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Innocent victims?

Stephanie Flanders | 12:59 UK time, Friday, 13 February 2009

After today's appalling growth figures from the eurozone, I'm starting to think that the UK will lose the competition to be the worst hit by the credit crunch.

Earlier this week, I said that this recession wasn't going to be fair. Looking at their fourth-quarter GDP figures, the Germans would surely agree.

When drawing up a list of those unfairly penalised in this recession, it's tempting to add the world's exporters to the list.

BERLIN - DECEMBER 15 2008: A worker moves parts for high-voltage circuit breakers at a factory of German engineering company Siemens on December 15, 2008 in Berlin, Germany.  Sean Gallup/Getty ImagesAmong European economies, Germany stood out as one that had risen to the challenge posed by globalisation. It saved. It invested. Against the odds, through reunification, through the downs and ups of the euro, it had stayed at the top of the league of global exporters.

Now, like savers and exporters all over the world, it's being hammered. Output fell by 2.1% of GDP in the fourth quarter - the worst fall since reunification in 1990.

That's worse than the UK, and far worse than France. It's even worse than Italy, for goodness' sake.

Germany was the first major economy to officially go into recession last year. The forecasts are now for another decline in 2009, of around 2%.

Like Japan, Korea, and the rest, Germany is being punished for its heavy dependence on exports.

So, another list of innocent victims to add to the roll-call? Well, yes and no.

In the parable of domestic savers versus borrowers, it's easy to see who has prudence and justice on their side. But when you're talking about countries, things are less clear-cut.

It is true that these countries did what they were "supposed to do" - they saved and produced rather than borrowed and spent. But they did an awful lot of saving and producing. And not very much spending.

That meant they had a lot of extra savings and products they needed to offload on everyone else - also known as an enormous current account surplus. And as we all know, the flip side of their collective surplus was a big deficit in countries like the US and UK.

In an ideal world, those imbalances would have gone away over time, as the currencies of the exporting countries got more expensive, and currencies like the dollar went down. But, as we all also know, that didn't happen.

The big Asian exporters accumulated a mountain of spare cash instead, which they invested in dollars to keep their currencies low.

Germany didn't go in for all of that. But, as Martin Wolf points out in his excellent book, Fixing Global Finance, it has long been among the world's leading excess savers. We just haven't noticed quite so much, because its current account surpluses have been offset by deficits elsewhere in Europe.

In 2006, it had a surplus of savings over investment of 5% of GDP. Germany's current account surplus that year was around $150bn, the third largest in the world after China and Japan. The US deficit that year was over $850bn.

Sooner or later, those imbalances were going to have to be unwound. And the longer they lasted, the bigger the chance that the "great unwinding" would come with a giant thud.

I noticed in Davos that the (few) Americans there didn't like to think they were victims in all this - the poor innocents who kept an imbalanced world going by force of credit cards alone. They'd prefer to be cast as the global imbalances villain, if those are the alternatives on offer.

But, as Keynes said many years ago at Bretton Woods (and as Mervyn King reminded us in his press conference earlier this week), the responsibility should cut both ways.

Back then, Keynes said the world needed a system where surplus countries had an incentive to adjust - not just deficit ones. He didn't get one. And the world never has.

The result is a system much more prone to boom and bust cycles - which ultimately hurt the saver/exporters as much as the borrowers.

Germany, Japan, and others are now learning that lesson the hard way. There's plenty of blame to go around. But don't think they are immune.


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  • Comment number 1.

    Thank you! At last I feel I've understood the root cause to all this.

    So much commentary has been focused on the detail, leaving the big picture aside.

    This matters, because if the root cause isn't widely publicised, then what chance is there of the world leaders fixing it?

  • Comment number 2.

    Until recently, sterling has been very stable against the euro. As illustrated below:

    6 Jan 2003 sterling against the euro = 1.54
    28 June 2004 = 1.50
    30 May 2005 = 1.46
    31 Aug 2006 = 1.48
    30 July 2007 = 1.49
    7 Jan 2008 = 1.34
    11 Aug 2008 = 1.27
    10 Nov 2008 = 1.23
    22 Dec 2008 = 1.07

    A stable currency allows trade to develop and be maintained in an equilibrium. Those countries with specialist manufacturing skills, such as Germany, will export their goods; and those countries with specialist banking and insurance skills, such as Britain, will export their services. This is a happy equilibrium for both Germany and Britain.

    Now, with the British financial sector firmly on the back foot, the exchange rate mechanism has found and enforced a new equilibrium. The fact the exchange rate has changed so quickly, first from 1.47 to 1.28, and then down to 1.10, puts pressure on importers and exporters who cannot react quickly to even out the imbalance. Thus, German exporters cannot export and British importers cannot import. The exchange rate, far from being helpful, does the opposite, by spreading the pain to both Britain and Germany. Britain has lost its ability to export its financial services, hence the weak sterling.

    It's worth bearing in mind that Germany has more savings and reserves to fall back on in these troubled times. It can hold out under siege for longer than Britain. That is why the German government is able to pay part of the lost wages for those German workers who are currently on a 4-day working week.

  • Comment number 3.

    Will the market be able to cure the imbalances?

    Firstly, where did these imbalances come from?

    Surely of significance is the role of the US dollar since WWII.
    Until the early 1970's the US dollar was tied to gold at $35 per ounce.
    But with dollar overhang (more dollars outside the US than the amount of gold in the US) Nixon broke with gold.
    Since then the US has been able to write blank cheques.
    And as some say they have been managing empire through bankruptcy.

    The pricing of oil in dollars is one of the most obvious examples of US hegemony.
    All these dollars in the world have taken fictitious capital to new heights.
    US budget deficits paid for by Chinese (& others) purchase of Treasury bonds, enabling US citizens to consume more than they produce and the recycling of these nomad dollars through financial institutions that lend citizens money to by houses and to purchase more Chinese goods on credit.
    A Ponzi scheme.

    This is why it is the US dollar that will have to devalue (collapse?) at some point.
    The Chinese still seem prepared to buy US debt knowing that their US dollar assets will fall in value.
    But they are frantically trying to save their skins from US consumer decline to Chinese productive decline to social chaos.

    The US dollar is on borrowed time and the economic and political consequences make a orderly market readjustment unlikely.
    The amount of capital that needs to be devalued appears to be very high indeed.

  • Comment number 4.

    Blimey, Lloyds Banking Group shares down 40% ... courtesy of HBOS losses. I wonder what possessed Lloyds Banking Group to release these nasty numbers on a Friday afternoon? Did a compliance lawyer give them a kick?

  • Comment number 5.

    A very insightful article. The instinctive demonising of those who consume, those who borrow and those who import has gone on too long. Consumption, borrowing and imports are logically necessary or else production, saving and exports can't exist!

    The following articles take a look at the same issue with regard to debt:

    Perhaps it's appropriate that it's a German word, Schadenfreude, that may be applicable now. Is it possible that our services-based economy is actually more robust than the manufacturing-dominated economy that some people wish we had?

  • Comment number 6.

    Whom do you blame? The binge drinker or the off-licence that sells him too much booze, too cheaply? I blame both.

  • Comment number 7.

    This is an interesting article and gets to the heart of the matter that actually globalisation may only have made the whole world financial system more unstable, and so more prone to boom and bust rather than necessarily better as it allows countries to use global markets to finance imbalances rather than deal with the root causes of them.

    So no more boom and bust but instead we have bubble and slump

  • Comment number 8.

    Stephanie wrote:

    "The result is a system much more prone to boom and bust cycles - which ultimately hurt the saver/exporters as much as the borrowers."

    This is a bold statement and indeed an as yet unjustified prediction. The key gamble is the phrase "as much as" presently from a prudent saver's and exporter's point of view that are being hammered and the borrowers and importers bailed out. The statement is simply not true - if it was true and there was an actual equality of suffering theat would be fine but it isn't.

    I return to my point that money in the UK and the USA has been made worthless in the same was as the Japanese made money worthless in the 1990's. The mantra 'ah but the Japanese didn't do it quickly enough and we are different' is not supported by the fact and is a terrible gamble.

    The problem we have is that there are still bunch of (failed) economists, bankers and politicians who inflated the bubble and all they can think of doing is to re-inflate the bubble. (Figuratively think of the economy as a balloon - it has burst and is in tatters - pumping it up again will not work.)

    These failures are unable to appreciate that savers and borrowers should suffer equally, and unless they grasp this the social and political consequences may be dire. My recipe is to get interest rates up again PDQ so that savers get a fair return and borrowers pay a fair cost - then and only then can we talk of recovery.

  • Comment number 9.

    This week has been one long search for someone to blame. Clearly there is much understandable public anger over bankers in general and rewards for failure in particular. The FSA and BoE are receiving justifiable attention focussed on their ineptness. And of course many bloggers are laying blame at PM Brown’s door; some, perhaps those with longer memories, implicate former PM Blair. Unsurprisingly there is a growing clamour for a new government. Now we are adding Germany, Japan and China to the list of culprits.

    To an extent these recent additions demonstrate that PM Brown has a valid point. This crisis is global. The blame lies principally with the system and only secondarily with those presiding over it. Hyman Minsky’s instability theory explains what has happened. For the past century we have all lived inside a giant Ponzi scheme. The fuel for this global Ponzi scheme has come from the inflation of fiat currencies worldwide. The banks, who have been practicing quantitative easing for 100 years, have been exposed. As Keynes (p17, Theory of Money, Vol. 1) says ‘there is no limit to the amount of money the banks can produce provided they march in tandem’. Now they are out of step.

    Finding individuals to blame may well be cathartic, a natural response to the chaos that is occurring, but of far more importance is the need to be clear about what the alleged crime is. The answer will help determine what sort of fix we want. There appears to be an underlying, unstated desire to return to c.2006 and carry on business as usual; if that is the case then the crime is quantitative not qualitative. Alternatively we need a clear vision of what a new system would look like and a route map of how to get there with minimum pain.

    Talk of dumping today’s ringleaders is premature given that there is no opposing vision. Better to leave them to sweat it out while we work out what we actually want.
    That said, we need to get a move on. These experts only know one game – the old one – and they will definitely carry on inflating currencies by central bank quantitative easing and monetizing of government debt. That will penalise the savers, individuals and countries. Is that what we want?

  • Comment number 10.

    Recession is simply the reduction in credit. It is a monetary phenomenon. It doesn't matter whether you consume or produce, if someone is out there destroying money, there will be less money around. It is really that simple.

    It has NOTHING to do with anything real. It is the MONEY which is vanishing, not the cars, not the houses, not the infrastructure. That is what a recession is.

    What's needed is monetary reform.

    To duvinrouge, I will just point out that the Saudi insistence on dollars for oil means that the dollar will not fail, not till the oil runs out anyway.

    US dollars are oin fact backed by Saudi oil. (Now doesn't that explain a lot about our recent history?) America gets paid *first* for every barrel of oil purchased.

  • Comment number 11.

    The more this story unfolds the more I'm impressed by the insights of Keynes.

    I have observed elsewhere that if things play out by the book the producers of capital goods get hit far harder by the decelerator than those who merely provide services. It isn't much use the Germans, and Japanese sneering at Anglo-Saxon profligacy - they should have spent their money at home if they didn't want the (global) financial sytem to spray it round.

