Two countries, divided by a deficit

Not merely the contrast between two policies but two cultures.In the thirties FDRs "Can do" attitude was behind the New Deal,in Britain the fiscal retrenchment was severe, but its impact on consumers and businesses was reduced by favourable terms of trade.

Today the contrast is starker,Britain again aligns itself with fiscal conservatives in the USA,while Mr.Obama pursues an expansionist policty based on Keynesian deficit financing.Who`s right? It`s too early to say as Mao famously said of the French Revolution, while Mr.Cable calls the present government`s economic policy Maoist.

The USA is growing,0.8% in three months while British GDP fell by 0.5%.Round one to Keynes. Both have huge deficits,it`s just the USA deficit is more bankable than ours.

Mr.Soros has issued a warning on the speed of UK deficit reduction. There is a herd mentality across Europe, led by the Germans, which insist that cutting is the way out of crisis.Time will tell."The Economist" is advising sovereign default since it is unlikely the debtor economies on the EU fringe will ever repay their borrowing.

The outcome for the British economy will mainly be decided in Europe.If the German engine gives traction to the others, Britain may prosper despite mistakes in economic policy.If it does not, which is likely,then an output plateau under the GDP when we entered the recession is the best we can hope for.

"The comparison between the two countries isn't very fair. As long as the dollar is the world's main reserve currency, everyone agrees that America can get away with a lot more borrowing than anyone else. "

Quite.

"But there were have been some prominent voices here voicing alarm about the UK."

Shoot your proof reader.

Also, let's not take advice from a country that's a special case due to it's reserve currency, yet has it's largest state issuing IOUs.

In his April 1991 working paper number 51 (Financial Crises: Systemic or Idiosyncratic) the economist Hyman Minsky wrote:

“As we try to fix the financial system three questions
should be asked of the pushers of a policy proposal:
1. "What is it that is taken to be broke?",
2. "What theory about how our economy works underlies the
proposal?
3. What are the dire consequences of not fixing that which
you assert is broke?”

Those in Davos, commentators included, need to carefully consider these questions and the answers.

In my view we are yet to answer any of them with any certainty or agreement. The economic theories currently employed are bankrupt and inappropriate to modern financial systems. So nothing is going to be fixed yet. Another wasted opportunity.

Reading and understanding some economic papers of the past can be illuminating, but in a rather sickening way. It demonstrates that nothing has been learnt.

2. At 9:21pm on 28 Jan 2011, Ben wrote:
"The comparison between the two countries isn't very fair. As long as the dollar is the world's main reserve currency, everyone agrees that America can get away with a lot more borrowing than anyone else. "

We are not concerned with fair but effective.The US is borrowing to grow,the idea is that State spending fuels effective demand because the initial outlay is multiplied through the economy.Cuts and tax rises have the reverse effect.

The British stimulus 2008-09 has now worked its way through the economy,output rose and revenues increased.Growth fell in the third quarter and is now negative, which you would expect with a small fall in government spending and declining consumed expectations into 2011.

Behaviour is the priority,attitudes follow.

Sleepy Dormouse 3

"In my view we are yet to answer any of them with any certainty or agreement. The economic theories currently employed are bankrupt and inappropriate to modern financial systems. So nothing is going to be fixed yet. Another wasted opportunity"

What theories do you have in mind and why are they broke?No more than four paragraphs of average length please.

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Let's be clear about the origins of what is now called the 'Global Financial Crisis'. It was reckless lending by Wall Street bankers flush with Asian savings that pushed down interest rates to less than sensible rates six and seven years ago. Big loans to US families with insecure incomes were bound to fail - and many of them did. Those bad debts had a knock-on effect on Banks all across Europe and North America.
Now the dichotomy in policy approaches: the current US Government wants to restore its tax revenues to generate the money needed to pay down its debts. The George Bush Party is indignant and wants huge and indiscriminate cuts just like Cameron is advocating. Not really to cut the deficit, but to reduce the Federal Government and its redistributive policies of spending on a Federal funded health care and improved education. In the USA, the Democrat Party is advocating the 'growth' approach which is working and the Republicans - who'd like to adopt the Cameron approach but can't - want to force Obama onto a 'big cuts' agenda.
So far, the Democrat/Obama approach is working well and the Cameron one is sailing into a disaster of stagnation and declining tax revenues with spiralling unemployment costs. But Cameron hopes that will change during this year or next.
We live in interesting times! Maybe the US Feds will get it right. Or maybe Cameron's deep cuts approach will eventually work out. Isn't it interesting to live deep in rival economics experiments?

5. At 9:41pm on 28 Jan 2011, bryhers wrote:
===============================
As a regular here, I am sure you know my views are based around the ideas within MMT. I find the idea of a job guarantee scheme difficult to accept, but apart from that MMTs description of the way modern economies with a fiat currency actual work seem a lot more plausible than those peddled by all the mainstream economists.

The USA is global capitalism`s engine room and empire builder...it can borrow and behave as it wishes because it`s too big/crucial to fail.

The question is can another nation behave like that or do different criteria apply to nations like Japan and Germany and the UK?

What we now have is a world in which the concept of the nation state is less relevant as the real economic power is in Wall Street and the global markets ...which sit above the world like gods on Mount Olympus.

