BBC BLOGS - Stephanomics
« Previous | Main | Next »

Risk, politics, and GDP

Stephanie Flanders | 18:37 UK time, Friday, 23 July 2010

Predictably, politicians on both sides of the argument over the economy have taken today's figures as support for their view.

George OsborneFor Chancellor Osborne, the strength of the recovery shows he was right to start cutting the deficit faster, and sooner. But naturally Alistair Darling says it shows he was right to support the economy when he did - and that Mr Osborne's plans are putting the recovery at risk.

Surprise surprise, I don't think this one set of figures decides the issue either way.

Mr Darling is right to point out that government spending played an important role in today's growth figure. The coming slowdown in government spending - consumption and investment - is another big reason to doubt that growth at this pace will be sustained. But there's little in today's numbers to suggest that Mr Osborne is about to tip us back into recession.

As we've seen, the lion's share of the extra output in those three months was due to the services sector, and construction. Both were given ample support by the government. The ONS data show that government services accounted for more than 20% of the extra growth.

We also know that public building projects will have played an important role in the jump in construction output - though quite how much of a role is difficult to judge because the lead-times for construction are so long.

New public construction orders recently overtook private ones - for the first time since the 1970s.

Some of those will be housing projects that would come on fairly quickly - so orders from the first quarter of this year could well be showing up in the output data we got today.

But when it comes to schools and hospitals projects, industry experts tell me that it would be new orders from 2009 that would be showing up in the second quarter data. Public non-housing construction orders for schools and hospitals grew by 10% in 2009, while infrastructure orders were up by 44% over the previous year.

So Mr Darling is right to say that he laid some of the foundations for this growth when he decided back in 2008 to bring forward capital spending into 2008/09 and 2009/10.

But the same industry insiders also tell me that long lead-times can't entirely account for the burst in public construction activity in the second quarter. They claim there was also a burst of public sector activity in the lead-up to the election.

If so, that would suggest that the talk of slash and burn contracting and pre-election sweeteners by the outgoing government has some basis in the facts, and helped push up the output numbers we saw today.

Whatever the truth behind the construction rise, it's safe to say that the public component will fall back sharply over the next year - though, given the lead-times, it's unlikely to happen all at once.

But today's figures show strength in other parts of the economy as well - the most encouraging thing about them is that the growth is fairly broad-based, even if the headline number is skewed by that jump in construction. Manufacturing grew by 1.6%. That's the third quarter in a row where growth has topped 1%.

The city commentators are probably right that this will be as "good as it gets" for the UK economy - at least for a while. But that's a phrase that many had prepared in advance - in the expectation of a much weaker set of numbers.

It's right to be cautious. If an annualised growth rate of well over 4% is as good as it gets in this recovery, we could still be getting it pretty good.


Page 1 of 2

  • Comment number 1.

    There's an name that describes this's called remission!

  • Comment number 2.

    So the recovery is back and all is well. The cuts are coming and the number of quangos and low paid civil servants are about to be cut but not for a few months or until next year so I suggest that we enjoy the recovery while we can. Once the jobs start to go spending will stop the recovery will faultier. The only pity is that like in large private companies the ground troops will be cut but the overpaid executives and long term civil servants will still be there the only thing that will go is service and quality. The figures release this morning on Radio 4 sums it up the interview with the BMA The richest 1% in the UK have a 5th of all income Wrong

  • Comment number 3.

    The key issue is whether it is necessary for the govt. to cut as quickly as it is. It seems that they wish to get all of the bad news out of the way before the next election; this is politics at work and people will probably suffer unnecessarily because of this.

  • Comment number 4.

    Politically this is very difficult for the Tories as the GDP figure is the result of the previous Labour governments policies.

    This is the boom before the terrible bust generated by the deliberate austerity policy! And the people will know this!

  • Comment number 5.

    " The richest 1% in the UK have a 5th of all income"
    Isn't that why they are the richest 1%?

  • Comment number 6.

    All this proves is that if you borrow enough and spend enough by certain measures you can appear to get growth. But this is not real growth it is just the sugar rush growth of stimulus based on borrowed money which is stolen from the future.

    We shall be paying for this so called growth for decades through higher interest payments - long after the new cars bought on scrappage deals have been scrapped themselves.

    Darling knows full well that he would be driving through similr austerity measures and VAT rises if he was still in No. 11 - that he and the others in the Labour cabinet ducked the hard choices are good enough reason amongst many why they should not see power again for a generation.

  • Comment number 7.

    The political tend to be more attracted by credit and less to blame. George III would be taking credit for the rise of the US if alive today. In politics the same recipe produces two entirely different dishes.

  • Comment number 8.

    At the end of the day, look at the grand total national debt. Its completely unsustainable even if growth continues at the rate announced today.

    The coalition are doing exactly the right things, with these cuts...

  • Comment number 9.

    Good news no doubt, but for whom? What effect on pensions does this new found prosperity have? None I assume. What's the effect of growth, even sustainable real growth have on Joe Average? Again I assume little.

    The problem for UK PLC is one not of growth but of fundemental problems within our society, the models we follow for health, education, National Government, local government regional Government, and a basic problem of how we actually share out the pickings from this land of milk and honey.

    Money these days appears to be a poor medium for organising and making this shareout 'fair'. Money appears not to be able to serve the purposes it has always done in the past, money no longer appears to be a good measure for 'store of value' 'standard for deferred payment' measure of value etc etc.

    This apparent breakdown in the purpose and function of money is clearly highlighted in the disgraceful wages payed to far too many at the lower end of the pay scale, and the disproportionate over payments made to fewer but still too many at the top end of the pay scale.

    The recent bail out of failing banks appears to have exacerbated this with the resulting bailout and engineered collapse of bank rate, ensuring little return for those who drank less milk and stored some honey, only for the banks to use this to rebalance their books by not passing this on to customers through fair rates.

    Now I agree that some jobs deserve more milk and honey than others, but the current situation is not sustainable even with 'real' growth. People need to be empowered by giving them the opportunity to work. Full employment must become a key political value and target. Never mind the 'big society' which can only further exacerbate this crass poverty/ greed culture that so fundementally disadvantages and disenfranchises far too many.

    Our young folk need hard nosed 'work' and real opportunity to grow into our bigger society, not bland political speak and political wallpapering. Only then can we possibly achieve real growth, an equitable shareout (which obviously embraces special skills)and a feeling of belonging, the sticky stuff that holds societies together.

    Once we start to get to, and address the basics of the problem then we can all start to take a bit of pride in the fact that we are all contributing to real economic growth and then the measures used may start to have a little more relevance and meaning to a lot more people.

  • Comment number 10.


    There's a word that describes this's called BS!

  • Comment number 11.

    These results are irrelevant because as soon as the cuts start to bite then we've had it as a country. We should not be cutting spending and I for one am very annoyed when I hear brainwashed members of the public saying 'We all know the cuts are necessary' as if there has been a proper debate about it and everyone has agreed to this. There has never been a proper debate, we didn't even get a choice to vote against cuts at the election either.

    There are people in this country who took bonuses during the boom based on false figures. Those bonuses were not earned and they need to be paid back retrospectively in tax to fund spending in order to improve growth. After all these are the people who have constantly argued for and voted for tax cuts rather than investment on the basis that they believe that they don't benefit from the tax system, yet these are the people whose jobs were saved by the bailout. They have been proven wrong and they now need to start paying their way rather than scrounging off the state.

    There are another group of people in this country who have vastly more money than they could ever spend and this also needs to be taxed. These people either inherited their wealth or gained it based on the hard work of employees who were paid peanuts in comparison despite creating the wealth through their sweat and tears.

    It's time for these people to put the money to good use by giving it to the state. The state could then invest in new manufacturing for greener technologies, re-nationalise our energy and public transport sectors providing cleaner energy and transport plus jobs for millions.

    Nick Jones recently said the following in an interview:

    'The crime of New Labour was to believe that only good could come out of surrendering to the city. If you’d have said ten years ago that the only nationalised industry in this country would be banking people would have had heart attacks. It makes you despair, why didn’t we prop up the car industry years ago, where people had proper jobs? Steel, coal, engineering, gas, water, electricity, the trains… why didn’t we keep them going, why don’t we own our own utilities? Industries based on jobs that involved men and women going to work and actually making something. '

  • Comment number 12.

    This political debate on the strength of the UK economic recovery borders on irrelevance, given that the UK economy is in reality caught up in the mother of all global financial crises. One of the best website for providing an unexpurgated analysis of this crisis is the “The Automatic Earth", where they have just updated (22/7/2010) their Primer Guide - an essential reading list in my opinion

  • Comment number 13.

    If George Osborne as got the audacity to take any credit for the positive figures out today, it will be no good him trying to blame anyone one else when they‘ve gone back negative. It amazes me as to where he thinks all these private jobs are going to come from, export??, when most of Europe is in the same boat as us, and our next biggest export market; USA, is still undergoing a fiscal stimulus, how is it going to effect our exports when Obama starts to apply the economic brakes.

    It's a foregone conclusion that we do need to put the brakes on public spending a bit, but not an emergency stop!!

  • Comment number 14.

    As a complete amateur at this, before the credit crunch happened I knew very little about economics. I have since realised that the world's economists probably knew less than I did. It seems to me that weather forecasters and economists are somewhat similar in their grand predictions of what will happen next. It is incredibly worrying that decisions that affect a huge number of people are taken by small numbers of people who have had their entire back catalogue of knowledge and experience discredited completely in such a short space of time.

    "Economics is bunk" to paraphrase someone who actually did know what he was talking about. The one thing about economists, both the professional sort and the amateur sort who post on these blogs regularly do have one thing in common. In their own world they are right and there is no room for discussion. Unfortunately when their predictions are applied to the real world in 6 months time based on the data available today, they are almost all completely wrong.

    I'm not daring to suggest that I know what will happen next, but I am sure of one thing, no-one else can know for sure either... maybe in the past some of the economic theories would have held up - but these days - no way. Throw out the text books and when this is all over and we are back to some sort of normality, then we can write some new ones.

    There are of course those who will be lucky, but they are no more certain of what will happen next year than my Uncle Fred is of what will win the 2.30 at Newmarket tomorrow. Actually Uncle Fred is probably more likely to be right!

  • Comment number 15.

    Curious no mention at all on BBC of this from the ECB, curious also very little criticism or comment about the true position of the US economy....far from being an example of a 'Federal' security blanket which the EU could do well to emulate just how many States are heading towards bankruptcy?:

    European Central Bank policymakers increased pressure on Friday on industrialized countries to cut public spending immediately in order to consolidate the present recovery.
    ECB President Jean-Claude Trichet said that while policymakers around the world had been right to correct the fragile fiscal situation, the timing was still disputed and an immediate start to belt-tightening was vital.
    Politicians and central bankers in the United States and Britain have warned that pulling support hastily could push the world economy back into trouble.
    "There is little doubt that the need to implement a credible medium-term fiscal consolidation strategy is valid for all countries now," Trichet wrote in a guest column in the Financial Times published on Friday.
    Trichet said systemic economic stability and sustainable growth relied on the capacity of public finances to intervene in crises.
    "We expect governments to confirm their determination to consolidate their public finances," Trichet wrote.
    He added: "Now is the time to restore fiscal sustainability. The fiscal deterioration we are experiencing is unprecedented in magnitude and geographical scope."
    Other ECB policymakers rushed to support Trichet's view. Executive Board member Gertrude Tumpel-Gugerell said it was time to withdraw the massive fiscal stimulus.
    "It is true the fiscal stimulus measures have made a contribution equivalent to roughly 2 percent of GDP in the euro area," she said.
    "But, with the economic outlook improving, it is now time to phase out these special measures and to start fiscal consolidation."
    Trichet said history suggests the near-term costs of tightening public spending would be slight.
    "Provided consolidation is pursued as part of a comprehensive reform strategy, the short-term costs for economic growth tend to be contained or very limited," Trichet wrote.
    Budget cuts were more effective than tax hikes, he added.
    Trichet also criticized last year's global push for budgetary stimulus.
    "With the benefit of hindsight, we see how unfortunate was the oversimplified message of fiscal stimulus given to all industrial economies under the motto: 'stimulate,' 'activate,' 'spend,'" he wrote.
    The euro steadied against the dollar after Trichet's comments, retaining gains made the previous day on strong euro zone data and U.S. corporate earnings.