    By the way, as Anatoly Kaletsky points out, the overwhelming proportion of 'debt' is sitting in the (global) financial system, not with impecunious Anglo-Saxon households.

    Perhaps the banking system shouldn't have multiplied the surpluses quite so much, but that's another story which reinforces Keynes astuteness (witness his heroic but futile attempts to get effective global monetary systems together after the war).

    I don't know if Stephanie can help here, but what really needs explaining is why these financial mood swings should impact so severely on the real economy (even if Germany is hit harder than the UK, as I suspect, we sink or swim together and ALL need to reflate).

    I expected a big hit on the building industry from house price deflation. I would've expected some impact on consumer sentiment from all the gloomy reporting (inc Pestons 'gloomour' machine) BUT this seems to be a general drop off a cliff.

    This is very tentative, but perhaps, in the UK, the hit on the real economy started BEFORE the credit crunch (as a consequence of land price inflation)?

    This is all parochial and anecdotal but around here firms like Alcan (Midsomer Norton) Rio Tinto (Avonmouth) and Purnells (Paulton) closed big land-hungry manufacturing plants within the last two years because, I guess, i) the land became very valuable as potential 'brown field' housing sites ii) manpower was becoming scarce in the UK but was still cheap and plentiful in South and Eastern Europe. iii) credit for the capital costs of plant relocation was easy and cheap iv) sterling was overvalued. It is easy to imagine similar pressures bearing on other sectors.

    Anyway, most of the people thrown out of work by the closures cited only recently came onto the statistics

    If, therefore, the causes of some of our economic woes preceeded the crunch and have been largely eliminated by it, perhaps (Cet Par, as the man said) we can hope 'the market effect' supports rather than resists our attempts to reflate this time round?

  • Comment number 12.

    Surely the country with all its eggs in the wrong basket will be hit hardest.

    Wrong basket = financial services.

    Now, which country had an economy dominated by financial services?

    The UK, perchance?

  • Comment number 13.

    Oh, I get it! We should be blaming the countries that saved and produced rather than the ones who borrowed, spent and consumed? That’s right, not only did they force us to buy all their products, they also forced us to borrow the money to pay for them as well. I mean, how many Germans, Chinese and Japanese do we see dictating financial policy at HM Treasury? How many of them sit on the Board of Governors of the Bank of England, which drove UK interest rates through the floor at the start of the decade and thereby caused the boom to go bust last year? Nonsense, utter nonsense!

    What has happened in this country since 2000 is that our short-sighted leaders adopted the typical Keynesian policy of borrow, spend and live for today and to hell with the consequences of tomorrow; they fully embraced Keynes’s own maxim: “In the long run, we are all dead.” Well, Keynes is dead and now he’s left us with the long run!

  • Comment number 14.

    "In the parable of domestic savers versus borrowers, it's easy to see who has prudence and justice on their side."

    Is this true? A saver demands interest on their savings, which they gain by lending their money to a borrower via a bank. They are complicit in the same act of lending and borrowing. Unless you claim the saver lends out of kindness and the borrower borrows out of greed, then its hard to see how one side of the arrangement can have the moral high ground over the other.

    The borrower may be borrowing to provide a home for her family or to start a business, and the saver may be profiting from her labour while sitting idly in his castle.

    Is the rich saver *better* than the poor borrower? If you think so then, well I'm guessing you probably read the Daily Telegraph or the Daily Mail.

    Fair enough, if someone knowingly borrows more than they may be able to repay, then they may have been reckless. But then again if a bank lends to someone in the knowledge they can't repay so that they can extract a commission and some interest and then repossess the house, then they haven't behaved too well either (and I rather think this has been happening in recent years).

    Finally, since money is created as debt, then no borrowing means no money, means no spending, means no jobs, no incomes, no economy and we all live in caves.

    Now I'm no moral philosopher or economist, but it does seem to me that this cliche much presented by the media recently about how tough savers are having it and how borrowers are all feckless and profligate is a trifle silly.

  • Comment number 15.

    This is along the lines of what I said earlier this week - countries with outsize export sectors have serious revenue trouble ahead in a global recession. Germany is socially and politically stable enough to survive the correction. Others especially in the developing world may not be.

    A structural overdependence on imports and exports alike is bad. It does not follow that the tiger economies will inherit the earth, as some commentators have argued in recent years, and protectionists have begun to fear. The irony is they may collapse holding fistfuls of title.

    You are on the right track here Steph.

  • Comment number 16.

    This week has been one long search for someone to blame. Clearly there is much understandable public anger over bankers in general and rewards for failure in particular. The FSA and BoE are receiving justifiable attention focussed on their ineptness. And of course many bloggers are laying blame at PM Brown’s door; some, perhaps those with longer memories, implicate former PM Blair. Unsurprisingly there is a growing clamour for a new government. Now we are adding Germany, Japan and China to the list of culprits.

    To an extent these recent additions demonstrate that PM Brown has a valid point. This crisis is global. The blame lies principally with the system and only secondarily with those presiding over it. Hyman Minsky’s instability theory explains what has happened. For the past century we have all lived inside a giant Ponzi scheme. The fuel for this global Ponzi scheme has come from the inflation of fiat currencies worldwide. The banks, who have been practicing quantitative easing for 100 years, have been exposed. As Keynes (p17, Theory of Money, Vol. 1) says ‘there is no limit to the amount of money the banks can produce provided they march in tandem’. Now they are out of step.

    Finding individuals to blame may well be cathartic, a natural response to the chaos that is occurring, but of far more importance is the need to be clear about what the alleged crime is. The answer will help determine what sort of fix we want. There appears to be an underlying, unstated desire to return to c.2006 and carry on business as usual; if that is the case then the crime is quantitative not qualitative. Alternatively we need a clear vision of what a new system would look like and a route map of how to get there with minimum pain.

    Talk of dumping today’s ringleaders is premature given that there is no opposing vision. Better to leave them to sweat it out while we work out what we actually want.
    That said, we need to get a move on. These experts only know one game – the old one – and they will definitely carry on inflating currencies by central bank quantitative easing and monetizing of government debt. That will penalise the savers, individuals and countries. Is that what we want?
    #10 true-liberal

    You make an interesting point about oil supporting the dollar. One that could, perhaps, also be made about any exporting country and its products. The worry, at least for the dollar, is if and when these exporters rush for the exit. Monetary expansion by the Fed militates in favour of such a rush.

    I agree that monetary reform is the sound route forward but suspect that those currently in power have too much to loose to implement it sensibly.

    I do not agree with your comments on recession. Deflation and inflation are purely monetary phenomenon whereas recession means a real reduction in productivity. The two are not synonymous nor do they necessarily entail one another. Hence the mistake being made at present in the belief that increasing money supply will increase production (i.e. revive the real economy). It wont.

  • Comment number 17.

    "These failures are unable to appreciate that savers and borrowers should suffer equally."

    I agree, that seems fair enough.

    "My recipe is to get interest rates up again PDQ so that savers get a fair return and borrowers pay a fair cost - then and only then can we talk of recovery."

    That doesn't sound like equal treatment to me! The saver gets richer while the borrower loses his home for want of a few pounds when the business he works for goes bankrupt.

    A fairer way to reduce debts and increase savings whilst making all suffer equally would be for the borrower to suffer a modest fall in income and then allow him to stay in work while he repays his debt over a longer period, at a lower rate of interest. Which is pretty much what is happening now.

    If this is too long and drawn out a process, then both savers and borrowers are served better by writing off a portion of the debt and having the borrower repay a sensible but not usurious amount, rather than go bankrupt and repay nothing.

  • Comment number 18.

    The root of the trade imbalance problem is wage arbitrage. Ultimately that is why the factories are concentrated where they are, consumers concentrated elsewhere, and capital flows in self-reinforcing fashion between them.

    The relative intrinsic merit of saving and borrowing, manufacturing and consuming is irrelevant to this debate. The problem is their geographic concentration, regional specialisation of labour, and consequent exposure of economies to common-mode risk.

    Everyone has a role to play, but the players were not evenly distributed enough for the system to be stable. I would attribute this to historical legacy, ie uneven economic development prior to globalisation, but the process reinforced these disparities before perhaps now beginning to rebalance them in a rather nonlinear fashion we will not enjoy. I expect a convergence of wages between the developed and developing world towards a median as the concentrations of economic activities are redistributed. It may be rapid.

    By the way, it is worth noting the continental European banking system is in as dire straits as ours. After the end of history, they financed the economic expansion of the eastern bloc. For the most part, Britain and the US stayed out of that market. The leverage over in the EU is as high as it is here and the markets of choice are as risky. The timing lags a little, that's all.

  • Comment number 19.

    LibertarianKurt (#13) Your spin isn't going to work - you do know that don't you?

  • Comment number 20.

    Robert Peston, Evan Davis, Nils Blythe, Andrew Verity, Mickey Clark and Stephanie Flanders. Oh and Jeff Randell. Only kidding everybody.

    But my point is - Ms Flanders' just lost me after the words "After today's...".

    Where were you all when my braincells weren't dying at an alarming rate?

    And I could contribute more worthily to threads like this. CSE only in Maths, me.

    But I will read it again and am determined to understand up to the words "hit by the credit crunch."

  • Comment number 21.

    The UK went into this recession with some major imbalances: external trade, consumer indebtedness and government deficits.

    The first is actually the least worrying. It seems to be starting to correct itself and if you look at the monthly review of trade statistics, our exports in many areas are actually booming. We just need a bit more import restraint (that will happen soon enough) and things will come right.

    Far more worrying is the position of the consumer, with the savings ratio having come down to nil at one point last year. The gradual recovery in savings will suck tens of billions of pounds out of the economy. This is an effect that will be almost absent in countries like Germany where it was higher to start with.

    Likewise, correcting the public sector deficit will also be much more painful here and hold back the economy more than in other countries. So we may not see such a sharp downturn as the others, but ours will be more prolonged and painful and the recovery all the weaker when it does arrive.

  • Comment number 22.

    Anybody involved in oversupply will be hit. It is no surprise. It does not matter where the oversupply is based. Oversupply is oversupply. Being independent of the euro is one of our few blessings.

    Anybody who is a saver is dependent on somebody wanting to borrow. If you have the credit rating there is no problem borrowing. There is plenty of credit. So savers dont have the borrowers so they have reduced income.

    I do not see the arguement that credit is scarce. What is more likely is that companies running at their ceiling are wanting extra to 'see them through' or to maintain previous borrowing in the face of reduced demand and or income.

    Incidentally why do individuals insist on describing shares as savings - they are not they are speculations. This is symptomatic of the problem, people at any level who only want to see an up side and perpetual growth.

  • Comment number 23.

    Stephanie, I cannot agree that any major economy is going to pip the UK for the title "worse placed to weather a global recession" (or whatever the phrase was).

    UK growth has long been overstated by the application of underweight GDP deflators. Such growth as remains after this adjustment has, for some years now, been borrowed growth anyway. Our national debt is hugely understated by excluding both PFI and public sector pension obligations, the latter alone probably equating to at least 70% of GDP. We have a huge dependency on financial services, and that is already proving an achilles heel.

    As Robert Peston once pointed out, in 2007 we borrowed GBP 625 bn from foreigners. Set that against GDP of GBP 1.34 trillion and it emerges that, of every three pounds that we spent that year, one pound was borrowed. This is a scary statistic and a measure of the mess we are in.