Who does David Cameron represent in reality? When he talks of the national interest I am reminded of Blair scuttling round Europe quietly turning it into one vast political and economic zone ..and for whose benefit?For yours Stephanie? Well perhaps...because you are part of a new global middle class with transferable skills and the education and contacts to move abroad.

But when did any politician (other than Enoch Powell) care about the horrid indigenous British underclass?

We are run by a global neoliberal aristocracy that is increasingly contemptuous of nations and our so called "narrow national interests"...and (sadly) they have such a grip on the political and media classes ordinary British voters are virtually disenfranchised and increasingly treated like Mrs Duffy by the Gordon Brown`s of this world.

Did anyone notice how no one in the serious media dared analyse whether Mrs Duffy had a point? No...the attention was drawn to it being a gaff.

General Motors is still going Stephanie...but what happened to Rover and its workers and the pension fund? There`s you answer to why the USA can grow while we have the baillifs in!Somehow I don`t think you will be putting this to NN`s oracle ...Irwin Stirzer!

"You will be surprised to hear that the Chancellor didn't choose to share any back-up strategy with me when we spoke Friday afternoon. Let alone a Plan B."

I posted the following on the 'Google at Davros' blog, but it's worth repeating here since you brought up the subject of plans.

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

Did anyone see Will Self on Question Time last night? A question regarding the latest GDP figures asked if it was OK to use bad weather as an excuse. This was his answer...

"I think it's a bit lame really of the Chancellor to appeal to bad weather to dig him out of this one. It's a bit lame of all of us to appeal to bad weather to dig us out of this one. The systemic problems with our economy remain what they have been since 2008.

We have a quasi-nationalised banking system, that won't admit that it's quasi-nationalised. We have legislators that remain, on the whole, poodles of bankers and are unable to get their act together to think about how to systemically deal with it. And we have a political class in general...who can't get it together to think what we do next.

We've had the 'there is no more cycle of boom of bust' and then we've had a big bust...the kind of problems that we faced with this system have not really been fundamentally addressed. And so we're going to have this fetishisation of % points, have we got growth etc.

What are we waiting to get going again? Are we waiting for a property asset bubble to get going so we can all max out on our credit cards? Are we waiting for the bankers to make loads more money with their fancy, weird borrowing from each other and making money on it? Are we waiting for that so we can get tax receipts up so we can spend them on our beloved public services that don't seem to have been running very well anyway because the schools are beginning to fall down?

What's the plan guys, what's the plan?"

The truth is that they don't have a plan because as Will Self said, they are poodles of the bankers. The bankers have a plan, but it's not to help the average man on the street, it's to continue making massive bonuses and stick two fingers up to the rest of us.

1. At 9:04pm on 28 Jan 2011, bryhers wrote:

It`s too early to say as Mao famously said of the French Revolution

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

It was Zhou Enlai in fact, but then he was a lot shrewder than Mao. It's a common misquote though and your point is still valid.

Superficially the latest economic outlook for the US appears to be better than that for the UK as Stephanie’s article implies, but in reality the difference may be largely illusory. The latest Congressional Budget Office’s (CBO) Budget Report gives a bullish view of the US economy, but this view is likely to be overoptimistic given its core assumptions regarding future unemployment levels, tax revenue and government expenditure. The latest article entitled “The CBO Smokes Crack” posted on the Automatic Earth website provides a useful reality when judging the value of the CBO Budget Report and thus a more sobering analysis for the US economic outlook.

https://theautomaticearth.blogspot.com/

Arguments over whether or not Keynesian deficit financing by increasing national debt (US approach) are preferable to Monetarist austerity by reducing debt (Europe & UK approach) miss a key factor that is slowly developing within the global economy. As the global economy transitions from the use of cheap high net energy fossil fuel to expensive low net energy fossil fuel plus renewables, future economic growth will at best be anaemic and at worst non-existent. This transition cannot be prevented, since it arises from geophysical limits not politics or economics that uses tomorrow’s growth as collateral for today’s debt. On this basis reducing debt is preferable to increasing it provided it’s done fairly, and that’s a debate worth having.

In mid April we will get the GDP growth figures that will confirm or contradict the growth claims of the coalition. I know where I will put my money as an observer of the Ireland experiment. In the meantime we will get the monthly unemployment and inflation figures with the latter in RPI form closing on 6%. If the economy leaps into life then we will have to construct new economic theories and re-invent mathematics!

8. At 10:01pm on 28 Jan 2011, SleepyDormouse wrote:
5. At 9:41pm on 28 Jan 2011, bryhers wrote:
===============================
"As a regular here, I am sure you know my views are based around the ideas within MMT. I find the idea of a job guarantee scheme difficult to accept, but apart from that MMTs description of the way modern economies with a fiat currency actual work seem a lot more plausible than those peddled by all the mainstream economists."

Who is MMT? Hope he`s not one of those back to the future pundits who favour the return of the Gold Standar?

So good to get some thoughtful comment from Davos on the cataclysm that is Coalition Economic Policy.

In 60 years' time historians will look back at what Cameron, Clegg and Osbourne are doing to our country in the same way we now look at Stalin's economic policy, but by then we will have slipped from being a second rate country to the lower levels of the "also ran" division. I have been a Liberal, then "LibDem" activist, since I was first able to vote in 1979 but I will never again support a group of individuals so willing to betray principles for power.

