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Feast and famine for UK businesses

Stephanie Flanders | 17:49 UK time, Monday, 26 July 2010

The Business Secretary, Vince Cable, today called for some fresh thinking on how to boost cashflow to Britain businessses, with the emphasis on getting the banks to do their bit. Robert Peston has written extensively on this in the past; I leave it to him to comment on the thrust of the government's approach.

But I am struck, once again, by the disconnect between the macro and micro picture on UK corporate cashflow. We hear a lot about the lack of money flowing to British businesses - the impossibility of getting a loan, and how the government might strong-arm the banks to cough up more loans. All of that is true and important to discuss. But it would be easy to miss, in all this debate, that UK plc is actually in rude financial health.

Come again? Yes that's right. British businesses are loaded. In fact, in the first three months of this year, they ran a financial surplus worth more than 5% of GDP.

As the authors of the latest ITEM Club forecast point out, British companies - non-financial ones - were running healthy surpluses before the crisis and these have actually risen in the past 18 months. The share of corporate profits in GDP is down a little from its peak of 24% at the end of 2008, but at nearly 22% it is still roughly in line with the average for the past 10 years. In past recessions, the story was very different.

As I've commented in the past, the relative strength of company balance sheets before and during this downturn is a key part of the explanation for why the number of corporate insolvencies has been so much lower than you would have expected for a recession this severe - and part of why employment has also fallen by less than feared.

So, you might say that Mr Cable - and everyone else who talks about this - are worrying over nothing; British companies already have a lot of the cash they need to fuel the recovery. But of course, it is not remotely that simple.

First, the fact that many big companies are sitting on mountains of cash doesn't make much difference to all those SMEs who are struggling to get a loan. One of the probable benefits of the Bank of England's quantitative easing programme, especially in 2009, was to make it cheaper for big companies to raise money from the capital and equity markets. Where this was available to them, they often used the opportunity to pay down bank debt. So part of the decline in bank lending last year was indeed due to falling demand, as the banks always argue, not just a decline in supply.

But as the joint Business Department/Treasury paper points out, only 2% of SMEs currently use external equity as a source of finance. A third don't use formal sources of outside financing at all. For the rest, it's bank debt they mainly rely on. And, as we know, banks have often not fallen over themselves to use their excess cash to take a chance on SMEs. Either the loans are not available or, more often, they are there but on much less attractive terms.

So this is indeed an area where creative thinking might be called for, not just on the hardy perennial of getting banks to lend, but also how to encourage smaller firms to make use of other sources of capital.

True, the very smallest businesses are not going to be launching IPOs any time soon. But, as Adam Posen pointed out in one of his first speeches after joining the MPC, other countries manage to provide more diverse sources of funding to their mid-sized companies. It has been a big weakness for the UK in this recession that our corporate sector is so unusually dependent on banks.

This debate will run on. The big point we should never lose sight of is that big corporate financial surplus I mentioned at the start: it is little exaggeration to say that what happens to that money, and the money sitting on bank balance sheets, will in large part determine not just this government's future but that of the entire UK economy.

If you include the financial sector, UK companies ran a surplus last year of close to 8% of GDP. Put it another way: British businesses, taken together, saved enough last year to finance nearly 75% of the UK government's budget deficit. So, as a nation, we were able to come up with the funds to cover all but about 18% of that record deficit. We weren't quite as dependent on foreigners to come up with the cash as we often seem to think.

That sounds like good news. But that high level of corporate savings is also one of the big reasons why the pessimists about the UK recovery are so pessimistic.

Why? Because what that surplus tells you is that companies (inside and outside of the City) aren't confident enough in the future to invest their revenues. Even with a very low cost of capital by historical standards, they think it makes better financial sense to hold on to that cash, or use it to run down debt.

If firms continue to save this much, and consumers either save more or at least chose not to run up a lot more debt, then the government - as a matter of arithmetic - will continue to have a mammoth deficit, whether it has planned for one or not. You might see the structural - controllable piece - of the deficit go down, but slower growth would push the cyclical part of borrowing up.

This is at the crux of the debate between those who support George Osborne's approach - and those who want to cut the deficit at a slower pace. In effect, it all comes down to whether there will be enough private sector spending - ideally, investment spending by domestic firms, and spending on British exports by foreign consumers - to lower corporate saving and also bring down the current account deficit, which you can think of as imported foreign savings.

That's why Mr Cable and Mr Osborne need, and want, to do all they can to get cash in the hands of every British company with a good business plan. That is why they need to make sure that raising bank capital and liquidity requirements over the next few years doesn't cause another sudden crunch in corporate bank lending. And that is why we all have a massive stake in their success.

Comments

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  • Comment number 1.

    Is not the answer to the problem some more quantitative easing? The extra money created, if used shrewdly by the government, could help relieve the credit starvation being experienced by SMEs and if there were a little more inflation, this might encourage those siting on piles of cash to spend it before they lose it.

  • Comment number 2.

    If large companies are awash with cash which they cannot or do not want to invest should they not return these monies to their shareholders?

  • Comment number 3.

    Said this for ages.
    a) Nationalise/tightly regulate banks such that loan repayments are fixed at current levels but with zero or close to zero interest repayment parts. This assists deleveraging.
    b) Encourage online social lending programmes where it is illegal to use borrowed money to invest in productive ventures.

  • Comment number 4.

    If your business is generating cash then you are in a good situation in a climate of growing uncertainty. You are not going to risk that by doing anything foolish.

    If your business has not been generating cash prior to autumn of 2009 you are now already familiar with the routines in Carey Street.

    It is not much appreciated that UK business were having a hard time before the recession began so the forces of Darwinian evolution had already been hard at work well before Gordon Brown's bubble burst.

    Having said that though if we are to develop the switch from government employment back into manufacturing and commerce then the banks are going to have to open their wallets to SME and new ventures. In other words they need to take on some risk.

    Now we are all aware that the bright boys in the City love risk as it pays them loadsamoney. But they don't care for this sort of risk as it doesn't pay anything like the same. It is even hard work - heaven forfend - nursing a stumbling SME onto the road to growth and prosperity. Yet this is the only way we are going to turn our country round in the medium term.

    It is called putting your money where your mouth is. It is not for the careerists; it is for the workers. Nobody is going to get rich but it must be done if the country is to have any future at all.

  • Comment number 5.

    I'm sorry but some of this most interesting article is I think contradictory:-
    .....................
    'First, the fact that many big companies are sitting on mountains of cash doesn't make much difference to all those SMEs who are struggling to get a loan.'

    later on ...

    'If you include the financial sector, UK companies ran a surplus last year of close to 8% of GDP. Put it another way: British businesses, taken together, saved enough last year to finance nearly 75% of the UK government's budget deficit. So, as a nation, we were able to come up with the funds to cover all but about 18% of that record deficit. We weren't quite as dependent on foreigners to come up with the cash as we often seem to think.'

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

    But surely, the company's holding the cash as being cash rich are generally the multi-nationals and inter-nationals i.e. foreigners and 'non doms' controlling the supply/logistics chains?

    An interesting article which is starting to get closer the nub of the problem facing the UK ... that in order to restructure and rebalance the economy some extar-odinary things need to happen at grass roots level in terms of new forms of business levels and partnerships in terms of getting everone involved.

    The article, is really just a reflection of human nature in that many who can make a difference will not lift a finger to help anyone else unless there is pound of flesh in it for them ... the fact that there is still a pound of flesh in it for them is over-looked as those holding the spare cash are uncomfortable outside of their own familar business models and techniques ... and are not really open to new ideas and just quite normally want the best rate of return for the leats possible input.

    The 8.2 million people who are currently inactive ... (and I say 'currently' as this figure can easily increase markedly in the coiming years) can benefit from local business partnerships and co-operatives and new ventures if the government e.g breaks up the power of e.g. the supermarkets and other vested interests.

    There is no way of knowing the UK inflows and outflows with cash held by 'UK business interests' ... much of this will be held in Swiss bank accounts anyway ... for UK tax avoidance.

  • Comment number 6.

    Is it possible that UK businesses can net a financial surplus, while UK runs a current account deficit? If so, how?

  • Comment number 7.

    This article would be easier for the slower among us if SME and IPO were defined.

  • Comment number 8.

    #1. stanblogger wrote:

    "Is not the answer to the problem some more quantitative easing?"

    No.

    Just as it is not the answer to lower interest rates.

    The British economy's response to reducing the cost or increasing the availability of money is to blow it on inflating the property bubble!!!! This is the disaster that got us where we are today so it is entirely illogical to see it as any form of solution.

