The what and when of spending cuts

The very fact that Brown initially tried to portray the economic scenario as "Tory cuts versus Labour spending" is proof enough of his puerile incompetence. And now his policy shift is going to founder on the rocks of Trades Union financial support being withdrawn if he starts to do what he should have commenced 6 months ago - cut public spending. Caledonian Comment

" The basic point still stands: tighter fiscal policy won't necessarily will tank the economy."

Stephanie we can't have it both ways = slight typo here or am I missing something?

"Fiscal policy won't necessarily will tank the economy"?

So that's clear then.

"You can't cut borrowing or spending as a share of the economy if that econmomy refuses to grow."

You can, but the cuts would have to be real and deeper than would other wise be the case.

In any event, the only conclusion that can be drawn from all this is that if the economy doesn't grow then we're well and truely in the midden. So what is being done to stimulate the real/private economy?

Good piece Stephanie,
We are unsure what will happen. The only thing we can be sure of is that we need to try something and Labour don't seem to want to admit it before a general election. Only when the Conservatives put forward an 'idea' will Labour talk. Even then they will radicule the suggestion before realising the general public seem to like the idea, or see it as necessary. Then they confirm it is their plan but they'll do it better!
Shocking tactics.

If I told you about an increase in red tape that may cost every small company in the UK a couple of thousand pounds a year, every year that is being imposed without much consultation in an horrendously complex way by government would you not be a reasonable person, like most reasonable people and say that it is a bad thing?

The UK has a very large number of small companies, far larger that most other EU countries. It is very easy to set up a small company in the UK and far easier than in the rest of Europe. This means that legislation that causes all European companies to do the same things hurts the UK disproportionately.

This is exactly what has just happened. The cost will by upwards of 2 BILLION pounds of of the bottom line of all UK companies. (800000 companies at a bit over 2000 each) This is being done by HMRC (and Companies House) - what they have done is chosen a hugely and unnecessarily complex was of requiring machine readable accounts delivery - All companies no matter how small are required for years ending 30 March 2010 to file not only their Tax returns electronically, but also their accounts. The accounts will not be accepted on Paper (or in pdf) for periods ending after that date.

The mark up language is a derivative of XBRL (Extended Business Reporting Language) that has to be combined with the readable text file of their accounts. The definitions of the dialects (or as they call it 'Taxonomy') are not yet finalised and a hugely complex one number for example will have to have about 200 characters of structure descriptors.

This is a double burden fro small companies as they already have to produce two sets of accounts - the full and the abridged - both of which will need this extra editing (using systems that are not yet available) and using so far as I can see different set of definitions (or Taxonomies).

This will kill many small employers and because the production systems fro these accounts will not be perfect and nor will the HMRC and CH systems will have the effect of blocking up the systems and this will lead to a reduction in the collection of corporation tax.

This should all be stopped NOW. We should not be introducing extra administrative burdens of the very business sector which we are hoping to expand and provide the new jobs to get us out of the recession - but THAT IS EXACTLY WHAT THE UK STATE IS DOING.

CANCEL THE iXBRL FILING REQUIREMENTS (until, say 2025, when we are out of recession and the HMRC and Companies House have tested working systems.) - Addressed to all political parties.

Separately

Stephanie you say:
"That could stimulate the economy in its own right by making it cheaper for companies to borrow."
Except that the banks are still holding onto their capital and repairing their balance sheets.
Banks, I understand, still fear the overall level of indebtedness so are still acting as a brake on the economy - this also delays the point at which the fiscal stimulus can be wound back, because the economy will remain in need of support until fully functioning bank finance returns.
As you say, without either demand financed by government fiscal stimulus or demand financed by bank debt we are nowhere in tackling the deficit.
I also doubt the export led recovery route as I just don't see where the scale of recovery in export markets will come from - are BRICS going to buy *that much* from UK to make a difference? I suggest that any adverse impact on world trade (latest spat US/China an example) will also hamper any UK recovery whatever the exchange rate.
In the meantime the UK faces (or needs to face up to) once in a generation changes in the structure of government and the economy. Trimming here and there will just not tackle the problem. There are areas where government may need to spend to support investment in mid- to long term- growth sectors. We do need our leadership to be positive and spell out an economic route beyond simply cutting government spending in whatever political guise.

Well it looks like we are having another labour u turn on cuts! Is it that they didnt understand how big a hole there is or that they didnt understand basic economics? Either way they are clearly incompetent and it is time they went!

With the spectre of public spending cuts looming we are set to return to the bad old days of Thatcherite conservatism.

Public spending cuts, by their very nature, always impact most on the most vulnerable in society. A measure of a civilised society is the way in which that society treats its vulnerable members.

This recession has been caused by the greed of the banks, the very banks that were bailed out with public money, and that are now reaping the rewards of a growing market and once again paying obscene bonuses. If that public money was not forthcoming, those bankers would now be on the dole.

Let the bankers fill the short-fall in public spending, cut bankers bonuses NOT public spending. Tax banks profits until public spending is back on track. Unfortunately we are all held at ransom by the banks. If governments threaten to tax them, they threaten the citizenry with poverty. We have placed far too much trust and power with the financial sector. In the words of Gordon Gecko 'greed is [became] good'.

Are we civilised or just subject to base, atavistic drives?

Does ANY politician have the courage to face down the greed of the banks?

Thanks Steph, you've made a very complicated subject much easier to understand. I think the battle lines in the election are becoming clearer: the Tories will argue for bigger public spending cuts sooner (and can argue that will help exports and private sector investment) while Labour will argue that public spending should be cut more slowly. As you say, the overall impact on growth is unclear but if you want a bigger state vote Labour, if you want a smaller one, vote Tory. Simple really.

"Reform a independent tank has come forward with £50 billion of cuts", if we implemented all these ideas we would still need BORROW another £125-£150 billion to balance the books for this year alone. Unemployment will be higher through out next year so even if we made swinging cuts NOW our expenditure 2010/2011 will be higher than this year.

Although expenditure is important to control ,tax generation will be the real issue next year,for example a lot of companies making a loss over the last 12 months, will be of setting these against profit in 2009/2010.

The idea we can add unlimited revenues by just increasing taxes is flawed , for example adding 10 p to petrol in the current climate would not generate the income expected/received a few years ago .I genuinely believe the general public would drive around less.The reality is the % of tax per £ earned is already to high and needs dropping to encourage the economy to grow. Unfortunately New Labour has taken us all down a long Cul de sac, we are going to have turn around and go back a decade.

Since the banks appear to be fresh with cash, maybe the tax on banking should be increased and they should begin paying back the "borrowed" money from the texpayers. Governments always cut the wrong things. Social programs are usually reduced, "across the board" as if that is fair. Subsidies to businesses are maintained. Business is the prime recipient of welfare as tax loopholes and lower rates and abatements drain the treasury much more than providing food and housing for the poor. I hate to bring up responsbilities, but since the banks and financial industry directly caused this mess maybe they should pick up a greater shared of the costs. Government cuts are usually a rewarding of the dead wood in the bureauracy and the productive have their positions eliminated. It sets the stage for future hirings.

So you are saying that all the parties are planning large spending cuts, and then hoping like mad that other countries fail to do the same, so the pound falls in value and we have an export-led recovery? That sound hopelessly optimistic to me. And the bit about "stimulating the economy by making it cheaper for companies to borrow" isn't going to get us far if there is no increase in demand for their products.

You also say "the UK is already planning to tighten fiscal policy by 2% of GDP in 2010...If it's a risky thing to do, then it's a risk that Labour is already planning to take." - maybe, but it also means that even bigger cuts are an even riskier thing to do.

The only way you can cut the Government deficit without hitting demand is to raise taxes and cut subsidies for those who already have more money than they wish to spend (ie net savers). But I'd be very surprised if those are the ones who are targeted.

In the middle of the article we have "That would, non-coincidentally, also help with the long-term need to re-balance the economy in favour of investment and exports." So we need Investments and Exports ? Really... Investments - Do we need more car factories ? More big shiny buildings in Docklands ? - Exports - Does China need our imports ? Do we really need to make things for other people ? I use the word 'really' because I want to point out that in reality we do not need More Investments and Exports but Financially we do. Financially speaking if we do Investments then we get paid for things that are not in the shops and won't be in the shops for a few years - so we can seem to be doing well, if we do Exports then we pay workers to make 10 cars and if we give 5 to
a foreigner then we have 5 cars on sale in the UK and the workers have been paid for 10 so they can again afford to buy them with business making a profit - the foreigner can go into debt to pay for his cars.

What this shows is that there is a mismatch between reality and the Financial System. So far, 'Fixing the Financial System' only means doing strange things in the real world to make the numbers in the Financial world look nice. We should be looking at changing the way we add the numbers up so they match reality NEFS Net Export Financial Simulation is a starter for ten in this direction.
PS The only reason neither of these two fantasic looking ideas work, even financially is that in the long run the Net Importing nation end up in the same mess we are in, and the 'more investment' economy runs in to trouble when the buildings are finished and their charges start to appear in the prices of good in the shops.