    Since that borrowing is no longer reliably available, we need to cut our spending by about one third. Since there is no way that we are going to see a one-third cut in public spending, we are looking at very severe falls in private disposable incomes. This cut will come about through a combination of (a) higher taxes, (b) higher unemployment, (c) poor returns on pensions and savings, and (d) inflation - yes, please believe me - inflation out-pacing earnings growth.

    Compared this, Germany, as a major manufacturer with a sound balance sheet, is just facing " a little local difficulty". German problems are comparatively temporary. UK economic weakness is structural.

  • Comment number 24.

    #17 douglasvarney:

    It sounds nice in theory, but loan modifications carry all sorts of unintended systemic consequences, such as invoking loss distribution or insurance clauses, causing cash flow problems, leading to cascades of defaults, and so on. Any written off portions of debt would turn up in all sorts of places few people would like. In the end the writedowns may still sink the borrower's company, pension fund, etc where it may not have happened had things been left alone. Changing the maturity of a class of assets from 30 years to 40 years for example would invalidate all cash flow assumptions and would destroy institutions and insurers across the world. Owners of assets left untouched would have their confidence in the stability of their terms undermined and could liquidate en masse while they still knew and understood what they were selling. Credit markets would be destroyed if the sanctity of contracts were no longer respected and could be altered by third parties at will. In short, down this road there are very easy ways to make this crisis much worse. I would much rather a borrower's actual ability to repay under the original terms determine whether a loan performs or not, rather than inflicting pre-emptive losses on the entire market and calling into question the point of anyone at all participating in it.

  • Comment number 25.

    #17. douglasvarney wrote:

    The second half of my point was - "so that savers get a fair return and borrowers pay a fair cost - then and only then can we talk of recovery."

    If money remains worthless (i.e. zero effective interest rate) then is no incentive for borrowers to repay anything and similarly savers will not invest in anything.

    If when an investment decision is being made the cost of money is zero - why not borrow an infinite amount as it costs no more, and then the efficient use of capital is meaningless. Money must have some cost for the monetary system to work - at zero interest rate it ceases to work at all.

    Your point about equity of treatment needs examining - In a regime of zero interest rates why should a borrower not pay an absurdly high price (infinite indeed) for a house, for example, and if this catches on asset price inflation goes berserk again and we are back with an even bigger bubble and more terrifying bust.

    So money must be rewarding in its own right and also costly otherwise the capitalist system no longer works. Asset prices MUST be moderated - if there are particular problems, as I have written before then social housing must be available before anyone is evicted.

  • Comment number 26.

    14. douglasvarney:

    "Is the rich saver *better* than the poor borrower?"

    I could agree, if all savers were rich. Unfortunately, a majority of them are not.

    Many are retired people, who have saved comparatively modest sums. These people typically have two sources of retirement income - pension provisions, which are now in many cases shot to pieces; and interest on their savings, which has now fallen by more than 80% in a matter of months.

    No other large group that I can think of have had to put up with such a swingeing cut in their incomes. Far from being rich, many of these retired people are probably now feeling extremely poor.

    So I think these ordinary, far-from-rich savers do deserve our consideration.

  • Comment number 27.

    JadedJean #19

    Well, don't be shy; give us your two-pennies-worth instead of hiding behind the bushes and firing off the odd glib comment ;)

  • Comment number 28.

    Noel Coward sang, "Let's not be nasty to the German's," apart from LibertarianKurt (if you think the UK government has been following Keynesian economic theory then you are a 'numpty'), this time he is right.

    In the UK we can see why we are in the mess we are in. However, let's have some thought for our German counterparts who believed that they were doing the right thing and still end up being shafted!

    The whole world is in a depression. The time frames of that are likely to be 8-10 years and not the recessive 12-18 month cycle. Therefore each country must now look to its long term wellbeing by focusing within its own borders and looking at exports as balancing actions for its necessary imports. This does mean that all nations will become protectionist.

    The BIG consequence of that is likely to be the end of the European dream as it is presently enacted in the EU. If we just look at the biggest economies of the EU we will find that Germany, France and the UK will have to adopt divergent strategies to meet their individual needs. This will also have tremendous consequences for the Euro.

    It's going to be rough in each and every country. How this plays out economically will depend upon the political and social forces in play. Let's hope that none of us are swept to the extreemes of the far right or left. However, European history shows that such lurches are very likely.

  • Comment number 29.

    is this a case of the statistics look worse than what they really are?

    sure the GDP of Germany has fallen, but they according to your article, have savings, the UK has none

    I know which side of the figures I would rather be on

    -1.4% GDP and trillions in debt

    .2.0 GDP and money in the kitty


  • Comment number 30.

    25. John_from_Hendon

    .... The second half of my point was - "so that savers get a fair return and borrowers pay a fair cost - then and only then can we talk of recovery."....

    But John savers never get a fair return. Conventional savings always show a loss against inflation. If you live off savings income you are actually seeing the capital slowly diminish in real terms. We have savings. We understand the situation.

    You keep saying you want higher interest rates. The reality is there will not be sustained demand for loans until the housing market resumes. That is why it is key to recovery. If there is demand for borrowing then interest rates will climb. I return to the point I keep making - in reality there is sufficient credit available to meet borrowers requirements. Would be borrowers either do not want to borrow or do not meet the safe lending criteria, reckless lenders having been culled. With , a major loan, a high deposit is now required because the price is expected to drop so a bigger buffer is needed to protect the mortgage. Businesses that have run full throttle on borrowing now have a problem because their book has shrunk. Individuals do not want to borrow or do not meet the criteria.

    All the time there is this theoretical discussion from the so called gurus about ringfencing the toxic assets progress will not be made. The toxic asssets are not the problem. Overvalued assets, oversupply of production, and a lack of demand is the problem and there is no alternative to downsizing in the affected sectors. The bubble has popped and the economy has to return to a sustainable level. Interest rates have little to do with demand. Incidentally 6 percent for the next year is available if you shift savings account to a major bank, that is just one random advert so there will be others. The only point in raising interest rates I can see is to up the FX and the present FX acts as a trade protectionism without being formal protectionism.

    Finally, and we remain in sustained demand at this end from the UK. For somebody wanting to trade at any level they need something people are prepared to make themselves poorer to get. That criteria is not met by many producers so their sales decline in the current market. Simple as that.

  • Comment number 31.

    glanafon has said it best of all. We and everyone else, need to sell things other people want, while letting the various crises of overproduction out there die a natural death. Pursue this, and investors will allocate credit accordingly. Keep contriving artificial demand and forcing credit where it does not want to go, and the market will freeze. Indeed it is simple. The age of something for nothing is gone one way or the other.

  • Comment number 32.


    In reality, you are not that far removed from John. You are both desribing means by which equilibrum can once again be achieved - though you disagree with regards to the process.

  • Comment number 33.

    foredeckdave # 28

    If you think I was being nasty to the Germans or even to the Japanese and Chinese (I was in fact being ever so slightly sarcastic), then you simply failed to understand the point being made – who’s the numpty? Try reading my post again and the penny might just drop!

    Also, the government may not have been pursuing pure Keynesian theory as you put it, but there were inescapable Keynesian themes to their fiscal policies; that is, increasing taxation during the good times. However, they forgot to apply the other half of Keynes’s “equation” by paying down debt with all this extra revenue. If Keynes were alive today, I’d think he would have been quite horrified that not only did the government fail to pay off debt, they borrowed (printed) even more money instead! Check the PSND figures – and don’t forget to add on all the unfunded liabilities as well.

    Now that the bad times are here, it appears pure Keynes seems to be back in fashion again with our glorious socialist elite, judging by the amount of fiscal stimulus (deficit spending) being pumped into the economy. Given the fact that interest rates don’t seem to be having the desired effect, expect more “stimuli” to be applied further on down the line.

    I have also been examining the rest of your post and can come up with only one word to describe it – prolixity! If you want to say that Europe will go down the protectionist route, then just say it - why all the unnecessary flowery prose?

  • Comment number 34.

    #33 LibertarianKurt

    "The whole world is in a depression. The time frames of that are likely to be 8-10 years and not the recessive 12-18 month cycle. Therefore each country must now look to its long term wellbeing by focusing within its own borders and looking at exports as balancing actions for its necessary imports. This does mean that all nations will become protectionist."

    If that is not explicit concerning protectionism, I don't know what is!

    If it has to be short for you then


  • Comment number 35.

    32. foredeckdave


    In reality, you are not that far removed from John......

    Yes I am aware of that which makes me smile. I would like to see higher interest rates.

    However. There is a subtle difference between people, ie the consumer, intending doing what they say or posture and what they actually do. By example - new product development large or small involves marketing ie trying to measure peoples intent. However if you ask somebody a question - will you do this or will you do that, ie buy. The answer is invariably yes. People project themselves into the scenario where they have the cash in hand and the item or service in front of them. Ego says yes I will buy. However go away and develop the item and put the real thing in front of them and the story can be very very different. Bizarrely so. That is why a VC is mainly interested in the books, hard fact. Hard sales. Otherwise it can be like asking somebody if they want to eat healthily. The answer is always yes but the action can be to say I'll do it tomorrrow. I have been involved in both industrial and retail product dev where the strongest marketing possible was not supported in the marketplace and the product bombed. Therefore I am most interested in actual actions not intent, and that is the problem in the cureent situation as far as I am concerned. Too much theory. Too much belief if a ritual is performed such as putting the toxic stuff in a bank, that will solve it. the problem is demand, an action.

  • Comment number 36.

    I know I keep reiterating the SWF angle, but here is a question for the armchair and professional economists out there:

    If I was to tell you that China's SAFE intends to spend 600billion EUR on European assets over the next 3 years, and if you were to believe me or take it as a hypothetical exercise, how would you expect the economic and political landscape to change?

  • Comment number 37.

    36. FrankSz:

    "If I was to tell you that China's SAFE intends to spend 600billion EUR on European assets over the next 3 would you expect the economic and political landscape to change?"

    I think the UK would do the usual, that is, "take their money short-term and spend it, and who cares about the longer term consequences?" Thus China would end up owning big slices of industries once considered strategic. I think their first targets might be oil companies.

    Other countries such as France might take a more nationalistic view of this, and might be quite prepared to ringfence important companies such as EDF and Total.

  • Comment number 38.

    18. WerringtonSilent

    ''I expect a convergence of wages between the developed and developing world towards a median as the concentrations of economic activities are redistributed. It may be rapid.''

    Convergence has to be on the horizon but I think, with no data to support it I might add, that if it happens too rapidly it will wreck the economies where low wages are based and cause social unrest. The stresses would be enormous. It is probably better to be at this end of the equation. It all depend what you think of as rapid. There are still a lot of people working for a dollar or dollar and a half a day. It will be incomprehensible to many in these countries that you can get free housing and benefits if you cannot work, which is taken as a given in the West. China has always been a cauldron. The gradual disappearance of cheap goods will have interesting consquences as to how society view products. They will have to be given more value. Mass production gives cost advantages but conformity. Bespoke and craft gives individuality. The demand in the west will be towards flexible manufacturing - mass production with high tech flexibility giving a diverse product spectrum based on an undelying matrix of characteristics. The best examples are Harley Davidson and the Mini One where a high degree of individuality can be ordered and the product enhanced with add-ons. However the concept is applicable to any manufacture. You are due to see a lot of big manufacturers trying to act like small ones and a lot of small ones trying to act like big ones. If this scenario is correct, and I think it is, because it has elements of what we use here, then some traditional retailing will be in trouble because the outlets are too inflexible. That is why some, but only some, of the high street is in trouble, lack of responsiveness and flexibility.

