11 Dec 2013

Sack The Economists

SACK THE ECONOMISTS: AND DISBAND THEIR DEPARTMENTS.

The disastrous flaws in mainstream economics and how economics can serve our total wellbeing.

This book looks very promising and is endorsed by Steve Keen amongst others. The author begins with what we know. Economists did not understand the global economic crisis or it's causes - and witness the fact that they are now setting up the same conditions. The argument that economists don't know what they are talking about is painfully obvious to everyone outside the profession it seems, but even well presented arguments have no effect on the juggernaut of the "free" market.
"Well, I think it’s clear we can’t be too subtle.  We need to speak in plain English, to everyone, and get straight to the point.  Economists don’t know what they’re talking about.  We should remove economists from positions of power and influence.  Get them out of treasuries, central banks, media, universities, where ever they spread their baleful ignorance." - Geoff Davies.
Publishers are offering a free download of the Kindle edition for Dec 10-11.

Website: http://sacktheeconomists.com/buy/ also available via Amazon.com (Amazon UK simply redirects you to .com)

9 Dec 2013

We're drunk

My thought for the morning is that the world is a bit like my alcoholic landlady. We're just out of an economic crisis caused by too much private debt, complex financial derivatives based on that debt, and insufficient oversight of the business dealings of large financial institutions. And, at least in the UK, we are putting in place the identical conditions. Private debt is rising, people are encouraged to take on debts they won't be able to afford when interest rates rise, complex products based on these debts are on sale, and the supervision of the finance industry is hardly any better than it was.

Having set the conditions in place we're pretending that, just like last time, economic "growth" that is resulting from this debt is somehow good news and that things are turning around. But being based on debt it's a house of cards. And with each recessions since 1973 we are more vulnerable that the previous because the debts are never quite paid back before we set off again.

So at present politicians, business people, and citizens are all saying "I'm not drinking" or "I can stop any time" or "I can handle it" or whatever and refusing to change their behaviour. At some point they'll get legless again, and fall down the stairs. But now they're older their bones are more fragile and falling means broken bones, time in hospital.

The government want us to believe in another economic miracle called Austerity. The last economic miracle resulted in a global financial crisis. Before that, every country the IMF and World Bank forced into free market policies subsequently experienced an economic crisis of massive proportions. Of course a small number of people do actually benefit from this drunk behind the wheel approach to economics. The 1% are accumulating wealth at a faster and faster rate as the 99% becomes poorer.

The trouble is that we've had all the warning signs but no one is changing their behaviour. Politicians and business people (and these two groups substantially overlap); and ordinary citizens: we're all trying to pretend that we can get back to business as usual. Economically are alcoholics that can't wait to get out of rehab and start drinking again.

5 Dec 2013

A New Statement of Aims

Recently Andrew Simms wrote in the Guardian concerning the origins of so-called Neoliberalism in 1947 at a meeting in Mont-Pèlerin, Siwtzerland where:
"Philosophers, academics and historians gathered at the Hotel du Lac to discuss how to halt the spread of ideas that emphasised common purpose and governments acting directly in the public interest."
Or in their words, after World War II "many of the values of Western civilization were imperiled [sic]." What were those values? The Society "see danger in the expansion of government, not least in state welfare, in the power of trade unions and business monopoly, and in the continuing threat and reality of inflation." Thus their concerns are more libertarian than liberal. The attitude is very similar to that expressed by Lewis Powell in his Memo entitled "Attack on American Free Enterprise System", though clearly Powell has gone much further down the road of tactics.

The Mont-Pèlerin Society is still meeting regularly. Simms did the interesting exercise of taking the original statement of aims from that meeting and tweaking it to suit the current situation. There are also a few little notes in square brackets.

Statement of Aims

The central values of civilisation are in danger. Over large stretches of the earth's surface the essential conditions for human prosperity, dignity, justice, and the free expression of dissent without intimidation have already disappeared.

In others they are under constant menace from the development of current tendencies of policy. State intrusion into our private lives marches alongside the punishment of those in poverty due to an economic crisis they did not create, and energy policies guaranteed to ensure climatic upheaval.