    Rates must rise and lenders must also be dissuaded from lending on property - that is the solution. The government should implement my suggestion to the Treasury of the late 1990's and mid 2000's that is legally prevent banks from getting security on loans on property. (Above a multiple of the borrowers income of about 3 times.)

  • Comment number 9.

    #7. Stephen comben wrote:

    "This article would be easier for the slower among us if SME and IPO were defined."

    SME - Small and Medium sized Enterprises (anything other than a large company)

    IPO - Initial Public Offering (The first flogging shares to unsuspecting punters ideally - but generally to larger organisation that exploit you and with gigantic fees to city insiders.)

    And it is not about being slow at all - TLAs are just a way of excluding people! (Oops sorry TLA = Three Letter Acronyms) But you are right the use of jargon is wrong.

  • Comment number 10.

    I believe the answer is peer to peer lending for businesses. It already exists for personal lending and is proven to work by Zopa and Yes Secure and at lower rates than banks offer. This lending would mean businesses with money can profit from it more than keeping it in a business savings account, and those needing the money can get the loan they need to grown at a more favourable rate.

  • Comment number 11.

    Raising interest rates would match supply and demand for loans better.

    Big business should treat it's smaller suppliers better.

    The government should stop borrowing money and just create it, forcing banks to work for their/oops/our money.

    Better still, employ the unemployed and underemployed at minimum wage so 2.25M x 12K is around 27B, or 1 to 2% GD/NP.

    http://bilbo.economicoutlook.net/blog/

  • Comment number 12.

    @oblivion, if non-business private people are dis-borrowing/de-leveraging i.e. they are saving somewhere around the 5% mark...

  • Comment number 13.

    So it boils down to a willingness of the public to spend and create demand seen by business as the engine of investment and growth. Nose diving the public sector is not going to help then.

  • Comment number 14.

    Rather than seeing companies sitting on mountains of cash as a good thing, IMHO it's another symptom of too much spending power being taken out of the economy instead of being paid out in wages or pensions to create demand and hence jobs.

    Why isn't this money being invested in productive capacity here? Because companies can't make money out of manufacturing in the UK due to the rigged foreign exchange rate with countries like China so that their exports to us are below our cost of production, so as we're standing on the edge of the mother of all recessions (indeed without the extra spending & propped up GDP from Darling's stimulus package, we haven't actually got out of the last one yet!) Boy George's cuts this autumn look like driving UK PLC over the edge - who in their right mind would invest in the UK given the risk?

    A Treasury leak revealed that 1.2M public jobs will probably go - then the private sector needs to create 2.7M new jobs, invest up to £500 Bn and boost exports by a third JUST TO STAND STILL - if this is going to happen, the banks are going to have to lend massively more than they are and companies must start throwing their mountain of cash at new capacity. Given the lead-in time for investment to feed through to jobs and production, realistically the ConDems only have until the spring to turn this around - if there are not clear "green shoots" by then, there's no way that the Parliament won't end with the UK PSBR having gone up, not down and we will be firmly in the grip of a depression.

    Meanwhile the projected cuts in spending point towards a massive wave of job loses....

    So are businesses mad to sit on their cash? Are the banks just driven by the personal greed for their managers? Not that I like any of them, but they seem to be behaving quite rationally in a free market economy - Cable's grumbles smack of scapgoating to me - to produce a change in behaviour the government needs to change the balance of interests in the market to create a climate for growth, which they are not doing.

    The elephant in the room is the rigged trade imbalance that is the root cause of the lack of profitability in UK production that in turn depresses GDP, employment and investment. Whether you're a socialist, a liberal or a conservative, where is the sense in clinging to libertarian "free trade" dogma which itself is a bitter irony, given the total lack of freedom of either the Chinese semi-slave worker or the British people denied gainful employment and loaded with debt.

    THERE ARE GOOD REASONS WHY THERE IS VERY LITTLE INVESTMENT GOING ON - WE MAY NOT LIKE THEM, BUT THEY ARE A RATIONAL RESPONSE TO A LUDICROUS SITUATION.

  • Comment number 15.

    What caught my eye was this 'A third don't use formal sources of outside financing at all. For the rest, it's bank debt they mainly rely on". This means credit cards and overdrafts in other words. It is extraordinary that both consumers and SMEs (less that 500 employees is the measure) do not use structured fianance (term loans paid back regularly by installments at various rates of interest depending on the risk). Consumers do this for mortgages and cars but little else. And businesses not at all.

  • Comment number 16.

    First of all may I suggest that (most) politicians and BBC commentators try setting up an SME and running it for several years because you then may have some grasp of reality and thus stop uttering banal pontifications about solving the 'problem'.

    The reality is that there are too many SMEs out there that don't make a profit but just about survive and who cannot get access to finance and thus sit in the 'living dead' zone just about making ends meet.

    The problems run deep exacerbated by the tax and spend policies of the past 15 years and the vast over-reliance on public spend to prop up many SMEs who shouldn't be there.

    If the majority of the horses (SMEs) are knackered (can't grow) it doesn't matter how much water (finance) you bring to them.

    The reality in the UK is that it's relatively easy to set up a business but very difficult to sustain it with any return. Taxation and employment policies just make it doubly harder as do the various distortive subsidies.

    Our business has been going eight years - statistically that means we're the 1 in 10 that survive this long.

    Would I recommend setting up an SME in the UK to anybody? Hell no. Certainly not now. Don't borrow a penny (the days of getting it on credit cards are long gone). Banks - don't make me laugh.

    Get a job in the public sector. Oh - you can't anymore. Whoops.

    I guess non-profit making social enterprises then? That'll do it. Sick joke.

    Too much finance/property, retail, construction and NFPs/charities. Too few of the innovating making-doing things. May be in a generation we could rebalance with prescience. Then again, may be not.....

  • Comment number 17.

    The current situation goes back to the decision to bail out the banks and the rationale that was put forward...none of it true. Basic failure of economics and understanding of the national economies are at the heart of the problem. They can't or won't undo the transfer of wealth from the middle class to the wealthy but reducing that personal wealth of the middle class is the underlying cause of the economic situation. The ruling class believe that they are most important and in times of crisis they protect themsevles and the results are plain to see. The decisions of two years ago are the cause of the problems of today. The criteria for loans do not recognize small business as a good venture and truthfully they go under more than go forward but that is also part of the economy of a nation. Basically , the leaders and the bankers took care of themselves and they haven't a clue on how to get out of the mess they have created. When the reasoning is wrong, when the approach is wrong and the decisions on policy are wrong, this is what you get. The warning is about the separation of big business and banking from governmental decision making and if that is not resolved, and it has not, one can only look to repeat performances. The government and the bankers want everyone to forget the betrayal, but it will not be forgotten for some time to come and only when some actions compensate the middle class for their losses as well and the banks are returned the bad loans the governments assumed in the name of the people. Large businesses have cash because people are not buying and they are not buying because the governments have given them nothing to believe that things will actually improve. Rewarding banks for gambling aways depositors monies does not instill confidence in the economy. On a more visceral level....no one was held accountable and blame was never assigned and that lack of justice contiues to turn in the bellies of the people. That axis is not to be found on a chart.

  • Comment number 18.

    1) Interest rates will not be raised anytime soon. This is solely to help banks raise capital and prevent bankruptcies on a scale yet unseen. Nothing to do with controlling inflation or determining the value of sterling.
    2) Banks are being told to increase their capital reserves.
    3) Banks know the recent stress tests were a farce but welcome the confidence booster raising share prices pumping up asset values on decidedly weak balance sheets.
    4) Companies both large and small are playing a waiting game, for what they're not quite sure yet.
    5) UK private and commercial debt is still far too large and will be for many years.
    6) Public deficit and debt is a mountain too big to climb, it will never again be in surplus, we don't have the infrastructure to finance ourselves even at a basic level.
    7) Government austerity is a foolish attempt to appease ratings agencies - not working in Ireland is it. Also a Tory philosophy that they've been given a perfect excuse to go wild with.
    8) Mass unemployment to come will destroy consumer confidence/spending.
    9) Commercial income is declining, I'm seeing it everywhere in my work.
    10) Controlling inflation is NOT a priority.

    These points are all inter-connected and that's why the money merry go round has ceased. I'm not saying I agree with all this but this is how UK plc is functioning at the moment and unless something radical happens (alien invasion anyone) this is how it's going to be for some time to come. The alternatives would be too severe on the populace for any government to contemplate so the pain to come is mild compared to raising rates and/or forcing banks to lend as only the financially very weak will fall in this situation. It's a hope, pray and wait game, nothing else.

    I see no ships only hardships.

  • Comment number 19.

    #18. NorthSeaHalibut wrote:

    "1) Interest rates will not be raised anytime soon."

