does not even go near to explaing our present position. Your vision has to be much wider and not limited to 'mere' economic theory. If your view is not informed by the politial and social inter-play then you cannot really understand the effects upon supply and demand.
    =========================================================================

    In itself knowing or at least being able to define demand is the basic element of economics. The same can be said about supply. The ability to pay encompasses all aspects around the finances. So in itself it is a broad approach.

    What I think we should move away from are the numerous theories that are now and have been put forward offering a various remedies / solutions. There is not a one size fit all solution as there is not a painless remedy.

    I fear that it is back to basics and that is what everyone is afraid of as we will have to pay the piper.

  • Comment number 87.

    85
    some good points but while a few take more than their true value they will suck money out of the system, the system cannot take it, so the system will collapse
    Unless this fundamental point is sorted their is no solution for GB other than bankruptcy
    All the bluster ,facts,and information given here and elsewhere will not change that fact
    Forgemaster shows the corruption going on only one man gains, whilst all others lose
    Unfortunately even he loses he's just to greedy to see it and yes we do not need people like that in this country, no this world

  • Comment number 88.

    83. At 7:47pm on 22 Jul 2010, John_from_Hendon wrote:

    #54. Justin150

    I did read your #37 but felt that you were getting off on the wrong foot from the start.

    Here is why 'affordability' inevitability leads to the collapse of the economy and is an economic 'crime':

    First interest rates fall and people are given bigger loans because they can 'afford' them. Then when interest rates need to rise these same people can no longer afford them and have to default. So to prevent this interest rates are lowered to absurd levels (lowest rate in over 300 years). The consequence of this is that debt balloons and money becomes worthless - the present position. Sooner or later inflation kicks in or the currency collapses and interest rates do rise and the inevitable happens those affordable loans cause a banking collapse. This is why 'affordability' is and always has been an economic crime of the worst type. When it started being used as a criterion for housing loans the crash became inevitable and so did the depression. (see my #15 on Robert Peston's blog)

    What we need is to engineer a transition as painlessly as possible to an economic condition where people can afford housing at 7 to 8 percent rates and where in all parts of the country the average wage permits the purchase, after saving for a 10% to 20 % deposit, of the average house.

    =======================================

    Maybe I am missing something but you complain about the crime of affordability yet in the same post say "What we need is to engineer a transition as painlessly as possible to an economic condition where people can afford housing at 7 to 8 percent " This makes it sound as though the crime is not affordability but how it is calculated. Now I may not agree with your calculations but I would agree that if borrowers and lenders did the calculations (and as we all know most of the lenders did not for far too many mortgages) then they should take into account the possibility of interest rate rises

    This brings me all the way back to when I bought my first flat 20 years ago and my first house 15 years ago. I knew I had stretched my finances to the limit and so took out a mortgage which was fixed for the first 3 years. Of course that was at a time when inflation was higher and pay rises happened so it was reasonable to assume that after the fix I would be able to afford the mortgage more easily.

    Now both borrowers and lenders ought to be assuming inflation at no more than 3% and little if any pay rises for a couple of years.

  • Comment number 89.

    If I were in charge of the countries finances I'd ban "interest only" mortgages... These allow a foolish public to take a "bet" on house price rises.

    Without them, then when after a few years the economy changes and interest rates go up they have a bit of a pad in their equity to ease the stress if they have to sell/move etc.

    I don't think we would have had anything likt the debt/property bubble of the last decade if they had not been allowed and prices would have risen at a more appropraite rate.

  • Comment number 90.

    I think supply and demand could be at the root of the problem if you consider that there is over supply of 'money' (or at least ones and noughts in computer systems).

    Its not too difficult to estimate how much there might be in accrued savings or cash on deposit based on a 60 year period of substantial economic activity and growth of worldwide population from about 2 billion in 1945 to about 7 billion now.

    Several years ago when aluminium prices were going through the roof, I spoke to a metal trader who decribed what he saw as a wall of money looking for a place to make a return. He described this like a tidal wave moving from copper to aluminium to oil to mortgage backed securities to US treasuries or any 'commodity' that seemed attractive for growth or safety depending on sentiment.

    Anyway, in my view it would seem that there is a demand for 'things to purchase', an over supply of units of exchange and not enough to meet the promises to pay. Its not surprising that there might be problems.

  • Comment number 91.