The position of the individual, community and campaign group is incrementally undermined by extensions of arbitrary power. Even those most precious possessions of enlightened society—the celebration of difference, freedom to expose corruption and hold elites accountable—are threatened by the spread of creeds which, claiming the defence of freedom when representing a privileged minority, seek only to establish a position of power in which they can suppress and obliterate all views but their own.

The market, whose diffused power was meant to guarantee against such abuse, has instead undermined democracy, allowing a previously unimagined concentration of control.
We hold that these developments have been fostered by a rejection of history, empathy and curiosity about consequences that substitutes self-interest for common morality, and by the growth of theories which question the necessity of preserving convivial conditions for life on earth.

We hold further they have been fostered by a decline of belief in public purpose and cooperative exchange; for without the deep resilience, openness and ambition associated with these projects it is difficult to imagine a society in which we may be free, survive and thrive.

Believing that what is essentially an ideological movement must be met by reality, argument and the reassertion of valid ideals, the group, having made a preliminary exploration of the ground, is of the opinion that further study is desirable inter alia in regard to the following matters:

1. The analysis and exploration of the nature of the present crisis so as to bring home to others its essential physical, moral and economic origins. [nb: one word added, 'physical' to include the real world]

2. The redefinition of the functions of the market so as to distinguish more clearly between the totalitarian and the liberal order. [A single word changed, guess which?]

3. Methods of re-establishing the role of society and of assuring its development in such manner that the market and other forms of centralised, unaccountable power are not in a position to threaten the environment in which civilisation evolved and the bonds which hold it together.

4. The possibility of establishing optimal standards by means not inimical to initiative, creativity, community and healthy functioning of ecosystems.

5. Methods of combating the misuse of history for the furtherance of creeds hostile to freedom or in the service of predatory power.

6. The problem of the creation of an international order conducive to the safeguarding of life, peace and liberty and permitting the establishment of harmonious international economic relations.

The group does not aspire to conduct propaganda. It seeks to establish no meticulous and hampering orthodoxy. It aligns itself with no particular party. Its object is solely, by facilitating the exchange of views among minds inspired by certain ideals and broad conceptions held in common, to contribute to the preservation and improvement of the conditions for life and the open society.

At the very least it's thought provoking.

9 Sep 2013

This Recovery

From Prime Economics on Twitter: "About this recovery.
  • US jobs flat
  • BRICS slow
  • German trade & indust flat
  • EZ flat/down
  • UK trade down, industry flat
But House Prices up!"

Could add wages falling, zero hours contracts taking over real jobs, chronic underemployment, static 7.8% unemployment. Residential rents, food and energy are all rising faster than average inflation. Savings are falling.

But worst of all UK private debt is rising:




Graph by 3spoken: UK Sectoral Balances and Private Debt Levels - Q1 2013. All credit to the author Neil Wilson. As he says "The UK is back on the borrowing drug."

This is not a recipe for economic success. If this is a recovery then it is very narrowly based on rising house prices. So yeah, rising GDP is a good thing (while we rely on an infinitely expanding economy to sustain our standards of living) but its not accompanied by other more encouraging signs.

3 Sep 2013

In Dependence on Causes: Buddhism and Political Engagement

As I write this Western politicians are striving to convince their colleagues that we must begin a "limited" military action against Syria for the use of chemical weapons (though doubts emerged from the USA today about what "limited" might mean). Few if any Western politicians are mentioning the International Criminal Court which was set up to prosecute war-crimes. It's as though a violent assault in the UK or the USA was dealt with by by dragging the alleged perpetrator into an alley and giving them a beating. In other words it is extra-judicial punishment. The fictional lawyer Horace Rumpole was frequently made to say that the right to a trial before a jury of one's peers was a "golden thread" that runs through British justice. If Assad is a war-criminal, and on balance I think this is the most likely conclusion, then there is a process we can go through to bring him to trial and justice. Slow though it may have been, people like Slobodan Milošević were brought to trial. The more we use this means, the more resources we give the court, the more effective it will be as a deterrent. If we subvert it, then we subvert our very civilisation.

All this political upheaval and conflict in the Middle-East is often presented without any sense of historical context. For example how many of us realise that the USA has taken action against Syrian governments in the past, including the toppling of an elected leader and his replacement with a violent military dictator? In living memory. Does this sound familiar? It ought to, because it has played out time and again in the history of Western imperialism in the Middle East. 

