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Austerity plans: Where do you stand?

Stephanie Flanders | 16:10 UK time, Friday, 10 September 2010

Which side is right in the debate over spending cuts and the economy? The truth is that no-one can know. Because the only thing everyone can agree on is that we live in extraordinarily uncertain times.

George Osborne

But the question of how fast to the cut the deficit is one of the most important facing this country today. This week I've summarised the best arguments for each side. You should think about where you stand.

Everyone brings ideological baggage to these questions. If you believe in smaller government, you're more likely to support Mr Osborne. If you tend to favour a big welfare state, you'll probably be more worried by the prospect of steep cuts.

But the more urgent debate I've been focussing on this week isn't really about the proper size of the state. It's about timing - and the size and nature of the economic risks we now face.

In fact, you can be a firm believer in markets and smaller government and still feel that the coalition is taking the dangerous path: Martin Wolf, the FT's chief economic commentator, who has been talking up the risks of austerity for many months.

The best way to work out what you think is to ask yourself three questions.

1) Is this recession more or less like the others that we've seen in the past 50 years - or a once in a lifetime global crisis?

Everyone agrees that this has been a serious crisis. But the recessions of the 1970s and early 80s also felt pretty bad at the time. There are many who think the comparisons between now and the 1930s are overdone.

Yes, there was a moment in the autumn of 2008 when the global financial system could have collapsed. But, say the normalists, all that emergency support by governments took us back from the brink. Now everything's back on course for a normal, or nearly normal, recovery.

This is the view of most mainstream economists, and the hope of most central bankers. But others - the likes of Paul Krugman, or Brad De Long take a darker line. They say countries like the US have not yet turned the corner - in fact, all the pieces are in place for a long, Japanese-style slump.

If you think they're right - that the private sector is too laden with debt to support an economic recovery - you're probably feeling pretty gloomy about the future.

But you still have to answer question number 2:

2) Even if we're looking at a long and painful road out of this - what do you think government can do to help?

Krugman and others call for more fiscal stimulus to insure against a double-dip recession in the US. In a large, relatively closed economy like the US, that could make a difference. But many economists think fiscal pump-priming is less effective in a small open economy like the UK, because a lot of the extra demand - if there is any - will leak overseas.

As we know, Mr Osborne agrees. He thinks that monetary policy is the only reliable way to support our economy. And the only reliable way to encourage the Bank to keep rates low is by cutting public borrowing. He thinks that's especially true when public borrowing is as high as it is today - and many in the city agree.

After a financial crisis, it's probably more difficult for low interest rates to spur lending and economic growth. For some, that's reason to go back to fiscal policy (see my post on The case against Mr Osborne's austerity). But you could also conclude that the world has changed and we just have to make the best of things.

Carmen and Vincent Reinhart - distinguished experts in the impact of financial crises - argue in their latest paper [687.18KB PDF] that part of the reason financial crises are so costly is that policy makers don't realise that the path they were on before the crisis is gone for good.

3) How do you weigh the short-term risk of a weak recovery - or even a return to recession - against the long-term cost of excess borrowing? And how far do you trust politicians to get the balance right?

Maybe you think today is all that matters - that another downturn would be so disastrous, the job of preventing one trumps everything else.

On the other hand, even supporters of the spend now, cut later school accept that it does have costs long-term. Public debt will be higher. Probably interest rates too. If governments overdo it insuring themselves against a double-dip, you could get high inflation - and a loss of financial market confidence - as well.

You might think those long-term risks are more important than the risk of a weak recovery. Or maybe you just don't believe politicians when they tell you they have to borrow more today - in order to borrow less tomorrow. Both will make you more likely to side with the coalition.

So, to sum up:

You will worry most about the coalition's policies if you think that this is a once-in-a -lifetime crisis; that government spending can help avert disaster; that the short-term risk to the recovery trumps everything else; and that policy makers can be trusted to cut borrowing as soon as the danger is past.

You'll be most supportive of Mr Osborne if you think that this economic cycle will be similar to the past; that more borrowing can't do much to support growth; that it's the long-term risk of inflation and a loss of market confidence that we should be focussed on; and that politicians have a hard time keeping their promises.

So now maybe you know where you stand.

But like it or not, it's the government's approach that is now going to be tested - in that sense, we should all be hoping that it is right.

Comments

Page 1 of 4

  • Comment number 1.

    1) Is this recession more or less like the others that we've seen in the past 50 years - or a once in a lifetime global crisis?

    It's definitely global but in real terms i.e. goods and services, output will still be consumed by a finite global population. Output needs be maintained as do jobs.

    2) Even if we're looking at a long and painful road out of this - what do you think government can do to help?

    Spend on maintaining jobs and output.


    3) How do you weigh the short-term risk of a weak recovery against the long-term cost of excess borrowing? And how far do you trust politicians to get the balance right?

    The borrowing argument is a fantasy. Spend to recover. Control the banks.
    Do not trust the politicians.

  • Comment number 2.

    I fear debt as it controls your life and so you are never free to make the right decisions. There is always something constraining you from doing what needs to be done. Couple this to a dour nature and austere values then I am by instinct a cutter.

    As I have said previously this is not a rational argument but a visceral reaction to conditions.

    However, we have to accept the reality that whilst the debt has ballooned in recent years as a direct consequence of ineptitude and ignorance amongst those who have put themselves over us, we have been trickling towards more and more debt for decades in both the public and private sectors of the economy.

    This has been driven by a misplaced optimism that there will always be jam tomorrow but as we know, tomorrow never comes. Our economy has become more dependent upon financial services and something I don't understand called the `knowledge economy'. This has been a terrible error.

    The metal bashing, wood shaping and thing-making that was the world us older folks grew up in has gone. Now we need it back if just to keep or put people in work. Welfare for the able is not an option.

    I can recall David Steele remarking back in the early Eighties at the height of the Thatcher Revolution that an economy in which we sell insurance and houses to each other will not work. That we have made it work for about a generation is quite remarkable but all it has done is hollow out our industry, our economy and put decent people on the scrapheap.

    There is no clear route as to how this is going to work through. I expect what is called a double-dip not necessarily solely due to government action but from a wider range of circumstances. Then after that we will have years of lumpy stagnant activity in which no clear pattern will emerge. In that period we need to remodel our economy.

    We will know when we have got to the other end of this when house prices are affordable, money has value, industrial estates are fully functional and there are no boarded up shops. We are a long way from that and there is a lot of life to get through in the interim.

    At the moment austerity has to be the policy, but once that is in progress the government needs to begin to facilitate economic development across the country which is local, self-sustaining and sufficient to keep the wolves from the doors of the people. This may not be fulfilled through traditional business but also by people cooperating
    and supporting each other. How to bring those ideas to fruition will help us move a long way forward.

  • Comment number 3.

    Good summary, Ms Flanders. Of course, even that is simplistic. This is similar to the past, but not exactly the same. You can never have the same "initial conditions" for any two financial experiments.

    Like many other people I've seen commenting here and elsewhere, I view the national finances as "household finances writ large." Most of us know that if the mortgage and credit cards and store card debts grow too much, then the interest rates go up too, we face misery. We know that the solution cannot be borrowing a bit more. So I'm in Camp 2, with Mr Osborne. I have been made redundant and resent it, but I understand why companies have to do this. And I also know that I have to economise so that I don't build up debt.

  • Comment number 4.

    Well, the alcoholic parent has drunk away the wages, and the responsible parent is left to feed the children. So the pawn-brokers looked like an attractive option. Sadly the silverware, furniture, clothes, shoes and kitchen sink have already been sold off.

    So the children get sold into slavery.
    ======================================
    The direction is downward, and no tinkering with structural deficits is going to change that. Britain is not competitive, has few natural resources, is overcrowded and out of date.

    The outgoing government used to be known as the party of "Tax and Spend". They added to that policy a new one of "Borrow and Spend".

    Famously, when they departed, it was said "There's no money left". I don't see that situation changing any time soon.

    While they were in power, they instigated a minimum wage, but failed to protect British jobs against offshoring to low-labour cost nations. They created "multicultural Britain, but couln't remember how many people had come through the ports. They gave away our sovereignty to Brussels, but chose to allow EU migrants to undercut their own minumum wage. They sold off our infrastructure, but failed to put price caps in place. They de-regulated finance, then taxed the public to shore up the failed banks.

    In short, the previous Government bled Britain dry. (The patient wasn't well in any case.)
    ============================
    In poverty, your options are restricted to:-
    A. go hungry today and perhaps be too weak to eat tomorrow, or
    B. eat today and maybe not find food tomorrow.

    Not a good set of options for an incoming government to have to choose between. Thanks Gordon.

  • Comment number 5.

    As I see it the Osborne approach looks to the Bank of England to do the stimulus heavy-lifting whilst the politicians do the cutting. I dont have confidence that QE delivers an effective boost to the real home economy.It just disappears in to a financial balck hole. As such, I believe his policy is lacking as this country has not really had an effective fiscal stimulus. You dont make mention of the state of banks and credit markets. This is the real drag against recovery led by private capital.I cant remember when this was such a dangerous threat.The Bank of England could find itself having to tighten policy to preserve its credibility on inflation.

    On the other hand, I believe there is a bubble in the safe-haven bond markets which is giving us a temporary advantage. However, we are vulnerable to self-interested financial market strategems which could exaggerate a reversal of fund inflows into sovereign safe-haven bonds or fan contagions.This could be made worse if the Bank of England either expands its balance sheet further or contracts it.

    A pragmatist politician would prefer to proceed extremely prudently and re-gear his fiscal consolidation quickly to incentivise private business growth and deal with the state of banks.He or she will be wary of hedge funds and the powers of the too-big-to-fails.Its easy for opposition politicians to call for more risk to be taken with public spending boosts because history will forget them. It will remember those in power.

    This is no easy call.There's a tipping point here where prudence can morph in to self harm.

  • Comment number 6.

    I am getting more mystified as the debate goes on. It is centred about this word 'growth'. I am not sure that there is any agreement on what this word means. Different 'solutions' will produce different types of growth and different types of society. There really needs to be a zeroth question. The starting point of the debate - what type of society do we want? David Cameron has said that sorting out the economy is the highest priority. Gordon Brown's authority before he became PM was based on having a stable economy (or an illusion of one!). But to do what?

    At certain stages of my life I organised my finances so I could achieve certain things. Now, later in my life, my finances are organised in a different way. The point is they were organised with certain objectives in mind. The government is no different. The economy should be structured to deliver certain objectives. The economy is a tool not an objective.

    Quick question - to show what I mean. Which should have a higher priority full employment or large company profits? (they may be linked but they are not the same)

  • Comment number 7.

    Come, come, Stephanie, you are giving far too much leeway to the poorly (if expensively) educated here.

    You know perfectly well, as a good economist, and as do the (hardly left-leaning) Kaletsky and Wolfe, that to reduce public spending before private investment picks up is economic suicide.

    If National Income bears a positive relationship to employment (which it does) and is the product of private investment, consumption, net foreign trade and net government contribution etc then to reduce any one of these is to reduce employment. To reduce employment is tantamopunt to reducing consumption, which is in turn a sure fire way to discourage private investment. The classic downward spiral. This before even considering the issue of expectations etc on consumption and investment.

    I sometimes think of the economy as a lifeboat carrying us all around in a heavy sea. As a direct consequence of the 2007/8 hurricane the boat is damaged and leaking. To set the crew bailing out before fixing the leak is stupid - they just drown more knackered. The right thing is to fix the leak (i.e. get economic growth firmly establihed) then bail. The Irish Spanish and Greeks are bailing like mad just now and look where it gets them. Lower in the water every month.

    Good debate, though.

  • Comment number 8.

    I don't think it helps that we refer to this "deficit reduction" exercise as "Austerity plans", that immediately puts a negative spin on any discussion...

    The word "austerity" immediately makes me thing back to the 1950's, but we're clearly not going back to those days.

    Once the deficit is under control and the fat has been cut from public services, there is actually great potential for things to be much better overall, in a few years time.

  • Comment number 9.

    Why doesn't the BBC ever point out that if the massive overspend of the country's budget is not addressed by spending cuts, then the only alternative is massive tax hikes on everyone who is working for a living? It's a simple choice: EITHER spending cuts OR tax hikes. Anything else belongs to cloud cuckoo land. So there is no point in the BBC or anyone else whinging about spending cuts unless it is at the same time prepared to demand, indeed insist upon, massive tax hikes. For every "cuts" story, why don't you tell us how much extra tax payer money will be needed to replace the cut?

  • Comment number 10.

