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Markets tremble. Fingers crossed.

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Paul Mason | 13:43 UK time, Tuesday, 29 June 2010

Erm...everything's happening at once. The FTSE is, as I write, down 2.1% and below 5,000; there's been a "flight to quality" in the bond markets - people clamouring to buy US debt and getting out of anything risky. So why?

It's a combination of what didn't happen and what might happen. What didn't happen at the weekend was that the G20 didn't come up with any unified global stance on combating a double-dip recession. It said in effect: if your political and fiscal situation demands austerity, go ahead; meanwhile if you can get away with more fiscal stimulus, be our guest.

Now, on top of that, the European Central Bank is preparing to pull 442 euros worth of liquidity out of the EU's banking sector. The ECB had extended the biggest ever central bank equivalent of a cash float to the stricken banks on a 12 month basis: from Thursday it will withdraw that facility. And Spain's banks above all are raging about it.

Meanwhile the Greek sovereign debt crisis won't go away. Despite being thrown a lifeline by the EU on 9 May, the quality of Greek debt keeps getting re-assessed downwards, increasing the likelihood - doom doctor Nouriel Roubini thinks near certainty - that it will default. If it defaults the whole EU 700bn flood defence will get tested for the first time.

Then on top of that there are worries that China has peaked: that its stimulus is running out of steam. The Shanghai stock market is 4.25% down on the day, 28% down on the year. Commodity prices are falling on the assumption that Chinese demand will dip once more.

Finally there are the banks, and above all the European banks. The Bank for International Settlements warned yesterday that there is just a huge amount of unstabilised bad debt out there.

"The financial disruptions in the first half of 2010 have brought the fragility of the
industrial world's financial system into stark relief: a shock of virtually any size
risks a replay of the events we saw in late 2008 and early 2009. The sovereign
debt crisis in Greece is clearly jeopardising Europe's nascent recovery from
the deep recession brought on by the earlier crisis.

"Unlike then, however, we have hardly any room for manoeuvre. Policy
rates are already at zero and central bank balance sheets are bloated.
Although private sector debt has started to decline, public debt has taken its
place, with sovereign fiscal positions already on an unsustainable path in a
number of countries. In short, macroeconomic policy is in a vastly worse
position than it was three years ago, with little capacity to combat a new crisis

- it will be difficult to find a source of further treatment should another
emergency arise." (My emphasis)

The remedy according to the Basel banking bigwigs is: rapid fiscal austerity, keep the economy moving with monetary policy, rapid reform of global banking. However, that takes us back to where we started: the G20 showed no signs of urgency about global banking reform; passed a take-it-or-leave it communiqué about fiscal austerity vs growth and - with the ECB at any rate - monetary policy is being shifted towards removing liquidity.

Basically the world - and above all the Iberian peninsular, notwithstanding today's crunch game - has more to worry about than football.


  • Comment number 1.

    This ties in With Stephanie Flanders' current blog: IMF says G20 could do better

    Krugman has had plenty to say about this too:

    The monetary ideologues are fighting back to recapture the economic controls from the pragmatists.

    Money should not be a commodity, it should be regarded as an entitlement to consume. What needs to be done is an analysis over the western world as to what how much currency is necessary to be in circulation to ensure an optimal amount of economic activity. Then they should bypass the banks and print it, giving cheap loans/tax-credits to selected businesses and individuals: just like QE, but using it directly for the benefit of the real economy, not the banks. Then, at a later date, if necessary, they can remove money from circulation by taxation. There should be a phased emasculation of the banks, stopping them from creating spending power out of thin air - a prime cause of bubbles.

    This would be a Social Credit type strategy:

    What also needs to happen is that taxation and legislation be used to discourage speculation, as opposed to genuine investment. One strategy here could be a punitive short term capital gains tax.

    It is an idnictment of the system that, just as BP and the US need to get their act together to deal with the oil spill, others are able to use this disaster as an opportunity to profity by short selling.

  • Comment number 2.

    Robert Welch Predicted Keynesian Armageddon of Massive Currency Devaluation, Increased Gov't Taxes as Response in 1958 and in 1974

  • Comment number 3.

    And the June bounce was a short squeeze and quarter end; plus the 50 day moving average stabbed down through the 150 day moving average; plus the S&P500 head and shoulders pattern, but the volume's wrong so it's worse than a head and shoulders; plus the Swiss franc keeps appreciating, etc, etc.

    And if government deficit spending doesn't increase private consumption and reduce imports and grow exports you're just burning your future income.

  • Comment number 4.

    And don't forget to look at the bearish divergence on the Baltic Dry Index either.

  • Comment number 5. discourage speculation, as opposed to genuine investment...

    very marxist. Every private sector job is based on speculation. You buy or make x speculating you can sell it at y.

    some people don't get it. they think everything is a state funded plan. Given more than 50% of the workforce work in the state sector its no wonder many don't understand real wealth creation the skills needed for it or the mindset.

    the credit crunch was not brought about by speculating on making a profit [that hated word]. Risky Mortgages were bundled with a triple A rating and sold to people who thought they were buying something good. That is not speculating that is deception.

  • Comment number 6.

    the elephant or puppet master behind the western collapse is china and their currency manipulation and 'competing' outside of human rights and rule of law. So of course they are 'booming'.

    In football they would have got a red card.

  • Comment number 7.

    This in no way surprises the dystopian class as we have been saying for some time that whilst the beginning of this crisis is over the main course has yet to come.

    Fears of a double-dip recession are the currency of those who still do not comprehend the size of the financial calamity that has been inflicted on the world. I would love a double-dip recession but I fear a significant and protracted slump. It is the latter which concerns me more than anything else and I will be happy to be wrong.

    Quite simply the money has run out. There remains a massive debt-vortex down which we could all tumble if we are not careful. We have had the fiscal stimulus but it was not enough to kick start the economy but then without an inventory of the debt we would have no idea how big a stimulus was needed. Until recently public policy has been more about drift in the hope of something turning up. It didn't, so we have started with austerity instead. But that is not going to be enough.

    Furthermore, nobody has a clue what to do.....Still interest rates are going up albeit slowly. I expect them to quicken. One must always look on the bright side of life!

  • Comment number 8.

    You are on a roll here Paul keep it up.

    Great to see such a positive response from your football post yesterday on your blog perhaps you should be given editorial license to throw that type of thing into the mix more often to get a wider audience for your important work beyond the usual NN demographic.