The timing of the cuts won't make much difference in the longer term. Whoever is governing the UK in 2010-11 will have to make significant cuts in the public sector. In parts of the country, where public sector workers account for over 50% of the workforce (e.g. NE England) the impact will be devastating. This is why the markets have not yet hit bottom in this economic slump. Last 2010-2011 should see a slide below the March 2009 lows. Next year, when commercial property goes belly up, when the US, Chinese and UK government spending stimuli are over and taxpayers are faced with rising taxes and balooning government debt, then things will get pretty unpleasant. All the money thrown at the banks has been a complete waste of time, which has simply made a few people filthy rich and prolonged the agony even longer. The "green shoots" are likely to turn out to be "green weeds" which will eventually strangle this economy.

#8 justinhove. If your not happy with what has happened so far then consider this:

https://www.guardian.co.uk/business/2009/sep/13/british-tax-havens-need-bailouts

That´s right, soon you will be required to stump up to help out the tax dodging citizenry of the BVI and the Caymens.

No politician will face down the greed of the bankers because they are two sides of the same kind. Only the people can accomplish this task, but the banksters bet is that the people are lazy, indolent mugs who can be ripped off for ever.

What exports will we stimulate that have not already been stimumated by a 30% drop in Sterling. Unless we want to become a cheap labour supplier to the world then we are not in the mass export business. Niche exports, such as high-tech engineering, require customers to buy and are invariably not cost driven.

So why not put interest rates up, stimulate the pound and attract money into the country - ie Financial Services are actually what we export at the moment. This would also give us the true correction in our overpriced domestic assets that will get us out of this debt-fest.

The long term role of government and economists is to determine exactly how the UK will balance its payments with the rest of the world - ie. in 2025 what will be the UK's major export (eg wind energy, electric cars) or will it be a large number of books on how not run an economy.

Supporting enterprise that creates value for others (and wealth for the nation) would be a good idea - as the revenues, and hence the taxes paid for by corporations / workforce, is what's actually needed to fund any public services in the future ... yet little mention / action by politicians with regard to this ... they all show they have no real policy/ideas on this at all ... hence their focus on cutting costs ... and they haven't really got a clue about that either.

What we see is current 'leaders' failing to 'lead' ... the government gave hundreds of billions of taxpayers money to financial institutions ... who prefer to i) make money from money (i.e. wealth manipulation'), to ii) gamble using other peoples' money, and to iii) profit from the good times and get bailed out by us in the bad ... nothing has changed, and we are continuing down this road again ... but with very little to show for it, except a massive debt to pay off, higher taxes and less & less cash to pay for public services.

Investment in entrepreneurship and real enterprise is needed to rebuild a sustainable economy and to fund future public services ... instead of trying to get investment to return into property again (alongside gambling) in the hope that international markets believe people in the UK will be prepared to take on more debt so that they can take a disproportionate chunk of people's salary in the process (for adding little/no value at all) once again ...

If the UK still plans to go for the latter, don't expect it to last for very long, as debt will continue to spiral out of control, more unemployed will need to be supported by the state due to the lack of enterprise, and many more enterprising/hard-working people will make a different choice on where they would like to live (e.g. remember EU borders are all open now)- and they will be unlikely to choose here (e.g. because of high property prices, high taxation and imploding public services ...)

Simply 'cutting' your way to 'success' is a flawed strategy. Innovation and value-added enterprise, supported by freeing up more resources to allow more value to be created, is far better (e.g. robust & sustainable) ... but current 'leaders' haven't got a clue ... fail to understand this ... and unfortunately the chicken's will eventually coming home to roost.

Much could be acheived with UK's finances if a simple spending test were to be applied to all public expenditure:

1) Does it provide substantially towards the objective of zero unemployment for British workers?

2) Does it provide substantially towards investment in Britain rather than the money going overseas?

3) Does in invest in substantially sustainable activity/projects?

4) Does the benefit to the British taxpayer outweigh the opportunity cost to the British taxpayer of not doing it?

5) Can the expenditure be justified to the British taxpayer on the grounds of natural social justice?

It is only when all government expenditure is assessed against this or a similar set of criteria that the problem areas in spending arise - and some of them are very clear indeed.

This is obviously not itself a panacea for all government spending - but it would be a start, and priority of spending can still be identified by most of the criteria.

When a government is elected to spend any amount of money on anything and in our name - that is certainly time to chuck all the books on economics - out of the window!

No doubt someone will soon write with an improved version (but please leave the bit in about British workers so as to please Gordon)!

Apologies to all ,for a while I have been stating a 20% cut in expenditure is required. I am wrong if we want to balance the books (Eliminate £175 billion deficit) a cut of at least 25% is required. Alternatively we could close down all of the NHS and Education for 11 out of the 12 months a year.

If we keep going as planned by 2014 the interest alone on the debt will equal 50% of the NHS budget.

The TUC's idea we can tax the rich to make good the deficit shows their ignorance of the facts.

Nice to see that everyone is agreed that spending is roughly £90 billion a year too much. Lets put it into context I believe that in 2007 public spending was in excess of 45% of GDP - at a time when the economy was supposedly doing well. My own view is that in good times govt spending should be below 40% of GDP. This means that govt in 2007 was spending 6-8% of GDP that it should not have been doing which implies that public spending needs to be reduced by somewhere between 12.5-17.5% compared to current levels. Lets be simplistic and say 15%

Does anyone actually believe that any of the political parties have the will power to chop 15% of public spending even if spread out over 5-8 years.

Hi,

Does anyone have a link to the Reform report that Stephanie is talking about?

Sounds interesting...

Thanks,

Jx

"It's not whether anymore - it's what, and when."

Everything, last year! And start cutting taxes now!

A well-reasoned article, Stephanie, but you have to accept that there is more than one way of getting out of our predicament and we do not know what the mix will be. What is crucual is confidence around the world and in the markets in the steps taken. Historically the Tories have enjoyed most confidence and so it seems we need to put our trust in them. That is the sad part because it shows there is no new thinking, no radical re-shaping of the economy which is what is desperately needed. Once again we are talking of the positions of the two main parties as if they represent our only choice. We need far more widespread debate and involvement of others in the process of government. Surely we are not going to carry on oscillating between Tory and Labour? What we need is a national plan - our position is so serious and much weaker than our rivals in the G20. We should all wake up and understand that arguing along narrow party lines will get us nowhere.

Actually, the UK should invest in exporting 'quality'. Quality branding, quality produce.

People are tired of cheap junk, and something quality is often incentive enough to save. Also, people still associate the UK with the Jaguar, Rolls Royce and Lipton's teas of the past...

Further, in deflationary times, it will be the savers with cash who buy, and they will be buying quality or not at all

My first reading of your blog, Stephanie. Congrats. I admire your work here and elsewhere.
I am not expert enough to make a judgement on the choices you outline, but I wonder whether economists have a successful way of measuring how bureacratised a system has become and how much expense might be squeezed out by reversing the process? Committees initiating, overseeing, and evaluating; targets designed and administered; procedures developed and monitored through paperwork; bloating of staff as remits are widened: these sort of things are devilish to undo and require fierce discipline, but I imagine all this has become more extensive over the last few years. Can economists do better than the politicians at quantifying the "waste", or well-intentioned bloating of government bureaucratisation?

The only argument the government seem to be able to come up with in order to delay cuts is that any cuts will damage the recovery. But I thought we had all these green shoots spurting out all over the place. Mandy has even asserted that the recession is over: no idea how he knows that.

The government finds itself impaled on the horns of its own dilemma. It wants to talk up the economy but it doesn't want to talk about the cuts that are needed and needed badly.

I can only warn that failure to promptly bring the public deficit back under control will lead to a run on sterling, a leap in interest rates and the devastation of inflation. This is the New Labour strategy and it leads straight to the doors of the IMF.

We are being sold down the river by an incompetent government, greedy bankers, grasping politicians and a bloated bureaucracy. The writing is on the wall: they have all been weighed in the balance and they have all been found deficient.

Cut now, cut deep and keep cutting. The way to end up with a small government is to start with a big one. We are in the right place to start.

Public sector spending is going to be decimated. Cuts will come where opposition is weakest, it will have nothing to do with the public good or social necessity.

The one thing that will not be touched is social welfare for the rich. This won´t be touched because those with their hands on the levers of power know full well that economic recovery is a fantasy. How can there be recovery? You have a systemically bankrupt financial system, North sea oil and gas is in decline and manufacturing has been all but destroyed. In addition they have built in further time bombs set to explode in the medium term - like for example you are going to run short of electric power by around 2017.

...and what of the great miracle of exports? What is there to export apart from guns? Look at the US. On Friday last week they ban the import of Chinese tires (estimated value $1.3 billion pa). On Monday morning the Chinese announce they are considering banning the import of US automotive parts and chickens (estimated value $1.2 billion pa).

