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The recovery's coming - but the UK's taken a permanent hit

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Paul Mason | 19:17 UK time, Wednesday, 12 August 2009

Here's my take on the August 09 Inflation Report. First, the good news, Quantitative Easing is working. Now the bad news: working means avoiding a catastrophe. It's taken £175bn - and says my interlocutor Doug McWilliam of the CEBR will probably take another £50bn - just to avoid a prolonged slump.

Even with 0.5% interest rates right through to 2011 and the full £175bn still in circulation until then, the Bank of England is predicting inflation will undershoot the 2% target for CPI. That means we should expect interest rates to be low for at least that long. It also signifies the recovery is going to be pretty appalling: weak and fragile.

The Bank's famous "fan chart" looks mighty perky - a near symmetrical V, centering on the last three months, showing that - although the recession is not over, the fastest period of shrinkage is over. But there are serious risks - both global and intrinsic - that this comes out worse than they think.

Here's the problem. QE, together with the 680bn guarantee for the bad assets of Lloyds Group and RBS, has begun to turn banking around. But there is scant growth in lending to individuals - and loans to companies are still shrinking. And so the Bank's main target on QE - expanding the money supply - is, well, off target. Growth of broad money (M4) has slumped and continued to slide even after the Bank started printing money. That's because while money makes its way from the BoE to the banks, it does not make its way in sufficient quantities into the pockets of borrowers or businesses.

Let us put it brutally: to save the banks the real economy's recovery is being delayed and perfectly healthy companies sacrificed. The governor of the Bank told me today this was more or less inevitable - we'll be discussing with politicians whether there are alternatives.

On top of all this there is a political variable: the Bank's growth projections today are based on the Labour budget figures. If, as the Conservatives have indicated, they rip these up and tighten faster there will be question marks over the growth projections.

Today's unemployment figures only tell half the story of the jobs market: pay freezes, short time and hyper-flexible work practices are contributing to the rapidity of recovery - but also to the permanent hit to economic demand that will dampen economic growth for the first half of the next decade.

Tonight we've got a trio of front-line politicians to discuss this, together with former MPC dissident David Blanchflower. Tune in at 2230 on BBC2.


  • Comment number 1.

    Can we have precise facts on who are the sellers of the gilts to the APF. The stated objective was to surpress gilt yields so that sellers would seek better returns in riskier ( note) assets raising prices.Thus, we see QE transmit to the wider economy. Are investors bailing out of gilts into HM Credit Guaranteed bank debt/equity? Are these the riskier assets. Is it right that a third of these investors are overseas players. How many of these sellers purchase new gilt issuance from the DMO? How much QE is being placed on deposit. Do the GDP projections incorporate £175bn QE on the blind assumption it will boost nominal spending in the medium term? Mervyn King said it would take banks several years to re build their balance sheets and capitalise to the higher thresholds and acquire fresh liquidity including gilts. Without the tiresome use of the ' you cant prove the counterfactual' stuff, is it right that forecasts should be built around the QE boost. Isnt it misleading to do this?

  • Comment number 2.

    the point of all this is to buy time till the cds expire in a few years time and to generate new industry in growth potential areas. this second part has stalled because the uk is now in election mode for the next 9 months and as every month goes by less will be done as people become demob happy with as crick says a near total clean out of mps.

    so the next election will be like a revolution in terms of change over of personnel?

    the risk is because gordon wanted to cling onto power at all costs this time of ease being bought at massive debt is to be frittered and wasted during an election year as all decisions are postponed till afterward.

    that sums up the new labour project. market fundamentalism, neocon fundamentalism and personal power fundamentalism?

  • Comment number 3.

    Silly question, but why can't the Bank of England set up a mini bank,on-line of course, where they could channel money straight to businesses and the public, circumnavigating the banks and kick-starting the economy? British nationals only, and sensible old fashioned scrutiny of risk. Could be slow going but could not be any slower than current policy.

  • Comment number 4.

    It was one fantastic discussion: a Newsnight classic.

    The Vulcan, eyes flashing, clashing with everyone in his sight. The Eagle flapping about hopelessly out of depth. Then there was Vince Cable,ás always the voice of calm, casting healing sense upon the waters.

    It was a good report too, Paul as you made the same point as I am prone to do: the so-called recovery is only a consequence of the many policy initiatives taken. So it isn't a recovery: its the saving of the banks. Although none of us in the real economy have noticed any gratitude from that department.