  • Comment number 16.

    Looks like the the 'Elephant in the Room' (aka inflation or more to the point expectation of inflation) has put on some weight.

    Same old UK economy. Growth mainly due to construction from a very low base. Nothing to indicate investment growth.

    Alternative view. Hav'nt the Chaps done well, growth up, crime down, a decent summer (so far); and only been in a few months. Next a consumer bubble and good feelings in the Shires. If only we had an Easter Election - would have won the World Cup. Well done Chaps.

  • Comment number 17.

    At least this should kick the idea being considered the other week by the MPC of further 'Mild Easing' into the long grass...Also if growth continues like this along with above target inflation how long can Mr King put off raising interest rates? I'm sure he'll try to wriggle out of it as long as possible, he wants to inflate away some of the debt, but without the excuse of a 'fragile recovery' to fall back on more people will begin to question his real motives...

  • Comment number 18.

    Has anyone heard of 'The Dead Cat Bounce'?

  • Comment number 19.

    I'd rather wait and see how things pan out in the next 2 quarters! Let's revisit this around Christmas time!

  • Comment number 20.

    13 SandCastles ... completely agree with you. If the growth is due to ConDem policies then the double dip will have to be theirs too. The problem with politicians is that they believe they have to do things because they know best. Actually it's fairly obvious that they don't or have we forgotten the mess ups of the Tories in the past; Messrs Cameron and Lamont should have very clear memories of the dangers of inflation to reduce debt.
    Cutting jobs has a number of outcomes not least providing excess labour thereby reducing costs of labour as people earn less to do more and in turn enhancing return on capital. Hence, a cynic would say, the reason for Cameron's Big Society of volunteers.
    The problem with our lovely nation state is that we lack added value. To escape from our problems in the long term we need to develop an added value mentality which invariably means manufacturing or more natural resources. Lets go panning for gold in them their hills!

  • Comment number 21.

    #14. At 10:06pm on 23 Jul 2010, Karl J wrote:

    It sounds as if you and I have been on the same journey, exploring economics and coming to nearly the same conclusions over much the same time period.

    I agree with a lot of what you have said. My views here will be well known to some, particularly those of a mainstream economic idea persuasion; [if your one of them, just skip to the next blog]. I wonder if you have found Professor Bill Mitchell's website and his extensive blog. The ideas he his putting forward, at least are based on what happens in a modern economy.
    See Go to the tab 'one page archive'; scroll down to the Category: Debriefing 101 and find the articles on Deficits and Fiscal sustainability

    The ideas seem to me to help a lot, but it takes time and effort to really understand them. I'm far from sure about them all, but as they are based on what happens in a modern economy they have more credibility than text book economics.

    You can also download a book called 'Seven deadly innocent frauds of economic policy' by Warren Mosler. Its written from the US perspective, but applies to UK and any other country operating a fiat currency as most of us now do. The frauds are [ie these statements are all untrue:
    1. The government must raise funds through taxation or borrowing in order to spend. In other words, government spending is limited by its ability to tax or borrow.
    2. With government deficits, we are leaving our debt burden to our children.
    3. Government budget deficits take away savings.
    4. Social Security is broken.
    5. The trade deficit is an unsustainable imbalance that takes away jobs and output.
    6. We need savings to provide the funds for investment.
    7. It’s a bad thing that higher deficits today mean higher taxes tomorrow.
    Here's a link and you can download a pdf.
    Even if you don't accept/agree with everything, it should make you think. The forward by James K. Galbraith is a good summary. And actually this book may not be a bad place to start; the meat is in part 1.

    To anyone else who likes to wonder if mainstream economics is on the correct track – please read these references. This may not be quite correct, but it sure shows that mainstream theories are broken and stuck in the 'gold standard' past.

  • Comment number 22.

    How to build a Jet engine-did you see that TV program? In 1971 Rolls Royce was saved by a 'government bail out'. Today they manufacture the best jet engines in the World. Highly skilled,competitive,add value, employ thousands, and profitable.The taxpayers loan has borne fruit.
    We are now told that within 4 years our economy will transform itself from a public to private,service to manufacturing-'just like that' as Tommy Cooper would say
    I am not an economist thank goodness, but having watched our economy develop since 1950, I know that David and George-(forget Nick as he is irrelevant)-are naive at best and dangerously stupid at worst.Get hard hats, the roof is about to fall in.

  • Comment number 23.

    Its nonsense to suggest anything other than that growth in the last quarter and going forward until probably close to the year-end is almost completely down to the last government's policies. Only a spinning politician or the most blinkered Tory could suggest otherwise. Note this will be the same if next couple of quarters show less positive figures (and indeed if this figure is revised down the way).

    Darling predicted 3% growth this year in his deficit calcs and it looks like he will be as close to correct as the 'independent' OBR. Thereafter the Tory slash and burn cuts will take hold and strangle any chance of sustained recovery.

    Going forward we need to not get caught up in overly theoretical economics - no 2 economists seem to agree on anything and virtually none of them predicted the recent crisis (those few that did got shouted down). We need to find a balance between public sector is good dogma and lets cut everything in sight dogma. I wont hold my breath.

  • Comment number 24.

    Foxy 4 - "Get hard hats, the roof is about to fall in"

    Is that the same roof that Labour didn't bother to fix for 13 years?

    The only answer people seem to have on here is borrow more and spend more. Borrow and spend in the good times borrow and spend even more in the bad times - never mind the debt we will just leave that to crush our children and grandchildren. We have totally lost our way - and our self-respect.

    Anyway these are not cuts more a return to SUSTAINABLE public spending. It won't be nice, I am not looking forward to it but we have to get back to sustainability before it is too late.

  • Comment number 25.

    The special factors in the construction industry really ought to be assessed and the underlying trend established, if we are going to understand what this means for UK PLC.

    1. The Olympics - a massive stimulus that feeds out of the figures in 2012. This will significantly reduce building industry output shortly: 30,000+ jobs are involved.

    2. Bringing forward public sector capital spending - another huge factor in turnover and employment - this begins to drop out of the figures next year - major cuts in the building programme are planned, so this will go negative shortly. When lobbying for spending to be brought forward, the building industry claimed 300,000 jobs depended on it.

    3. New housing starts were marginally up: Commenting on the figures, Imtiaz Farookhi, chief executive of NHBC,said: "Despite the impact of the general election and the political uncertainty that surrounded it, NHBC's figures show that the number of homes being built in the UK is continuing to improve at a steady rate." But he went on to say: "Sustaining this level of improvement post-budget and into the summer building season however will be the next major challenge to face the industry".

    4. Commercial property: it is predicted that overall lending levels would remain depressed for two years and that the £15.1 billion of new lending to UK property undertaken during 2009, which was a ten year low, would be repeated this year and next as lenders ambitions for new debt issuance remains weak.

    CONCLUSION - if the Autumn statement means a sharp fall off in government spending - direct or indirect - in construction, then this sector is heading hard down next year because of these exceptional factors. We would need NEW demand equal to BOTH the Olympics and the Darling brought-forward spending just to stand still - and there is no prospect of private investment replacing it.

    The UK construction sector is particularly exposed to public sector spending cuts, so we could see major companies going down if they suddenly lose their order books. I cannot see how Boy George can square the circle and make the value of cuts they are looking for: either there is a huge cull of jobs within the civil service, or a huge cull of jobs in the construction sector - OR BOTH.

    By my calculations, 350,000 contruction jobs have been identified as being at risk now before any cuts - that figure is likely to go over 500,000 within 2 years BEFORE any more cuts are announced.

    The leaked Treasury projections at the time of the emergency budget projects up to 1.2 M civil service jobs going - add the two together and that's heading for 2M already - anyone take bets on 5M more unemployed by the next election, in addition to the 2M already on the dole?

    Darling's approach was to risk a "quick dip" - he seems to have called it right and we only put our head just under the water for a moment. Boy George's approach looks like saturation diving in comparison and if he's dumb enough to claim the credit for what happened in the first quarter after the election he can hardly blame Darling for what happens next.

    I hope Stephanie has this mantra ready for all her interviews come the autumn:"Chancellor, you've claimed the credit for the economy's performance in your first quarter in office - so don't you have to take the blame for the state of the economy from now on?"

  • Comment number 26.

    This type of activity won't help the recovery either...

    From Andrew Neil's blog

    'It reported that over $3 billion had been openly (ie officially recorded) as having flown out of the country in the past three years, often in sums so large that it was piled on to pallets. Since Afghanistan's GDP is only $13 billion that means almost a quarter of it left the country in cash in three years, some of it aid money meant to help some of the poorest people in the world. Most of it went to Dubai, which means aid money has probably bought more million-pound condos there that it has built schools in Afghanistan.'

  • Comment number 27.


    Yes the same roof,that was built in the 1980's,and not replaced in the 2000's.

    Borrowing for long term investment is no bad thing- but very difficult in our precarious situation.The thought occurs however that the depth and scope of these cuts are ideologically driven-killing the patient in the process.

  • Comment number 28.

    #24. At 09:23am on 24 Jul 2010, StartAgain wrote:

    I beg to differ with your views. I agree that we cannot be profligate and borrow without control any amount we like; but, I suggest its not quite the way you have expressed it in your contribution to this debate.

    Please see my post at #21. I would suggest that you might just consider that the economic theories and ideas you are suggesting are now actually wrong [Actually they have been since 1971 when the Bretton Woods agreement collapsed]

    Please download 'Seven deadly innocent frauds of economic policy' by Warren Mosler. Link is at #21. The point number 2 is particularly relevant to your post

    I hope it may give you pause for thought. The ideas you are putting forward would be appropriate if we still had a convertible currency; but we don't. The ground rules are different since convertibility went out the window. Sadly, the ideas live on. Equating household and business financing with that of the government is wrong; the government have important freedoms of action in its financial actions that all of us individuals do not have. Unless they want to, the government cannot go broke. Sure they can mess up big time, cause inflation,see our exchange rate fall etc. The ideas are NOT a recipe for a free lunch, but at least they seem to be based on the way money really flows in the economy and the way it really works.

    The book is downloadable for free; if you do nothing else, read the Forward by James Galbraith. I hope it will make you start to question some cherished ideas [I had the same ideas that you expressed at the time of the election. Reading these sites have made me question the basis for economics as it is taught and implemented around the world. I now think it is flawed and am searching for a workable paradigm].