    See my #8

    I repeat unless and until interest rates are raised anything approaching normal economic activity cannot resume. I think you are in fact agreeing with me from the other direction.

    The Catch 22 of the private debt mountain has to be chopped down to size - that can only happen when the banks have built up sufficient reserves to sustain the gigantic losses on defaults and crashed asset values. However unless and until this (the excess private debt) situation is resolved nothing much can improve - sic. we are all Japanese now.

    I think the banks have enough money NOW. But they are scared and furthermore want to retain their bonuses and absurd bloated salaries so they will not act. They must be forced to act. Putting up interest rates will force them to act. Then and only then can the process of debt deflation being and only by beginning can it complete and only then can economic conditions revert to a situation where real economic activity is possible. This is what will happen - it has happened in every similar situation in history and it will happen this time. Delay will compound the errors made by the economists. We must get rates started on their way up to deflate private debt in a controlled manner and above all no increase in property debt can be permitted for at least fifteen years.

    Public debt is an easy problem to solve in comparison (as the public sector can raise taxes and reduce expenditure in ways unavailable to private individuals.)

  • Comment number 20.

    The problem for SMEs could be solved IF they could hang onto more of their profits , ie keep them in the business .So they didnt have to borrow to expand ( or weather a bad time ) because their own money was waiting .
    A sole trader finds all his business' profit is treated as personal income ,maybe landing him in a high tax bracket . He cannot salt away some profits to use for future growth . It is all traeted like he spends it on himself .
    A limited company is better off, in that personal tax rates only apply to money the directors take out . But the money retained in the business is still taxed .
    Perhaps SME s could have a ' personal allowance ' ,the money safe from tax until taken out of the business .

  • Comment number 21.

    re #18
    Not sure the low interest rates are working though. It appears to me - could be wrong, of course (only two brain cells and no knowledge of business) - that serious money is dashing off all over the place except into banks' coffers. Apparently copper is starting to zoom upwards again, following a bunch of other commodities that are hot on the heels of gold.

    I'm puzzled why the complainers about fiat currencies don't also complain about low interest rates. An element of funny money got us into this mess and the Governments of several developed nations seem to want to keep the funny money thing going.

    Not sure, either, that companies are playing a waiting game. Very interesting interview with Mark Price of Waitrose on BBC R4 'You and Yours' today, and a good lesson in business growth for all who post on this site and have trouble with the concept.

    SME's can't really play a waiting game, especially if they are start-ups as most fail in the first year. You've got to hit the ground running these days and keep on running.

    I think some of your points, NorthSeaHalibut are good on first sight and worthy in isolation, but are somewhat contradictory when taken together. For example, Cable acknowledged today that when talking about getting banks to lend was no good if existing borrowers were paying off loans and potential borrowers were put off by interest rates or the economic climate. On another point you say inflation is not a priority but it causes unemployment too, and our current inflation is not money supply led. People do not have money to spend, and more inflation will mean they have less to spend.

  • Comment number 22.

    I’m a self employed Joe with a small business, and for what it’s worth here are my observations:

    Although those people with a successful business are not borrowing money, because of the terms of loans and the interest rate they are being asked to pay.

    Although those people with an unsuccessful business want to borrow money in the hope they will survive, but are being refused further credit, because the bank believes that ultimately they will default.

    From what I’ve seen, any business that hit this recession with high borrowings, has, or is, running into trouble. Conversely those that haven’t are surviving intact.

    Same applies to individuals, those running high credit card debts are being bled to death for example, with the average rate (I’m told) being around 25%.

  • Comment number 23.

    One of things that always tends to surprise me is this:

    If you are a small business, you operate for the purpose of making a profit and thereby making a living.

    The less interest (on borrowings) you pay, the more profit you make.

    Why pay interest (which is a bank’s profit) at the expense of your own profit, if you don’t have to.

    Trading is tough at the moment, it’s hard enough trying to make a profit, let alone make a bank’s profit (in the form of interest paid) as well.

    As previously mentioned, all those that are surviving with a small business that I know, are the ones that aren’t being bled to death by their bank.

    Economists seem to forget that ‘interest’ is the bank’s profit, gained at the expense of your own business profit.

  • Comment number 24.

    Following from WOTW excellent response yesterday this blog reinforces his position on Velocity.

  • Comment number 25.

    Well Mr Cable, here's some fresh thinking on how to boost the cashflow to Britain's companies. How about the government running a larger deficit? That should solve the fundamental problem which you are grappling with but have not realised yet: the money supply is now too small.

  • Comment number 26.

    Re 'QE'~~~I am afraid that the monetary tranmission mechanism is not working. MNCs do not need the flow of funds and the smaller firms are barriered for many of the reasons mentioned in contributions to this blog.

    Those of us involved in sustaining and growing the Greater Cambridge High Technology business cluster are in near despair as we watch innovation come under threat as funding dries up and clever scientists and enrepreneurs look to go West to Boston or Silicon Valley (AGAIN!.

    All of this in a commercial financial environment where the top 15 global technology companies sit on a cash pile estimated by the FT to be in excess of $350 billion.

    Where in the name of the Good Lord do politicians think future economic growth and UK export potential is to come from with this prevailing UK under-investment problem?

  • Comment number 27.

    Dempster

    You may recall I have made mention to one of the tax distortions in that businesses can net interest expense (on loans) against taxable profit (cash generation) in complete contrast to the (double/triple) taxation on dividends (cash distribution) for example. It's why private equity exists as an industry.

    Your point on the economic trade-off is quite correct of course but I think a lot of SMEs are only just finding this out.

    Thus the whole commercial sector is wrongly directed to lending for growth/acquistion (which ultimately becomes survival) purposes.

    This has to change otherwise problems just carry on in perpetuity. Osborne has made mention of this but it's difficult to change such is its endemic nature. But change has to start sometime...

  • Comment number 28.

    http://www.co-operative.coop/enterprisehub/what-is-a-co-operative/

    This is one possible solution to the UK's predicament ... if the government is serious about community then when is it going to put its weight behind some of these projects and make it easier and encourage the setting up of similar projects.

    Trying to attract foreign investment to the UK has succeeded ... but the result is for all to see - the foreign investors are sitting their with cash not sure whether to wait and seek further exploitative opportunities ... or to disinvest in the UK and go somewhere else.

    I find it hard to understand why successive UK governments see the prospect of attracting further foreign investment and globalisation as the preferred solution for improving the UK's economy.

    Government policy is just ... 'Goondog GDP Trillionairing'.

    I think that Vince Cable has good ideas ... he is just stifled as how to implement them.

    the government has to set out a deal for businesses in the UK for those with and without investment and say this is how your business can succede in Britain and break up the monolpolies but your business must:

    - be long term investment
    - employ unemployed British workers and re-train them
    - set out what your business can do for the UK ... and we'll set out what the UK can do for your business

    Do we have anyone in UK government with any real idea how to move this all forward ... like sometime ... NOW?


  • Comment number 29.

    #21. At 00:12am on 27 Jul 2010, Up2snuff wrote:
    "re #18
    I think some of your points, NorthSeaHalibut are good on first sight and worthy in isolation, but are somewhat contradictory when taken together."


    That's exactly my point and why things are as they are, every indicator is pulling against another creating instability suggesting meltdown whatever future action is taken. I would clarify that when I say inflation is not a priority I mean at the moment, there are bigger fish to fry than mere inflationary pressures, unemployment is a price they are clearly prepared to pay. As Michael Caine said in Zulu "I see, it's still a holding action then is it?"

    #19. John_from_Hendon

    I can't disagree with a word you say John but government policy (Labour would be the same although less severe) is to cut, keep rates low and hope inflation and markets don't rally against them. In the face of not knowing what to do to avoid the private debt exploding in their faces the powers that be will try everything else first before hammering the final nail of raised interest rates inot our economic coffin. When rates rise the economy will be in the deepest brown stuff and this is the root cause of liquidity problems at the moment for reasons many have stated previously. John you may hanker for mass debt deleverage with courts crammed full of bankrupts and repossession summonses but it would be political and economic suicide until there is any reasonable sign of getting out of this depression - which there isn't.

    Look west, the future is coming and it aint pretty.

  • Comment number 30.

    #23. At 08:22am on 27 Jul 2010, Dempster

    This is a good point and so right. But it is every contact with the financial industry that I have had where I feel the fees are exhorbitant. They are the first to tell us that the public sector needs to sqeeze out inefficiency.

    Maybe they should look in a mirror. With fees at >£200/hr, their market is industry and the wealthy. If they believe in the cuts, they will realise the number of companies is going to shrink and the wealthy will fade also. They may be raking it in now ........... but maybe they got so much already they just don't care! I wonder ....