    Any chance of your article being given a slot by Gary Linekar? They seem to be struggling to fill the time they have at the moment, sometimes resorting to airing random cartoons about north Korean politics. I reckon it would be really interesting to see what those guys make of your article..

    Come on BBC..make it happen.

    That aside.

    Unusually for me I totally missed all the market moves today, why?

    Well I am too busy trying to stop the company I work for collapsing and my team of very good engineers along with it.

    Why are we in trouble again all of a sudden?

    Well we are at the front line of the effect of the austerity measures in our business and what happens to us now will feed to others down the track.

    In construction, as the biggest ticket items out there, our forward work pipelines are collapsing right now as a simultaneous response to a dip in confidence, simple as.

  • Comment number 9.

    #1 Sasha Clarkson

    One problem I find with Stephanie is that she reflects the collective wisdom (or lack of it) too much. OK, that's a reporters job, but I think she should be more sceptical. The IMF doesn't have too good a track record, especially during the run up to the current crisis. OK, the G20 could do better, but then that headline could be applied to almost anything.

    As you suggest, government's shouldn't be controlled by the markets, they should be controlling the markets for the public benefit. That's where the G20 could do better, but I suspect that we've missed the window of opportunity.

  • Comment number 10.

    Stage 2 of the global economic crisis is just kicking off.

    In 1930 most people believed an economic recovery was underway - they did not yet know that they were in The Great Depression.

    No one I know is buying - people are petrified of losing their jobs, their homes and saving every penny. This in a country which has yet to see a housing crash or unemployment levels on a par with the US. For 50 years we have followed where the US has led, albeit 18 months or so behind them - will this time be different? Of course not.

    The World has gone through one giant ponzi scheme - a con! Didn't we all cheer when Capitalism brought about the downfall of the nasty Communists and the World was saved from global war.

    Alas, it resulted in unbridled Capitalism, bubbles in one thing after another and now there is almost nothing left to create a bubble in - heck, they are even trying it on with water.

    Hundreds of billions have gone into the bubble of global property - now that property is worth a fraction of the bubble prices... everywhere except the UK. Hundreds of billions went into the flat screens, the furniture, the kitchens, the xboxes and the cars that filled those houses and sat on their drives.

    Now - it's magic - it has all diappeared leaving banks frightened of the debt they have hidden on their own books and fearing the debt that everyone else has.

    This is truly an enlightening time.

    It is a time when countries will go bust.

    It is just a question of whether it will kick off now or whether the teams are merely limbering up ready for the Autumn. 7,000 on the DOW? 5,000? 3,000? What then for the FTSE?

    My bet is that it won't only be leaves that are falling in October.

  • Comment number 11.

    Ahh the desire to determine our nebulous debt to the past. Osbourne like Oedipus wanted his history all marked out and contolled. Alas soon he may be stabbing his eyeballs in grief as the "Mourning becomes Electra".

    PS Arthur Edwards did a beerish prediction in 2009 for S&P at 800 and Gold at $2000 oz, he also touted Spain for the cup !

  • Comment number 12.

    Isn't the FTSE down because "the markets" are anticipating worse growth and therefore worse profits - hardly a ringing endorsement of the austerity budget.

  • Comment number 13.

    On a different note, has been down for a couple of hours now and is only up slightly and flaky. The database appears to be off-line which, for a site with such redundancy, should not happen.

    It is almost as if there is some kind of attack going on - Russian revenge for the spy story in the World news perhaps?

    Economic warfare?

  • Comment number 14.

    so, gold begins to head towards the sky. same old. when the brown stuff hits the whirring machine dig a hole, bury ur (golden) treasure, and run to the hills.

  • Comment number 15.


    @5 Dishonest and deliberately disingenuous. And it's Keynsian not Marxist. If you don't understand the difference between the factory and the casino read chapter 12 of his General Theory of Employment Interest and Money.

    To use the word, in this case "Marxist", as a pejorative to damn what you don't like is a classic dishonest trick: (see chapter III of Thouless' "Straight And Crooked Thinking".) :-D

    @6 Krugman's take on what he calls "The Renminbi Runaround":

  • Comment number 16.

    I've been wondering for ages how Britain is going earn a living, let alone grow its economy ?
    North sea oil put Britain on the road to recovery last time we had a full blown recession.
    Nothing I can think of is going to get us out of this dreadful mess.
    The only area that is likely to grow in troubled times is ...arms and munitions.
    If all European countries implement austerity measures and it looks like they are, demand for goods and services will get worse.
    We are not going to be able to compete with China re cost of manufactured goods.
    The banks are going to keep a tight reign on lending, so the housing market will stagnate.
    Global tourism is in trouble, its all about special offers and discounting.
    VAT increase will anchor consumer spending at a time when everyone is worried about losing their job.
    VAT increase will definitely harm the struggling service sector.
    QE has finished, but leaves no lasting infrastructure improvements.
    We better start thinking quicker and better the rest of the educated globe if growth is to come from a yet to be identified "knowledge based recovery "
    Double dip must be unavoidable, will two merging recessions amount to a depression?

  • Comment number 17.

    A Marxist understanding of how capitalism works will explain just why the fiscal stimulus has not resolved the crisis & why there still needs to be a massive fall in the value of capital - businesses going under &/or inflation - to restore a 'true' productive rate of profit.

    Keynesian fiscal stimulus could work by borrowing from the future when the huge effiency gains from oil could be had & increasing amounts of labour could be brought into the capitalist system.

    With the end of cheap energy & most peasants now labourers, Keynesian fiscal stimulus is not an option.

    The huge devaluation of capital can longer be avoided.

    There is now more governments can do except print money & debased world currencies.

  • Comment number 18.


    you can see how perilously the whole Eurozone econmy is balanced on a knifes' edge when one 500 euro note is the difference between continuing for another day and total collapse, no wonder the markets are jittery.

    ' preparing to pull 442 euros...'

    (perhaps that should be billions :)

  • Comment number 19.

    #10 tawse
    "Alas, it resulted in unbridled Capitalism, bubbles in one thing after another and now there is almost nothing left to create a bubble in - heck, they are even trying it on with water."
    Bubbles in water - that I would like to see!

  • Comment number 20.