  • Comment number 29.

    # 28 SleepyDormouse

    Thanks for your post I have had a quick look at your link - more than anything it makes me want to add further to my collection of gold & silver bars and coins!

    I understand that any government can magic up more money to pay it's way but that still has to be done in a framework where people still have some faith in it. The fact that it relates to the US makes it unique - although the US is certainly heading for a big fall once it loses it's reserve currency status.

    Anyway it is not as if our own Govt. and BoE (which for the purposes of this discussion is the same thing)isn't already testing the limits of this with £200Bn of QE. There is probably room for more but not an infinite amount. The alchemy has to end somewhere (hyperinflation) You might be happy to dig a hole and fill it in again for computer generated GBP. Just don't expect the rest of the world to be so keen to exchange their food, oil, and cars for the same.

    High debt countries are low growth countries with high unemployment.

  • Comment number 30.

    #27 Foxy

    Yes they are all to blame - or perhaps it is us for not demanding more/better of them. Perhaps if we had a sovereign wealth fund like Norway that could be used to fund long term investment free from political interference (bit hopeful I know) with a mandate to do what is best for the sustainable development of the economy.

    Unfortunately the cupboard is bare here - but we could just 'create' our own fund using magic money say £500Bn to start.............

    I am sure there is a lot of ideology about these cuts - just as there was with the massive expansion of the public payroll. And I repeat Darling would have been doing pretty much the same anyway - and is probably relieved in some way that he doesn't have to.

  • Comment number 31.

    #28 Sleepy

    Also worth remembering that the US still has a large reserve of gold. We do not.

  • Comment number 32.

    This growth has, very sensibly, been driven by quantitative easing and public investment. Both of these have now been, or are about to be, cut off or substantially reduced, repeating the error which led to the 1930's slump.

    Unless a sudden flash of intelligence manages to penetrate the ideologically limited minds of the right wing leaders that Europe has unfortunately found itself with at this critical time, the future outlook is bleak.

    The important fact that needs to be understood is that if the easy credit which drove the economy before the crunch, is to be stoped, there has to be a compensating increase in the money supply.

  • Comment number 33.

    Celticace18. I am pleased to say hear hear. Will change to our society happen because of revolution or eventual revulsion?

  • Comment number 34.

    #29. At 11:03am on 24 Jul 2010, StartAgain

    OK we will disagree then, but thanks for looking at the reference, sorry it doesn't convince you. I suspect it looks like 'printing money' to you; I thought that, but there are controls etc that would stop hyperinflation [but politicians could still get it wrong!] But it doesn't just relate to the US; most countries (exc the Eurozone) are fiat currencies. Yes, the US has some unique features, but the underlying realities are the same for most countries, US, UK and AUS as examples.

    The problem is more than just which economic paradigm works and should be used. The result of the ConDem austerity package will be increasing unemployment and I suspect, a recession at the very least. The loss in output and wealth for this country will be considerable. Individuals and families are going to hurt severely by all this. My view now is that it doesn't need to happen. My views changed from the line you are taking when I found that macroeconomic theory has flaws. Basing actions on a shaky/flawed underlying theory just cannot be right. At some point it will fail big-time; I think we are virtually there now. So, for different reasons I too would like 'to add further to my collection of gold & silver bars and coins!'

  • Comment number 35.

    34. At 11:45am on 24 Jul 2010, SleepyDormouse wrote:

    Well we agree about our fears for the human cost of this ongoing crisis. Nobody should be abandonned in the years to come. But, did we really think it could end well after years of debt (public & private) fuelled 'growth' - that the day of reckoning would never arrive? Cuts or higher interest rates which unpleasent medicine do you prefer?

    I wouldn't trust any of the cenral bankers/politicians to keep hyperinflation away - once you start down the path of QE it's too tempting to go on until you hve gone too far - we'll all be out buying wheel barrows.

    Will the coalition cuts deliver - will they even last the distance - your guess is a good as mine. What disgusts me is that Labour politicians pretend they wouldn't be doing pretty much the same if they still held power. They may have had to be even more severe especially post Greece to convine the world that they were serious.

  • Comment number 36.

    #35. At 1:23pm on 24 Jul 2010, StartAgain


    Yes, I agree that no matter which party won, we would have the same crash, just at different speeds, but one slight difference, Labour seemed to be saying they would not cut so deeply. Do I believe that? No not really, not to the extent that it will change the outcome. Like many on this blog, I see recession and possibly depression round the corner.

    Also, on the basis of past performance, I too would support your view on central banker/politicians. But, although I could envisage them 'getting it wrong' and creating hyper-inflation, that is because I believe now that so many individuals in power and in the media [broadest sense] still act, write and speak as if we are on the gold standard. Their comments are from a previous generation and are regretfully factually wrong. So, given that they are pulling and pushing levers in the wrong directions, anything could happen. Its as if they are steering a car with the steering wheel connected incorrectly; turn it to the right and you go left and vice versa. I've been in a soapbox car connected up to steer like that and it impossible to drive to where you want to go. Same for our present Government.

    You wrote “They may have had to be even more severe especially post Greece to convince the world that they were serious.”. Sad but probably true: So who is running Britain; our elected politicians, or the financial markets? If you read into the references you will find that the government actually doesn't have to buy debt. There are good reasons why they should, but there are alternatives (but I suspect they would make the economy more difficult to control, and if so, then our present government are bound to get it wrong). The financial industry need bonds even more than the Government. An example: Some years ago Australia was running a surplus; it had no need to sell bonds – but crazily it was. Why? Because their financial industry NEEDED their constant supply of low / no risk investments. Real 'Alice through the Looking Glass' stuff – country is in surplus but continues to build up debt. This simple example should be thought provoking.

    If they [politicians/media/financiers/academics; a minority does understand] really understood what modern day economics is all about, understood how money flows around the system and realised that they are in their position of power/influence for the good of all the people, I would expect them to behave differently and produce a far better outcome. In the 80s I kept hearing politicians say 'there is no other way' as our manufacturing industry collapsed. They didn't see the point in having policies that supported it then – well, I wonder if they do now? I know their policies were wrong from the point of view of the man in the street. They still are.

  • Comment number 37.

    Did the country ever not borrow to pay its bills but paid them from its tax revenue - in as much that the government only spent what the taxopayers earned ? If it did have to borrow surely it was an admission that it was broke , Banks do not lend to people who are broke so surely there will come a time when no one will lend money to our government and we will have to live within our means - spend what we have got and not spend any more than that . Is this the real reason why the government is trying to quickly balance its books - and would this ever be possible seeing as we owe such a collosal amount of money .

  • Comment number 38.

    I really can't see why these figures are being seized on by the Tories as proof that 'they were right' to make pointless, politically motivated cuts?

    First, these stats are directly the result of the previous govts investment in projects that were a hang over from years of the previous administrations underinvestment - a situation in keeping with the last ten years. Darling argued this before the election, and has been proved right by the figures.

    Whether Osbournes senseless cuts will cause a double dip won't be known until the cuts are finalised, which is months away yet, and the final outcome of that won't be known until next year. So declaring that there is no evidence that his actions will or won't cause a dip into deeper recession is well wide of the mark.

    I say senseless with confidence. Already questions are being asked even by Tories how these cuts will give benefits in real terms, in particular as the cost of losing staff, offices, refurbishment of estates being closed or left (you leave, you've got to put back in original order), adds up to sums that leave the 'savings' looking less and less realistic.

    However, losing Public sector jobs gets public support, and pleases the Daily Mail, so who cares if it actually achieves Osbournes stated goals or not eh?

    Oh, and of course, the Private sector is already being hit by these cuts, before even the Public, so hang on to these 'positive figures' as even by the next quarter, (seasonally adjusting aside) things are going to look pretty grim.

    As for the govt 'needing' to make these cuts - tosh.

    There are plenty of options open to them, they have simply chosen the most ideologically pleasing one.

    Merkel, Camerons German alter ego, has publicly admitted the German govt didn't need to make them!

    At least she's honest..........

  • Comment number 39.

    #37 At 2:22pm on 24 Jul 2010, innov8tion


    To save time I have copied this from Prof W Mitchell's blog at

    "Budget deficits or surpluses occur in a modern monetary economies. A modern monetary economy such as Australia and almost every major economy has four essential features:

    * A floating exchange rate, which frees monetary policy from the need to defend foreign exchange reserves;
    * Modern monetary economies use money as the unit of account to pay for goods and services. An important notion is that money is a fiat currency, that is, it is convertible only into itself and not legally convertible by government into gold, for instance, as it was under the gold standard.
    * The sovereign government has the exclusive legal right to issue the particular fiat currency which it also demands as payment of taxes – in this sense it has a monopoly over the provision its own, fiat currency.
    * The viability of the fiat currency is ensured by the fact that it is the only unit which is acceptable for payment of taxes and other financial demands of the government.

    As a matter of accounting between the sectors, a government budget deficit adds net financial assets (adding to non government savings) available to the private sector and a budget surplus has the opposite effect. The last point requires further explanation as it is crucial to understanding the basis of modern money macroeconomics.

    While typically obfuscated in standard textbook treatments, at the heart of national income accounting is an identity – the government deficit (surplus) equals the non-government surplus (deficit). Given effective demand is always equal to actual national income, ex post (meaning that all leakages from the national income flow is matched by equivalent injections), the following sectoral flows accounting identity holds

    (G-T) = (S-I) – NX

    where the left-hand side depicts the public balance as the difference between government spending G and government taxation T. The right-hand side shows the non-government balance, which is the sum of the private and foreign balances where S is saving, I is investment and NX is net exports. With a consolidated private sector including the foreign sector, total private savings has to equal private investment plus the government budget deficit.

    In aggregate, there can be no net savings of financial assets of the non-government sector without cumulative government deficit spending. In a closed economy, NX = 0 and government deficits translate dollar-for-dollar into private domestic surpluses (savings). In an open economy, if we disaggregate the non-government sector into the private and foreign sectors, then total private savings is equal to private investment, the government budget deficit, and net exports, as net exports represent the net financial asset savings of non-residents."

    As this is a simple accounting identity, its valid. If you would like to know more, and there's a lot, follow the link. Its turned my ideas about economics upside down. I give more references at #21

  • Comment number 40.

    The only lesson we have truly been able to learn over the last two years is not to make any economic predictions based on interim data. These are extraordinary times and nothing is what it seems. The economists and pundtits know this, which is why so many are using a lot of words to say very little! Some openly admit this of course. Heads down, work hard and ignore the published data until Q2 of 2011 when it gets tasty.

  • Comment number 41.

    [16] Richard Dingle,

    You are a shameless tory, really...those figures are labours and not tories. The conservatives have always talked about a broken Britain and were hoping crime to soar during this recession.

    Now with Lib-Cons austerity measures about to decimate the police numbers it's going to be intersting to see if crime numbers will stay down when we hit the next recession.

  • Comment number 42.

    #12. At 9:56pm on 23 Jul 2010, Richard wrote:
    "This political debate on the strength of the UK economic recovery borders on irrelevance, given that the UK economy is in reality caught up in the mother of all global financial crises. One of the best website for providing an unexpurgated analysis of this crisis is the “The Automatic Earth", where they have just updated (22/7/2010) their Primer Guide - an essential reading list in my opinion "

    Wow, that's scary stuff much bleaker than I was expecting. I'm firmly on the "Pessimist" side of this debate but they're even scaring me. "Debtors prisons," HELP!!!!