And how did the future of the next generation feature in the conference at Davos?
Was it considered?
Even mentioned?

" Arguments over whether or not Keynesian deficit financing by increasing national debt (US approach) are preferable to Monetarist austerity by reducing debt (Europe & UK approach) miss a key factor that is slowly developing within the global economy. As the global economy transitions from the use of cheap high net energy fossil fuel to expensive low net energy fossil fuel plus renewables, future economic growth will at best be anaemic and at worst non-existent. This transition cannot be prevented, since it arises from geophysical limits not politics or economics that uses tomorrow’s growth as collateral for today’s debt. On this basis reducing debt is preferable to increasing it provided it’s done fairly, and that’s a debate worth having."

Resource limits may inhibit the capacity of economies to grow through natural exhaustion and increasing cost.However the managament of the economy still devolves on which strategy is likely to deliver optimum results, whether this is to a static,declining or growing economy.

If your approach reduces revenues faster than debt, then your debt will grow.This is the case with Greece and Ireland who fit your criteria of a declining economy,even if the cause of their decline was not raw material shortage.

George likes to tell us how his deficit plan saved UK in the eyes of the world.

Gilt yields compared to a year or so ago - around 0.2% lower at 15 years, around 0.3% lower at 10 years.

So this UK saving approach saves us around £200-300m interest on £100bn of borrowing. Given the difference in Tory/Labour spending plans up to 2015 amounts to around £60bn, George appears to be widdling in the wind.

His latest wheeze - blame the unions - for what!?!

UK growth halted, UK confidence plummeting, Clegg trying desperately to see the cuts are nothing, while Cam and Os tell us its saving the economy from ruin.

Pure politics and precious little economic going on.

Printing of the dollar is working out great. Tunisia, Sudan, Egypt. Ask them what they think, the cost of Bernanke's inflationary policies are spreading, how long before they reach Europe eh?

Just look at the price of food commodities in the past 6 months Stephanie. Wake up and realise that the US has only grown in GDP because they are fudging their inflation numbers. They say they see no inflation? What a complete lie, unless you leave all food items in there. But of course who needs food?! Inflation is all about iPads right?

The cost of basic living in the USA has soared. Luckily in the USA repossessions take years and you can live without paying your mortgage for about 2 years. Then a bit of banker accounting fixes the fact that billions in mortgage interest is not being repaid, plus a quick call to uncle Ben.

Considering Bernanke is flooding the markets with about $7 billion per day at the moment , and around $1.5 trillion per year since March 2009, don't you think the US economy should grow?

If you print ~10% of GDP, you'd expect some growth in the short term. Unfortunately the negative side effects do not always show their face from the start. Let's see what the picture looks like in 2 years time.

MMT = Modern Monetary Theory, i.e. the way the monetary system actually works.

For excellent coverage of the deficit/spending debate on both sides of the atlantic, I recommend this article (and everything else on the associated blog): https://bilbo.economicoutlook.net/blog/?p=13266

My view is that the UK's spending cuts will hurt the poor while increasing the value of the Pound - in favour of the rich, big business and the government puppets.

bryhers -chapeau bas. And just to be sure. Would you agree that money is a natural phenomenon (as humans are a natural phenomenon too) and, as such, will always tend to escape strict control? This does not preclude any urge to control flows and stocks, just sets a threshold of knowledge and skill.

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#18, The GingerF,

"Pure politics and precious little economic going on."

We can agree on that point.

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One lesson of Japan, from its bubble then burst then stagnation decades, is that greater equality broght about greater growth.

Instead of the rich spending on foreign produced luxuries, the poor spend it on mass produced goods, produced by industries nurtured by a hands on government.

Redistribution here would certainly promote growth and preserve the living standards of the poor here.

Merve says his bank 'can't' protect the poor.

But he and his bank can, even under the cockomaney brief he holds. For growth from redistribution would be less inflationary than the usual bank sector led asset inflation driven growth of the Thatcher and Blair years.

We need to challenge those that bang on about "deficit denial".

What about "Asset Denial" ?

A large part of the deficit last year was money borrowed to recapitalise the banks - and the shares are held by UK Financial Investments - value now approaching £75 Bn.

HMG now owes £110 Bn.

This level of borrowing is NOT the normal cyclical surplus/deficit that Government runs over the economic cycle - YOU CANNOT SEE THE BANK BAIL OUT AS "BUSINESS AS USUAL" - it clearly isn't.

Would you assess the financial health of a person, a community or a company by only looking at their liabilities and completely ignoring their assets? No you wouldn't.

UKFI is an asset - and we can sell its bank holdings and use the money to repay the borrowing - and no doubt HMG will when the time is right.

Therefore our "normal" borrowing less this asset is actually 5% of GDP - no cause of any alaram and certainly not a reason to run a huge risk of driving the economy back into recession.

So Stephanie PLEASE CAN WE START ASKING WHY THE COALITION IS IN ASSET DENIAL?