As Buddhists we are taught to seek the causes of events and phenomena. Ultimately, we are told, our own minds are inextricably linked to the creation of our world. On the one hand the search for causes leads us to question the status quo, but on the other the idea that it is our own minds which determine reality, leads us to naval gazing and indifference to the world. Indeed I've argued that most Buddhists are stuck in an unhelpful kind of mind/body dualism which makes the physical world, the world of human endeavour, ugly to us. We constantly seek to get beyond the human realm, to create "sacred spaces" in which we are insulated from that ugliness. When that ugliness follows us into the sacred space we can become quite vicious in response (as I have discovered to my great personal cost over the years). 

At present the idea of causes and conditions ought to be at the forefront of our attempts to understand the present. Why is what is happening, happening? If we don't understand why it is happening, how can we respond effectively? And as Buddhists claim to be the masters of this kind of analysis, we ought to be at the forefront of the public discussion, pointing out how past actions have lead to current consequences. But Buddhists are nowhere in the public discourse. Indeed we are mentioned in recent times only in connection with Buddhists taking up arms against their Muslim neighbours in Burma, egged on by 'fully ordained' bhikkhus (funny how we drop that phrase 'fully ordained' when the PR is negative). 

When it comes to history, Buddhists often simply shrug and make an oblique reference to the faults of saṃsāra. Political disengagement is casts a dismal pall over public life at present, and Buddhists are leading the retreat. Compare fundamentalist Christians in the USA and the power they now have to install presidents and lead policy. If we are going to change the world, it won't be by naval gazing.

In any case we could do with some historical perspective on the Middle East. The Arabic speaking peoples of the world don't hate the West without reason. For a couple of centuries most of the Middle East was under the yoke of the Ottoman Empire. When presented with an opportunity to throw off their oppressor with British help during World War One, they overcame sectarians divides and fought together. The person who brokered the alliance was T. E. Lawrence aka Lawrence of Arabia. Lawrence, on behalf of the British Government offered the Arabs self-rule if they would help fight the Turks. An Arab state, under Prince Faisal with it's capital in Damascus was the prize they fought for. 

This vision of self-rule and freedom from Imperial power inspired the Arabs who drove the Turks back. When the Brits arrived via Egypt, the Arab forces had already liberated Damascus. It was a great victory and they were on the verge of a new world. However the British government had no intention of honouring the agreement made through Lawrence. They hung him out to dry and with the French divided Arabia up and took over. Under the Sykes-Picot Agreement the British got the south: Egypt, Jordan and the, then new, oil fields of Southern Iraq. France took control of Northern Iraq, Syria and Lebanon. A number of artificial boundaries were set up. Straight lines on maps that cut through religious and ethnic communities. The Kurds fared worse than average being scattered through 3 or 4 of the new 'countries'. This happened in 1916, with the blessing of Imperial Russia. 

Not many Westerners remember the Sykes-Picot agreement, but I gather it is still a hot topic of conversation in the Middle East. Having thrown off the Turkish overlords, they got landed with Western European overlords instead. Imperial Britain has seldom been any better than any other imperium, and at times as bad as any empire in history. 

The various new countries gained their freedom and by the early post-war years Syria, Lebanon, Iraq and Egypt were all democratic to some extent. Well, elections were being held, though they were widely corrupt. Much like Britain in the early 1800s, wealthy landowners controlled the power and forced people to vote for their choices or bought votes where force won't work. The story of the USA's secret and not-so secret attempts to subvert the political processes in Syria are recounted in a book called 'The Game of Nations' (1968) and more recently in Adam Curtis's blog from 2011: The Baby and the Baath Water. At first they tried to nudge Syria towards a freer society. When that did not work they engineered a military coup which put a violent military dictator in power in 1949. He had promised to support American interests before the coup d'etat but immediately reneged. For several years Syria was racked by political unrest and coups. 

Then in 1954 democracy was restored. However: 
"The politicians - and most of the Syrian people - were now terrified of America, not just because of the interventions and the coup, but also because of their support for Israel. In response the new government turned to the Soviet Union for economic aid and friendship."
Already we start to see why Russia is reluctant to endorse the use of military force in Syria. In 1957 another CIA plot to overthrow the democratic government of Syria was uncovered. The plot was real. 