    Have to say the "How to Build a Lifeboat" primer is very sensible and sound advice considering what's on the way irrespective of whether it results in total social collapse or just a tad of discomfort, I'm somwhere in between on that one but I do think we're heading for mountainous seas on a "Ship of Fools" full of holes.

  • Comment number 43.

    The figures do tend to show that all crisis is in the banking sector. So, while Mister Osbourne might be right to say the "deficit" must be cut quickly, he seems to have chose the wrong sector of the economy to begin his tinkering with. He can only be right if the announcement of the cuts in the current quarter have not affected business confidence: if businesses do not sustain the growth of the previous quarter there is a case for Mister Osbourne and Mister Cameron packing their bags and leaving number 10 and 11.

    They might have ideoloogical reasons for cutting public spending but there are practical matters to be understood and addressed. First: the cuts that are being made have an ideological slant: the ending of the Schools Building Programme in favour of Free Schools, for example, is not a cut but a transfer of resources to an alternative programme. True, it is less resources and that constitutes a cut. Similarly, the "volunteering" Programme in Public Health is a massive transfer of resources in a cynical low cost outsourcing. The cuts in spending might be needed, but they are being used to smuggle in alternative, untested policies that might not actually work.

    What is known - by economists on both sides of the political divide - is that banking is the largest single source of economic slowdown and instability. The current set of figures show that the previous governments policies were beginning to disentangle the mire of banking from the real economy. Not that the policies were "working" or "failing". The figures show what the policies were "doing".

    So it seem that the proposed cuts have an ideological purpose which every tory politician recognises and the will "do" something about the banking crisis that no tory politician recognises in public. The cuts will entrain public and private spending to the banking sector. The length and depth of the recession - and some people think it will be long and hard - will be a direct measure of how powerful the banks are. Because a recession now would be about paying the debts of the banks off from the publics future earning. If the banks are as powerful as some people think then a recession would also be about guaranteeing the banks future profits.

    Six banks failed the "stress test" - in reality, no more stressful than a stroll, because the conditions were watered down. What European governments should be doing is identifying which banks, winding them up and distributing their balance sheets to the other banks with a stern warning: fail the stress test in three months time and you are next. Yes, this places all the toxic debts in one place: but death focuses the mind wonderfully.

    The last quarter results are not a reason to plunge into a round of cuts. All the politicians at Westminster know this. Neoconservative Ideology and a terror of things that are too "big to fail" are driving them. The only thing that anybody should be claiming is too big to fail is society. We should be sacrificing a few non-essential profit announcements to keep the society we want. Anything else is a senseless return to bonded labour and slavery: working for the bank shareholder instead of the taxman.

  • Comment number 44.

    Surely even Alistair Darling must realise that growth based on borrowing, if that is what we are seeing from the last three months' figures, gives a completely false picture of our financial health, and is certainly nothing to be proud of.
    Sadly none of the political parties can accept the inevitable truth that sustainable growth at any level is an impossible dream in the long run and that any apparent growth in any quarter is only a temporary fluctuation in what must ultimately be a flat line when we reach an equilibrium with what Mother Nature can provide.
    One absolute certainty is that all the moaners who want to abandon any attempt to balance our books are living in cloud cuckoo land and perhaps should consider creating an opposition coalition party for people who find reality too difficult to handle and best ignored.

  • Comment number 45.

    The easy way out of this mess is to think British before you shop. Many high street names appear to be be British but in fact are now owned by private equities and all the profits after low corporation taxes disappear off to Swiss banks......a prime example is Boots the Chemist... Byebye sterling currency!

  • Comment number 46.

    The growth figures are pitifull - the only numbers that matter are unemployment and inflation.

    While the private sector are deleveraging, HMG need to do the following (at least):

    1 - Support the economy with more government spending. Start a properly funded 'Full Employment Program' with immediate effect. This will increase our potential GDP as well as acting as an anchor on inflation.

    2 - Leave interest rates low to discourage normal saving - we need spending and investment instead.

    3 - No more QE as it does not increase bank lending at all.

    4 - Have a 'Public Bank' directed by government, which will net-lend even when the other banks won't, and will lend to important areas of the economy ignored by the other banks, and so act as a counter-balance to the banking system.

    5 - End the independence of the BoE and make them cash Treasury cheques - so we can finally embrasse the move from 'gold standard' to fiat currency.

    6 - Ban FR Banking - it serves no purpose and is inefficient. Neither Canada nor Australia do FR and they are better off for it.

    7 - Stop issuing government debt, as it's not necessary to finance government spending. Put interest on excess reserves instead. Only issue government bonds where it is for public purpose.

    8 - charge 'Rates' on empty residential property to discourage using houses as financial investments. This would help deflate property prices, and make mortgages more accessible.

    Kind Regards

  • Comment number 47.

    #46. At 8:24pm on 24 Jul 2010, Charles Jurcich


    Good to hear from you. I agree with your list but would add that the cuts in allowances visited on various sections of the community need to be reversed. Pension payment uplift should be raised by CPI or RPI, whichever is the higher. I know from personal experience that pensioners' inflation is far greater than the politicians imagine. Pensioners need to employ people to do things that a younger person would be able to for themselves. Its surprising how much this costs. Many pensioners struggle to make ends meet – not a respectful way to treat the elderly.

    As an aside; I can see that soon the CPI will be higher than RPI if/when the downturn comes. If it happens, I suspect the figures will stay that way round for some time.

    We also need a highly educated workforce. The recent Michael Gove announcements will only depress the overall standard of education. The ideas being put forward for a graduate tax are discriminatory. Just because you've worked for little more than a subsistence allowance for 3 or more years, you are now to pay additional tax on your income. What a disincentive! What if you take a part-time job so that you can fund yourself – do you still pay the tax? If so, its immoral and unethical. Shame on those who suggest it. I'm disgusted at the LibDem support for this.

  • Comment number 48.

    #46. Charles Jurcich wrote:

    "2 - Leave interest rates low to discourage normal saving - we need spending and investment instead."

    How little you understand the psychology of the individuals that have the money you want them to spend. If returns on investment remain low those with money will tend to cut back even further, and they are the only section of the economy that does not live perpetually in debt or hand to mouth and can choose to make discretionary spending decisions. So keeping rates low has the perverse effect of further depressing the spending of the only sector that has the ability and the cash to choose to spend. Your idea will condemn the country to a depression.

    To get this group to spend they must feel that their returns will rise and it is worth investing. Perpetually low rates will have exactly the opposite effect that you seek!

  • Comment number 49.

    "41. At 3:48pm on 24 Jul 2010, DUCK-island wrote:
    [16] Richard Dingle,

    You are a shameless tory, really...those figures are labours and not tories. The conservatives have always talked about a broken Britain and were hoping crime to soar during this recession.

    DUCK-island (great moniker btw) I am not a Tory; did you miss the sarcasm in my post.

    First of all don't read too much into one quarter. However the Labour governments policies were beginning too work. Hysteria on deficit reduction has been the mother of all fig-leaves for the Tories and their gutless fellow travellers (Calamity Clegg and chums). We are not Greece, our debt has long maturity and a good plan was in place, we also, largely, pay our taxes.

    Of course the deficit and our total debt position are a serious concern but a sensible reduction over 2 Parliaments is the best way forward.

    The Tories have an agenda namely state reduction, dismantling the NHS and rolling back advances in state education. All the hollow protestations about the NHS being dafe with the Tories are coming home to roost.

    By the way, Justin150, continuing our skirmish from a previous blog...

    "I may not agree with that view but it is a logical, if socialist, view. However, to refer to Cameron as shallow and callow simply because of his schooling and your dislike of his policies is not a reasoned argument. To compare him unfavourable to George Pompidou who had an even more privileged schooling is at least amusing"

    ...I agree Pompidou did have an elitist education at one of those famous French academies but they do turn out excellence compared to equivalent institutions in the UK.

    "is a logical, if socialist view Really nothing to do with socialism (I am not a socialist). The Germans have called it right on this. Private education in German is protected by the constitution and rightly so from a civil liberties perspective, but it is neutered by making it illegal to pay a private school teacher more than a state teacher on the same grade. In other words you cannot buy superior education in German. Before anyone posts I am mindful of the fact education is not just about money, not all the best teachers draw the highest salary, but it is a major, major factor.

    This is an important point. The education system in Germany is the biggest single factor contributing to German economic dominance of Europe (long may it continue) and we have to do something similar here before we can break the mould and move forward.

    We continue to go round in circles.

  • Comment number 50.

    No.46. Charles Jurcich wrote:
    "6 - Ban FR Banking - it serves no purpose and is inefficient."

    The UK doesn't have Full Reserve Banking; there is no need to ban something we don't have.

  • Comment number 51.

    John_from_Hendon @ 48: #46. Charles Jurcich wrote:

    "2 - Leave interest rates low to discourage normal saving - we need spending and investment instead."

    How little you understand the psychology of the individuals that have the money you want them to spend...(continued)

    Thanks for posting that; I was going to do a response that would have been rather more vociferous if perhaps less well argued. Sorry if anyone finds this offensive but I find that sort of proposal (#46) downright arrogant. How *dare* you dictate that those of us who have saved (perhaps to supplement pensions) should have our generally modest returns reduced to zero just to fit some nebulous economic theory. In case you hadn't noticed it wasn't savers who clocked up enormous debts either on houses they couldn't afford or on making sure our various bits of plastic didn't feel unloved. Savers by and large take the view that living within one's means is generally a good idea, and yet you seek to "punish" us for our caution. (I have fought hard to avoid the word "prudence" for obvious reasons)

    If the previous government had adopted the "savers' creed" then in all probability we wouldn't be in the mess we are now. And please do not trot out the "global crisis started in the US" argument; nobody forced the previous government to borrow excessively - it did that entirely of its own accord in the delusional belief that it had "abolished boom and bust" and that there is indeed a "magic money tree". It would appear that this delusion seems to be common amongst many who see themselves as economic gurus. A plague on the lot of them / you.

    On reflection I have posted my vociferous response anyway...

  • Comment number 52.

    "How little you understand the psychology of the individuals that have the money you want them to spend. If returns on investment remain low those with money will tend to cut back even further, and they are the only section of the economy that does not live perpetually in debt or hand to mouth and can choose to make discretionary spending decisions." [john_from_hendon]

    As I understand it the interest rate only has the effect you describe on investments in financial services and products. If I'm right about that (and correct me if i'm wrong), it would force banks to invest in the real economy instead, which actually generates jobs.

    Dear SleepyDormouse,
    I agree about pensions and graduate taxes, the later did seem very odd to me. I would add £10/week to state pensions, pension credits. I would add £15/week to working tax credits too and raise the level of income at which people are eligible. We need some bottom-up stimulus to support normal retail and services on the high street, and to help people pay-off their credit cards and mortgages etc.

    The inflation that everyone worries about is usually imported inflation that has nothing to do with the deficit as you are aware, and most of it is actually due to the VAT rise - yet the 'hyperventilators' as Bill calls them are still looking for signs of hyperinflation - so sad.

    Kind Regards

  • Comment number 53.

    I meant Fractional Reserve banking.


  • Comment number 54.

    The Coalition have only been in office for just over two months and so the current figures can only apply to policies of the previous government. As I have posted before given the size of the public deficit and QE some sort of recovery was inevitable however bogus.

