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Unsustainable deficit

We got a large wadge of data this morning, giving us a full picture of the third quarter of this year. And guess what - it didn't contain much Christmas cheer.

The data shows that the UK balance of payments deficit (the broadest measure of our international trading position) is as bad as it has ever been. We earned less from the rest of the world, than we spent in the rest of the world, to the tune of 5.7% of our national income.

To put it another way, our spending in the summer was maintained only because foreigners lent us almost 6% of our national income.

Most shockingly, that means our balance of payments deficit is now bigger in proportional terms than that of the United States. (It's been a very long time since we could say that.) The US deficit has shrunk from 5.6 per cent of national income in the first quarter of this year, to 4.9 per cent in the third.

The only occasion that our deficit was this high was in the third quarter of 1989. The good news then was that the deficit soon came down. The bad news was that it was corrected with the aid of a very serious recession.

Now, I don't want to be alarmist about this. The balance of payments deficit is a funny old measure and it is quite volatile. It might well fall back next year on its own. Quite a large part of the deterioration reflects the fact that our banks have been paying more interest to foreigners and that might adjust automatically.

And we certainly don't have to worry about it as we once did. Back in the 1960s and sometimes the 70s and 90s, we worried about these things because the exchange rate was fixed and deficits literally meant the country could run out of money.

But mostly when the balance of payments deficit is large it is telling us that the British are borrowing and spending heavily, thus relying on imported goods. And that is a good deal of the story at the moment (other data released today showed the household savings ratio falling).

In that sense, the deficit is reminding us of a problem we have already known about.

But even if we are not going to run out of money to buy things, and even if we know that we have had rather low savings recently, the deficit can offer a forewarning of a pretty serious adjustment to come.

This is because our balance of payments deficit is manifestly unsustainable, and as there is a hackneyed saying in economics that if something is unsustainable, it won't be sustained.

The question is how the eventual adjustment will shift to a smaller deficit will come about.

The most obvious two ways are through a slowdown in our own spending (which reduces imports) or through a fall in the value of the pound which promotes exports.

One or both of these look likely over the next couple of years.

How does this play into the already fragile state of our economic nerves at the moment?

Well, the data is already old news. It barely reflects any impact of the credit crunch on the real economy. Indeed, it is probably best viewed as the last guide to what was going on before the storm broke.

And my own interpretation would be that it indicates we are entering 2008 with more serious imbalances than perhaps previously understood.

If the economy is turning away from rising house prices, low savings, high borrowing and easy lending, the balance of payments will improve. But it seems we have a bigger turn to make than we realised.

The US has been in a similar position. It has already started improving its current account, with the dollar falling very significantly.

The UK looks it has had more in common with the US than we thought.

Comments   Post your comment

  • 1.
  • At 05:01 PM on 20 Dec 2007,
  • scottow wrote:

If there is going to be an adjustment one of the things that will need looking at is government spending ie fewer new schools and hospitals in fact fewer nurses altogether. There's no evidence that anyone is thinking about this at all.
Certainly since Gordon Brown became PM he has thrown money at everthing expect police pay.

  • 2.
  • At 05:20 PM on 20 Dec 2007,
  • Finn wrote:

I think the problem with the economy has been that it sat in the doldrums of low interest rates for too long. When interest rates are low, money has little value and that is - in every possible way - a bad thing ... just look at Japan to realise how low rates led to an economy that essentially lost all power and direction.

Low rates do/should encourage investment, but they also encourage relentless spending and borrowing, which makes no sense at all in the long-term unless the borrowing and spending generate growth. Low rates also encourage poor business in that they allow poorly run businesses to survive by borrowing their way to a false prosperity.

We indeed face a tough 2008 and I for one am not sure the BoE and the Treasury have the foresight and ability to deal with the year ahead.


For the last few years everyone was concerned about how high consumer borrowing had got, I remember when we hit the one trillion pound mark, but since then it doesn't seem to get much press.

Everyone knows that after running up a debt there comes the hard part where you have to knuckle down and start to pay the money back - that's where we are at now. People had better get used to going with out some of those luxury items!

  • 4.
  • At 05:28 PM on 20 Dec 2007,
  • Finn wrote:

I think the problem with the economy has been that it sat in the doldrums of low interest rates for too long. When interest rates are low, money has little value and that is - in every possible way - a bad thing ... just look at Japan to realise how low rates led to an economy that essentially lost all power and direction.

Low rates do/should encourage investment, but they also encourage relentless spending and borrowing, which makes no sense at all in the long-term unless the borrowing and spending generate growth. Low rates also encourage poor business in that they allow poorly run businesses to survive by borrowing their way to a false prosperity.

We indeed face a tough 2008 and I for one am not sure the BoE and the Treasury have the foresight and ability to deal with the year ahead.

  • 5.
  • At 05:29 PM on 20 Dec 2007,
  • Mike South wrote:

"Balance of Payments" - what on earth is that? Will any people under 30 understand what you are talking about?

Labour spent all the surpluses, borrowing is out of control, Public Sector waste is institutionalised, and the best source of export earnings - manufacturing - has been allowed to wither away (and contrary to Labour beliefs the associated R & D is already following it). We are tumbling down the world productivity league.

Credit madness, obsession with housing prices, maintaining a "work/life balance", 2.3m on disability benefit....we are heading for disaster.