    Fixing the deficit is not fixing the right problem. Private debt is the problem that needs fixing more than public debt. If private debt is not deflated any economic recovery will die in its tracks.

    Like most politicians they go fro the easy achievable target rather that the real one. Fortunately their austerity will help catalyse repossessions and stall the housing market in not collapse it which is a requirement for private debt deflation.

    The banks are still bust and we will still have to bail them out, but as austerity will be very slow and painful and last a long long time the Government have chosen the worst possible way ahead - which is to be expected!

    Stick interest rates up to rational levels (5% now!) this will cause a rapid debt deflation and then we can move to a rapid recovery. What they are doing is to prolong the agony which is almost the worst possible thing to do! Avoiding the arithmetically inevitable is like slowly pulling teeth and it will last a minimum of a decade - all the time the economy will stagger from crisis to crisis. It is a far far better way to get the necessary adjustment over rapidly.

    As to the probably method (of firing people) this is again the worst way for the country. It is far far better to keep everyone employed and reduce their pay.

    as to the comment above:

    "There are many who think the comparisons between now and the 1930s are overdone. "

    Hell no, this is like the 1870s - The Long Depression - because of the nature of the debt bubble. We are in for 20 years of pain.....

  • Comment number 11.

    How can you be for cuts when all they have to do is print their own money that does not involve banks?

    The only part of the budget not being cut is the INTERNATIONAL AID budget and this is because the IMF's greasy fingers is within that budget!

    IMF = IN MY (fiat) FOOTSTEPS

    Recapitalising the system by decapitalising the people

  • Comment number 12.

    SF: 'You will worry most about the coalition's policies if you think that this is a once-in-a -lifetime crisis; that government spending can help avert disaster; that the short-term risk to the recovery trumps everything else; and that policy makers can be trusted to cut borrowing as soon as the danger is past.

    You'll be most supportive of Mr Osborne if you think that this economic cycle will be similar to the past; that more borrowing can't do much to support growth; that it's the long-term risk of inflation and a loss of market confidence that we should be focussed on; and that politicians should be judged by what they do now - not what they promise for the future.

    So now you know where you stand.'
    -------------------------------------------------------------------------
    Thanks Steffie! Stuck in the middle ...

  • Comment number 13.

    I think Stanilic is absolutely right about the need to get back to 'making things': lots of other people have been saying this. George Osborne and David Cameron said the same thing during the election campaign and correctly pointed out that we cannot keep on importing manufactured goods. In effect, the trade deficit needs to be eliminated.
    The problem is: how do we get there? The options I can think of seem to be: 1)old-fashioned exchange controls; 2)overtly protectionist restrictions on trade with countries which are themselves protectionist (but that leaves open the possibility of allowing imports to come from other countries instead; 3) using higher taxes to reduce the level of personal spending and directing those taxes to recreate British ndustry.
    I do not pretend to be an economist and am sure other correspondents will tell me why none of these ideas will work. However, I am quite clear as to what has to be achieved. The debate needs to be about HOW it is achieved. Ideas anyone?

  • Comment number 14.

    Thanks Stephanie. Whilst they may not be the questions that I would have used for the start-point of my personal analysis, they are pertinent. Therefore I will use them as the framework for my response:

    1) Is this recession more or less like the others that we've seen in the past 50 years - or a once in a lifetime global crisis?

    If only beause this crisis is still in progress, then it is different from any that have gone before. However, it won't be a once in a lifetime global crisis if we stick to the political and economic philosophies that are currently in-play.

    More seriously, a number of factors are now in play, both globally and domestically that does make this crisis different:

    (a) The fatal imbalance in the UK economy.

    We now have off-shored a critical amount of both our manufacturing and service activities. The financial services industry, whilst providing tax revenues is divorced from the wellbeing of its host economy.

    (b) Globalisation

    This strategically inept philosophy has led the developed economies to far more than financial bankruptcy and the developing economies into a potentially critical bubble.

    (c) Concentration

    Never in our current economic history has wealth been so concentrated in so few hands - to the point where power has passed from nation states. As an adjunct to that is the fact that this wealth is now defined almost totally in money terms and has little true realtionship to the value of the assets that it is derived from.

    (d) Debt

    Never before has the whole economy been so mired in debt. Now we can argue about the deficit, the structural deficit and the national debt and their relationship with the bond market. However, very few comentators are seriously forwarding proposals for paying down corporate, household and personal debt - which now stands at record values. Those who do comment upon it appear to take some strange stances eg claiming that companies and households are paying-down debt whilst the levels of debt are still increasing!


    2) Even if we're looking at a long and painful road out of this - what do you think government can do to help?

    Stop claiming economic necessity for philosophical policies. To develop policies for the nurture of UK manufacturing and services. To join with our EU partners in developing protctionist policies before they are forced to. To actually make the pain of their policies universal and not just direct the pain at the poor.


    3) How do you weigh the short-term risk of a weak recovery against the long-term cost of excess borrowing? And how far do you trust politicians to get the balance right?

    There are fatal flaws in this question.

    A weak recovery is the absolute best that will be achieved by the ConDem policies - and the odds on that are very long indeed. Far more likely is that we return to recession and stay there for far longer than is good for the economy.

    Costs are just that costs! For far too long we have been ruled by the bean counters and know the cost of everything and the value of nothing. Costs can be repayed but, if we don't have a viable economic base with which to do so, only at the expense of society itself.

    As for the politicans, irrespective of party, I wouldn't trust them to get anything right!

  • Comment number 15.

    In a different post I suggested redeeming all gilts ccurrently redeemable 5 years or more hence by Govt crediting the bond holders bank accounts. Naturally I was advised that if the money did not stay in bank accounts and hit the high st perceived wisdom indicates hyper inflation.

    My understanding is that a high percentage of the debt is held by pension funds so how does this hit the high st? Surely the incentive would be for those incredibly talented fund managers to invest in businesses with growth potential creating jobs and facilitating the 'recovery'.

    In either case you have virtually eliminated public debt and future interest payments (if you believe thats a problem.) You have of course created the potential for another asset bubble (ok not bonds) but at least there would not be this very thin excuse for killing off public services.

  • Comment number 16.

    There are a few throw away comments in your last few blogs that make disturbing reading.

    1. 'the government says we need to shrink the public sector - to allow the private sector to climb out from under the dead hand of the state. That's a reasonable philosophical position to take.'

    so using the phrase 'dead hand of the state' is reasonable.

    2. 'You will worry most about the coalition's policies if you think ... that the short-term risk to the recovery trumps everything else; and that policy makers can be trusted to cut borrowing as soon as the danger is past.'

    coupled with

    'You'll be most supportive of Mr Osborne if you think ... that politicians should be judged by what they do now - not what they promise for the future.'

    so if you're against him then you're only focused on the short term and you will support Mr Osbourne if you think politicians should be judged on what they do and not what they say, a convienient argument for the only party with the ability to put their policies into action.

    Is this a party political broadcast script of some description.

    As an aside related to judging politicians on actions not words - let's see what the coalition come up with to replace the BSF program, which they claim was only cancelled due to it's waste of resources, but they are fully committed to building new schools. BTW the reason 10% of the cost of an office are spent before construction and 30% of the BSF cost were spent before construction is because planning an effective office involves asking how many sockets/desks/offices you need while planning an effective school requires analysis of the pupils needs/learning styles and analysis of other schools/countries projects to make sure the most suitable school is built for the catchment area, but it's not news that the Tory's don't give a monkey's about education.


    The argument isn't for or against cuts, it's moderate 'get the deficit under control' cuts vs savage ideological small government at all costs cuts. The argument against the cuts is that it very likely will prolong the recession and slow the eventual recovery down, reducing tax revenues and tying the governments hands in the future.

    Another part of the blog which I take issue with is this -

    'But you could also conclude that the world has changed and we just have to make the best of things.

    Carmen and Vincent Reinhart - distinguished experts in the impact of financial crises - argue in their latest paper [687.18KB PDF] that part of the reason financial crises are so costly is that policy makers don't realise that the path they were on before the crisis is gone for good.'

    I agree with the sentiments just not the interpretation. The financial crisis and current problems weren't caused by the previous government overspending (#4 puzzledmushroom really needs to take his blue tinted specs off and look at this http://www.ukpublicspending.co.uk/downchart_ukgs.php?year=1960_2010&state=UK&view=1&expand=&units=p&fy=2010&chart=F0-total&bar=0&stack=1&size=m&color=c&title=UK%20Government%20Spending%20As%20Percent%20Of%20GDP) but by the previous government putting too much faith in the markets, something this government isn't changing but is taking to a new extreme.

    I'm seriously getting worried because the content and tone of these blogs has changed considerably in recent times, from reporting on the dangers to european banks and sovereign debt worries to telling people how to make up their mind on Mr Osbourbe's policies using Daily Mail style selective truths and phrasing.

  • Comment number 17.

    9. At 6:44pm on 10 Sep 2010, halford wrote:
    Why doesn't the BBC ever point out that if the massive overspend of the country's budget is not addressed by spending cuts, then the only alternative is massive tax hikes on everyone who is working for a living?


    Because it is untrue. Govt spending does not need to be financed by taxation or debt. Don't let let anybody convince you otherwise.

    It may sound logical but the Govt is the sovereign issuer of sterling currency (ok at the moment through private banks) and tax collector of same and as such does not need to finance its spending.

  • Comment number 18.

    Stephanie said:
    Even if we're looking at a long and painful road out of this - what do you think government can do to help?

    This is an easy one: take control.

    Direct intervention in banks. Heavy spending on technology.

  • Comment number 19.

    ...also:

    How do you weigh the short-term risk of a weak recovery against the long-term cost of excess borrowing?

    False dichotomy. Why does the government need to borrow to spend?

  • Comment number 20.

    #14. foredeckdave wrote:

    "However, very few commentators are seriously forwarding proposals for paying down corporate, household and personal debt"

    The two words in the above with stick a bit are "paying down". I don't think this is possible in the sense of paying off a credit card bill. I think the sums are so unmanageable in the cases of many individuals that the debts will need to be repossessed and the bailiffs will need to sent in and their assets ceased and sold at what the market will pay and the balance of the unpaid debt written off - and we will have to bail out the banks again. I see no other way. This is a very terrible prospect, but as I have long maintained it has to be faced if we are to recover in the foreseeable future (say by mid century).

    It is no solution for us to become like the Japanese who have had the same problem from roughly the same cause for over a decade and they have so far made no impression on the problem.

    We can't run any kind of society (big or otherwise) with houses costing 12 times average incomes in London and first time buyers having to wait till they are 52 to save for the deposit (and 59 in the case of women). We must do something drastic quickly.

    We know what to do. Put interest rates up to 5 to 7 % to catalyses the credit deflation that must happen and provide social housing for the dispossessed families. What the Government proposes will also do the same thing but in a much less managed way, by making large number of govenrment employees redundant and so unable to pay their mortgages and other debts. Even my preferred way (see above) of pay reductions for all civil servants will do the same thing, but my way, at least, payments for unemployment benefit will not rocket.

    PS I've been 'seriously examining' this for ages (since the mid noughties) - I guess I must not be serious by your definition, but admittedly I see no way of 'paying down' the debt mountain as I can't make the arithmetic add up.

  • Comment number 21.

    "How do you weigh the short-term risk of a weak recovery against the long-term cost of excess borrowing?"

    As others here have said, the government does not need to borrow money to spend, it only does so because it has bought into Monetarist neoliberal dogma.

    Yet, even if it did continue to borrow, it has the power to almost endlessly restructure its debt (unlike Eurozone countries) - just look at Japan's debt of about 200%GDP or more, and yep, it is still able to pay those debts when they become due, and nope, bond yields are still very low. So even under this silly neoliberal paradigm the long term risks are just not there.

  • Comment number 22.

    Oblivion - yeah heavy spending in tech. How about we start with an integrated IT system for the NHS. A new tax office IT system. MoD. Ah wait. They already tried that.

    Labour had "control" in that spending approached 50% of GDP. Unfortunately they blew loads of this on total garbage. A recent radio 4 program on MoD IT spending was hilarious. Sounding like they wanted something Dr Evil's HQ twinned with one of those silly detective shows where everyone has translucent touch-screens and low lighting.

    And yes, you need to borrow to spend. Printing money erodes your currency via depreciation relative to others, which as we purchase foreign goods, is the same as borrowing.

    For another public sector IT breakthrough: BBC IPlayer cost £6 to develop. Seems other channels did just fine reusing existing software. Took a freedom of information request to get it out of them.

  • Comment number 23.