    There are unfortunately two issues that complicate the matter; this stimulus is using borrowed money which will have to be paid back at some time and that this recovery is not much more than a reinflation of the bubble we had before the bust.

    We face a serious dilemma. We have to demonstrate to the financial markets - which incidentally the taxpayer rescued almost two years ago - that the taxpayer is prepared to clear the debt all over again this time as a fiscal deficit otherwise those financial markets - which incidentally the taxpayer rescued almost two years ago - will pull the rug out from underneath the taxpayer as in the manner of Greece, Ireland and others. This is why the Coalition government has started to pursue a policy of cuts in government spending which are greater than the efficiency savings that the previous government had already implemented. The only alternative is financial collapse followed by at least four Horsemen.

    The reinflation of the old bubble that had deflated two years ago is about as useful to us as the proverbial ice fireguard. All this has done has been to put off the evil day.

    So all the attempts at protecting the taxpayer as the public is also known from the full effects of the credit crunch have failed. Thank you, Gordon. Not only has the taxpayer been had over once for the banks, the taxpayer is now going to be had all over again for the fiscal deficit.

    I am begining to feel that perhaps in autumn 2008 we should have let the banks go down and have financial armageddon. By now we would all be broke and looking to get ourselves back on our feet. But the debts would have gone along with the banks so all we would be doing now is working for a future albeit deferred. However, there would be hope as it could not get any worse.

    As it stands we still have an ongoing credit crunch albeit in a different place, we are now being expected to pay for the same deficit twice over, we still have uncertainty and we still have regulators trying to stick the tail on the donkey blindfold.

    I think the best thing to do is to assemble all the economists in the UK into the Royal Albert Hall, lock all the exit doors, switch off the electricity and order them to make the lights work. Those who put their hands in the air on the principle that many hands make light work can be deemed to have a sense of humour thus qualifing for Job Seekers Allowance. The ones who seek to reconnect the power can be rewarded with real jobs as electricians. The remainder are to be sent out into Hyde Park to count daisies, sleep on the benches and make rude noises at passing dogs as they are quite useless for anything else.

    I am not looking forward to Christmas even though I am not a turkey and 2011 is begining to scare me as the options have all run out.

  • Comment number 55.

    Radiowonk et al.
    I'm not suggesting interest rates remain low indefinitely, just another year or so to get out of this mess. I think the last government were only marginally better than a Tory one (and this one). If the government had followed a 'savers creed' that would have inevitably caused a recession anyway as aggregate demand would have been even lower.

    Radiowonk, I take your comment as a compliment.

    Kind Regards

  • Comment number 56.

    #54. At 9:37pm on 24 Jul 2010, stanilic

    At the end, you wrote 'I am not looking forward to Christmas even though I am not a turkey and 2011 is beginning to scare me as the options have all run out.' You may well be right, no matter what we do.

    However, if the private sector wants to pay off its debts, it seems a strange way for the Government to act by sacking 500,000 public sector workers – and causing who knows how many in the private sector to loose their jobs. The size and speed of these cuts is so fast, its going to cause carnage. Perfectly good and viable private sector companies will go to the wall.

    Control is needed on what can be loaned to individuals (an anathema to many) so that personal debt is reduced. It seems wrong to me that putting many people out of working and thus denying them the chance of paying off their debt is seen as a valid policy option.

    I know many think the public sector is too big; some want to see it as small as possible. But they will never actually say when the shrinkage should stop. I doubt they would be happy with one person just signing contracts for the private sector to do all the work. Well, we all use and benefit from the public sector, imperfect though it may be – even David Cameron! Our MPs are public servants.

    So why are they carrying out such damaging policies? I don't remember to many protests from the Institute of Directors and the CBI about Labour placing PFI and all those other contracts with them. Perhaps they did protest, it wasn't very loud or sustained and sorry I didn't hear it. I am just suspicious that its 'cut the pubic sector and give the job to the private sector. We can then earn a tidy profit on an everlasting work stream – that will at least pay for the Board of Directors pensions! Sorry workers, we cannot afford your pension scheme, we'll cut it back'

    Or am I just being cynical?

    Remember, without the vast numbers of employees [ie us, the general public] earning enough to buy the private sector's output, there cannot be a private sector. We won't be buying iPods, all we will be able to afford are peas in the pod.

  • Comment number 57.

    re #55
    Dear Charles,
    Had we had better rates established gradually during the late summer, autumn and winter of 2007/08, would there not have been a better chance of our banks and building societies enjoying better cash inflows? The liquidity crises of 2008/09 might have been minimalised or avoided.

    It would have been tougher for the property market but by then many people were on fixed rate mortgages anyway with a year, or two or three's protection and a chance to ready themselves for a future increase.

    What happened was that the switch from FRM mortgages has still been a shock, because by and large, people have not been able to access 2 - 2.5%+ bank rate. They have gone from 5% - 5.5% FRM to 5 - 6% VRM! And the banks had their liquidity crises. And we still have a big savings and pension problem getting worse for the future. And it is said, some banks are still having trouble getting hold of funds!

    Is that not three bad ANDS that might have been mitigated by more reasonable interest rates?

    Best wishes for a good weekend,

  • Comment number 58.

    No.54. stanilic

    The net debt is held by China, Japan, Germany, Taiwan, Switzerland, and the Oil nations.

    One could default on these debts, but it would mean that our assets also become worthless. In other words, you would lose your personal savings and all companies would lose their working capital, there would be no food in the supermarkets, and (shock horror) houses would be worthless.
    Maybe even gold would not be worth a single mackerel.

    Barter economy and back to living in wattle and daub huts would follow.

    We could simply net the debt off, but it would mean that the Chinese would own your house, and you would have to pay them rent, forever.

  • Comment number 59.

    Charles Jurcich @ 55: "If the government had followed a 'savers creed' that would have inevitably caused a recession anyway as aggregate demand would have been even lower."

    Possibly so, but only because once "growth" becomes dependent on the spending of borrowed money, then "future growth" will almost certainly require yet more borrowed money to be spent without the first lot being paid back first. And so on ad infinitum. Not a good idea.

    Only an economist could interpret a criticism as a compliment. I might try to get that into the multitude of "economist joke" websites. :)

  • Comment number 60.

    #52. Charles Jurcich wrote:

    "As I understand it the interest rate only has the effect you describe on investments in financial services and products. If I'm right about that (and correct me if i'm wrong), it would force banks to invest in the real economy instead, which actually generates jobs."

    Nope, you are still mistaken and your analysis is flawed. Risk and the perception of risk matters to both sectors (if indeed those with the ability to direct investment differ at all - which I suspect is also wrong.)

    With low interest rates the perception is that everything is almost exponentially more risky and thus everyone will be extra cautious. Even the so called Venture Capital sector can't find anything to invest in (although they actually do not invest in risky things if they can possibly avoid it!)

    Exceptionally low rates equate to the increase risk and the proximity to economic armageddon. Until rates rise and this is taken as a real indicator of an economy on the turn (an not just inflation!) then and only then will those with money or the control of money begin to considered investing - it makes no sense at all to invest if there is a real possibility of economic collapse.

    Low rates equate to future economic collapse - so no investment until rates rise form either personal or private investors. The idea that people take counter intuitive risk assessments, that you seem to view as a predicate for investing is wrong as investing then makes no investment sense as the present risks are far too high (the same it true of uncertainty.)

    This can be seen in the banks where they are concentrating on rebuilding their own capital base (indeed we are even forcing them to do so) - your logic would have them investing - which they are not. Everyone with excess funds is doing the same as the banks, rather than investing for growth for exactly the same reasons and in response to exactly the same market forces. This is why, until rates rise, investment will be very anaemic!

    The lower the rates the lower the investment and the more those who invest will maintain exceptionally conservative investing strategies - so stick up rates if you want investment and jobs! This will lead growth not follow it and that is the historic mistake made and still being made by the Bank of England - they have lowered rates to one fifth of their previous lowest level and created the perverse incentive rule that applies very strongly at these present levels. It is all about perception of the future and risk - fear dominates the markets greed has been almost entirely vanquished in favour of survival (think about the banks!)

  • Comment number 61.

    #60. At 10:48pm on 24 Jul 2010, John_from_Hendon

    So if we want investment by industry interest rates need to rise. But if they rise too far, this will be a disincentive? Like the bears porridge, it needs to be just right!

    I just don't understand then why interest rates fell so far and so fast in so many countries. Didn't anyone have a word in Gordon's ear?

    I'm not doubting your assessment of the psychology of all this, but I am surprised no-one in the Treasury, BoE or in the political class realises this. Sounds like gross incompetence to me; rates should never have fallen so far.

    At the time I seem to remember commentaors saying that they had to go to this sort of level, and since then any hint of a rate rise would be seen as a sign of inflation due to all the QE money pumped into the economy.
    Where am I going wrong? Its a mad-house. Only end is tears!

  • Comment number 62.

    #49 Richard Dingle wrote:
    By the way, Justin150, continuing our skirmish from a previous blog...

    "I may not agree with that view but it is a logical, if socialist, view. However, to refer to Cameron as shallow and callow simply because of his schooling and your dislike of his policies is not a reasoned argument. To compare him unfavourable to George Pompidou who had an even more privileged schooling is at least amusing"

    ...I agree Pompidou did have an elitist education at one of those famous French academies but they do turn out excellence compared to equivalent institutions in the UK.

    "is a logical, if socialist view Really nothing to do with socialism (I am not a socialist). The Germans have called it right on this. Private education in German is protected by the constitution and rightly so from a civil liberties perspective, but it is neutered by making it illegal to pay a private school teacher more than a state teacher on the same grade. In other words you cannot buy superior education in German. Before anyone posts I am mindful of the fact education is not just about money, not all the best teachers draw the highest salary, but it is a major, major factor.

    This is an important point. The education system in Germany is the biggest single factor contributing to German economic dominance of Europe (long may it continue) and we have to do something similar here before we can break the mould and move forward.


    Ah this skirmish is fun

    So the French system is fine even if it is based even more than UK private education on your access to elite schools being dependent on how your parents are (mere wealth is not enough)

    As for the German system making it illegal for private schools to pay more than the state system, given the reports of some of the pay packages for state school heads in the UK it appears that the state system pays more than private sector in some cases. I would suggest however that such a system is a gross invasion of civil liberties - after all if govt can tell some private sector employer what wages to pay so that they do not compete too fiercely with the public sectors favoured child, where would this stop - govt telling everyone what wages to pay?

    IN any event I suspect in the UK private schools do better for two very important reasons, more teachers not better paid (ie smaller class sizes) and (on average) more committed parents. That does not mean all parents who send their kids to the public sector are uncommitted or that every parent who sends their kids to private school is some uber-committed person it is merely the average.

    But you are right to compare the Germany education system favourably to ours. However, I do think the Germans value education more than most people in the UK and crucially teachers are still viewed as professionals. In the 1950s and 60s the UK still regarded teachers as professionals but since then we have stopped thinking that. Teachers have stopped acting professionally (the more lurid parts of the annual NUT conference and regular strikes did not help). Which was the cause and which the effect?

  • Comment number 63.

    John From North London & Dear old Dormouse

    If interest rates are zero and the government stopped issuing gilts, the private sector would be forced to invest in jobs and production, because it would have nowhere else to park its cash. The private sector would be crowded in.