  • 6.
  • At 05:31 PM on 20 Dec 2007,
  • Laks wrote:

Evan, that means we must sit tight with our spending, which is not so bad as at some point of time we as a country must do.
Is it good news or bad news the pound value going down?
If the value goes down drastically will the foreign labour force return back citing Euro will give more returns than the pound, which in turn will reduce the imports which in turn will increase the exports. Not sure...

  • 7.
  • At 05:56 PM on 20 Dec 2007,
  • John wrote:

Hi Evan,

In the context of the pound falling (so investing in the UK being less rewarding), Government debt rising, and other debt guaranteed by the Government (eg Northern Rock) rocketing, is it likely that it will become significantly more expensive for the Government to borrow?

  • 8.
  • At 05:56 PM on 20 Dec 2007,
  • Andy wrote:

Gosh, between this and Robert Peston's blog I'm alarmed. For months, the media have told us to expect a 'soft landing' as the UK apparently has 'good economic fundamentals'. I take it that our huge and worsening current account deficit doesn't quite qualify as a 'good fundamental'!

Surely the key to what happens next lies in inflation. With the pound looking set to weaken as the dollar has, won't that tend to result in higher inflation. If this happens, won't that also tend to stop the BOE being able to cut interest rates?

Please tell me if I'm wrong here (being nowt but a bar-stool economist), but shouldn't we all be a bit worried?

  • 9.
  • At 05:59 PM on 20 Dec 2007,
  • Jim Currie wrote:

But if the obvious remedies are to spend less, borrow less and devalue our currency...and the global - I say global - problem is effecting every country's economy.. surely every major country and currency will make the same adjustments? It will then only be the relative differences in specific adjustments that will create a very very small slow-down as we all continue, en- mass to move down the slippery slope toward world recession.

Jim Currie, Madeira.

  • 10.
  • At 06:01 PM on 20 Dec 2007,
  • d chandler wrote:

We have a huge population of immigrants living and working here.Surely a lot of their earnings are going abroad instead of being spent here.This isnt meant to be racist but it must be regognised.

  • 11.
  • At 06:07 PM on 20 Dec 2007,
  • George Geee wrote:

Perhaps in some small part, this deficit reflects our obsession with buying the latest in electronic gadgetry (and problably foreign cars) on credit, which are invariably made in the far east. Nothing wrong with buying imports, but with unfettered and mix in some dodgy lending practices, should this deficit come as a surprise! One solution to reducing the deficit is to stop credit to those who are irresponsible or unable to repay.
What is so complicated with that? The central banks are throwing obscene amounts of hard earnt cash at sustaining the flawed banking system, instead of instigating tough & immediate control of credit by regulation and legislation. If its not too late already!

  • 12.
  • At 06:12 PM on 20 Dec 2007,
  • Roger Sandilands wrote:

We need more information about the composition of the balance of payments before reaching alarmist conclusions.

A country that is attracting a lot of direct foreign investment will tend to have a surplus on capital account and the capital account is the mirror image of the current account. It will be accompanied by imports of raw materials and component parts to establish and expand the productive foreign plants (as well as domestic plants).

Singapore ran huge payments deficits every year from the early 1960s till the mid-1980s. It was a symptom of its dynamic economic growth and never a cause for concern. Let's hope this is true of the UK today also.

  • 13.
  • At 06:14 PM on 20 Dec 2007,
  • Paul wrote:

You're absolutely right - we do have a lot in common with the US.

Only the US mortgage market contains around 3% subprime. Even the most optimistic guestimate from RICS puts the UK's subprime mortgage burden at between 6-8%.

When the realization dawns that there's an awful lot more toxic subprime slime over here than in the US, the other foot will fall.

  • 14.
  • At 06:27 PM on 20 Dec 2007,
  • Simon Allen wrote:

That was a good, balanced BBC cautious note! My guess is that we are in for a hard landing and have the view: The sooner the better.

For the last three years, house prices have been fuelled by bad lending which the BofE/Govt took no action on and the rest of the catalogue is already enumerated. The sooner we have a crash, the faster people will react to work + save.

I think that the slow slide into the forthcoming recession has made it worse. But Gordon Brown believed that there would be no more Boom-and-Bust. That very statement told me that he was going to be a bad Chancellor.

The pro-active, but counter intuitive, way to deal with it - would have been for the govt to precipitate the decline with interest rates and a squeeze. But, of course, politicians only get elected if they tell us nice things.

So, let's get on with the very nasty recession (like 1989/90/91) and try to do better next time.

  • 15.
  • At 06:32 PM on 20 Dec 2007,
  • Graham wrote:

Evan, I am usually impressed with your shrewd comments on the economy but do you know your wedges from your wodges? Surely, wadges were last seen taking their money out of a certain rock.

  • 16.
  • At 06:34 PM on 20 Dec 2007,
  • Alan McNaughton wrote:

Evan,

you are never happier than when you state the obvious and of course bad news.

everybody knows that a trade deficit today is someone's bounty tomorrow, and in the past it was the U.S that was pleased to play this part, now its our turn.

G.B knows what he is doing, and although i am a massive SNP / Alex, Salmond fan get off the PM;s back, and encourage all to buy British.

  • 17.
  • At 06:44 PM on 20 Dec 2007,
  • pj kelly wrote:

Unsustainable deficit? Uunsustainable currency, country and people more like.

I'm sorry Mr Davis but the poor readability of your words here and the obvious typo of 'wadge' on the first line chime in with the amateur status of this country and its trading deficiency with the world.