    Paul, there are three other matters of concern I'm afraid. 1."Flight to quality" has lowered gilt yields,easing government financing - is this sustainable or just a product of a volatile market.2. Inflation is persistent and the Output Gap theory hangs on a thread on the MPC.Will rates have to increase soon.3. Cost and availability of credit are conspiring to undermine growth.Ask German bund investors why they are accepting such small returns on 10 year investments.

    Any bad news, however insignificant, is going to shout itself around the world. I hope Mr Osborne is up to the job when he finds he cannot set up an Office for Protecting Us Against The Consequences of Banking Pollution.

  • Comment number 21.

    Cameron's claims today that the OBR says employment will rise in the UK is SUCH a deception NewsNight needs to take the OBR to pieces about this ASAP.


    1. In effect £1 trillion of demand is being taken out of the UK economy through cutting back public spending AND tax increases, so how can the private sector be forecast by OBR to grow enough to end up employing more people by the end of the parliament than are in work now? Leaked Confidential Treasury forecasts show 1.2 m increase in unemployment from public sector cuts - so who is right about unemployment - HM Treasury or OBR?

    2. The banks are not lending anywhere near enough to the private sector - how can OBR be predicting that it will expand if business can't borrow more & invest?

    3. Our main export market is the EU - and EuroLand is in crisis with major auserity plans, so how can OBR expect us to increase our exports in this climate?

    4. The £ has strengthened and the Euro has gone down - so our terms of trade with our main export market have significnatly worsened - yet OBR is predicting growth in exports - how can this be - are currency rates & terms of trade not factored into OBR forcecasting?

    5. Has the OBR done any contingency planning if there is a second banking crisis and will this mean because there cannot be any more government borrowing, HMG will have no choice but to let British banks go bust? Which banks have exposure to Euro debts - and so should we all pull our money out of them now?

  • Comment number 22.

    bubbles in water is fair means bubbles only last so long...I see them everyday when I swim...they start and then they finish i.e. cash stimulants have to be for longer periods then we may have recovery not slash and burn like the Bullingdon lot are doing and killing off any form of GROWTH...also Keynes got a lot of his ideas from Marx and he saved a few asses after the war...

  • Comment number 23.


    His WWI 'namesake', had that idea, and made 'quite an impression' on a lot of British lives.

    Hague is just 'our Bill' and we shall certainly have to pay - always do.


    I think he will find we are doomed to remain the BACKSIDE of Europe.

    Whatever 'Europe' is.

  • Comment number 24.

    Bad as it is going to get, maybe soon the general public will see the incompetence of their generals. So this 'running out of room and ideas' is a good thing.
    I think the people will accept the challenge; everyone understands you can't just 'print money' and you certainly can't hope to get away with it by calling it Q.E. Didn't they have a marketing genius on board to come up with a better phrase than that?
    The UK is just so lucky it had a generation of North Sea Oil to bale us out. We have been basically going downhill for 100 years, and now we have run out of time.
    We don't grow our own food, make our own goods, or source enough energy. The big wake-up (unless we can't be bothered) for the UK is another day closer.
    Step One is stop paying the Banks; all that money being channeled to the City, give back to the people as income tax rebates; some of them will save it, some of them will spend it. That will generate some activity on the real economy.
    Step Two is you have to cut the waste. Public Sector, Healthcare, Social Security, stupid grants and quangos have to be squeezed into efficiency.
    Step three, I could go on.


  • Comment number 25.

    FTSE went through crucial 4940 support level this morning - if you follow this kind of thing it means that the FTSE could well head on down to 4000 between now and the Autumn... and we will be back where we were 12 months ago.

    Manufacturing output down, unemployment rising and the World's biggest housing bubble yet to pop!

    Euro bank roll-over come bail-out come desperate attempt to continue the illusion of safe banks on Thursday. US jobless figures on Friday.

  • Comment number 26.


    I dont know what the 4940 support level means but I can certainly see from general observations of the economy that the balance of probabilities are strongly in favour of what you suggest.

    Interesting to see posts like #16 emerging also with ever increasing frequency, I do think that there is, at long last, an increasing awareness of the real situation here, 'Gosh' indeed!

    It represents the first step to changing something but my word, we have along way to go with this as demonstrated by #21. The OBR is off to a bad start and will be easy pickings for labour in PMQ by the Autumn probably.

    Looks like hurricane season is starting up in the gulf also, expect another wave of anger and a fall in BP share price as booms are overtopped and oil appears on beaches thus far untouched as the bad weather mixes things up a bit.

    Finally the strikes in China of low paid workers churning out the stuff we dont need for subsistence wages to keep the global economic model alive. They are starting to realise, they have access to the internet and foreign TV with its never ending tantelising images of incredible and totally unsustainable consumption, meanwhile working 10 hour days in repetitive jobs for £1 an hour offers them no access what so ever to that lifestyle and never will because the world does not possess enough physical or energy resources to achievce that with the current population levels..... so what are they doing it for?

    The whole global economic model is approaching its physical limits of support now and if you put all those above observations together you can recognise them as the creaking noises that are made as a support system is becomming overstressed and approaching the point of collapse.

    What is the weakest link, how will the collapse manifest itself I wonder.

    Will it be the European banks? Will it be the UK housing bubble popping or some other harder to predict area of unrest or conflict or natural disaster.

    I dont know, all I do know is that we have been passing through the eye of the storm in the last year or so, our ship is badly damaged, taking water but is still a float with all pumps working at full capacity, but we can now see the other half of the storm approaching, we are looking around us at the status of our vessel and wondering if it will hold together next time around.

  • Comment number 27.

    #26 and Paul

    Stop press : Output Gap THEORY under question by MPC members : why is inflation persistent in UK? For twisted knickers,rumination and fancy theories see Fisher and Posen's speeches for more in depth analysis....

  • Comment number 28.

  • Comment number 29.

    I have to admit that I have never known such uncertain economic times - inflation, deflation? Are we about to have an era of austerity or is 5 trillion worth of QE just around the corner?

    I remember the 70s and the 80s - both pretty miserable for their own reasons but at least there appeared to be choices, albeit limited choices, back then. Now, deciding what to do, in order to protect yourself from either inflation or deflation, is night on impossible for the average person.

    Houses, shares, even cash in the bank earning next to nothing in interest and losing against inflation, all look incredibly risky now. No wonder people are flocking to gold and buying up works of arts - people want something substantial for their cash.