    Oh dear, in any popular discussion on the UK economy, it won't be long before we are told that the country must get back to "making things" as if the path to wealth still consisted in knocking out millions of low margin consumer durables. That era is over for developed economies which wish to remain wealthy, only low GDP per capita countries do that now.
    There is an important role for UK manufacture in specialist engineering products (which is doing quite well), but generally high margin services are where we need to compete. Government policy should focus on stimulating exports in these areas by keeping sterling competitive.
    Reducing the deficit is necessarily a judgement call. It's possible to cut too much and too little. My guess is Osborne's hatchet will deliberately not be as sharp as he says it will. There is a lot of expectation management going on here.

  • Comment number 24.

    Charles Jurcich - yep. Keep on spending the next generation's future. Boom baby boom...

    Alesha Soba - the BBC don't point out the true scale of the debt because they are absolutely bricking it about the cuts. ie a conflict of interest!

  • Comment number 25.

    #22 Ben,
    "And yes, you need to borrow to spend. Printing money erodes your currency via depreciation relative to others, which as we purchase foreign goods, is the same as borrowing."

    In the years between this recession and the last, the banks expanded the money supply by typically 5% to 7% of GDP per year. So that happens normally anyway, and given that the banks are not net lending at the moment, government issued money would not depreciate our currency any more than normal. Add to that, our trading partners will also inevitably have to increase their money supply at some time or other (or they won't recover), in the long run much of the depreciation will reverse.

    Kind Regards
    Charlie

  • Comment number 26.

    # JFH,

    John,

    A small cry of "unfair" escapes my lips. When I said "few commentators" I was refering to media commentators, politicians and the majority of academics. A brief trawl of the past threads on this blog alone will clearly demonstrate that you have consistantly made proposals to address this issue and I am more than willing to acknowledge that.

    The major points that I was trying to make are:

    The total debt level is way beyond anything that we have seen before - as you acknowledge

    That corporate, household and personal debt is a totally different problem and needs to be addressed via different policies.

    I have never suggested that you are not serious about the opinions you forward and trust that even when we disagree (eg protectionism) you reciprocate that.

  • Comment number 27.

    This crisis is centred on the financial system itself; therefore it is different.

    The problems are at the heart of many countries financial operations for controlling their economies. I believe that George Osborne's proposed way forward is madness and I expect a double dip recession. Worse than that, it will rip the heart out of the private sector. They won't invest because too many people will not be able to afford to buy the goods they produce, either here or abroad.

    The people likely to be affected will come from all walks of life and a much wide range job classes. Previous downturns have not really affected the public sector; jobs in many areas stayed secure. Now virtually all departments are under threat like never before. This is another significant difference.

    Many pensions, which once collected by passing 65, are now under threat. Pensioners allowances, like the winter fuel allowance, seem likely to be means tested or altered in some way to reduce the governments expenditure. This too is different. The government are saying that they will reduce the money they spend by a huge amount. A couple of months ago, the talk was of 25-40% for some departments. Significantly, the timescale for implementation was rarely mentioned. Now, in the last week, I notice that politicians and reporters are mentioning the timescale that this will happen over the next 4 years! As if this made it better; so the cut this year will be an average of only ~6%. This to me means that the uncertain for most of the people in this country will last 4 years; if you don't loose your job in year one and you watch friends and colleagues suffer unemployment, it could still happen to you and your family in years 2, 3 or 4. So with this uncertainty over a long period, how will many react. They will save more, pay off debts and become more canny about their finances. The effect will be that the economy will decline as expenditure reduces.

    One problem not mentioned in Stephanie's article, is that the economists seem incapable of understanding how the real economy works. Many of their proposed measures are based on incorrect theories and so are doomed to be sub-optimal at best and severely damaging at worst.

    The other problem is that this government's policies are going to knowingly harm many people, driving down living standards. As it hasn't really started to bit, I believe few have any real idea how bad things might become; I'm not sure I do yet, but I am expecting high unemployment. In the past, there were benefits available to help keep people afloat; but now this too is under attack, and I fear for the consequences. Another difference -

    Stephanie doesn't mention the effect of many countries being in roughly the same state financially at the same time and pursuing similar-ish policies. No / little hope from exports then! Again a significant difference.

    In the past, banks would lend in recessions if the business were sound. Perhaps not this time – the banks need to bolster their capital and are likely to very choosy about their lending. Capital needs to rise from2 to at least 7%. Again a difference, in my view likely to exacerbate the down-turn. It certainly won't help!

    If it is a short sharp recession, then the coalition may just get away with it. It is, however, the fact that we have a coalition that gives the UK, unlike many other nations, the possibility of relief. The ConDems have to hang together, but I cannot see this happening if the downturn becomes a double dip recession. The Liberals Democrats will know for certain that they will be wiped out if they stay in a coalition during a recession. Their only hope would be to go it alone by forcing an election; they might/probably will still take a severe beating, but they might just hold a small number of seats from which they could rebuild. Labour would be the only beneficiary. Again a difference for this time compared with many before.

    So at what point will the clamour from the people cause the LibDems nerve to snap? Your guess is as good as mine; but it may well come sooner that we think once we have seen the contents of the spending review. GO could make a mockery of all this by backing down/ changing the emphasis of his policies, but it is, I think a forlorn hope.

  • Comment number 28.

    History has shown that the only guaranteed way of getting out of a crisis like this is for the public to spend their way out of it. Spending cash that they possess and not through credit. Investment creates jobs, Jobs create disposable income. Increased revenue increases business confidence which results in investment which creates jobs... we have to speculate to accumulate. We need to ensure that appropriate, relevant and targeted investment continues whilst identifying and actioning manageable efficiency savings. Evolution not revolution. We must also lower the availability of invisible cash i.e credit by the banking institutions and make them start lending money to businesses.

  • Comment number 29.

    Cuts or not, the debate is pointless. As others have posted above the problem is the level of debt. Thats is both the private debt and the public debt. The first step is monetary reform, ie removal of fractioanl reserve banking, and money creation passed back to the state. THis will get rid of virtually all of the government debt, and saving £50b annually. THis need not be inflationary, as the commercial banks who loaned money to the government created it out of thin air in the first place and it will be destroyed when they are repaid. The next step is to reduce private debt (60% is in housing alone). If you reduce it enough, the public will be able to pay sufficient taxes to cover the cost of public services once again and the books will balance. THis could be achieved by printing more money, and inflating it away, or by taxing those with higher levels of accumulated wealth (i.e the board room). Traditional measures wont work this time, we need to think outside the box, and cut the banking system down to size, which is literally sucking the life blood out of the economy, simply to balance their books. Once the books are balanced,the government should start investing in the future by spending rather than borrowing, in businesses that will lead to a more sustainable future, eg the worlds greatest renewable energy schemes, and get us off oil dependency. The politicians and there vested interests are simply holding us back, the solutions are there for the taking.

  • Comment number 30.

    #20 At 8:03pm on 10 Sep 2010, John_from_Hendon wrote:

    “PS I've been 'seriously examining' this for ages (since the mid noughties) - I guess I must not be serious by your definition, but admittedly I see no way of 'paying down' the debt mountain as I can't make the arithmetic add up”

    The personal debt mountain will be solved as individuals die and their estates are wound up. The debts will be paid off or the financial sector will have to take the loss. A few years ago the value of property could be expected to mean that the losses would be small-ish. As the recession bites, property prices will fall leading to larger personal losses and also in the financial sector.

    The private business sector's debt (excluding the financial sector) will only be solved if the systematic fleecing of them is stopped. If they are not able to sell their products due to a large scale recession, then I have to agree that many of their debts will remain or they go broke.

  • Comment number 31.

    There was a financial crisis there never was an economic crisis (it was an election fable). The financial crisis was solved in 2008/9. Now we have an incompetent government collapsing the real economy by inappropriate spending cuts. Large numbers of people will have worse four or five years t han they should have done.

  • Comment number 32.

    11. At 6:54pm on 10 Sep 2010, PetersKitchen wrote:
    'IMF = IN MY (fiat) FOOTSTEPS'
    'Recapitalising the system by decapitalising the people'

    What an absolutely wonderful description.

    Average Joes right. Monetary reform is the only thing that offers salvation for the next generation.

    In a previous post I put links to various videos.
    Anyone who watches them, will likely have what Alesha Soba describes as a ‘revelation’.

    A short animated film by Paul Grignon, ‘Money as Debt’ (link below).
    http://www.youtube.com/watch?annotation_id=annotation_942534&feature=iv&v=z5vC_8azMFk

    The documentary Secrets of OZ, explains our debt based system of government finance (link below)
    http://www.youtube.com/watch?v=D22TlYA8F2E

    The meaning of 'Austerity' the IMF and the reality (link below)
    http://www.youtube.com/watch?v=jUmQbf1AyA8&feature=related

    Two groups wishing to make changes to the system, see links below.
    http://www.bankofenglandact.co.uk/act/
    http://www.prosperityuk.com/prosperity/prosperity.html

    Take a chance, it may well change your perception of things.



  • Comment number 33.

    Stephanie

    I look forward to your articles and this time I had to wade in

    on question 1

    Governments need to creat times of crisis as its easier to exert control and what person goes into politics unless they want to change something. So is it real somewhat but I know of some companies that expect to grow their turnover 300% over the next two years with investment. So its not the worst ever at all

    2 can governmet help well yes go on holiday for a year people arnt thick when it come to sorting themselves out they just need stable conditions and if government took time off we would stop the bankers to ministers and ministers to bankers round about.

    There were many casander's in the late 1990's predicting a bubble burst then again in the mid 2000's now we make documentaries about them but why because no one listens to anyone when there is a posibility to get rich. I know bankers that in 2002 realised it was all built on sand because I asked them and there reply was "I kept going because i wanted my share". So if all the info was there in the past 10 years and nothing was done then why should we expect evidence based decision making from PPE and history graduates when they cannot even follow the tenets of what they were supposed to be taught between the drinking and the societies.

    3 never ever ever trust politicians there is a difference between conviction voting and negociated compromise. with one you get a true reflection of what the will is with the other you get - adulteration of purpose - they are supposed to be our government but whatever the electorate decides is spun / changed into whatever they can get away with.

    even writing this i realise the futility of this debate I cannot change anyones opinion all I can continue to do is grow my business and not move production overseas- continue to plan for apprentceships and maybe fund a degree or two for employees.

  • Comment number 34.

    It's all fine as far as it goes, Stephanie. But where do you stand? What do you think is the right course of action? As the BBC's economics correspondent, I expect you have a view. Let's hear it!

  • Comment number 35.

    To the Mrs Flanders, the BBC and all who work there.

    I believe that Monetary reform is needed, and I believe it because it is in the younger generation best interests.

    Are we really going to sit back and watch our children enter, what can best be described as debt slavery?

    Debate on our debt based monetary system is so important, if only to give people an insight into how it works, and the alternatives.

    The articles written on this website have prompted curiosity, and such curiosity has led at least me, and likely a few others to this point.

    Given the current ‘Austerity Measures’ about to be imposed upon people and the effects on the younger generation, if ever there was a time to discuss monetary reform, this must surely be it.

  • Comment number 36.

    28. At 8:59pm on 10 Sep 2010, Graham Stephenson wrote:
    History has shown that the only guaranteed way of getting out of a crisis like this is for the public to spend their way out of it. Spending cash that they possess and not through credit.
    ------------------------------------------------------------------------
    There are two dilemmas.

    One: People do not have money to spend because their income after tax is too low. Reduce the tax? OK. Reduce what the tax is spent on? People don't like that, it means cuts in services. [There is worse. People do not have money to save for their future as pensioners. Therefore no more spending after working life is done!]
    Two: Even people on relatively modest incomes can get to the point where they do not need to buy more stuff. In fact it is possible these days, to have lots of stuff sitting around unused. It does not wear out much in that sort of situation and therefore doesn't need replacing so often.

  • Comment number 37.

    #26. foredeckdave

    "The major points that I was trying to make are: The total debt level is way beyond anything that we have seen before - as you acknowledge" etc..

    Dave, I share your opinions on this aspect of policy and sorry if I was a bit touchy about pointing out the importance of the problem as in the past I have taken a lot of flack for my persistence!

    Turning to

    #30. SleepyDormouse who wrote:

    "The personal debt mountain will be solved as individuals die and their estates are wound up."

    Assume this 'solution' dominates - just consider how long it will take to unwind the debt this way. These are the buyers in negative equity who cannot sell and who can keep up the payments (and not all will be able to do so) - it may take 50 to 60 years until their estates are wound up. This equates to a 30 year depression (30 = half life) - just about the same as the 23 year Long Depression of the 1870s given that life expectancy has increased. (Note: the Long Depression centred on property and excess debt too.)