    Conclusion: government should stop spending and privatise everything, from the NHS, to the police, to the education system, to the army.

    There would be no taxation, and everyone would choose how to spend their money. What could be better than that? We could all buy shares in the new companies, and watch the dividends roll in. I'd stop foreign share ownership though, just to make it fair. We'd withdraw all our savings from the banks and building societies in order buy the shares. House prices would fall and the value of our shares would rise. Shares are more divisible and liquid than houses; a much better asset class altogether.

    With kind regards.

  • Comment number 64.

    "Low rates equate to future economic collapse - so no investment until rates rise form either personal or private investors."

    Why do low rates equate to future economic collapse? A governments is a monoploy issuer of its own currency, how can it collapse - it sets the rules of how its currency works by statute. You seem to misunderstand how currency systems work. The government is always in charge. The value of a currency is determined by the real resources and productivity which the government has the option to purchase. The markets are not in charge, the government is!(unless they are stupid.)

    Second, your repeated reference to the 'perception of risk' is flawed. Most ordinary people and companies 'do the best with what they have got' - they cross their fingers and hope. Your thinking is not stock-flow consistent. Perception of risk is related to 'Ricardian Equivalence' and 'Rational Expection (RATEX)' which have been disprooved, along with 'Say's Law' - no empirical evidence whatsoever!

    Modern Monetary Theory disciplines itself to be stock-flow consistant, and bound by empirical evidence - that's why I trust it.

    Kind Regards

  • Comment number 65.

    "Only an economist could interpret a criticism as a compliment. I might try to get that into the multitude of "economist joke" websites. :)" [radiowonk]

    I'm not an economist - sorry, I'm just a normal 'concerned citizen' who happens to research things on the internet - though again I'm flattered that you thought I was.

    It took me a while to get my head round this but - 'Borrowed money' in the private sector is fine, so long as no more than 2% is likely to default. The problem came when salesmen gaving loans to people they knew could not pay it back. The existing (flawed) system relies entirely on loans to increase the money supply (everytime you do not pay-off your credit card in the first month - the amount that you do not pay off increases the money supply!!). I propose (as do others) that the government gets to inject money into the economy in other ways - through a Public Bank and through the BoE cashing government cheques.

    Either way, get rid of the idea that bankers run the country by changing statute law - stuff them - they can go and live in Dubai or something, rather than distorting our local house prices and stuff - stuff them - bye bye bankers.

    Kind Regards

  • Comment number 66.

    #63 Mr Tweedy,
    If the banks were forced to invest in the real economy (manufaturing, retail and services) then they would create jobs and income, which would boost aggregate demand - the rest of your argument makes no sense to me.


  • Comment number 67.

    Dont worry about a thing the coalition will collapse during the next 18 months an election will be called and the labour party will be back in power as too many people are going to be made unemployed by George Osborne.
    mostly in ship building and manufacturing ie Bae

  • Comment number 68.

    Richard D and Justin150... forgive me for intruding on your education debate but as a state school teacher who sent his daughter to public school I thought a word or two was in order.
    1. I teach GCSE classes of around 25 students and A level classes of up to 20. My daughter's classes were roughly 15 and 10 respectively. I have much less time per student.
    2. Parents - 50% Parents' Evening attendance is the norm in my comprehensive; daughter's school more than 90%. So only 1/2 of my students' parents/carers are "bothered". As a form tutor I spend far more time dealing with pastoral, difficult home issues than on my tutees academic progress. Not the case in the private sector.
    3. Disruption - which takes an inordinate amount of time to deal with - high in state schools; much lower in private education. Paperwork/filing re disruption takes up lots of my time.
    4. Inclusion - kids with problems - Teaching Assistants tend not to be needed in private schools. Lessons have to be differentiated sometimes at three levels; the aspirational learners, the distracted learners and those who really can't access their learning ~ it all takes time. Gifted and Talented students get my time, those who disrupt get my time and those who need lots of help. The ones in the middle suffer.
    5. Quality of teachers - tend to be better in state education due to the above! In my experience many public school students are able to teach themselves.
    Due to the above my time per student is between 30% to 40% of the time I would be able to spend with them in the private sector.
    We teachers need the following to help us:
    1. Parents not to assume that X-Box, Playstation, Facebook et al are good babysitters. Parents need to spend much more time with their children.
    2. Parents to apply some discipline on their children re respect for others, helping around the home, bedtimes, homework/reading. Books are a thing of myth and legend to some students. Newspapers non-existent.
    If I were to be truly cynical I'd say we get what we deserve because poor education and home life over the last 50 years cannot be turned around by teachers alone. The government and others suggesting that teachers and schooling need to improve all of the time is no help; especially when results improve year on year and are deemed such a success! An open debate about parenting skills would help.

  • Comment number 69.

    "after all if govt can tell some private sector employer what wages to pay so that they do not compete too fiercely with the public sectors favoured child, where would this stop - govt telling everyone what wages to pay?"

    Of course not. Education is important as is health and these are the few areas (along with defence and law and order) that I consider the state has an important role to play. Another area is the judicious use of state championing of key industries (another poster made a good point about UK government help for Rolls Royce in the 1970s).

    The grandes ecoles of France are unique and without doubt eletist and highly selective but it is not about money. There is no equivalent in this country; Oxbridge is the nearest we get. As for the 'opening of doors' based on who you (or your parents) know, this is something rather human and goes on everywhere.

    You make good points about remuneration of certain state teachers but I have never claimed the UK state education is anything near the finished article, in fact in terms of being cohesive and fit for purpose it is a shambles. France set their current education system in place in the 1880s when laws ('Jules Ferry laws') were passed requiring every boy and girl 15 or over to attend state schools that were free of charge as well as secular.

    The UK over the same period have treated education (and more recently the NHS) as a political football and have just tinkered. It is probably the biggest indictment of the Labour Party that they failed to grasp the nettle on education (they did grasp it on health and the NHS is now the envy of the world). If the Tories really were a 'one nation party' I would have expected them to have done so as well, but we all know they represent a certain political class.

    For a state to succeed (Germany and France are good examples though not even the best examples, for that try the Far East) one has to have a solid platform of state education. We fail in the UK dismally and it really is the primary root of all our problems.

  • Comment number 70.

    I'm far from sure that the interest rate discussion above really has a lot of bearing on the lack of investment at the moment. It is surely far more to do with the paralysis currently caused by the Government due to the cuts it has announced and the fact that, apart from insiders, the general public do not yet know where the axe is to fall. This leads to great uncertainty. Companies might be formed or wish to expand, but they need confidence that the market will still exist for a significant period. Some companies can take a long view as their new business projects take many years to mature, so not all will cease. Many will want to see the axe fall and the 'heads in the basket' before deciding what to do. The Government has not helped itself by asking departments to prepare plans for cuts up to 40%, far beyond the 25% originally expected. Its pointless saying 'Oh this is speculative, it won't happen', if plans are prepared, of course it could happen with cuts between 25 and 40% now being possible. It opens up the political choices; one department takes more pain, another less; but it averages out to 25%. Do politicians think we are naïve?

    So the Government has introduced a prolonged period of uncertainty; the one thing companies find difficult to cope with and markets abhor. The market volatility will be unlikely to settle. Investment will remain subdued. With this as the background, are interest rates the primary driver for anything?

    We are currently thinking too parochially about all the economic retrenchment actions. With many countries all taking similar measures more or less simultaneously, what is going to happen? Aren't these uncharted waters? When in uncharted waters the wise Captain goes very, very slowly taking constant soundings, willing to reverse at the first sign of the ship totally foundering. We can take paint being scrapped off; maybe even a small hole or two – the pumps will cope [if they keep running and we have spares]. So its Full steam ahead, lash the tiller – we hope its the right direction!

    It won't be for one simple reason.

    No-one knows the risks of the co-ordinated actions being taken around the world, no-one can quantify them; few understand the complex web of interdependences that exist with components for vital products now, potentially, being sourced from????? Globalisation has created a huge uncharted network. Its not just the sale of new items; its the sale of all the spares and materiel that keep current production/factories running. The glossy new automated pile of metal and plastic that produces items at a fraction of the price of the human production line can be turned into a pile of useless junk in a moment once that vital component factory goes into liquidation. Interest likely will still have to be paid on the capital used for the initial purchase and now you are in trouble, perhaps heading to administration. Your market is still there, but you've gone.

    There's talk above of elephants in the room – here's another; its getting crowded [hope they don't reproduce].

  • Comment number 71.

    A further thought on my post at #70.

    How to determine how much you are at risk.

    [This is just one way, I don't recommend it necessarily and I, personally, have nothing to do with insurance and have no expertise in the field – just make your own mind up]

    1 Identify all the equipment that your companies output depends upon, in which you have a large investment, that is producing your income. They need to be items that have some uniqueness about them.

    2 Identify your dependency costs and decide what you are trying to insure; do you want to keep and pay your staff, or will you just seek to cover interest payments and other overheads + profit.

    3 Go to your ever so nice and friendly insurance broker.

    4 Seek a quote

    5 Decide if you can afford it; if yes then pursue the matter and think carefully before rejecting it
    If the quote is laughable, large, exorbitant – YOU'RE COMPANY AND YOU ARE AT RISK – you need a back up plan!

  • Comment number 72.

    #63. MrTweedy wrote:

    "If interest rates are zero and the government stopped issuing gilts, the private sector would be forced to invest in jobs and production, because it would have nowhere else to park its cash. The private sector would be crowded in."

    Wrong I am afraid - they would invest in Gold! (This has always been the case in all recorded history!!!) By the way this is why the private ownership of Gold was severely limited in recent times. It is not limited at all now.

    #64. Charles Jurcich wrote:

    "Why do low rates equate to future economic collapse?"

    Your 'ideas' ignore the nature of global capitalism and the ability of investors to buy and sell anything, globally. Low rates equate in a country to incompetent economic management and the dire state of the country's economy and the perception that it will not improve. Money and investment will move to the growing economies and will not result in investment here unless and until rates are raised.

    Real markets (and investment) react to the balance between 'fear' and 'greed'. If the perception is that a country's money is worthless and worth even less (that is the case with near zero interest rates) then fear is the predominate emotion. See my response above.

    UK interest rates must be raised to redress the balance between fear and greed and to suggest that returns will rise and not fall - as the only reason to invest (aka save) is the idea that there will be a positive return from doing so - otherwise it is gold! (At present gold bars look far better than anything else!)

    You just don't get how the financial world actually works!

    Both of you (see above) should study economic history and the role of gold as the ultimate refuge in times of financial stress. Gold is the ultimate backstop against fear. It is absolutely impossible to threaten investors/savers to invest in good works - they will not! The only way to get investment is to redress the balance towards greed and away from fear. This can only be done by providing real returns to investors/savers and because the balance is so far towards fear the incentive will have to be substantial. (This is the direct result of the incompetent Bank of England!)

  • Comment number 73.

    Looking at the price of gold since 1975, it would appear that there was a nervousness creeping in back in 2004-5 and, by the end of 05, there were enough buyers to indicate that something was really wrong.

    Someone's got to be buying it, even today, to support the current price. They will need to sell it at these prices to get their money back at some time in the future. The current price would seem to me to indicate extreme fear, maybe terror. Or is it just needless / thoughtless panic?

  • Comment number 74.