The Chinese are not playing to lose, and the US does not yet realise that after so many decades it is playing a game that it must lose. The British are irrelevant in all of this. It´s only contribution is to arm a few lunatics around the world, and to send more of its sons off to die for a cause so ludicrious it cannot even be explained. Should make you proud to be British!!

Whilst the argument in the UK has become increasingly polerised, very little time appears to have been given to the question WHY.

Does the UK really have too many public services? Leave aside for a moment initiatives that we personally do not like eg Identity Cards and then try and define which services are actually redundant. If we decide that we may actually like to have even more services eg swimming pools then we should be looking at efficiency and effectiveness rather than the blunt axe of cuts.

Ah! but you are forgetting the costs - we simply cannot afford what we have! Again, the question is WHY.

One of the things that we do know after the financial debacle is that the global financial markets will work in their own best interests and not as a true reflection of what the UK government does or does not do in the best interest of the country. There is no way that the UK can really influence the exchange rate as it is totally out of our control.

Unfortunately the grand models of the economic forecasters - including The Treasury Model - have been shown to be almost worse than useless in helping us to avoid the debacle. The structure of economic policy is no longer fit for purpose. We have suffered from a too low level of exports and Germany from relying too heavily on them. Perhaps we need a complete re- think of macro-economic theory to fit the needs of a 21st Century 'modern' economy.

If a recession has been caused by major strucural flaws in the economy, there will be no lasting recovery until those flaws are corrected. It does not matter if that makes the recession last longer, since when we emerge we will do so in much better shape to sustain recovery. If we blunder on with the old model we will lurch from one crisis to the next with mini booms in between as we did in the post war period.
We have to reduce the size and scope of central goverment, secure the retail banking system but let the investment banks pay for their own losses, return to sound money, sound valuation of assets, reduced housing costs, less process, less borrowing, more saving and making a good deal more of what we buy.To maintain services we may well have to increase taxes, but income tax needs major reform. If services are good people will pay, but not to wait hours in A&E nor have thier children underperforming in poor schools.

Here's a little poser for those whose economics qualification is a little more recent than mine.

GDP can be defined in three different ways, all of which in theory are supposed to come out at the same total. One of the ways is the Income Method, which includes Gross Corporate Operating Surplus as one of its constituents. So under this definition, presumably, the high levels of profitability of the Finance Sector (FS), pre-crunch, would have made a significant contribution to GDP. But there is a strong argument for saying that the FS pre-crunch profits were largely unreal, being based upon a set of assumptions that have turned out not to be true. And that a more appropriate way of accounting for the last (say) 10 years is by restating earlier years rather than taking the whole adjustment in the post-crunch accounts. So what happens to GDP calculations if we account for post-crunch losses not in 2008/2009 but as downward adjustments to the original GDP figures in earlier years? Don't we end up with a shallower GDP growth path that culminates in GDP at a lower level immediately pre-crunch? And, if so, aren't we being more than a little ambitious if we think that the post-recession GDP growth path will resume from the level it had reached pre-crunch? Shouldn't we instead be looking for it to resume from an adjusted level from which the mis-stated profits of the FS have been removed?

21st century management practices double the value-adding capability and halve costs both at the same time - but because it's 'lean' in terms of management (and 180 degrees different to traditional management!), most 'leaders'/'managers' either fail to understand it or choose to ignore it, and prefer to stick to what they know* ... most 'leaders' and 'managers' don't mind change, so long as it doesn't change how they lead and manage ... but unfortunately that's what's now needed ... don't expect to see it in a hurry ... but you'll see successful nations/enterprises doing it ... Sir Gus O'Donnell (head of the Civil Service) has known this for years*, but has failed to do anything about it.


* take a look at https://poweromics.blogspot.com/2009/06/targets-era-is-over.html for instance.

Hold on a minute! There's a less gloomy scenario.

A massive privatisation of the huge shareholdings we own in RBS, Lloyds and Northern Rock is already being discussed by City bankers. Those holdings are already priced above what we paid for them, and bank share prices are very likely to go still higher. Whoever sells those shares, we all stand to gain enormously.

None of those vast assets is shown in our national accounts: because nations don't publish balance sheets. But if they were, the huge debts you're referring to, would be already offset by bank assets, and by more than the cuts you're suggesting.

Moreover, the margins our banks are making on the mortgage and commercial loans are at record highs. And as the economy recovers they'll be re-appraising their past write-downs to reflect that recovery in expectations of potential loan defaults. That'll boost bank profits and the taxman will take his cut for us too!

Even the BoE is helping out! Merve the Swerve has bought more than £150 billion of government debt. Which means HM Treasury pays £5.4 billions in interest to our own wholly owned bank. Which is quite a profit on invented money, isn't it?

Selling those debts and bank shares onto the market may take more than one parliament. Meanwhile they'll be earning good returns for those held investments. What is also for sure, is that most of that cash will re-pay current debts without recourse to the sorts of cuts in investment you're discussing.

There's no need to be so gloomy. This is a crisis of capitalism we can cope with.

I agree with Mandelson this morning that the Tories will look to make cuts with relish and are salivating at the prospect of cutting the public services. It would be madness to cut public spending now and make the recession worse. Kenneth Clarke was the mad axeman Chancellor before 1997 and he's back again, and the Tories clearly are back to saying that unemployment is the price worth paying. I'd far rather have Brown Darling and Mandelson that Cameron and his bunch, who care nothing about ordinary people surviving the credit crunch.

Okay, as you'll see I'm no economics expert. I'd appreciate if someone informed could give me their opinions to a few questions -

1. Was our economy fundamentally less prepared for the crisis, and impared by virtue of

a) a reliance on tertiary products and/or
b) our inate lack of primary resources (labor, land) compared to other countries?

2. Is there a link between how a national economy is comprised in terms of primary, secondary and tertiary business, and it's robustness in the face of economic downturns?

3. It seems the article suggest there is no other option than cutting in spending from the government. Is there no possibility of spending our way out of a crisis like this? With intelligent policy, focusing spending on new technology, research, subsidising sustainable industries and not cutting social spending?

4. Was the UK more severely hit by the global downturn, not just because of it's links to the sub-prime mortgage situation in the U.S., but because the wealth in UK society is less evenly distributed than e.g Germany or France, on a personal and business level?

As I said I don't really know a great deal about economics (hope the questions don't sound too socialist), just wondering if I can learn something from people's answers. Cheers.

stanilic # 26

"I can only warn that failure to promptly bring the public deficit back under control will lead to a run on sterling, a leap in interest rates and the devastation of inflation."

Inflation is already happening; we're just not seeing its effects yet. A run on the pound and a sharp spike in interest rates will come after food, energy and commodity prices (most notably gold!) begin to increase rapidly.

One aspect of this whole sorry affair continues to worry me (and Stephanie sort of alluded to it in the comment about rebalancing the economy in favour of exports and investment) and that is how long can we continue to keep going with our current lifestyle with foreigners holding sterling they got as a result of us paying for all those imports because we make so little. What can they spend sterling on? Well, I guess they could continue to buy up our companies (the current Kraft attempt to buy our Cadburys would mean that billions of pounds would be repatriated in exchange for the ownership of Cadburys and their future profits). There can't be too much left for foreigners to buy, though. Apart from British Gas, most of our utilities are foreign owned. Nearly half the mobile phone network is foreign owned (Orange = France Telecom, T-Mobile = Deutsche Telekom, 3 = Hutchinson). You could go on for pages...

In my youth, there was much talk of the balance of payments which regularly became a 'crisis' -- presumably because foreigners wouldn't hold sterling if we had nothing to sell them that they wanted. What has changed? Is it that if they didn't let us and the US sink further into the mire of debt, then their factories would stop? Or do they seriously believe that at some point in the future we will be able to balance the books and they will be able to do something about the IOUs they are holding. This country is a gigantic Mr Micawber hoping something will turn up to replace the misery caused by the Dickensian adage "Income £1, expenditure 19/11d, result = happiness. Income = £1, expenditure £1.1p, result = misery". And no politician is prepared to move it from the shadows of the too-difficult-to-do-pile to the spotlight of public debate.

#32 leftilkley. The banks that you refer to remain irredeemably insolvent. All that has happened is that accounting rules have been changed and they have received an emergency transfusion of cash.

The core problems of over leveraging and lack of transparency remain. Government borrowing has been ramped to the maximum, and the real economy has continued to decline. Deflationary collapse cannot be avoided.

#33 Fairoakgreen. No politician that can credibly come to power cares one jot for you or any other ordinary person.

You do not like or believe this message? Ask youself is it possible that someone may have lied to you? Do these people have form in this area? Were there any weapons of mass destruction in Iraq? was the economic crisis limited to problems in the US sub prime market? Are banks solvent? If so, why don´t they publish their full exposures?

A services based economy driven by borrowing....

