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The world is squeezing us more than Mr Osborne

Stephanie Flanders | 09:56 UK time, Friday, 21 January 2011

Ministers complain that the commentariat is overstating the impact that coalition budget cuts will have on ordinary households in 2010-11. That is up for debate. But we are almost certainly under-estimating the squeeze being inflicted by the rest of the world.

The structural primary budget deficit is a fairly good indicator of how much a government is actively choosing to loosen or tighten policy in a given year, because it (theoretically) excludes the cost of debt interest, and purely cyclical changes in taxes and spending.


George Osborne

 

On that measure, policy is due to tighten by 2.2% of GDP in 2011-12. That's roughly 0.6% of GDP more than would have happened on Labour's pre-election plans, and more than most major advanced economies, but it's not much more than 2010-11, when the deficit is likely to have fallen by 1.9% of GDP.

On Tuesday I suggested that higher inflation - and other costs such as rising pension contributions - would probably have a larger direct impact on family incomes this year than the VAT rise and the like. Now I find that the economists at Goldman Sachs have conjured some numbers that make a similar point.

They calculate that the rise in VAT will cost households 1% of their disposable income in 2011. The public sector pay freeze may take another 0.3%.

Turning to prices, they reckon the lagged effect of recent big leaps in the price of energy and other commodities like wheat (up 60% in 2010) will increase household bills by nearly another 1% of income in 2011.

Assuming that other prices - "core" inflation (excluding VAT) - rise by around 2%, the average household would need to get a nearly 5% pay rise to keep their disposable income broadly the same. (Sharp-eyed readers will recognise that number: the Tax and Prices Index, a broad measure of the cost of living that includes taxes, rose by 5% in 2010 as well.)

Against that, the OBR is expecting average earnings in the UK to grow by just 2.2% in 2011: in other words, household income is unlikely to keep up.

You will also have noticed that the 'hit' from commodity prices is roughly the same as the hit from higher VAT. But that's forgetting the much bigger punch in the stomach that the global marketplace has already delivered to the UK consumer.

For much of the nineties and the first half of the noughties, the world - from a British household's standpoint - was getting cheaper. Outsourcing and the rise of cheap production in China meant the stuff we liked to buy as consumers became cheaper, relative to the things we made. If you were in work and had money to spend, it was a nice wave to ride. (In a later post I'll get into the crucial question of whether the Bank of England should have allowed inflation to come in below target more often during this period of adjustment, just as it is allowing inflation to go above the target now.)

In essence, companies can only shift their production overseas once. You can't generate these kinds of cost savings indefinitely. The Goldman Sachs economists suggest that the end of the great outsourcing boom, coupled with the rise in the pound and the jump in commodity prices, has now reversed nearly all of the gains that consumers made in that earlier period.

They reckon that this big change in the terms of trade for UK consumers has depressed household income by 4%, for a given amount of national output. In other words: it's not just that we've lost income thanks to the recession - it's also that the output we earn as employees now buys us less.

Oh yes, and they also think that the amount that we pay into company pension schemes (if we have them) has risen by about 2.5 % of wages since 2005, because very low bond yields in Britain and around the world have made the long-term funding gaps in these schemes even larger than they were before.

Putting it all together, the research suggests that, for any given level of GDP, UK households' real employment income had fallen by 6% in the last few years, even before the latest commodity price jumps. That might not make you feel any better about the increase in VAT - more likely the opposite. But when you're cursing Mr Osborne, you should also reserve some time to curse the global economy.

Comments

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  • Comment number 1.

    A very interesting blog and one that explains why most of us are feeling worse off. What follows is likely to be in-building inflation through compensating wage and salary claims with widespread industrial action almost inevitable. It is also difficult to see how the public sector pay freeze will hold for two years even with the programme of redundancies across the sector. Once inflation breaks the 5% level the government will panic and raise interest rates (by courtesy of the MPC who are currently responsible for the only detectable form of economic management)

  • Comment number 2.

    It took Cameron 17 minutes into his first PMQ to use Margaret Thathcer's 1981 term 'popular capitalism', and on the Channel 4 Chancellors' debate programme before the election George Osborne said that the economy was 'like a household budget'. It is time that the BBC started to give people a history of economics in the last 30 years which puts Robert Shiller's publications from 1981 to the present at centre-stage. Irrational exuberance cannot be explained by Alan Greenspan's econometrics - nor George Osborne's.

  • Comment number 3.


    Not much point in cursing. Living standards are falling in the UK and relative to the rest of the world will probably continue to fall for some years to come....as the global economy rebalances.

    With domestic wage inflation being 'benign', I wonder if the majority in the UK have already tacitly accepted that ?

  • Comment number 4.

    Lets just all accept the fact that our standard of living and national wealth is going to decline. How much longer are people going to think it can keep being propped up for? We've had our good times now its the turn of other developing countries - simple as that. Unfortunatly though, it wont be a reduction from everyone, the poor are about to get poorer and you know the rest.....

  • Comment number 5.

    1. At 10:27am on 21 Jan 2011, watriler wrote:

    I think you will find that the MPC will jump well before 5% as if they don't their ability and creditability to manage the economy in terms of inflation will be shot.

  • Comment number 6.

    Global inflation is not going to drop out of the figures in 12 months time but be an ongoing strain on people's disposable incomes for many years. The rebalancing of the global economy has a long way to go yet and, for us, that means many years of rising prices on the things we import.
    The interesting question for me is what the BoE will to do if the economy slows down as a result of the looming spending cuts.
    When the IMF came out in support of the government's spending cuts timetable at the end of last year they did so on the understanding that it would be complimented by another round of QE, and George Osborne duly gave his permission for that to happen.
    Would the IMF have a different view of the viability of our cuts timetable if the QE side of it was dropped? After all QE is supposed to ward off deflation but there is not much chance of that.
    Will we see high inflation, a stalling economy and money printing all at the same time, or will the government be forced to cut the deficit over 10 years instead of 5 in order to negate the need for more QE?
    And what state will the poor old consumer be in by the time it is all finished?

  • Comment number 7.

    It is all about (un-repayable?) private debt.

    The private debt overhang will inevitably crush the global economy until it diminishes. This always crushes all 'recoveries' at the start of all Depressions (see 1930s and 1870s).

    The debt diminishes in three ways: 1. It is repaid, 2. The secured assets and forfeited and sold by the lender for the market price, and 3. On the death of the borrower (which is actually 1 0r 2 above depending on the equity).

    The whole situation of un-repayable private debt is the result of the policy failures of the 'Fools' during the noughties - this is being made worse by not actually tackling the problem now. Let me explain why their policy choice to aide the imprudent and injure the prudent delays the recovery. It does this by crippling the economy by prevent the freeing up of assets and the down pricing of them. This results in these assets not being available for productive use. This means that the current 'rent' (including the assets costs) results in business being held back by having to pay far too much for their business premises. The 'Fools' made the initial blunder and they are now compounding their error! (They must raise rates and catalyse the necessary correction.)

    What must happen for a real recovery is the deflation of the private debt, not only here where the problem is particularly acute but in the USA and many countries of Europe.

    I have explained before why house prices need to be roughly comparable in the UK and its competitors, but I will do so again here - Let us say a business can choose to make things and employ people in the UK or Ireland (or Spain). It has to pay its staff wages. These wages have to cover at least the basic costs of living plus a bit extra. So if the cost of housing in the UK is £1500 a month but in Ireland (or Spain) it is only £750 and if the same wages are paid in each country the Irish/Spanish workers have substantially more disposable income - after housing costs (which drives the local economy)

    In essence until the banks' balance sheets are fixed we are all doomed to a non recovery and hence a Depression. This is made doubly bad fro the UK because of our 'magnificent' international banks which are all teetering on the brink. Hence the banks are transferring the whole global private debt catastrophe on to the British Taxpayer and will inevitably crush the British Economy making the Depression inevitable and far longer lasting that in outer countries.

    ['Fools' = The Fools of Threadneedle Street = Bank of England and in particular it Governor Mervyn King and his sidekicks the MPC.]

  • Comment number 8.

    All this user's posts have been removed.Why?

  • Comment number 9.

    SF: 'They calculate that the rise in VAT will cost households 1% of their disposable income in 2011. The public sector pay freeze may take another 0.3%.

    Turning to prices, they reckon the lagged effect of recent big leaps in the price of energy and other commodities like wheat (up 60% in 2010) will increase household bills by nearly another 1% of income in 2011.

    Assuming that other prices - "core" inflation (excluding VAT) - rise by around 2%, the average household would need to get a nearly 5% pay rise to keep their disposable income broadly the same. (Sharp-eyed readers will recognise that number: the Tax and Prices Index, a broad measure of the cost of living that includes taxes, rose by 5% in 2010 as well.)

    Against that, the OBR is expecting average earnings in the UK to grow by just 2.2% in 2011: in other words, household income is unlikely to keep up.'
    ----------------------------------------------------------------------
    These are average figures. It is claimed by some that the top 10% of earners drive our economy. They will be relatively untouched by all of this, except their opportunity to earn from the rest of the earning populations' product.

    The real drivers, in my view, of the UK economy and contributors of the bulk of taxation are the bottom two-fifths and middle-fifth of earners. They have probably seen incomes and savings shrink - not rise by 2.2% or any other figure in 2010. The incomes are unlikely to do anything other than stay static or shrink (again not rise by 2.2%) in 2011 and beyond - before taxation and inflation. [I include pensioners as earners although increasing numbers of pensioners will require Benefits support in future. As do the two non-earning groups, both of which are growing/could grow further, therefore requiring more support.]

    Stephanie, you seem to be desperately looking for some cheer. But your last two or three Blogs really reinforce the fact of our truly gloomy situation. It is up to Government to respond to the external events - whether military, political or economic. That's what we elect them to do.

    Dave & GO are responsible for responding to the rise in oil price, for example, just as GB & AD were in 2008. If they choose to do nothing to ameliorate the situation, then they must take the responsibility for what happens next. If the bulk of the population suddenly stop spending because 'there is no money left', Dave & GO are just as responsible as anyone outside the country or any other nation.

    It could, of course, all turn out OK. Something (beneficial) may turn up. But it may not. Something else may suddenly arise to adversely affect us. Do we have anything in our contingency 'fund'?

    Time to start whistling nervously in No.10, No.11 and the Treasury?

  • Comment number 10.

    @Stephanie

    Indeed, the world is the tougher challenge; is that making it any better? Does this help anybody?

    I do not believe it is really relevant; we are selling out jobs and labour and any kinds of recourses and where we don’t own them we watch open-mouthed how China is paving its way with countless investments from rotting greenback bonds into becoming the one and only key economy and its Yuan becoming the key currency ; the one and only one!

    So how important is it that Mr. Osborne is not quite as bad and should we not wake up and invest in getting better?

    caw

  • Comment number 11.

    #7 John_from_Hendon. You don't get it do you? No-one is going to raise interest rates, not today, not tomorrow, not ever. This is it (oh OK you may get some kind of timid rise which will be more or less immediately reversed).

    Look at the World Economic Forum and McKinsey. You think those guys are not plugged in? They want a doubling of global debt up to $200 trillion by 2020. How you going to service $200 trillion of debt if you have interest rates anything above zero?

    The UK is only a bit player in the brave new world. Look at the US with helicopter Ben spraying money all around the verdant offices of Wall Street. Look at the shifty Spaniards bailing out the Cajas (for about the 3rd time) but this time accepting the Cajas themselves as fantasy collateral in exchange for fantasy money.

    This is the last phase of the great ponzi scheme, it is all too late for theory or rationality. It is what it is, so get ready to say a big hello to hyper inflation.

    Oh and don't keep banging on about "prudent" and "imprudent" Everyone has been played for a mug and because we were too thick to see it coming or too lazy to do anything about it we are all imprudent.

  • Comment number 12.