The vision of a Pan-Arab nation had not died with Sykes-Picot. President Nasser of Egypt nurtured such dream. So did the secular and modernising Baath (or Renaissance) Party. Amongst the Baathists in various places were a young Saddam Hussein and Hafez al-Assad. The recent history of military coups and the dream of a united Arab republic helped the Baath Party to come to power, just as the recent instability helped the Muslim Brotherhood come to power in Egypt, only to be thrown out in a military coup. Across Arabia the people are looking for an alternative to the past. That past is dominated by sectarian divides, military coups, and US interference. Is it any wonder than people look to Islam to unite them and bring stability? 

The Ba'athist vision was submerged in sectarian politics and power plays. In Iraq Hussein was manipulated by the CIA into attacking their enemy, Iran (and Western nations sold arms to both sides of that war). In Syria Assad eliminated opposition and consolidated his power. He brutally put down a rebellion by the Sunni majority, lead by the Muslim Brotherhood in 1982. 

As Adam Curtis says:
"Back in the 1950s America set out to create democracy in Syria, but it led to disaster. It was by no means the only factor that led to the violence and horror of the Assad dictatorship, but its unforeseen consequences played an important role in shaping the feverish paranoia in Syria in the late 1950s - which helped the Baath party come to power. And while the Western powers no longer remember this history, the Syrians surely do."
One can read a similar story in the history of Iran where CIA plots put the Shah in power for 25 years only to be replaced in an Islamic revolution. And in most countries of the Middle East Western powers have played a deadly game of manipulation and greed. 

Actions have consequences. For complex actions in complex situations there are almost always unintended consequences. The conclusion for Buddhists seems to be a determined step away from the world. In the early days of my involvement in Buddhism I asked why we did not contest elections and try to influence decision making. I was told that the world of politics corrupts people. Twenty years on I can see that it does. Witness the great liberal hope, President Obama, condoning drone strikes in Afghanistan and Pakistan and now urging US politicians to subvert International legal processes and, to use the buzz words of the day, "degrade the Assad regime". 

I submit that even if we only drop bombs on Assad himself we won't win any friends in Syria. US bombs dropping on Syria will be a long-term disaster because people in Syria have not forgotten the reasons Assad was able to come to power and the role of the US in that rise. 

With respect to the Middle East the problem is not so much that the people are incapable of participating in a democracy, but that the powerful, both locally and internationally, won't let them participate. In the UK the gradual release of power to the disenfranchised was a long, painful process. Women got the vote in the UK less that a century ago, and then it was only for women over 30. Almost a century later women are chronically under-represented in public life, at least in part because the powerful are slow to relinquish power. Indeed in the UK we can say that the powerful have made a substantial grab for power in the last 30 or 40 years and that democracy has been seriously undermined and even compromised. Wealthy international business empires, controlled by a smallish group of men with no loyalty to anyone but themselves, have far too much power at present. They collude with professional politicians from privileged backgrounds, whose road to power is smoothed by nepotism, to subvert the will of the people, to directly manipulate that will using powerful psychological techniques via the mass media. We're caught up in the technological spectacle of multimedia entertainment while we are gradually being disinherited and disenfranchised. We sold our soul for another season of The Wire. Frank Zappa presciently said decades ago that government is the entertainment wing of the military industrial complex. 

I complained about the disadvantages of our Western Buddhist demographic recently, but one of the advantages of our demographic is that we are more than averagely educated and articulate. Without much effort we can all write to our MPs and tell them what we think. I don't presume for a moment that there will be a single Buddhist view of things, but I can hope that we will reflect on causes and conditions and understand that our previous interventions have gone awry most of the time. We can articulate our views to politicians and decision makers. As voters our sole advantage of the wealthy and powerful is that we out-number them. If we consistently speak up in our millions then we will carry the day. If the Buddhist message is going to make a difference beyond the confines of our tiny lives then we must actively engage with society and argue for change. 

It's been said that "all it takes for evil to triumph is that good people do nothing". And most of us are not even good, we're just ordinary. I guess that most people see no other option at present, which may be why anti-depressant prescriptions are so popular. Thoughts of hopelessness are a key symptom of depression. 