    I am watching 'The Daily Politics' on now and a bunch of politicians & journos are angsting over political reform re the Lords - watching and listening to them is like watching people completely out of touch with the stark economic reality now facing tens of millions of Britain.

    I have quoted Clinton before on this blog - it is the economy stupid!

  • Comment number 30.

    #29 tawse57
    Spot on. Just read an analysis of the retail development sector. As a sub sector, the expert says its been through the longest recession since the French Revolution.

  • Comment number 31.

    I honestly cannot see what is propping up the stock market. Everyone I know is busy trying to pay down their enormous mortgage and the enormous debt that they build up under Gordon Brown - silly fools, they actually believed it was different this time.

    But it means they are not even saving, (not that there is much point now), and certainly they are not ploughing money into shares via pensions and ISAs. I doubt many will be investing in stocks for many years to come.

    So what is propping up the stock market? QE? Hasn't that ended?

    Rising unemployment in the US and the EU. A Public Sector jobs cull about to begin in the UK. None of thse people are going to be rushing out and buying cars, xboxes and flat panels any day soon so what now for the profits of the major companies.

    Same thing with housing - well, housing in the UK.

    It seems that effectively 0% interest rates, and various Government schemes, have convinced everyone that houses are, um, as safe as houses... but is the UK really going to escape the 50% falls of the US, Eire and Spain? Who would buy a house now in this uncertain jobs market? Who could afford to? (Although I can see how the cash rich are buying up properties at the top end of the scale? Banks are scary places to hold cash in nowadays!)

    By now I was expecting to have heard grand plans from Cameron & Clegg about how the Private Sector is going to exactly go about picking up the slack from the 600,000 soon to be unemployed Public Sector workers - nothing! No ideas, no change, nothing!

    I was also expecting to have heard of massive job cuts by now - very little.

    One QUANGO, BECTA, has gone but what about the rest? 400 jobs down and 599,600 to go? Or are they all having their 100 day consultation? Isn't the UK supposed to be reassuring the bond markets that we are not a PIIG by slashing our Public Sector work-force?

    I just get the feeling that we are on the edge of financial melt-down and that, in order to try and stop the growing deflation, massive QE printing will take place that will wipe out savers and drive up hard assets - metals, works of art and even property.

    As I said before, I have never known such uncertain economic times. My parents and grand-parents did - with hindsight they called it The Great Depression.

  • Comment number 32.

    This Krugman article "Myths of Austerity" is I think one of the most important he has written recently:

    Also this one on post crash Iceland is interesting too:

    Of course, these articles are only partly relevant to Britain's problems. With reference to the Icelnndic situation. one blogger rightly pointed out that not all countries can devalue at once.

    However, I often wonder whether, because of the power of the city, the pound is still valued too highly and that this continues to help depress Britain's real economy.

  • Comment number 33.

    I've just been watching your report on European Banks. You stated that "yesterday in Spain a there was 48 hour general strike against pension cuts" As usual the BBC researchers are clueless about Spain. It was in fact a 48 hr illegal strike by Madrid underground drivers protesting about pay cuts. Still, let's not let the truth distract from having a go at the PIIGS eh Paul?

  • Comment number 34.

    #31 tawse57 Interesting post. I agreed with much of this - I've been thinking for some time. I actually think that Osborne has nudged the markets' cross hairs onto other targets with his budget. As others have pointed out here and on the SF blog - Healey and Howe in the 70's and 80's didn't actually achieve cuts, just slowed the rate of growth in spend. Inflation and N Sea Oil got us out of that mess. GO is seeking 25% real cuts. The transfer to private sector jobs from public sector is disarming, because what we need are transfers into jobs that generate wealth and GDP to pay off the debt to the markets. Now not all private sector jobs actually do that - the contribution from reassigning public sector workers to shelf stackers in Tesco (gawd love em) are not really going to cut it with international markets. Their tax revenues will come in handy, but hardly on the scale required. The devil is in achieving the huge cuts required in pretty short order. Civil servants will just not get it I fear or least of all have the emotional capacity to execute the plan. Public sector managers will need training to carry out the process without incurring mass unfair dismissal claims. This will also be an emotionally demanding task, real people involved, not just numbers on a spreadsheet. When the credibility of this government is shot and the markets realise in 2 years time that the cuts haven't actually been made, then we will see a run on the GBP, or the money truly run out. The markets may not even have to wait 2 years...

  • Comment number 35.


    Don't forget most of the paper shufflers in the Public Sector are basically unemployable outside of the Public Sector.

    Also, and I find this frightening, that every Government Minister seems to be only able to now rubbish IT.

    I am truly staggered by this as we live in an age when IT is driving most of our lives - from wanting the latest iphone, internet enabled TVs and a 1001 other things which are all IT driven.

    IT is high tech, cutting edge and can bring in vast revenues but the Coalition appear to have adopted a Ludditte mentality towards Information Technology - and that is truly worrying.

  • Comment number 36.

    Ditch the Dollar! Its demise is months away!!

    'A number of states, including Russia and China, have repeatedly called for a new reserve currency system. The UN has now suggested using a basket of currencies for this purpose. London-based markets strategist Nick Parsons believes it’s only a matter of months before the dollar will start to go down.'

  • Comment number 37.


    '' have the emotional capacity to execute the plan''

    It is a good point often missed.

    When will it be realised that there will never be enough jobs ever again for people to work 5 days a week.

    When will it be realised that the above is a fantastic achievement and opportunity to completely revolutionise the way we live and think about ourselves.

  • Comment number 38.

    #27 - output gap theory

    I had to look it up but I understand it now.

    I guess for someone like me with no formal training in economics beyond an unhealthy (according to my wife) fascination with it the answer seems quite obvious, I tend to examine things in real terms as oppose to abstract theoretical ones.


    for the benefit of the MPC.

    1) looking in the rear view mirror to guide you is not a wise idea. Output gap theory is surely only valid for an industrial and commodities based economy.

    2) Imported inflation

    3)The emotional factor, pay cuts are a last resort decision for many firms as they effect moral, margins go first. Many busineses are operating mostly on a turnover basis, they can manage because interest rates are so low generally, even a slight increase would instantly cause huge issues I suspect.

    In short MPC, for an economy heavily reliant on the government sector and services, output gap theory is pants.

    I hope this helps at your next meeting.

  • Comment number 39.