    One potentially positive outcome of the shift in the global economy outlined by Staphanie is that there will be some reversal of the outsourcing and less purchase of overseas goods and services. That will provide growth in the British economy, which is positive. Of course, other countries may react to that change, but if they do we won't care. We are a net importer and therefore other countries need us more than we need them (economically speaking).

    I'm feeling the squeeze, but as a net saver, and having managed my finances sensibly (no big loans and flashy spending) I have had two years of squeeze already. So what I would like is someone else to take on the role of saving the British economy. Would overpaid and procected public service employees like to volunteer for the role?

  • Comment number 13.

    Would it be a good next step to courageously and ruthlessly examine whether the economic and political myths and fantasies that have been imposed on us by the Americans have any practical value to us here in the UK ....if we don`t want to be like Haiti or the Sudan in ten years time?

    As I see things Neo Liberalism benefits authoritarian corrupt undemocractic countries like China and Russia and (sorry but it`s true!) ...the USA.....and leaves civilised scocial democracies like ours dead in the water.

    But if anyone has evidence to the contrary please shout!

  • Comment number 14.

    "But we are almost certainly under-estimating the squeeze being inflicted by the rest of the world."

    Please do not assume I am as foolish as this 'we' you're talking about. I have been saying for a long time now - the only solution capitalists have is for a new market opening up to create much needed demand.

    ....and all the other markets are contracting too - there is no new market left. The ever-expanding system of capitalism can no longer expand on this planet (bar a population explosion).

    This is Economics for dummies by dummies Stephanie - it was obvious this would happen - only those determined to see recovery were blind to it.

  • Comment number 15.

    It would be interesting to see how much people care about differing economic issues such as inflation, unemployment, underemployment, debt price and the perceived risks of these factors. I suspect people care most about the risk of losing their job. I think people are stoical and pragmatic about the cost of living.

    If you wanted to find what people think about these issues, one option is to ask people directly. There are traditional measurement theories that have been used for several decades to do this, such as..

    http://en.wikipedia.org/wiki/Level_of_measurement

    For some reason the wiki page doesn't include absolute measures which are normally included within this model. This basic theory is easy to apply in a wide variety of cirumstances. With online surveys or highly trained interviewers there are other options like adaptive testing using item response theory.

    http://en.wikipedia.org/wiki/Item_response_theory

    Item response theory is ideal for determining interval and ratio measures but not for nominal and ordinal measures. There are workarounds though. So if you wanted to find out how much people care about unemployment and compare this to how much people care about the cost of living. Item response theory is a great tool to use.

  • Comment number 16.

    #11. armagediontimes wrote:

    "#7 John_from_Hendon. You don't get it do you? No-one is going to raise interest rates, not today, not tomorrow, not ever."

    No, it is you, if there is not return to rational interest rates there will be, and can only be, a prolonged Depression just like the 1870s. Lasting until such a time rates do rise.

    The idiot bankers of whom you speak are only propelled by the insanity of their own balance sheets. Rates will rise - it is inevitable. This rate rise will help deflate the himalayan private debt mountain. This is how capitalism works and has worked for the past millennia. The idiot bankers are just positioning themselves so that the parcel is passed to someone else!

    The position that you are adopting is the head-in-the-sand, fingers-in-the-ears, shouting la-la-la to try to prevent the rational and historical certainty of a rate rise back to rational levels. The longer the 'Fools' (and you) delay then the higher the rate rise will be!

  • Comment number 17.

    We have lived on the back of the so called third world for 400 years if my memory serves me right it was reported that in 1975 for each year for every barrel of oil consumed by China and India the US consumed forty two last year the ratio had reduced to 25 to 2 taking in to account that the bric countries represent two thirds of the worlds population it only requires that a small increase in their consumption will have a large effect on the rest of the world, most of the developing world are welcoming these countries with open arms due to the treatment they received from the so called developed countries

  • Comment number 18.

    #16 John_from_Hendon. Oh dear John how wrong can you be. It is you that has your head in the sand waiting in vain for someone appearing over to hill to save you. No-one is coming to save you.

    You gotta front up to reality no matter how distasteful you may find it. You gotta find a way to protect yourself from what is coming. If you close your eyes it will not go away.

    Me, I intend to remain on my feet and able to survive the hurricane of asset price deflation and commodity price hyper inflation that is now a racing certainty. Anyone can survive this if they prepare themselves and take sensible precautions. No-one will survive this if they expect a sudden return to rationality or for some great alturist to reach out and pluck them from the eye of the storm.

  • Comment number 19.

    Stephanie Wrote:
    For much of the nineties and the first half of the noughties, the world - from a British household's standpoint - was getting cheaper. Outsourcing and the rise of cheap production in China meant the stuff we liked to buy as consumers became cheaper, relative to the things we made.
    ~~~~~~~~~~~~~~~~~~~~~
    Thankyou Stephanie,

    as an economic neophyte I stumbled across this thought while composing my last comment a couple of days ago, but as with everything else, wondered if it was even rational. It seems it was.

    Which leads me to conclude that the last 20 years of loose monetary policy has been a deliberate attempt to stave off UK deflation in the face of a globally falling cost-base. Why? The only reason that I (being a neophyte) can think of was in order to sustain the illusion of domestic "growth" as measured by spending-based-GDP.

    Mushroom has had many reasons to be irritated about the focus on "continually growing our spending-based GDP" as a measure of economic health. Now I have another one to add to the list. It cost us a runaway money supply.

    One day the Industrialists will be hauled up before the beak to give their excuses.

    What will they say?

    "We trashed the entire world, caused millions of human beings to live in poverty, killed off entire species, wasted billions of tons of irreplaceable natural resources and chose not to eradicate disease, hunger and inequality. Of course, we didn't want it to be that way. But we simply had to keep increasing our profits, paying inflation-beating dividends to our shareholders, and trousering a portion of the proceeds. We were legally obliged to get the best return on investment possible. And, if we hadn't done it, someone else would have."

    And the Bankers will say, "We oiled the wheels, but never made any moral judgements about the machine. Don't blame us if we happened to cream a continual round of champagne off the top of the world's misery. If we hadn't provided the finance, someone else would have."

    And the policy makers will say "We knew all this, but we had to support the Bankers and Industrialists, becuase there were no alternatives that would keep us in power. And if we hadn't supported the vested interests, someone else would have."

    ~~~~~~~~~~~~~~~~~
    In Mushroom's little universe, the raison-detre for consensual government of any flavour is to cub against private greed through enforcing legislation, in order to sustain the well-being of the community.

    Do you think our recent Governments might have forgotten that?

  • Comment number 20.

    My god - HAVE YOU SEEN THE PRICE OF COFFEE!!

    http://www.bloomberg.com/markets/commodities/futures/

    Panic stations Britain - we're heading into a "growthless inflationary recovery" (whatever that is)

    lets hope the BoE puts rates up and kills off every landlord in the country - or doesn't and creates food riots, or maybe does nothing and we get a bit of both.

    It doesn't matter - only the fools think the Government and it's institutions are in control of Capitalism - the rest of us just sit back and watch the show from the relative comfort of our vegetable patches.

    I hope you saw the channel 5 documentary on the war last night - because that's a good primer - just without the bombs and you cannot sign up to 'fight the enemy' - simply because the enemy cannot be identified.

  • Comment number 21.

    "The world is squeezing us more than Mr Osborne"

    Which is why he should stop squeezing now.
    Hopefully Ed Balls gets it and, if so, its time for the LibDems to bring down Thatcher Mark 2.

  • Comment number 22.

    7. At 11:42am on 21 Jan 2011, John_from_Hendon wrote:
    It is all about (un-repayable?) private debt.


    Agree mostly.

    But if we have a chancellor who does not understand the relationship between public debt and private savings /(debt) in sterling, by that I mean one is the mirror image of the other, we are lost.

    People and businesses are having a damn good go at repaying private debt. The present coalition policies will force them either into greater debt or another recession.

    They need to go.

  • Comment number 23.

    Stephanie suggests in her headline that it`s the world that is squeezing us and not just George Osbourne!

    Well this bit of "us" thinks Osbourne is "the world" in the sense that George Osbourne is a representative of global capitalism .....here to squeeze us on behalf of the people who really run Britain......and let`s please stop kidding ourselves that we voters run UK plc!

    We have now had over thirty years of American Neo Liberal dictatorship...... controlled by and in the interests of
    a nation that is the richest in the world.... but is only now getting round to giving its own people medical care!

    Notice how nobody is investigating where all our public and private assets went over the past thirty years of privatisation and free market plundering?

    All that oil revenue and gold and that Black Wednesday money? I think I can guess!

  • Comment number 24.

    14. At 1:36pm on 21 Jan 2011, writingsonthewall wrote:

    '... Please do not assume I am as foolish as this 'we' you're talking about. I have been saying for a long time now - the only solution capitalists have is for a new market opening up to create much needed demand.'

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

    Advances in technology create new products, and marketing creates demand.

    Cast your mind back to the 20th century, and just consider the new global industries created on the back of technological progress. Surely you must admit that you enjoy the benefits these developments provided?

    Capitalism, for all it's flaws, is a force for lifting living standards - although, I will gladly concede that some are raised much higher than others. But if everyone benefits to some degree, the system has to be supported and improved until something better is developed.

  • Comment number 25.

    21 EconomicsStudent

    I was also wondering if Ed Balls might actually understand macro-economics (hopefully), or just be 'neo-liberal lite' like the rest of his party. If he does understand, it will be difficult for him to re-educate the population about fallacy of composition etc.

    GO has clearly abdicated his economic responsibilities, and when it all collapses, they will set about re-writing history to make it the fault of the unions, the OBR, the BoE etc

  • Comment number 26.

    What I'm getting out of Stephanie's blog and all the fascinating and doubtless highly informed comment here is that it's all going to be a bit like, well,
    Flanders Fields at some point not too far off the horizon.

    But - I'mm a novice, so bear with me - surely when Stephanie says:

    "The Goldman Sachs economists suggest that the end of the great outsourcing boom, coupled with the rise in the pound and the jump in commodity prices, has now reversed nearly all of the gains that consumers made in that earlier period"

    then the "rise in the pound" would make imports, as per usual, relatively cheaper?
    And so not be contributing to "reversing the gain" ? (Albeit high pound makes it harder to export or dwindling supply of stuff, as per Econ.101)

  • Comment number 27.

    25. At 6:17pm on 21 Jan 2011, Charles Jurcich

    Agreed. Big questions.

    Does Balls actually get it?
    Can he convince Ed ?
    Is Ed man enough to change the policy?

  • Comment number 28.

    EconomicsStudent,
    "25. At 6:17pm on 21 Jan 2011, Charles Jurcich

    Agreed. Big questions.

    Does Balls actually get it?
    Can he convince Ed ?
    Is Ed man enough to change the policy? "


    Will Ed Balls declare that it is now Labour policy to pursue full employment, in line with our obligations under the UN Charter? Hope so!

  • Comment number 29.

    I think I agree with you on this Stephanie. Times are tough, but it is not all down to the Chancellor.

    He could do a lot to help though, particularly those working long hours on the minumum wage, who are paying taxes and not claiming benefits. We need to see a rise in the national minimum wage, so that the poorest workers (single people as well as families) are helped.

    After all, the price of a gallon of diesel is now typically more than the national minimum wage (before tax). We've actually got to work for more than an hour before we can afford a gallon of fuel...!

    And when we do invest our hard earned income in that gallon of diesel, most of that £6+ is tax...!

  • Comment number 30.

    27. At 7:15pm on 21 Jan 2011, EconomicsStudent wrote:

    25. At 6:17pm on 21 Jan 2011, Charles Jurcich

    ------------------------------------------
    Why not try writing to him with some well thought out questions to see how he responds? I know that MPs usually only respond to questions from people in their own constituency, but we might be surprised!