    My solution is to accelerate the process of debt deflation (by reverting to rational levels of interest rates 5%-7%) as this will be a way of getting over the problem far quicker and thus the general impression will be that as soon as the worse is behind us then people will be happier and be able to look forward in a more positive way - something that will be very unlikely to occur in a long grinding depression envisaged in #30.

  • Comment number 38.

    The public spending surge was due to a booming economy followed by the crunch , with the resultant swelling of the deficit because of the need to keep the banks afloat and the sudden fall in the tax take from businesses and self-employed , and contractor-type pseudo-self-employed.
    I know many, many people who owe the taxman a fortune and who are having to sell up houses and assets and scramble for loans ......that is partly what is keeping house prices low .The taxman is due a huge backlog of unpaid tax.
    Masses and masses of cash........
    .............because the sixpercent plunge in GDP was accompanied by a near-halving of tax take......and that is because hardly anyone running a business was able to pay their tax.....but no-one can escape the taxman's clutches.
    Watch this space for a massive rebound in tax receipts.....remember the huge penalties that are being imposed, which will also generate loadsamoney.
    Alot of these downsizers are renting, but they will eventually need to buy and that will trigger another housing recovery.
    And then public finances will look a heck of a lot rosier than they are now ......... so in that regard the cuts are overkill.

    George is showing his lack of experience and it is really sad for Britain.

  • Comment number 39.

    This is a really important, critical debate. And it is depressing, given it's significance, the poverty of the coverage in the wider press. However, I have recently become diverted by a new distraction: spotting the interventions of the party spin doctors.

    It's great fun. Try it at home. It's quite safe.

    In the previous thread on this subject, I'm pretty sure that I spotted both the Labour and Tory spin interventions (though, not yet in this thread, after all, it is Friday night). I am, though, torn. Part of me screams out for them to leave us (the public) alone, we're fed up with them (or I am anyway). However, another part of me hankers for this new sport, whether on blogs, twitter, facebook, or wherever. Spotting these total frauds, masquerading as members of the public, is such fun. They are such sad acts.

    It will be interesting to see if they complain about this post and get it blocked.

    Back on topic, the deficit is eye-poppingly horrible. It is, by a huge margin, the worst peace-time, adverse fiscal event this country has seen, in centuries, if not ever. And was already pretty nasty, even before the "global economic crisis". It has to be addressed. The, so far, benign attitude of the bond markets (who we collectively borrow from, to fund the deficit), is because of the prevalent assumption that the government will address the issue. Were those markets to even suspect that we would not address the problem, or worse, inflate it away, then we're toast. And once that searchlight of doubt is pointed towards us, it is very, very hard to escape. And the cost of our debt then rockets. Our collective pips would collectively squeak (as would our children's, still paying our debt, decades into the future - some of us actually feel guilty about that).

    I am convinced that at least one Euro country will default on it's debt, within three years: probably Greece, perhaps Ireland or Portugal or others.

    So, logically, we have only three options: (1) borrow even more than we already intend to (which, as it stands, is gut wrenchingly nasty), (2) cut government spending or (3) increase taxes (or some mix of the three).

    Well (1) is not an option (sorry Ed, if we do this, the impending scene is us going cap in hand to the IMF and then we're back to (2) or (3), and even worse off). This is only an opinion, but I am far from alone in this conclusion.

    So, to tax or to cut (the only two remaining options). Well, the previous Government answered that question. By raising the tax take, as a proportion of GDP, to about as high as it has ever been, raising taxes much further is very hard, unless you want to risk civil disorder.

    Where does that leave us: cuts.

    Yet! Ed has a good point (well not his, but Keynes), cuts will undermine demand and risk a further recession. However, we have no real alternative choice. That does lead me to my actual point:

    Cutting, right now, is horribly dangerous, but we have little choice. So, we need extraordinary measures to encourage the private sector to fill the vacuum and compensate (sorry George, but you are not even out of the blocks on this yet, and it's really, really worrying). Not half measures. Not gestures. Extraordinary measures. In my opinion these have to be in two areas: (1) access to finance, targetted at new business, wealth creating opportunities and (2) temporary tax reliefs, similarly targetted, (these are not tax cuts as they relate to wealth creation, not yet there).

    I manage my own pension (you don't imagine that I'd let those robbers in the City or financial services industry near it, do you?) and it is all in safe havens (well as safe as I can get). I am deeply gloomy. Cutting is our only viable core strategy, but I see no evidence of anything approaching adequate compensating policies.

    Brace, brace, brace.

  • Comment number 40.

    Ben

    Well...I am afraid that's just all wrong. If you think otherwise, supply evidence...

  • Comment number 41.

    Tory ideologies are price that we have to pay for the follies of others whether you blame Labour, bankers or the poor for the problems.

    We are heading for a bigger recession, created to satisfy the ideological policies of a group of ministers who do not use the services they are cutting or can afford to pay for alternatives if they need to do so. Thus they can afford not to worry about getting the decison wrong because its the peasants that will suffer. If they get it right they will deservedly get the credit for it. But if they get it wrong they can focus on their businesses and wash their hands of the mess, so crime is up, the NHS is too expensive for the poor to use, so what?

    If only the Lib Dems had the courage of their convictions to moderate these ideologies we might have a more reasoned path out of the present difficulties. Sadly the future Conservative Candidate for Sheffield Hallam is having too wonderful a time embracing these ideologies to care.

  • Comment number 42.

    It is incumbent upon each generation, to do that which is right and proper by the next generation. To allow the next generation to enter debt slavery is possibly the most heinous dereliction of duty that is possible.

    Monetary reform is needed.
    Abolish debt slavery, if only for the young.

  • Comment number 43.

    Hi Stephanie,

    I've perused the BBC website, as well as the media generally, and would like the following question answered:

    "To what extent is the current debt crisis a result of the Labour governments fiscal stimulous and a notional debt because of the "bail-out" of the banks, and to what extent is it a direct result of any over-investment in the public sector, such as schools, hospitals and benefits?"

    Ball-park figures, please, if nothing else. It sounds like a loaded question but honestly I am after an honest assessment; as I don't believe this issue has been directly accounted for since the 2008 collapse.

  • Comment number 44.

    You know, I have never been an anti-capitalist but the truth is now clear. We live in a world where there is (currently) enough, finite, resources to feed the poor of Africa, Asia and South America but the right, big business, and their allies would try to convince us that we are in store for hardship and need to "tighten our belts" whereas bankers still walk away with multi-million bonuses.

    Isn't the truth that the current economic system is exactly that? A system devised by man. With a 'feed-back loop' which the Labour government was trying to cultivate to eradicate poverty in the UK and beyond, and which the Tories are trying to kill in the name of "Austerity"?

  • Comment number 45.

    Stephanie said: "You will worry most about the coalition's policies if you think that this is a once-in-a -lifetime crisis; OR - You'll be most supportive of Mr Osborne if you think that this economic cycle will be similar to the past".

    It seems to me, Stephanie, that each recession has been a once in a lifetime crisis. All of the recessions, mid 70's, early 80's and early 90's had different causes and hence different effects. However they all seem to be characterised by the fact that it took 13-14 quarters from the start of the recession to get back to where we had been in GDP and employment terms.

    Will this recession be different - possibly! It's certainly deeper than previous recessions and the characteristic of a liquidity crisis is that it takes longer to fix. The other factor is that we have precious little room to manoeuvre this time using policies such as increased Government spending.

    So, if you believe like me, that Mr Osborne is doing the right thing in bringing down Government spending to match tax take, you are probably left only with increasing the money supply if the economy nosedives, with the consequent dangers of inflation.

    So if we undertake pump priming, perhaps, John from Hendon's favourite Banker, Merve the Swerve had better look the other way when inflation continues to climb above 2%.

    However if you look at previous recessions they seem to have been characterised, obviously by large unemployment and also by house price reductions, poor business profits and the loss of many companies. It doesn't seem like that has happened this time. This might be a good sign in that credit drought not with standing, the underlying economy is still reasonable robust. Whose with me to raise the half full glass?

    Personally I more concerned that a mad as a hatter Middle Eastern country is on the verge of going nuclear. Perhaps we should be worrying more about that?

  • Comment number 46.

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

  • Comment number 47.

    I'm scared by Osborne's rhetoric, talking about culture of idleness, already he's back on the old Tory tack of blaming the ills of the world on the unemployed- how long before he calls them scroungers?
    But the truth is we are still a rich country and if you doubt that, tell me why there are more and more new cars on the road, and they're getting bigger (and seemingly usually German) too.
    Science has debunked the right wing theories that wealth is somehow (magically) a measure of virtue, how "fit" one is in some make-believe world of economic natural selection. Humans are (unless damaged) born pretty much the same: the differences, particularly in brain function minute, and in any case not hard- wired and therefore easily overcome. So why do we categorise and stereotype people, particularly the young, into "clever", or "stupid", when we know now that this is not the case? It's a self- fulfilling prophecy because people end up believing it at whichever end of the scale they were categorised into.
    Labour had its faults, but they did introduce the concept of valuing people, and trying to give everyone a good start in life by investing in education and social welfare programs. They screwed up over taxation, failed to reverse the industrial decline, allowed way too much private education and dumbed us down though.
    Osborne is taking away the net at the bottom, especially where children are concerned. We're going back to "know your place" and the only ones who will crawl up the social ladder will be the ultra- competitive types willing to tread on others (remember Thatchers Children?).
    Austerity is a bitter pill to swallow when the problem was caused by greedy incompetent arrogant bankers. If we were all in the same boat then the Big Society might stand a chance. But i think it has little hope when really the cuts and inevitable distress are being put in place to keep an undeserving minority in luxury and grandeur.
    There is a different way. Just look across the Channel.

  • Comment number 48.

    # 45 dontmakeawave,

    "However if you look at previous recessions they seem to have been characterised, obviously by large unemployment and also by house price reductions, poor business profits and the loss of many companies. It doesn't seem like that has happened this time. This might be a good sign in that credit drought not with standing, the underlying economy is still reasonable robust. Whose with me to raise the half full glass?"

    You appear to be making the mistake of thinking that this crisis has passed. Along with the majority of economists and commentators I feel that there is far more to come in this saga (both nationally and globally) than has yet been revealed.

    As for our economy being "reasonably robust", I truly hope that you are flexing your chuckle muscle. I doubt that you will find more than a handful of people (even in the Coalition government) that would share your opinion.

    I would share a drink with you but the half full glass is merely an illusion.

  • Comment number 49.

    Cyclical aspect----I think the tech bubble in 1999 wasn't allowed to 'properly' deflate but was transferred (if you can transfer a bubble) into property both commercial and domestic.
    When everyone's house is 'earning' more than they are at work then that's a big signal something's wrong--and when it goes on for years then something's really wrong.

    It's telling that in the mid nineties people thought it was a no-brainer: Save for a pension---by the middle of the first decade of this century only numpties, did that because the smart thing to do was borrow up as high as one could, because the house(s) would pay for everything---- the equity release would enable everyone to live happily ever after, we didn't need productive work either personally or as a country...or perhaps we did.

    Perhaps it's a good thing that we're not repeating all those mistakes from the past and are clearly working out bigger and better brand new ones.

    Structural aspect----------- The effects of digitisation and the velocity of change they are driving mean there is not going to be a 'back to normal' --Normal in 1910 in Glasgow, Newcastle, Liverpool was powerhouse Cities at the heart of regions enjoying being at the centre of an ongoing sunny mid-day of Empire.

    It took 60 or 70 years for that to turn into the rainy November their economies resemble today.

    Digitisation of information could do to the professional service industries what the social changes did for the Northern industrial cities--- it's doing it to entertainment, music, journalism and TV and these changes won't take 60 years to work through.

    Maybe they won't be as devastating in comparative terms, or maybe they'll be more devastating--I haven't a clue...but I am certain their isn't any 'back to normal' from this (Super) Cyclical recession because there is no 'normal' to get back to.



  • Comment number 50.

    24. At 8:40pm on 10 Sep 2010, Ben wrote:
    Alesha Soba - the BBC don't point out the true scale of the debt because they are absolutely bricking it about the cuts. ie a conflict of interest!

    The debt, the debt The debt....

    Private debt (Corporate, business and household) is reducing naturally because people are wising up or simply are unable to borrow more.