5.7%, 6 per cent of GDP is outrageous. Please don't come the coy attitude of 'perhaps we've more in common with the US after all'. Anyone with a brain knew that the UK was and is far WORSE off than the US. The UK trade deficit until now has been padded by invisibles, against a massive(7-8%GDP) visibles deficit. For instance most of US treasuries buying by foreigners is done through London banks($30bn out of $50bn in month of October via London). Great for London bankers fee earnings but sweet f.a. in terms of real sustained income for the country's wider residents outside of the square mile. It appears even this hot money is now shifting elsewhere.

Which brings us to the crux. Why is the pound so MASSIVELY overvalued? A trade deficit of c.6-8%GDP; a public sector borrowing requirement heading for £50bn in 2007/8(4%GDP). The country's last real asset/collateral - its housing stock - massively overvalued and heading for a fall of 40%; no large-scale maufacturing UK-owned enterprises left to earn foreign currency. Just where is this demand for Sterling coming from?

In comparison the US dollar has already been beaten down to c.76 trade weighted index on the back of superior figures and a greater-discounted housing market burst. Just what is it, that allows the Pound to defy gravity? Could it be the City's bankers not wanting to pull the rug out from under themselves, you know, you don't defecate on your own doorstep?

As for a fall in the pound supposedly curing the trade deficit and UK's economic woes a la US; again that's hogwash. Just what are you gonna substitute those 'can't live without' German autos with, or French/Italian luxury goods, etc., etc.? You've no recognisable industry to fall back on to take advantage of cheaper exports. Face it, the UK was always historically a mercantile nation, not a manufacturing nation, and now it's reached its apotheosis with the dominant financial services industry and its centre, the City. Well turns out the City and its denizens first loyaly is to the hot money and its non-domiciled owners and the vast fees earned from shuffling it around, nominally via London and assorted offshore tax havens, AND NOT TO the UK as such and its greater population.

  • 18.
  • At 06:55 PM on 20 Dec 2007,
  • Adam wrote:

"Balance of Payments" - what on earth is that? Will any people under 30 understand what you are talking about?

Just to let you no mike im 17 an have a good understanding of the balance of payments :)

Anyway, all this talk of hard times ahead will be a self fulfilling prophecy won't it?

Hopefully there will be enough demand for graduates who like me will be wanting employment in a few years ^^

  • 19.
  • At 07:00 PM on 20 Dec 2007,
  • Michael Henderson wrote:

I remember Harold Wilson forever going on about Britain's trade deficit in the 1960s. Now that it is so much worse, why doesn't the Labour Government ever mention it ? All they say is that the economy is in fine shape. All we ever heard was how we were living beyond our means. I don't understand it.

  • 20.
  • At 07:00 PM on 20 Dec 2007,
  • Michael Mciver wrote:

Low interest rates,uncontrolled government spending on unnecessary clerical jobs throughout the whole system,total lack of proper control over benefits,the sale of all our national assets to foreign companies,the handing over almost total control to the EU,the huge rises in peoples essential living cost,no control over house prices,Etc.etc.
Sadly this all just adds up to one big recession due any time now.

  • 21.
  • At 07:33 PM on 20 Dec 2007,
  • Tom wrote:

Please bear in mind that not everyone under the age of 30 is a mindless, reality show watching buffoon with the attention span of a toddler [obviously, apart from the toddlers..].

I think that the UK is heading for a recession, as purse strings tighten and the never-ending river of credit dries up. Consumer spending will undoubtedly drop as people and companies struggle with debt that is not as cheap as they once thought. If that leads to significant job losses next year, we could be in for a rough ride, although I doubt it will get as severe as the 90s.

Thankfully, recessions usually lead to 'regime change'..

  • 22.
  • At 07:34 PM on 20 Dec 2007,
  • Johan Prose wrote:

So before considering the deficit, inflation is already above target (even on the 'new' measure; I dread to think where the RPI is) and the Bank is looking to cut rates further.

Just a convenient way to let inflation run a bit and bail out the foolishly over-endebted masses?

  • 23.
  • At 07:37 PM on 20 Dec 2007,
  • Krishna wrote:

I think, the fact that sterling has grown stronger against other currencies and specifically the falling USD is the cause for this increased deficit. In 2008, it should adjust itself with the value of the pound decreasing as interest rates are cut.

  • 24.
  • At 07:50 PM on 20 Dec 2007,
  • Mark wrote:

...and all of this against a background in which economic policy orthodoxy now seems to be that the ONLY instrument of macroeconomic stabilisation is interest rate setting. The fact is that the global economic system IS open to effects that cannot be controlled through market operations by single banks or by interest rate variations - we've seen evidence of that this week as the central banks have tried to mount a coordinated approach to ward off recession.

How is the Eurozone doing on this measure? Is the pound about to fall against the €?

  • 26.
  • At 08:32 PM on 20 Dec 2007,
  • Gerry Lynch wrote:

Yes but ....we have a Bank of England inflation target of 2%.

If your analysis is correct it seems likely that will need to be adjusted upwards in the next 12 months.