    Reading some of the posts above, they are very doom-laden. Whilst I can share some of their views, events have, in the past had a way of following an unexpected trajectory [for good or ill]. I would like to believe that those 'in control or in power' will, in the end, alter course and act to keep our economy going.

    As I write this, I am trying to think of actions that might avoid a disaster --- and I can't! Perhaps I should hibernate.

  • Comment number 31.

    27. At 7:15pm on 21 Jan 2011, EconomicsStudent wrote:
    25. At 6:17pm on 21 Jan 2011, Charles Jurcich
    --------------------------------

    A few thoughts:

    First and foremost Ed Balls is a politician and he won't leave himself open to attack by talking about labour policies to which he cannot answer the question ' how will you pay for it' – he knows he will be ridiculed by those neo-liberals everywhere. He needs help from outside by a sustained attack on the basics of economics as currently practised from people whose views will command respect. The problem is I cannot think of anyone who actually would be listened to. The totally inadequate foundation to current mainstream economic ideas and theory really does need to be exposed.

    His best option that I can see is to attack the ConDems and predict failure so he can say 'I told you so'. At the moment, he will keep quiet about what he really thinks the alternatives are. I just have to hope he does understand, he can get back into power and then pursue sensible policies; but I suspect the major damage will have been done by then.

  • Comment number 32.

    SleepyDormouse,
    I now suspect that at least one quarter of negative growth is immenent, and if people respond as they have every right to (negatively), then people won't need to understand, they will just assume that the opposition must be correct. Though it would be a shame not to take advantage of the impending downturn to once-and-for-all bury this supply side "economics" madness in a more public way, and teach ordinary people how money works.

  • Comment number 33.

    I wish NN would investigate George "Black Wednesday" Soros and his Open Society Foundation.

    ( Re Black Wednesday....The Tories don`t like this mentioned because it`s a reminder of what they were really like at running the economy!....but why don`t Labour mention it?)

    The Open Society Foundation are everywhere "aiding" political and economic and social "change"...without being very "open" about it!

    What is he up to in Britain and the rest of Europe? Time NN spilled the beans.

    Or we could have Irwin and Will Hutton again if we really want thrusting cutting-edge journalism?

  • Comment number 34.

    32. At 8:36pm on 21 Jan 2011, Charles Jurcich wrote:
    -------------------------
    On a number of occasions, I've tried talking to people about MMT and got no-where. They cannot get their minds around it. They are convinced that everything must be like a household budget; after all, 'Maggie said so'. If there is a big downturn, both Labour and ConDems were calling for cuts; both will be tarred and feathered unless Ed Balls can get distance between what he is saying is Labour policy now and the policies put forward by Alistair Darling. This will be a very difficult trick to pull.

    An academic attack is needed since business seems to be firmly in the neo-liberal camp.

  • Comment number 35.

    #18. armagediontimes wrote:

    "#16 John_from_Hendon. Oh dear John how wrong can you be. It is you that has your head in the sand waiting in vain for someone appearing over to hill to save you. No-one is coming to save you."

    You have a very peculiar view of an economics blog. You seem to view the World only through the personal. That is not economics. I write about economics with no reference to my personal circumstances or what will be injurious or beneficial to my personal situation. Indeed it is highly likely that to do so will always provide erroneous analysis and solutions. In short you write nonsense - as I wrote earlier.

    If you are concerned about survival then it has always been the case that those that spread their risk tend to do better in turbulent times. Anyone, able to do so, should spread their assets. The one certain error in these times is to owe money. Owing money was the right thing to do in the last twenty years, but the World has changed. Debt will be hugely costly - secured debt even more so as the lender will be able to foreclose and recover what he is owed.

    An age of austerity has always, so far as I can see, been accompanied by retrenchment in both the public and private sector - generally the retrenchment in the public sector drives that in the private sector. This nonsense about the mega expansion of credit in the next decade is tripe generated as the last fling of the casino bankers. The markets will bring them to book and many will collapse. The markets will also without question drive up interest rates to quite high levels - higher than they would have gone if the 'Fools' and their mates (The Destroyers of C Street) had not destroyed the price of money. Their catastrophic error was to make money worthless. The inevitable effect of this is to devastate all economies and in particular financial institutions - even though their purpose was to help these same institutions. There is a very simple reason for this. If rates had gone up the banks would have started getting themselves in order. But as rates went down they further expanded credit and added further to their and our problems. The credit bubble will be unwound - to believe or hypothesise otherwise is seeking to bring about the total destruction of money and hence capitalism. I fear you do not understand this. I have previously shown that a nugatory price for money renders impotent all other means of managing an economy (fiscal and macroeconomic policy) and that is why money requires to be scarce, and always valuable. To seek to destroy money is to seek a return to barter and the destruction of all global trade. Money must regain a proper price or we are all doomed!

  • Comment number 36.

    John@35 I am a ignorant of economics ....like the rest of humanity I can`t predict what global capitalism will do next....but is it possible that the spreading of risk/investment is only beneficial within the peculiar circumstances of the Neo Liberal era from around 1980 to the Second Wall Street Crash Scam.....and that all bets are now off?

  • Comment number 37.

    The “imported” inflation arises from several factors, commodity speculation funded by leverage (debt), US QE that has depreciates the dollar (to reduce the value of US debt), which also happens to be the global reserve currency (also used for trading oil), plus the UK’s QE that depreciates the pound thus increasing the cost of our imports. The reason for all this QE is to provide credit to counteract the “credit crunch” due to the insolvency of the banking system caused by their financially "innovate" products backed by depreciating property based assets (CDS’s CDO’s etc).

    Also the cuts currently being implemented by the coalition are needed to balance the books following our credit binge of the last decade, a not uncommon problem shared with many other developed countries. Given this situation it’s amazing to read that the World Economic Forum’s latest report on (wait for it) Sustainable Credit, proposes doubling the overall level of global debt. The fact is that tomorrow’s growth represents collateral for today’s debt, and given that globally as we transition from high EROEI (Energy Return on Energy Invested) fossil fuel energy to lower EROEI fossil fuel and renewable energy, economic growth will inevitably decline.

    Given this reality that is based on physics not economics, these economic clowns propose in their report that over the next decade we need another £63 trillion of credit to support global economic growth, and that this doubling of credit (debt) will not risk another major financial crisis.............really, do people never learn!

    Steve Keen’s Debtwatch website discusses this report in an article entitled “How I learnt to stop worrying and love the Bank” that’s worth reading.

    http://www.debtdeflation.com/blogs/

  • Comment number 38.

    #35 John_from_Hendon Wrong again mate - economics is all about the personal. It is all about that stuff that is between (personal) buyers and (personal) sellers in order to make a market. Nothing to do with me, or you, all about all of us acting together to make the perfect market.

    It is totally untue to suggest that spreading risk is beneficial in "turbulent times." You gotta make a decision as to where it will end, and then front it up.

    So much garbage about interest rates. So much insight about the devastation of all economies.

    This is it. This is the end, my friend. Get ready to contribute beyond thst point.



  • Comment number 39.

    #37 Richard,

    "given that globally as we transition from high EROEI (Energy Return on Energy Invested) fossil fuel energy to lower EROEI fossil fuel and renewable energy, economic growth will inevitably decline."

    Is this statement necessarilly true?

  • Comment number 40.

    #36 worcesterjim, Don't be so coy, sure you can predict what will happen next. It is much easier than Derrin Brown.

    There will be a massive spread of free money - but don't worry you won't grt any of it. It will all go to your social betters. They will use this money to drive up the price of champagene, cockles, and whores. The rest they will use to drive up the price of food and fuel. Oh happy days.

    Bets (for those with money) are not off, they are on. Bet on commodity price inflstion snd asset price deflation.

    Of course if you have no money you are not in the game. Think about that and ask why

  • Comment number 41.

    #20 writingsonthewall wrote:

    '"growthless inflationary recovery"'

    You are Andy Coulson aren't you.

  • Comment number 42.

    #38 armagediontimes,

    "John_from_Hendon Wrong again mate - economics is all about the personal. It is all about that stuff that is between (personal) buyers and (personal) sellers in order to make a market. Nothing to do with me, or you, all about all of us acting together to make the perfect market."

    This statement is simply wrong. The economy is far more than the aggregate of peronal interactions of buyers and sellers. You also have to account for the interactions between corporate bodies (both governmental and commercial) which are certainly not personal. Additionally you have to account for the externalities which affect the domestic economy. All of this activity does not form a market but a series of markets which are regulated, to a greater or lesser extent, by laws, rules and taxes which again are not personal.

    If you can then I would be delighted if you could identify for me a "perfect market".

  • Comment number 43.

    #42 foredeckdaave. It aint nuffink to do wiv me bruvver. It is all about economic textbooks and the same books that John has swallowed whole. Therefore I don't need to account for no externatilies or no taxies nor nor no busses nor no nuffink.

    So, Lets all see who will live and who won't. Don't blame me, It is just a test that helicptor Ben and King Merv has set us all. Just cos you don't like the test aint my problem. You probably should have kept the loonies away from the trigger before they pulled it. Ask why you did nothing!!!



  • Comment number 44.

    #44 armagediontimes,

    :) night night.

  • Comment number 45.

    I'm looking forward to the NIESR report at the end of January. Essential reading methinks. They had the temerity to disagree with the OBR and may therefore conjure some interesting facts and forecasts. In October for example the NIESR were rather less bullish than the OBR predicting lower growth, a higher change of a second recession, the impact of unemployment...
    World economies shrinking, commodity price inflation...... the majority of us are and will be more worse off. Of course, quite obviously we need a burst of inward investment from those countries who have the money we have been spending with them and borrowing from them. So come on China we have some (although not as many) industries left for you to purchase. You could buy our NHS rather cheaply at the moment, maybe a PFI scheme.
    We will be worse off. It will pay for our excesses. We will at the same time attempt to save in readiness for the next problem. We will have to stop spending so much. Eventually we'll reach the bottom and then the only way is up. Worked in the 80's so the Tories have recent history on their side. Isn't their only way forward to wreck the economy over the next two years and then reap the benefit of the bounce in the last year or two of their term?
    Alternatively we could have what we need a National Government of the Talents (there should be enough across all three major parties). They could then tell us the truth as no party would stand to gain or fail on its own. Economically brilliant as the market analysts would see long term stability developing. Do we need another election for this? No we weed Ed1 and Dave and Nick to get their heads together.... likely to happen ... absolutely not. Shame on them as it is actually what we voted for and have voted for over decades. Governing party with 40% of the vote means no governing party.

  • Comment number 46.

    45...Yes but "it worked in the 80`s" because we gave away all our assets ...including North Sea Oil....now all we have is a load of toxic assets flogged to us by a nice American chap who is still growing his economy while (surprise surprise!) our continues to plummet like a stone!

    Does the phrase "Never give a sucker an even break" ring any cash registers?

  • Comment number 47.

    2. At 10:50am on 21 Jan 2011, ntp3 wrote:
    It took Cameron 17 minutes into his first PMQ to use Margaret Thathcer's 1981 term 'popular capitalism', and on the Channel 4 Chancellors' debate programme before the election George Osborne said that the economy was 'like a household budget'. It is time that the BBC started to give people a history of economics in the last 30 years which puts Robert Shiller's publications from 1981 to the present at centre-stage. Irrational exuberance cannot be explained by Alan Greenspan's econometrics - nor George Osborne's.