    Yet, despite this massive bail-out of the financials ervices industry the real economy remains in free-fall. The banks got the money, the rest of the economy got stuffed and the bankers still want their bonuses whilst MPs moan about their rations.

    This does not make for a happy future. This is where the political leadership has to come in and start bashing heads together, setting priorities and recognising this is going to be a very long haul and we have to start the journey sooner rather than later.

    However, I am afraid that this is not going to happen soon. In due course we will end up with a default government which will be out of its depth from day one. This is a crisis of leadership as much as anything else.

  • Comment number 5.

    Failing to increase M4 is not the same thing as failing to make things a lot better than they would otherwise be.

    Here's Axel Leijonhufvud in a recent Cambridge Journal of Economics paper:

    "The lesson to be drawn from these examples is that deficit spending will be absorbed into the financial sinkholes in private sector balance sheets and will not become effective until those holes have been filled. If the sinkholes are large, this will take a long, long time. Today, they are enormous. Policy must address both the capital accounts and the income accounts. Nationalisation of the crippling losses of the financial sector—whether or not the financial institutions are nationalised outright or just ‘bailed out’—is a precondition for old-fashioned ‘Keynesian’ stimulus to work."

    The full article, very much worth reading, is here. (I'm not sure if you will allow html so giving link)

    If you are talking about QE "failing" because banks are rebuilding their capital ratios, then perhaps it is not failing at all.

  • Comment number 6.

    A company with no working capital is not a "perfectly healthy company".

    Too many companies distributed profits and cash as dividends and/or relied on continuous borrowing during the "boom" years.

    These companies are now finding life difficult, because they failed to plan for the following contingencies:

    (i) A drop in demand for their products
    (ii) A reduction in their ability to borrow money
    (iii) Increased credit risk of their customers
    (iv) Weak pound pushing up the cost of their imports
    (v) Increase in interest rates (which of course has not happened, yet)

    All in all, companies must build strong balance sheets by having decent sized bad debt provisions, cash balances, liquid investments, all backed up by currency hedging where needed. This is basic corporate management.

    The economic crisis has been made worse by businesses and households taking on too much debt in the good years, rather than building up reserves in the expectation of a downturn.

    "No more boom and bust" is a fallacy; there is always boom and bust.
    During the boom years we must all pay off our debts and tuck money away into reserves, in preparation for the inevitable down cycle.

    It's worth mentioning that the government is borrowing so much, that there won't be much money left for the banks to lend to anyone else.
    The banks can't make much profit from lending at the moment. If the banks use the cash gained from QE to push up asset prices, they will reduce their future losses, as the gap between their assets and liabilities will reduce.

    Increasing demand from the government for borrowed funds will eventually push up real interest rates for everyone..........

  • Comment number 7.


    A company with no working capital is not a "perfectly healthy company". True.

    I have been saying for decades (before and after retirement from small business) that the offering and accepting of credit terms should be controlled by CRIMINAL law not civil law. Default is fraud.

    Long credit (and trading 'on terms') hides the insolvent companies and is a never-ending income stream for BANKS. It also gives rise to a swathe of unnecessary financial management companies. Small wonder all government did, after many years - with much trumpeting - was to allow interest to be demanded (if not received) on debt unpaid.

    For the record: A perfectly heathy company runs IN THE BLACK (as we did) and only borrows to fund prudent expansion.

  • Comment number 8.

    #5 LuisEnrique

    So it is misleading, then, to build the QE boost,fiscal stimulii ( such that it is) into the immediate forecasts for growth re: blackholes and all that. Isnt it? No-one told the public that QE was a back-door recapitalisation lifeboat for the banks while private business ( other than the big FTSE's) are allowed to go to the wall. At least, I dont think they did, did they?

  • Comment number 9.


    Eagle and Cooper - even to my financially unsophisticated ear - seem to have little idea of what they should be talking about, and fill the air with mantras. I particualarly liked the Eagle offering that debt/lost jobs is about people not money; the message bing that government caring ovverrides their inability to actually HELP anyone.

    Who controls hirings at the Treasury?

  • Comment number 10.

    The patient is not dead - that is all that can be said. Further there is no expectation of a recovery at all at present and also there is no mechanism that might provide for an eventual recovery.

    But this is just what many contributors to the economic blogs on the BBC have been saying for the last nine months - and flatly contradicts all of the grossly overoptimistic statements of politicians and regulators.