  • 27.
  • At 08:32 PM on 20 Dec 2007,
  • Paul wrote:

The balance of payments deficit is yet another indication that the market economy, based as it is on ever-increasing credit and debt, is unsustainable and is heading for a 1929-style crash. A new book I've read called A House of Cards, at least offers some not-for-profit alternatives.I found it at http://www.aworldtowin.net

  • 28.
  • At 09:10 PM on 20 Dec 2007,
  • DJD wrote:

With regard to house price stability - or shall we say instability ( as more appropriate);

the RICS have commented today that they do not foresee a sharp slow down in prices !

we have to treat this comment with a highly sceptical note - as they represent the interests of Estate Agents and we all know how much we trust the views of Estate Agents

  • 29.
  • At 09:13 PM on 20 Dec 2007,
  • Scamp wrote:

There is actually another significant difference between the US and UK that makes this data even more worrying and that's our relative competiveness.

Commenting on the recently released Competitiveness League Tables that put the USA at the top again the Chief Economist of the World Economic Forum said :-

"The US gets its leadership position through a winning combination of highly sophisticated and innovative companies that lead the world in research and development and operate in very efficient and large markets. This is buttressed by an excellent university system that works closely with business, a very flexible labour market, a unique ability to attract talent and a financial sector that supplies the needed capital for risky innovation ventures. These strengths allow the US to overcome weaknesses related to its macroeconomic imbalances"

And herein lies the real problem. Whilst the US financial services sector has it's share of private equity bandits and hedge funds etc it is still investing in the risky stuff we are not and that has to be a real cause for concern.

  • 30.
  • At 09:13 PM on 20 Dec 2007,
  • Chris wrote:

It makes Gordon Brown's comments yesterday look rather fishy. He said everything looked OK but he must have already seen these figures.
Does he really think we are all stupid?
Don't answer that!

  • 31.
  • At 09:29 PM on 20 Dec 2007,
  • Chris R wrote:

I remember when balance of payments deficits were a major story, with the exchange rates and money supply figures too, each month figures seemed to be headline news like the interest rates are now... "interesting" how the story changes.... but in a way the fundamentals don't. Like fashion we may start seeing the old style headlines on deficits and exchange rates return anew. Looks like the pound exchange rate will be heading south .... will we see the headlline in 2008/9 £1 = 1 euro!! places your bets.!!

  • 32.
  • At 09:29 PM on 20 Dec 2007,
  • Deepak Chawla wrote:

GBP has fallen 10% against most currencies of Rest of the world. Mostly the countries it imports from. (The reason why we are up on US$ because US$ is falling faster than GBP)

Hence the increase in UK inflation because we are now paying more for the same.

I must add, in the good years of easy money (last 10 years) UK didn't put on any fat(surplus) now in lean times countries like Singapore and China are making a mint by lending billions at over 10% to western businesses.

  • 33.
  • At 09:48 PM on 20 Dec 2007,
  • Dave wrote:

Governments are an obscenely poor spender of tax-payers money (note: its YOUR money) - viz. on Northern Rock. I fail to see why MY money should be squandered on a clear basket-case. Until governments recognise that 'economics have consequences' we will go on having booms and busts. This Labour-inspired one is sadly no different.

  • 34.
  • At 09:49 PM on 20 Dec 2007,
  • Mick wrote:

Public Spending is out of control as a result of shambolic governance and corrupt policy. Take Housing Market Pathfinder as just one example, billions and billions and billions wasted on terrorising decent ordinary people out of their homes and seizing their property on the cheap so that their land can be handed over to housebuilders on the cheap or free to build new but worse houses for huge profits - see how the housebuilders bray with delight at such nonsense and megaprofit.

That certainly isnt sustainable (in any shape or form) and we all pray that it wont be sustained !

  • 35.
  • At 09:49 PM on 20 Dec 2007,
  • Paul Emmerson wrote:

Yes ... but what is the pound going to fall against? Not the dollar, that's falling too. The euro? Maybe. The yen? The Japanese Central Bank keep trying to stop their currency from rising. The most likely thing is a wave of competitive devaluations as we head into a mild recession, with everyone trying to protect exporters and jobs. What to do? Buy gold. It will rocket under these circumstances. Everyone should have a substantial part of their portfolio (ISAs etc) in precious metals - for the next few years.

  • 36.
  • At 09:58 PM on 20 Dec 2007,
  • Rob wrote:

if you run three concurrent deficits (personal, PSBR and payments) it's blatantly obvious that GDP has to stall at some stage. Combine that with high debt levels and rising worldwide inflation and the picture isn't pretty.

But why has it taken so long for commentators to see the THREE elephants in the room?

  • 37.
  • At 10:10 PM on 20 Dec 2007,
  • andy wrote:


Mike South has hit it bang on the head.
We've had ten years of economic mismanagement with New labour effectively buying votes by stoking up the 'feelgood factor'
It could not last and now they are making it even worse by chucking taxpayers' hard earned at inefficient and incompetent banks.
Cheap Cheap money seems to be their only answer. Well, I can see no other course than further pain and disaster if the treasury (forget the hogtied BOE) continue down this road.
Rabid inflation and a currency worth peanuts is on the horizon. Heaven help those poor souls on a fixed income.

  • 38.
  • At 10:38 PM on 20 Dec 2007,
  • Numaan wrote:

lets cut the jargon! Basically the way I see it we have had 10 years of relative prosperity, now lets get use to the idea of 10 years of not so good prosperity!