    It is a disgrace that we don't find better options for informing people than equalizing to a lowest common denominator. If anybody wishes to try to, saying figuratively, switch on the "pull up" buzzer, is better not to start from denying power of mathematical modelling. "Irrational Exuberance", "Stubborn Refusal of Offer", and other exceptions of real game processes can be and are modelled. I can not see a good reason to dismiss them and I do find albeit one good reason to advertise them and explain them. In the process of modelling one starts from structures so simple that deemed irrelevant by most. Than one proceeds to more intricate approximations but there is always a gap between reality and a model. At some point it dawns on the modeller that it would probably take less effort to "iron out" the real thing structure to fit the model that is already complicated enough. It is a plain technological/engineering choice; it's like a choice between more complicated modelling "and sorting" of a bolt-socket pair or tightening the sigma value. On one hand one wins on stability and predictability, on the other one looses on cost. So far so simple, but as we move from technological into a social process (or from intelligent design to entities endowed with capability of self replication when in clusters of sufficient size - indeed a hierarchy of clusters) we loose something more, namely a scope of evolutionary choice - we freeze the system. That is all to stick to a modeller perspective. It is a valid perspective, but it is the one that is supposed to be subservient to generally approved preferences (ideology, political choice and basic rights).
    I am here to argue that:
    social control over the process of modelling is inadequate
    subjects are unaware of how pressure (nudging) is being implemented to reduce diversity (increase homogeneity) which a u t o m a t i c a l l y rises the threshold of entering the next "dispensering group". In this process we ultimately gain efficiency of performing well defined tasks at a cost of broad adaptability. It's a slow and unpleasant death! (as, ultimately only adjectives can be changed and it is a choice of four, let's consider: do we choose democratically first adjective first... or do we choose from four pairs, or do we give values in points to every one and, then "quick and pleasant" is a sure outcome?)

  • Comment number 48.

    Well if Goldman Sachs sign over their bonuses to the Chancellor ... then we'll all be allright!

  • Comment number 49.

    Just remember that no one and I mean no one in govt or in 'opposition' has a realistic plan for large scale, sustainable UK 'growth' (a plan for a 'sustainable value adding economy') ... that will benefit all and sundry ... in terms of incomes, jobs, stability, etc.
    Like very few on here seem to understand or have any idea of where the UK is placed right now in terms of the degree of difficulty in improving the economy ... towards stability ... never mind our political class' rhetoric about credit boom 'growth'
    Nothing... nada ...nix... nowt! Why doesn't the BBC try asking all of the politicians properly and see how much they know or care about this issue:

    Plan?
    Strategy?
    Vision?
    Choice of rebalancing mechanism?
    Time horizon?
    No of jobs?
    Where and when?
    Future profile of the UK economy?

    We're drifting overall while the establishment and political class and those well placed look after themselves in the globalised sector of the UK economy.

  • Comment number 50.

    48...Mmmm! Bit of bad news on that front my old waterman....er...if you thought bailing out the Irish Celtic Turkey was expensive just wait till Southern Europe`s financial mafia hit us with their next round of national bankruptcies.

    And just guess which venerable Wall Street institution helped advise them on how to "creatively account" their way into the Eurozone!?

    Still...thank goodness we didn`t "adopt the euro"...we are safe from taking the next hit....just like we were over Ireland`s little cash flow problem!I wonder if Wall Street took a hit?

  • Comment number 51.

    49 ....More bad news nautician....our political and media establishment left Britain (in spirit) decades ago...and there`s a clue in which elections the BBC spent trillions of pounds covering....was it the we love Obama "change" fest in the USA ...or the almost invisible EU parliamentary elections?

  • Comment number 52.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 53.

    #38 armagediontimes,

    "John_from_Hendon Wrong again mate - economics is all about the personal."

    Wrong! Money and its proper price is an essential part of economics (after the World abandoned barter) and the price of money is mediated via its managment, be it by the state or the private sector. This has absolutely nothing at all to do with the conpletely personal yet it is crutical to all economics. I could go on and blow further holes through the pitefully weak arguement that you put forward but it is not necessary as you are sunk!

  • Comment number 54.

    49. At 08:41am on 22 Jan 2011, nautonier

    Good points. Re starting point.
    Bill Mitchell and Joan Muysken, in their book 'Full Employment Abandoned' explain 2 frameworks, one that existed after the war up to the 70s and of course the neo-liberal framework that we now exist in. I propose we go back to the former.

    Framework 1 Full Employment

    Economic Pillar: Committment to full employment
    Keynsian, fiscal & monetary demand management. Public sector employment.
    Govt as employer of last resort. Govt mediates the class struggle.

    Redistributive pillar: Intervention to ameliorate market outcomes
    Transfer payments. Redistributive taxation. Services to enable participation. Regulation. Conciliation & arbitration via specialist tribunals.

    Collective pillar: Rights of citizenship
    Uniform services. Pursuit of collective will. Professional administration. Services delivered by the state. Rights embodied in legislation.

    Framework 2 Full Employability

    Economic pillar: Primacy of markey based economic outcomes
    Inflation targeting. Fiscal drag. Full employability & compliance programmes (Workfare). Govt as agent for business.

    Redistributive pillar: Intervention to stimulate market outcomes
    Compliance tests and penalties mediating transfer payments. Taxation advantages for high incomes. Policies to force participation. Deregulation. Welfare to work.

    Individuality pillar: No intrinsic right of citizenship
    Non-uniform services. Individuals responsible for their own outcomes. Mutual/reciprocal obligation. Outsourcing of public services. Privatised service delivery.

    Take your pick

  • Comment number 55.

    54. At 09:18am on 22 Jan 2011, EconomicsStudent wrote:

    49. At 08:41am on 22 Jan 2011, nautonier

    Good points. Re starting point.
    Bill Mitchell and Joan Muysken, in their book 'Full Employment Abandoned' explain 2 frameworks, one that existed after the war up to the 70s and of course the neo-liberal framework that we now exist in. I propose we go back to the former.

    ....................

    It's not the worst of the academic waffle (as being little benefit on real imeplementation and delivery processes) but I have set out as 'import tariff rebalancing' as being the most suitable for the UK as a non. continental, net importer with relatively small and depleted and under-used conventional natural resources, with massive debts and unable to borrow or print any more money without crashing the UK economy (and probably the rest of Europe with it) and which I believe comes under this category.

    'Redistributive pillar: Intervention to ameliorate market outcomes
    Transfer payments. Redistributive taxation.'

    So I have taken my pick ... applying underused taxation to provide revenues to rebalance the economy and describe/provide a delivery mechanism which BTW ... the academic economists find near impossible to achieve as being 'protected environment wafflers'.

  • Comment number 56.

    Import tariffs are hardly consistent with the lofty aims in your previous post. Imports increase the standard of living of the importers as long as our currency is demanded.
    Increasing exports therefore would achieve the same objective. Surely that is not beyond us yet. The alternative energy industry looks like a prime candidate to me.

    As regards the framework, I see it more as a starting point and statement of principles rather than a plan of action but i do think we need some kind of 'ethical' (call it what you like) underpinning in order to rebuild.

    Practically the key is fiscal policy, jobs, maintaining and creating skills and fully using the resources, especially labour, that we have for both the country's material and social well-being.

    Politicians and economists do not understand how money flows in our modern monetary system and it is essential they get up to speed quickly.
    Once they understand, the rebuilding can then begin.

  • Comment number 57.

    50. At 08:46am on 22 Jan 2011, worcesterjim wrote:

    48...Mmmm! Bit of bad news on that front my old waterman....er...if you thought bailing out the Irish Celtic Turkey was expensive just wait till Southern Europe`s financial mafia hit us with their next round of national bankruptcies.

    And just guess which venerable Wall Street institution helped advise them on how to "creatively account" their way into the Eurozone!?

    Still...thank goodness we didn`t "adopt the euro"...we are safe from taking the next hit....just like we were over Ireland`s little cash flow problem!I wonder if Wall Street took a hit?

    ...........................

    Britain and all non-euro and new EU memebers will be forced to commit to the Euro during the next 5-10 years as part of a European stability pact ... and which is being worked on by EU bureacrats ... behind closed doors.
    Let me just say ... I can feel it coming!

  • Comment number 58.

    In order to understand our current predicament we need a reasoned analysis of the Brown economic legacy, then we can discuss Osborne's plans in a reasonable context.

    Basic economics:

    The role of government & BoE in the economy is to:

    1. Take the heat out of inflationary periods by taxing more, running a surplus and raising interest rates.

    2. Take the sting out of a recession by borrowing and spending more and BoE cuts interest rates.

    This combination of fiscal and monetary policies is described as COUNTER-CYCLICAL action - it irons out the effects of booms and busts, which makes UK PLC more efficient because it prevents the worst excesses at either end of the cycle - Brown's gold rule was that the surpluses and deficits should balance each other out over the cycle - "prudence" in his own words - but IMHO he didn't change this rule - the whole rulebook of the global economic game were changed overnight and he was powerless to do anything about it.

    What happened to cause this - and was Brown to blame for it?

    Firstly, the economy was going into a mild recession - then the world's banking system self-destructed overnight and there was a huge risk of the commercial banking sector disappearing. This was caused by a number of factors virtually exclusively from the USA - sub-prime mortgages and worthless paper dressed up as "special financial vehicles" - i.e. a massive con trick - suddenly Leaman Bros et al were caught out and had to realise these huge loses and went bust.

    What should the UK government do?

    Firstly UK PLC invested vast sums in buying equity in the banks to recapitalise them - the alternative? No banks, deposits disappear, unforseen collapses in companies suddenly without credit or access to their money - back to bartering until a new state bank could be established - the choice to prop the commercial ubanks p was the least worst option - and we can sell UK PLC's stockholding in the banks at a later date - currently showing a healthy profit.

    The paralysis of the banks resulted in the credit squeeze - no money to lend, so no money to borrow. The effect of the credit tap being turned off was a sharp fall in demand - and a recession heading for a global slump.

    What should government do now?

    Counter-cyclical doctrine and the experience of the Great Depression of the 1930s tells us that governments need to inject demand into the gloal and domestic economy to stop it going off a cliff - this means borrowing and spending.

    The difference in this case was the scale of the borrowing - add in the bank recapitalisation and the stimulus package and critics are right in saying it's a record.

    Where they are wrong is that you cannot view the bank recapitalisation as the same thing as running a "normal" deficit - for start there is an ASSET there which can be sold - bank shares - and unlike hiring a council worker or commissioning a new road, the bank holdings can be unravelled and the borrowing repaid without recourse to tax rises of spending cuts.

    If you blame Brown for all this you are simply shooting the messenger - he had nothing to do with the credit crisis and if he hadn't recapitalised the banks, then god help us.

    We are currently still feeling the benefit of the stimulus package Alistair Darling put in place - but we are about to feel thev full force of the "negative stimulus" of the spending cuts.

    What would a sensible, pragmatic economist do as Chancellor?

    Firstly in assessing the level of UK PLC debt, he/she'd discount the value of the bank holdings from the total debt because they are a realiseable asset we will eventually cash in and use the money to replay the debt - next he/she'd accept that the credit crisis wasn't "business as usual" it was a very serious crisis unrelated to the normal economic cycle - and one that should not be balanced out over a single cycle - i.e. probably two parliaments or more.

    Should Brown have thrown on the brakes earlier, cutting spending harder, sooner?

    Clearly with the benefit of 20:20 hindsight, we now know that cutting spending would have kept UK PLC in recession with lower GDP, lower incomes and higher unemployment, all of which would probably have produced the same level of deficit anyway due to higher welfare payments and lower tax take.

    The ConDems believe that they can cut the deficit over this parliament. They propose to do this by £110 Bn of tax rises and spending cuts. As each £ borrowed and put into the economy circulates and changes hands several times, taking £110 Bn out is magnified - I'd say by a factor of up to ten. We call spending money in UK PLC as "aggregate demand" - and if you take my figure of 10, that equates to a fall of £1Tn.

    In an economy barely keeping its head above recession, with our export markets in a similarly fragile state, conventional wisdom says UK PLC will be tipped into a deep recession.

    However, the Office for Budgetary Responsibility says we're going to get loads more new private sector jobs, billions of investment and our exports will surge.

    This is because of a quasi-religious belief that the public sector "crowds out" the private sector, so hack back public spending and the private sector will expand to fill the gap - the "magic of the market" will ensure that underused resources are snapped up and applied to make money.