Is there really a way out without fundimental changes far deeper than the cuts we will hear about!

I doubt looking back to a time when we were an industrialised nation with modest borowing will help!

so to summarise then

"No-one knows"

In terms of what has been said there is a difference in timing rather than intent on Public Spending.

However, I can't believe Labour really would make large cuts in Public Spending, they just believe in big Government and big spending my it.

I think everyone, including Labour voters know that the Conservatives would make big cuts and therefore have much higher credibility in this perhaps depressing respect.

Comment 33 : Fairoakgreen

"I agree with Mandelson this morning that the Tories will look to make cuts with relish and are salivating at the prospect of cutting the public services"

This is a quite disgraceful comment, and I think unless you have firm evidence to back it up you should withdraw it. The Tories may genuinely believe that a reduction of public service provision is an essential step in rebalancing the economy and creating the foundations for a sustainable and prosperous future, but to suggest that they are salivating at the prospect of the concomitant short-term hardships is to imply to them a hatred of their fellow citizens that is quite unjustified.

If any political grouping has behaved in such a way as to suggest a hatred for others it is the Prime Minister himself, suitably assisted by his close supporters and cohorts.

Apologies for the messy post on #13. I put some HTML tr's and td's all padded out nicely with chr(9)'s and the result, when I clicked Preview, looked very nice.
What was finally posted looks nothing like the Preview - has anyone worked out how to get tabulated data to show nicely ?

#40 SUPERMK

"Conservatives would make big cuts and therefore have much higher credibility in this perhaps depressing respect."

I agree that deep Conservative cuts would be a depressing prospect - a 1980 reponse to a 2009/10 situation.

Fairoakgreen # 33

"...the Tories will look to make cuts with relish and are salivating at the prospect of cutting the public services."

If you think the UK Tories are "bad", then I suggest you meet some Misesians!

#36 TonyHants asks a good question : In my youth, there was much talk of the balance of payments which regularly became a 'crisis' - presumably because foreigners wouldn't hold sterling if we had nothing to sell them that they wanted. What has changed?
– Well back then they could hold the sterling for a while and wait to buy some British goods, but if nothing appeared they wanted, then our currency would drop in value… to the point where our goods were cheap enough to be of interest to them – this was the essential crisis – our currency devaluation.
The new situation is the WTO has arranged we have ‘free trade’ and this does not mean freedom to buy and sell goods it means freedom of what is called ‘capital’ i.e. it means that foreigners (for foreigners read Chinese) can use their sterling to buy our government bonds, mortgages, shares, company bonds, land, property… our assets - lock stock an barrel and our currency does not devalue… yet.
When there are no assets left to buy and 50% or more of our tax revenue goes to pay the interest of government bonds held by the Chinese, and we are de-industrialised and what we do have is owned by the Chinese so all future profits will accrue to them… then you’ll see a proper crisis.
I feel a quick moan about linguistics is due here : One of the most dangerous words in the English language is ‘Freedom’. It’s too easy to stick it in a sentence and make a bad thing sound good : ‘Freedom of movement of Capital’ sounds great – of course it does, it has the word ‘Freedom’ in it but it’s a little like saying you should be able to drive your car with ‘Freedom’ from the petrol gauge – no longer will you be tied to filling up when you are nearly empty just keep driving !
There is a theory of International Trade based on the work of Ricardo – This theory does have holes it see : Why Ricardo was Wrong but at least it has some thought behind it. Assumed in Ricardo’s theory is the discipline of currency devaluations that come from trade in goods only, he does not have the ‘Freedom’ from this discipline.

INFLATION - don't forget this time its different, all previous recessions have been against a background of 'stagflation'.

#42 and #45 - GlenisD

Congratulations on finally discovering whitespace and trying to format your postings. I am very interested in what you have to say and would like to understand more. Readable posts help.

I agree that words like 'freedom' are loaded and linguistics distort and distract. Let us look at the numbers.

You posted several Excel models of Discrete Event Simulations but with some omissions. You omitted the Central Bank and minimum reserve requirements. You also omitted that multiple Workers and multiple Businesses holding their accounts at different banks. Further you omitted cash. Most importantly, you omitted interest repayment and the effect of interest burden.

Why did you omit these from your Discrete Event Simulations?

#46

Take a look at this hard data:

https://www.voxeu.org/index.php?q=node/3421

Apart from 'industrial production', we are still tracking the 30s depression and are significantly worse off in the markets still. Let people celebrate temporary recoveries for now. The underlying dynamics are volatile and 'chaotic' at the moment. The trend is deflationary still.

#41 ExcellenceFirst

The words 'pot' and 'kettle' come to mind.

#48

Frank,

Why are you surprised? The financial collapse has been put off for the time being. Nothing has been fixed. We are still using the same systems and the bankers are still employing the same psychology. The causes remain unaddresed.

The best that we can hope for is a continuing series of minor recoveries and crashes.

Why does it have to be so painful.

Just invade the Cayman Islands (which are a British Overseas Territory anyway, so it doesn't really count as an invasion), confiscate the money in the hedge funds located there ($1.2 trillion), and you've pretty much paid for the entire UK bank bailout. Problem solved.

OK - that was a bit tongue-in-cheek, but the point is there is plenty of money out there to sort out this mess. It just happens to belong to a relatively small number of very rich people (many of whom no doubt are the same bankers that caused this crisis) who want to hang on to it at all costs. It is within the Government's power to do something about that though.

As no one is interested in saving the UK's small business from a completely unnecessary extra 2 billion pounds a year (see #5 above) I will put my oar into spending cuts...

Will the turkeys vote for Christmas - David Cameron has to hope so...

But again I suspect that spending cuts are a diversion from the need to re-establish a rational price for money. The price of money is still ultra low so there is little incentive not to simply borrow our way out of recession (and yes I know that is impossible). It is the switching point from insanity in money pricing back to where all commentators know must be - that is the problem - i.e. not whether but when (See LK above) This was precisely the same problem that faced the regulators and speculators on the upswing of the bubble. They failed then and I see no rational way that 'they' can fail to fail again. (So if one is a betting person it looks to me to be an odds-on bet that we will delay too long to cut/raise interest rates and then have to do it too much.)

Basically the whole of economics is shot and we and they are floundering around in the uncharted darkness for something, anything that points the way. I have negative confidence (worse than zero) that the existing regulatory and control mechanisms have the intellectual capacity or understanding or command of arithmetic to have any hope of getting it right. Gordon Brown says he will cut when Germany and France cut and in a way, rather perversely, this may be our only hope of a strategy as the prevailing Anglo-Saxon economics has failed utterly.

Inflation....!!!!

Fascinating to listen to Mandelson interviewed by Barry Humphries on Today programme. Humphries should have known better - Mandelson wiped the floor with him. Then at the end Humphreys - pathetically - tried to ambush him with little boy Robinson and failed miserably. Either must try better or pack up altogether.

Re #47 from FrankSz,
Well first thanks for your criticism of my posting style, I hadn't really taken any note of it.
For starters I'll address the lack of the 'interest' in my models :
a) The main reason is, I don't see Interest as being a primary issue. My models manage to crash economies without any interest at all. My main problem with Interest payments is that they mis-allocate Income - but I don't see this as a primary cause of the problem - explanation of this statement to follow in a later post.
b) Islam - Islam is a big issue in the Modern World. I have attended many public meetings on 'the problems of the financial system' over the past 15 years and no small number of them have been hijacked and even sponsored by Islam. Their thinking being 'Islam says that Usury - Riba' is Evil and if we make enough noise then we can get this meeting to agree that the problem of the Western Financial system is that it is based on Usury - this will prove once again that Islam is the true religion.
The Islamifiation of the critique of the present Financial System has done nothing but wreck any real progress that might have happened in this area.
Quick aside on Islamic Finance : The banning of Interest by Muhammad was quite specific and almost the only thing he did I have any time for : He banned lending with interest of Gold, Silver, Barely, Wheat and Dates.
Up till this ban something quite sickening happened. Rich men used to essentially play a diabolical game of musical chairs with poor people : 100 gold pieces were lent out to 10 poor men, there was a demand that each of them pay 11 pieces back less they suffer foreclosure. Collateral for the loans was not infrequently their children, their only asset.
What this meant in isolated desert towns was that no matter how hard the men worked, though it was possible for some of them to return 11 pieces of gold to the lender, it was inevitable, given that in total 110 pieces were demanded back and there were only 100 in circulation, that, at the end of the year some poor man would end up carrying his young daughter into the rich man's Paedophile harem. The rich man knew he'd never get 110 pieces of gold back.
Muhammad never banned the lending of sand at interest, modern money is a little like sand in its lack of scarcity and the Islamic mono-objection to interest is, though well funded, misplaced and hence of great benefit to the those who would have us stay as we are as it goes nowhere near the real issues.