  • 39.
  • At 10:47 PM on 20 Dec 2007,
  • George wrote:

Evan, when are you and the BBC going to directly blame Gordon Brown and Nu Labour for creating this mess in their attempts to buy public sector votes?
He borrowed £35 billion every year that was wastedly pumped into the economy creating artificial GDP growth, and in supposedly good years when he should have been saving. He has nearly doubled the national debt from £306 billion in 2001 to over £500 billion in just 6 years with no plans to re-pay it back. Now that his overtaxation is producing lower tax revenues, and the slowdown making things worse, the budget deficit will get bigger with any resulting cuts accellerating the decline and falling house prices. It is Gordon Brown's policies with increased (borrowed) money supply that caused the house price boom which will now create high inflation when the £pound collapses in value as per your correction argument.

  • 40.
  • At 10:49 PM on 20 Dec 2007,
  • Ian Watson wrote:

Maybe if we stopped sending good money after bad e.g. Trident replacement, standing army in the Middle East/Afghanistan, crackpot IT and ID card schemes and restarted the old way of ploughing good money into good British infrastructure, improving schools and hospitals, roads and police, in short INVEST in Great Britain rather than keep selling swathes of her to keep the balance near even.

When Blair kept robbing the public coffers to pay for the illegal war in Iraq, it was only a matter of time before the hammer would fall, he stripped infrastructure investment to the core and was the worst gamble in history for Britain after Suez.

There is no "quick fix" here, what needs to be done now is to have vision and start rebuilding our society, move it away from capitalist greed, privatised, globalised means into more homegrown control, after all if you consider that none of the sub-prime fiasco was anything to do with us, why should we pay for it, if we hadn't globalised, then we would not be facing this dark hole in front of us.

Simple.

  • 41.
  • At 10:55 PM on 20 Dec 2007,
  • Liam O'Brien wrote:

The strong pound in real terms has damaged our exports hence the BP deficit but, are we really in a position where we need to, or even can, compete with the exporting nations in the far east? Coversely, a period of higher interest rates where money is no longer seen as "cheap" will bring a reduction in general expenditure - but how hard will this recession bite?? Without increasing demand from the 'outside' world for our goods and services by a process of gradual devaluation of Sterling our industry and services sector could suffer from unemployment. But if we did devalue Sterling we could reign in general spending without this having a profound effect on industry and services... oh, and I am under 30!

  • 42.
  • At 10:58 PM on 20 Dec 2007,
  • Jeff Gray wrote:

Isn't stagflation where the economy is heading? No one seems to be talking about it but surely that is where lower interest rates are going to take us? Is the Bank of England being to complacent in relying on CPI inflation when RPI inflation at 4.3% is likely to be a more reliable guide to UK inflation? Won't lower interest rates lead to a further devaluation of the pound and a further rise in inflation?

  • 43.
  • At 11:04 PM on 20 Dec 2007,
  • John D wrote:

I think this article has some truths, but also paints some pretty scaremongering comments.

You point out that the pound could fall in value, thereby cutting imports and improving exports. No doubt you are also aware that the BoE is predicted to have a significant cut to interest rates over 2008, and we have already seen cable fall substantially over the past month. Therefore the most realistic outcome is for the weakning currency to have an effect, which is a good thing, and is something the US is already benefitting from.

It has been some time since my school economics days, but I am sure there is competing arguements out there about balance of payments deficits. Who is to say a deficit is a bad thing? Is a massive surplus a very positive thing for China right now or Japan in the 1990's? You are confusing facts and generating fear where it need not be when you start drawing comparisons between the deficits of the late 1980's and the recession. I would like to see your proof that the deficit was a fraction of the cause (perhaps changing property laws and sky high interest rates, neither of which are occuring today were!).

Please be less of a journalist by writing on fear and more an economist by providing fact, it will help your credibility.

  • 44.
  • At 11:09 PM on 20 Dec 2007,
  • Geoff Berry wrote:

Evan,

Has 'aunty' restricted you to one downside economic factor per day and banned the r------- word ?

Increasing trade balance deficits, unprecedented personal and corporate debt, property market slumped, government spent our surplus and borrowed billions, banks and building societies in unquantified crisis, predictions for 2008 inflation up and growth down, government incomes down and nothing left to tax, international financial institutions pumping billions into black holes, sterling too strong, etc. etc. etc.

Please help me, Is this a r------- or not ?

  • 45.
  • At 11:21 PM on 20 Dec 2007,
  • Bob Doney wrote:

This is a serious issue. Shouldn't it be "wodge"?

  • 46.
  • At 11:51 PM on 20 Dec 2007,
  • Turtle wrote:

Evan,
This is nothing new, as a percentage of GDP the UK deficit has been about as bad or worse than the US's for some while now. The real problem is that most of the supposed wealthiest countries in the world have huge debts to the rest of the world. In most cases that can be considered OK in the normal events of business, but the largest debtor also happens to spend more on arms than the rest of the world combined. Who wants to push for repayment if they default?

nice post from Mike South, by the way he didn't mention that all the new schools/hospitals etc.. have been built on PFI and so are all off balance sheet. Add those in and we are truly shafted.

When this hits home the squealing will be immense, because nobody is to blame for thie own actions anymore are they!

Iron Chancellor - I think we may have to rethink our views od the econony Mr Brown built.

  • 48.
  • At 02:35 AM on 21 Dec 2007,
  • Chris wrote:

I just thought that I would point out that the word data is a plural. So your phrase "Well, the data is already old news. It barely reflects any impact of the credit crunch on the real economy." is making errors which school children get picked up on. You should have higher editorial standards.