  • Comment number 39.

    36 FrankSz

    China is buying up left right and centre big time. Very large blocks of agricultural land (in Madagasar?) for wheat production, mountains literally of mineral rights in Peru or Bolivia (gold, copper), can't remember which. etc etc. Think old british empire or american multinational in terms of activity, with a twist, and some local unhappiness inevitable, and that is what I would suggest. Why should this empire be any different. Decision making back at HQ, knowhow back at HQ. Local labour a resource. These actions tend to provide employment but be unstable in the longterm. Wariness about joint ventures at Chinas end unless they control the knowhow if technology is involved. as a strategy it gives control of more of the supply chain so money from value added at each stage. Dont ask me about economics. Every economist seems to have a different opinion. PS Petrodollars also up to same game to some extent. No shortage of money.

  • Comment number 40.


    Ah ok but what about the impact on the USD, and what would be the net stimulus and would it be enough t spur consumption of Chinese exports. Would it lead to a healthy situation of mutual import export or would it lead to another trade imbalance a la USD, but with recycled Euros?

    Here's another thought on a separate line. Could China, the middle east and so on, solve water distribution problems by switching to hydrogen powered vehicles? Could this result in a dramatic saving, reduction on dependence of oil etc, while stimulating economic activity based on the new technology?

  • Comment number 41.

    40. FrankSz:

    I think we in the west sometimes take an over-sanguine view of China. The country's strengths include manufacturing, living within their means, and saving - all things that we conspicuously do not do, in the west in general and the UK in particular. China also uses blatantly protectionist tariffs to keep out manufactured imports.

    But China has huge deficiencies, not just of energy and minerals but also of water - based on its own resources, China does not even have enough water to keep its people alive.

    Buying resources overseas is all very well if you can protect ownership of those resources (imperialism?) and guarantee your shipping routes (hence China is building a blue-water navy, but has a long way to go on that one).

    All the while, sitting just north of China, is a huge tract of sparsely populated land boasting vast resources in terms of energy, minerals and, above all, water. One contact with knowledge of Russia has told me that Russia expects to have to fight China over this. Russian paranoia, maybe, but China faces the same problems along the imperialist path previously trodden by Spain, Britain and America.

  • Comment number 42.

    40 Frank

    Water distrubution cannot keep pace with demand so it has to be rationed at some point. Provide a pipeline and consumption rockets. In the UK water consumption has done nothing but climb per head of poulation. That is in a country with high rainfall. In SW USA they are now abstracting brackish water aquifiers several hundred thounsand years old, desalinating, pumping the water to desert conurbations, and injecting the salt concentrate into deep geological locations. That is the solution. Just more unsustainable actions.

    I dont buy the hydrogen plant solution. It is an entire infrastructure needed and the downside is unknown. All you have is a positive gloss from interested parties. The more likely near term solution is biofuel stretching oil supplies. But nobody ever talks about cutting back on mileage whcih is the real solution, just as cutting back on water consumption is the real solution in that respect.

    China exports - move will be towards higher tech exports asap, ie more value added, that is what happens historically. There is not much healthy about imbalance and that is what any commercial activity seeks, and it is a big player.

  • Comment number 43.


    I think you are on the money. If constrained by resource there are two solutions - adjust to live within the resource or expand to aquire somebodyelses resource by one means or another, commercial or military or settlement. The settlement mode it is very strong, eg New Mexico, Israel, Tibet. NZ, Oz

    Re UK and France view on o/s takeovers, also seems reasonable. France domestic view seems to go back to French Revolution. UK view seems to go back to the British Empire where they would sell their granny or anybody elses granny. Both have their strengths but when the UK strategy goes wrong it goes wrong big time. Personally I prefer the french view on infrastructure.

  • Comment number 44.

    I dont know. For example take Israel / Palestine recently. Apart from the obvious pre-election incentive to go and bomb the hell out of some besieged Arabs, the Israelis' prime concern is water distribution. This year their main source of water has been at dangerously low levels. The Israeli infrastructure is essentially a large water distribution tree that pumps from their main lake and also coastal desalination and purification plants. An example of one desalination plant consists of several thousand reverse-osmotic filters, where water is pumped using electric pumps through the filters. The power station that drives these pumps is a fifty megawatt gas powered reactor that is fueled by a rig a few kilometeres out on the coast. Coincidentally the Gaza strip has within its territory an as yet untapped gas field, the rights to drill which were sold by the Palestinian authorities to British Gas, of about one or two trillion cubic feet. Naturally, Israel does not want a non-Israeli friendly authority monopolising gas exports from Gaza territory, when it could be using that coastline and gas to build new desalination plants. So that's just another incentive for these hardline nuts to bomb more Arab children.

    Now it occurs to me that if the electricity were used to produce Hydrogen and Oxygen instead of water, then the costs of that would be covered by the demand for fuel for transport, and water distribution would occur as incidental byproduct. This could not only save costs but could also change the ultra-paranoid culture that goes around protection of water supplies.

  • Comment number 45.

    43. glanafon:

    "If constrained by resource there are two solutions - adjust to live within the resource or expand to aquire somebodyelses resource by one means or another, commercial or military or settlement".

    Agree absolutely. Bearing in mind that China is a one-party state - with social stability dependent on a continuing growth dynamic - adjusting to living within their own resources is not really an option, so expansion in some shape or form is inevitable.

    Given the iconic political importance of the Army, I find the channeling of huge resources into the NAVY a fascinating trend. The aim is to move from a coastal defence force to a blue-water, extended-reach navy. This will inevitably take a long time. Part of the process is likely to include the acquisition of overseas naval bases, so watch out for moves in the Gulf and southern Africa in particular. They also need a ring of bases around their near seas, especially the Malacca Straits.

    On infrastructure, yes, the French take a more nationalistic approach than the UK but, then again, so does almost everyone else - power companies in the US, for instance, are American-owned. I still find it staggering that HMG sold off nuclear builder Westinghouse Electric in a little-publicised deal, and now needs EDF to build the next generation nukes! The recent placing of the train order with a foreign builder (Hitachi) instead of a domestic company (Bombardier) is another example of a pattern that would not occur in France.

    It is the same sort of short-sightedness that was evident in exporting gas from our pretty modest resources and burning up much of the rest for short-term cheap electricity. This short-termism (irrespective of governing party - the "dash gas" was under the Conservatives) is futile and depressing.

  • Comment number 46.

    44. FrankSz:

    Interesting. I do not know enough about the Gaza issue to comment, but your logic seems spot on.

    The interesting feature which you raise about water is true of other geopolitical areas, too, such as China. Bottom line seems to me that the population of the earth is growing (by about 1.5 million per week), and the resource base is not, so the big question is "where will the resource/population collision happen first?" Many have pointed at oil, but I rather think that water could be the flashpoint.

  • Comment number 47.

    46 friendlycard

    The amount of water needed for drinking is actually just a few litres per day. Add a bit for cooking. Still very small volumes. Domestically it comes back to laundry and toilets and baths. Plenty of scope for reduction. It is agriculture and industry which swallow the water. Agricultural development seems to be a major growth problem but is not the only one. I have heard of problems such as soft drink bottling plants in India lowering the water table so subsistance farming in the area is effectively destroyed, or water abstraction for Spanish strawberry farming damaging supposedly protected habitats. I saw details of a single massive greenhouse complex, 9x football pitches going up in this country. growing water intensive foods such as salad stuff. It is all about trying to create artifical environments inside or out that would not exist normally. The further the artifical habitat is from the damage the less of a public link with the problem. As long as the water flows then it is all okay. And people make money out of it flowing. There is little to stop the relentless creeping consumption other than the resource - which does not fail immediately. In the case of aquifiers - some of them are 50 to 100 thousand years old. The ones under bristol are 50+K years old. So if you abstract too rapidly, howver long they take to empty, they do not refill immediately. Springs tend to be capped and fed into the system rather than feed streams. That happened in the Home Counties in the early 20th Century. It changes the environment which is why the trout rivers have problems in some locations. The desalination route is popular but is a very expensive process, both in plant and in energy costs and it returns to sustainability. The credit crunch is due to be followed by a resource crunch. give it ten years.

  • Comment number 48.

    45 friendlycard

    ...On infrastructure, yes, the French take a more nationalistic approach than the UK but, then again, so does almost everyone else...

    Quite agree. Think Napoleon had it right. a nation of shopkeepers ie those active on policy do not understand what they are holding so do not value it. The value becomes the sale, ie reverting to shopkeeper mode. But you can only make the sale once. We have had 30 to 40 years of abysmal strategy. So we now have a minimum wage sector of some size, which is under threat. And a financial services sector which realistically could be moved anywhere, just like it was moved here. China?

  • Comment number 49.

    A most interesting article amd a welcome antidote to all the gush anout the capital balances built up by China, sovereign wealth funds etc. They are as dependent on us, the source of their capital balances, as they are on us. All imbalances cause instability and the world will be a better place when they are ironed out.

  • Comment number 50.

    47. glanafon:

    "The credit crunch is due to be followed by a resource crunch. give it ten years".

    Indeed so. From an economics perspective, it is strange that, since 1945, labour has become relatively more expensive and resources relatively cheaper, despite resources being increasingly scarce and labour increasingly abundant. My suspicion is that the labour/resources pricing equation is now going into reverse, which will have interesting (to put it mildly) consequences.........

  • Comment number 51.

    foredeckdave # 34

    “The whole world is in a depression.” Quite possibly. However, by focussing on trade “imbalances” as some kind of explanation for depressions is wrong. By simply pointing an accusing finger at those nations which produced and saved (i.e. Germany, China and Japan tec.) and inferring that they are the cause of our economic mess here in the UK and also the US is ludicrous. For example, if I was to borrow £200,000 to fund the purchase of a Ferrari sports car, I cannot rationally blame Ferrari when I subsequently find out that I could never have afforded the repayments on the loan in the first place. This is the fallacious point Ms Flanders hints at when she states: “Keynes said the world needed a system where surplus countries had an incentive to adjust – not just deficit ones.”

    Now, without going into a detailed explanation of how balance of payments issues such as current account deficits, capital account surpluses and so on cannot per se give us precise information as to the economic state of any one nation, the point I was making at my post # 13 is valid. That is to say that the causes of depressions, recessions, downturns whatever, lie much closer to home.

    Oh, by the way, I suggest that you study Keynes and then afterwards study some of the major criticisms of his economic theory by Henry Hazlitt: A good starting point is his The Failure of the New Economics: An Analysis of the Keynesian Fallacies.

  • Comment number 52.

    I wish you'd stop quoting that Bloomsbury upper-class sybarite Baron Keynes. This is 2009 not 1949.

    Immersed in his ideology and statistics Keynes looked down on working people and never, ever grasped that an thriving economy is a priceless collective of individuals all doing their best for the country and believing that they have a place in the scheme of things and that their efforts matter and their efforts will be rewarded. Keynes: a) he never ran a business in his life and b) assumed that taxation revenue just fell out of the sky and c) he came from an age where it was taken for granted that it was important to make things.