    So who do you believe? did Brown splurge our money and leave us in so much debt that we need a stiff dose of spending cuts to pay them off?

    Or do you see the current plan as a dangerous gamble based on ideology not economics?

    Luckily we will find out who was right in the next 18 months.

    The coalition claim that the public spending cuts won't have a deflationary impact on th economy and that critics overstate its impact.

    Steph's piece above is a salutory reminder that the economic backdrop is also an important factor in UK PLC's prospects for growth, jobs and paying off our public AND private debts.

    There is however a precedent for Osborne's plan - a very similar austerity plan was implemented in Eire, which he described as a "shining example" of a successful economy.

    Eire is now on its knees unable to service its debt and unable to stimulate its economy because the spending cuts have so surpressed demand that GDP shrank by 17% last year and house prices fell by 40%.

    The verdict of history will be that Brown was a boringly conventional Chancellor faced with an unprecedented crisis that left him little or no choice.

    Osborne on the other hand is likely to be seen as the man who drove UK PLC over a cliff in the winter of 2011/12. The "world squeeze" means that we pay more for less - Osborne's plan to cut aggregate demand by £1Tn as well flies in the face of both Keynesian and Monetarist economic theory - the risk of drastic deflation is simply too high and cutting public spending this rapidly will cause GDP to fall,which in turn cuts tax revenues and drives up the welfare bill - which will INCREASE public debt, not shrink it.

    Let's spin forward 18-24 months - I predict we will be reaching 5M unemployed and GDP will be shrinking fast. Public borrowing will be rising and inflation caused by the collapsing Pound will be over 10%.

    At this point we will hopefully have learnt our lesson - Hayek's "Road to Serfdom" is the ONLY theortical basis for the coalition's current economic policy - and as there will be millions of people trapped without work living on poverty benefits chasing non-existent jobs at the behest of private sector barons running "workfare" programmes, the poorest in our society will have reached Hayek's destination - they will be serfs, pure and simple.

  • Comment number 59.

    #53 John_from _Hendon. So what is the price of money supposed to do if not to influence aggregate demand for money and the goods and services that money can buy? What is aggregate demand if it is not a summation of individual (or personal) decisions as to what to buy?

    Endless repetition sprinkled with Ad Hominems does not sink any argument at all.

    Turning to the substantive part of your argument regarding the need for higher interest rates; Does not the fact that interest rates are at record lows (both in the UK and elsewhere) indicate that those with control over rate setting policy take a different view to you. Why do you think this might be?

    Is it sensible to look at interest rate policy in isolation? Do you not think that zero interest rates taken together with changes to accounting standards, the ongoing manipulation of precious metals markets, the toleration of high frequency trading and the effective abandonment of the rule of law may be telling a more complete story?

    You can read every book you want, but none of them will be dealing with economic theory in a situation where the rule of law no longer applies, and where the general population are completely ignorant of the crimes being committed in their names.

    Ultra low interest rates are absolutely necessary to maintain the fiction of the TBTF theory. It is well known and widely accepted that low interest rates will lead to commodity price bubbles and hot money flooding into developing economies and that entire countries will be destabilised.

    It is well known and widely accepted that low interest rate policy will eventually mutate into sovereign debt crises, and that the biggest debt crisis will be faced by the biggest debtor of all the US. It is well known and widely accepted that the US debt crisis will imperil the very survival of the country.

    With all this known there remains no intention at all to raise interest rates. Can you not see that the solutions to what we are collectively facing cannot be found in economic textbooks.

  • Comment number 60.

    58. At 10:48am on 22 Jan 2011, richard bunning

    Great post ! I wish some of the commentators and economists would stop obsessing about inflation and act on some of your points.

  • Comment number 61.

    56. At 10:39am on 22 Jan 2011, EconomicsStudent wrote:

    Import tariffs are hardly consistent with the lofty aims in your previous post. Imports increase the standard of living of the importers as long as our currency is demanded.
    .........

    Yes they are ... the bit you don't get is that import tariffs can create UK market opportunities for British based companies ... the proof of this is the tens of thousands of tariffs that are now in operation around the world. the evidence for this is here... http://www.globaltradealert.org/

    The idea of import tariffing is that the tariffs are carefully selected ... not everything is tariffed ... and the tariff is paid by the importer and that is good because that is better than e.g raising VAT on all UK citizens because the importer's behaviour can be changed and this favours British made/grown/value added products. Criteria have to be established for choosing tariffs and be carefully evaluated ... it is not easy but can be done.

    The key is to look on the global trade alert websites and see how other countries manintain the their own competitive position as using tariffs/ subsidies and restrictions.

    The problem is that the establishment and political class/vested interests do not like UK tariffs because their own import and related incomes depend on import and other spivving. So tariffs would help the bulk of the UK population and hurt some of the establishment/rich list. So the rhetoric is against income and welath redistribution in favour of British business (particularly SME's) using tariffs).

    Tariffs would actually increase UK investment as international spivs would see the new opportunities in the UK market.

    New investment as a tariff side effect would create new jobs and tax revenues and promote innovation ... if linked to a vision for the UK economy.
    ...................
    Increasing exports therefore would achieve the same objective. Surely that is not beyond us yet. The alternative energy industry looks like a prime candidate to me.
    ...................
    A) No it will not ... as the UK plc is unlikley to grow its exports much further as starved of investment and unattractive to investor speculators due to income taxes/VAT/ high operating costs and employment rights. The spivs and establishment already hold just about everything of value and have no interest in further UK investment unelss they're persuaded to change their investments by more aggresive and targeted UK tax policy as rewarding those that invest in the UK plc

    Current higher exports are a blip with a weak £ pound ... the exports stats show us this relative to the pound and when interest rates go up in an infalionery world ... the UK exports will struggle and fade under global price competition from susbsidised and artifically low currency exports.
    ....................
    As regards the framework, I see it more as a starting point and statement of principles rather than a plan of action but i do think we need some kind of 'ethical' (call it what you like) underpinning in order to rebuild.
    ...................
    A) it is the only viable framework for th reasons I have explained ... import tariffs can be selecetd to strengthen fair trade and so is entirely etical and be fully defended on moral and ethical terms.
    ................
    Practically the key is fiscal policy, jobs, maintaining and creating skills and fully using the resources, especially labour, that we have for both the country's material and social well-being.
    ................
    A)Some waffle in there I think
    ...............
    Politicians and economists do not understand how money flows in our modern monetary system and it is essential they get up to speed quickly.
    Once they understand, the rebuilding can then begin.
    ...............
    A) I agree ... the problem is that the financial sector has strategic control of UK plc and sells us all out for investment profits instead of growing UK business ... when it should be the govt directing where investment is made by steering ALL UK based bank lending through taxation policy ... which is more effective and quicker than normal regulation as it hits the bankers pockets and balance sheets.

    This is a spin off effect benefit to the entire economy and taxpayer from using taxation policy to rebalance the UK economy ... as it is quicker and more effective than other policy mechanisms.

    No one can say that what I say does not work ... because it has never been applied in the UK ... but we are all the daily victim of not applying this when we all go shopping. We either 'play the game' or we continue in decline.
    Cheers

  • Comment number 62.

    Unfortunately for all of us in the western world our old piratical financial tricks (that made this barmy casino capitalist world work in our favour) have been taken up successfully by asian people with the brains and ruthlesness to reverse the old imperial game and take us to the cleaners for a change!

    You can sit in your backbedroom pulling all the theoretical economic levers you like but the only card game left in town is one that we are set to lose....unless we get real about what made the west rich and powerful in the first place .....and revert to bullying and regime change and war to keep on top!

    Usury...our old secret weapon...has just left the building and is on her way to the East!

  • Comment number 63.

    61...That`s the most sensible thing I have ever read about so called economics.

    The BBC made documentaries about the destruction of the Lancashire cloth making industry and what came across in a most worrying and sinister way was that since we became effectively bankrupt in the Second World War that industry was quite obviously sabotaged by BOTH Tory and Labour governments using the excuse that we must maintain open markets and free trade....just as we have been fed the equally counter-intutive nonsense that immigration is vital to our continuing prosperity (?)!

    I know this all sounds like a conspiracy theory ...but quite seriously chaps....who is really running Britain and in whose intersts is it being done?

    Because it appears we are unable to vote in politicians who really care about us and our families as their prime responsiblity.They care about EVERYONE and EVERYTHING else ....EXCEPT US!

  • Comment number 64.

    58. At 10:48am on 22 Jan 2011, richard bunning wrote:

    “Basic economics:

    The role of government & BoE in the economy is to:

    1. Take the heat out of inflationary periods by taxing more, running a surplus and raising interest rates.

    2. Take the sting out of a recession by borrowing and spending more and BoE cuts interest rates.”

    And the cycle merely continues. There is a time and a place for everything, the problem with this is that it is short term: reactive not proactive. Yes the simple equation is a+b=c or a-b=c but that’s fine if a and b are constant. As we now know a and b are effected by external financial decisions e.g. banks and other countries (world trade) and thus c is not a true expression of either a+b or a-b. Unfortunately it is similar to the beginning of WW2 – the axis playing a new game while the rest (inc, us) were still playing WW1. Forcing yesterday’s tactics to meet today and tomorrows new world, planning to loose?

    I would agree that Old Gordy had no other choice but to throw good money after bad (poor or creative accountancy by the banks saw to that) but surely we have to look back and see if he had a contributory influence i.e. regulation changes 1999 and 2002, which not only gave the financial institutions greater freedom but included the relaxation of mortgage registration to enable this greater freedom.

    I think therefore we both agree that it was the activities of the financial establishments that was the main cause of the crisis with the help from governments. The next question is therefore is: was it complicity or ignorance? Either way I am not happy! And just because the US lead did not mean we had to follow and this is also reflected in the Iraq war. So should the question be: was it complicity, ignorance or puppet mastery?

    Like you I do not like the cuts and the scraping of jobs. But with reference to your above quotes (1 & 2) this as not worked because we are still in a cycle of ‘Boom and Bust’ with each passing boom and bust being greater than the one before. With out WW2 this one may have happened in the 1950’s (but this can only be supposition). History can teach many lessons but over reliance can lead to an inability to see past ones own nose/bias dogma, and hence an inability to move forwards. What we are doing now feels correct to me (except for tackling the banks, Sept 2011 is too far off) but I can agree ‘that only time will tell’ but some one some where has to do something?

    So I’ll repeat the question:

    Was Gordon Brown: complicit, ignorant or just a US puppet?


  • Comment number 65.

    64...They are ALL complicit in the sense that they are actors working to a global capitalist neoliberal script while having to pretend that they give a damn about us.

    Don`t you see ...this is distraction politics and it`s just a waste of our time to atribute party political blame...just see them s one party and try to imagine how a Tory regime would have differed if New Labour hadn`t been in "power"?

    Politics and economics is a hoax in a country that doesn`t own and control its wealth and resources and assets....and with that loss of economic power and influence goes any real chance of controlling our own destiny...not just our economic but also political and even cultural future.

  • Comment number 66.

    For a long time now the ordinary man & woman in the street has known that the system is ripping them off.
    That we are used & abused to generate profit for the rich.
    Everyday experience testifies to that, you don't need to have studied economics.

    Now the cut is real wages is being measured & reported on by the economists; offically, we are now getting worse off.

    There's a lot of angry people in Britain, just as in Tunisia.
    And just like Tunisia there's a lot of young people with no job, no money, no future.

    If it can happen in a country like Tunisia it can happen here.

  • Comment number 67.

    64/ 65

    The counter-cyclical economic principle in fiscal and monetary policy is just an economic theory - it isn't political, moral or a blueprint for the future - it assumes the underlying economies are sound, that trade is balanced and that there is a reasonable level of employment and access to investment funds.

    "Ceteris paribus" - is the assumption in ALL economic analyses - translates to "other things being equal".