  • 49.
  • At 08:11 AM on 21 Dec 2007,
  • Donald wrote:

Hello

Criteria for measuring inflation did not include relevant things such as Coun cil Tax etc.

Therefore interest rates set too low.
Therefore people could afford to spend more on housing.

Housing bubble.

People borrow loads from their housing equity to spend on stuff - imported?

So - bubble in personal spending, not to mention government spending.

hence balance of paynments deficit.

Does it matter?

I doubt the government will put out a statement afirming this a sa problem.

So - i guess it does not matter.

Now back to the real world!

Interesting and balanced Evan; very good.

Yes I believe we are at a turning point; the £ has already started to fall and will fall again in 2008 where Bank Rates are (rightly)reduced. This will boost exports and cut imports.

Mr Browns decade of spend spend spend to 'cure' public services HAS to stop - but that in itself will take cash out of the economy too.

I am not convinced the Japan example quoted in a comment above is correct, I believe Japans rates are low to revive the stagnated economy - low rates were not the cause of that economy stagnating.

Things have changed yes, we all need to be more prudent but not lock ourselves away in a dark cupboard!

  • 51.
  • At 09:46 AM on 21 Dec 2007,
  • Rob wrote:

Oh dear, is Evan becoming one of those doom mongers, so easily dismissed over the last few years? Those 'amateur' economists who didn't know the front end to the back end of a boom or bust?

The BBC and the media is general are complicite in the financial disaster in the making. No pressure brought to bear on Gordon Hamish Brown, the biggest economic sinmeister of all time, regarding his 'prudent' running of the economy.

Never did economics at school but have learnt over the years that you can't spend what you don't have - may be it was the seventies that drilled that into me! And that is exactly where we are right now - IMF bailout to come!

  • 52.
  • At 10:23 AM on 21 Dec 2007,
  • Nigel Wheatcroft wrote:

This has been along time coming but this problem was bound to arrive.Brown has been negligent in the way he has run the economy and neglected what ha should have been doing.Instead of overseeing a mad growth in government,bureacracy and red tape he should have been overseeing a growth in industry and production.

  • 53.
  • At 10:30 AM on 21 Dec 2007,
  • John Smith wrote:

'Wodge', surely?

  • 54.
  • At 11:43 AM on 21 Dec 2007,
  • Jonathan Hunt wrote:

All economies need recessions to create growth. For those in their 20's it will mean that they will be able to afford a property for their young family in years to come as house prices tumble. The housing market had got to the point where their was no growth whatsoever and the only people keeping the prices ridiculously high, were property investors, but-to-lets. Now they have vanished the housing market is falling rapidly (between 3-6% in the last month according to Rightmove). For those who get their fingers burnt, this will be an education to value money instead of spend spend spend. The government are to blame too, they have wasted billions of taxpayers money by red taping businesses and inefficient spending and recruiting in the public sector. Instead of leaving business to its own devices they have meddled and interferred (home information packs, for example) thus the wheels of commerce are no longer slick but riddled with Red tape, they should be ashamed.

  • 55.
  • At 11:50 AM on 21 Dec 2007,
  • Finn wrote:

Evan's spelling of the word "wadge" is correct. Doh!

  • 56.
  • At 12:01 PM on 21 Dec 2007,
  • Phil Hoy wrote:

Evanomics isn't it? As opposed to economics.

If we have a trade deficit it means we don't export enough to pay for the imports we need. Imports like food and energy - things we need to survive. Having a floating exchage rate doesn't help. If the pounds falls relative to other currencies it means we export more - but our imports become more expensive. With some food products already rising by 14% per year that isn't a nioce thought.

And if you really want to work out what is about to happen to the economy - take a look at the M4 money supply figures. They are dropping like a stone.

  • 57.
  • At 04:00 PM on 21 Dec 2007,
  • Stephen Wyman wrote:

Evan, even I was surprised at this figure and it is indeed extremely worrying.

However this deficit figure is only one snapshot at one given time and we need to see where this deficit is at this time next year before we can really pass judgement on the future of Sterling. As it is the overall accumaltive borrowing as a percentage of GDP, which is really important and not the rate that it is accumulating.

If our total borrowing is more than the U.S. as a percentage of GDP, then then Sterling should devalue against the dollar and the Euro.

However this figure does not tell us that. It just tells us about the speed at which we are borrowing. Although if this speed remains at this level, then you are right.

However I still say that if you are right then rather than having a large devaluation, we will instead stumble upon the start of the end game for Sterling and by 2012 the master currency in the UK will be the Euro.

The only question is at what level should sterling be fixed to the Euro. I am betting Eur. 1.20 - Any Takers.

  • 58.
  • At 04:50 PM on 21 Dec 2007,
  • Tyro wrote:

I remember balance of payments.

Always the first item on the evening news.

And that 'pound in your pocket' lie. Expect to hear that one again soon.

And how the UK had to go begging to the IMF. And Callaghan said, "Crisis? What crisis?". Just like Brown is.

I still have a 'Buy British' mug. Buying British then meant buying British Leyland. Where did they go?

We've been living on tick since 1997.

It's payback time. Pensioners on fixed incomes will be paying for it. Just like they did in Russia.

Evan, you're young. Governments don't act. They react. Usually too late.


  • 59.
  • At 05:20 PM on 21 Dec 2007,
  • Tyro wrote:

At 10:10 PM on 20 Dec 2007, andy wrote:

"Rabid inflation and a currency worth peanuts is on the horizon. Heaven help those poor souls on a fixed income"

I am a poor soul on a fixed income.