    Other countries version of QE is to spend their citizens' money on useful infrastructure projects that create assets of lasting value for the Nation - all we have done is line the bankers' packets - THIS IS SIMPLY INSANE! This is the gigantic mistake.

    The Nation is as much in hock to the bankers as ever. These are the destroyers of the Nation. They must be stopped - NOW. No more money for bankers! We need a new source for direct lending to business that doe NOT work through our fundamentally corrupt banking system. The Bank of England MUST immediately stop funding these 'thieves'. Continuing to do so will NOT generate a recovery - even the Bank now says so!

  • Comment number 11.

    Eagle completely lacking in the grasp pf how damaging this situation is. She is hopeless also is the wide eyed looney tune that was the conservative voice and the only voice of sanity was Vince. I am not a Lib Dem but he is head and shoulders over these other two minnions and Brown should get around the cabinet table and forget the protocol....

  • Comment number 12.

    #4 Stallinic

    ''Yet, despite this massive bail-out of the financials services industry the real economy remains in free-fall. The banks got the money, the rest of the economy got stuffed and the bankers still want their bonuses whilst MPs moan about their rations.''

    In terms of back analysis I think you captured it all in that sentence!

    Rather than finding ever more ways to say the same thing in the context of the news of the day we should all just copy it and paste it everytime this subject is broached in a Gordon Brownesque type way ''GLOBAL problem'' ''Do nothing party'' repeat repeat repeat. Perhaps people will realise then!

    By tying off the above issue perhaps we should all concentrate on the answers rather than variations of commentary on the problem.

    We all know what the problem is at its core, the starting point of any stable society must be justice, as stallinic clearly demonstartes we do not live in a just society. If we want to make a difference rather than amusing each other with our various witty takes and insights on the same basic issue perhaps we should start to behave in a different way?

    It does not only apply to the UK either the world is grotesquely distorted now in terms of rich and poor.

    With the technology and depth of understanding we now have, how do we find it acceptable collectively in the west to live high off the back of human suffering elsewhere, especially as much of the 'high living' we pursue at the expense of others does not seem to increase our quantum of happiness, quite often it is the opposite.

    Our national 'picture of Dorian Gray' is coming to resemble an obese couch and internet potatoe, incresingly engaged in an internal world of TV and internet fantasy punctuated by mass produced potatoe crisps, microwave meals, pornography and gambling. We are like moths to the flame of our ancient instincts which no longer serve any useful purpose.

    What are the answers?

    We have been running and debating an open manifesto on for a while now which we are now trying to consolidate into core hard hitting points to send to the powers that be on the basis of if they adopted them they would win the genuine backing of the nation. We would appreciate any views on it. It is quite short.

  • Comment number 13.

    It is no surprise that banks aren't lending enough for it has to be true that people are so much in debt they cannot afford to borrow any more.

    We have had a boom over the last few years and sensible and healthy companies will have held onto cash balances as will sensible people and will not need to borrow.

    One I know gets frequent calls from the bank asking if they need to borrow any money when it's quite obvious they do not.

    Some businesses are bound to fail in the present climate and should not be kept alive by the banks. The real need now is to encourage start-up businesses in technolgy agriculture and anything else that will help the country export more and become a bit more self sufficient.

    If Germany and France are coming out of recession then it's because they are more export orientated and ignored the QE route for more definable stimuli.

    This country is far behind them so it is difficult now to relate to Gordon Brown's claim that we were best placed to come out of the recession.

  • Comment number 14.


    " Some businesses are bound to fail in the present climate and should not be kept alive by the banks."

    That's a good capitalist's priciple equally applicable ofcourse to the failing banks before they were bailed out by the taxes paid by the businesses going out of business now. Sweeping generalisations can be used to mask massive injustice. To quote Governor King yesterday

    '' What we should not forget here and those in banks
    particularly ought not to forget is that the institutions that have
    really suffered through this recession have not been banks or
    financial sector institutions, they’ve been ordinary companies
    that suddenly were hit by this worldwide downturn, many of
    them have gone out of business and people are losing their
    jobs. And that recession is still there and it’s very deep. And
    you cannot point to structural failings in the real economy as to
    the causes of this recession.''

  • Comment number 15.

    #14 shireblogger

    Interesting quotation, if those are actually the words of Mervyn King then surely this constitutes grounds for legal action for damages against those institutions and banks that caused the recession, he is clearly pointing the finger.

  • Comment number 16.

    Excessive borrowing caused the recession.

    It could have been prevented but wasn't.

  • Comment number 17.