    The UK earns net investment income of £7.2bn per quarter, in its balance of payments current account. This is mainly the income from the UK's foreign direct investment, ie the profits of subsidiary companies located abroad. This, and an export surplus in the trade of services of £12.3bn per quarter, helps offset the UK's deficit in the trade of goods of £20.4bn per quarter.

    This leads to the following points:

    (i) Investment income from FDI abroad creates jobs abroad, as the subsidiary companies employ local staff. The foreign subsidiary companies pay corporation tax abroad, not in the UK.
    (ii) The depreciation of the pound boosts our foreign investment income and helps reduce the price of our exported services, but it leads to an increase in the price of our imported goods.
    (iii) The UK cannot easily switch from imported goods to home produced goods.
    (iv) The UK government must employ the workers who do not have jobs because of points (i) to (iii). But these workers tend to spend their money on imported goods; so UK government spending leaks and ends up supporting the surplus countries of China, Japan, Germany, etc.

    Now the UK finds itself with weak (falling?) global demand for its exported services; and the UK government has less money to spend and is threatening to reduce public sector employement; and we cannot easily stop importing goods and switch to manufacturing them ourselves. This means the private sector will struggle to expand employment, at a time when the government cannot afford to employ as many public sector staff.

  • Comment number 40.

    Re: 39

    This is good stuff - thanks!

    hOWEVER I am a heretic in believing that free trade is now an unsustainable luxury in the current conditions, particularly with a rigged exchange rate with China that has a repressed labour market, working in cahoots with multinationals simply investing in the lowest cost production sourcing the can, with no regard to this being unsustainable economically, environmentally or socially.

    The market mechanism can only be left to sort this out by driving whole countries into sovereign debt defaults as the last price mechanism to stop them living beyond their means by importing too much whilst under-employing their own people in the private sector and inflating the public sector to create employment.

    The bitter irony is that by cutting public spending beyond a certain point, countries so depress their economies that they reduce the tax take so much that their debt rises, so they become trapped, not able to cut or reflate to reduce their borrowing - Greece is probaly there already, Spain, Portugal, Italy and others are heading that way.

    At which point there is another option governments may turn to - drive central banks into Weimar-style QE to plug the borrowing gap, devalue their currency and hope hyperinflation doesn't take hold. Some choice!

    We need to face up to the issue: it is either defaults and another irresistable tidalwave of banking failures potentially taking down the whole system, or we must impose punitive tarriffs on these imports and offer incentives to invest in UK production capacity that substitutes for imports to force companies that want to sell to British/EU consumers to employ British/EU workers to make these goods - it's as simple as that.

    Announce the policy - announce incentives - give them three years of phased in tarriff increases - once the global brands see we mean it, they'll jump - those that don't will be priced out of the UK market and new players will spot the opportunity and step in.

    So we upset the Chinese and a few others - we tried the laissez faire approach and its virtually bankrupted us - if we do nothing it will end in tears anyway - surely better to bite the bullet and consign the libertarian free trade ideology to the dustbin of history where it belongs?

    We simply cannot compete with the rigged market or the poverty wages and working conditions - the delusion that the City would go on delivering huge invisible exports to fund our imports so manufacturing going down the pan didn't matter was and is a delusion.


  • Comment number 41.

    40 richard bunning

    Agreed: we do need an industrial policy. This is going to be the only means by which we can provide jobs for the future.

    However, we don't have free trade. There has been a progressive reduction in tariffs over the last twenty years. This policy has been based on the argument that overseas trade brings global wealth and development. This process is now dead-locked so we can expect no further tariff reductions which under current conditions could be a good thing.

    Our problem is that the manufacturing economy in the West has been badly managed by our governments during the good years so that we now have huge deficits and massive debts. A lot of this damage was avoidable, particularly in Britain. I think this is where the industrial policy has to start just to create work for the millions of unemployed.

    Britain's trade policy is run by the European Commission. The Commission seems to be declaring enquiries into the dumping of goods by China on certain tariff classifications almost daily. They also seem to periodically get very excited about the Ukrainians dumping ironing boards into Europe as well. So the guys are on the job. Maybe they could be quicker but they have statutory procedures to follow.

    In my view the European single market and the European Economic Area are sufficiently large to fulfil most of our economic needs if we set our minds to it.

    The big issue that importers from China are currently facing is that costs are going up in China, freight costs are increasing monthly, the cost of financing the purchase of product, its import into Europe or North America and its local distribution for sale are becoming more expensive just as consumers are becoming more inclined to save rather than spend. In my view the option of local manufacture will predicate the decline of this model as interest rates increase and sterling and the Euro decline against other foreign currencies.

    We don't need any major change in policy we just need to consider our own best interests. The fact that we are unable to discern what those are in a changed world just demonstrates the poor quality of economic leadership there is in this country and Europe. We just have to look at the level of private and public debt to realise that.

  • Comment number 42.

    Just watched the second episode of BBC 2's 'How To...' series.
    Tonights episode was on 'How to Build a Jumbo Jet Engine'. What a superb programme about the construction of Rolls-Royce's Trent 1000 series jet engines. High tech engineering providing high quality jobs to many thousands in Derbyshire an throughout the UK.
    What struck me as fascinating, apart from the technology, was the dedication of the entire workforce at Rolls-Royce to its products. From board executives to highly skilled engineers, welders fitters, engine testers, purchasing personnel and apprentices (I didn't know they still existed in this country), all rowing in the same direction making the finest aero engines in the world.

    I will feel extra pride and reassurance the next time I step on a plane that has the Rolls-Royce badge stuck on the side of the engine knowing that it was developed and built in the UK by a real world class company and real world class people.

    If you missed the programme I strongly recommend that you watch the repeat tomorrow on BBC 2 at 11:20 pm.

    This country still does some things well despite our useless thieving political 'elite' and the banksters that work in the square mile.

  • Comment number 43.

    Total UK population = 61.8 million

    12.20m (19.8%) Children under 16
    10.05m (16.3%) Retired senior citizens
    1.96m (3.2%) University undergraduates

    2.50m (4.0%) Unemployed
    2.06m (3.3%) Long term sick
    4.17m (6.7%) Other inactive

    6.66m (10.8%) Banking, finance, insurance, property services
    6.09m (9.9%) Public sector
    4.29m (6.9%) Hotels & restaurants & hospitality
    3.40m (5.5%) Manufacturing
    2.90m (4.7%) Retail
    2.23m (3.6%) Construction
    1.70m (2.8%) Transport & communications
    0.50m (0.8%) Extraction, agriculture & fishing
    0.33m (0.5%) Energy and water
    0.76m (1.2%) Other

    61.80m (100%) Total

  • Comment number 44.