Should I set out my car boot market stuff now or wait till later?

Or should I buy gold?

  • 60.
  • At 07:11 PM on 21 Dec 2007,
  • Michael Henderson wrote:

Re: message 48 from Chris.
Don't forget that the word DATA is a neuter plural , and in Greek, and I expect also in Latin, from which datum/data comes, a neuter plural takes a singular verb.

  • 61.
  • At 10:45 AM on 22 Dec 2007,
  • John wrote:

Hi Evan.
Well, here's the thing - you have spent too much time in the States. The English pronunciation of 'wodge' is 'wodge'. The American (East Coast) pronunciation is 'wadge'. So 'keep it in the ballpark'. It isn't 'rocket science'.
I hope you have a Happy Holiday and 'have a nice day.'

A Merry Christmas to All.

  • 62.
  • At 01:47 AM on 23 Dec 2007,
  • Mark wrote:

"And we certainly don't have to worry about it as we once did. Back in the 1960s and sometimes the 70s and 90s, we worried about these things because the exchange rate was fixed and deficits literally meant the country could run out of money."

Anyone remember the ERM. This was the exchange rate mechanism which tied the currencies of the EU together within a fixed range before the Euro was adopted. It tied the hands of central bankers. One day the pound sterling fell out of the ERM acceptable range and the government said it would not make an adjustment but the billionaire George Soros bet it would and won big taking the UK for a reported one billion dollars in one night. The Bank of England never verified that number. As dumb as the ERM was, joining the Euro would be even dumber. There, countries like France have NO recourse when disaster looms as it does now. The UK can, should, and almost certainly will inflate its currency devaluing it, bringing the pound down to size, making exports much cheaper for the outside world and imports much more expensive for Brits. Learn to be more self reliant. There will be inflation and there could even be a slowdown or recession, the good times don't always roll. But first it will have to tear up any treaties which still restrict its ability to manipulate its currency (monetary policy) to compensate for its fiscal policy (government spending deficits) and possibly EU dreams with it. The principle is to pay back expensive debt with cheaper currency by just printing more of it. That's how the US gets through every time and it will do it again. Or Britain could just go down the tubes with the rest of Europe. What will happen when the French government really has empty coffers as Sarkozy's ministers says it has and can't pay its workers or its debts? How many other nations will go down with it? When the bough breaks, the cradle will fall, and down will come Europe, China, and oil prices and all. Afterwards, Europe will become very cheap. I'm thinking about buying the Czech Republic or maybe Slovakia. I wonder if I could get a subprime mortgage on one of them.

BTW, once upon a time, the US had both substantial trade surpluses and a government budget surplus. And then the stock market crashed and the economy collapsed in the depression of 1929. There's a lot more to economics than meets the eye with a single number or two. Central banks are scrambling to create and maintain liquidity, the grease which keeps economies spinning. One number to look at is GNP which considers the repatriation of profits from overseas investments. There may have to be some belt tightening by the government for awhile too. Britain and the rest of the EU can point to America's lack of a complete social safety net but Europe's is far more expensive than it can afford and most of it doesn't even have to foot its fair share of military spending. But to suggest paring back that safety net in France or Germany is political suicide, the population refusing to accept the economic reality of their plight.

The weak US dollar compared to the Euro and the WTO rules which require opening domestic markets without the kind of protectionism Europe and other countries once enjoyed is America's economic war on the world and it is winning. Much of China's industry is owned by American corporations who were encouraged to invest there massivley decades ago. A lot of that difference between GNP and GDP in the US is from profits these companies are making in places like Europe. If the UK wants to tie its stars to the EU's economic fortunes, it will surely hang with them.

  • 63.
  • At 06:55 PM on 23 Dec 2007,
  • John wrote:

"a fall in the value of the pound which promotes exports"

Fine, if we actually had anything left to export.

Month after month more manufacturing and back office jobs are being moved to Eastern Europe and Asia, the remaining British companies are being sold off - and it's all one-way traffic.

Lets get back to basics here, If I earn £1,000 a month and spend £1,050 a month, then sooner or later I'm going to reach the stage where I can't borrow any more money and come a cropper.

If individuals (collectively), businesses and the government are all spending more than they are earning, then how can anyone say the economy is doing well?

No amount of mumbo jumbo and tinkering with interest rates can compensate for the fact that we have less and less left to sell to the rest of the world to pay for all the stuff we import (i.e. practically everything).

  • 64.
  • At 10:30 AM on 24 Dec 2007,
  • Andrew wrote:

What do you expect from socialism? Tax and spend and if you cant tax anymore borrow money from the banks, except the creditors are now foreign banks and sovereign wealth funds. They cant wait for the UK's economy to start cracking up so they can buy up all of the nation's wealth (just like what is happening in the US).

"The end of the business cycle" I think Gordon Brown said! When he said this we were in the largest credit boom ever, we are now entering the end of this boom. Due to socialist regulations and economic planning, the only thing keeping the UK alive is NOT independent businesses (our services industry which is all we have left), its government spending (which they borrow) to "stimulate the economy". Well all this central economic planning and increased attacks on our liberties (ID cards, anti terrorist powers, nanny state blah blah) reminds me of something from the recent past....communism.