    Now public debt.
    The QE total was how much? £200 billion. Take, i don't know lets say a 7% reserve ratio. That equates to a maximum £2.5 trillion injection to the money supply which presumably was the intention (a stimulus). Thats two and a half times the National Debt. In actuality the £200 billion has probably gone straight back to the Govt and is now classed as more debt because the Govt chooses to finance its spending by issuing bonds.

    But if follow the logic of the intention Public debt could have been wiped out by simply redeeming Govt bonds and raising the Reserve rate on private banks to something sensible imo 100%

    Take FRB away from Private banks and put it in the hands a state bank and don't let them use 'Debt' as an excuse to kill off the welfare state.

  • Comment number 51.

    34. At 10:10pm on 10 Sep 2010, canarytim wrote:
    It's all fine as far as it goes, Stephanie. But where do you stand? What do you think is the right course of action? As the BBC's economics correspondent, I expect you have a view. Let's hear it!

    As a BBC correspondent Stephanie is unable to give her view but I for one would love to hear it. That goes for RP too.

  • Comment number 52.

    OK, this is what I believe.....the standard of living that we enjoy in the UK is unsustainable given our economic earning power, this is blindingly obvious if as I do, you work in the private sector, we are just not generating enough real income to pay for the services that we all enjoy, at a rough guess, it feels to me as if the state has been spending about double what we are earning , the population is soft and we have two generations that have had an easy life, expect to retire in their 50's or early 60's and then spend 30 years consuming, whilst the rest of the developing world powers ahead working for a fraction of what we earn and for decades longer.
    Under Labour, I am convinced that we were heading for total disaster, the coalition "may" be able to keep the show on the road for a little longer, but unless the population wakes up, accepts that we need a drastic reduction in all of our living standards we are heading for massive problems within a decade or two (as is much of the western capitalist world)
    This need not be as dire as it sounds, we need to move away from the obsession with economic growth as the engine for the economy, we need to organise our economy on a more local basis, we need to grow more of our own food, we need to import less trash from China and make useful high quality products that we really need, we need to drive less and drastically improve public transport, so do I think we need to make cuts ?....you bet I do, will the overfed soft populus accept it and wake up ?....not so sure
    I would say that unless we radically change over the next decade or two, we really are in big trouble
    PS, I stood as the candidate for the Green Party for South West Devon at the last election, I have some reservations about the green manifesto, but it makes more sense than most of the lunacy we here from the mainstream parties, I listened to Clegg on Today prog the other day, he did well IMO, but they need to be even more radical if the UK is to survive

  • Comment number 53.

    Sorry this is not a fascinating academic exercise the policies to be followed by the Coalition will ruin or damage millions of lives of people who were not responsible for the position we are in. Once again Complex, not tough decisions. with tough consequences for people other than those who make the decisions.

  • Comment number 54.

    Oblivion. Wow that was a really lucid reply. All wrong?

    iplayer: http://en.wikipedia.org/wiki/BBC_iPlayer

    it projects: http://www.information-age.com/channels/management-and-skills/news/1095512/it-projects-among-governments-biggest-failures.thtml and thousands more links. google it

    50% gdp: http://www.telegraph.co.uk/comment/telegraph-view/7494248/A-shocking-statistic-that-sums-up-Britains-plight.html

    The point about printing cash for a fiat money system reducing the value of said cash is, I'd say, pretty obvious.

    So you say all wrong - here is the evidence :-)

  • Comment number 55.

    This article by Stephanie Flanders is a wonderful example of the Value of Economic Analysis.

    Notice that the choice is : For or Against further Deficit Spending. That's a binary 50/50 choice. And notice that it is impossible for all the Economic Intelligence in the world to determine which is the better choice!

    And it's nice to add a human touch to economics, by adding that whichever 50/50 choice we have to live by, "Let's hope it's the right one".

    My goodness, men and women of ancient religions could barely come up with less. Speaking of less not more, no wonder Tim Harford has decided it's more important to teach people how to count. For example, how many cars did you see in your traffic jam today that had only one driver in them? How many fewer loaves of bread can you buy with £1.00 today than you could have bought 7 years ago? How many fingers am I holding up? (None - I'm too busy using them to type. By the way, None is the same as ZERO. Zero is the same as 0).

    And how many Economists does it take to make a 50/50 decision?

  • Comment number 56.

    # 37. At 10:39pm on 10 Sep 2010, John_from_Hendon wrote:

    ******

    Of course you are right about the extended period it would take to unwind the present situation, but I was trying to be optimistic! There is a very dim light at the end of a very long, long tunnel. It forms the default fallback solution for many. Many of the population will not earn enough after the neoliberal policies have impoverished the nation. Its happening now and has been really for the last 30-40 years, but most don't realise it - not even now after all that has happened.

    We need to get away from the debt based society in which we now live. For youngsters, they have an opportunity to eschew debt, but that will be difficult for them when their peers behave so differently. But for anyone of around 35+, it is going to be far more difficult, particularly if the expected downturn written about in this blog does come to pass; [so I really do hope we are all so wrong and GO is right; but I fear it will prove otherwise].

    We can change the system, its man made, so it can be altered; but only if the stranglehold of the current monied class is broken. Their attitude of "Its mine - all mine; and I want all yours too!" must be changed somehow. Maybe it will only be when the middleclasses are badly hurt financially that real change will come about. Additionally, some economists who actually know how the financial system works would help also.

  • Comment number 57.

    @54. At 09:32am on 11 Sep 2010, Ben wrote:
    ----------------

    We have had debt free money in the past. See YouTube The Secret of Oz
    http://www.youtube.com/watch?v=D22TlYA8F2E

    It worked then until the money hungry got into the act.

    I don't understand what changes if the government pays interest for the money it issues compared with a system where they just issue it. Of course there has to be visible, enforced, workable controls to stop inflation. Actually, we pay tax now to stop inflation, not to fund government expenditure. My evidence is a paper by Stephanie Bell 'Can taxes and bonds Finance Government Spending'. Available as a download if you google it or use link
    http://econpapers.repec.org/paper/wpawuwpma/9808008.htm
    to get at a pdf file

  • Comment number 58.

    Idiots’ guide to macro economics for chancellors

    Wealth = consumed output
    Imports increase wealth because we consume other countries’ output
    Exports decrease wealth because we don’t consume our own output unless the foreign currency used to pay for them is spent on imports

    Governments should have maximum output, full employment or both as primary goals

    Sterling money is a means of exchange that facilitates trade that, along with employment, produces said output, imports, exports i.e. wealth.

    As sovereign issue of the fiat currency Sterling the Government controls the provision of money to the economy. As such double entry accounting rules do not apply to Government finance.

    It can add money to the public sector by spending. At that point money is created. It can then enter the private sector where it is combined with private sector spending to facilitate the production of output i.e. wealth and jobs.

    It can take money out of the private sector by taxation. At that point money is extinguished forever along with its spending power.

    It does not need to tax or borrow (issue gilts) in order to spend.

    Given the primary aim of maximising output and employment, what you don’t ever do is reduce Government spending at the same time as private spending is depressed and at the same time increase taxation unless you are confident that other countries will continue to send us their output.
    (I think China will found out quite soon that sending us all their goods and hoarding US dollars is not the way forward)

    Such action would have a catastrophic effect on output and employment which are your primary goals as elected representatives.

    Does anybody know if George ever studies A-level economics ?

    Shift your focus away from the debt people. It’s a red herring.

  • Comment number 59.

    #54 Ben (not having read what monetary reform advocates have been saying) says: "The point about printing cash for a fiat money system reducing the value of said cash is, I'd say, pretty obvious".

    The point increasingly well, comprehensively and clearly made above (e.g. by #2,11, 14,21,25,29 and especially 32) is that we already have a system which is at least 93% fiat. The problem is it is operated by the BANKS, who charge us and our government not a commission but INTEREST on credit they simply AUTHORISE (it is made real by the people who accept it in exchange for goods, work and services).

    The point which ISN'T being made is that we have to EAT etc what we already have before we can work to PRODUCE more than enough for next time round - so we are able to MAINTAIN skills and equipment and INVEST in improving our working and social cultures.

    Thatcher had and it seems Osborne still has the idea that "necessity is the mother of invention", forgetting that we have to eat from surplus created by other people in order to be able to invent, and to work in order to maintain our surplus (to say nothing of our skills and our different types of motivation). #4 Puzzledmushroom might have had it about right, if his timescales had stretched back even as far as Thatcher.

    #11 "Recapitalising the system by decapitalising the people ...".

    The truth is, an under-employed nation will be best able to recapitalise itself by decapitalising money and recapitalising its people: not central but local government authorising creation and WRITING OFF of local credit properly used, with central government regenerating largely self-sufficient communities by basing them on communal property rights and duties (e.g. operation and control by residents and employees rather than credit-money purchasers of legal title and contracts).

    In the mean time, I understand Ian Duncan Smith is proposing something like a BASIC INCOME coupled with incentives to work. CREDIT FIRST, WORK LATER, instead of workers having to give credit to employers in the form of working "a month in hand".

    That might succeed, if interest payments via local banking services can also be replaced by commitment to voluntary work for the good of the community. Someone is going to make good the public services the Tories are proposing to cut.

    Let me join the chorus wondering what Stephanie thinks, in light of the comments on her arguments, both for and against. Can she at least reassure us she READS our comments?





    On the other side of the story

  • Comment number 60.

    Yes, Austerity is the order of the day.

    Growth is no more and the next 20 years will be different from the previous period.

    We are in a Global recession.

    Why is it such a bleak picture....Because Growth is and has always been associated with OIL production/ consumption.

    We have reached peak oil...Oil companies now search for oil with billion pound rigs in deeper and deeper ocean areas...desperate measures are now being taken...even going to war (Gulf wars).

    OIL = GROWTH

    We have lived through unprecedented growth over the past 100 years or so, but the party is over as we approach diminishing oil resources.
    We have technology, science, education etc, but nothing I can see, can replace or be a substitute for oil...

    You see, talk of an alternative for oil, inevitably means that rare earth materials, come into the equation and the operative word here is "rare"...

    In the next 20 years, if growth world wide was to double, (i.e. 3.5% per annum growth), then the oil consumption/ production during the next 20 years would exceed all the oil production ever produced since day dot (simple arithmetic...work it out)....Obviously not sustainable.

    So whatever political views one may hold, change is inevitable.

    The fear is that during this transition, which is going to be extremely painful, the majority will have to sacrifice their standard of living, whilst a few will fight tooth and nail to maintain their standard of living....and who do you think the few, who are in power at the moment are.??....

    But really, to see where all this is going to take us, we have only to watch the USA, because that is where all the consumption is at the most and that is where we shall see the effects of austerity first....Watch and learn from the events that is going to take place in the USA...

    Unfortuneately we have already witnessed an event in the Iraq war, instigated by the USA and backed by a UK Governmenmt....What next one may wonder.?

  • Comment number 61.

    A couple of thoughts

    1. It's not just public sector debt that matters. It's private sector debt as well. Indeed the extremely high levels of private sector debt are already a bigger concern than the current (relatively manageable) levels of public sector debt. If the Governement's "austerity" programme just results in public sector debt being transfered to private sector debt, then that will make things worse rather than better.

    2. There's a good argument that the root cause of growing levels of both private and public sector debt is actually the historically high levels of inequality in our society
    - the rich (say the richest 5-10%) get richer and the rest get poorer
    - the rich run out of consumables to spend things on, so they save instead
    - increasing levels of saving by the rich is either spent on assets (causing asset prices to
    rise) or lent to everyone else, either via the banking system or via government borrowing/
    spending.
    - this lending (at interest of course) is needed/justified so that demand in the economy is
    maintained, and so the non-rich can afford to continue to buy over-inflated assets (aka
    houses).
    - the interest on the increasing levels of debt means the rich get richer and the rest get
    poorer....

    So what really matters is not the size of the austerity package, but how it is done and who suffers most. Cutting benefits/increasing taxes for the rich is fine. Cutting benefits/spending on the rest will just dig us deeper into the inequality hole and cause overall debt to continue to rise.

  • Comment number 62.

    Austerity plans: ?

    This surely is a biased pointed question/statement by the BBC?

    George Osborne does not have any plan or plans for 'austerity' .. he has a plan for the short, medium and long term effective and responsible management of the UK economy and national finances.

    The plans are not for or in the interests of 'austerity' - the 'plan(s)' are to ensure that Britain can pay its way in the world and deal with the next financial storm ... which may well be on its way ... we just don't know when.

    I'm afraid what could have been a good opportunity for an interesting economic debate on this blog for the possible shape and detail and extent of the plan(s) ... has been lost in the partisan political rhetoric.