    As the "dysmal science", economics offers the least-worst-fit analysis of what has happened and tries to forecast what will happen in the future. In doing so it fails to take account of factors not being observed, it uses inaccurate data and by presenting explanations economist influences behaviour in the market, so making their forecast influence the outcomes.

    Econmics is not therefore a science, even if it uses scientific methods to collect and analyse data.

    POLITICS is the business of belief in right & wrong - in the type of society we want and who should have the power to make these decisions.

    I have some sympathy with people who suggest that the scope to play around with interest rates, government borrowing, taxation or spending to "fix" things is rapidly coming to an end - i.e. economics is nearing the point of being unable to explain, predict or manage the economy.

    At this point we move from the ciurrent rules of the game into a new world - and its not going to be easy.

  • Comment number 68.

    67. At 6:27pm on 22 Jan 2011, richard bunning wrote:

    “At this point we move from the ciurrent rules of the game into a new world - and its not going to be easy.”

    I agree and I hope others agree or at least have a measure of understanding and accept that it’s not going to be easy. There are going to be winners and losers, most of us being losers unfortunately. Mistakes are going to be made but it is how these mistakes are managed. I personally do not think that protectionism for ones own should be encouraged because there will be some natural protectionism, which will hopefully be enough.

    But where do we start? My gut tells me that unless ‘us’ the people stand up, financial establishments will still carry enough weight to dilute and amend any strategy put forward. It is now a game of blind brag; who’s got the bottle to see the game out. I believe that we the people have a duty to send the financial establishments a clear message and give the government a clear mandate to rule for us, for the interest of us and in the interest of us!over the short, medium and long term.

  • Comment number 69.

    There is nothing at all wrong with 'economics' or as calling it a science as ultimately based on mathematics, logic and probability - the 'issue' in terms of controversy concerning the opinions of 'economists' is that most economists fall into one of three distinct camps:

    1) Academia - protected waffling environment - opinions biased on politics and research grants and college reputations and image

    2) Private sector ... mainly paid 'yes men' and 'yes women' - again biased by politics and money

    3) Independent and 'inactive' economists - a very mixed assortment of individuals and views.

    The difficulty with economics is in finding unbiased and competent opinions that are full, reasoned and contextually appropriate.

    Economics has not got anything wrong regarding economic issues - it is biased economic opinions that are misused and taken out of context which have got the economics profession a bad name.

    It's like saying that football has got a bad name because of the antics of certain premiership footballers ... that's how stupid the debate can get regarding economics.

    A good example of the mis-use of the application of economics is in some still trying to apply Keynesian rhetoric and policies to today's market ... which is totally inappropriate.

    Those saying that 'economics has failed' are entirely 'non-economists' from what I can make out - and hardly qualified to say whether economics has in any way 'failed' ... as economics is evolving all of the time ... just like other areas of 'science'.

  • Comment number 70.

    For much of the nineties and the first half of the noughties, the world - from a British household's standpoint - was getting cheaper. Outsourcing and the rise of cheap production in China meant the stuff we liked to buy as consumers became cheaper, relative to the things we made.

    We have been mugs. We only saw these first flushes of globalisation, where we get all the benefits of exploiting cheap labour. But from now on we will have the great levelling. And why not? What right does a lazy person in the West have to a massively higher standard of living than the person slaving 10 hours a day the other side of the world making the products for the lazy Westerner?

    Anyone in the West who does not have real skills that are useful in the new globalised world should be very afraid. As it will probably only take 20 years for the standard of living of a non skilled worker in the UK to match that of a chinese equivalent... with our standard of living sliding down, and their standard coming up.

    Hearing this week that only 16% of 16 year old children would pass the proposed "core 5 subjects" is one of the most shocking things I have heard for many years. We are only talking about Maths, English, one science, one language, one humanity. Yet 84% of our children do not have them. And that is year after year after year after year of our schools pronouncing increasing standards of education.

    The schools didn't tell us that the reason students were now getting B grade instead of D grades was because they all dropped physics and took hair dressing GCSEs. Now these schools need to explain to these children what poverty will be like for the next 60 miserable years of their lives.

  • Comment number 71.

    UK Finances are not only squeezing; they are at the point of forcing tears from the publics' eyes.
    In spite of the continuous, economic mantra that high inflation (above 3%) was always just temporary, that it would fall to about 2% by the end of the year, The Coalition Government has ended 2010 with a warning: persistently high inflation is set to continue during 2011.
    I wonder what The Coalition Government means by "persistently high onflation"?
    High UK Inflation has apparently surprised everyone (who should have known), by the simple fact of remaining above 3% from early in 2010 to the very end of 2010. The Bank of England during 2010 was instrumental in the regurgitating the stipulated "temporarily" high inflation. UK Inflation by Feb 2010 had already spiked at 3%. However the Bank of England's Feb 2010 forecast that the spike was temporary and would resolve by November 2010 was mistaken. November, 2010 witnessed 3.3%.
    Then it was said that spare capacity in the economy would bring down inflation, though very few seemed to stop and ask themselves: What spare capacity?
    The Bank of England's most recent Inflation Report (November 2010) now forecasts UK CPI Inflation to target an early 2011 peak of 3.5% before inflation falls to below 2% CPI by the end of 2011. Really? I'll bet against that!
    Personally, I'm thinking that a lot of time and paper might be saved if the Bank of England got out of the forecast business. It's just guessing! And because it's no good at guessing, do you believe it has a clue what the interest rate should be? The Coalition Government could save the BoE Forecast budget simply by instructing the Bank of England to scrap its economic forecasting.
    The Bank of England was not expecting high inflation during 2010 and beyond; so why did the Bank of England's own staff pension fund switch from being
    30% invested in inflation-index linked government bonds to
    70% investment in late 2009?
    There must have been something that the BoE knew that it didn't tell the public?
    The UK led the way in inflation during 2010 that many other economies such as the US and Euro-zone will play catchup to during 2011, thus it will be interesting to see what the deflationists will come up with next to perpetrate none-existant deflation. The UK Inflation trend is entering its second year with the trend firmly in motion, this years Inflation forecast is an easier exercise to undertake than last years'. It does not take a genius to workout that regardless of what the Bank of England's quarterly inflation propaganda report states, that UK CPI inflation can be expected to remain above the banks 3% target for the whole of 2011. Therefore the question mark is how high will UK inflation spike.
    Oh by the way, the real UK inflation measure; I mean the current UK inflation figure stands at my guestimate at just over 6%.
    Why do I say this?
    VAT 20% Inflation. The VAT time bomb that has been ticking for the whole of 2010 exploded on 4th of Jan 2011 that will now likely result in an surge in Inflation to above 4% CPI and 6% RPI. A post UK election VAT hike to 20% from 17.5% is near certain to bring in extra revenue of about £13 billion per year. This will have the effect of both spiking inflation and maintaining the ongoing longer-term inflationary trend; therefore I would not be surprised that following the implementation of a VAT tax hike that CPI spikes above 4% and RPI as high as 6%!
    But the BoE will still be mantra'ing: "Don't Worry Folks its Only Temporary".
    Crude oil prices are only part of the story as 2/3rds of the pump price is tax comprising of fuel duty and VAT. Therefore UK consumers are being hit by very large price hikes in petrol prices as VAT has gone up by 2.5% this month lifting petrol prices to a new all time high of above £1.30. With a further further duty rise of at least 4% coming in April 2011 that will act as a further accelerant on fuel price inflation...and another spike.
    The Coalition Government seems to want to tax consumers to death by lifting prices on demand commodities.
    Unfortunately the monopolistic energy companies that supply Britain's Gas and electricity have been ripping of the consumers by announcing price hikes in recent months of an average of 7% that is resulting in huge rises in profits of near 100% for companies such as British Gas.
    Food prices during 2011 can continue to expect to deliver spikes. Whilst people in the developed world increasingly grumble at rising food prices that tend to be rising at levels at twice the official inflation indices, food inflation is inevitable...
    So, you tell me: Who is squeezing whom, and who will break first?

  • Comment number 72.

    70. At 7:38pm on 22 Jan 2011, jonearle wrote:

    Anyone in the West who does not have real skills that are useful in the new globalised world should be very afraid.
    .....................
    No they should not be afraid ... they should receive help from all of us and our govt and help them find a job that is suitable for them with or without skills.

    Instead of their being written off we should help them ... as led by our govt. This means redistributing wealth and creating and engineering jobs and margins for new business opportunities.

  • Comment number 73.

    #39. foredeckdave wrote:

    #37 Richard,

    "given that globally as we transition from high EROEI (Energy Return on Energy Invested) fossil fuel energy to lower EROEI fossil fuel and renewable energy, economic growth will inevitably decline."

    Is this statement necessarily true?

    Yes, energy has always been the master resource throughout history, and today about 70% of economic growth arises directly from the consumption of fossil fuel energy, the rest being due to the traditional agencies of capital and labour. I suggest you read the article entitled “Entropy and Empire” on the Oil Drum Canada that evaluates the impact of declining net energy (EROEI) on an earlier civilisation, namely the Western Roman Empire, and compares their predicament with that facing today's globalised industrial society.

    http://canada.theoildrum.com/node/2381

    This particular article is based on a book entitled “The Upside of Down” by Thomas Homer-Dixon, and I can thoroughly recommend it.

    These nextvctwo links go to YouTube presentations by Richard Heinberg (1st) and Chris Martenson (2nd), where they discuss the relationship between energy, resource extraction and economic growth.

    http://www.energybulletin.net/media/2011-01-12/globes-limitations-how-peak-oil-threatens-economic-growth

    http://www.youtube.com/watch?v=msTW7D_rSm4&list=PLAFF8951B6CB05AC2&index=1&playnext=6

  • Comment number 74.

    72 nautonier....I agree that society should help its members but the other day I was on Mark Mardell`s blog and an american chap said that people must help themselves.His assertion was that being born in a society or paying taxes was no entitlement at all.
    And what struck me forcibly was that it`s this Scroogist attitude that Friedman must have encouraged into Margaret Thatcher`s thinking before she behaved as she did in the 80`s.
    The problem is that however many of us reject Scroogism in the new feudal capitalist world we have no political power to match that of the markets and money lenders and their governments and media.
    Right now the political bailiffs are in to take our remaining assets and soften us up for austerity ...but what can we do to challenge this daylight robbery?
    Many are convinced they wasted it ...without realising that it`s being given to moneylenders and failed crooks and fraudsters to cover their own mistakes.
    Are we too big to fail?

  • Comment number 75.

    Or too little to succeed!

  • Comment number 76.

    OK here's my solution to escaping the squeeze and the coming crash:

    PLAN B

    1. Get out of the town city and buy a smallholding whilst your house is still worth something.
    2. Keep you own animals for meat, eggs & dairy and grow your own veg.
    3. Harvest wood by tree coppicing - install a woodchip boiler and stoves.
    4. Install photovoltaic panels for electricity - be ready to start storing it in batteries if the grid goes down.
    5. Drill a borehole, install cesspit and say bye bye to water, gas and electricity companies.
    6. Get electric car - free motoring - bye bye petrol station!
    7. Make your own biodiesel @ 20p litre - tractors need diesel...
    8. Repair fences and electrify them.
    9. Buy a gun - you'll need it eventually...
    10. Convert you pension to a SIPP and invest the whole lot in more land... they're not making it anymore and in a hungry world, it will always have value - you can't eat stocks, bonds and property, particularly if they've become worthless.
    11. Claim council tax rebate as your income is too low to have to pay it... now virtually zero bills except phone, TV and odds & sods shopping.
    12. Barter produce with your neighbours - no VAT on swaps!
    13. Set up your own brewery, plant vines and make your own wine - it's not difficult - bye bye alcohol taxes too.
    14. Join the TA/Special Constables - direct access to the local law enforcement or Armd Forces might be quite useful.... Neighbourhood Watch is also going to be a potentially important "self-help" organisation to build on.