12 Aug 2013

Krugman Sees the Light

Paul Krugman, Noble Prize winner and influential US economist, has called time on Neoclassical Economics, which might be the turning point in the insane experiment with laissez-faire markets. This seems to me to be a very significant moment in history. The call comes in his New York Times Blog under the title "Synthesis Lost".
"So the neoclassical synthesis — the idea that we can use monetary and fiscal policy to make the world safe for laissez-faire everywhere else — has failed the test." 
"At the very least it means that we need “macroprudential” policies — regulations and taxes designed to limit the risk of crisis — even during good years, because we now know that we can’t count on an effective cleanup when crisis strikes. " [emphasis added]
This is a huge admission of failure on the part of Neoclassical Economics since the Reagan/Thatcher era. The deregulation of finance created a dangerous situation that lead to economic crisis and made it much more difficult to deal with it when it happened.

Having helped to recreat the conditions for the Great Depression one of the mainstream has admitted that it simply lead to disaster all over again, and that the impulse to put controls in place in the post-war years was the right one.

Lest we forget the post-war years were years of steadily growing prosperity and a lack of economic instability, and the contrast with the present could hardly be more stark. The UK started off with massive debts and a lot of damage to repair. And it responded by building: houses, roads, the NHS. And it paid off those debts. There were no recessions from 1945 to 1973. Yes, there were problems, by the end of that period, but they were not because of the controls, but in spite of them.

This opens the door to wider public debate of the alternatives and opens up the possibility of real change in the way we run our economy. This is the first genuinely optimistic news I have read about the economy since I started taking an interest in it a couple of years ago.


Other Responses

Duncan Weldon. Political Economy Trumps Macroeconomics.
"Yesterday Paul Krugman wrote [one] of the most significant blog posts on economics I’ve ever read."
"Essentially Krugman’s (and indeed Kalecki’s) point is this – we have the macroeconomic tools to restart a robust recovery and get unemployment down but these tools are not being used for political reasons." 

Dan Kervick. Escaping from the Friedman Paradigm.
"Aspects of Friedman’s macroeconomics might be in trouble; but Friedman’s broader paradigm for political economy is still, regrettably, too much with us. In fact, Krugman himself doesn’t seem to have moved much outside that paradigm, as I will try to show."
"What Krugman might have pursued further here [but didn't] is that not only have Friedman’s views about central bank policy been proven wrong, but his broader views on the decisive role of monetary aggregates and monetary policy on economic activity are flawed as well." 
"On the whole, [Krugman's] view seems to be that central bank management of macroeconomic affairs is effective except in the unique circumstances of a liquidity trap."
"Krugman...is working within a framework that is based on a natural real equilibrium rate of interest." [Which is to say that he still accepts the idea that aspects of the economy will tend towards an equilibrium value. This central assumption of Neoclassical economics is demonstrably wrong. Complex systems, like national economies or weather, do not tend to equilibrium at all.]
"So, in substantial measure, Krugman embraces the Friedman paradigm prescribing central bank direction of macroeconomic policy, but has sought to repair the flaws in that paradigm with the addition of a few epicycles." 
Matias Vernengo. Krugman on Friedman, Austrians, and Paradise Lost.
The Neoclassical Synthesis, was based on Hicks ISLM and Modigliani's fixed wages. The fundamental idea is that with wage flexibility the system would lead to full employment, a proposition that Keynes denied in the General Theory.

John Quiggin. Krugman, Keynes, Kalecki, Konczal. Crooked Timber.
"Still, this marks a striking shift in macroeconomics, where only five years ago, the leading figures were congratulating themselves on the convergence between saltwater and freshwater schools, under the banner of dynamic stochastic general equilibrium. As I argued in Zombie Economics, it’s precisely the centre ground of convergence that has been rendered most thoroughly untenable by the crisis. Yet that is still where the majority of academic work being published in journals is grounded."

11 Aug 2013

Irony

For the last three years Osborne and Cameron have had a mantra that they repeat. They invoke the recklessness of the last government which left the "finances in a mess" and saddled the government with massive debts. Their response to this has been to minimise debt at any cost. Then they tell us that the answer is for banks to lend to business and for business to invest; and for banks to lend to home owners.