    The wayward assumption that the way to govern Britain is with an increasingly enlarged, inefficient and bloated public sector ... paid for partly by the taxes of private individuals and partly by the taxes paid by the private sector is naive in the extreme.

    'A spoonful of sugar helps the medicine go down
    The medicine go down, the medicine go down
    A spoonful of sugar helps the medicine go down
    In the most delightful way'

    The main question is not just what is cut but what else will the Chancellor to do (besides implement 'savings') to 'add value' ... something out of nothing ... by better planning, management, co-ordination of govt. policy and resources, organization.

    The private sector will not invest until the bureacracy on British business, the uncertainty about the govt on taxation, legislation etc is clarified.

    The private sector will not make an effort to employ and retrain many of the British unemployed until there is is a tax penalty/incentive scheme in place for employers to evaluate this.

    Mr Osborne has to be bold with the concurrent activity besides the savings that have to be achieved ... and this means bringing forward e.g. welfare reforms and creating productive jobs with public private local partnerships where they are most needed and for those who prefer work rather than dole.

    Hopefully, the debate can move beyond 'cuts' to the big picture ... but cuts cuts and nothing but cuts will be a govt mistake in the absence of some concurrent govt initiative and intervention where it is needed most.

    Uk businesses have a responsibility to try and take on at least one unemployed person if only on a part time basis ... they all fiddle enough on their taxes to pays something back ... this in itself would make a massive difference. George Osborne needs to reflect this in his 'plan(s)' and make it easier and less costly for UK businesses to take on a new British employee.

    There is plenty that can be done to add value and do more with less ... it needs some hard work by govt to deliver this quickly ... timing is crucial.





  • Comment number 63.

    Ben

    You seem to miss the point. What difference does it make whether it cost 6GBP or 60GBP of government spending to make an iPlayer? Does the money somehow disappear into a blackhole in your mind, or does it get spent on other, presumably more important things? Why is it important to me that someone overspent on tech when the government is overspending in the hundreds of millions propping up some fat bankers I would prefer to see imprisoned, in the name of free enterprise and the Western model?

    Ben, look at the first 3 links, it might help you:
    http://www.3spoken.co.uk/2010/04/primer-on-modern-monetary-theory-mmt.html

    Your assertion that printing money is inflationary does not make sense, and is not supported.



  • Comment number 64.

    Ben

    Regarding spending on technology, I was referring to energy and energy infrastructure. The real root of the crisis is the end of the petrodollar. This means the end of the system of international trade and the system of energy distribution that went with it. The two were coupled and now need decoupling.

  • Comment number 65.

    Political debate in UK left-right politics used to be about the balance of private vs. public spending, where cuts in public spending were balanced by tax cuts that fed back into the economy - the money was still spent, but by individuals not Whitehall - and we voted for which way we wanted the balance to fall.

    THIS IS NOT THE SAME! Gorgeous George is proposing to take o/o/m £100 Bn out of the economy - and as every £ tends to be re-spent about 10 times before returning to deposit/savings, that's A TRILLION POUNDS of demand being taken out of the economy.

    That trillion would have generated tax receipts - VAT, income tax, excise duties, etc. which will now not happen, so cutting public spending without cutting taxes will reduce the government's income in the future.

    At the same time the cuts in spending will throw at least 1.2 M people who were directly employed in the public sector out of a job - and many of those working in the private sector on government contracts will also lose their jobs too - in construction alone this is more than 500,000 people. They will all sign on for jobseekers' allowance, housing benefit, council tax rebates, etc. so driving the cost of welfare payments from the government up.

    REDUCED GOVERNMENT INCOME - INCREASED GOVERNMENT SPENDING - SO THERE IS A VERY REAL RISK THAT GOVERNMENT BORROWING WILL THEREFORE RISE, NOT FALL.

    The ConDems answer to this is that there will be a renaissance in the private sector that will be "set free" as it will no longer be "crowded out" the the public sector's "bloated control" of so much of the economy, so private enterprise will create an additional 2.7 M new jobs over the parliament, invest £400 Bn in new capacity and boost our exports by a third, so generating new tax income, taking government welfare cost out through creating employment and addessing our unsustainable balance of payments deficit, building confidence in the UK economy to keep the costing of borrowing low.

    To expect us to believe this is going to happen flies in the face of mathematics, basic economics, the lessons fo history and commonsense. Taking £1 Tn of demand out of the economy is BOUND to impact businesses as consumers will cut their spending as total income falls, which will lead to fewer jobs, not more. The Scottish CBI admitted this on SKY NEWS earlier this week by saying the private sector can't even replace the lost public sector jobs north of the border let alone increase overall employment.

    The idea that there is going to be an export-led recovery is quite frankly laughable, when you look at the state of our main exports markets in Europe and the USA and that one of our main sources of imports is from China, which is running a trade surplus of $20 Bn per MONTH with the rest of the world.

    We are not competitive, we don't have the industrial base for an export-led recovery and our traditional trading partners in Europe and N. America are as deeply mired in debt and the aftermath of the banking crisis as we are, so quite why anyone thinks we are going to outperform even the best economies in the world by boosting our exports by a thid simply escapes me.

    Therefore my verdict on George Osborne's austerity plans is not based on political allegance or what he proposes to cut - it's based on whether it is going to achieve his objective of reducing government borrowing or not and the clear result for me is that it is a high risk strategy with little or no chance of working.

    The other consequence is that people will be driven to increase their level of personal indebtedness, cutting their savings/pension contributions and so UK PLC will end up having increased it level of public and private debt, whilst making deep cuts in public services, reducing our standard of living and our quality of life.

    We're simply shooting at the wrong target - the real problem lies with TRADE, INDUSTRY and EMPLOYMENT because we allowed our manufacturing industry to go to hell in a handcart in the 1980s and our finanical services industry to run amok.

    We need to get back to making what we consume, employing our own people to make what we need and to stop importing food, energy and manufactured goods on the unsustainable level that we currently do.

    This would mean Government playing a MORE active role in the economy, taking the appropriate action to restrict imports and to boost domestic production - i.e. unravelling just about everything the last Conservative Government did in the 1980s to drive our strategic industries to the wall and let loose the maniacs in the City of London by deregulating and privatising our economy.

    THe other thing that has changed is the addition of a new Fig Leaf for Gorgeous George to hide behind - the Offfice for Budgetary Responsibility.

    Just as Gordon Brown attempted to deflect criticism of monetary policy by making the Bank of England responsible for interest rates, now the OBR is cast as providing independent analysis of economic policy to take fiscal policy out of direct accountability.

    Given the failure and apparent powerlessness of the BoE to control interest rates and their recourse to effectively zero interest rates and QE combined with the OBR's incredible acceptance of these ludicrous employment, investment and export forecasts, is see the MPC and OBR as the Tweedledum and Tweedledee.

    The characters are perhaps best known from Lewis Carroll's Through the Looking-Glass and what Alice Found There. Carroll, having introduced two fat little men named Tweedledum and Tweedledee, quotes the nursery rhyme, which the two brothers then go on to enact.

    They agree to have a battle, but never have one. When they see a monstrous black crow swooping down, they take to their heels. The Tweedle brothers never contradict each other, even when one of them, according to the rhyme, "agrees to have a battle". Rather, they complement each other's words.

    Sounds very prophetic to me....

  • Comment number 66.

    #62 nautonier,

    It's a bit ich to state that the thread has been hijackd by political rehetoric and then say:

    "The wayward assumption that the way to govern Britain is with an increasingly enlarged, inefficient and bloated public sector ... paid for partly by the taxes of private individuals and partly by the taxes paid by the private sector is naive in the extreme."

    Let alone your little ditty.

    After that you make some good points. Trouble is Boy George has made no
    no tangible efforts to try and address your hopes. It's not just timing that is crucial. Joined-up thinking is even more vital

  • Comment number 67.

    #2 Stanilic I browsed briefly the comments for the answer to your (figurative?) question about the knowledge economy, or "knowledge based economy" and found no reference. My dilettante guess is that it is what it "says on the tin". It's an economy where you are very economical (sorry for bad English) about your knowledge. You don't give it out for free. You either barter it or sell it for money. Any knowledge in such a kind of economy, even very basic, has its cost and price. In this way although we dispose of our physical capital we keep our technological and social capital (or at least the upper layers to them) protected. And, of course, that must be all as what I say here is self contradictory already.

  • Comment number 68.

    Aside from the country's digging deep to rescue the banks from financial meltdown, which was probably necessary, there have been two attempts to stall a deep recession.
    The first was wholesale borrowing by the government. Face it; we are in a recession but it is hidden behind government spending. Whilst this spending has the appearance of creating jobs, it is a ridiculous sham, since it doesn't stimulate self sustaining job creation from the private sector, but quite the opposite - they take skills out of the private sector. Unless these jobs are released again during an economic upturn a jobs shortage is the result, and we still have the deficit to pay back.
    The second was the 'quantative easing' by the Bank of England. In other words printing money, and the stubborn inflation figures over 3% are the result of that. Inflating our way out of the deficit robs everyone with assets and is a shabby way to run a government.
    George Osborne is right. Control of public finances, cutting red tape and encouraging private enterprise is the only way we'll ever see our way out of this mess and still maintain the trust of foreign investors.

  • Comment number 69.

    Oblivion. From that first blog post:

    "Suffice to say that the Federal government, as the monopoly issuer of its own currency is not revenue-constrained. This means it does not have to “finance” its spending unlike a household, which uses the fiat currency."

    How on earth can that be correct. Granted if the UK gov created an extra 5bn that wouldn't matter, much, but as this gets larger and larger the confidence in the fiat currency is eroded, and foreign countries refuse to accept it. Witness our scaling down of operations in Pakistan as they demanded more money following a 25% fall in the pound. I guess they don't understand MMT either, and are labouring under the false assumption that bullets cost money. Fiat money sucks but it is still confidence based.

    Finally, yeah the iplayer money (and the NHS IT project) has disappeared. You might as well get half of them to dig a hole and the other half to fill it in. Yes those employees went and spent the money which provided other jobs, but taking this to it's extreme, if everyone did that how would we eat? Create more money in a screen and then spend it to buy grain off another country? Maybe I'm just not smart enough to understand this latest bolt of thunder from our excellent economic friends.

    I really should copy in Ethiopia on this so they can start running a massive deficit and get their own NHS up and running. Oh that's right, nobody would loan them any money to pay for all the staff they would need, because they would never be paid back. Let's tell them about MMT as well then maybe we can get everyone running a deficit and everyone can have everything they ever wanted.

  • Comment number 70.

    #67 Suav,

    look at Drucker's work and follow the links from there

  • Comment number 71.

    Also the banking bailout, whilst outrageous, and caused entirely by Brown's "light touch", was a one-off cost. All the cuts are related to the deficit, not the debt. The deficit is caused by Labour spending money like, well, a bunch of crazy socialists. The banking bailout costs have little to do with this, other than the interest payments on the debt. Also the banking bailout was down to the housing collapse, which in fact benefited many in this country for a long time. It wasn't just spend on cigars by fat men in braces.

    Don't blame the banks entirely. Why not look at ourselves as a nation of , lazy consumers. That is how your children will see the boomer generation, like it or not.

    Who caused a greater decline in manufacturing? Nu Labour or Thatcher?

    Also I'm pleased to read that 100bn spending generates 1trn demand which then goes in to taxes. Wow - that sounds like we should increase govt spending from 50% gdp to 100% as it's free money. Another economic miracle that doesn't appear to have worked in practice but is in fact still true.

  • Comment number 72.

    #69. At 1:34pm on 11 Sep 2010, Ben wrote:

    Oblivion. From that first blog post:

    "Suffice to say that the Federal government, as the monopoly issuer of its own currency is not revenue-constrained. This means it does not have to “finance” its spending unlike a household, which uses the fiat currency."

    How on earth can that be correct. Granted if the UK gov created an extra 5bn that wouldn't matter, much, but as this gets larger and larger the confidence in the fiat currency is eroded, and foreign countries refuse to accept it.

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

    Ben - please look at my post at #57 to you and the Youtube piece in particular. Ignore the music, it has a serious message and may help.

    I would like to hope that it will make you wonder why a number of us writing here pursue the line we do about debt free money. It took me a while earlier this year to get my head around it, but I can now see it isn't crazy.

    It will only be by gradually spreading the word that the current policies arre wrong that we stand a chance of getting out of this. If we do not convince you, please write back, and maybe we can show you what we hope is a better way forward.

    If we do convince you [or have started to], come back anyway! Its nice to know when we have changed someones mind [or at least started to].