    In these times, we all need to look at our expenditure to see how economies can be made. The ConDems have set the tone for the next few year's at least; so I now try not to spend unless I have no real option, if I consider the expenditure brings me some benefit; the nice-to-have items are going.

    Doesn't do much for industry and shops I know, but the family comes first.

  • Comment number 31.

    #29. NorthSeaHalibut

    In the end at some point in the future the debt problems (both the easy public or the much more difficult private) will evaporate one way or another - that is the lesson of history.

    As with holes - The key is to stop digging. Whilst we continue to pile up debt the debt problem will only get worse and drag us further down and elongate the depression.

    A steady flow of bankrupts is actually not happening bankruptcy hasn't significantly risen - which it should done if policy had been correct. I return to my idea that there should be non-financial pressures on lending on property - just like when there was too much HP in the past the door was slammed shut at some point and that should happen now with property debt. This will start the process - which we must undergo - the sooner we start the quicker we will really recover!

  • Comment number 32.

    @12 RNG

    Not sure I get it. If individuals are diseleveraging how that affect the current account deficit, other than it should be reducing, where is the money coming that permits private businesses to net a financial surplus while the UK has a current account deficit?

    Or is it that the UK now has a trade surplus?

  • Comment number 33.

    #31. At 09:13am on 27 Jul 2010, John_from_Hendon

    Why single out property debt? Really its all debt, isn't it?

    But its debt that drives the financial sector. So who is going to do it? Not our current brave pioneering politicians!

    It all comes back to control and oversight by individuals who have the correct knowledge and know when to call time. I doubt anyone knows what level of debt is supportable. In good times more get away with it, but as Dempster has pointed out, when times are tough ANY debt can be a disaster.

  • Comment number 34.

    Creative thinking is the key that might unlock the door. For viable and growing small and medium size businesses with a good track record, borrowing to support cash flow is reasonable and banks are probably knocking on the door to lend to them. Creative thinking around the means of raising investment money for expanding existing businesses and for start-ups is required and there is a great deal of scope for it. Local banks, if they were allowed to exist, could do worse than follow the example of their 18th century forebears until legislation was introduced that put them out of business. Local banks gave us the industrial revolution after all.

  • Comment number 35.

    The country needs the average person on the street to spend money. However the average person has no cash. They need to have spare cash but they are can’t keep what they do get. The average tradesperson must be allowed some beer money and the tax regime is too tight. Cash oils the economy and we should not forget it. The money lenders only have us in their grip because we pay too much tax and can’t keep what we earn.

  • Comment number 36.

    Stephanie: "The big point we should never lose sight of is that big corporate financial surplus I mentioned at the start: it is little exaggeration to say that what happens to that money, and the money sitting on bank balance sheets, will in large part determine not just this government's future but that of the entire UK economy."

    Absolutely spot on. :)

    The profit from UK plc has gone somewhere, and has not been re-invested. Call it balance of payments deficit, call it globalisation, call it Tax-Havens, call it whatever you will, but it looks to me like conquest and enslavement.

    We have reached the point where the little people don't have any money left, and both they and their Government have sold everthing they owned, spent everything they had saved, and promised their projected income for the foreseeable future, and it is becoming clearer and clearer to this mushroom where their money has gone.

    The provision of credit is a service, and a commercial economy can work with banking in a symbiotic relationship. But when the symbiotic relationship becomes parasitic, the host dies. SME's who can't get credit, or private individuals who cannot get an unsecured loan from a mutual lender for less than 18% are locked into zero growth.

    At the risk of being a useful fool, it looks like a forced re-distribution of wealth might be on the cards. Anyone for a retrospective "globalisation tax"? (Like the US is trying to squeeze out of BP?)

    The alternative, historically more reasonable perhaps, is that the corporations, having taken on the governance of the world, are going to find that they need to re-invest a larger slice of the pie to keep their workforce alive. Every conquering race eventually ends up being less despotic and more democratic. It just takes mass starvation, social unrest and large scale emigration to explain it to them.

  • Comment number 37.

    I thought QE was supposed to have solved this issue, if not where did all the money go?

  • Comment number 38.

    19. At 10:46pm on 26 Jul 2010, John_from_Hendon wrote:
    ======================
    Yup.

    My suspicion is that interest rates are artifically low to prevent too many mortgages from defaulting. In my conspiracy theory moments, I presume that this is because the UK lending banks assets are largely tied up in private property, and if property prices fall, so do the banks share prices.

    This has indicated to me that mortgage-lending banks are still overstretched, (like their customers).

    Now...they may be thinking that if we can hold our breath for long enough, natural inflation will devalue property prices in a controlled manner. But without rising wages, I don't see how that can happen. Inflation will drive wage demands, wage demands will drive unemployment, and spiralling unemployment will cause the crash that they are trying to avoid.

    The only solution is a radical re-distribution of wealth. That will probably involve writing off lots of bad debts. Which would be bad for everybody involved, but will happen anyway if we get back to stagflation. Or it might involve siphoning off the imbalance from the parasites and paying back some of their profits to those whom they have enslaved. (Ain't gonna happen!)

    To quote a donkey from a well-known satire..."Life will go on as it has always gone on—that is, badly."

  • Comment number 39.

    19. At 10:46pm on 26 Jul 2010, John_from_Hendon wrote:

    I think the banks have enough money NOW. But they are scared and furthermore want to retain their bonuses and absurd bloated salaries so they will not act. They must be forced to act. Putting up interest rates will force them to act. Then and only then can the process of debt deflation being and only by beginning can it complete and only then can economic conditions revert to a situation where real economic activity is possible. This is what will happen - it has happened in every similar situation in history and it will happen this time. Delay will compound the errors made by the economists. We must get rates started on their way up to deflate private debt in a controlled manner and above all no increase in property debt can be permitted for at least fifteen years.

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

    No, the banks do noy have enough money now. They need to repay they owe £800bn in 2012 and they still have the haircuts to make on sovereign debt.

  • Comment number 40.

    What if the B of E used its QE money not to buy Gilts but to provide funds to a bank {Northern Rock ?}. These funds are only for loans to small & medium sized businesses and/or mortgages on very competitive terms.This wont solve the problem directly, but large numbers of customers moving from RBS Barclays etc to {Northern Rock?} should make the banks rethink their position and start lending more freely.

  • Comment number 41.

    36. At 09:43am on 27 Jul 2010, PuzzledMushroom wrote:

    "The profit from UK plc has gone somewhere, and has not been re-invested. Call it balance of payments deficit, call it globalisation, call it Tax-Havens, call it whatever you will, but it looks to me like conquest and enslavement....

    At the risk of being a useful fool, it looks like a forced re-distribution of wealth might be on the cards. Anyone for a retrospective "globalisation tax"? (Like the US is trying to squeeze out of BP?)"

    Funny you should say that..

    In addition to a 'Tobin Tax' (which is the ideal way to re-distribute wealth back from the rich to the poor and 'middle classes') I've always thought a 'globalisation tax' on imports would be a good idea.

    This could take the form of an import tax, being a miniscule percentage of an item's value times the distance that item has travelled from place of production in miles (or km, if you prefer). So goods coming from China would be hit hard – so much so that it might actually be cheaper to manufacture them in the UK.

    Protectionism? Not at all! Just doing our bit for the environment and our green credentials....Politically this could be winner.

  • Comment number 42.

    If they man the presses again - I owe Dempster £10.

    Surely they won't resort to that old trick - it will be Japanese decade confirmed.

  • Comment number 43.

    Politics by news headline as usual

    Cable - banks must reduce risk, no longer engage in the most risky areas blah blah

    Cable - banks must lend more to small businesses otherwise we will tax them to death

    Vince: it may have escaped your notice but SMEs tend to be the more risky corporate loans. So which of the govt diktats are banks supposed to obey reduce risk or lend to risky borrowers (sorry I mean SMEs).

    Then of course look at Stephanie's blog - maybe one of the reasons corporate loans are not at an all time high is that corporates want to reduce debt.

    I have helped many SMEs, bought and sold a few. Even now there is no difficulty getting finance for the right company. Of course each bank has its own definition of what is "right" but in most cases the criteria are pretty sensible. What is very difficult to get finance for is a new start up or a company that has only been trading for a year or two. That is where the funding problems are

  • Comment number 44.

    14 richard bunning

    Your comment about `Chinese semi-slave workers' is quite offensive. I agree that China has different ways to us but they also have a different history. The conditions that workers have in China is not much different from many of those experienced elsewhere in the Far East so why should they be pilloried? But at least they do have work and their conditions are improving. This is more than can be said about the UK.