The worst aspect is lack of leadership or vision from our politicians, where are the longer term plans to re-balance and grow the economy or reduce it costs by improving infrastructure (renewable energy, highspeed electric rail, high speed fibre internet, etc) If our economic wealth continues to shrink paying off the massive debt becomes more and more brutal.

Hi Stephanie, I generally get the drift of your pieces, but this one about asking a Swede about welfare reform / cuts needs to be read in the context of a eugenics programme running in Sweden from the 30's - late 70's which meant that the welfare they delivered was, per capita, relatively over funded / low demand.
In the 90's they wouldn't have had anyone to spend any money on, because the they'd sterilised all the women and girls likely to deliver "needy" children.

As to the rest of it......
Economics as a science / displine / academic exercise, is a busted flush / emperor's clothes / smoke and mirrors "game" for the gamblers who just can't stop, and their hangers-on who haven't got anything better to do.( nothing personal, you and everyone else weren't to know that it would all fall down just now)
These are behaviours!

#54 "100 coins in circulation" just about does the basic maths. All the rest is horse feathers.
A far as I'm aware Pegasus was a story / parable / educational tool.

#54 Glenis Devereaux

a) I noticed on your blog-city site all the formatting is stripped during posting. Even carriage returns. It's a shame as I think you'd be getting a lot more interest if what was there didn't look like it wasn't written by a teenager on crank.

b) Prior to 1971 (or thereabouts) money was linked to gold, so the arguments about musical chairs and interest repayments don't necessarily apply. There are 'viable' systems that involve continuous creation of deposit money.

c) In your discrete event simulation called 'Consumer Debt', if I remember rightly, the business attempts to pay off the loan before the end of the cycle. Please try the following or explain to me what you'd expect:
- Copy the Quadruple entry rows for Loan Repayment and rename to Interest Repayment
- Modify the simulation so that the banks have separate acounts for each client, or just use a separate bank for each client.
- Modfiy the simulation so that in the storyline, the first X rows are 'initialisation' rows, while the remainder are 'cycle' rows over which your loop iterates. This allows you to issue a loan in the initialisation phase and cycle over interest repayments. Alternatively introduce the concept of event handlers and fire loan application events when balances are below a certain threshold
- Introduce the central bank. Fail loan applications to banks if minimum reserves are not met.

Tweak this to see if it is possible to maintain economic activity with continuous money supply expansion.

If you achieve that, let me know. Then add asset speculation to the model and see what happens.

No 5 John_from_Hendon "The mark up language is a derivative of XBRL (Extended Business Reporting Language) that has to be combined with the readable text file of their accounts."

I have been "looking into XBRL, an extension of what was formerly known as BPRL (Business Process Reporting Language) for some years now. The Language and its usage are not as difficult as it sounds.

What are major problems for most people is when they try to apply it to legacy systems whose design do not quite match the definitions given be HMRC for the requisite reports. In trying to "save time and money" and forcing the legacy system to be HMRC compliant, they are, in effect, trying to hammer a square peg into a round hole !!

A better solution is for the SMEs to buy and use an HMRC compliant system and then hire some temps to transfer their historic data from the old system to the new one AFTER the old dataset had been sifted through be some accounts-knowledgeable person !! My humble self had been through many wars over data migration from old, legacy datasets into new systems.

*THIS* is where the true cost of such a blatant dictat lies, from this government of total IT-illiterates !! It's always easy to make pronouncements and dictats when there is total disregard for the consequences to the SMEs !! The costs in time, effort and money will probably slaughter the SMEs while the government will probably blithely say, "Oh well, they were failing businesses anyway" !!

Thus do they regard the SMEs. This much do they love the aspiring, enterprising little men (and women, let's not be sexist here) :-)

No 56 "A far as I'm aware Pegasus was a story / parable / educational tool."

Totally within topic, actually Pegasus was also an accounting package although, not having examined its recent incarnations, I have no idea whether it will be compliant with the latest HMRC/government pronouncements !! Just thought you'd like to know !! :-)

Lord Mandelson made this remark about Labour and "wise spendings" !! This, from Teflon Mandy, the *capo* in charge of building that greatly over-budget, ghastly monstrosity formerly known as the Millennium Dome, now the O2 Arena ?? "Rich" is not exactly the right word to describe that statement !!

Labour and "wise spendings" are mutually exclusive !! If they think the British public will believe this nonsense, then either they think the British public have an average IQ of 1 or they are is desperate need for new and better spin doctors !!

No 8 "Public spending cuts, by their very nature, always impact most on the most vulnerable in society. A measure of a civilised society is the way in which that society treats its vulnerable members."

This is not necessarily true !! Public spending *CAN* be deeply cut *without* impacting on the most vulnerable !! It is the entrenched interests of the "civil" servants and the Unions that force cuts in areas that impact on the most vulnerable !!

A good place to start is to reduce/remove entirely all those quangos that cost a lot and produce nothing effective for their money !!

"Public inquiries" are another place to cut !! £16 million spent, to "prove" that it was the fault of the Phoenix 4 who destroyed what's left of Rover, is a waste of public money as everyone knew that already. What would have been effective is to discover why and what over-riding reasons, this government in general and Teflon Mandy in particular, chose them instead of a more economically feasible offer from Alchemy !!

The Ministry of Defense is another place to make swingeing cuts. Billions are spend by them and yet the front-line troops are *STILL* underfunded and poorly or under-equipped !! That ministry have more chair-borne warriors than front-line troops and that says it all !! Report after report had proved that they don't know how to do their job(s). Budgets are blown and procurements are jokes !! Decimation (killing or removing 1 in 10, Roman style) is not good enough. There has to be swingeing cuts to put more money for the use of the front-line troops !!

And the best and most effective public spending cuts of all are to ban MPs' expenses claims and reduce their pay !! If they can't live on 2x average pay (AFTER TAX !!), they shouldn't be in politics at all !! Millions have to live on what they earn and pay for their own expenses !!

#58. ishkandar wrote:

"Ah you grasp the problem I read, but not perhaps all of it (see below)...

"A better solution is for the SMEs to buy and use an HMRC compliant system and then hire some temps to transfer their historic data from the old system to the new one AFTER the old dataset had been sifted through be some accounts-knowledgeable person !! My humble self had been through many wars over data migration from old, legacy datasets into new systems.
*THIS* is where the true cost of such a blatant dictat lies, from this government of total IT-illiterates !!"

The key to comprehending the scale of the problem is I think best understood when you take on board that the huge majority of the 800,000 small companies trade just above break even employ a few staff and cannot possibly afford the cost of the change envisaged.

Looking at the technology from SGML, through HTML, XML and the mess that has been created by the illiterat geeks of the govenrment that was XBRL and now is iXBRL - it is immediately apparent that its design is grossly inefficient.

The whole idea that all companies are big enough to employ an army of temps to migrate the data is totally fanciful and ridiculous for most of the Mom and Pop small businesses. Mast could not even afford the software required and many will not have anywhere fro a temp to sit let alone have the money to employ one. Yet the same rules apply to the very smallest of businesses as well as the largest - this is ridiculous and that is what I was essentially getting at in #5 above.

I have carried out a small survey in a group of accountants and most do not use any form of accounting preparation package at all, just having a design they have themselves created in Excel over the years which they adjust for each client. (I have tried several of the excel plug-ins are they are extremely difficult to use.) Some also produce an elegant version of the accounts in a word processor. (Again the plug-in is a pain in the lower anatomy - particularly where verification is concerned.) The basic problem is that of the huge complexity of the 3500 labels that can be used and deciding which one best meets your requirements - so far as I can see this remain a huge problem fro accounts preparation systems. iXBRL for small companies need stopping NOW or the economy will suffer a prolonged depression because business has the put-up with an unnecessary extra burden, just when it is most vulnerable, when it is small and starting-up!

Under this level there are a huge number of companies, that employ people, where thee owners do their own accounts and quite often these have no computer skills at all, but do traditional bookkeeping and at the end of the year type up the accounts. What the proposed changes will do is put these people out of business and they are insane - particularly during (a hoped for) recovery as most of the jobs which are desperately needed will come from these businesses.

I am led to the obvious conclusion that the Government is using this proposal as a blatant attack on small businesses (or the accountancy profession - having lost small company auditing years ago - now sees this as a way of gouging small businesses for fees!) I remain incandescent for the Nation and despairing for the recovery.!

The latest classic from Osborne - let's sell the bank shares back to the people a la Sid! So sell people something that they already own as taxpayers. Wheeling out that famous con trick (British Gas, BT, and the rest) is so bare faced its almost obscene.

For original shareholders of Lloyds HBOS and RBS that must be spectacularly galling. Own a bank once, own it again as a taxpayer, then own it again as a pension fund member and it's still worthless.

Comment 49 : foredeckdave

"The words 'pot' and 'kettle' come to mind."

In what respect?

It is possible, you know, to believe that your ideological opponents are genuine people who have just reached different conclusions about life than you have. You know, that they believe what they do because they think this would be best for society generally. As I presume is the case about why you believe what you do.