Yes, Britain *is* likely to enter an 'depression'. What is unfortunate is that the measurement of whether we are in a depression is based on such a strange quantity - GDP. All sorts of relatively unproductive effort is measured along with productive stuff like manufacturing, exploration, scientific research etc. - strangest of all is included consumer debt incurred to spend on foreign holidays (for example). I am sure that everyone would agree that if people stopped taking expensive foreign holidays and spent just half that amount on domestic leisure market we would all be better off. But that would mean negative growth.

So negative growth (especially now that oil production has peaked) is not all that bad.

#26. richard bunning wrote:

"YOU CANNOT SEE THE BANK BAIL OUT AS "BUSINESS AS USUAL" - it clearly isn't."

Yet, despite the obvious contradiction that is the whole basis of the (stupid) policies of the Government and the autonomous puppet the Bank of England.

Absolutely nothing has been done or is intended to be done about fixing the problems inher4ent in the un-repayable over borrowed private sector. All the 'rules' and 'reasons' behind the management of monetary policy worked out over the past millennium have been deliberately forgotten - this cannot end happily for the overly indebted borrowers in particular. (That is almost everyone who has an outstanding mortgage taken out in the last ten or more years)! The reason for this is their inevitable plunge into negative-equity (Liabilities exceeding the assets.)

Who do I blame - the regulators. Who will get us out of this crisis - new regulators. First, we must fire the current regualtors who got us into this position.

On the subject of bank assets and liabilities: It is important to understand the leverage consequences of a small slip into negative equity by borrowers. It good times when there is very little negative equity the balance sheets of banks look strong, but even a small slip into negative equity by borrowers, because of the same multiplier effect, destroys the balance sheets of banks when marked-to-market (Basel 2). The 'Fools' actually know this, but have no solution - they are staring at the oncoming express train and seeing it as a light at the end of the tunnel - they are wrong and so incompetent it beggars belief that they are still in post! To deny the arithmetical reality creates only an illusion of recovery. We need real recovery. We have a right to expect real recovery. It the simple minded dolts running the country (of all parties) don't recognise this they may well find themselves swept away by the avalanche as in Ireland, Tunisia and today in Egypt. This method of change is profoundly to be avoided almost at all costs - but the politicians must change and first admit there is a problem and get rid of the current regulators and the system of regulation and replace it with one that understands the depth of the pit in which our monetary system sits.

Hence my call for a National Government.

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bryhers - another way to perceive the increase then decrease would be to say yes it was down to government stimulus. It was down to it entirely as the private economy was hollowed out and replaced by the dead hand of state spending, which cannot go on forever.

I agree with worcesterjim in that we are not comparable to the USA when it comes to almost unlimited borrowing. We are closer to Ireland or Greece.

Finally - clearly we have had 15 years of borrowing, that looked like an asset boom. At the end of it we have nothing to show for it. Unless the government is investing in infrastructure like motorways or industrial parks, ie stuff private industry can leverage, I would rather have a fall in living standards to get back to reality. Rather than borrowing to pay for more people to do pointless desk jobs so they will vote Labour that will leave nothing tangible once they all get the boot and we get the bill.

John_from_hendon. Spot on regulation was dire. Brown was possibly the stupidest man ever. Light touch - no more boom and bust. He has to be the worst Chancellor ever.

Surely he wasn't so stupid as to think this was sustainable. Teachers in houses approaching £0.5 million in the South East. How would the next teachers buy? Higher multiples! Loans from parents! Longer mortgages! 105%! Nobody could ever think this was in any way ok.

New Labour treated people like something you find on the bottom of your shoe. With utter contempt. What was he saying after his "no more boom and bust" speeches if we'd had a microphone on him?

Him and Blair have a legacy that outlives their time in office. My toddler will be paying off this debt. Many sons lost in foreign wars. Bet Blair's got a nice hotel room in Davos.

Richard @ 26

I agree it seems strange that the public stake in the banks is ignored, but is it not just a one-off that will reduce the borrowing requirement in the year or years it is realised? £75bn will be very helpful but once its gone ots gone, or have I missed something?

JfH @ 28 - the deficit reduction plans for Tories and Labour over 5 years are not so different in any case so you could argue we almost have your national govt by default! I reckon if you project Labours half the deficit plans against the OBR projections of Torylition plans then there would be £60bn difference over 5 years. Again shines a light on Tory scaremongering (but also Labour too). Where your plan would make a difference is to get the best economists in place to make sure we get the growth policy right.

This is the difference between having a political and central banking culture in the UK focused on the myths of 1976, and one in the US aware of the realities of 1937 (and Japan 1997). The reason I say UK myths of 1976 IMF crisis are these: here are the GDP figures for 1972-81 in the UK:
1972 = 3.0%
1973 = 5.9%
1974 = -1.5%
1975 = -1.9%
1976 = 2.0%
1977 = 2.8%
1978 = 3.4%
1979 = 3.0%
1980 = -2.9%
1981 = -1.0%
Here is Paul Krugman blog, Invisible Cavalry To The Rescue! "I’ve written a lot about the invisible bond vigilantes who have terrorized policy makers, even though there’s no actual evidence for their existence. But after Ben Bernanke’s speech this morning, it seems to be that I should also start writing about the invisible cavalry, which is always about to come to our rescue, but somehow never arrives. Bernanke more or less admitted that the economic situation has developed not necessarily to America’s advantage, nothing like the growth he was predicting six months ago. But he argued that 2011 will be better, because … well, it was hard to see exactly why. He offered no major drivers of growth, just a general argument that businesses will invest more despite huge excess capacity, and consumers spend more despite still-huge debts and home prices that are likely to resume their decline."
Meanwhile, our Thatcherite government flails around trying to understand what the demand side is, and if one exists.