    Now you're self-sufficient in food, heating, water and electricity and you're free of the financial system and the government can't tax you for using your own property by being self-sufficient. The real trick will be holding on to it all when the economic system collapses...

    You think I'm joking? There are literally dozens of families moving to the country and starting their own Plan B every month - MANY OF THEM ARE EX BANKERS - does that tell you something?

  • Comment number 77.

    74. At 8:32pm on 22 Jan 2011, worcesterjim wrote:

    72 nautonier....I agree that society should help its members but the other day I was on Mark Mardell`s blog and an american chap said that people must help themselves.His assertion was that being born in a society or paying taxes was no entitlement at all.
    And what struck me forcibly was that it`s this Scroogist attitude that Friedman must have encouraged into Margaret Thatcher`s thinking before she behaved as she did in the 80`s.
    The problem is that however many of us reject Scroogism in the new feudal capitalist world we have no political power to match that of the markets and money lenders and their governments and media.
    Right now the political bailiffs are in to take our remaining assets and soften us up for austerity ...but what can we do to challenge this daylight robbery?
    Many are convinced they wasted it ...without realising that it`s being given to moneylenders and failed crooks and fraudsters to cover their own mistakes.
    Are we too big to fail?
    .....................

    Its a matter of perspective ... we all look out for ourselves ... and those 'without' expect the govt to do the same ... to some degree ... but the govt does not see it like this. The govt manages politics, budgets, elections ... not the lives of individuals.

    Helping oneself is fine for most if it is a level playing field with the govt playing its part? Sometimes the govt needs to think ... are we doing enough ... the right things ... are we helping people in the right ways? Generally/arguably there are more opportunities in the US than in the UK and their mindset is different ... But I think that many Americans are also now questioning this ... 'you're on your own' rhetoric - and being written off? Most just want a level playing field... as failure is not an option.

  • Comment number 78.

    jonearle, you speak my mind!

    no amount of economic theory can replace actual people with skills, hard work and determination - and our education system has stripped of even that, our key remaining (renewable) resource.

    china has a population 20x ours - if it had an economy to match that ratio, it would'nt do them justice, compared to our pampered, moaning, pay-us-to-go-to-school generation.

  • Comment number 79.

    #73 Richard,

    I believe your contention to be wrong on a number of counts. Whilst we are still at the start of our search for renewable energy sources there is both a need and a desire in the whole of the developed world to find cheap renewable energy. If, necessity is indeed the mother of invention then it is more than likely that the search will be far from fruitless.

    You also have to look at the strategic profile of our existing power sources:

    It takes larger and larger levels of investment to generate (forgive the pun) smaller levels of increased output.

    Investment is disproportionally directed towards process rather than product.

    Marginal consumers are consider as being non-economically viable.

    All of the above are indicators that the climate (sorry to do it again) is right for a major technological shift. As history displays such shifts are commonly realted to power generation. I do not know when this shift will happen or what the process will be. All I can do is to point to the fact that it will happen.

    In the interim we will have to accept that the development of 'new' processes will cost us more in the short term. However I do not accept the argument that economic growth will necessarilly decline because of it.

  • Comment number 80.

    76 Richard...This "Good Life" that you describe is an excellent way to have a family life when your children are young and you still have the physical capacity to partake in it all.Later on it can be a burdensome impracticality.

    Around me in Worcestershire/Hereford/Shropshire there have been quite a few attempts at it.... and several communes too. (A chap called Dunkerton left the BBC and started his own cider making business...mod! )

    My advice would be to consider what some social work colleagues of mine did when they sold up in London and pooled their money and were able to buy an old country house with parklands with the proceeds.

    Once you have two or three times the figure that the average person can afford to spend on a house you get far more value for each extra pound that you spend...as every developer knows!

    But...the real challenge is to work in a civilised and humane way to create a world where there are far fewer people living a much better quality of life.And we can`t go on burying our heads in the sand about this or the devastating affects of the human population on the environment either...and that requires lots of joined up politics rather than our current selfish atomised capitalist imperialist thinking.

    It takes little imagination to realise that in Britain we are way above an optimal population figure .....because of a variety of beliefs we hold about the benefits of capitalism and religion and political ideas which collectively have made it almost impossible to challenge the crazy idea that we "have" to keep taking in more people than it`s quite obvious we can rationally and properly cater for.

    The Black Death halved our population..... but it freed the people who survived from the tyrrany of serfdom....because their labour was now scarce and they could ask for proper money wages. Would it really be a disaster if we hade thirty million people rather than seventy? The religious folk would say yes...but I doubt it!

    And we do have to ask whether your proposed manner of living is a practical proposition for more than a tiny proportion of our current population....... and then ask how you would protect yourself from having your land taken from you by more powerful people as law and order either broke down or was used by others to legally requisition all that you had built up for yourself?

  • Comment number 81.

    7. At 11:42am on 21 Jan 2011, John_from_Hendon wrote:
    'It is all about (un-repayable?) private debt.
    What must happen for a real recovery is the deflation of the private debt, not only here where the problem is particularly acute but in the USA and many countries of Europe'


    I agree.

  • Comment number 82.

    Commentariat??? Do you speak English?

    I've heard the media called a lot of things, but commentariat takes the crumbleroid, sorry, buscuit!

  • Comment number 83.

    80

    All good points - and no, what I am doing is not a sustainable option for the UK population which is many times - maybe even orders of magnitude - bigger than the countryside could ever sustain.

    I'd just say this - if the global system of food and energy production collapses and the financial system does to hell in a handcart, only those with their own food and energy sources will survive - there are a lot of possible options short of that, and most of them are very serious for those that live in cities and are totally dependent on the system holding up - what happens when the water, electricity and gas goes off - when there is no food in the supermarket or fuel in the petrol station, let alone jobs or money anymore? It has happened many times down the centuries - why not here?

    The risk of this happening is no longer that of a sci fi movie scenario - it gets more likely with every sovereign debt crisis, every banking bailout and every big hike in commodity prices like oil and grain and every extreme weather event that decimate crops.

    Is my plan simply deluded survivialism? Those those hoped to survive a nuclear war clearly didn't understand the science of nuclear winter or of the health consequences of nuclear fall out, or they'd hope to be vapourised in the first strike...

    In the west country I've got enough land, water and animals to survive and I'm already not visiting the supermarket for meat or veg and making a growing income selling grass fed rare breed meat at a premium.

    My commitment to holding on to this resource is absolute - my family, friends, neighbours and community are a long way from forming a vigilante force, but I can see that if threatened they'd close ranks overnight.

    I could see an "iron curtain" being brought down across the countryside to allow viable rural communities to defend themselves against the millions of hungry, destitute people streaming out of the cities to try and strip the countryside bare of food until they destroyed everything and the wasteland would be universal - and famine would determine the future anyway for everyone including those that tried to build a sustainable lifestyle.

    Make no mistake - we'd fight - at this point there would be no alternative - and we wouldn't be alone.

    But what could be done about the 30-40,000,000 people in the UK that could not longer be fed, kept warm or employed?

    A quick end might be the kindest option...

    We all knew about the risks of climate change and globalisation - we went on consuming, borrowing and living the high life - if it all goes to dust, those that gambled on going on with their excessive lifestyles will pay the price for it - those that recognised it was the road to hell and voted with their feet and changed their ways will survive.

    Social, economic and environmental Darwinism - an ironic outcome for the libertarian politics of free market individualism - those that believed in the free market will pay for their belief in globalisation by starving to death when it disintegrates, whilst those that rejected the unsustainable economic and environmental consequences of free market consumerism will inherit the earth - or what's left of it....

    It is not too late to change - there are real options to make UK PLC sustainable - but the clock is ticking and the scope for us to change course gets less with every passing year.

    Start by rejecting globalisation and libertarian ideas of selfish freedom - start recognising we live on a crowded, overheating planet with too many people and too little food and natural resources and that we will all pay the price if the world doesn't change.

  • Comment number 84.

    83 Hear hear to all that...and thank goodness people are beginning to have the courage to challenge the orthodoxy that we can go on and on overpopulating the world.

    But you are seriously underestimating the ruthlessness of mobs of hungry people ...and the power which modern military technology places in the hands of our elites and their military and police forces.Your vigilante groups might be overwhelmed.

    My guess is that a lot of warfare in the past was a response to the sort of situation you are describing and whole populations did starve as you say....and as recently as the 1840`s here in the British Isles.

    And without mass emigration from the British Isles I dread to think what would have happened here......though I notice we never mention the enforced mass emigration when we pride ourselves on our "tradition" of welcoming incomers and offering asylum to oppressed foreigners these days!

    My current fear is that religious groups known to favour large families are busily working not just in the third world but in China as well...so that any sacrifice or self control (by way of smaller families) on our part could be futile if migrants carry on arriving here unchecked.

    We keep being told world population will stop growing in the next century ....but the science around these issues is so speculative and open to manipulation that I hope we don`t leave future generations to live in a Mad Max world.

    Of course the religious types are going to Heaven ...so they don`t care!

  • Comment number 85.

    Hold on to your hats folks, this economic roller coaster has only just started!

  • Comment number 86.

    GDP now officially stands for grossly deflated product!

  • Comment number 87.

    O please god let us not return to the late 70's scenario when inflation topped 28% and the 3 day work week was the norm and petrol and electricity were rationed..etc,etc. Dont you just love monetarist policies?

  • Comment number 88.

    #83 , richard bunning,

    Wow, the People's Free State of Curry Rival united under the motto of What We Have We Hold!

    Well if that is the level of intelligent economic debate that this blog has sunk to then it should be closed down. Your comments amount to nothing more that survivalist Chicken Little BS.

    Please can we return to some sanity. Please can we return to economics. Oh for the interminable debate of all money is debt or the intricacies and/or relevance of MMT. If economic debate across the spectrum from Libeterianism to Marxism and beyond is about anything then it is about the management of scarce resources for the common good and not some nihilistic fantasy.

  • Comment number 89.

    Brave Lady!

    I always read it here from the bottom of the Globe!
    I admire the eloquence of simplicity and logic of thinking to an economy without claws arrogant. Write loose and detached from the pressures of the powers
    hidden big business.

    I have no academic training, but I'll dare to comment
    about the curves of the great wave of momentum, even commenting on
    the flight of this spacecraft will view only as of other natures than those of fundamentals but of nature GOLDEN. (the Divine Proportion in nature)!

    Let's talk flight of the serpent of commodities, the us-and some treassuries
    currencies. My thought is released, but all stuck to nature aurea.

    Mrs. Hope do not be alarmed. The intention is to bring light on other paths. There will be a landing anything random (hidden adjustment without notice) in the second half of this year with destiny still in flight until August 2013. THIS SHIP WILL BE READ BY WHAT WE ENFORCE THE FLIGHT OF THE US-TREASURY-1O. THE COMMODITIES WILL BE NO FUEL!
    WHAT WOULD STILL TO COME, STILL RESONANCE OF WHAT IS COMING FROM 1985. (Us-treasury-10 on 15.85%) remember?

    synthesis: the world does not want to see real hole in the hull of the ship!
    because this time the Iceberg is a cloud! SHIP IN FLIGHT!



    This is what we'll talk.

    Stick to 2PERIODO FOR MAY!

    Congratulations on your face that inspires confidence and gentleness.
    Success in its mission since dreamed as a child!

    Bravo! sorry for the translation. I do not speak English.!

    Carlos Dantas,
    I SORRY MY INGLES!

    [Personal details removed by Moderator]

  • Comment number 90.

    #88 foredeckdave

    "Please can we return to some sanity. Please can we return to economics."

    But Richard Bunning is giving us a taste of capitalist economics as it breakdowns.
    True on an economics blog we should be discussing more fully the economic models that explain how capitalism works.
    For my part I have consistently tried to get Stephanie & others to discuss the economic theory that explains crises.
    I haven't read a decent explanation of crises yet.
    I think this is because Keynesian & neo-classical economics is based upon the fallacy of marginalism, but I'm happy to discuss this.