    Richard Dingle,

    My bad, didn't get your sarcasm there! I dont know how quickly the last gorvenment realized that the Banks after getting free money were going to hoard the free loot and pay themselves bonuses a year after the financial crisis...

    If they had that knowledge early on then they should have used the 12b from the VAT reduction[17.5 to 15%] to undo the credit crunch by giving small and medium businesses loans that the banks were unwilling to give.

    I think for Obama and Brown, the banks lockdown [after all the free QE that was thrown at them] must have felt like as a slap in the face.

    The fact that the banks have gone back to their old ways is an indication of the contempt they have the for public and lack of fear of the law-makers.

    It's a shame that the same people who were creating financial time-bombs in the same banks ended up at the treasury and were in position to help their old buddies....tragic!!

  • Comment number 75.

    No.72. John_from_Hendon

    Which is why FDR banned the private ownership of gold in 1933 via Executive Order 6102.

  • Comment number 76.


    "If interest rates are zero and the government stopped issuing gilts, the private sector would be forced to invest in jobs and production, because it would have nowhere else to park its cash. The private sector would be crowded in.

    Conclusion: government should stop spending and privatise everything, from the NHS, to the police, to the education system, to the army."

    I get your point now - if I was a bit abrupt I apologise. I think that having a low interest rate is important for the moment - it would not necessarily mean governments should stop spending, as although lower interest rates might temporarily help investment in the real economy - this would not crowd out the public sector in my view.

    A low rate, plus other measures (a Public Bank etc) would ensure we could rebalance our economy by investing when others are afraid to do so.

    john_from_Hendon's point that investors will rush to gold: Well, so long as government invests and spends to secure growth, then it would not matter too much - if investors want to create a 'gold bubble' then that's fine, because when it collapses it will not affect ordinary people too much.

    I agree with SleepyDoremouse that the main problem is that cuts in government spending are going to stall recovery. I think government spending and investment are key to this recovery - particularly pumping money in to the bottom of the economy through tax credits and other things - the rest of the real economy would benefit from this, and it would raise confidence. Some of this extra money should be permanent too.

    Kind Regards

  • Comment number 77.

    74. At 11:02am on 25 Jul 2010, DUCK-island


  • Comment number 78.

    Charles Jurcich

    Everyone talks of "crowding-out" and I was interested in testing in the opposite direction, to explore what "crowding-in" would look like.
    In reality, I'm a supporter of government being an objective parent, who sets the rules and nurtures, but only intervenes when necessary.
    I am not in favour of the anarchy of free markets; so I don't support the crowding-in argument I made above.
    I am not in favour of political (left v right) government, as I believe government must be objectively centralist. However, a degree of elitism within the workforce is necessary in a competitive world. In theory, government should have no direct links with business or unions, but it must understand the economy and promote stability through the enforcement of safety limits.

    The UK needs to balance its imports and exports, employment, skills and wealth distribution. The world needs to keep trade circulating and reduce trade imbalances.
    Will we achieve this? Only time will tell.

  • Comment number 79.

    #63. MrTweedy wrote:

    "Conclusion: government should stop spending and privatise everything, from the NHS, to the police, to the education system, to the army.

    There would be no taxation, and everyone would choose how to spend their money. What could be better than that?"

    What about those who have no money - the unemployed, elderly and otherwise disadvantaged? How will they get access to the public services they, more than anyone, need?

    Your vision of a Utopian future is a cruel, selfish, heartless one.

  • Comment number 80.


    On the trade deficit in the UK - unless I got my decimal places muddled up somewhere along the line, the top trade deficit nation position by a long way is jointly held by Germany, Norway and China and that combined deficit represents less than 0.2% of final household spending in the UK.

    What does that imply though? Aside from that I may have got my calculations wrong, why is final household spending so large in contrast with the trade deficit?

  • Comment number 81.

    PS: I wonder in what ways trade imbalances are related to population imbalances, and in what ways resolution of trade imbalances will involve management of reproductive patterns and the involvement of biological perspectives in governance.

  • Comment number 82.

    #78 MrTweedy wrote “The UK needs to balance its imports and exports, employment, skills and wealth distribution. The world needs to keep trade circulating and reduce trade imbalances.
    Will we achieve this? Only time will tell.”

    I couldn't agree more with these sentiments. As you will have realised from my previous posts over the last few weeks, I very much doubt the ConDems will provide the correct political policies. The Labour party, despite their links to the Unions, were going to make severe cuts.

    The G20, less USA, agreed to austerity. [but Congress won't provide funds to Obama, so a bit of paralysis here]. In my view, that's the road to ruin for many people, families and companies. The early 80s will look like a picnic. Coordinated austerity is extremely dangerous; I wrote about my concerns at #70. Who do we export to if all are in austerity programmes? We have yet to see significant company bankruptcies and to hear about the financial provision being made by the banks that loaned the money. It will just be another reason for them to build their reserves even higher. The banks want money to protect themselves and their business. OK; but if they are putting themselves in the position where they get the bulk of the money, the general public won't be using banks, we won't have any money to deposit or withdraw. Everyone looses each time there is a default on a debt. Enough defaulters and the banks are in trouble again. Conservatives nationalising banks to save them – what a sight that would be!

    Without jobs, we as individuals cannot pay off our debt.
    Without jobs, consumers won't have funds to purchase industry's output.
    Without a marketplace, companies will not be able to sell their output.

    Result: Decline, recession and … maybe, just maybe, ….... depression

    I suspect that there could be a positive feedback, as the decline gathers pace, so there will be greater decline. Now we will have many countries in decline simultaneously, so that there is no support for jobs anywhere.

    Has anyone modelled this?
    Is there a point at which the decline feeds on itself and becomes effectively unstoppable until there is little left?
    I wonder?
    Positive feedback is often a sign of an unstable system; [it produces the howl between the microphone and the loudspeaker]. I can see the mechanism, I just cannot see the speed or magnitude. Everyone would want to reverse a decline, but what policy options and levers would work once confidence has been totally destroyed by the scenario outlined above. Apart from switching everything off and starting again from scratch.

    So I really do hope that George Osborne and the Treasury have done their calculations properly and the cuts do not take us into a financial positive feedback region of unstoppable decline.

  • Comment number 83.

    #80. At 2:20pm on 25 Jul 2010, Oblivion wrote:

    Can you quote any figures and sources please. What you write sounds odd


  • Comment number 84.

    "For Chancellor Osborne, the strength of the recovery shows he was right to start cutting the deficit faster, and sooner. But naturally Alistair Darling says it shows he was right to support the economy when he did - and that Mr Osborne's plans are putting the recovery at risk."

    ...and what neither of them realise is that both efforts would end in disaster. Osbourne's approach will result in price deflation and a long depression - Darling's tactics would lead to hyperinflation and currency collapse.
    The deficit is too wide, the debt is too high, the exports too few and the imports to many. We would be better of defaulting and 'beat the rush' because they are not going to borrow, inflate or deflate their way out of this one.
    Tick, tock, tick, tock - the longer we ignore it the bigger the shock.

  • Comment number 85.

    Try this explanation folks.

    The goal of banks is to accumulate capital (well they not in the game for the kudos!).
    This capital ends up in the hands of a decreasing number of people (as most industries are not banks and banks are generally 'good at their job')
    Banks and lending do not create jobs and income - demand creates jobs and income.
    Consistent demand comes from peoples needs, inconsistent demand comes from peoples wants.
    Evenly distributed income produces evenly distributed demand.
    Unevenly distributed income produces unevenly distributed demand.
    The actions of a small number of people are more volatile than those of a huge majority.
    Inconsistent demand is removed from the economy much quicker than consistent demand in recession.
    The removal of the inconsistent demand from a small number of wealthy people will have a big effect on the aggregate demand.
    The consistent needs of those at the lower end cannot be fulfilled - people protest, people riot, people associate to increase their safety (gangs etc), people die.
    Hence the economy and politics are more volatile with banking.

    Banking must be stopped.

  • Comment number 86.


    I'm not sure about the ratio of imports to consumer spending. I saw you had looked at the countries the UK imports from, which is very interesting. If I get time, I'll take a look myself, as I haven't gone into it in that amount of detail. As an aside, Holland has a big export surplus, which I wasn't aware of until recently.
    I do know that the UK current account deficit is only about 1.6% of GDP.
    According to the Pink Book 2009 Edition, available on the web, the UK imported £460bn in total against exports of £422bn. Total real GDP is around £1,200bn.
    However, there are imbalances within this, as private sector wealth and employment tends to be skewed to a relatively small number of geographical locations within the country. For instance, many of the exported services provide employment in the London area.

  • Comment number 87.

    No.79 rbs_temp

    The poor would be subsidised by the government through tax credits, or similar, paid for from taxation of the private sector. Anyway, I don't actually support the crowding-in argument of 100% privatisation. I posted it only as a theoretical argument.

  • Comment number 88.

    #75. MrTweedy wrote:

    "#72. John_from_Hendon

    Which is why FDR banned the private ownership of gold in 1933 via Executive Order 6102."

    But that has gone long ago with the deregulation and globalisation of markets! (But that was precisely why it was enacted - you do I think get my point!)

  • Comment number 89.

    88 continued

    This whole argument leads to the inevitable conclusion that the only way to restart investment is to raise rates - and by doing so decrease fear and re-energise greed!

  • Comment number 90.

    sleepydoormouse, I fear you may have been sold a pup.

    I was also intrigued by the ideas until I began to understand the premis upon which they are based. That premis is that governments of states do not operate in a global economy where they compete to attract the best merchants, and the best business organizers.

    I do not seek to speak down to you here, because I can completely understand how the good professors' ideas might make sense. But I feel i am experienced enough in a highly specialized field to perhaps shed some light on why you should reconsider the wisdom you have adopted as valid.

    I am a common law lawyer living in Switzerland. My field is international corporate structuring. Unkind people might say I help folks "cheat tax", by advising on suitable "tax havens". I disapprove of those terms, for two reasons. The first is that they are hugely biased towards a world view that presumes state power to be beneficial and legitimate, and the second is because every internationally active business must have some kind of structure. If choosing a structure that gives the highest returns to shareholders is "cheating", then it follows that choosing a structure which gives all profits to the highest taxing regime in the world is "playing fair". And in such case, playing fair means supporting communist regimes which appropriate all property and hold it in the name of the state, and playing fair as a corporate advisor on structure means giving away your clients money to your favourite communist dictator. That could be seen as coming into conflict with fiduciary duties under the common law, and so you may see that for people such as myself, who have a lawful duty to protect their clients investments, "playing fair" cannot possibly mean paying as much tax as possible. Indeed it must mean paying as little as possible, because in many cases one is administering trust funds for orphans and minors, and they depend upon their trustees good judgement for a secure future.

    In fact I have never administered a trust fund for an orphan, but it is worth observing that it could theoretically happen. *cough*

    Well, the point I would make is that we must be very careful choosing our terms. A "tax haven" can also be described as a "competitive government". If you understand that international corporations, and before these happy entities evolved, international merchants, are free to set up shop and trade where they feel most welcome, then you understand that governments compete for custom. A state is not a micro universe. It is more accurately described as a marco household, or very large town. States interact with international traders, and they must compete or be avoided. And if states are avoided by traders, they do not receive all the benefits that come with global interaction.

    It is worth pausing now to consider some of these benefits in detail. My personal favourites are toilet paper and literacy. I'm sure you have your own. But there is no doubt, all technology and human philosophical advancement is spread to all states via trade. And without trade, states become backwaters and the quality of life degenerates.