In short the govt wants the private sector to borrow its way out of the depression, while the govt refuses to borrow. They want the private sector to invest, while the govt refuses to invest. This is economic Neoliberalism: free markets and small government which plays little or no active role in the economy. Unfortunately every where and every time these kinds of policies have been enacted the result has been growing inequality and instability - with frequent descent into chaos.

The government stands alongside business and households as a major sector in the economy.

At present government debt is about 75% of GDP and still rising.




As previously note the last government started borrowing more after the crisis of 2009 in order to meet the costs to the nation of the worst recession on record. On the other hand, according to the Governments own figures, private debt is more like 440% of GDP.

2013 Budget Report, Chp 1, p.12.
But more to the point the non-finance sector debt is about 110% of GDP and household debt is about 100% of GDP. So just to put these together:
  • Government debt = 75% of GDP.
  • Non-finance business = 110% of GDP.
  • household debt = 100% of GDP. 
Now if economic growth is the answer to our problems, and that is in itself a vexed question, then investment of capital is required. It is true that there is a lot of capital tied up in savings at present. Though we noted recently that household savings are declining. The depressing likelihood is that the depression has gone on so long that people are either desperate enough to spend their savings on basics. Note that due to high unemployment there is an over-supply of labour at present. But during a long period of stagnant demand does it make sense to invest precious capital in more supply? It does not. The only obvious area of excess demand in the UK is housing where we have both a significant shortfall in supply and over-pricing and there are complex reasons why the market is unwilling to supply more housing. But if there is overall reluctance to invest capital to create growth then what do we do? Many economists argue that it is the role of government to invest when the private sector cannot or will not, and to save when the private sector is investing.

The alternative which seems to be favoured by the Neoliberals is to just wait until the market corrects itself. Low demand ought to lead to lower prices. Certainly we are seeing real wages fall (pay rises are less than inflation) in a market over-supplied with labour. But food and energy, for example, are going up in price due to external forces. With housing, food and energy costs all going up at a time when wages are going down it suggests that domestic demand for all commodities will stay stagnant at best. And given that our major trading partners are all going through a similar process, having also embraced Neoliberalism, then foreign demand is also low. Where a few months ago people were pointing to China and Brazil as untapped sources of demand, we are seeing their economies slowing down as well.

In terms of business you have to be a mug to start investing in increased supply at present unless you build houses. For banks the risks of lending in an economy already super-saturated with debt, and with chronic low demand, are too high to be worth it. Bank of Dave notwithstanding. Of course the economy continues to turnover £1.5 trillion. There is a huge amount of economic activity happening. Loans are being made and even paid off in good time throughout the land. Houses are being built. It's just that its not enough to make a difference to the big picture. And while the big picture is depression then investing is going to be on a small scale. if we want to turn around the high unemployment and falling wages then we need the economy to grow at an appreciable rate (4-5% per annum) for about 5 years. That would be a recovery. What we have at present is stagnation - those who look at the surface seem optimistic and throw the word recovery around, while those who look beneath seem pessimistic and are reluctant to use the word recovery.

Of the three main sectors: government, business and households, only the government is free to act at present. Since the government can act, it seems to me that there is a moral imperative to act.

The government needs to do one of two things.
  1. They could borrow money to build many new houses - perhaps a million of them to bring the cost of housing down, provide employment, and stimulate spending which would in turn make investment seem sensible.
     
  2. They could use QE (money printing) to have a modern debt jubilee - aka helicopter money. They could give money to the people, especially the poorest people who spend all their income. This would stimulate demand in the short-term at least. Steve Keen's answer to the problem that this indirectly punishes those who were prudent enough to save money (and a lot of people were prudent), is to require recipients of jubilee money to pay off debts before spending. This will cramp the cashflow of lenders. Wonga might go out of business, but that is no great loss. 
They won't chose the first option because this would be an electoral disaster. For most people their home is also their main investment. If you bought a house in the last 20 years it's now massively over-valued. If housing sank to something like it's true value, vast numbers of the middle classes would have more debt than the worth of your asset (negative equity).