    Now we have a survival game foist upon us, the key directive always being the big picture, the 'global economics and propping up the banking system, devil may care what happens anywhere else - let them go bust, we have other priorities.

    Try putting 2 and 2 together. If Britain's balance of trade is not restored in our favour pretty quick we're going to run out of internal money. That means incentivising export on a grand scale. OOOH export, dirty word. Don't believe me? Wait till the next Budget and you'll see then what pain awaits you as a Labour Guvt runs out of money.

    Unless someone with a modern approach to joined-up economics for THIS nation steps forward pretty quickly and says, hey - we need people to work hard and we need companies and they all belong in this it won't matter one iota quite soon whether we have a banking system and an 'economic policy' at all'. That Brown follows Keynes just shows what a barmy old fool he really is.

    And as if you citing him every time you post wasn't pitiful enough, considering Keynes' view of communism -

    "exalts the boorish proletariat above the bourgeoisie and the intelligentsia, who with all their faults, are the quality of life and surely carry the seeds of all human achievement? Even if we need a religion, how can we find it in the turbid rubbish of the red bookshop? It is hard for an educated, decent, intelligent son of Western Europe to find his ideals here, unless he has first suffered some strange and horrid process of conversion which has changed all his values.."

    - the fact that the old Mrxist we have as Chancellor (he was a supporter in the 70s of the International Marxist Group, the British section of the Trotskyist Fourth International) is a Keynes supporter too - has me splitting my sides, quite frankly.


  • Comment number 53.

    Can I bring up something that I raised earlier, and invite comments?

    According to Robert Peston (and I am sure he is right), the UK borrowed GBP 625 bn from foreigners in 2007.

    In that same year, GDP was just over GBP 1300 bn.

    This means that, of every three pounds that we spent in 2007, one pound was borrowed.

    If foreign borrowings are no longer available, does that mean that, collectively, we have to reduce what we spend by one-third in comparison with 2007?

    That is what it seems to mean, unless I am missing something. Hard times ahead, then.

  • Comment number 54.

    guycroft # 52

    Sorry, was your post directed at my post # 51? If it was, them I'm afarid you have completely misunderstood the point that I am trying to make.

    I am not and I must repeat NOT, in any way, a supporter of Keynes or his fallacious economic theories.

    Try reading some of my other posts (click on my name) and you will discover what school of economics I subscribe to.


  • Comment number 55.

    Linking this analyis of lousy economic performance on the Continent to polcy responses and the QE article of last week.

    Are Euro member countries devoid of the option to print money? I assume this is so since the ECB will not be able to agree a 'fair' distribution of the notes given the different 'needs' and predispositions of the various memeber states - I recall the Luxembourg member of the ECB indicated as much. For me this seems a real good reason to stay out of the euro - maybe Gordon did at least something right in his first few years with his 'five tests'.

  • Comment number 56.

    #54 - Kurt,

    no, rest assured that my remarks vis-a-vis Keynes and his flock were firmly directed at the author of this blog and her supporters.


  • Comment number 57.

    guycroft # 56

    Thank you, for a moment back there, I was getting rather worried.


  • Comment number 58.

    Keynesians versus the Austrian School...

    The Keynesians seem to think that they can evade the laws of the capitalist economy through the use of monetary and fiscal policy, whilst the Austrians think they can save the good side of capitalism (those that actually produce) by dumping the bad side (the unproductive financial markets).

    OK I've simplified your positions somewhat.

    Both overlook the fact that only labour produces value and that as capitalism has advanced the ratio of constant capital to variable capital (the organic composition of capital) has increase and so depressed the rate of profit.
    The bursting of the fictitious credit bubble that has hidden this unto now is painfully clear.

    Capitalism has had its time.

  • Comment number 59.

    This is one of the better summaries on the web explaining the nature of the world economic crisis:

    [Unsuitable/Broken URL removed by Moderator]

  • Comment number 60.

    I am not going to stick up for Keynes, of whom I am certainly not an admirer. But the question of whether we can follow "Keynesian" policies in this situation does not apply anyway.

    Keynes is famously associated with the theory that government should smooth the economic cycle by increasing spending in a downturn. But this also presupposes that the state runs a surplus in good times, which this government - and, for that matter, corporates and individuals too - did not do.

    Instead of "save in good times, borrow in bad", we have got "borrow in good times, borrow even more in bad".

    This is not Keynesian, neither is it Friedmanite, or any other label. There is only one word for it - irresponsible.

  • Comment number 61.

    We are constantly hearing these days about “the world economy” or “the global economy.” There is no such thing. Understand that it does not exist. It is an illusion, a chimera, a dream, a figment of fevered imagination foist on us by greedy Gordon Gekkoes, blind bankers, and corporate charlatans. Because it has been given the nod by pygmy politicians, galaxies of errant economists, and plausible political pundits, even the desperately few capable commentators that there are, believe in it. But it simply does not exist.

    A national economy takes hundreds of years to develop, and however different economies may appear to be on the surface, we are easily able to see if we examine them, that they are “the same but different”. If we listen to France’s Chants of the Auvergne, Spain’s Zarzuela, England’s ballads and madrigals, or Germany’s lieder, we are able to recognise that they are different, but the same. They are all music, but they have national differences. Each is beautiful in its own way, but each is different. It is no different with economics. Every national economy sounds the same notes as it were – land, commodities, capital, labour, markets, government, people, and entrepreneur-created wealth, but they sound them in ways that are different. For example, when America was colonised there was so much land available that they could use it as currency, and many was the university that started life with a grant of land in lieu of cash. In England the land had to be enclosed, expropriated, and divided into saleable units; and there had to arise a concept of saleable land. But it is not these differences that make one economy greater than another; that is another matter entirely and this is not the place to go into it. The point is that each of these “notes” took sometimes hundreds of years to sound, and until they did we could not even dream of a national economy of the sort we know now; it simply did not exist.

    For barely thirty years we have been developing a “global economy”. In the history of the world, indeed in economic history, it is yesterday’s invention. The Europeans have been particularly culpable in this context. They formed something that they called “the common market” and pretend that it is a pan-European economic system. It is not in anything but name. In Eastern Europe and later in China there arose the Communist economic system based on Marxist thought. In both cases people spoke of the existence of types of market as though an economy is nothing more than a market. But in this they are gravely wrong. A market is like the body’s blood system; it conducts nourishment to the economy’s various parts. If we properly understand the interrelationships of the cogs and wheels of an economy, we can see that at each level a market is required to allow for the flow of forces. An economy is not a market; markets are constituents of each part of an economy; there are markets and not a market. The European Common Market is as deficient as the “global economy” Neither has the structures and channels that are required for the proper flow of forces.

    We have to grasp the fact that it is exclusively a national entity that can have an economy; no supra national entity can have an economy. But we can only grasp that if we have a very clear model of an economy in mind, and most people haven’t the vaguest notion of what the model of an economy might look like. The curious fact is that on the one hand people believe that economics is nothing other than a tale of greed, and on the other proclaim it to be a science, and present graphs of this or that as though they are law-conformable. The truth is that both are true. Can there really be law at work in economic chaos? The strange answer is that there can be, and is. But to most of us it is the law and science of the unpredictable. It is what contemporary science calls Chaos, the science of the unpredictable.

    The fact that no supra national entity can have an economy or economic system accounts for much of the economic disaster scattered world-wide. It is this simple but irrefutable fact that has accounted in western economies for:

    • The need for the arising of fictional capital.
    • The need for runaway personal and national debt.
    • The property market bubble.
    • Raging consumerism and the decline in savings.
    • The decline in manufacturing production.
    • The inability of governments to match spending demanded by the people.

    The totality of these problems has led to world-wide economic collapse.

  • Comment number 62.

    53. Friendlycard

    ''...the UK borrowed GBP 625 bn from foreigners in 2007...''

    Thought it was the roll up of foreign borrowings from 2000 to 2007. Still a problem. That was Browns affluence, or was that flatulence.

    ''..If foreign borrowings are no longer available..''

    I dont know the detail but US (and Iceland etc) borrowings appear to have been recalled at least in part, or are being recalled as they reach end of short term contract, somebody suggested this would occur over a number of years. 3 years. Hence credit problem remains. Hence HMG shoving money into banking system. Still plenty of money in the world but I suspect FX and interest rates would have to be stronger to attract it. I still come back to demand. At some point housing has to pick up and then things get going. It is when and where will it bottom out. A house bought for 60Kapprox in 2000 has just come on the market for 200K, it would be less than 90K if there had not been the boom in house prices. It may be they are hopelessly out on price but even if you knock 50K off it gives some idea of the asset 'wealth' in the system. Parts of the economy are sound and smaller parts are in growth. First time buyers still have a problem so I would not say the housing market has exactly 'crashed' or buying would not be a problem would it.

  • Comment number 63.

    62. glanafon:

    Good points. I do think Robert's GBP 625 bn was a one-year figure, and a truly scary one at that. As recently as 2000 the UK did not borrow anything (net) from overseas lenders. My view is that the UK economy has been in trouble for longer than is generally believed. Apply a realistic GDP deflator and, on my calculations, recession really began in mid-2007. This is not hindsight, as I said so a long time ago.

    House prices do indeed need to bottom out, the question is where. The historic price/income multiple is 3.1x, which points to a low of 110k, still a long way lower than we are today. Put another way, house prices need to fall to the point where first time buyers are no longer priced out. That suggests further significant falls, I suspect.

  • Comment number 64.

    #52 #61 and others

    Tosh. Completely missing the point.

    Quick summary of events:
    a) WWII
    b) US ends up with most the world's gold
    c) People try to come with new system for international trade
    d) Keynes proposes a system involving a global central bank where international trade involves exchanging domestic currency for an international currency, and where trade imbalances result in payment of interest or penalties on both sides - regardless of surplus or deficit
    e) US vetoes this and imposes its financial clout at that time to set up the Bretton Woods system as we have known it. This gives the US dollar special status as the only currency convertible to gold, with others at fixed exchange rates. They also set up the World Bank/ IMF but make sure that it gives the US preferential treatment. The US get special veto rights there
    f) Keynes and others say the world will come to regret this
    g) The US spends all its gold on total insanity such as the Vietnam war and trying to make Russia look bad
    h) People begin to suspect that the 35USD to one ounce of gold fixed rate cannot be supported by the level of gold America probably has to the number of dollars in circulation
    i) France and England ask to convert x billion francs and pounds to Gold
    j) 1971 - America realises it is screwed. Fears international run on its banks. Nixon solves the problem by unilaterally announcing the rest of the world can't have any of its gold.
    k) World goes bananas - no one knows what to do. All currencies become fiat - floating exchange rates adopted
    l) World begins to realise that it is in a credit money economy - the US prints dollars and retail banks issue credit so that consumers can pay previous debt
    m) Exporters like China only have 2 options with respect to their dollars received for recent exports - convert them to domestic currency or reinvest them in the US. If they convert to domestic and invest domestic, they raise prices of exports and cannot compete, so they reinvest in the US
    n) This dollar cycle goes on - the US issues debt, this pays for goods from the rest of the world, the exporters get a current account surplus of essentially worthless dollars, so reinvest it in the US thus funding more debt
    o) This puts pressure on the US to find more and more avenues for foreign investment to keep the cycle turning. The expansion of money supply causes bubbles. First crippling Asia and later causing bubbles in the US too such as the dotcom bubble. It also causes corruption in large companies, mismanagement and misallocation, causing later corporate bankruptcies and prosecutions.
    p) It also gets to the point where US retail banks no longer have to carry the risk of issuing mortgages because they sell that on as packaged securities to Fannie Mae and Freddy Mac
    q) The banks are under so much pressure to create yet more credit that they are forced to lend and issue mortgages to arsonists who burn down their own homes for fun
    r) This causes housing bubble which eventually pops
    s) Exporters no longer view the US as credit worthy so now seek to diversify from dollar and exports to US.
    t) Housing bubble pops causes packaged mortgage securities sold on to Fannie Mae and Freddy Mac to become worthless, thus undermining the value of assets held by banks and other financial institutions

    The US is hanging on by a thread. Now the dollar is high because of deflationary pressure. Their recent escapades in the middle east served to ensure that their OPEC oil-dollar link isn't threatened so that USD demand persists as a reserve currency.