" Finally - clearly we have had 15 years of borrowing, that looked like an asset boom. At the end of it we have nothing to show for it. Unless the government is investing in infrastructure like motorways or industrial parks, ie stuff private industry can leverage, I would rather have a fall in living standards to get back to reality. Rather than borrowing to pay for more people to do pointless desk jobs so they will vote Labour that will leave nothing tangible once they all get the boot and we get the bill."

This really is a partisan rant so let`s start with some evidence :On the eve of the recession the deficit was 3.6& of GDP.This was the same as the one inherited from the previous administration,the debt lower.(Source IFS 2008).

The rocketing debt and deficit,shared with Europe,the USA and Japan,was a result of the collapse of private capital,not the dead hand of the state squeezing private business.

Was the pre-crisis public expenditure wasted? It went to pay for underfunded public services to bring them up to European levels.Hospital waiting lists fell as did mortality from cancer and heart disease.You may not feel this spending was worthwhile,this is a matter of political priority where we will have to disagree.Was their waste and inefficiency in the catch-up.Almost certainly,they were people in a hurry and mistakes were made, although productivity in service industries is hard to measure when you are combing quantity and quality.

Why this matters is there is an alternative view on the causes and consequences of the economic crisis.Accurate diagnosis leads to adequate remedies.

21. At 11:47pm on 28 Jan 2011, Suav wrote:
"bryhers -chapeau bas. And just to be sure. Would you agree that money is a natural phenomenon (as humans are a natural phenomenon too) and, as such, will always tend to escape strict control? This does not preclude any urge to control flows and stocks, just sets a threshold of knowledge and skill."

Natural in the sense of man made surely.Coin is fairly recent preceded by barter.Cowie shells or equivalent were used until quite recently in remote parts.Not sure what you mean by money escaping strict control? Conjures up all kinds of cartoon images so I had better stop.

I am adopting a cnvention of not attaching names to bloggers I quote partially.It is up to them to claim owbership of their comments if they wish.

Ben @ 31

Its that type of short-sighted view of the issues that will cause us to do it all over again.

The regulatory system was removed of any teeth by Thatcher and Reagan in the 1980s. The Latin America crisis in the 80s lead to the comedy of Basel I bank regulation (Peston programme showed the absurdity of the capital requirement system put in place by central bankers). Throughout the 90s bankers first worked out how to avoid holding capital and then developed horrendously complex product to help fuel an unsustainable credit boom. Brown's failure was to not convince others of need for new Global regulation (see his Harvard lecture of 1998).

Be clear however that regulators and bankers must shoulder the bulk of the blame and absolutely must show they have learned the lessons for us to move forward and avoid another 2008 crash.

"This really is a partisan rant so let`s start with some evidence :On the eve of the recession the deficit was 3.6& of GDP.This was the same as the one inherited from the previous administration,the debt lower."

Yes but much of the tax receipts garnered during this period were from an unsustainable boom in finance, capital gains (housing) and purchase of consumer goods paid for by ever increasing private debt, happily fed by unregulated banking and irresponsible borrowers.

https://www.telegraph.co.uk/finance/economics/2814527/Record-numbers-face-debt-meltdown.html

I'd argue that what was handed over was a system maxed out, public and private. And just in case we sort that out we have a future of PFI contracts too.

To look at a snapshot in time is not always instructive. Like seeing a still picture of a car about to head off a cliff. We need the momentum also to give a diagnosis. Ponzi schemes are fine until they are not.

GingerF - I agree regulation is the key. It may have been enacted before Brown and yes it's important to get the root cause. However the economy went completely out of control under his nose when it was completely obvious and it was under his power to do something about it. Instead Brown and Balls thought it was all fine. I find this incredible. All the while touting "light touch" and "no more boom and bust" when in fact as you say the former leads inexorably to the latter.

Two countries divided ...... etc. etc.

They are selling us forever this "cousin relationship" at every conceavable moment. Is this really good for our health? The term incest comes to mind. Coseing up to a cousin when very young and immature is perhaps part of growing up, but there it should end. More challengeing relationships await us. Are we so weak that we prefer to dodge those?
Our cousin has lived above his means for quite while, he has even taken money from the poorest Chinese to dream his foolish dreams.

David Cameron, it seems to me, has taken the right approach, the one of lots of cold showers to toughen us up to get fitter and cope with the future and those healthier relationships.

Ben - Major, Clarke, Brown, Balls, Blair, Hague, Duncan-Smith, Howard, Cameron, Osborne, the US, the Germans, the French, everyone except a few people without power (economists who had the gumption to put head above the parapet while we all enjoyed the boom) thought that everything was fine before it wasnt.

Cany you imagine the howls from the market, bankers, political opposition if Labour had went for some kind of unilateral regulation. I'm not saying that excuses Brown from political responsibility to a certain degree, but it pails into insignificance when compared to the total failure of regulation across the globe and the greed and arrogance of the market.

The question really is. Whose side you are on, the wealthy or the less well off? Or to put it another way, the creditors or the debtors?