    As we've moved onto the issue of house prices, I'd make the following observations:

    The Brits are obsessed with home ownership - most of Europe rents - we see our house as a speculative investment - this is a high risk strategy for the individual, their bank, their community and the whole economy. Individual exposure to catastrohpic lost of personal wealth through a housing market collapse is now the elephant in the room and our government is stuck between a rock and a hard place: no room to cut interest rates, banks unable/unwilling to lend more to home buyers, draconian cuts in public spending on social housing and the prospect of demand going into freefall if the predicted mass unemployment happens.

    Where did this mindset come from? Selling council houses was a greed-driven quick fix invented by monetarists to stoke up the private sector by denuding the community of publically held assets which were then sold below their cost that then fuelled the speculative housing boom of the 80s/90s by increasing availability of homes to buy whilst shrinking the public rented sector - people had no choice but to buy - then in the boom years they got hooked on making far more out of house price inflation than the could by working.

    There has also been a major market failure, in that nowhere near enough rented homes were (and are) being built, so creating a massive imbalance in supply/demand, against the backdrop of a rising population. The result is a massively overhung market of inflated prices, but with impossible barriers to entry for first time buyers. The overheated private building inner city boom of overpriced flats that first time buyers couldn't really afford ended in tears - buy to let went pear haped - the developers (and their lenders) ran for cover: those that didn't go to the wall.

    The new factor is the prospect of whole sections of the population looking to downsize at the same time, which I think is now highly likely as older workers get made redundant (NB 1.2M public sector workers) pensions don't measure up to expectations and parents seek to liberate capital to bankroll their kids' needs to get on the property ladder. This is bound to take demand out of the middle market, which is the engine room of property prices. The top end is immune, as it's the international rich buying UK property, although the appreciation of the £ has dampened this.

    At the bottom end there is very little new building likely to happen for rent or sale, so overall the seeds are in place for a 10% fall just on current factors without a double dip recession - paradoxically it's going to be the small private sector landlords who will do well, as people have to live somewhere.

    If the ConDems have got it wildly wrong and we end up with a bigger debt and 5M unemployed, there is likely to be a runaway fall in house equity values as repossessions spiral - think Chicago, where you can pick up repossessed houses for $100.

    This all seems horribly familiar. Where else did the middle class get squeezed to penury? Their savings devalued, their property becoming worthless? Where you needed a wheelbarrow of money to buy a loaf of bread? Where the government used "Quantitative Easing" (read printed money)in a desperate effort to kickstart their economy and fund their debt?

    Weimar.

    I always think the most chilling thing about the rise of the Nazis was the name of the Hitler Youth's marching song: "Tomorrow Belongs to Me."

    Nick Griffin may have missed out on Lizzie's cucumber sarnies yesterday, but he's a man who has a following wind right now. If the ConDems keep following the Weimar strategy, scapegoat politics cannot be far away: in 1903s Germany the middle classes were driven into the arms of the far right because there was nowhere left to go, as the crippling debts imposed after WW1 drove Weimar into an unsustainable debt/cuts spiral.

  • Comment number 92.

    #88. Justin150

    You know very well that the 'crime of affordability' to which I refer and to which the rest of the world refers is to argue that with very low interest rates bigger mortgages were 'affordable' - but only affordable so long as interest rates did not rise. This is the 'crime' is a deceit perpetrated by the banks and other lenders to get borrowers to borrow more than they could afford. The banks and other lenders know that rates of interest can and do rise and indeed will rise about the absolutely stupidly low levels of today and to lend at multiple of income calculated on these rates was and is insane. It is insane because when rates rise borrowers will default and so undermine the balance sheets of the lenders causing a collapse (see recent history).

    You actually know this, and knew this when you commented on my comment.

  • Comment number 93.

    #86 Chris London,

    There is no argument that supply and demand are essential elements of economics. However, it is nigh-on impossile to understand the factors that effect and influence both without reference to elements normally considered as being outside of the standard economic definition.

    A classic example of that is given in mrsbloggs13c2 post #90.

    As for the ability to pay then you are cerainly into the areas of politics and culture.

    Where I do agree is that there is no 'one size fits all' answer to our present dilema. However with the degree of debt worldwide (national, corporate and household) the whole financial infrastructure and maybe even our understanding of wealth and value come into question.

  • Comment number 94.