    There is a global economy and it is the combination of USD and the US military arrangements in the middle east propping up the dollar so that a vast cycle can be perpetuated where dollars get recycled from trade surplus countries to the US, fueling the creation of yet more dollars.

    This process is what is dying and what we call the financial crisis. The author of the blog is right - Keynes was right.

  • Comment number 65.

    I should also add that in light of the above, and that Obama is backed and influenced by Mr Soros and crew, it should be quite clear what their strategy is: they want to invest in alternative tech to get off oil and end the oil/dollar coupling. Obama wants to end the dollar hegemony. If military hardliners in the US think there is a chance of perpetuating the above process however, he will probably get assassinated I think.

  • Comment number 66.

    Let me state this quite clearly. I DO NOT SUPPORT A KEYNESIAN ECONOMIC RESPONSE TO THIS CRISIS. Hopefully that is now quite clear. My argument was that the UK government had been employing Keynesian policies.

    From the position in which we appear to find ourselves, neither Keynes or Friedman offer either an appropriate or acceptable response.Therefore whilst some form of economic strategy emerges, my focus will be on practical issues that buy us time and hopefully prevent a socio-political disaster.

    Last night on radio 5 there was a phone in debate on the guy who was sacked for putting up a "British Jobs For British People" poster. The debate included Keith Vass and a Conservative MP. Both of the politicians put down the generally ill-informed protests from the public. This really frightened me. The voice from the street may be ill-informed but you ignore/despise it at your peril! People are becoming afraid and with fear comes anger. If we do not shortly take action that can be seen to alleviate this fear it will ultimately explode.

    Therefore we can continue to pour resources into banks and keep calling for non-protectionist policies. We can argue for the creation of a new global trade/finance system. To the man on the street, this is so much intellectual waffle. We need to take practical measures. In the present climate such measures will have to be protectionist. Therefore I would like such measures to have a strong research and training element.

  • Comment number 67.

    63. Friendlycard

    ''....on my calculations, recession really began in mid-2007. This is not hindsight, as I said so a long time ago...''

    I am concerned that the recession, or downturn or whatever you want to call it started before 2007. If it is taken that foreign borrowings where shipped in from 2000 onwards, and the bubble grew, and the economic growth rate was roughly a constant 3 percent per annum, then the question is where was the economy under the bubble. Because that was the bubble-free economy. If one then looks at the previous recessionary cycles and the economic data then it looks as though a recession was due potentially at least somewhere between 2000 and 2004. So did one actually start to show through, and was the strategy was to deflect it by shipping money in and encouraging a bubble, to try and ride on through. If that is the case then on the underlying bubble-free curve of the economy you have what looks suspiciously like a decline, and a build up of recessionary pressures. If that is the case then it is no surprise that when things went pop that they did it big time.

    ''....House prices do indeed need to bottom out, the question is where. The historic price/income multiple is 3.1x.....''

    I hear you but I think 4x is probably more likely, not that it affects me one way or the other. It depends on interest rates and the perception of how stable interest rates are going to be in the near future. Interest rates are very low and an attempt to restart the housing market is highly likely in 2010. It is too early to say. If interest rates remain low then the main stumbling block is the current high deposit criteria which is based on the need for a buffer due to a falling market. It is affordability which is the key coupled with the likelyhood of no more falls in value. Nothing is going to happen in 2009 because the expectation is for a fall.

  • Comment number 68.

    #40 "Could China, the middle east and so on, solve water distribution problems by switching to hydrogen powered vehicles?"

    Eh ?? What has hydrogen powered vehicles got to do with water distribution ??

    #41 "China does not even have enough water to keep its people alive."

    You are not quite correct here !! Every year, central and southern China has more water than they will every want (i.e. floods) !! It's northern China and the parts that border the Taklamakan and Gobi deserts that are perpetually short of water !! Hence the Chinese spending trillions in building not one but three new large canals that will carry the surplus water from the south and central China to the thirsty north !!

    Each of these projects rival the building of the Great Wall or the Grand Canal !! They are, quite literally, carving large gashes in the landscape over more than 1,000 km each !! With this recession and many millions unemployed, they will probably accelerate the projects and just hire more construction workers. With their high national savings, as mentioned elsewhere in this blog, they are not too worried about funding these projects.

    "One contact with knowledge of Russia has told me that Russia expects to have to fight China over this. Russian paranoia, maybe,..."

    ...or he/she is pulling your leg !! To reach the Siberian resources, the Chinese will have to march through Mongolia. And that is not the easiest of landscape to march through even unopposed !! Wars cost men and money and destroys valuable resources. Trade does more for both sides !! Also, historically, China has never been an expansionist state, quite unlike the Western imperialist ones. Therefore, you, or your contact is imputing Western expansionist ideas ( including Tsarist/Soviet expansionist ideas) onto the Chinese where such ideas simply do not exist !!

    Besides which, they have far easier means of getting those same resources by selling to the Africans and Latin Americans goods that they want and can afford instead of over-priced goods manufactured in factories in Europe or America with over-priced labour !!

    There is some talk of a convergence of labour cost but I believe that is a pipe-dream so long as the labouring class has to pay for the non-labourers in the West !! Furthermore, even China has been losing millions of jobs due to closure of factories deemed too expensive to be run there and were moved to cheaper labour cost areas like Vietnam, Cambodia and Laos !! Will British labour cost converge with that of the Lao (less than US$1 per day) ??

  • Comment number 69.

    glanafon, foredeckdave

    Sorry, I have not responded earlier (one of my 500GB disks died and had to be replaced)

    One of the aspects of interest rates and the recovery that I perceive as important to understand is that if and when there is a recovery interest rates will be/become higher.

    Any economist that thinks that there can be something they call a recovery without higher interest rates is not using the term recovery in a way that I believe that most people will understand.

    The question is can you get a recovery by increasing interest rates? The bubble, after all, can be seen to have been caused (at least to some extent) by interest rates being too low for too long - so why is the reverse not the case too?

    The BoE is always saying that they set interest rates fro 12-18 months in the future so it is easily possible to assert that by continuing with zero interest rates the BoE is (optimistically!) looking forward to another 12-18 months of recession.

    I am actually optimistic and I see that the BoE should now put up interest rates (at the latest by June). The benefits are twofold: first that savers and investors have some hope of income and so may start spending and cause a recovery (there are after all 7 times more savers than borrowers), second that borrowers will restrain their borrowing as they perceive that they will suffer a real cost of borrowing and this will prevent the re-inflation of the credit bubble. (The latter would be catastrophic.)

    I would actually like to see the BoE say that it will in the future raise interest rates as the possibility of rate increases will give hope to savers and warn borrowers to put their houses in order. This nonsense of a zero rate and no indication that it will ever rise is, in my view, fundamentally wrong.

  • Comment number 70.

    #45 "They also need a ring of bases around their near seas, especially the Malacca Straits."

    Why ?? They can use Singapore which has the largest drydocks in the world, thanks to the Royal Navy, and they have a base in south-western Burma, in the Andaman Sea !!Further out, they can use Pakistani or Yemani (Aden) bases. And that's as far as they will want to go. I don't think they are going to launch an armed invasion of Africa; at least not in the near future !!

    BTW, someone mentioned land in Madagascar. I think it was people from the "renegade province of China" that did the land-grabbing, not folks from the PRC !!

  • Comment number 71.

    #45 Re-Bombardier - It, too, is a "foreign company" being owned by the Canuckistanis !!

  • Comment number 72.

    69 John from Hendon

    Hi John

    I think the first thing I have to say - if it is not blindingly obvious - is I am not an economist

    I can see some upsides to the arguement.

    Mainly - Low interest rates -

    Do not reward saving, and therefore damage savers situation.

    Can be argued to subsidising major borrowings eg housing purchase


    The demand for borrowing is not apparently outstripping savers deposits so more deposits are not demanded so interest rates do not need to rise to attract them.

    Are related to FX so currently helping exports and inhibiting imports.

    Low interest rates, or more importantly some reasonable projection of interest rates not going skyhigh, will be needed to encourage buyers into the housing market. It is not unreasonable to wish to see an active housing market, not a overheating market, just a market normally active. The housing market provides all sort of sideways spending, furniture, flooring, equipment etc.


    I am sorry if I am harping on about housing but I do not think you will see recovery until the housing market is working again. It is unfortunately important to the economy and peoples perception of their security and illusion of wealth.

    For what it is worth I think rates are too low and will have to go up at some point.

    I too am optomistic but I do not know if we share the same definition. I expect a major clearout and only muted growth. I believe the residual economy following the bubble clearout is/will be robust and that most people will be in work. I have to add the comment that I do not want anybody to think I am not aware of the problem of unemployment. I am not expecting a boom to follow this bust. In fact I expect difficulty to continue in some sectors.

    I do think some good things may result from what is going on. A re evaluation of values is needed. A focus on UK based activity rather than obsessively importing from the far east is helpful. An awareness that what you do as a consumer has impact.

    We are currently losing income on deposits so are not unaffected, however at present I think low interest rates are a good thing.

    I think the BoE is right to err on the side of pessimism on the issue of recovery. There will be an upturn but I cannot see any reason to expect it to occur shortly. It would be nice if a recovery followed the pattern of previous recent recessions but I think there is more going on with this one so the imbalances are deeper.

    Anyway I am only to happy to be shot down.

  • Comment number 73.

    68. ishkandar

    I dont think anybody can be unimpressed with the China focus on doing things. Health and saefty, Human Rights, Workers rights, welfare provision, environment etc, No, but just getting the job done is impressive. No public inquiries, no delays, no arguements. It will all catch up with them sooner or later.

    Thanks for the correction re Madagascar. It was S Korea I was thinking of not China. Daewoo plans to build a corn plantation on Madagascar that is half the size of Belgium. I think the Saudis were also buying up large tracts of land but would need to check. China wants to develop ties with Madagascar and is active in other ways there.

  • Comment number 74.


    The more our great and glorious leaders keep banging on about securing the banks and preserving globalisation, the longer it will be before we see any kind of recovery.

    Your argument regarding the housing market is an indicator of the problem and not an indicator of recovery. There is intrinsically no real reason for the majority of us to actually own a house. If we could find a true equitable level of rent (provided we moved away from the short term leases) then most people could use their disposable income in savings and other investments (over 30-40 years the returns would probably be better). Home ownership is actually a Thatcherite con. It has skewed our economy very badly.