    # 15 BobRocket
    Press conference transcript 12 August, August Inflation Report, answer to Sean O'Grady of The Independent.

  • Comment number 18.

    #4 stanilic

    "Yet, despite this massive bail-out of the financials services industry the real economy remains in free-fall. The banks got the money, the rest of the economy got stuffed and the bankers still want their bonuses whilst MPs moan about their rations."

    A perfect summation of this sorry mess!

    This country is going to have to vote in the LibDems. Labour are out of ideas and the Tories will auction off the NHS to pay for the mess the bankers made. Jo Public gets hit over and over again... Where money is involved, justice is excluded.

  • Comment number 19.

    So is the subtext that regardless of the complexion of any future government, or the particular action of individuals or business, a digitized financial system has evolved that must be maintained at all costs ?

    Has this dominant global system become self-healing ( through QE etc.) self-serving, self-aware even ? and will it subsume territorial governence unto itself ?

    No wonder Mervyn King looked ready to shrug his shoulders in reponse to your questions.

  • Comment number 20.

    QE seller ( 5-15 yr maturities) make-up statistics so far ascertained from certain sources - anyone in the know, please contribute :-

    NB BoE broadening maturity range of gilt purchases ( cornering market?) and lending QE gilts back to market ( ?shortage) - why?

    5th March - 30 June

    Resident banks and building societies 17.1%
    Resident private non banks 50%
    Non residents 32.9%

    What are they doing with liquidity?

    Looking at Life Insurance fund recommendations portfolio rebalancing by pension funds / insurance companies could comprise strong holdings in

    UK Equities ( financial and retailers)
    US Equities - sterling sold?
    UK conventional gilts, neutral on index linked
    UK corporate bonds - strong component on yield, QE influenced / financials / blue chip
    US and Euro bonds - sterling sold?

    Does anyone have a good take on this for each seller class, including foreign investors?

  • Comment number 21.

    Viva Grannyfromthesticks

    Continuing on from your suggestion of a single national public utility lending facility..

    I challenge whether the world needs a private banking system, any more than we need a privatised water supply. You cant eat money. Banking should only be a shifting around mechanism, facilitating the use of the real wealth of human capacity x the resources of the earth.

    Big 'weird' stuff?? No weirder than this 'desired aim' we are having foisted upon us, to return everything to the way it was, only with the undoubted increased inequality and demise of working conditions that will be the capitalist convenience of this episode. How crazy is that?

    Well I dont expect international bankers to go right along with this. Neither any shade of government that we have on stage. But a bit more emphasis from the likes of Paul Mason, on what is happening in the 'real economy', what is happening to the 99% of us who are not banking or political elite, might move us a little closer towards the practical necessity to implement the first little part, that which you have suggested, GFTS - a national public utility lending facility.

    We can call it a national bank later, when we get it.

  • Comment number 22.

    I think that in the end instead of people being in debt up to their necks with interest rates at 3.5% any economic recovery will be at the expence of people getting up to their necks in debt with inerest rates at 0.5%. What happens when interest rates go back up again, as they will one day? Your guess is as good as mine!

  • Comment number 23.

    This crisis won't come to a head until all BBC editors agree that they should be critically objective in their journalism. Stop pussy-footing around on mainstream programmes. (Newsnight excused)

    In this instance it would mean that this government has to fall.
    Unfortunately that is the power of the BBC, for good or ill. They have a duty to reflect the views of their viewers and listeners, but haven't bothered up 'til now.
    Until such times as they do, the current regime will sulk its way until the end of the 5 year term, doing nothing but printing and spending money we don't have -setting up a horrible next 5-10 years that they will try and blame on the incoming government.

    The only thing that will trigger an election otherwise is external world banking calling us to account (for being bust).


  • Comment number 24.

    #23 hear hear!

    This theme/thread is now being persistently repeated on many other blogs...not just BBC ones!

  • Comment number 25.

    Confidence in the 'system' has been shaken to its very core by the events of the last two years. Any return to the levels of lending and consumption that charaterized the mid-90s to 2007 will take a decade or more. People no longer trust banks and other finacial institutions to the extent they once did. This has still to play-out fully in the years ahead. With the government effectively taking onto its own balance sheet the debts of the private banking sector and insuring future lending,this can only mean cuts in public sector spending and employment, high taxes, lower expectations, high youth unemployment, urban decay and a general austerity not seen in the Uk since the post-war years.

  • Comment number 26.

    Re #24

    ...c'mon Paul...grow some cajones!