In terms of making tough decisions this is one that our tough-talking government will almost certainly not do. It's one thing to oppress and undercut the poor and the sick, but making the middle classes uncomfortable is not something a populist government would do. Also most of the government have their own money invested in property and have a vested interest in high property values. Instead they are complicit in keeping house building at a minimal level and the cost of housing obscenely high. This is how free markets work when one party is both free not to participate and extremely greedy and the other party is compelled to participate (or be homeless in this case).

They won't chose the second option because they are deeply imbued with the ideology that inheriting money is good - though it is wealth obtained with no effort or application of effort - while giving money to the poor and ill is encouraging dependence and laziness. Trust-fund good. Dole bad. Though both are something for nothing. Again I don't think we can expect the government to change the focus of their money printing from banks to households.

What the government are in fact doing is minimising government debt at a time when government debt has never been cheaper, madly encouraging the private sector to borrow more (and trying to cajole banks to lend them more), and crossing their fingers that historical patterns of recovery from recessions will eventually reassert themselves. Like back pain, 80% of recessions cure themselves. But in this case a vertebrae is fractured and they haven't realised it yet.

In the meantime private sector debt is still 440% of GDP and non-finance and household debt are both a or a little over 100% of GDP.

10 Aug 2013

Manufacturing and Production

We heard last week from the ONS that manufacturing and production figures went up in Q1 2013. While this is certainly good news, it's still too early to be talking about a recovery.


Following Frances Coppola I note that the rise is pretty small and we're still well below the levels of 2007/2008. Again it's far to soon to call this a recovery. We've already seen a much larger increase in both manufacturing and production fritter away in recent years. Indeed the trend in both lines on this graph is headed downwards still.

It's all too easy to latch onto good news as being yet another round of "we're past the worst" but that narrative has been an almost constant refrain since 2008. Just as one quarter of negative growth does not make a recession, one quarter of positive growth does not make a recovery (and we have yet to see one quarter of above trend growth since 2007).

Everyone is a bit desperate for good news and that is understandable. But the government have failed to address the fundamental problems with the UK economy and we probably won't see sustained growth for some years to come.

9 Aug 2013

Barclays vs UK GDP

When I commented on Shaun Richards's blog about Barclays Bank he responded:
"The next number two numbers may also provide some food for thought on the amount of credit around. Barclays balance sheet size £1.56 trillion. UK GDP (seasonally adjusted) for the latest 4 quarters £1.51 trillion...."
The basic formula for a balance sheet is

Assets = Liabilities + Shareholders' Equity

And for a bank it's assets are made up of reserves, buildings, and its investments and loans. And the total, just for Barclays Bank, is more than the GDP of the UK.

This is how they can report half year profits of £3.6bn. And while this seems a huge number, it is only about 0.25% of their assets. But it's also what makes them "too big to fail". A disruption on a par with the GDP of the UK would be a disaster.

HSBC has total assets of £1.7 trillion.
RBS has total assets of  £1.4 trillion.

This is also suggests why bankers salaries and bonuses are so high - each bank manages assets on the scale of a moderately sized country. By comparison US based Goldman Sachs has assets of ca. £6.18 trillion and the net worth of the UK (effectively the county's balance sheet) was £6.8 trillion.

7 Aug 2013

Good news?

If you were listening to Radio 4 last night at about 10:30pm you would have heard France Coppola being interviewed about the recent goods news on the economy. She pointed out that growth in economic activity is correlated to a rise in consumer credit and a decrease in savings. This is "heading down the same track" as before the crash. 

We need to be clear that if we base growth on spending savings and borrowed money that it will end in tears.

UK GDP is about £1.4 trillion. According to Humber Debt Solutions in July 2013:
Outstanding personal debt stood at £1.424 trillion at the end of May 2013.
This is up from £1.410 trillion at the end of May 2012. 
Average household debt in the UK (including mortgages) was £54,024 in May.
This is up from a revised £54,002 in April. 
The Office for Budget Responsibility (OBR) predicted in March 2013 that total household debt will reach £1.931 trillion in Q1 2018. This would mean that average household debt would reach £73,284 (assuming that the number of households in the UK remained the same between now and Q1 2018).
The levels of debt that we are sustaining at present is a significant drag on the economy. We cannot add more debt and expect positive results in the long term. Any growth we get is likely to be short-term.