    Interesting stats.

    In Marxist terms this would mean that only about 10% of the population are 'productive'.

    I'd be interested to see the equivalent for China.

  • Comment number 45.

    From The Pink Book: 2009 edition :

    Total imported goods in 2008 = £344bn
    Total imported services in 2008 = £116bn

    "The balance on trade of goods has shown a deficit in all but six years since 1900, with the value of imports exceeding the value of exports. The last surplus on trade in goods was recorded for 1982. In the period 1992 to 1997, the deficit settled into the range of £11bn - £14bn before widening in every subsequent year. In 2008, the deficit increased to a record £93bn.
    A surplus has been recorded for trade in services in every year since 1966. There was an increase in the surplus from £45bn in 2007 to £54bn in 2008."

  • Comment number 46.

    The Taylor rule for advanced economies (which is based on a country’s history of inflation, real interest rates and GDP) suggests that interest rates for the following countries should be:

    USA should have a negative interest rate, at -1.3%
    Eurozone should have a negative interest rate, at -2.1%
    UK should have a positive interest rate, at +4.2%

  • Comment number 47.

  • Comment number 48.


    Thank you for that, that list really tells a story.

    If you were to specifically write a national utilisation demographic like the one you present with the specific intension of showing what it should NOT look like to be best prepared for the coming cuts and global dynamic without huge upheaval, I reckon it would look pretty much like the one in your post.

    Putting the scale of the issue in numbers like that is truely disturbing.

    Just take out one of the big ticket revenue generators and the whole lot must surely collapse. The likelyhood is at the very least we will lose substantial GDP from 4 out of the top 5 on the list. Where does that leave us OBR?


  • Comment number 49.

    The major UK exports are manufactured goods (pharmaceuticals, power-generating machinery, specialised machinery, chemicals, intermediate goods) and services (financial services, travel, transport, and 'other business services' such as legal, accounting, advertising, engineering consultancy, business consultancy, R&D consultancy).

    Although tourism is an important source of income, wages tend to be low in hotels, restaurants and hospitality. Wages are also low in the retail and distribution sector, but the profitability and buying power of the large supermarkets is enormous.

    Average wages per hour in the public sector are higher than the private sector.

  • Comment number 50.

    #42 Debtjuggler caught the repeat last night

    Very impressive operation at Rolls Royce.

    I hate to disappoint the Hooverite tendency, but would beg to point out that it was government intervention that saved RR in the 70's.

    Someone in Ted's government had the foresight to see this is the sort of industry we do well and have a competitive advantage in. The sort of industry that when the jobs are lost they never come back, an industry that can sustain apprenticeships. Many criticise action to support certain strategic industries - but without more of these sizeable champions we will become a nation of endemic poverty. The market would not entertain this sort of investment (without support) as there are high barriers to entry. Government helped many of the car manufacturers set up in the North East etc. Where is the industrial policy? (and I don't mean leisure, tourism and retail)

  • Comment number 51.


    Alas...we don't have too many Rolls Royce Co's in the UK.

    Robert Peston's latest blog is now covering some of the subject threads mentioned in this blog.

    Don't expect any industrial policy from this Gov't's just too statist!

  • Comment number 52.

    SMEs and the UK economy:

    There were an estimated 4.81 million private sector enterprises in the UK at the start of 2008. These enterprises employed an estimated 23.1 million people, and had an estimated combined annual turnover of £3,000 billion.
    Small and medium-sized enterprises (SMEs) together accounted for 99.9% of all enterprises, 59.4% of private sector employment and 50.1% of private sector turnover.
    Employment in SMEs is estimated at 13.7 million.
    Turnover in SMEs is estimated at £1,500 billion.

    Source = Department for Business Innovation and Skills, 14 October 2009.

  • Comment number 53.


    With reference to your report on this evening's Newsnight, in which Rolls-Royce cars were mentioned as an example of successful UK exports to China.

    Rolls-Royce cars are assembled at their plant in Goodwood, West Sussex. However, the car bodies, engines, gearboxes, etc are all imported from Germany. The parent company is BMW.
    Rolls-Royce cars only employs around 900 people in the UK. The cars' coachwork and interiors are designed in the UK, and the finished vehicles assembled here, in order to maintain the brand's British 'feel' and 'identity'.

    My point is that even successful exports depend on imports, and therefore do not provide large scale UK employment.

  • Comment number 54.

    Meanwhile, the total collapse on the Baltic Dry Index, down for a record 25 days in succession, does not inspire a great deal of confidence.

  • Comment number 55.

    #53 and 54

    Useful stream of numerical and factual bullet points. It was not lost on me either that the CEO of Rolls Royce cars interviewed spoke with a heavy German Accent! Surprised it was not picked up on by NN actually as it does change the tone of the article somewhat.

    How long before the Germans or others with deeper pockets turn their attension to Rolls Royce Jet Engines and Nuclear industry component busineses?

    I would not be suprised if Paul pick ups on your Baltic Dry observation.

    I think he has used that before as a supporting rationale to point to issues which will soon emerge...I seem to remember he was right on that occasion so it may be worth a comparison with the situation the last time it was looked at on NN as an indicator of future economic activity.

  • Comment number 56.


    Thanks for your replies.

    The UK does a lot of things well. Our net international investment position (one of net debt) and our current account deficit are not especially large relative to GDP. However, we do seem to struggle to provide 'sufficient' employment for our population, given we tend to invest abroad and import a lot of goods and services.

    The UK is a two tier country, divided into the haves and have-nots, but this could be said of many countries in the world. Even Germany, with all her surpluses, has an official unemployment rate of over 8%.

    However, global trade does seem to be slowing down; the gross margins earnt on sales to emerging nations are relatively low; and China does face her own internal economic issues. Martin Wolf of the FT says private sector surpluses offset public sector deficits, so we shouldn't rush to cut UK government spending; but I think many people are now expecting downgrades on corporate earnings, and a period of bear market activity.

  • Comment number 57.