Frank 48 - graphs 1-7

try squashing the 50 month traces for the 1929 event onto th 20 month traces for the current event.

Maybe the world has speeded up since '29 ?

Answers for “artteacher” listed at 5.07pm on the 14th:

I'd appreciate if someone informed could give me their opinions to a few questions -

1. Q: Was our economy fundamentally less prepared for the crisis, and impaired by virtue of either a reliance on tertiary products and/or, our innate lack of primary resources (labour, land) compared to other countries?

Answer: No. UK was as better prepared for the unexpected US Banking crisis. Because we had a much lower than average national debt, the UK has been able to borrow money to buy new shares in banks, which can be sold off at a profit in future years.

2. Q: Is there a link between how a national economy is comprised in terms of primary, secondary and tertiary business, and it's robustness in the face of economic downturns?

Answer: No. Concepts of ‘primary’, ‘secondary’, ‘tertiary’ business are rarely relevant. All parts of economic activity inter-dependant. For example, more folk are employed servicing cars and selling them than in their making. But we couldn’t make cars that couldn’t be serviced. If we accept the pejorative view of an hierarchy of categories we’d allocate higher status to the marketing department of a cigarette maker than to staff in a cancer treatment hospital. UK economy has shrunk less than Germany & Japan because we happen to be greater traders of services.

3. It seems the article suggest there is no other option than cutting in spending from the government. Is there no possibility of spending our way out of a crisis like this? With intelligent policy, focusing spending on new technology, research, subsidising sustainable industries and not cutting social spending?

Answer: Growing efficiency means we can re-deploy resources to where they’re most needed. Which may feel like a cut, but it isn’t. Truth is, the so-called bank bail-outs are backed by shares issued to UK government that will be sold-on for a huge profit over the next five years. Meantime, tax revenues and inflation have both fallen, so some wage restraint is inevitable. But not big cuts.

4. Was the UK more severely hit by the global downturn, not just because of it's links to the sub-prime mortgage situation in the U.S., but because the wealth in UK society is less evenly distributed than e.g Germany or France, on a personal and business level?

Answer: Not especially. Moreover, USA, Germany & Japan have each suffered much bigger falls in output than the UK, and have larger proportions of unemployed. Comparisons of household incomes are very deceptive! A lot of UK wealth distribution is through health care and education provisions in excess of what is available in other countries. So that measures of average household cash incomes are usually wildly misleading.

Stephanie. I'm sure you must be familiar with the Public Accounts Committee website. This last decade there have been a huge number of projects allowed to run billions over budget. Often they have delivered nothing at all and where some delivery is made, often many years late, most of the key performance criteria are woefully undershot.

This runs into hundreds of billions of budget overspend delivering nothing or very little worth having and as such could have been cut with no significant consequences at all.

This total waste driven by incompetence across Whitehall implimenting misconceived dogma and hubris is the first thing we need to get rid of.

The second is the complex and costly administrative burden that this government insists that every small business complies with. I for one have decided that starting a modest biotech business to amuse me in my retirement just isn't worthwhile. I'll spend so long on the paperwork there won't be much time to get any inventions worked on. And I didn't retire to spend my time fulfilling this cabals value destroying bureaucracy.

APbbforum (#9) "..if you want a bigger state vote Labour, if you want a smaller one, vote Tory. Simple really."

Not that simple really.

If you look more closely (and ask why both Blair and Thatcher both have chapters in Irwin Stelzer 'The Neocon Reader'), New Labour (New Left member of the SI) is not the Labour Party, as it ditched Sidney Webb's Clause Four, which was central to the party. New Labour is, I suggest, operationally better seen as a Trotskyite party now, and that has morphed into the Neocons. New Labour, by its track record since 1997, is breaking up the national state. It just does so by filling it up with staff who can't/don't do their jobs effectively - e.g. see the local recruitment quotas by ethnicity which ignore mean group differences in ability. The Conservatives just want to cut it more openly. These are both anarchistic parties when judged in terms of outcomes (and the Liberal-Democrat libertarians are no different). These are all centrist parties, i.e. they all effectively do nothing to build the state as the state is deemed bad for the free-markets. Paradoxically, they legislate in order to minimize national state power. Hence the EU Lisbon Treaty and the Balkanization of the UK into Regional Development Agencies (each about 6 million in size, the size of a EU NUT), aided and abetted by massive low-skilled immigration and anti-nationalism via anti-'racism' etc. It's subtly done, but the consequences are all too clear.

This provides lots of docile, narcissistic (infantile/adolescent) consumers for bigger businesses (like supermarkets etc), which ever more displae smaller businesses, destroying smaller communities.

No 51 "Just invade the Cayman Islands..."

I presume that instead of sending armed troops to the Caymans (which we haven't any to spare after the commitments to Afghanistan), we will send then battalions, nay divisions, of pen-pushers from Whitehall and strangle the enemy to death with red-tape !! :-)

And if we force the Cayman Islanders to feed and pay for them, then we will also have solved part of the public spending cuts !! An elegant solution all round !!

Comment 58 : ishkandar

"*THIS* is where the true cost of such a blatant dictat lies, from this government of total IT-illiterates !! It's always easy to make pronouncements and dictats when there is total disregard for the consequences to the SMEs !!"

But governments aren't geared to deliberate in a way that is multi-consequential - you know that. The mainstream expectation is that governments should adopt the same process that the general public does, which is to firefight situations discretely, in the present, as and when they occur. The fact that a particular policy cures an immediate problem has become all that matters, and the idea that we can do better by tailoring policy to suit both the present and the future has been dismissed as academic frivolity.

But then, when authority has destroyed the trust in which it was held by debasing its communications with the public, who's going to allow it to deal with problems other than those that are immediately apparent?

No 46 "INFLATION - don't forget this time its different, all previous recessions have been against a background of 'stagflation'. "

The current situation had deferred or exported inflation. The inflation that should have hit many years ago was exported to the low cost countries in terms of cheap goods imported from them. Now that imports have slowed, the real effects of inflation are biting harder !!

Secondly, the real rate of inflation was omitted from the government stats because they deliberately left out house prices from their calculations. When that is included *AND* back calculated, we can see the real rate of Inflation !!

Since there is little or no money left for any pay rises and inflation is climbing, we have - ta, da - stagflation !!

No 45 "When there are no assets left to buy and 50% or more of our tax revenue goes to pay the interest of government bonds held by the Chinese"

Strange as it may seem, the Chinese are *NOT* terribly interested in buying or holding Gilts or UK government bonds !! When the interest is less than the devaluation of the currency, they give a negative ROI (Return On Investment) !! Never a good idea !! Rather like buying Zimbabwean government bonds !!

No 42 "has anyone worked out how to get tabulated data to show nicely ?"

A little tedious but tabs and white spaces work nicely !! Now, where's my nice, chunky VT100 dumb terminal ?? :-)

Comment 66 : leftilkely

Your answer to Q1 includes the claim that we were better prepared because we had a much lower national debt. Ought you not to clarify this and say that this relates to public sector debt alone? I think you will find that if you include nett private debt in the calculation that the UK was actually worse off than most other countries.

I know that the public debt argument is one of the Prime Minister's favourite fallback positions, but I think that either he's being misdirected by his advisers, or he's painting a false picture for party political purposes.

Moreover your answer to Q3 seems to be nothing more than a self-fulfilling prophecy. We don't need to cut spending because greater efficiency and profit on the resale of the banks will provide the funding. Why do you cling on to this symbol of an indestructable public sector? Why, if we are capable of greater efficiencies, shouldn't it be possible to provide the same value from the public sector at less cost? Isn't this the fallacy that the defenders of the status quo fall into? That to preserve the output of the public sector we have also to preserve the input. It's nonsense, isn't it, unless it can be shown to be the case that the public sector is already optimally efficient.

ishkandar (#73) "Now, where's my nice, chunky VT100 dumb terminal ?? :-)"

Ummmmmmmmm have you looked between ...... ;-0

#12 random thought:
"The only way you can cut the Government deficit without hitting demand is to raise taxes and cut subsidies for those who already have more money than they wish to spend (ie net savers). But I'd be very surprised if those are the ones who are targeted."

This is true, in the circumstances in which we now find ourselves. It also matters how governments raise taxes, because direct and indirect taxes have different impacts, and how governments spend.

Raising VAT, for example, would reduce demand more than would raising income tax on high earners. It would also, given the usual parameters, probably raise more revenue. What's more important - revenue now, or demand now? Reducing child benefit to households already in poverty would reduce demand more than would cutting expenditure on advertising; buying goods made abroad, such as expensive military kit or hospital equipment and infrastructure, does no good to the UK economy, whereas buying the same kit made at home has a direct domestic demand effect. Simply raising revenue and using the increase to pay off the debt would be deflationary.

What's the right mix? This is where the arguments should be. Perhaps we'll begin this debate eventually.