    I agree with you that if our recovery is to have any true value then we need to develop a totally new set of ideals upon which to build our prosperity. One of my 'bete noirs' is the accountancy profession. They do know the cost of everything and the value of nothing. We must lose the fixation with cost and low prices as the prime driver. We must learn to respect and demand quality and value. Something like a bargain being a bargain but cheap always being cheap. Maximising profit and dividends has to be constrained by longer term objectives. Pride in national ownership has to be re-engendered - not everything is for sale.

    How the hell we can actually achieve this I do not know. Somehow we have to constrain greed and selfishness.

  • Comment number 75.

    #73 Health and safety - most major govt. projects and some of the larger private sector projects in China do have some health and safety rules. It's just not as stringently or obsessively followed as in the West. The smaller projects and other operations have little or no health and safety rules at all. They are still in the process of formalising their rules !!

    As for public health and safety, the Sanlu case highlights the fact that the company's management were more concerned with profits than with product safety. They will pay heavily for it after their very public trials. Also, the local provincial govt. officials involved will also pay for their lack of morals.

    In the West, when dioxin was found in pork, all that anyone got was a slap on the wrist !! What price, public inquiries ??

    On the other hand, there was a story of canisters of Oxygen intended for hospital use being labeled with a warning "Do not use if allergic to Oxygen" !! I have no idea how true this is !!

    Human Rights - their Human Rights record is poor but then Britain is not a country to point fingers after the KGB-like raid on a sitting MP's home and office after his arrest by *anti-terrorist* officers !! Who had he terrorised ?? When anti-terrorists Laws are used to spy on people's dustbins and parents are jailed for the truancy of their children ??

    Workers' Rights - until recently, much of their "workers' rights" were based on the old Communist system whereby everyone worked for the state and, therefore, had no rights to complain. With the growth of Capitalistic economy, they have more and more workers' rights. They are also in the process of formalising those rights. For instance, one of the American fast-food chains was punished for paying their workers less than the statutory minimum wage !!

    The rising amount of workers' rights have also driven all lot of low-cost, low-tech factories out to cheaper, less stringent countries.

    Welfare provision - This presupposes that there will be a welfare state which China, and most Asian countries, aren't. Therefore this will be a circular argument like - I am right because I say I am right and therefore I am right !! Historically, welfare had always been provided by the extended family which will keep a person alive but will "encourage" that person to seek whatever work he/she could get. This obviates the problem of scrounging off the state !!

    Environment - Per capita, the Chinese produce one third the pollution produced in Britain and one quarter of that produced in America. To make a fairer comparison, China should be compared to the pollution produced by the whole of the EU (relative size and population). Alternatively, we can say that Britain is 20 times more polluting that Singapore and 200 times more than Nairu, whose main and only export is guano (bird poo) !! To get to a level playing field, Britain must first reduce its pollution by two thirds; which means many factories will have to shut down to achieve that level !!

    Re Madagascar - The S. Koreans did indeed want a large plantation there but much of the main environmental damage is done by illegal loggers who have damaged the once pristine rainforests and are about to wipe out a lot of species. Plantations are far less damaging than strip logging where the undergrowth is simply burnt off to get at the big trees and, in the process, killing everything that lived there !!

    Then again, Belgium being a small country, half its size isn't all that big. Half of France or Germany would be a different kettle of fish altogether. There probably are ranches in Argentina and the US that are of that size !!

    That said, Britain is hardly in the position to complain when much of our forests were chopped down to build the ships needed to conquer an empire !!

  • Comment number 76.

    FrankSz made an excellent point when he wrote about water and resources. Perhaps Buckminster Fuller was right: the problems of the world are not fundamentally political (or even economic); they are design problems. I.e., with water and energy demands rising, war is likely unless scientists and designers can come up with alternatives which are given wide publicity. It's easy on an economics blog like this one to remain focused too narrowly on purely economic reasons and causes.

    FrankSz #64 + #65: sounds like you are referring to what Catherine Austin Fitts has called the military holds the dollar up.: "My assessment is that 90% of the value of the U.S. dollar comes from the U.S. military. After we had our satellite systems in place, Cheney said “deficits don’t matter.” The US debt and deficit financing is no longer a debt system. It is a global taxation system."

  • Comment number 77.

    Yes. The main reason for the Iraq invasion was to stop Saddam Hussein trading oil in Euros, and in general doing what a good CIA trainee ought not to be doing. Putting a hundred thousand troops on top of their oil is a nice way to guarantee the petrodollar for a while longer. Funny how since Iran has been trading oil and planning the trade of oil in Euros and other non-USD currencies, we are being encouraged to believe that they have a WMD program much like Saddam Hussein. How silly we must be.

  • Comment number 78.


    I agree - the world's problems cannot be solved by politicians. The must be solved by people who understand technology. The short term interests of large companies and governments must be given second place to the long term interests of humanity.

  • Comment number 79.

    Friendlycard # 60

    Yes, you are quite correct; it is neither Keynesian nor Friedmanite. It is a composite, increasingly unworkable mixture of both; the inevitable result of which is that capitalism gets a bad name. From an Austrian viewpoint, it is not capitalism that is bad; it is precisely the interventionist, interfering nature of this “mixture” which is causing today’s economic problems. The resulting fallout of all this misguidedly leads the casual observer to conclude that “something must be done” about these greedy capitalists.

    The Keynesians or more correctly the neo-Keynesians believe that the markets can be “managed” by imposing costly (to the taxpayer) regulation on them whenever they perceive failure in them – which they always do – to deliver what the policy-makers require: that is to ensure the politically motivated, coercive, fiscal re-distribution of wealth. The Friedmanite monetarists similarly subscribe to this strategy, albeit to a lesser degree of regulatory enforcement but with more emphasis on monetary policy as a means to manipulate the economy.

    As this depression unfolds, it will become apparent that at some point in the future we are going to be faced with a choice; a decision if you like. And this is what it will amount to:

    Given the incontrovertible evidence that capitalism – as constrained and unjustly maligned as it presently is – has provided many people with an immeasurably improved standard of living since the beginning of the 20th century, do we now abandon it in favour of a post-capitalist system?

    (This would be something our dear little Marxist friend (duvinrouge) hopes will happen. His unachievable utopian dream is that only by the adoption of the common ownership of the means of production and the application of the irrational labour theory of value – which he tenaciously clings to – can society finally arrive at justice and equality for all. He posits that the ownership of private property – except for the clothes and shoes one wears – amounts to nothing more than selfish, self gratifying greed that must be abolished in order for a socialist paradise to become a reality.)

    Or, do we – as the Austrian School believe - pragmatically recognise capitalism’s achievements and dispense with the neo-Keynesian/Friedmanite regulatory impositions on it in order to attain more individual economic freedom by promoting and supporting the private ownership of the means of production through enforceable private property rights?

    The time for fence-sitting is running out. It has to be one or the other; either capitalism or socialism: there exists no middle way.

  • Comment number 80.


    "Given the incontrovertible evidence that capitalism ? as constrained and unjustly maligned as it presently is ? has provided many people with an immeasurably improved standard of living since the beginning of the 20th century, do we now abandon it in favour of a post-capitalist system?"

    You neglect the incontrovertible evidence that "capitalism" has ruined an equal number of lives and has supressed the progress of developing nations and the poor.

  • Comment number 81.

    "The time for fence-sitting is running out. It has to be one or the other; either capitalism or socialism: there exists no middle way."

    That is just not true. Both systems have their advantages and disadvantages. From a theoretical standpoint, Marxists would argue that true Communism has never been enacted. Alternatively, others will argue that we have not seen the face of rampant Capitalism. At their extreemes they are both equally unacceptable.

    With this depression comes the opportunity to think about and describe a new system that has the potential be better than what has gone before.

    Yes time is short if we are to avoid the mistakes of what has gone before.

  • Comment number 82.

    If nothing else of value emerges from this crisis, I hope that we can at last ditch ideology and extremes. Communism and its various derivatives are demonstrably flawed, but so too is unfettered market capitalism. There is a regrettable tendency to think that we have to choose between these extremes, whereas neither is perfect or even necessarily workable, so we need to move on. The term "third way" is irremediably tarnished, I know, but we do need a system based on pragmatism, not ideology.

    Market capitalism, for all its faults, is an effective wealth generator, so the basis of economic activity needs to be market driven. But unfettered capitalism is fatally flawed and tends to eat itself, so over-arching regulation is needed as well. We do not need state planning along Soviet lines, but neither do we need 'let-rip' style market capitalism along US lines.

    I suspect that Sweden may prove to be the best model for us to emulate.

  • Comment number 83.

    So Germany saved and invested whilst the UK spent heavily on public services and welfare.

    Was Nu Labour typically squandering our tax money? Of course.

    The BBC and the rest of the PC brigade did not say boo.

  • Comment number 84.

    Would the national economies be better off if the various industries were spread between nations more? For example, if Germany were to produce its cars in other countries. I'm sure I'm being naive - these imbalances are caused by all sorts of factors. The main one being for national military / security reasons. It's staggering to consider the advantage US companies enjoy from spin offs from defense and other large national budgets.

    Whilst I think that over the long term interest rates should be set at a level to achieve a fair balance between savers and borrowers, I don't see how it's fair for savers to expect a perpetual advantage - just observe the indignation expressed over recent rates.
    In order for a saver to "earn" anything significant they require large balances, even when rates are around 5pc. At the moment a saver with 100k savings is not getting much interest, but a 100k mortgage is still costly - check out the rates. Somebody is making a mint out of this and it's not the saver or borrower.
    Just to muddy the water more, most borrowers are savers in the long term.

    As for the housing market, it won't really recover until values reach near their previous peaks. I think prices would stabilise somewhere near this peak - held in check by affordability and sensible lending practices.
    Many on these blogs have questioned what an affordable level is, quoting 2.5, 3 or 3.5x the mythical average salary. This shows gross wishful thinking. People are sufficiently motivated to get on the property ladder by all sorts of means - using 2 salaries and longer terms for example.

  • Comment number 85.

    #82 - it seems the situation for the Swedes isn't that rosy either:

  • Comment number 86.

    74. foredeckdave

    ''....Your argument regarding the housing market is an indicator of the problem and not an indicator of recovery. There is intrinsically no real reason for the majority of us to actually own a house. If we could find a true equitable level of rent (provided we moved away from the short term leases)''

    I understand you are suggesting something more like the German model where rental is common. It may be correct to suggest that is a solution, or even the solution, but it assumes a clean sheet and there never is one. The straightforward fact is housing ownership is high in this country. That generally high grade property is not available longterm on affordable rentals, and that 6 month short term tenancy is very limited and you have no security of occupation, or usually much prospect of getting your bond back. However much anybody dislikes private house ownership or the UK property characteristic it is here. The vast bulk of UK domestic borrowing is related to house purchase. As for people investing is something other than housing. Like what. I sold all shares 5 years ago. Any money I invest is in myself. I have no intention of giving my money to a big businessman who I will never meet. No if you want the economy in growth you have to get money moving again and the only easy way is to see the housing market trading normally, not overheating, normally. At affordable levels, at affordable interest rates that give a balance between savers and borrowers. If it is not happening naturally it will be encouraged by some sort of soft intervention in 2010. You have to live in the environemnt you find yourself in, and whilst changing the environment slowly is possible it takes a long time. You are proposing unpicking 40 odd years of house purchasing. Good Luck. If you have to pick a figure out of the air - which is as good as any other method at the moment - for a worst case, then 20 percent of households could have varying amounts of negative equity which could disappear within 5 years assuming some element of inflation. Housing will be either the vehicle or the indicator for recovery whichever way you view it, but it will be part of the process.