    @46 Mr T

    Thank you for your well researched posts. I don't buy the conclusion of this one though. Higher interest rates would increase the value of the pound, decreasing exports, and increasing imports.

    Many economists recognise that Britain has a longstanding problem with too many imports. What we need instead is selected credit controls, end exchange controls. This as part of a strategy to aim for something like productive self-sufficiency.

    Benjamin Franklin on QE and fiscal stimulus, before it was invented: (In the interests of balance, I should point out that he owned a printing business :-D )

    The whole document is well worth a read, but one sentence in particular caught my eye: "A plentiful Currency will occasion Interest to be low: ..... at the same Time it will tend to enliven Trade exceedingly, because People will find more Profit in employing their Money that Way than in Usury;

    Keynes in his General Theory, was very much inclined to a similar view about usury: he believed that interest on money savings should be restricted in order to encourage actual capital investment.

  • Comment number 58.

    No.57 Sasha Clarkson

    I enjoyed that link to Benjamin Franklin; I'm always interested in the 18th century view, as in many ways it does seem to echo the current day quite closely.

    I have a big dislike of debt, but if I can see that gearing will provide a positive return due to it funding productivity gains, then I will vote in favour. However, I do worry about the government's stock of debt and unfunded liabilities.

    I am not in favour of higher interest rates for the UK at the present time, although higher rates would benefit me personally.

    I can see the argument that government must spend if business is not investing, but I keep coming back to my worry about the stock of government debt, which is basically a claim on future income. I am willing to pay higher taxes to reallocate funds from the private sector to the public, but this would only work if the government *invests* the funds wisely, rather than using them to prop up the status quo with UK government spending leaking away to imports and supporting the surpluses of Germany, China and Japan.

    I am not sure exactly how Britain becomes more productively self-sufficient. I will bow to your greater knowledge of credit and exchange controls on that issue. In theory, because the UK's current account deficit is small (approx 1.6% of GDP) and the fact she earns net investment income on her international investment position of net debt (net foreign liabilities approx 14% of GDP), Britain won't need too much of an adjustment to balance her trade.

    Even if we do balance our trade, it is likely we will still have an unemployment issue, and the stock of government debt will require servicing via higher taxes and general price inflation.

    That brings us back to Benjamin Franklin. The alternative to debt is money printing. If the BoE engaged in more QE and the money supply in circulation expanded, it would not be inflationary if UK productive self-sufficiency increased. However, if Britain failed to reduce imports or grow exports, and its money supply increased, we would end up with more imported price inflation, which would erode net incomes, savings and UK global competitiveness. A sterling depreciation would also increase the UK's net international debt position, to the extent it is denominated in foreign currencies (I don't how many of the UK's foreign liabilities are denominated in sterling and how many are denominated in foreign currency).

  • Comment number 59.


    Mr T - I agree almost completely. Except that Britain's current account has always had a significant component of what used to be called "invisibles", generated by finance, insurance and overseas investment.

    This has typically distorted the British economy, enriching S.E Engand, but depressing everywhere else. It has been a factor in keeping the value of the pound higher than would be favourable to manufacturing industry. It has meant that Britain can, in the short to medium term afford imported goods. However, the disincentive to manufacturing, means that we are more dependent upon those imported goods (too often manufactured by people with a very poor standard of living).

    If the decline in North Sea Oil revenues were to be accompanied by international political turmoil, and a repudiation of international financial obligations, Britain would be deep in the brown stuff. Since Suez, it has been clear that we can no longer send in the gunboats to enforce our "rights".

    Why credit controls? At the height of the house price boom, banks like HBOS borrowed abroad to finance British mortgages. As capital was flowing in, this increased the value of the pound, whilst not helping anyone afford a property: on the contrary, it merely inflated the bubble further and, after the rescue collapse of these banks, added to Britain's Sovereign Debt. The higher value of the pound caused by the property bubble did further damage to home manufacturing, and fed the import junkie habit.

    I agree about unemployment. Technology should mean that people don't need to do full-time boring repetitive jobs. So we need to share the work that there is and find constructive ways to fill our increased leisure.

    I also find it objectionable that I need to buy c*** in order that someone else can earn enough to survive. I don't know any of the answers, but as Confucius should have said: "The first step in solving a problem is to recognise that it exists!"

  • Comment number 60.

    Sasha Clarkson

    (i) I agree with sharing the jobs out. We would all work less, but we would all work. If the price of houses was kept down, and mortgages were small, we could afford the increased leisure time.
    (ii) I don't know why retail banks were allowed to borrow on the wholesale money markets from 2001 onwards. Opponents of splitting the banks, ie now splitting retail banks away from investment banks, point to Northern Rock and say it was a small bank not connected with investment casino banking. They forget that Northern Rock borrowed on the short term wholesale markets and then lent long term mortgages to people who could not afford to repay them. NR then securitised these loans and sold them to Lehman Bros. Lehmans kept coming back to NR asking for yet more securitised loans, and NR duly borrowed yet more from the wholesale money markets and carried on with the model until it popped.

  • Comment number 61.


    Bertrand Russell dealt with (i) in "Praise of Idleness" and Frederick Soddy dealt with (ii) in "Wealth, Virtual Wealth and Debt"

    The trick is to transcend the two, without fermenting a power struggle.

    P.S. What, Zizek on Newsnight and Gavin didn't get him to explain " Kung Fu Panda"! Disapointing.

  • Comment number 62.

    25% immediate cut in ALL public sector salaries - teachers, doctors, Police, BBC employees, office workers, refuse collectors, etc, etc, is needed.

    People get to keep their jobs.

    But the mentality here is just to cut some jobs and keep the rest on the gravy train. Workers like this as everyone convinces him or herself that it will be the other guy or gal that is fired and not them.

    Eire has done it. Why is it not even being debated here?

  • Comment number 63.

    As I've said before, attack tactics in the markets amount to financial crimes against humanity. These people are criminals: we need a financial equivalent of the Geneva Convention.

    Also, check out the "Other Taxpayers' Alliance". They're on Facebook too - spread the word!

    URL removed by Moderator]

  • Comment number 64.

    #59 and others

    It keeps on coming around time and time again here via different analytical routes guided by the particular economic issue of the day but i think Sasha captured it particularly well.

    ''Technology should mean that people don't need to do full-time boring repetitive jobs. So we need to share the work that there is and find constructive ways to fill our increased leisure.