#65 superiorsnapshot

Visually tempting, but the growth from cc1940 onwards in the graph was down to military build up for WW2. Militarisation = GDP boost.

Some of the recent spike in 'world production' is just down to government stimulus and new money conflated into the figures.

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

No 32 "A massive privatisation of the huge shareholdings we own in RBS, Lloyds and Northern Rock is already being discussed by City bankers. Those holdings are already priced above what we paid for them, and bank share prices are very likely to go still higher. Whoever sells those shares, we all stand to gain enormously."

The market valuation has little or nothing to do with the real value of the banks. They can be driven much more by rumours and conjectures than by real valuations !! This is the crux of speculations !! These banks are not quite that profitable since they have not paid back their loans *NOR* have they taken back their "bad debts" which they have hived off to the government !! And it will be those bad and doubtful debts that will kill them when they are "privatised" !!

"None of those vast assets is shown in our national accounts: because nations don't publish balance sheets. But if they were, the huge debts you're referring to, would be already offset by bank assets, and by more than the cuts you're suggesting."

If, as you say, the banks' assets more than offset their debts, then the banks will *NOT* have had to go to beg for government loans !! Therefore "It does not compute, Captain !!" as a certain Mr. Spock is alleged to have said !! Their assets may offset some or all of their *current* debts but they do not offset those bad and doubtful debts they have hived off to the government !! There's still tons of CDOs and CDSs waiting to be unwound and those are the real killers !!

"Moreover, the margins our banks are making on the mortgage and commercial loans are at record highs. And as the economy recovers they'll be re-appraising their past write-downs to reflect that recovery in expectations of potential loan defaults."

It will take several Parliaments to get to that point, so don't hold your breath till then !! Meanwhile, the budget is going to down the pan and something has to be done *NOW* !! It might be helpful if ALL civil servants refuse to draw any pay until the banks have sorted out their problems but I seriously doubt that will come to pass !!

"Even the BoE is helping out! Merve the Swerve has bought more than £150 billion of government debt. Which means HM Treasury pays £5.4 billions in interest to our own wholly owned bank. Which is quite a profit on invented money, isn't it?"

Invented profit on invented money !! This will not impress the foreigners that have the real money and are looking to invest that somewhere !! Meanwhile the interests on the real debts keep piling up and someone has to pay for that with *REAL* money !! Somehow, I seriously doubt that people will be terribly happy to receive Monopoly money in their pay-packets this month !! Similarly, I doubt that foreign holders of British debt will be terribly impressed to receive Monopoly money in payment of their interests !!

"Selling those debts and bank shares onto the market may take more than one parliament. Meanwhile they'll be earning good returns for those held investments. What is also for sure, is that most of that cash will re-pay current debts without recourse to the sorts of cuts in investment you're discussing."

If those debts were even just paying their interest only, they wouldn't be labelled as "bad", they might be labelled as "doubtful" !! No interest = no income !! No income means no way to pay for anything without cuts in expenditure !! And the banks are still desperately trying to pay off their loans from the government because there is a clause in their loans that they *CANNOT* pay dividends before their government loans are paid off !! No dividends = no income !! See above for Catch-22 !!

Perhaps the greatest failure of government strategy is in not hiring Harry Potter !! I'm sure he can solve all their problems by waving his magic wand !! Failing which, I'm sure Hermione will do, and she's prettier, too !! :-)

THE STATUS QUO

FrankSz (#77) "Some of the recent spike in 'world production' is just down to government stimulus and new money conflated into the figures."

This is why, depressing and pedestrian as it may be, one has to look to physical measures of behaviour, not intensional content/rhetoric.

The problem is that most people reading (and writing) to these blogs do not understand what the term behaviour refers to, and even where they do, they appear to have been made to fear demography and genetics. Why? War, disease, immigration and policies driving differential fertility i.e. birth-rates can, and dramatically have, changed the collective behaviour of our populations. yet day after day we just see people posting material here which amounts to little more than petty quibbling over trivia, most of which references inscrutable variables.

Re #72 ishkandar wrote 'Strange as it may seem, the Chinese are *NOT* terribly interested in buying or holding Gilts or UK government bonds !! When the interest is less than the devaluation of the currency, they give a negative ROI (Return On Investment) !! '
Search on the internet for something like 'China Finance nuclear option' and you'll see that back in the Sunny days of 2007, China held over $1 trillion of US financial assets - of 40% of the Total US national debt at the time - and were threatening to sell them all and wreck America.
I don't have the very recent figures but seeing as the West still does Uni-trade with China I think it reasonable to suppose that the situation is worse now than it was then.
The Chinese are very conscious of the power this situation gives them. Is it a positive short term ROI that the Chinese are after ? or something more strategic ? - De-industrialisation and hence de-militarization of the West followed by financial ruin the moment they choose to pull the plug ?
We pay £X billion per year in our taxes to pay interest to the Chinese (plus dividends on the Western companies they have bought) and now they say we can't afford £Y for Trident. The £X and the £Y are of the same order. You can see this either as a loss of income - suffering low and negative ROI's - or the cheapest way to de-nuclear deterrent the UK - all for a few 'cheap' plastic toys, undies and assorted knick knacks most of which are now in land fill sites.

Stephanie said:
"It's not whether any more - it's what, and when."

No it's not - what and when is merely media frenzy to try and split the vote. Discussions about 'health will be spared' or 'defence will remain constant' is designed to give some people a voting option (i.e. I am fit and healthy so I'll vote for the party which is cutting the NHS spending)

The reality is cuts are cuts - and as all departments are intertwined you will find cutting one will still affect the other. i.e. cuts in defence spending means poorer equipment, more troop injuries and a bigger impact on the NHS.

What is crucial is how much is needed - because if you get that of any party now, you will realise in 3 months time how far short they will be as their over-optimistic projections fall way short of expectations.

I really don't think the politicans have an incling of how bad it's going to be, and clearly the media don't either or they wouldn't be wasting their time with talk of which curtains to hang in a house that's set for demolition...

79. ishkandar

Good response, thats someone's la-la-land well and truly shafted.

I stopped blogging as there were more rewarding things to do with my time, but its good to read sense amongst the nonsense. Keep up the good work!

GlenisDevereux (#81) "back in the Sunny days of 2007, China held over $1 trillion of US financial assets - of 40% of the Total US national debt at the time - and were threatening to sell them all and wreck America."

The USA government, like the British government, is internationalist, not protectionist. I suggest that as a socialist non racist state, the PRC would target the anarchists abusing the people of the USA, not the innocents themselves. The predatory lenders and others doing well via Financial Services have found a way to absolve themselves of risk and loss by burdening 'their own' people with the toxic assets via privatisation of profit and publicisation of risk. Ideologically the PRC/SCO will want to change the system, not hurt innocents. Those responsible for this mess can be seen to be blackmailing the PRC/SCO this way.

#72 ishkandar

I would add to your already strong argument that the reason many of the bank shares have risen are because of temporary factors.

The guaranteeing of banks 'bad assets' by the Government means that you have taken a balance sheet of liabilities and credits and simply removed all the liabilities. Don't you think this would have a dramatic affect on the ability of the bank to make profit (which is what the share price reflects)?

The Government is hiding half of it's liability, lets suppose we are able to offload the bank shares to the market over the next year - however the Government will be forced to take up those loans. Giving them back to the banks will crush the share price and holding on to them means the Government will have a long slow trickle of defaults coming out of the treasury for years to come.

All of this is assuming you can offload some half a billion shares into the market without depressing the price dramaticaly...

( 405 Million RBS + 116 Million Lloyds )


....and of course there needs to be the re-nationalisation of B&B and Northern Rock. B&B were running with 617 Milion shares when they closed and NR had 420 Million

Talk of a profit is a pipe dream for the financially incompetent. The Government are hoping that there are enough people fooled by this hope to alay the anger out there.

BTW - For all those who were lauding the profit made by Switzerland when selling the UBS stake back to the market a few weeks ago - consider this:

The whole thing is a card trick, if you remember at the beginning of this crisis UBS were the first bank to make heavy job cuts. The sign to the market was that UBS is leaner and meaner and therefore more investable - hence the rise in the share price.

Those unemployed people (some 12% of their 76,000 workforce) are now being supported by the state with unemployment benefit (or they have taken a job that means someone else will be unemployed)

Where Switzerland have been clever is that most of the jobs lost have been abroad and not in Switzerland - so the unemployment is now someone else's problem.

Therefore the Swiss Governments profit is at a cost to any country who has a UBS bank within it (and a social security system) - the biggest loosers were the UK and US.

I'm sorry to bring this up but once again the taxpayer is footing the bill - at least this time it's another Government and not a silly banker.

84. At 2:11pm on 15 Sep 2009, JadedJean wrote:

"The USA government, like the British government, is internationalist, not protectionist."

Sorry Jean - this is incorrect.