David Cameron may say that we are all in this together, but the truth is that getting growth up and unemployment down is much more important to the less well off. Especially to those who have lost, or fear they might be about to lose, their jobs and to the mullions of young people who have never had a job and have zero expectation of getting one in the near future.

As a representatives of the wealthy, the UK coalition are naturally primarily concerned to have expenditure cuts and wage freezes so that the BoE does not have to print so much money, which dilutes the value of that owned by the wealthy. No one can explain how this approach can generate growth and jobs. On the contrary it is likely to trigger a vicious downward spiral, and may already have done so.

Obama on the other hand seems to have genuine concern for the poor and unemployed. So his policy is to give growth and job creation priority, even at the expense of causing inflation combined with low interest rates, which is making it difficult for the wealthy to preserve their riches. He probably considers that inflation is the "price worth paying" since it is paid mainly by the haves, rather than unemployment which is a price paid mainly by the have nots.

The shoe is pinching. Maybe the millions, who seem to vote on the basis of who looks prettier on TV, will take the trouble to try to understand the choices they have at the next general election. Just as those, who went through similar experiences in the 1930s, did when they voted for real socialism in 1945.

A contraction in the UK economy....I wonder did anyone see that coming....err yes....Should have been obvious really when you turn the economy over to such an immature and economically suspect youth.

37 Ginger...NO ONE "has to shoulder" responsibility for this unfolding disaster because the powerful make their own rules. Mr Diamond and his cronies tell our politicians what government will do and not do....there never was justice or fairness in the world!

Don`t you see that just as in 1929 our entire society has been brazenly wrecked by financiers and their dodgy doings....yet the political and economic systems which granted them the power to pull off this megaheist are POWERLESS to stop or even retrospectively judge and punish them.

Why? Because "our" Bullingdoneer politicians and our global capitalist run media are part of the conspiracy...they BENEFIT from it!

Why are we being diverted with piffle about Coulson and our undemocratic Coalition when a little bit of real analysis would disclose that we have the bailiffs in to strip out what few assets Thatcher and Blair left us with?

'42. At 11:20am on 29 Jan 2011, stanblogger wrote:
The question really is. Whose side you are on, the wealthy or the less well off? Or to put it another way, the creditors or the debtors?

David Cameron may say that we are all in this together, but the truth is that getting growth up and unemployment down is much more important to the less well off. Especially to those who have lost, or fear they might be about to lose, their jobs and to the mullions of young people who have never had a job and have zero expectation of getting one in the near future.

As a representatives of the wealthy, the UK coalition are naturally primarily concerned to have expenditure cuts and wage freezes so that the BoE does not have to print so much money, which dilutes the value of that owned by the wealthy. No one can explain how this approach can generate growth and jobs. On the contrary it is likely to trigger a vicious downward spiral, and may already have done so.

Obama on the other hand seems to have genuine concern for the poor and unemployed. So his policy is to give growth and job creation priority, even at the expense of causing inflation combined with low interest rates, which is making it difficult for the wealthy to preserve their riches. He probably considers that inflation is the "price worth paying" since it is paid mainly by the haves, rather than unemployment which is a price paid mainly by the have nots.

The shoe is pinching. Maybe the millions, who seem to vote on the basis of who looks prettier on TV, will take the trouble to try to understand the choices they have at the next general election. Just as those, who went through similar experiences in the 1930s, did when they voted for real socialism in 1945.'

Summed up most excellently well.

In the light of this weeks GDP figures dare I ask if Gordon Brown actually called it right?

To say that "everyone agrees that America can get away with a lot more borrowing than anyone else" is something that is challenged by what is actually happening in financial markets.
For in government bond markets the US long bond (30 years) now has a higher yield at 4.53% than the UK 30 year equivalent of 4.45%. So I am not so sure that investors agree with this statement and they are the ones backing their position with their money. In more recent times the UK yield has usually been higher but nervousness over the US financial position has driven their borrowing rates up.
Also the US is in the process of ending its Supplementary Financing Programme which will give it the ability to borrow an extra US $195 billion. This is because it is frightened of breaching its debt ceiling of US $14,300 billion. I wrote an article on Friday describing the impact of this on the US money supply and its central bank the Federal Reserve.

So in conclusion not everyone does agree....

At the end of the day on this one - it does not matter to me
that the economy and financial system suffer shocks, these have
aways happened - even if by Brown's optimistic claim of removing
short term politically driven boom/bust is true it has not altered
the greater underlying cycles - these will continiue to happen.

What disturbs me is that the lender of last resort - the taxpayers
- are being used to support institutions that have failed. And not
support the bits that are needed for society to function, but support
the shareholders and bond holders who frankly should take the loss and
a cold bath before the taxpayer saves what needs to be saved.

It does truly look like whole countries are being forced to pay to
refloat banks that still pay dividends and bond interest to their
owners - international individual and institutional ones at that.

We are all still serfs.

The other differences between US and UK;
US unemployment is a lot higher 9% compared to 7%.
But US deficit and debt are currently smaller than UK's as a percentage of GDP. US can borrow at lower interest rate than UK. US companies are far more competitive and better at creating huge multi-nationals.
Germany, over last 10 years, got it's Unions to restrain pay rises, reform pensions and working practices to make it more competitive and we are currently seeing the results. German companies invest far more in high technology, R&D and has far more renewable energy than UK.
Message for UK; far more investment needed, more competitive, speed and innovation needed. UK needs to become world leader in renewable energy.