I would suggest people educate themselves, even if you dont agree with them (at least you will be critially thinking) try looking at some of the following authors you probably never heard of (true free market capitalists and NOT the "phoney croney socialist" based system we have, which people think is capitalism when it isnt) :

Ludwig Von Mises (see mises institute)
Murry Rothbard
Ayn Rand
Hayek
And even Adam Smith (the invisible hand isnt Gordon Brown's!).

You will soon see that socialism causes a lot of these issues (yes, the USA is just as socialist as we are except they have different priorities).

Also teach yourselves how our central banking system works and how money is created (there isnt any gold in those vaults any more, check our the GATA website). You will see the things you dont learn in school and may even question why we need a central bank.

We need a return to hard curreny and the remove the government / crown / monopolised banks the right to issue OUR money turning us into debt slaves.

And before you tell me the gold standard didnt work, have a read of those authors and you will see how government was manipulating the standard during British and then American imperialism and the eventual adoption of socialism. These are conspirancy theories its just governments cannot help but tinker with the system and give handouts of polical gain.

Also, dont forget to write to now Prime Minister Gordon Brown to ask if he wants to sell some more of the NATION's gold for around $300 (or any other paper currency) an ounce, I know some people who would be interested.

P.S if you indeed, you do see the world of finance in a different light WRITE to your MPs and demand we debate these issues! The economy is taken for granted and seems to be viewed as something separate from politics when it is the only important thing in politics. So do we want a centrally planned economy giving into the whims of big banks with ever decreasing civil liberties or do we want to be left alone, free and without government intervention? Ideology is not dead in politics and we are in a very dangerous turning point where we face freedom or debt salvery with government control. We need to return to TRUE capitalism without government made manopolies and free from government controls.

  • 65.
  • At 01:59 PM on 26 Dec 2007,
  • John Day wrote:

constantantly refering to other nations that are effectively subseidizing Britain through buisness and international loans as 'foreigners' shows yet again another trend/example of how the BBC seems to be adopting a new more subtle right wing language into its reporting.

  • 66.
  • At 08:44 AM on 27 Dec 2007,
  • Robin wrote:

Good summary of where we are now, Evan. It's a shame that so many of your corresponents demonstrate so much complacency about any of this mattering.

It's a tribute to the spinning skills of New Labour that so many actually believe the GB has given us the perfect wrold with no business cycles and an endless supply of cheap credit. The sad reality is that thre is no chance of having the biggest credit boom on history wothout it being folloed by the biggest credit bust in history. No government anywhere, ever, has managed to avoid this universal truth. Debt is REAL and must be paid back. New labour's debt is larger than any run up by any British government ever before, as is housing debt, as is consumer credit.

Many of the replies above seem to be relying on GB to bail us all out.. with waht exactly? Now the spell is broken, we can expect the pound to slide and with it inflation to rise. How exactly will the Bank of England then justify cutting rates to help those in need?

The sad reality of the last ten years is that after all that money spent on education, nobody actually trained to do anything.So we now have a nation of amateur property developers who will have nowhere to go nopw the bubble is burstng. Manchester, Leeds, Liverpool, Birmingham city centres and others are full to busting with unsold two bedroom flats. The buy to regret money has run out because it has no economic return anymore.

This is the only truth that the dreamers of GB's golden economic miracle need to remember..money has a price..the risk free price being the cost of governemnt debt. Anything else needs a premium to attract investors and buy to regret at a yield below government bonds is totally unsustainable.

The New Labour hangover is going to be extremely painful.

  • 67.
  • At 07:30 PM on 29 Dec 2007,
  • Diddio H wrote:

I am Malaysian with an income in baht that has gained strength against pound by 14% over the last 6 months.(1 GBP = 70 BHT vs 1 GBP = 60 BHT now) It means that my planned holiday next summer in UK will be cheaper (for 4 persons) and my daughter's university education in UK is likely to get cheaper if the pound remains or gets weaker in 3 years time. Further, if the property price falls by 40-50% as postulated, then I might even consider buying a property in UK instead of renting one for her to stay. (The speculative element is creeping in!)

Therefore in addition to exporting physical goods or financial services to reduce the deficit, it is helped by tourism and education too.

  • 68.
  • At 11:16 AM on 30 Dec 2007,
  • Denis wrote:

As a born Londoner now entering the twi-light years,I was always fascinated by the art of "making things".Seeing bits and pieces magicly composed into a constructed item-be it knife and fork,table or car.Yet,over all the years,( sadly decades),only 2 times was I ever able to watch such skill in practice with my own eyes.These on tourists visits to Murano off Venice and in the 1970's Waterford Crystal's factory for similar glass making near Waterford.On one occasion I especially went to Stafford to see a pottery making household jugs and colourful things,(a household name),to be informed by my taxi driver-an ex potteries worker,the factory was closing and moving to Malaysia.
I live within the shadow of the city of London sky scrappers-where presently the sky line is dominated by cranes and new construction scaffolding.My own job,( now being out sourced to India ),being a PC based service industry one.The share price of the company I work for has continually fallen,(it's in the top 30 FTSE),and I expect within 2 or 3 years will be bought by an overseas foreign group.
Yes,the economic miracles of the UK have certainly defied my simple logical understanding.A time poor busy nation-over taxed, that produce so little.Official statistics,( CPI/RPI),few believe reflect observed reality.Yes,I think life for the young will be a daunting challenge in the years ahead-shuffling thin air to live and fund an ever hungry treasury and somehow keep the sky line of the city expanding ever upwards on mountains of cash ? Or hot air ?

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