    It has been pointed out before that the UK is a member of a free trade union called the European Community. The UK is also part of the European Economic Area that provides trade preferences within all of Europe for manufactured articles made in other European countries.

    This has been a practical measure that has enhanced economic development both here and on the continent. There is no reason to throw the baby out with the bathwater.

    The European Commission, despite its many faults, actively monitors the international trade for products being dumped at values below cost on European markets. Local industries are active in supporting this activity. Many classes of product are being constantly reviewed and in mnay cases anti-dumping duties are being imposed on imports.

    All of this activity is conducted within the terms of the World Trade Organisation. Currently the EU is conducting a trade war with the USA over the Byrd amendement which provides tax privileges to US exporters. This means that certain US manufactured articles are subject to a punitive additional import duty of 15% over and above the standard import duties.

    In my view there is a case for the European Union to enhance trade within its borders thus excluding externally manufactured articles. This has to be done carefully otherwise exports from the EU to the outside world will suffer punitive sanctions. However, the development of local preferences within Europe will go a long way to combatting the high levels of unemployment and associated welfare costs.

    Lastly, we should not lose sight of the fact that the real problem is not the conditions of Chinese workers but the levels of debt within European economies which were joyfully incurred during the good times. This is a self-inflicted injury which needs fundamental surgery and life-style changes to resolve. We are debt-obese societies: we need to take ownership of our condition before we can resolve our problems.

  • Comment number 45.

    This is what happens when you base your system on contradictions. All the 'fixes' merely create bigger and more unstable contradictions.

    This will continue and the media will be 'puzzled' by it, MP's will be 'confused and concerned' by it - but it's not confusing if you accept the fundamental logic that reveals this system is going to burn itself out eventually.

    I suppose part of the problem is you're all still listening to the people who failed to see part 1 coming - and you intently listen to their version of 'part 2'

    Maybe try listening to people who predicted part 1 for a change.

    "When gold was at $275 per ounce in 2002, Celente said the price had bottomed and in 2004 forecast the beginning of the "Gold Bull Run." Since that time, with pinpoint accuracy, he said when, why - and how high - gold would go. "

    http://www.trendsresearch.com/gerald.html

    ....or you could go back to listening to the same old matnra being churned out by the media - who in the main are controlled by the same people who are so keen to retain the system as it currently stands. (BBC excluded? - I'll let you decide)

  • Comment number 46.

    #7 and #9. Jargon can be useful if it is explained. All writers should use the full expression folllowed by the acronym the first time they mention it in each article. After that, three lettered acronyms (TLA) are very useful.

    Stephanie, you write very well and very interestingly but some of us have no background in finance or ecomomics - yet we want to understand. For example, you wrote "A third [of SMEs] don't use formal sources of outside financing at all. For the rest, it's bank debt they mainly rely on." What are these "formal sources of outside financing"? Where else do SMEs go for their borrowing except banks?

  • Comment number 47.

    38. At 10:03am on 27 Jul 2010, PuzzledMushroom wrote:

    .......The only solution is a radical re-distribution of wealth. That will probably involve writing off lots of bad debts. Which would be bad for everybody involved, but will happen anyway if we get back to stagflation. Or it might involve siphoning off the imbalance from the parasites and paying back some of their profits to those whom they have enslaved. (Ain't gonna happen!)
    -----------------------------------------
    Your solution is self-fulfilling in that non payment of debt or writing off of debt is re-distribution of wealth.

    Will it happen? Do you know how easy it is to walk away from debts nowadays? The system is not punitive and even bankruptcy is becoming the fashionable way walk away.

    Not all company and personal debts are being paid down you know.


  • Comment number 48.

    Is there a difference between a haircut and a close-shave in banking terms, or in any other terms for that matter? Discuss.

  • Comment number 49.

    Perhaps i'm being naive here but won't this problem sort itself out without direct interference over time as a result of inflation and low interest rates?

    The crucial factor is surely confidence. If companies are sitting on cash [due to low confidence] then they will know that cash is actually dwindling/decreasing due to the effect of inflation and low interest rates.

    Whilst rates probably won't stay (as) low for much longer, there will probably remain a disparity between interest and inflation for some time. On paper this will equal an incentive to invest the cash surpluses, or face devalued supluses over time. Obviously this becomes more acute over a longer period.

    If the above is even remotely accurate- rather than focussing on persuading companies to spend now (with the risk of creating a bubble), don't we need to set the foundations to ensure that the capital is ultimately invested in this country? i.e set out low taxes and incentives for companies to invest here to prevent the cash surpluses moving abroad?

    On the face of it your article reads the situation in quite a positive light.

  • Comment number 50.

    Vince Cable's pretence that restricting bank bonuses and dividends will generate new lending is disingenuous populist hokum. Only if bank lending were being constrained by banks' capital could his theory apply in practice. But banks' capital is clearly very adequate ... all our banks sailed through the recent EU stress tests.. so sorry, Vince, I just don't buy it.

    Let's not forget that an acceleration in outlays on plant and equipment normally only takes place after an acceleration in exports which isn't yet convincingly in place. What we chiefly need is less tinkering from HMG but a continuation of the low base rate and perhaps some more QE, which will incidentally help to negate the recent unhelpful bounce in the sterling/dollar rate.

  • Comment number 51.

    #41 - re:globalisation tax
    I used to work as a senior design engineer for a Japanese television company when millions of sets were made here in the UK. One of the rules we tried to follow was to have at least 40% of the value of the contents of a TV being "locally sourced" ie made in Europe.
    One of the key components, the RF tuner, was bought in from Germany... until we discovered that it was made in Japan (as parts) shipped to Hungary for assembly and only then shipped on to Germany for test and having a label attached. This last action qualified it as being of European origin.
    If something so mundane could get around the spirit of the rules, I'm sure big businesses today could get around them in exactly the same way.

  • Comment number 52.

    One of the main sources of help for SMEs and micro businesses have just had its funding slashed. I refer to the Regional Development Agencies such as Advantage West Midlands, along with the Business Links across the country. I work for BL in Birmingham and last year the programme that I work in helped to leverage over £15 million from various sources for over 120 companies. This cost the tax payer £250K and created over 500 jobs and safeguarded a further 250. I reckon that to be very good value for money.

    When the lights start going out over Birmingham, the Black Country, Shropshire etc, we know who to blame.

  • Comment number 53.

    The whole point of getting a bank loan is so that a business can invest in new equipment and new staff so they can make a profit! Of course, banks need to be careful who they lend to, which is why we got into the current mess in the first place. Now, however - as Cable rightly points out - they are being overly cautious.

  • Comment number 54.

    Surplus value with no productive returns to invest in equals hoading of cash equals recession.

    Increasing asset prices & artifically inflated profits is just fictious capital trying to keep the Ponzi scheme going.

    The game is up!

  • Comment number 55.

    Stephanie
    Your article seems to draw on figures taken across all sectors of the economy. The one striking thing about the recession was how a few sectors (banks, construction and motor) suffered terribly while others were hardly hit.
    As a SME in the construction industry - we saw turnover drop over 50%. The developers at the top of the chain have managed their cash by refinancing and selling off surplus stock (before the crash they would build blocks of flats speculatively - now they are built to order).
    It would be interesting to see your analysis repeated for the worst hit sectors.
    After surviving the storm orders are returning - http://www.bbc.co.uk/blogs/thereporters/stephanieflanders/2010/07/a_pleasant_surprise_on_growth.html - turnover doubled last month- the last 2 months have seen a surge in orders - from our perspective these seem to be in part people putting off purchases until after the election and in part delayed orders due to the poor weather at the beginning of the year. Also don’t forget the Olympics will be starting to ramp up now after the shells of the buildings have gone up)
    This surge has put a strain on the cash reserves and the bank have been less than happy to help. From our perspective the banks have always been "prudent" - never lending without a means of recovering the funds by means of second charges, personal guarantees etc - Now after 2 years of supporting the business these funds are gone.
    A government backed scheme to help fund working capital for SMEs with firm orders from reputable companies would be a welcome addition.
    Tim


  • Comment number 56.

    #39. PetersKitchen wrote:

    "No, the banks do not have enough money now. "

    I still say they have - if they hadn't they would not be paying the absurd salaries and bonuses, would they - or are you saying that the management are completely incompetent?

    What is critically necessary is to 'prevent' then banks from investing in the wrong things. Property price increases is just wasting money. They are not producing any more land so paying more for it is just totally inflationary and daft - it is just devaluing the currency. Or in summary no more mortgages fro a while until business is well funded!

  • Comment number 57.