    I also find it objectionable that I need to buy c*** in order that someone else can earn enough to survive.''

    Surely at the heart of all the global economic woes (along with outdated religious doctrine generating overpopulation issues..for another day !!!!).

    Yet outside of here and other such fringe areas (sorry Paul) it is never debated discussed or given any media or political momentum what so ever despite the underlying logic and truth which clearly shines out of quotations such as Sasha's.

    Its just soo....soooo ****** frustrating!!!!

    Maybe we should ask the German psychic octopus (if you do not know what this is where have you been!!) to decide which argument is correct, at least it would get media coverage then.


  • Comment number 65.

    As prompted by an earlier post by Mr tweedy at #54 I have been keeping an eye on the Baltic dry (that rhymes y'know)!

    Down 5% today alone and down for 30 days straight when the IMF are revising up growth forcasts! How does that work?

    #63 on good form Sasha I see, they dont kill anybody directly but the quantum of human suffering certain individuals in the banking profession have willingly unleashed for personal greed in the last decades is absolutely massive.

  • Comment number 66.

    @63 tawse57

    Irish Austerity isn't working:

    It's a return to the 30s - any Keynesian would have predicted this: also see the Krugman link in pot #1

    But Ireland is truly spit-roast, as are the other smaller Eurozone countries, because they neither have control over their own currencies, nor influence with the central bank.

    My prediction is that they will fall out of the eurozone unless the ECB introduces some kind of QE.

    In the meanitme, this kind of fiscal contraction causes savage deflation in which the real value of debts increases. But never mind, the rich will get richer. Plus ca change!

  • Comment number 67.

    63 - Sasha Clarkson and 65 - Jericoa

    I think your identification of bankers as being non-typical and also deliberately anti-social with their greed is faulty. It's much more likely, in my opinion, that they are standard products of the society in which they live than that they are contrarian to it.

    "Do well by doing good" is a Benjamin Franklin aphorism that I'd argue has been corrupted by deductive fallacy into being interpreted as "you can only do well by doing good" and that therefore "if you do well you must have done good". It is the non-challenging of this fallacy that has allowed the money-makers of the financial sector (and, to be fair, other sectors too) to maintain the assertion that their rewards must be no more than fair remuneration for wealth creation.

    The "rules" that govern the acquisition of money are written upon the outdated premise that the fundamental behaviour of the vast majority of people will be driven more by equity than by naked self-interest. It's obvious that this premise no longer applies, and that therefore rules structured upon it are no longer appropriate. As a society we need to decide whether we rewrite the rules to reflect the new reality, or we modify our behaviour to fit in more comfortably with existing rules. Or, perhaps, that we change both behaviour and rules to meet somewhere in the middle.

    What we shouldn't do is go on deluding ourselves that there's nothing much wrong with where we are. Because there is.

  • Comment number 68.

  • Comment number 69.

    No.65. Jericoa

    The price of oil has also broken out of its trend channel, and is heading lower, with support now acting as resistance. This is also a good chart to watch.

  • Comment number 70.

    further to @60

    Martin Wolf attempts to square the circle :

    but I don't beleive this will avoid the power struggle, and hence will not see the light of day.

    P.S Halfway through Zizek ' End Times; if you have to attempt philosophy then there are slicker machines on the market than Zizek's inefficient, fume spewing, two stroke, East European obsolescent Hegelian-Lacanian cluncker.

    He's an entertaining film critic and when odd jobbing on a spot of Nietzchean hammer wielding.

  • Comment number 71.

    @67 Simon

    I've no doubt that bankers are typical of one face of humanity. It's a matter of altering societies' perceptions as to what is acceptable behaviour.

    Torture and slavery were acceptable in the past, but are generally shunned in the modern world.

    I remember the anger of drinking motorists when Barbara Castle introduced the breathalyser back in 1967. Then for many years people worried more about getting caught than about killing people. But now drink-driving is not socially acceptable in most circles.

    Financial games destroy lives. These people should be pariahs.

    BTW your reference to "Doing well by doing good", reminded me of this Tom Lehrer song:

  • Comment number 72.

    #67 Simon

    ''I think your identification of bankers as being non-typical and also deliberately anti-social with their greed is faulty''

    Probably just reinforcing Sasha's take on it really but I take your point and those that followed. Philosophically I am generally of the camp that free will does not exist, or at least it does not exist in the way that the criminal justice system assumes that it does for crime and punishment purposes.

    I (and others) use the phrase 'white collar crime against humanity' or similar for the banking sector in the context of trying to get a messgae out there so the results of thier actions can be seen in the same light as other 'crimes' of greed like theft.

    If we want to change the current state of affairs which is increasing the quantum of human suffering way beyond where it could be then we have to be pragmatic about it.

    The pragmatic part is to identify the behaviour which caused this ridiculous state of affairs we now live in and identify it as unacceptable, that requires society to make such behaviour unrewarding which requires society to punish those who display that behaviour.

    It is nothing personal as far as I am concerned, at the moment the perception is that they trashed the system through greed and have got away with it, leaving it for everyone else to pick up the pieces.

    Very few people will change their behaviour based on that. They will change their behaviour if those individuals are dragged through the courts and stripped of all wealth (at least) irrespective of where they have hidden it offshore or in siblings accounts etc and made pariahs. If they do not hand it back..then they go to jail until they do.

    Your sentiment is correct, they are an extreme representation of an aspect of our modern modus operandi but in order to change that modus operandi we have to make an example of them. It is nothing personal, it is part of the process that has to happen for things to change.

    #69. Mr tweedy

    Thanks for that, I thought commodities would come back down as the ever larger world economy tries to grow but continually hits the buffers of resource availability, in effect going up and down about a 'flat' or slightly downward trending median line

    i.e. we try to grow..cant as not enough commodities for people to buy it, drop back again..try to grow again..same result ad infinitum.

    I am not sure if this apparent dip is the first manifestation of that dynamic or something else at the moment.

    Read an article in the FT suggesting the Baltic Dry may be affected by an increased shipping supply this time around rather than being atrend indicator..but i guess someone says that everytime it happens.

    lunch time over...back to the day job.

  • Comment number 73.

    We are lucky to have Newsnight- can you imagine news without it?
    Can someone tell me where I can find a sound analysis of the relationship between the national debt and the bank bail-outs? No-one seems to talk about that anymore!


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