The UK and US are only internationalist "when it suits them" - because (as you're about to find out) the US in particular has the greatest number of complaints with the WTO for unfair trading practice for good reason.

At times like these the US and UK will be putting up their barriers faster than any other country - even if it's more subtle than others - mainly because they've praticed it more.

You see the good old US and UK preach anti-protectionist spiel at times like this in order to get a march on their trading partners. Protectionism under UK and US law is 'protection from unfair foreign tariffs' - not 'protecting foreigners from our unfair tariffs'.

...a bit like the US Governments desire to 'control the proliferation of weapons of mass destruction' - which of course doesn't include the proliferation of US weapons of mass destruction.

#64 ExcellenceFirst

I agree with what you have said. My 'pot' and 'kettle' refers to the vitriol that has been poured upon Brown and Darling on both this and peston's blog by those who claim to be Tory supporters/sympathisers.

However, you are right when you say that I do hold a different view from that presented by the spokesman for the Tory Economic Recovery Committee who appear to be looking backwards to 1979 rather than forward to 2010 and beyond.

#81 GlenisDevereux - The Chinese understand something that most western citizens do not, namely; that western governments have been captured by financial oligarchs.

This explains why they have recently made utterences that Chinese companies have the right to renage on derivatives contracts. (i.e. they understand that JP Morgan has some $87 trillion of derivatives on its balance sheet and they understand that this is in excess of stated GDP of the US - about $15 trillion)

They have also advised their citizens to buy gold and silver because they understand that COMEX is rigged by a small clique of oligarchs. They rig this market by short selling gold that they do not have in order to suppress the price. How many people in China need to buy gold in order to create a catastrophe for the oligarchy.

The Chinese understand that the US decision to ban imports of Chinese tires was driven by pressure from the UAW. 2 days later the Chinese ban the import of US auto parts - i.e. they target directly the interests of the UAW.

I would be very surprised if the Chinese lose much sleep over the UK "independent nuclear deterrent" 12 US carrier battlegroups don´t seem to bother them too much.

#82 writingsonthe wall. Why do you care whether someone is trying to split to vote? Whoever wins the policies will be the same - a massive assault on the poor.

"All over, people changing votes,
along with their overcoats,
and if Adolf Hitler flew in today,
they´d send a limousine anyway"

Joe Strummer.

It was understood nearly 30 years ago, surely the actual experiences of the last 30 years can leave no doubts.

No 75 "Ummmmmmmmm have you looked between ...... "

Yes I did, as a matter of fact, and it's awfully DAARRKK in there but No, my VT100 is not there !! Any other suggestions ??

No 81 "I don't have the very recent figures but seeing as the West still does Uni-trade with China I think it reasonable to suppose that the situation is worse now than it was then."

Latest figures available on the BBC website stated that the Chinese current hold about $700 billion, down from the height of $1 trillion !! They are still doing business, though !!

"You can see this either as a loss of income - suffering low and negative ROI's - or the cheapest way to de-nuclear deterrent the UK"

I doubt that the major nuclear powers are too terribly worried about Britain's nuclear deterrent !! I doubt even France is terribly impressed !! After all, pulling the plug on Britain's oil and gas supply and/or stopping the electricity generation will do more harm than simply bombing the place AND the country can be reused afterwards !! A nuclear battlefield needs rather a long time for it to be reusable !! I believe it's called "the Clean Option" !! I believe neutron bombs were first touted for this but was found to be still too "dirty" !!

"all for a few 'cheap' plastic toys, undies and assorted knick knacks most of which are now in land fill sites"

And not forgetting cheap PC and Macs, IPhones and other mobile phones, MP3 players, TVs, fridges, washing machines, microwave ovens, etc. They're all destined for the land fill sites eventually. For now, the land fill sites are full of discarded British-made products !!

No 83 ThorntonHeathen - I try !! I try !! But many tell me I'm too trying !! :-)

No 85 Well, P T Barnum was known to have said - There's a sucker born every minute !! Perhaps there's still hope !! :-)

writingsonthewall (#85) "The Government is hiding half of it's liability, lets suppose we are able to offload the bank shares to the market over the next year - however the Government will be forced to take up those loans."

In the anarchistic liberal-democracies, 'government', by design, is minimal in practice, so should really be read as 'the means of endebting the larger, weaker part of the population for the benefit of the economic elite'. Substitute 'public debt' for 'Government' and what you say comes closer to exposing the scam that's being foisted upon the naive and ever more cognitively-challenged public. The libertarians play on the ambiguity of this, making out that the state is the enemy, but this is only so for them where the state is truly regulative of their behaviour. This is why they try to make out that there are no innate cogntve or racial differences. They arehoping the masses won't see the scam. In the liberal-democracies, 'government' legislates for the freedom of the elite to make money out of an ever growing, uncritical, less cognitively able, consumer base. Hence mass immigration and the humanistic 'topping' of the intelligentsia via mass higher (female) education (delayed reproduction, i.e high differential fertility).

Comment 88 : foredeckdave

"However, you are right when you say that I do hold a different view from that presented by the spokesman for the Tory Economic Recovery Committee who appear to be looking backwards to 1979 rather than forward to 2010 and beyond"

What do you mean by this? The last time the Conservatives had to rescue the country after a period of Labour economic nonsense was in 1979. Is it completely beyond the bounds of possibility that some of the measures that have to be taken now will bear great similarity to the measures that had to be taken then?

Or do you feel that 1980s Conservatism was totally unnecessary, and that a re-election of the Callaghan government in 1979 would have seen the economy recover in a very similar way to what actually happened? Just as there are some people who seem to think that today's Labour Party is capable of taking the action that is needed to right matters now. After all they have seen (or perhaps chosen not to see) over the last 12 years they still believe that Labour ideology is consistent with the maintenance of a robust economy.

By all means have reservations about some of the things the Tories may believe necessary, but surely, surely, you can't seriously believe that more of this Labour Party is a viable alternative?

Response to Comment 66: ExcellenceFirst

You’re correct that I did not include commercial sector debt. That’s because it is less relevant, and because the UK’s combined debts are still lower than, say, Germany or the USA. What does matter is that the cost of financing government debts is projected to rise to c 3.6% of GDP by 2012. That’s a lot less than the 5.2% peak in 1997-98. We weren’t in a dire straight then and we’re not nowadays either.

There’s no need to cut public sector investment drastically because the current deficit is caused by short-term declines in (mostly) bank profits. Moreover, the current deficit helps offset the destruction of demand caused by excessive savings. Those tax declines are the consequence of the special banking arrangements that mean that banks can “write-off” potential bad debts they haven’t actually incurred yet. That’s so that their balance sheets are cautiously drawn-up. But it also has the great benefit of postponing their Corporation Tax liabilities! As demand in the the UK economy recovers, those projected “write-offs” will be written back and those postponed taxes will be paid. But if the government deficit is cut before the economy fully recovers, the write-offs won’t recover and Corporation Taxes will remain low and unemployment will further depress demand.

I appreciate that it’s counter-intuitive to offset a recession with deficit spending by government, but it is the quickest way to get back to the virtue I suspect you seek: a balanced budget.

#96 ExcellenceFirst

That the seeds of the present disaster were sown in 1979 is indisputable. That Thatcherite free market economics not only fed the greedy, it destroyed what was left of any concept of society. That the Conservative governments post 1979 presided over the fastest rise in the imbalance between rich and poor is a proven fact. That the privitiastion of British utilities has been an unmitigated disaster is proven. That British manufacturing was officially laid to rest in 1980 is clear.

If only a part of the above is re-visited by any Conservative administration after the election then it is a price to high to pay!

If it is of any interest, I don't believe that ANY of our political parties have the a coherent economic policy or the courage to put one into effect.

SATANISM

ExcellenceFirst (#96) "After all they have seen (or perhaps chosen not to see) over the last 12 years they still believe that Labour ideology is consistent with the maintenance of a robust economy."

Serious question. What have you seen over the past 12 years which bears any resemblance to what Michael Young drafted here?

In fact, could anyone imagine it here without us being invaded by liberating/regime changing forces from the land of the free (Big Satan) searching for WMDs etc ? ;-)

#97 leftilkley. If you beleive any of what you have written then you are in for a big shock.

Since the days of Thatcher the UK economy has been underpinned by a combination of North Sea Oil and Gas and "financial services"

The North Sea is in irreversible decline and the UK has switched from being a net exporter to net importer.

The financial services model appears terminally broken. JP Morgan has a derivatives portfolio of $87 trillion and RBS has a balance sheet about equal to the GDP of the UK. How do you know that the losses suffered by the banking sector are short term losses?

One way of making some form of informed judgement would be to examine the component pieces that comprise the balance sheets of these behemoths. But no-one can do that because they are protected from scrutiny by regulation and law. If the position was as you claim it to be then revealing the balance sheets so as to prove that "all is in order" would likely engender international confidence and make UK gilts and US treasuries marketable and hence obviate the need for QE.

Why do you think that route is not being followed?