    50. At 11:33am on 27 Jul 2010, taudelta wrote:

    ........... But banks' capital is clearly very adequate ... all our banks sailed through the recent EU stress tests.. so sorry, Vince, I just don't buy it.

    Is it? Did they? They have adequate capital to deal with today, what about tomorrow?
    They sailed through the stress tests -tests designed and fixed to ensure they passed.

    "sorry vince i dont just buy it" - agh the crux of the problem, nobody is buying anything they are saving, paying down debt or defaulting.

  • Comment number 58.

    The real reason that the larger companies have lots of cash and the SME's struggle for cash is because the larger companies take forever to pay SME's. Most SME's struggle for cash flow because they have to pay their employees, suppliers and tax whether they get paid or not. I have found that the banks will lend for investment under the EFG scheme (although it is very expensive) but not for cash flow purposes. When companies are taking 120 days+ to pay their smaller suppliers it is no wonder SME's are always stuggling for cash. An innovative solution would be for all Companies to have to settle their invoices within 60 days without fail, then well managed SME's would be better financed and more attractive proposition to lend to for expansion or investment purposes. It is not the banks that need strong arming it is the culture of late payments that needs eradicating, then UK PLC cash flow will improve for everyone.

  • Comment number 59.

    "What we chiefly need is less tinkering from HMG but a continuation of the low base rate and perhaps some more QE, which will incidentally help to negate the recent unhelpful bounce in the sterling/dollar rate."
    Really. It seems to me that less tinkering from HMG is what led to the banking system collapsing and requiring a biblical level of bailout. The effects of that are still being felt to this day in the form of sovereign debt levels being too high. Next year the banks have to repay £390bn, thats double what they made at the height of the boom, so whats the chances they will be able to pay it back? You suggest the printing presses run off a little more, but that will simply lead to inflation, and a risk of hyper inflation in the fullness of time.

  • Comment number 60.

    Commodities, money & hoarding.

    Capitalism is based upon commodity production: things are produced for sale not for immediate consumption.

    Exchange has implications for production.
    The market is a place in which the labour of individual producers is brought into relation with that of other producers, and so of society as a whole.
    The market is a particular way of allocating social labour, appropriate to a particular kind of society in which individuals work independently of one another to produce goods for the use of others.

    Thus the relation between individual producers in a commodity producing society is not directly recognised as a social relation; the producers do not get together to plan production as interdependent members of society.
    Instead the social relation between these producers takes the form of a relation between things, between goods they exchange for one another.

    The exchange value of commodities, is not, therefore, merely a relation between inanimate objects, but it expresses the relation between the labours of individuals who have produced those commodities.
    Exchange relations are a form of social relations of production: the market regulates the interdependence of producers who appear to be working independently of one another.

    Exchange presupposes the recognition of private property rights.

    The imperatives of commodity exchange give rise to money.
    It is exchange that gives rise to money and not money that gives rise to exchange.
    The universal equivalent emerges out of the development of exchange itself.
    Money is itself a form of social relation.

    The functions of money:

    1. Measure of value – the commodity in terms of which the value of other commodities is expressed.

    2. Means of circulation – in order to exchange one commodity for another the value of the first commodity has to be realised in the form of money and the money then realised in the use-value of the second commodity.

    The circulation of commodities has the form C-M-C.
    This is quiet different from the simple exchange of use-values C-C.

    The separation of purchase and sale introduces the possibility that the whole system can break down: a commercial crisis, for every sale is conditional on previous purchases since the buyer must have money.

    3. Means of purchase – while commodities enter and leave circulation, money remains within circulation.
    Thus a given quantity of money is necessary and sufficient to maintain the circulation of commodities.

    Many economists (Monetarists) believe that the quantity of money determines the level of prices. Marx argues that with commodity money it is circulation that determines the movement of money and not vice versa, hence it is the level of prices that determines the quantity of money required.

    Token money can replace commodity money.
    With token money, if too much money is issued the currency will be devalued and price will rise.

    Hoarding increases the quantity of money required.


  • Comment number 61.

    The main business of a bank is survival.

    The banks apparently have money that they are not lending. But a significant part of banking is to lend money. Also, the banks have passed their recent stress test. At the moment they can borrow money very cheaply, but it is expensive for everyone to borrow from the banks. So why aren't they lending and making enormous gross profits? There must be a reason.

    From this a number of thoughts flow:

    1 The banks know that the stress tests were not a good indication of their ability to survive, so they are continuing to build reserves. The stress tests did not mirror the cfinancial conditions they expect to see.

    2 The banks are building reserves to survive very severe conditions caused by defaults in Europe and elsewhere that they believe are likely to happen.

    3 The banks expect that default rates will increase markedly in the future from the norm seen in the past and so have to loan money at a higher interest rate. This higher rate is unsustainable by many business as the bank is effectively demanding most or all of the profit. Businesses cannot afford to borrow.

    4 The banks are prepared to lend where they see a good business plan; but they have changed their definition of good and now need to see a business that is very resilient. ie. The company taking the loan must not have 'a single point failure'; one market.

    5 The banks are expecting very harsh times, unlike anything we have seen; they have learnt from the 30s and are preparing for a re-run soon. So why lend to a business where they expect it to fail?

    6 The banks can buy government bonds and earn a return that is risk free, so why loan elsewhere if hard times do come.

    7 The banks are altruistic and do not want to see an even higher debt mountain [ No even I do not believe this one!]

    Could any of these suppositions be correct?
    Which are nonsense?
    Would anyone like to suggest alternatives/additions to the list

  • Comment number 62.

    53. At 12:20pm on 27 Jul 2010, Ed Hardy wrote:

    The whole point of getting a bank loan is so that a business can invest in new equipment and new staff so they can make a profit! Of course, banks need to be careful who they lend to, which is why we got into the current mess in the first place. Now, however - as Cable rightly points out - they are being overly cautious.

    - I agree that it is a case of being overly cautious, but as we've seen with the Sheffield Forgemasters deal, the cut can help employment. Obviously different circumstances but I think it's worth pointing out.

  • Comment number 63.

    and as we consider these lofty matters...... good companies go to the wall while large businesses wring there hands with joy and cash. Does anybody ever speak to the large number of sme's short of cash, starved by the banks. Answer No. Does Vince Cable really give a dam now he is reborn as a Tory. Answer no. We can't force banks to lend, we must make it worth there while, and remove some of the risk they are clearly adverse too. They never lose do they, we just bail them out in the end anyway.

  • Comment number 64.

    60. At 1:04pm on 27 Jul 2010, duvinrouge wrote:

    Commodities, money & hoarding.
    - - - - - -

    I wonder if you could go just a step further for me in your post please:

    Am I interpreting your post correctly as saying the Government needs to be in deficit to make more money available now?

    If so, does it actually matter if this is money from the sale of bonds, or money put into the economy by the government buying goods and services for the benefit of the country without increasing the country's debt. (Some will call this printing money). If this is the case, then it would mean an increase in taxes once employment starts to increase.

    Perhaps I have just misunderstood?

  • Comment number 65.

    I think that this article is somewhat confused Stephanie.
    "Put it another way: British businesses, taken together, saved enough last year to finance nearly 75% of the UK government's budget deficit. So, as a nation, we were able to come up with the funds to cover all but about 18% of that record deficit. We weren't quite as dependent on foreigners to come up with the cash as we often seem to think."

    We weren't dependent at all on them as we in essence bought our debt off ourselves via QE. I thought that you were aware of this

  • Comment number 66.

    As John Kay has argued very effectively, the large banks are in effect Utilities with Casinos attached.

    As far as I can see all of the money being pumped into the system is going to rebuild the balance sheets of the Casinos. SME customers of the Utilities will be very unlikely to see any of that money.

    Until we force a split between retail banking utilities and the proprietary trading casinos this situation won't change. We also unnecessarily risk more banking crises down the road.

    Let's regulate retail banks as the near monopoly utilities they are. If the casino banks want to carry on they should do so at their own risk, not that of tax payers.

  • Comment number 67.

    I run a small hotel in cornwall ,profitable but not profitable enough for any bank to remortgage to move the buisness on,regulations say I must improve but unable to get any interest as the banks want me to show I could service a loan if interest rates go to 12% If I had that much profit why would I need a loan .The loan required would not even buy the building plot ,a superb coastal location .Last year we employed 4 full time staff this year none as we try to be as profitable as possible whilst remaining alive .The refinance would provide work for local businesses improve the product and improve turnover ,all irrelevant in the eyes of the banks .We have to show we can service the loans at rates that would cripple most businesses,but it wasn't the defaults of businesses like mine that got the banks into trouble it was their own interbank lending on products they themselves invented yet did not understand .What ever happened to bank managers who understand thier local businesses thier requirements ,their risks and their ability to service loans .