    As a Marxist the rate of profit is at the heart of the analysis.
    Capitalists only produce if there's a positive rate of profit - they don't produce to meet human needs.
    With the rate of exploitation declining due to the end of cheap energy there is downward pressure on the rate of profit (in otherwords, a larger percentage of work time is required to reproduce the means of subsistence for the reproduction of labour & a smaller percentage is available for profit).
    This declining rate of profit has arguably been happening for a long time, about 40 years or more, but has been hidden by financialisation.
    That is, by rising asset prices (fictitious capital) which has been possible due to the printing of US dollars & the fiat currency regime.
    So for Marxists it looks like there's a lot of fictitious capital out there that has totally divorced itself from true value (socially necessary labour time).
    The devaluation & destruction of value will likely be huge.
    The consequences for humans are terrible.

    So whilst Richard may not agree with Marxist theory, he paints a good picture of what many will be doing to try & survive.
    Of course, what's really required is an end to capitalism & the common ownership of the world's natural resources & means of production.

  • Comment number 91.

    #90, duvinrouge,

    At least you are forwarding an economic/political response which you believe would beneficial to society. That is the essential difference.

    It matters not if I agree with your ideas as it forms the basis of a positive discussion.

  • Comment number 92.

    Well I am only a rather simple old man but this thread has given me more hope for the future of mankind than years of reading and listening to what I think of as neoliberal hogwash and self importance. Were there ever confidence-tricksters like Washington and Wall Street?
    In 1929 their criminal behaviour set in train a global economic, political and social tidal wave of misery and death...a depression and Holocaust and a war that claimed around fifty million lives and ruined us europeans for generations....in fact it enslaved us and the world and placed us under the thumbs of a few greedy shysters in America.
    Fast forward to 2006 and they are AT IT AGAIN!This time using all the extra power of the media and the politicians and their CIA and military etcetc....and we all carry on like zombies or peasants in a great feudal system worshipping the god of mammon and shopping and borrowing money from people who in reality never had it to lend!
    Poeple of the world unite...George Soros is the new marxist messiah...???

  • Comment number 93.

    92. At 08:48am on 24 Jan 2011, worcesterjim wrote:

    In 1929 their criminal behaviour set in train a global economic, political and social tidal wave of misery and death...a depression and Holocaust and a war that claimed around fifty million lives and ruined us europeans for generations....in fact it enslaved us and the world and placed us under the thumbs of a few greedy shysters in America.
    ------------------------------------------------------------------------
    Interesting post.

    Do you completely dismiss WWI as a cause for WWII, then?

    Similarly, many would see WWII as the ultimate fight for freedom from Fascism, with the fight for freedom from Communism following on. Do you not agree?

    It could be argued that in Europe we have enslaved ourselves to the EU as a result of WWII. And that the EU is enslaved to 'the system' - a mix of bureaucratic subsidy and the same system as Wall Street but in competition to it. Are you discounting the EU completely?

  • Comment number 94.

    90. At 07:13am on 24 Jan 2011, duvinrouge wrote:
    #88 foredeckdave

    "Please can we return to some sanity. Please can we return to economics."

    But Richard Bunning is giving us a taste of capitalist economics as it breakdowns.
    True on an economics blog we should be discussing more fully the economic models that explain how capitalism works.
    For my part I have consistently tried to get Stephanie & others to discuss the economic theory that explains crises.
    I haven't read a decent explanation of crises yet.
    I think this is because Keynesian & neo-classical economics is based upon the fallacy of marginalism, but I'm happy to discuss this.
    -------------------------------------------------------------------
    But economics impacts and is interweaved in the practical, is it not? It could also be argued that modelling, statistical analysis, macro economics, etc., got us into this mess.

    Sheer practicality - "How do I audit that?" - might have kept us safe.

    Hey! Let's be careful out there today.

  • Comment number 95.

    90. At 07:13am on 24 Jan 2011, duvinrouge wrote:

    As a Marxist the rate of profit is at the heart of the analysis.
    Capitalists only produce if there's a positive rate of profit - they don't produce to meet human needs.
    ~~~~~~~~~~~~~~~
    Interesting. The only Marx I ever read was the Communist Manifesto. Which sounds suspiciously like a litany of the complaints and "bright ideas" on this and RP's blog.

    This mushroom has puzzled long and hard about that, and decided that the fatal flaw in that manifesto is that it requires enforcement, and no viable political system has yet arisen which can enforce "fairness" without falling prey to human nature. (Didn't Plato try to deal with this?)

    Whether a benevolent dictator will ever arise is a moot point. Lacking one such, human society needs a way to muddle through.
    #############
    Back to the economics...There is a myth propagated and often repeated, that "business exists to make a profit".

    I disagree profoundly with that statement.

    In fact, I believe "business exists to provide goods and services that people need and/or want and that they can afford." This is a direct result of specialisation leading to growth in the net value of an economy.

    In mushroom's world, profit is a measure of the success/efficiency of a business, not its raison d'etre. And what is more, it is not a linear relationship.

    When a business is making "normal profits", it is at the point of balance within its economy. When a business is making a loss, it will eventually fail. When a business is making "super-normal profits", it is extracting more than it is contributing to the community. Marx was probably right, in that if super-normal profits continue in the long term, the economy/political system will eventually fail of its own accord. But in the meantime, the society will be "unfair".

    Seems to me that the regulation of super-normal profits is therefore a key issue for the government of a society. Does that make me a "Marxist"?

    ###############
    However, I slightly disagree with the idea that the "rate of profit" is at the heart of the debate. I am much more concerned about usury and what JfH calls "the price of money".

    A day of labour today is worth more than a day of labour next week. Why? Because a loan today is paid back "with interest" next week.
    But that "interest" is not related to the growth in net value of your labour. It is charged at a rate above the "return on investment" so that Banks can get "inflation beating returns".

    A day of labour last week is worth less than a day of labour today.
    Why? Because the money you were paid last week, while saved in a bank, devalues. And the reason it devalues is because there is more money in the system today, relative to the net value of the economy, than there was last week.

    We have used the term "wage slavery" to describe this process, but it is really slavery to usury.

    This continual devaluation of the currency in which you are paid your wages is, I believe, at the heart of the crisis.

    And the reason is that everybody is trying to get an "inflation-beating return on their savings and investments."

    Which is mathematically nonsensical, but if people cannot understand exponential functions, what chance have they got to understand that everybody cannot consistently beat "inflation" (devaluation)?

    Mushroom thinks that it is this continual "devaluation" which causes the treadmill to run ever faster, and causes business to chase ever increasing "growth" in turnover and "profit".

    WOTW seems to think that only the supremely greedy and shortsighted would chase super-normal profits, and that could be legilated against.

    But when currency devaluation is built into the system through usury, then everybody has to chase their tail just to survive.

    100 years ago, a 10,000 GBP turnover would have been a large business. Now, a business which employs the same number of people, and produces the same number of widgets would have a turnover of several million GBP.

    The spending-based "growth" that government seems determined to support looks to me like it is simply the flip-side of usury-based currency devaluation.

    And I do wish people would not use the word "inflation" when they mean "devaluation". (as in "inflation adjusted figures"...it confuses this rather simple mushroom whether they are are really "inflation adjusted, or actually "devaluation adjusted".)

    Happy Monday Anyway.

  • Comment number 96.

    Three things that are obvious here:
    a) That the BofE is powerless to stop inflation by raising interest rates - the inflation is not internal.
    b) Increased competition and investment would help. For example Farmer Giles COULD breed some more cows and invest in some bottling kit and allow himself to sell his milk direct to the consumer - he would make more AND the consumer would pay less. Yet the current 'real' interest rates charged by the major banks make this prohibitively expensive. The government needs to leverage its ownership of two high street banks to fix this by INSTRUCTING the bank to charge zero charges on business banking AND limit the interst rates on business loans to 1% above BofE base.
    c) The rich - Cameron, bank directors et al are happy to award themselves 30,50,100% pay rises in order that they are unaffected and justify this by sacking 'cheaper' workers and moving the jobs to the lowest bidder in South Africa, Brazil, India or China (regardless of quality).

  • Comment number 97.

    "The coalition claim that the public spending cuts won't have a deflationary impact on th economy and that critics overstate its impact."
    This is actually true.
    Since much public spending is done on goods and services imported (BMW's for the police, Mercedes for the councils, foreign ambulances, foreign fire engines, NHS computer system from India, tax systems, tanks and missiles from America, army uniforms from China to name but a few) then CUTTING public spending ACTUALLY BENEFITS the UK.
    A million pounds spent in Germany on police cars is 1 million pounds taken from our economy, 1 million pounds less demand. It is 1 million pounds more investment made in Germany on lower taxes, lower unemployment and better products. If we don't spend that money in Germany we leave ourselves with more demand, investment and jobs in the UK.
    IF the government actually gave a fig leaf about the British economy it would ensure that ALL public spending was done exclusively on British goods and services. It could do this - and do it legally (in an international and european sense) merely by insisting that the comparisons for 'value for money' currently made in all purchasing decisions included the costs in increased unemployment and reduced tax revenue of any decision to buy foreign products or services. The Germans, Americans, Chinese, Indians, Italians, Spanish and French all do this because you won't find ANY of those countries buying foreign goods for their public bodies.

  • Comment number 98.

    90. At 07:13am on 24 Jan 2011, duvinrouge wrote:
    Capitalists only produce if there's a positive rate of profit - they don't produce to meet human needs.
    --------------------------------------------------------------------
    Interesting statement.
    "What's that pile of frozen pizza for?"
    "Oh, it's a Damien Hurst."
    "Why was it produced?"
    "Oh, to meet the artists need to create art."
    "Why did it get sold to a collector?"
    "Because it pleased the eye of the collector and met his/her need to acquire."

    I'd be interested to know how human needs can be met by capitalists producing at a loss?

  • Comment number 99.

    97..Pseudonym...You say "If the government actually gave a fig about the British economy...etc"

    Would it be a truly liberating and momentous "move forward in this age of change" if the public were allowed to realise what their intuition must surely have been telling them for decades.... that politics and government obey the same law as all other professions.... in being conspiracies against the laity?

    How long has it been since politicians could seriously give a fig about us and our "horrid populist chavvy shameless racist xenophobic right wing etc etc" views and wishes?

    My guess is that the attitudes and values underlying the behaviour of Westminster and the BBC are an accurate reflection of those held by our ruling class....and they are a long way from being the those held by the average voter in this pseudo-democratic society of ours?

  • Comment number 100.

    95. At 10:36am on 24 Jan 2011, stillpuzzled

    A wee bit heavy for Monday morning thinks I!

    Would it be farer to say inflation is the increase that devalues the pound in your pocket? And if growth fuels inflation, then growth also devalues the pound in your pocket? So! (and thinking out loud here) if there was a period of none growth there would be a period of stability? But this does not take into account any rise in operation costs due to either increase in extraction or production?

    I am not disagreeing with you. I find it a difficult concept when looking at yesterdays 10k being equivalent to today’s billion, for the same input/output.

    I was taught to always leave something in for the next person along the line, this I believe as been lost to personal greed and perhaps as you say the misunderstanding of exponential and their belief that every thing is linier.

    I am saying the next bit not in an attempt to belittle but to aid understanding, I am also trying to do it in the most simplest way I can think of without being over complicated:

    Linier = 1,2,3,4, or 2,4,6,8 (straight line graph)

    Exponential = 1,2,4,8, (curved line graph, increasing through time)

    I’d have used equations but my memory (some 40 years ago) can not produce the recall needed LOL. (x=y and x=y to the power of 2, I think?). I’m sure some one will correct me!

    Happy to sit along side you in the Bull dodo!


 

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