47 Welcome Anagach...you speak the language of my ancestors ..gaelic...and that`s quite appropriate because we have cause to know the sleekit ways of the financiers of London and New York.

Weren`t our kind "disappeared" from the caring hospitable multicultural British Isles "asylum"...in our millions?

Yes we are "serfs"....and the last time the powerful allowed us a little freedom was in the landslide socialist victory after the Second World War....and since then they have made dead sure Britain collapsed into ashes while global capitalism`s USA got richer and richer.

But what`s this? Does 9/11 and 2006 mean THEY are now facing ruination? Let`s guess who ewill be paying for that...AGAIN??

24. At 00:22am on 29 Jan 2011, DebtJuggler wrote:

You are abviously not allowed to watch this...

Uprising Muse - V for Vendetta

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

Paranoia is in bloom
The PR transmissions will resume
They'll try to push drugs that keep us all dumbed down
And hope that we will never see the truth around

Another promise, another seed
Another packaged lie to keep us trapped in greed
And all the green belts wrapped around our minds
And endless red tape to keep the truth confined

29. At 09:11am on 29 Jan 2011, you wrote:

The BBC blocked the quote (despite being properly notated indexed as quotes) I got from wiki on GDP ... but it is worth looking up for those interested

Essentially the rest of the comments blocked include:

'The comparison between the two countries isn't very fair.'

So why make it then?

I know that many criticise Wiki but its analysis is quite a bit more thorough than the BBC...

........... look up GDP on wiki and see the difefrent methods of calculating GDP or GNP as calculated in some countries

The quote by Kuznet (1962) regarding the distinctions that can be made between the 'quantity and quality of growth' are particularly relevant as in 1964 is was well known that all GDP figures have to be very well interpreted and explained on such aspects as sustainable growth that is inter connected within an economy and is not e.g. fuelled by excess credit.

So the real question(s) is what do the UK GDP figures tell us about the UK economy? ... and what do the US GDP figures tell us about the US economy? ... How does the composition of GDP/GNP differ between the two countries? ... and what sensible conclusions can be drawn in economic terms?.

My point is that some if not all GDP figures can very soon become complete twaddle if not explained properly - so a direct comparison of superficial, quarterly % increases/decreases in GDP (as is the obsession with the British media and politicians) can, at best, be a pointless and misleading exercise!

38. At 10:32am on 29 Jan 2011, Ben wrote:
"This really is a partisan rant so let`s start with some evidence :On the eve of the recession the deficit was 3.6& of GDP.This was the same as the one inherited from the previous administration,the debt lower."

Yes but much of the tax receipts garnered during this period were from an unsustainable boom in finance, capital gains (housing) and purchase of consumer goods paid for by ever increasing private debt, happily fed by unregulated banking and irresponsible borrowers."

Similar charges made during the Lawson boom of the 1980s after the "Big bang," deregulation of financial services. This period was also marked by a loss of manufacturing capacity all the more damaging because the economy was tanking.

As far as government`s are concerned,a buck is a buck is a buck as Warren Buffet remarked.That credit should have been tighter,regulation more effective is retrospective wisdom.Few agreed prior to the recession,the yea sayers included the conservative opposition,financiers,CEOs of major corporations,Bernanke,Alan Greenspan,Paulson,all were demanding less not more regulation.

Your criticism displays the vanity of retrospective wisdom.Before displaying this publicly remember that life is lived forward but understood backwards.

May I complete your view of the US and the UK by considering another economic giant, Japan, facing a similar public debt.

Surprisingly the financial agency Standard and Poor´s (S&P) rated Japan down form tripple A to only AA+ which caused a lot of anger in Japan. Japan is therefore urged to put up plans for tough spending cuts to escape from this situation. It is still unclear if spending cuts will be put on track.

I do have admit that I have problems with Timothy Geithner, US Treasury, for teaching other economies what they are supposed to do. It is clear he critisises the UK for the spending cuts by rejecting such a rigid policy for the US.

He recently told Germany to take down their export rate as the world´s secondest largest exporter after China in order to improve the competitiveness of US companies for export.

Germany doesn´t need any tips in that direction, and so it would be a good idea if Mr Geithner would stay within his limits instead of teaching others what they are supposed to do.

I'd trust George Soros more than George Osborne. He knows how to make money. That is what Britain needs.

GC

bryhers

"Your criticism displays the vanity of retrospective wisdom.Before displaying this publicly remember that life is lived forward but understood backwards."

Ok so if it's wisdom we are agreed it's correct? Firstly I didn't see this retrospectively. It was clear to me back in 2000 that housing and debt were out of control. The only part that wasn't obvious was how far the government would try to carry the ponzi scheme. I thought it would have imploded say 5 years ago. In this I was wrong, however I think that delaying the fall so Labour could try to win the last election will lead to more pain in the long run.

Secondly - isn't it the government's job to correctly predict that a steep increase in public and private debt has to end in tears?