    And your good professor fails to take this reality into account when he suggest that there is such a thing as a pure fiat currency, or that states control their money supply and therefore their economic outcomes without reference to the reaction of capital markets.

    States inevitably have to deal with the reality of international markets, and the perception of their behaviour in those markets. If states simply create money from thin air, without borrowing it or raising it through taxation, markets react. They always have done. Even in the times of the roman empire, the debasement of the silver in the coinage by the roman state had profound consequences for trade and technology. Indian merchants who brokered their trade via the place we now call Israel had better metallurgists than the traders inside the roman empire, and so demanded increasingly more coinage for the same wares as the debasement went on. Rome needed the trade with India and beyond (china), and so special dispensation was given to certain traders to use "real currency" upon behalf of the roman state.

    You see, just because a currency is not pegged to the commodity gold does not mean it is truly a fiat currency. A state may proclaim that it is not converting its notes into any other commodity, but in the end it must. In the final analyses, all states want to buy foreign tech and foreign materials. And when they do, they need to exchange a certain amount of their currency for those materials. And thus you have a return to the mutability of their "fiat" currency, and a return to a material exchange rate. It might be a "wheat" standard, or a "titanium" standard. Or copper, or steel, or small furry animals. Whatever it is, sooner or later a state has to take its notes to market and see what they bring.

    So the idea of a floating currency being immune from degradation is false, and so is the idea that governments can increase money supply without penalties afflicting them very swiftly indeed. Any government which simply prints money is inevitably on a doomed course. To do so spits in the face of everyone who ever lent you their currency at agreed exchange rates, and very soon you have no one willing to give you credit in the international market. All the best merchants watch their investments degrade in value, and they pick up and leave, to establish themselves somewhere where the government understands that it is competing in a global area to provide the best service at the best price.

    And once a government cannot obtain credit, it is forced to either raise taxation or print more currency on worthless paper. Raising taxation in an environment where business is already leaving simply speeds up the process and creates a vacuum of talent and technology. Printing more money does exactly the same. Both wipe out your middle class, and thus create environments of extreme instability, which further encourages international merchants to vacate as swiftly as possible.

    So state government shave a very simple choice, in the final analyses. They can either compete to provide their services (a stable environment) at the best price (tax rate), or they can drive every free merchant out into other states, and reap stagnation, poverty and instability.

    Your professor seeks to ignore the reality that states are limited in this fundamental way, and his entire thesis is based upon the idea that money is superfluous to the exchange of goods and services inside a total state. And that is right. It is. If you have a total state, where everything that exists is bound within the borders of the state, and where nobody can leave the state, and where nothing needs to enter by choice, and where everyone must obey the megalomaniacs who control the state by force, then the theory makes sense.

    Nothing else does, but that is a matter of personal preference. It is true to say that inside a total state governments can run fiat currency and do as they wish with the market. Because in such a state everyone is a slave under the control of their overlords.

    And that might be a good thing, if you believe that it is possible to be lucky enough to have just the right overlord.

  • Comment number 91.

    I am troubled by the use of the term "growth" by Stephanie, in the context of economic activity created by an increase of government debt.

    Is that right? It is legitimate to call economic activity caused by debt spending "growth"?

    I am not asking for an economists academic opinion here, but rather a normal educated persons' understanding of the terms.

    Can we borrow money and spend it, and then claim to be richer because we spend more money?

    Because that is what growth means. It means to get bigger over time. And in the context of the discussion of national wealth, it means to get richer over time. More money. Growing wealth. that is what we mean when we speak of economic growth, or I submit we are playing childish tricks with terminology and need a good thrashing to bring us to our senses.

    Now if I am not borrowing money, and yet "somehow" I seem to be spending more this year than I was last year, it might follow that I am getting richer. I must be, to have the money to spend. So a neighbour would be entitled to presume I had received a promotion, seeing me spend more money than previously. Or that I inherited some money, or was spending savings, but let us leave those complications to one side.

    So I do see the economists correlation between increasing GDP, meaning money spent by the societies economy, and becoming richer as a society ("growth"). Sure. I see that there is a correlation. It is the same as my neighbour who sees me spending far more than last year, and who then says "He must have been promoted and be earning a higher salary. He must be richer now.".

    But what if I am spending more money than last year because I have a credit card? Or three credit cards?

    I am then getting richer? More to the point, is my neighbour entitled to make the observation that i am getting richer?

    Clearly I am not getting richer. I am actually getting poorer, and faster, because I am obliged to repay those debts with interest.

    And so it is with government "stimulus". Economists and academics can be as clever or dishonest with the terminology as they wish, but in the end the reality is the same. When you borrow money and spend it, it makes you poorer. You are not growing richer, but rather becoming poorer.

    To call economic activity based on government borrowing "growth" is not an exercise in terminology. In is fundamentally an exercise in deception. It seeks to create the impression of something which is not so. We call that deception. Those who think it is OK to deceive others call it "spin", because that is how people who believe such things behave. They always use a nicer word for an ugly piece of behaviour. It is easier than behaving properly.

    But on this blog, I think we are all nice folks who can agree to behave properly. And so we ought never call deception "spin", and we ought never call spending borrowed money evidence of greater wealth.

    Such behaviour is simply dishonest, and I sincerely wish journalists would cut it out. It is bad enough listening to party members sell their racket without having journalists do it as well.

  • Comment number 92.

    #25 quote "The leaked Treasury projections at the time of the emergency budget projects up to 1.2 M civil service jobs going"
    According to the Civil Service web site there are only 498,000 full time civil service posts being covered by a total of 532,000 people (a percentage are part time workers so you need more people to cover all the full time posts).

  • Comment number 93.

    #90. At 6:07pm on 25 Jul 2010, democracythreat

    Firstly, may I thank you for such a full and well argued exposition against the claims of MMT generally and Professor Mitchell in particular. I am really very grateful for the time and trouble that you have taken.

    It is clear that, your background and the knowledge that has given you, has had a significant influence and provided you with an insight that I lack.

    I believe I have to acknowledge that states have to compete and, in these global times, the mobility to which you refer is very visible.

    Some UK pottery companies have taken their production to the far east because of the availability of cheap labour. Others have gone to the old east block countries like Poland for similar reasons. However, I gather that there are instances where this apparent mobility has not worked out so well; costs have actually proved to be higher. They have to live with it as the cost of a return to the UK is too much for the company to pay. One simple example, probably not typical, but illustrative of the care that will need to be taken when companies think about moving their operations out of UK. However, I must acknowledge your general point; I must not generalise a specific instance; it is just a cautionary tale. Some types of industry are obviously very mobile.

    I had not considered the effect of mobility on these theories and have no immediate answer. So I will need to think and read more carefully in the light of your comments.

    I am uncertain about the which pieces of mine you have read, but I only started to join these discussions on 7 July and I am no economist, just someone who is unhappy and very uncertain about the correct way forward. I am reading what I can to try to understand.

    My early enthusiasm for MMT has waned certainly, as I have seen problems. Not least is that I could not see how one country could follow policies based on MMT in the midst of a world largely following mainstream economic ideas. I had not thought further to your general point. It had seemed to me to need everyone or no-one to follow MMT; [not very likely given the stranglehold of neo-liberals in the economic community].

    Current economic policies do, however, seem to ignore the fact that we are no longer operating in a world of convertible currencies and fixed exchange rates. My technical background has always taught me that it is essential to understand all contributory factors and that these need to be correct. So when I found that some of the fundamental facts were largely ignored, it makes me question the whole intellectual edifice. Finding MMT that did seem to build from the ground up was, as you suggested, seductive.

    Now I must re-think again.

    You may have seen my posts today at # 70, 71 and 82. I believe all these stand. None are really based on any MMT theory, more on pessimism. Your post makes me even more fearful for the future. My concern centres on the speed and the depth of the cuts across virtually all areas of Government spending. The effects I describe in #82 seem more likely; I fear we are no longer as phlegmatic and stoical as a race as we once were.

    Again many thanks for your time and trouble.

  • Comment number 94.

    Forget published GDP, interest rates, growth data, unemployment stats, deficit, debt etc and open your eyes, look around you.

    I've just got back from two weeks holiday (in the UK) so the wife dragged me kicking and screaming to a large shopping centre on the outskirts of Birmingham we frequent. We found two closing down sales of well established shops, the never ending sales in Next, M&S, River Island etc yet the majority were walking around minus shopping bags full of goodies. A banking economist colleague once told me you can assess the state of the nation by counting shopping bags in city centre's and shopping precincts, forget the crowds, there will always be crowds, count the bags of merchandise. If that's so I think we're in trouble folks.

    I was also brassed off that the only thing not on "special offer" in the entire centre were the Voodoo Johnson CD's I was after.

  • Comment number 95.

    #91: democracythreat. I think you are absolutely right. Just two remarks. 1. WOTW has said a number of times basically the same thing, and 2. This is why GDP is not a reliable measure of the health of an economy. If you go to the GDP entry of Wikipedia, you will see a very cogent criticism of that concept, but there is no agreement what should replace it. I think also replacement (by GNH, say) can only be simultaneous by all countries, but that is not likely is it.

    What is good about the definition of GDP is that it shows there cannot be an export-led recovery (if recovery is measured by growth in GDP...) if every other country is trying to engineer an export-led recovery.

    I do think that a better criterion of health is needed and pronto.

  • Comment number 96.

    to SleepyDormouse

    Your manners and courtesy to others together with your desire to get to the facts with a considered unsensational open minded approach does you great credit - I doff my hat to you.

  • Comment number 97.

    LOL over the lather made over GDP.

    It is a measure nothing more nothing less. GDP = the gross value of goods and services produced by a country's working population. The point about GDP is that it needs to increase with population growth to keep per capita GDP constant. It is a measure of standard of living although one sided and not perfect (few if any economic measures are); it ignores quality of life for instance though most rational observers would see a correlation between the two.

    As for export led recoveries not working if every country has one. Why not. It will still produce benefits due to the 'comparative advantage' of trade; though it would be screwed by any protectionist nonsense.

    Any real recovery in a country like the UK can only come from producing goods and services that the world wants. This argument is not so strong when applied to very large countries (effectively continents) like the USA which is capable of producing everything it needs itself.

    Trying to see complications where they don't exist is not helpful. This country has a poor outlook for very fundamental reasons which I have already posted on.

  • Comment number 98.

    Still more fence sitting rhetoric.

    There's a little bubble and its called the Houses of Parliament unfortunately there is a lot off gas swirling around inside this bubble so from the inside visibility is negligible.

    Which is a shame as outside this bubble is the real world.

    Move along readers ... nothing to see here.

  • Comment number 99.

    @ #58 Oooh, a sort of global feudalism?

  • Comment number 100.

    Well it seems the recovery plans are well underway.

    Sell the only thing we do make well (arms) to a country in a volatile region in order to pull us out of recovery..

    A country with about a 14% inflation rate and huge numbers of poor already - what do they want with jet fighters? Surely their perilous state of economic affairs is the priority. This just goes to show how far capitalism has come where anything goes in order to 'make a buck'

    Maybe it's to defend themselves against the Taliban, in a region which had a relative calm before we showed up with our 'enforced democracy' ideas.

    If this the way out of recession - I'd rather stay in it thanks and retain my morals and dignity.


Page 1 of 2

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.