  • Comment number 68.

    At the bottom end of the market the Government would be much better advised to match funds with business angels and the smaller institutions. If they did that they would be side-by-side with commited investors. The small loans guarantee scheme fails because even though the govt guarantees 75% of the loan the banks often take PGs off the owners for more than 25%. A fund of £250m (relatively small in terms of this sort of scheme) would make a huge difference.

  • Comment number 69.

    This excellent article demonstrates the folly of this kind of thinking …. [Unsuitable/Broken URL removed by Moderator]

  • Comment number 70.

    "Hoarding increases the quantity of money required." [duvinrouge]

    I agree with this - you could say a government sector deficit supports a private sector surplus. Failure to support the private sector's desire to save (hoard) means that it cannot save - though in practice the most powerfull agents in the private sector will continue to save at the expense of weakest, poorest and least powerfull.

    The BoE needs to be cashing government cheques, and the money introduced at the bottom 3rd of society to increase aggregate demand.

    Kind Regards
    Charlie

  • Comment number 71.

    49. At 11:14am on 27 Jul 2010, pawns_or_players wrote:

    "Whilst rates probably won't stay (as) low for much longer"

    Didn't you say that a year ago?

  • Comment number 72.

    As previously mentioned I’m a self employed working Joe, and have a small business. And unsurprisingly I know quite a few other Joes and Janes who are also self employed and/or operate a small business.

    Their question tends to be: how do we survive this recession?
    And none of the answers thus far put forward have been: try and borrow your way through it.

    Because as anyone currently witnessing the plight of the over-indebted will know; the chances of you borrowing your way out of this one successfully, are somewhat remote.

    And if you need further evidence, consider the average credit card interest rate, apparently now around 20%, with the BOE base rate at 0.5%.
    Why is it so high for those still paying?
    Answer: to make up for all those who can’t pay.

    I have the current misfortune of seeing a friend of mine gradually losing site of any hope of financial survival due to the spiralling minimum monthly payments on his debt.

    And when he defaults, which now seems almost inevitable, his debt will have to be written-off, and the cost of that right-off will be palmed off to others still trying to make it all fit.

    I think there’s a way to go yet before we hit the bottom, and given that the ‘bottom’ still seems obscured from view, increasing your borrowing at present would seem somewhat of a precarious method of going forward for the small business owner.

  • Comment number 73.

    54. At 12:23pm on 27 Jul 2010, duvinrouge

    Where have you been?

    I told you not to waste your time on those political blogs - much better you stick to the Economics ones as there is no grounding of logic in politics.

    Luckily I hear that the recovery is 'imminent' and that death by a thousand cuts will be 'good for us' - to rid us of that awful state stuff like health care, social work and education. Apparently they wasted all the money - the banks had nothing to do with it.

    Not long to go now - you'll notice that attitudes have changed somewhat and it's not hard to start a conversation on a bus these days, all you have to do is mention bankers.

    Still nobody has answered my basic question "where does the profit come from" - but you and I already know the answer to that one. Some make vain attempts - which I admire them for - the rest simply ignore it for they know they cannot answer.

  • Comment number 74.

    Isn't QE just giving more money to the wrong people?

    This has been posted a few times in the last 18 months:

    http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

  • Comment number 75.

    60. At 1:04pm on 27 Jul 2010, duvinrouge

    very nice - but so many fail to understand.

    I always explain that monetarists are like bad doctors - you walk in with a cold and they cure it by sealing up your nose.

    Attacking the symptoms and not the cause - which is why it never works. Clearly there are some who trust their doctor implicitly - even though you've been ill for 2 years now and it's not getting any better.

  • Comment number 76.

    You talk about the UK economy as if it were some tangible national treasure the Tate Gallery. There is no such thing as 'the UK economy'.

    The UK 'tax pot' more like.


    GC

  • Comment number 77.

    60. At 1:04pm on 27 Jul 2010, duvinrouge

    ...and you forgoet my favourite bit....

    Banking = M-M-M

    They lend money, they convert it to interest payments, they take back the principle.
    They've got it sorted, don't even have to bother with that 'covert to C' nonsense!

  • Comment number 78.

    62. At 1:35pm on 27 Jul 2010, DanishDuncan wrote:

    "I agree that it is a case of being overly cautious, but as we've seen with the Sheffield Forgemasters deal, the cut can help employment."

    ?????

    Where? - you mean the employment prospect of those in a rival factory owned by a large Tory donor?

  • Comment number 79.

    http://uk.reuters.com/article/idUKLDE66Q1AX20100727

    Success will follow and breed more success.

  • Comment number 80.

    72. At 3:24pm on 27 Jul 2010, Dempster
    "I think there’s a way to go yet before we hit the bottom, and given that the ‘bottom’ still seems obscured from view....."
    -----
    There is only one place the bottom can be if there is no visible mechanism for the economy to expand; that is a pretty complete collapse.

    If I could I'd get a market garden to grow and supply food, it will be the only thing left to do - grow food!

    The government are expecting industry, SMEs upwards to invest and generate jobs. It won't happen as you know. They will have to do it themselves. They are willing to bail out the banks, but the people of the country - no!

    I hope they learn soon, but sooner would be better. We need a latter-day Keynes.

  • Comment number 81.

    79. At 3:36pm on 27 Jul 2010, onward-ho wrote:

    "http://uk.reuters.com/article/idUKLDE66Q1AX20100727

    Success will follow and breed more success."

    Ah you're still my favourite Economic optimist - I hope you're still around when the end comes - I think you might make us all feel just a little bit better.

    I admire your determination and refusal to be negative - if only it was on another subject - I would be right up there with you on cloud 9.

  • Comment number 82.

    #79. At 3:36pm on 27 Jul 2010, onward-ho

    May I suggest that this is due to the initiatives of Darling et al. We have seen no effect yet from the Osborne measures.

    Maybe there is someone out there who reads this differently; if so, please could you explain?

  • Comment number 83.

    I respect a lot of the comments from people on this blog (esp. WOTW, Plamski, Dempster and one or two others who's names escape me) and have taken precautionary actions in case you are right, but how long can they continue this charade if things are really 'that bad'.
    Just found this http://www.thisismoney.co.uk/markets/article.html?in_article_id=510155&in_page_id=3 which is the type of article that will continue to feed people like onward-ho, but can they really hide 'how bad it is' for mcuh longer, as in several more years!?
    All answers and diverse opinions welcome.

  • Comment number 84.

    #64 SleepyDormouse

    I was just explaining Marx's thoughts on commodities & money to give a deeper understanding of hoarding.

    In times of increasing productivity & growth of the labour force I believe it is possible for governments to spend their way out of a crisis, Keynesian style - in effect borrowing from the future.

    But with the price of energy increasing in recent times & less peasants available to bring into the circuit of capital, I don't see a Keynesian solution.

    Indeed, even the huge deflation required may not be enough to restore 'true' profitability, because for capitalism to survive it must accumulate & it looks to me like the limits to growth have been (nearly) reached - peakoil, ecological crisis, fewer peasants.
    In short, less to loot.

  • Comment number 85.

    I find the original post a little worrying for a couple of reasons.

    One is that I now realise I don't properly understand the relationship between the private sector and the "foreign sector," so to speak.

    Second is that Stefanie implies that there will be pressure to create more debt, especially to SMEs, and that the reason why SMEs are not taking on debt is because banks don't want to lend it to them. This implies a neoclassical worldview that holds the same kind of misconceptions that led to policies behind the financial crisis.

    We need to deleverage, not take on more private debt. SMEs are not taking on debt because they do not want to on any terms. If this is not abundantly plain by now to even laymen, never mind economics editors, then there is not much hope for us really is there?

  • Comment number 86.

    #74 SeanBrosely - That link hits the nail on the head. Money needs to go to the average Joe.

  • Comment number 87.

  • Comment number 88.

    Three points worth adding:
    * It's always been clear that our country is neither 'in a mess' not remotely like either Spain or Greece. It's only deceivers who say it otherwise.
    * Banks get blamed by St.Cable for lending unwisely, and now for not lending unwisely. He can't make up his mind.
    * Stimuli of both quantitative easing and extra spending by government has been keeping company cash-flows healthy and taxes rolling in.
    The abrupt change of policy will slow the recovery from the Wall St crash, creating mass unemployment and static sovereign debt.
    Growth is the answer to both UK government and commercial debts.

  • Comment number 89.

    #84. At 4:48pm on 27 Jul 2010, duvinrouge

    --------

    Many thanks for your explanation and replying to me.

    You paint an uncertain and probably unpleasant future. So the current way forward is, in your view doomed, or at least in for a very rough time. Humans react badly to change like that; they try to blame others and end up squabbling.