  • Comment number 27.

    Everyone world-wide needs to know what George Bush and Dick Cheney and many democrats don't want you to know.

    I am a Democrat.
    [Unsuitable/Broken URL removed by Moderator]

    Lots of information and links to check out.

    I am the Good Guy.

    [Personal details removed by Moderator]

    Sitting with me also is a man from British Columbia

  • Comment number 28.

    " gnuneo
    27 June 2008 at 19:42

    one possible fix for the mess:

    double council tax on residential properties where the owner owns more than 2. Quadruple it for those who own 4. Octuple it for those who own 5.

    the resulting scramble to offload property by land rentiers will drive the housing market down as fast as blair went down on bush.

    whilst this will have severe short-term repercussions, it will have the effect of rapidly making available cheaper housing for those who wish to purchase, and will restabilise the UK housing market in the shortest possible time - and don't delude ourselves, the market will continue to fall until the cost of housing matches people's incomes again anyway.

    to shelter those who are in negative equity (and that will increase dramatically soon), set up a mutual society backed with govt funds, and then advise people to claim bankruptcy, dropping their mortgage.

    let the mutual society then purchase the homes at the vastly reduced market rate, and offer a stable, reliable and non-international-market-reliant morgage for the former owners, legislation can quickly be passed to prevent rapid eviction to allow this to happen.

    the UK will come out of this with a *higher* level of home ownership, a ridiculously stable point-of-centre mortgage lender, and people once again able to afford housing, on what for most are stagnating or falling real incomes.

    the ones who lose will be the ultra-wealthy who own banks, the rentier class who own far too much of the UK housing market, and the international financiers who will not be able to bleed off our internal mortgage providers anymore.

    higher home ownership, stable mortgages, and a rationally priced housing market - but our political masters would have to annoy those who will pay them their various retirement packages and bonuses.

    the People and sanity v the Ultra-wealthy and an irrational market that will drive us into severe depression if left festering long enough - why do i suspect that once again the People will be left to pay the price?

    oh yes, based upon former experience.

    this crisis has been coming for well over a decade, and has been warned about almost as long, yet our political masters allowed it to continue. This is not a surprise to them, although it *seems* unplanned for - this is certainly an absolute failure of our political and economic leaders, who seem only to want power given to them so they can line their own nests, instead of doing for the British People their absolute best.

    and the revolting thing is, if we get rid of the current lot of power-hungry narcissistic toadies, the likliehood is we will simply get another of the same, possible worse, under the blue banner.

    are these [self censored] *trying* to foment revolution in the UK??? Or are they just incapable of actual leadership and problem solving?"

    from the newstatesman:

    i stand by this even more, as it becomes clearer and clearer this Labservative Govt is more concerned with protecting the wealth of the stupendously wealthy (such as the bank owners), than in serving the People of this country. We need a clean-sheet banking sector, we need financial services that we can trust (ditto regulators), we need to invest in national infrastructure (sustainable energy, low loss power lines, a permaculture evolution, and we need to start punishing the people who deliberately got us into this miss - and that WILL include some Govt ministers, nor should i be very surprised if that list will include Meddlesome and Brown.

  • Comment number 29.

    a little OT, tried to post this next comment to Vince Clarke upon the newstatesman in reply to his recent article "the bankers cannot believe their luck", and had it completely rejected - censored - by the magazine.

    "vince: good words. I have but one warning for you to hopefully keep note of - beware when the proposals to "split up" the partly nationalised banks is put forward, expect that the parts the tax-payer will retain to be the part that has all the toxic debt still hidden in - those who own the banks when this crisis hit will run off with the assets and wealth. Scrutinise such proposals closely, and remember - neither Govt officials, Tory party economists nor City talking heads will tell the open truth on this, they ALL have their hands in this particular pot.

    the simple truth is, we need a change from the Labservative Party, the corruption within it is now so endemic, they can't even see it themselves - it is just normal behaviour/beliefs for them.

    btw vince, if you have the time, i recommend reading my comments on this page:

    peace. "

    this was only one of many comments, upon harman, hannon, banks, mehgrahi and farming amongst other things, none of which was posted, although none of them was in the slightest bit offensive. From which i can only conclude the newstatesman is no longer devoted to free speech, but has become merely a propagandic outlet. What a sad ending to a magazine that has had such an occasionally great past. I hope the BBC has more backbone with regards to standing up to powerful interests.

    and again, as i said, sorry for being slightly Off Topic.


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