  • Comment number 87.

    81 foredeckdave

    '' "The time for fence-sitting is running out. It has to be one or the other; either capitalism or socialism: there exists no middle way."

    That is just not true. Both systems have their advantages and disadvantages.''

    Oh dear Oh dear Oh dear Dave

    : )

    You are sounding like The Third Way, popular in the 1930s, popular in fact with the Nazis. lol Now I know your not one of them.

  • Comment number 88.

    I rather liked Paul Moore but the way my newspaper is playing him now - he has turned into an avenging Cyborg and has mistaken Gordon Brown for John Connor.

    Revenge of the Whistleblower? lol

    Don't tell the newspapers what you are going to do, Mr Moore. Just do it!

    The actor Eli Wallach said it best to a recently departed this life bad dude in an old spaghetti western

    "When you are gonna shoot - shoot! Don't talk".

    The movie.

    The Good, the Bad and the (just plain) Ugly!

  • Comment number 89.

    75. ishkandar

    I dont know what point(s) you are trying to make.

    I have never suggested buying a plantation in Madagascar damaged the environment, on balance or account, I dont have the data. I was commenting on the asian expansion which is similar to expansions by other cultural blocks in the past. eg british empire, american commerce etc etc. And they are not alone, the Arabs are active also. There is nothing as such wrong with it or right with it. It is just happening. It is commercial or strategic activity. Further half of Belguim as an area may be 'small', but it is just one plantation, one venture, and a monoculture. What has happened in S America has happened. This is something new.

    Human Rights - It would appear by any definition human rights are not healthy in a number of countries in the east. Whether there is the odd incident in the UK so what, it will be sorted given time because the UK has a democracy, unlike some countries. To suggest however obliquely that China and the UK are on par on human rights and freedom of speech is quaint to say the least. Is not the internet censored in China to give just one example.

    Trees where chopped down in Elizabethan times in the UK. Err I wasnt there buddy. Incidentally the first conservation bill was introduced by Elizabeth I in response to that. What went on in this country when the environment was not understood is in the past. The emissions in the UK and other countries have to drop. China simply building dirty coal fires power stations knowing of the problem does not help does it.

    Welfare - ''Historically, welfare had always been provided by the extended family which will keep a person alive but will "encourage" that person to seek whatever work he/she could get. This obviates the problem of scrounging off the state !!'' Fine but unfortunately the family unit is breaking down or will breakdown in the face of modernity and problems will result. Just watch it happen.

    I am not suggesting China is not evolving, or that some good things are not in progress there. If I am saying anything it is they are active and not to be underestimated and not all impacts will be positive. And they can implement faster than the West because they just do it.

  • Comment number 90.

    'After today's appalling growth figures from the eurozone, I'm starting to think that the UK will lose the competition to be the worst hit by the credit crunch.'

    Stephanie - an interesting piece that is very alarming for the UK in its worst case scenario - particularly as the UK is drifting in economic terms and which I think is very damaging.

    Besides the UK banking fiasco, the UK also imports a lot of food produce and other basic stuff which, if grown at home, would help boost the internal economy.

    What is worrying is that the UK 'internal economy' is so neglected in Westminster - the front bench politicians are obviously not economists and do not seem to understand basic economic principles, balanced economy, multiplier effects, micro/macro policy.

    I suspect that if we are able to delve into the figures more we will see that the Germans have also neglected their own 'internal economy' and import a lot of fuel and raw materials and are struggling on energy production (I don't suppose there are any nuclear power stations is Germany).

    This I think raises three further points:

    1) If the EEC economy stagnates on a worse case scenario - those countries with a weak internal economy are likely to do worse particularly UK as the £ currency also appears to be exposed.

    2) Globalisation is to some degree the inverse of having a good well balanced internal economy - when politicians rant on about avoiding protectionism they fail to understand that in order to have a good internal economy - you have to practice what the less well informed commentators sometimes refer to as 'protectionism'. Well balanced also means well balanced socially, culturally and morally.

    3) Final thing - the most important short, medium and long term issue is population level for countries, EEC world - Does the EEC have any population planning policy - I doubt it. I very much doubt if any other EEC countries have any population planning policies either. Adequate population planning is also crucial if your government is borrowing hundreds of billions of pound sterling for our grand-children to pay back - the population level and structure in 20 years time is of massive importance to us.

    All the supposed leading scientists keep telling us about global warming, carbon etc etc - but that is nonsense - the underlying problem is massive population growth which is outstripping world resources. We very rarely discuss the cause of CO2 production - it is massive population growth and increased demand and Co2 output.

    Economists usually ignore 'population levels' in their discussions (but many economic models do of course contain population projections) as not being politically correct - but wouldn't the politicians, world leaders do better trying to discuss and influence population levels. China did this and arguably (for a time) had the most success with its economy.

    Yes - I'd agree the UK will come off worse - but is it just a coincidence that we:

    1) Are the most over-populated nation in Europe?

    2) Have a relatively weak internal UK economy ?

    3) Have a feeble - no sorry.. pathetic government which is incapable of having a population policy or plan?

    Most of the political economic discussion (outside of this blog) seems to miss the things that really matter most? This is what politicians cannot grasp e.g. less GDP/population growth, better balance and planning could actually make a country/the UK 'better off '.

  • Comment number 91.


    Aha! the old Third Way may offer a means of unpicking the UK housing market - "Ve haz vays of making you RENT"


  • Comment number 92.

    90. nautonier:

    Population is indeed the key issue. In the past, intensive agriculture enabled us to feed far more mouths than had previously seemed feasible, but intensive agriculture requires huge energy inputs, and that may not be sustainable, let alone repeatable, in the future.

    At the end of the day, the equation remains the same - growing population, finite resource base. Within that equation, we in the west have a living standard way beyond our actual economic output, whilst other countries live a long way below their real earnings.

    The future rebalancing would be bad enough if we were simply dealing with economic imbalances - dealing with resource constraint as well makes the whole problem look even more daunting.

  • Comment number 93.

    #92 and others. The issues raised by ever increasing population will push innovation. I think you're overly pessimistic.

    In theory we should be able to generate enough power and water for the current population plus some. Resource bottlenecks are the real issue.
    Maybe the contents of landfill sites could be used.

    The problem is the cost to make necessary changes to our infrastructure is not currently economically viable. I hope that we have enough time between when it is viable and when it is needed.
    I'm not filled with confidence, given the impending energy generation capacity shortfall. On the other hand, maybe the powers that be will use this threat to encourage investment in micro power generation.

  • Comment number 94.


    What is 'cost'? What is 'value'? These are all measures of a person's desire and motivation.

    Unfortunately, people's desire and motivation is determined by the incentives given to them by their employers and leaders.

    It is the incentives of big company bosses and political leaders that are the obstacle to the application of technology.

    Big company bosses are focussed on making a quarterly profit, while governments are focused on collecting votes.

    Oil companies hold patents that prevent the development of nearly free renewable energy sources. They don't want to throw away several trillion dollars worth of oil while its scarcity increases.

    We have had the ability for quite a while to make recyclable plastics, everlasting lightbulbs, hydrogen powered cars, carbon-free energy, and a whole plethora of technology that could eradicate poverty and disease throughout the world.

    The problem is that we hear people publicly stating their good intentions towards poverty, hunger, drought, disease, etc, but very few people actually have the incentives to do anything about it.

    The problem with the last 30 years or so is that we have all been living in a Dilbert culture of purposeless insanity, producing overvalued junk that nobody really needs (internet fridges?? smelly-telly?) This life of mindless corporate drivel and endless PC deliberation is a direct result of the relentless credit expansion since 1971.

    How can one have a meritocratic culture that rewards technological progress, invention, ingenuity, thrift and skill, when the very concept of value itself is embodied in a never ending printing press of worthless paper? When money is cheap, and can flow in vast quantities to the next fad of an asset bubble on a whim, value is meaningless.

    The positive aspect of this crisis is that purpose and direction will eventually return to people's lives. The positive characteristics of human behaviour - creativity and invention for example - will be rewarded, as we struggle to improve our lives and find better ways of doing things.

    This is why I am convinced that the answers now lie in technology. Not technology in the sense of a new mobile device that allows you to share photos of naked women with friends via Bluetooth, but technology in the sense of nanofoods that prevent malnutrition, clean and cheap energy, and so on.

  • Comment number 95.

    #72 glanofon wrote:

    "...will see recovery until the housing market is working again"

    It is rather a question of both the cart and the horse and what we mean by 'working again'.

    If a recovery is defined as a working housing market - don't we have to ask what working means.

    Markets can work at many different prices, particularly where the price of the goods is not well correlated with their price as in housing.

    For a society to function house prices need to be at levels where a single earner can pay for a home. If this is not the case then the 'production' of children is mitigated against. At what price level this is depends on the relationship between income and interest rates (and indeed inherited capital!)

    So if prices stay the same then incomes must rise substantially, or interest rates collapse further. Neither of these 'solutions' is a viable option. So house prices needs must fall further by a large percentage and then we can have the 'working market' that you seek.

    A half-way house will drive societal changes - already the age of marriage is rising to meet the age of the end of fertility!

    as for
    #91. 15 Feb 2009, foredeckdave wrote:

    "Ve haz vays of making you RENT"

    But the affordability of rents also matters... (see above argument above "For a society to function...")

    (Just returned from delivering my dead HD to the manufacturer's shipping agent, under RMA as it is still under warranty.)

  • Comment number 96.

    By the way, on the topic of quantitive easing, I think this article should be the final say on the matter:

  • Comment number 97.

    foredeckdave # 81

    There is no "new system" to think about. As I have previously said, it is either one or the other. Ultimately, that is the deal!

  • Comment number 98.

    FrankSz # 80

    Capitalism has not ruined any lives; governments have through the the use of inflation, taxation, regulation, subsidies, tariffs, price controls, rationing, minimum wage laws etc.

    And you are definitely barking up the wrong tree if you believe that capitalism has impoverished the poor in third world countries. Most of those countries are, I would hazard a guess, totalitarian socialist-fascist dictatorships.

  • Comment number 99.

    In the last few days, any lingering belief in the wisdom of ramming through the Lloyds-HBOS merger has gone up in smoke;a minister has conceded that we are in a hundred-year-worst recession; a key government advisor has defected to the Tories; and one of GB's FSA nominees has resigned. I could cite many more examples, but the point is that Labour seems to be losing its grip. This suggests that David Cameron may soon be PM.

    If any of us had the uneviable task of taking over an economy in such a parlous state, where would we begin? The thorniest issue of the lot is likely to be public spending - so what should DC do about that?

    The policy platform for a future Tory government is not getting much attention - other macabre events are getting the limelight - but we do need to start looking ahead to a post-Brown Britain.

  • Comment number 100.


    No, capitalism has exploited 3rd world capital. Study globalization. Read for example 'The Bubble of American Supremacy' by Soros on his views of globalization.

    The truth is that 'capitalism' alone is not to blame, but the drive to preserve the image of capitalism through credit expansion, globalisation and military backed dollar hegemony is.


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