    #92 but presumeably borrowers should also know that interest rates can (and will) rise? Presumeably borrowers are allowed to take other factors into account such as probably pay rises, inheritance that sort of thing.

    Is it really right to call it "deceit" when every piece of literature issued by the banks does warn of the risk of rates going up?

    I think the big difference between you and I is that I do not believe in this "crime" or "deceit" what I believe is that, as historically has been the case for all bubbles, delusion took over from common sense. Everybody knew that house prices could go down (after all they did in 1989-1992) but they all wanted to believe it would not happen now. YOu could argue, and it is an entirely reasonable argument, that the current record low interest rates are but another bubble and delusion is taking over where people believe they will not go up significantly.

    If I were a borrower I would do my best to fix the mortgage rate for as long as possible.

    Ultimately I still maintain that in fact you do believe in "affordability" as the way forward in calculating whether a loan should be made it is just that you think people do not and have not given sufficient weight to negative factors such as potential rises in interest rates. Now there is nothing worng with that, put 3 valuers in a room and ask them to calculate the value of an asset you will get 3 different ranges of answers, with different risk factors and different weighting of risk factors. If professional valuers have such difficulty coming up with a consistent method why should you and I be different

  • Comment number 95.

    I have a few very simple question - It was reported in October of 2007 that there was about 850,000 empty houses in the UK. Given that that was the start of the slump and that sales fell off the edge of the cliff. It is now being reported that there are only 460,000 empty homes. So if this is the case why have the housing lists not dropped dropped proportionally?
    There is another twist to this in as much as there was an estimated 300,000 plus property which where empty but not being declared so by their owners. Where have all these gone?
    There are reportedly 1.8 million on the waiting list for a council property. Yet there are councils who have large numbers of empty properties, Birmingham for example is supposed to have more than 9,000 empty houses. Why?
    Also, why do so many people in the UK live alone. There are over 6.8 million single occupancy homes in the UK. So 1 in four homes in the UK have just one person living in them. And this is forecast to almost double by the 2021. It is also now estimated that there are well over 10 million empty bedrooms in the UK.
    Finally, why do we need to build so many new homes. It is estimated that we need at least 100,000 new homes to be built each year.

  • Comment number 96.

    81. At 6:08pm on 22 Jul 2010, Charles Jurcich wrote:
    Just to correct my previous statement in #77 :
    Injecting money into a an economy running at full capacity does not inevitably cause accelerating inflation, but it is likely to cause sustained higher levels inflation.
    ------------------------------------------------------------------
    Charles,
    One or two posters have referred to 'rules of economics' and a lot more have complained about 'the failure of economists'.

    Inflation is a good item to consider whether there are rules in economics.

    What was understood about inflation in 1970 changed by 1980. Inflation hadn't played by the 'rules'(if any) of 1970 in the middle of that decade. Understanding was changed.

    Some economists have been busy trying to re-write 'deflation'. I suspect that that may be because they feel a little bit guilty, that what they thought was low or no inflation, between 1996 and 2008, was anything but. In numbers terms, yes 2.5% was less than 7.5%, but what was the context? And in that context was 1.5% much too high, -0.5% too high and -2% high?

    Difficult stuff this economics. Bit like unclear physics! {no typing mistake!!}

    With every good wish,
    Snuffy

  • Comment number 97.

    re #78
    Canada went from just in top 10 oil producers to no. 3 with a little help from Gulf War 2, the high oil price and production from tar sands. If Iraq (ever) gets back to full production, Canada may go down a slot.

    Anyone know what effect the BP field coming on stream would have had?

    If the oil price fell substantially, and stayed low, things would not be quite so rosy for Canada.

  • Comment number 98.

    Oh, Lord. This feels so much like arguing how cold the water is or isn't as it starts to pour into the hole in the bottom of the boat.

    So many words, and so little sense. The neo-classical economic paradigm is an ideology, not a science. And is now, as ideologies go, an irrelevance. Even my 11 year old son understands this. We're running out of steam, as a socio-economic construct; and doing absolutely nothing about it. Extraordinary. Richard Heinberg has posted a millionth time about this; http://www.energybulletin.net/node/53766 is a good place to start. It would be great to see us grownups starting to talk properly about this, rather than the embarrassing, poorly informed, self-serving delusion we see all about us. Come on, you lot. We can do better than this. Please. :/

 

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