    I'll be looking out for your response, either here or in a later post from Stephanie

  • Comment number 73.

    Re: 68

    "George Osborne is right. Control of public finances, cutting red tape and encouraging private enterprise is the only way we'll ever see our way out of this mess and still maintain the trust of foreign investors."

    "Private enterprise" covers many things. As David Cameron says, our economy is now too dependent on the financial services sector.

    HE IS RIGHT.

    I'm not advocating more debt or cutting unecessary red tape - all I'm saying is that ISN'T ENOUGH ON ITS OWN to solve our economic problems - and if that is all you do, there is a very real risk of driving the economy over a cliff because it is acutely deflationary - in fact o/o/m £1 Tn worth of deflation - of demand being taken out of the economy as a whole.

    So our manufacturing industry must expand to not only replace public sector jobs, but also to generate exports, tax receipts and even more jobs to replace a hefty slab of parasite financial services industry. But everyone goes on about small businesses - unfortunately they don't really export very much or replace imports - so the SME sector could help to soak up some unemployed people, but even it it did, we'd still be lumbered with a structural problem - too few BIG companies that would export and replace our imports with home produced goods, creating new employment, getting our balance of payments out of the red and generating tax income for HMG.

    IMHO, given the rigged nature of global trade - OPEC, the Chinese Communist Party's manipulation of its exchange rate / labour market, plus the credit crisis, the Euro Crisis and the recession in the USA etc, I simply don't see a renaissance of British industry happening without state intervention to limit imports and to create the climate where investment happens.

    We've tried deregulation, privatisation and the hands off approach to ship building, coal mining, steel production, the car industry, electronics, the list of decimated industries goes on and on. The developed countries that still have strong manufacturing industries are those that have a partnership approach involving the private sector, the community and the state - regional and national. Why else is Germany growing whilst others are not? Take a Trip to Wolfsberg and visit VW - the partnership approach in action.

    The libertarians have had their fun - they are to be found in the ranks of the Tories, LibDem and New Labour - the mantra that "the market knows best" does not work - it very nearly destroyed the entire financial system and would have done so without the state stepping in - I simply do not see UK business building the economy out of the hole without the state manipulating the domestic market to make home production more competitive and to drive the investment we need to rebuild manufacturing. This should be targeted at emerging technologies and import substitution in manufacturing, food production and energy.

    Please explain to me why the state should invest in educating and training people, but not in the buildings and infrastructure they will work in? Why should we be expected to pick up the welfare bill for unemployed people here in the UK so that some multinational can make more money using repressed Chinese ex-peasants to produce goods on the other side of the world to seel to British consumers, whilst individually and as a nation we are getting deeper and deeper into debt to pay of our imports?

    The problem is not too many public sector jobs, it's too few private sector ones paying a decent wage. All the cuts will do is to transfer the cost of the people about to lose their jobs from a payslip to a welfare payment. A pointless exercise in rearranging the deckchairs. To avoid the iceberg, we ned to change course.

  • Comment number 74.

    SleepyDormouse and co I've just watched the Wizard of Oz video on youtube as you suggested. It makes some sense and debt free money controlled by an elected government would certainly be a huge improvement in achieving social justice for all.

    However, I can see some problems that this will not address:

    We in the UK have a problem in that we are reliant upon imports from the outside world to survive. In particular I'm thinking of the basic need of food and less essential but still very important needs of oil, other commodities, and goods. We have to have an exchange mechanism whereby we can use money which is accepted by others in the world as valid payment for these goods. This whole exchange rate mechanism is ultimately based upon how highly others value what we have to trade with them in return and this is where I see our problem arising. We don't have enough to trade with them of any real value in return any longer that they can't get cheaper or better elsewhere.

    In short we are living well beyond our means and whatever money system we come up with I don't see how this can change this fundamental problem. What do we have to trade to pay for our food and other imports that we can't produce enough of ourselves?

    The USA a much larger country with a much lower population per unit of area does not have such a problem as doesn't Canada, Australia, China etc.

    Europe and the UK in particular have grown in population well beyond anything that can be sustainable by anything other than other nations charity as far as I can see.

    Can you explain how we can pay our way in the world? I agree debt free money is desirable but it doesn't solve the UK problem of living beyond our means internationally way beyond our ability to sustain ourselves from our own resources as a nation.

    We arrived in this predicament by being the workshop of the world and being able to make huge profits on what we made and sold abroad. This enabled us to grow well beyond our own self sufficiency. Those days are now gone and how can we sustain ourselves internationally with such an over large population?

  • Comment number 75.

    66. At 12:45pm on 11 Sep 2010, foredeckdave wrote:

    #62 nautonier,

    It's a bit ich to state that the thread has been hijackd by political rehetoric and then say:

    "The wayward assumption that the way to govern Britain is with an increasingly enlarged, inefficient and bloated public sector ... paid for partly by the taxes of private individuals and partly by the taxes paid by the private sector is naive in the extreme."

    Let alone your little ditty.

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

    Hiya Foredeckdave

    I don't think that the quoted paragraph is political rhetoric ... it is I consider a matter of fact and the only question is at what point does an over-sized public sector become inefficient and unsustainable for the private sector to maintain it from tax revenues since although employees in the public sector also of course, pay taxes; ultimateley, all public sector salaries and wages are paid by the private sector taxes as the public sector simply does not produce enough economic output to sustain itself.

    The 'little ditty' is taken from from the 'Sound of Music', I recall, but seems very poignant for the occasion.

  • Comment number 76.

    As I understand it, in our debt based monetary system:

    If the amount of new debt created is less than the amount of capital and interest that is required to be repaid, then there are going to be defaults.

    Now if private sector demand for new debt falls (as it has done, and presumably will carry on doing), and government demand for new debt does likewise, then the number of defaults will rise dramatically and we will have significant deflation of assets that are based in this country.

    In a debt based monetary system such as ours, it is important that:
    New debt created each year ≥ amount of capital and interest required to be repaid on existing debt.

    Problem is, unless you want significant defaults, the level of debt must grow each year, which is why I, along with others advocate monetary reform.

    Various links below will help explain this issue:

    A short animated film by Paul Grignon, ‘Money as Debt’ (link below).
    http://www.youtube.com/watch?annotation_id=annotation_942534&feature=iv&v=z5vC_8azMFk

    The documentary Secrets of OZ, explains our debt based system of government finance, this is nearly 2 hours long, but well worth watching (link below)
    http://www.youtube.com/watch?v=D22TlYA8F2E

    The meaning of Austerity IMF and the reality (link below)
    http://www.youtube.com/watch?v=jUmQbf1AyA8&feature=related

    Two groups wishing to make changes to the system, see links below.
    http://www.bankofenglandact.co.uk/act/
    http://www.prosperityuk.com/prosperity/prosperity.html

  • Comment number 77.

    Stephanie says:
    "He [Osbourne] thinks ...

    the only reliable way to encourage the Bank to keep rates low is by cutting public borrowing ... "

    But does not the Bank belong to us. It is our servant and can be told to do what is necessary for the health of the UK economy.

    This crisis is different, because the pattern of bank lending has changed, certainly for the medium to long term, if not for good. Before 2008, easy credit was an important driver of the world economy. After the trauma of the crunch, banks will no longer lend as freely as they did, even if the new Basle rules are not adopted.

    Something must be done to compensate, if a long term slump is to be avoided.

    The 1930's slump was finally ended by increasing public expenditure in preparation for world war 2. It seems that even right wingers can overcome their anti public expenditure prejudice when war is in prospect. Can world leaders not be wise enough do this now, without war?

  • Comment number 78.

    Following on and concluding the points made in Post 50.

    Time to tackle the public debt myth.

    What exactly happens when the Government issues Debt i.e. Gilts.
    Have you ever thought about it?

    All that happens is that money is replaced by a bond. The money goes to the Government and so like tax it is extinguished. It disappears along with its spending power.
    Government borrowing does not finance Government spending so why issue the debt?

    Remember the Government creates money by spending where it chooses to spend. At that point money is created. This is exactly how money should be created. Unfortunately it seems to think that money should also be created by allowing private banks to operate Fractional Reserve Banking. That is the problem. It allows the parasites to extract massive bonuses for no good reason. It does not need to allow this. It can create money itself by its own spending in accordance with the primary goals of maximum output and full employment and operate its own form of FRB through a state bank if necessary. In this way it would also have better control of the money supply.

    I can only think of one possible good reason for issuing so many gilts. To mop up money in the economy that is is not being used to produce output or wealth i.e. pension funds. With that money extinguished there would be more scope to create (spend) money in areas which would contribute to the economy if there is spare capacity in terms of resources and unemployment.

    If you understand double entry bookkeeping you will be programmed to think of both sides of any financial transaction. You must not do this when money is received or spent by the Government (the sovereign issuer of a fiat currency) when it comes to Government accounting but it obviously applies in Corporate and Household accounting because they are revenue constrained. The government is not.
    I repeat the Government creates money when it spends. When tax is paid or gilts purchased the money paid to the Government disappears forever.
    Lose any idea of a Government balance sheet even if it thinks it has one.

    Please rip me to pieces here but this is not rocket science. They either think we are still tied to a gold standard or are up to their necks in it with the banks. You may think these guys are fully dressed but they are in fact starkers.

    There is no problem with the debt. It will be repaid when it falls due.
    Have they really convinced the middle classes that massive spending cuts are the right thing to do based on an inability to grasp basic economics?

  • Comment number 79.

    Sorry when i referred to the previous post I meant 58 not 50

  • Comment number 80.

    Alesha - so let's imagine the UK as a big household. We want to get grain in from Russia because we are a net importer of food. What are we to pay them with? A bottomless pit of IOUs, with "There is no problem with the debt. It will be repaid when it falls due" and your signature on the back?

    I grant you we don't need the current financial services creaming off the top of transactions. Let's imagine we get rid of them so they don't distract from the main point. How do we buy grain from Russia when our government just keeps on creating money whenever it needs it? Surely it has to be tied to something that provides a measure of worth in order to trade with Russia. Surely the bottom line is we can't run a deficit every year, however you measure it.

    I just don't see how the debt will be repaid, if like the current generation we spend more than the next one will earn, in real terms. Let's not start talking about increased productivity as a justification for stealing stuff from the next generation either.

  • Comment number 81.

    80. At 7:16pm on 11 Sep 2010, Ben wrote
    'Alesha - so let's imagine the UK as a big household. We want to get grain in from Russia because we are a net importer of food. What are we to pay them with?'

    Exactly in the same way as we do now

    'How do we buy grain from Russia when our government just keeps on creating money whenever it needs it?'

    Its not creating money when it needs it. It is replacing private banks operating FRB and it controls the money supply. Obviously when we are at full capacity it will not create additional money.

    'Surely the bottom line is we can't run a deficit every year, however you measure it.'

    The deficit is the difference between Govt spending and taxation.
    what happens when the economy operates at full capacity ? taxation rises welfare spending reduces. The deficit falls. It is a mirror image of what goes on in the economy not something that needs to be controlled. A deficit is in fact essential when private spending is depressed.

    'I just don't see how the debt will be repaid'

    Simple. No 1 Dont issue any more debt. No.2 When the debt falls due credit the bank accounts of the bondholders.

  • Comment number 82.

    Totally disagree with that prosperity site:

    "This money should be spent, not lent, into society on the basis of proven need." (by the government "independent" body)

    No thanks. I'd rather have decentralised lending than a centralised socialist pie shop. What happens when government bodies (independent or whatever) have a monopoly? Usually at best incompetence. At worst corruption.

    They can't even means test a flat rate child benefit at the moment. This is socialist, academic fantasy. No doubt like socialism it will persist and where it fails proponents will say it hasn't been "tried in it's purest form".

    The state already have enough of a role in my life thanks. I don't want to go to my comrade (a gift of friendship brother /hands bottle of wine to officical /) to get a mortgage.

  • Comment number 83.

    Ah I see. Operating at full capacity. I did wonder where in the logic the magical step occurred. Just keep on spending and it's cool as you will definitely get there. Unless the market looses faith before you get there and refuses your currency. Then you can't buy grain.

    http://www.sciencecartoonsplus.com/images/miracle_sharris.gif

    People say the last 10 years were a bubble and then says "of course when we get back to full capacity" where full capacity is in fact the bubble. That was above capacity, hence the deficit. We aren't going back there.

    So we don't issue more debt, but we do until we get back to full capacity. However long that period is who knows. Let's hope we get there before the demographic time bomb blows as those olds won't be working at all but still need feeding.