    Self-sufficiency would be a good move for this country. Not necessarily a step back into the past, but the use of the knowledge we have by communities so they can survive without outside help. If one does go down, it shouldn't take everyone else wih them. [A community might be the size of a small country, I'm not thinking village size]. It would be good-bye to globalisation - I don't think I would mind about that, it has too many hidden and unrealised costs. We have a lot of unemployed and likely many more soon .......... sets one thinking ...

  • Comment number 90.

    Oblivion and duvinrouge,
    The modern version of Keynes is Modern Monetary Theory, and it uses Prof Godley's 'sectoral analysis' as it's heart. It seems to say that one of the best ways to solve this problem is to implement a proper 'Job Guarantee' program. This increases employment and therefor aggregate demand (more 'peasants' so to speak). Combine that with fiscal stimulus directly into low paid people's pockets through say increased Tax and Pension Credits.

    It says we should pay for it using 'deficit spending' which is 'creating money (from nothing)' and spending it. 'Debt Money' is already created out of nothing, but by convention the government restricts itself from spending it directly. Deficit Spending means the government does not have to borrow the money, and is not inflationary unless the economy is at full capacity.

    see http://bilbo.economicoutlook.net/blog/

    Kind Regards
    Charlie

  • Comment number 91.

    The problems facing SMEs could be alleviated if:-
    - Large Public Companies and others flush with cash offered to help struggling SMEs by letting them have surplus plant for nothing or very cheaply.Also cash rich companies should be encouraged to pay their smaller suppliers faster.I have seen both these measures used in past recessions with real benefits to both large and small enterprises.
    - The High Street banks accepted that they have lost great swathes of experienced lenders through redundancy/downsizing and the elimination of locally based Branch Managers hence very few of those making decisions on loan applications have the qualifications for the job. To correct this lack of experience and any sense of corporate history cannot be done by turning the clock back but some use of older wiser heads could help break the cycle of decline of reasonable lending propositions which is undoubtedly taking place and delaying recovery.How about an appeals or moderating role for a bunch of older experienced lenders to help break the cycle of cynical inexperienced negative decisions which seem to be based on a belief that anything other than a cast iron proposition is bound to fail and add to the sorry pile of bad debts?

    Ophrys17

  • Comment number 92.

    For any business where the likely rate of return exceeds the cost of capital it makes sense to try to up scale the operation and in the process secure greater returns. The by product of this can be increased rewards to shareholders and possibly additional jobs, but it is also increased risk that reflects the uncertainty of the undertaking and the timing difference between banking the return and committing the additional cash required to secure it. Thats show business.

    Sure there are SME's struggling and in need of short to medium term finance - but many of these businesses may not be good investments because they are not in a position to provide a sustainable returns in the current likely environment. If for example you cant generate profits much north of 5% it will be a struggle to finance growth sufficient to result in significant job creation and paydown debt, but if by judicious investment you can both increase volumes and push returns in excess of 10% then it should be much easier to move forward provided that your working capital requirement is within shouting distance of say 25% turnover. If you are an SME with no easy access to cash and you dont meet these criteria you may have to risk your home to finance growth or just keep head above water. So life can get extremely hard and some businesses will inevitably fail.

    My guess is that currently the broad problem is not so much a lack of cash as a lack of confidence - and vince bashing the banks - useless though most of them are - wont actually solve very much.

  • Comment number 93.

    At the end of the day the banks will do what's good for the banks and forget everybody else. You only need to look in the media to see that big bonuses have returned and the top end of the consumer market is doing very nicely thank you because of it. I work in the public sector and am pretty much resigned to getting the heave by this time next year, so at the moment other than the bare essentials and clearing my credit card I'm not spending and you can bet the farm there are a lot like me in exactly the same boat.The irony is I doubt if the public sector can create not only enough jobs but the right jobs to re-employ those public sector staff made redundant. The scenario could be that you have middle aged people with degrees and other qualifications stacking shelves in your local supermarket and their expertise is lost. Put it this way if I was working for the minimumm wage I wouldn't be giving any thought as to how to improve the company I'm working for, my attitude would be other people are getting paid more to think of that so let them come up with the answers because at the end of the day it's the bosses who get the bonuses and the workers get nothing.

  • Comment number 94.

    You really don't have to be an SME owner or corporate exec to understand why cash is being hoarded. Lack of confidence. Until the ConDems understand business confidence they will forever be chasing never-never land.
    So where would you invest your cash if you were in business? Would you lend it to a bank?! Would you lend it to UK plc? Would you lend it to an entrepreneur in Rio?

  • Comment number 95.

    There are number of problems hear which Stephanie doesn't do a very job of explaining.

    First and foremost the UK is just about one of the worst places on the planet for finding good old fashioned venture capital. Try starting a company that actually wants to manufacture something and see how far you get and yet of course creating more manufacturers is exactly what we need to do.

    Secondly, lending to smaller companies in particular is more difficult now than its ever been yet even "pre-crunch" it wasn't easy. It's also of course even more difficult if you're involved in developing and manufacturing stuff.

    So what's the problem? Well most of those Venture Capital companies that used to provide risk equity capacity have now turned themselve into private equity companies whose business is primarily aimed at buying existing viable companies and flogging them on later for a profit. So a lot of funds are finding their way into the hands of these barrow boys who create very little that's new. The same applies of course to hedge funds that also create pretty much nothing that's new.

    That said there are very few PE company people I've come across who can do much more than read a balance sheet. Most of them don't understand markets or technology.

    Pre credit crunch the banks of course lent the PE companies a lot of money so creating a sort of uncreative alliance.

    But then the banks also don't understand markets or technology and are certainly unopportunistic which is a feature they also share with most of the surviving VCs.

    So if you want to start a techy type SME unless you can attract a business angel with deep pockets or win the lottery then I wouldn't even bother to try here. Buy a ticket to the USA and do it there because despite all the problems with their banks, hedgies etc the Americans are still huge believers in taking a risk and will still invest in good ideas and good people.

    It really isn't the common language that divides the UK and USA it's attitudes to capitalism. They are and we're not - properly capitalist that is.

    How to fix it? You can't without effectively taking the money off the banks, hedgies etc by force. In effect the coalition is doing that with the bank levy but sadly all that cash is going into the Treasury where it will undoubtedly never be seen again. What should have happened was the creation of a £500m rolling venture fund managed outside the City by a company run by people who had vision and where the beancounters made the tea.

  • Comment number 96.

    89. At 6:06pm on 27 Jul 2010, SleepyDormouse wrote:

    "Self-sufficiency would be a good move for this country. Not necessarily a step back into the past, but the use of the knowledge we have by communities so they can survive without outside help."

    I agree 100%

    While we're all working hard to make ourselves self sufficien - the Government is ensuring the nation is totally reliant on the private sector and free market intenational trade.

  • Comment number 97.

    More brainwashing, sorry I mean good news.

    http://www.bbc.co.uk/news/business-10776846

    I especially like the opening gambit;

    Sales on the High Street increased in July at the fastest pace since April 2007, the latest CBI survey of the sector has indicated.

    Annual summer sales, the World Cup and warm weather all appeared to encourage trade, the business group said.

    The areas with the strongest growth were grocers, clothing, and footwear and leather.


    That would be booze, burgers, tacky England t-shirts and trainers with a few football's thrown in for good measure then. Hilarious!!!!

  • Comment number 98.

    89. At 6:06pm on 27 Jul 2010, SleepyDormouse wrote:

    "Self-sufficiency would be a good move for this country. Not necessarily a step back into the past, but the use of the knowledge we have by communities so they can survive without outside help. If one does go down, it shouldn't take everyone else wih them. [A community might be the size of a small country, I'm not thinking village size]. It would be good-bye to globalisation - I don't think I would mind about that, it has too many hidden and unrealised costs. We have a lot of unemployed and likely many more soon .......... sets one thinking ..."

    Careful now, that's almost communist you know. And you're working this all out for yourself, you should be teaching this stuff Sleepy.

  • Comment number 99.

    At 4:24pm on 27 Jul 2010, writingsonthewall wrote: "I would be right up there with you on cloud 9".
    Enough said!

  • Comment number 100.

    Hoarding = accumulation of wealth.

    In my opinion this was always going to happen when QE finished and credit was not eased as a consequence. Businesses who can hoard will, those who can't will fail. Unfortunately the hoarders are feeding off the failures and will grow thus reducing the competition giving more scope to hoard.

    Banks on the other hand are in race against time to accumulate enough wealth (guaranteed capital not value inflated assets) before the big bang arrives. I fear most will not win this race.

 

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