    Again I must mail Ethiopia to tell them about this. They can start issuing their own currency and work towards "full capacity". Once they have explained this to engineers and doctors in other countries they will all come over and have rhetoric for tea.

  • Comment number 84.

    Alesha Soba

    "I can only think of one possible good reason for issuing so many gilts. To mop up money in the economy that is is not being used to produce output or wealth i.e. pension funds. With that money extinguished there would be more scope to create (spend) money in areas which would contribute to the economy if there is spare capacity in terms of resources and unemployment."

    Yes, the same thing ocurred to me too. I suppose the implication is that high deficit spending is acknowledgement that a high net savings situation is happening and the aim is to recycle those savings back into circulation via the government.

    However, if I remember rightly, weren't they simply using the money to buy securities from banks and corporates, who then used it to clear balance sheets with no economic stimulus via the man on the street?

  • Comment number 85.

    The question is still not answered by the debt free issuance of money when it comes to imports that we need to survive.

    See my earlier post 74.

    How do we pay foreign suppliers? We have to have something of value to trade in return to underpin whatever currency we use?

  • Comment number 86.

    Ben

    "I'd rather have decentralised lending than"

    Davos? How is a handful of private banks owned by a small elite group of shareholders "decentralised". The free market kool-aid is elitism of a different kind, that's all.

  • Comment number 87.

    83. At 7:45pm on 11 Sep 2010, Ben wrote:
    'Just keep on spending and it's cool as you will definitely get there. Unless the market looses faith before you get there and refuses your currency.'

    Spending is targeted to produce output and full employment.
    What exactly is 'the market' you are referring to?


    'So we don't issue more debt, but we do until we get back to full capacity'

    No we stop issuing more debt now

  • Comment number 88.

    84. At 7:46pm on 11 Sep 2010, Oblivion wrote:
    'Yes, the same thing ocurred to me too. I suppose the implication is that high deficit spending is acknowledgement that a high net savings situation is happening and the aim is to recycle those savings back into circulation via the government.'

    We would be giving them perhaps too much credit if that was the case. Remember they are using the that as an excuse for massive cuts which is criminal.

    'However, if I remember rightly, weren't they simply using the money to buy securities from banks and corporates, who then used it to clear balance sheets with no economic stimulus via the man on the street?'

    It is key to recognise that once the money enters 'Govt' it disappears otherwise we will get lost. However that may have been the thinking of these talented people. When you follow their logic and the money, everything is going round in circles. The money goes back where it came from and the logic disappears up their own backsides

  • Comment number 89.

    The last time I looked the banks were owned by private shareholders. In fact two of them are largely owned by the UK government (you and me). This is complete conspiracy theorist rhetoric that it's just a few rich guys who own everything and they're supressing the masses to keep it that way.

    FACT: all of the richest people in the world have worked their way to that state in their own lifetimes through their own inventions and efforts. (Gates, Mittal, Buffet, Jobs, Branson etc).

    Don't pedal the old Wolfie Smith failed ideology stuff.

  • Comment number 90.

    85. At 7:48pm on 11 Sep 2010, Sage_of_Cromerarrh wrote:
    How do we pay foreign suppliers? We have to have something of value to trade in return to underpin whatever currency we use?

    I think that imports increase our wealth because we get to consume stuff we don't produce and we are dependent on them.

    It does appear that countries want to sell us stuff. What are they getting in return ? Their own currency at an exchange rate or perhaps they take sterling or dollars. In either case our money supply is unchanged.

    Yes at the end of the day we have to produce tangible output for export. I think we are capable of that. I think the changes I've mentioned would increase the likelihood of that.

    Sorry I'm all over the place here but I dont see why our exchange rate strength should be affected for the worse by anything I've said if your question was aimed at my comments. If not, apologies.

  • Comment number 91.

    Ben,

    You make perfect sense. Money is purely a lubricant for trade. It is the value of what you have to trade that ultimately dictates worth. Wasting earnings on servicing debt for consumption and non-jobs is a loser.

  • Comment number 92.

    89. At 8:12pm on 11 Sep 2010, Sage_of_Cromerarrh wrote:
    The last time I looked the banks were owned by private shareholders. In fact two of them are largely owned by the UK government (you and me). This is complete conspiracy theorist rhetoric that it's just a few rich guys who own everything and they're supressing the masses to keep it that way.


    You are ignoring the bonuses

  • Comment number 93.

    Bertram Bird wrote @3:
    "Good summary, Ms Flanders. Of course, even that is simplistic. This is similar to the past, but not exactly the same. You can never have the same "initial conditions" for any two financial experiments...."
    .
    Hi, Bertram,
    being retired, I have time for pedantries.
    Try running your experiments in parallel rather than in series ;-)
    Geoff.

  • Comment number 94.

    63. At 12:11pm on 11 Sep 2010, Oblivion wrote:
    Ben

    You seem to miss the point. What difference does it make whether it cost 6GBP or 60GBP of government spending to make an iPlayer? Does the money somehow disappear into a blackhole in your mind, or does it get spent on other, presumably more important things? Why is it important to me that someone overspent on tech when the government is overspending in the hundreds of millions propping up some fat bankers I would prefer to see imprisoned, in the name of free enterprise and the Western model?

    Ben, look at the first 3 links, it might help you:
    http://www.3spoken.co.uk/2010/04/primer-on-modern-monetary-theory-mmt.html

    Your assertion that printing money is inflationary does not make sense, and is not supported.
    ------------------------------------------------------------------------
    At the risk of intruding into something of a two-way debate, Ben is technically correct. But he is not necessarily practically correct. Other factors can come into play around and into the expansion of money supply.

    One of the problems with economics is that you can know what is in the textbook, you can remember or read about what has happened in the past, and then you find yourself in a particular new situation and apply the economic text book and/or the history book and find that the accepted theory and practice doesn't quite fit or suit the new situation.

  • Comment number 95.

    Alesha its a bit more basic than you think. We NEED imports and they have to be paid for. We can not grow anywhere near enough food to sustain our 62 million population. Trade is now international much more than it is national. We buy food and other commodities from abroad and pay with currency that is ultimately based on what the overseas producers see it being worth. This is ultimately based upon our exports and their perceived value. Money is just a lubricant to trade, it's how your goods and services are valued that ultimately set your wealth.

    My argument is that the real value of our exports is insufficient to sustain the standard of living we have come to expect and this is why we have indebtedness. We have continued to think we can grow in all directions without actually performing to sustain this. We have to put a stop to it and live within our means.

    Secondly we then have to do something about our runaway population which is unsustainable and a drag on our ability to improve our quality of life in the future.

  • Comment number 96.

    78. At 6:47pm on 11 Sep 2010, Alesha Soba wrote:
    Following on and concluding the points made in Post 50.

    Time to tackle the public debt myth.

    What exactly happens when the Government issues Debt i.e. Gilts.
    Have you ever thought about it?

    All that happens is that money is replaced by a bond. The money goes to the Government and so like tax it is extinguished. It disappears along with its spending power.
    Government borrowing does not finance Government spending so why issue the debt?

    -----------------------------------------------------------------------
    Again. and this is linked to #63.

    Firstly, the issue of gilts can be used to adjust money that is out there to buy goods and affect deflationary/inflationary pressures.

    Alesha, you are not quite right, in that the money raised doesn't just disappear. The gilts proceeds are either held by Government against a liability elsewhere in Government, or spent by them, ie public spending.

    Want to keep public spending going and not enough tax revenues? Sell gilts. (Or as a lot of posters would be quick to point out - go into debt as a State.) The money doesn't disappear but trickles out. All those State employees that have mortgages are saving a chunk of it while paying a bit to bankers with big salaries and big bonuses and a bit to savers as well as employing mortgage brokers, bank clerks, estate agents, conveyancers, removal firms, DIY stores, garden centres, builders, electricians, gas fitters, painters and decorators, HM Treasury {stamp duty}, Local Authority {searches}, that get that State-employed person a home to live in.

  • Comment number 97.

    'How is a handful of private banks owned by a small elite group of shareholders "decentralised"'. - millions of different people in the uk alone own shares in said banks.

    "Spending is targeted to produce output and full employment." - ah ok. Like in the former USSR. How did that work out BTW? Or was it not exercised "in it's purest form"? Have you any idea how silly that sounds?

    "What exactly is 'the market' you are referring to?" - the money markets who buy government gilts that allow us to continue to import food and oil even though we are taking more from the world than we contribute.

    I still don't understand how we clear the deficit. Do we default and then start on this new scheme, and if so, how do we trade?

    Alesha - as I said in an earlier post the banking bailout was a one-off cost, nothing to do with the deficit. If a private company pays a bonus how does that effect you? Plus the total provided in bonuses is chicken feed relative to the deficit. It's like the parliament expenses. The cost of that is a drop in the ocean compared to the debt and the deficit. The principle matters but my kids can't eat rhetoric so I'd prefer if Labour hadn't run us into the ground.

    It might seem important to you because socialists you know bang on about it, but it's a distraction. Put your brain into gear - how will we trade?

    I've said this before on this forum - where do you these guys all meet for a conspiracy? In a room like on Austin Powers?

    Up2Snuff - good double speak, comrade.

  • Comment number 98.

    95. At 8:33pm on 11 Sep 2010, Sage_of_Cromerarrh

    Sage I don't see how providing the conditions for a vibrant private and public sector with the aim of maximum output and full employment can affect our ability to import for the worse.

    What I'm saying is that unless we make the changes I've suggested in previous posts we are unlikely to reach a point where we can make that happen.

    I am saying the Government is totally misreading the current situation, banks should be controlled, money should be created by the state rather than private banks and the Government should target full employment and maximum output. It can do this and and and control the money supply if it wants to. It is the wrong thing to do to cut public spending now.

  • Comment number 99.

    17. At 7:30pm on 10 Sep 2010, Alesha Soba wrote:
    9. At 6:44pm on 10 Sep 2010, halford wrote:
    Why doesn't the BBC ever point out that if the massive overspend of the country's budget is not addressed by spending cuts, then the only alternative is massive tax hikes on everyone who is working for a living?


    Because it is untrue. Govt spending does not need to be financed by taxation or debt. Don't let let anybody convince you otherwise.

    It may sound logical but the Govt is the sovereign issuer of sterling currency (ok at the moment through private banks) and tax collector of same and as such does not need to finance its spending.
    -----------------------------------------------------------------------
    Oh, how I wish? Would it not be wonderful to just produce money to pay for things without any, any er.., - I want to say but perhaps should not - 'quid pro quo'.

    Goverment doesn't have any money. It's our money. Government is effectively a group of us getting together and organising something as a group. Apologies if that explanation sounds patronising - it is not intended to be - but ramp things up by several layers of complication and multiply by umpteen levels of magnitutde, and Goverment is like a very large club.

    Members pay subs to finance the activities of the club. The club provides services to the members. The club may be big enough to employ people. The club may start to own property but has to take on a loan to acquire it. The club has elections to its Committee. The Treasurer may be too generous with guest speakers fees or the refreshments at meetings and next years subs have to be increased.

    Trouble at AGM!

  • Comment number 100.

    The polticians/govt in the UK and in many other countries see macro economic management almost entirely as a matter of a 'big fiscal fix' or a series of 'big fiscal fixes' for the overall economy and which is of course largely true in terms of 'government finances'.

    However, the current situation facing the UK Colaition govt. is that it needs to break with 10 Downing and 11 Downing St traditions and look beyond the fiscal solutions ... the task facing George Osborne is as much about resource and other planning, organisation, structure, rebalancing of the UK economy and on a massive scale as it is to with money ... these are issues which no previous post war UK Chancellor has had to face on the same scale (probably since 1945).

    This requires a 'paradigm shift' in thinking for the Coalition govt from a 'bankers fix' for the fiscal element of the UK economy to an 'administrators fix' for the entire economy including much better co-ordination of govt policy and resources ... with govt departments communicating with each other, much more effectively. This means a 'shake out' of Whitehall and which I think the indications are that something along these lines is coming in October.

    This is now the real primary task of UK government in a global economic world and which has been lacking in the UK, especially in recent years, as our global economic position continues to slide ... its not just a money managmenet situation for the Chancellor ... much better real resource planning ... a 'big plan' is needed for all UK resources and not just the money supply/debt deficit or govt policy has no direction and cannot be implemented effectively.

    Let's hope there is the 'big plan' with a much better planning and resourcing mechanism being put in place in Whitehall, for implementing proposals for the UK economy ... as 'cuts, cuts and cuts' are not by themsleves ... 'enough'.

 

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