Finally, what part of that graph I linked to in the Telegraph is hard to understand or predict? Private debt tripled from 1997 to 2007. Imagine it's 2003 and extrapolate? Not hard, it's a straight line.

Again, how is it hard to spot housing was out of control when people are getting 105% mortgages and Northern Rock have demutualised and are securing most of their funding on overnight money markets. When there is even a term, "liar loans" for the common unspoken practice of lying about your income when applying for a mortgage. You don't need to analyse complex debt products to see there was a problem. I'd have suggested walking outside and observing people who have poorly paid jobs borrowing massive amounts to cover huge mortgages on very average houses, with no savings and credit card debts. All as state spending approached 50% of GDP!

First of all, GDP is not a measure of economic growth. It is a measure of economic activity. You could have half the people in the country digging ditches and the other half filling them in again and you'd increase the GDP. It wouldn't be of any value to the economy though.

As for the difference between the US and UK ...

Imagine two families living in the same street (the Obahmas and the Camerons, say). Both are up to their necks in debt, having spent the last decade or more buying consumer goods, taking holidays, eating at fancy restaurants... etc.

The Camerons look at their finances and realise how stupid they have been. They decide that, despite the pain of it, drastic action is required to pay back their debt. So they sell their cars and buy bicycles. They stop eating out and dine at home on beans on toast. Instead of shopping for the latest fashions at the most prestigious clothing stores they go to local second hand shops.

Meanwhile the Obahmas find another line of credit and carry on with their usual spending habits. In fact they decide to buy yet another new car and up their children's allowances.

A stranger arriving in the street may look at these two families and decide that the Obahmas must be doing something right - look how wealthy they appear to be. The Camerons, on the other hand, appear to have made some tragic error that has reduced them to poverty.

After settling in, the (former) stranger learns more details of the past of these two families. Once he knows their real financial situations, he comes to a conclusion about their long term financial viability.

Which family do you think he would favour in the long term?

new_germany,
"Surprisingly the financial agency Standard and Poor´s (S&P) rated Japan down form tripple A to only AA+ which caused a lot of anger in Japan."

The Japanese have every right to get upset, given that Japan is the monopoly issuer of its own currency and so CANNOT run out of money, and will ALWAYS be able to pay its debt obligations.

Germany on the other hand, is not the monopoly issuer of its currency, just like every other Eurozone country, and so can become insolvent under the Eurozone's current system of Monetary Union.

I also note that Germany's success has alot to do with th fact that it subsidises employment far more than, say, the UK does. This in effect means that Germany has had on-going fiscal stimulus for sometime, and this has led to it recovering strongly.

. At 11:50am on 29 Jan 2011, Notayesmanseconomics wrote:
"To say that "everyone agrees that America can get away with a lot more borrowing than anyone else" is something that is challenged by what is actually happening in financial markets.
For in government bond markets the US long bond (30 years) now has a higher yield at 4.53% than the UK 30 year equivalent of 4.45%. So I am not so sure that investors agree with this statement and they are the ones backing their position with their money. In more recent times the UK yield has usually been higher but nervousness over the US financial position has driven their borrowing rates up."

Interesting:Shows that international support for the dollar is ambivalent to say the least.The US are between a rock and a hard place,they need to spend to stimulate growth whose effect take time to work through the economy,at the same time pay down the deficit in real time to reassure the market.A difficult if not impossible balancing act now inscribed in legislation coming before congress.

The growth figures, if sustained should steady the bond market.If not expect global financial crisis stage two.

What matters with growth and GDP is the quality of growth relative to whatever strategic economic profile of the economy... the management of that economy is intended to achieve.

This means that within trend line parameters the absolute up and down % GDP movements are less important than whether the country can afford whatever changes are being made to that economy in order to reach the target economic profile - this will include e.g. real net dispoable incomes and maintaining adequate tax revenues from policies for re-balancing tax revenues.

Making sense of GDP is not just a static analysis as many seek to apply as it is a matter of analysing the structure and nature of the GDP and growth to see whether e.g. the growth and economic expansion is organic and well embedded in the economy, or, e.g. is excessive and inflationery with excess credit supply.

This means that GDP modelling of the current efforts to cut reduce the UK structural deficit should mean that a couple of years down the line when the Uk economy should be better balanced and e.g. has a smaller public sector requiring less tax revenues for its funding ... that the UK growth measurements outputs (the GMO's) should be much more organanic, sustainable and stronger.

The economic profile of the UK can be re-engineered to e.g. stimulate UK agriculture and reduce imports of food then measures like this can improve growth and add to its quality and sustainability of our growth.

The important bit ... even having a good strategy and plan for growth is not enough to re-engineer an re-balance an economy and improve growth i.e. sustainable value outputs and value outcomes ... in order to apply policies and stumulus etc efficiently ... 'vision/strategic planning' is necessary to have future target profiles ... in order to adjust and plan adjustments to attain the growth and sustainable economic profile.

In order to assess the growth performance of an economy in terms of the structure, composition and quality of growth in termms of GDP ... unless the future economic target profile is known/identified (the vision element) ... then there is no qualitative basis for saying what the true position is on any particular set of 1/4 ly growth figures is likely to achieve any given set of forecast growth data set, going forward.

The logic of which I think explains why the BOE/ govt/ markets/ media are making such a mess of UK and other 'growth' analysis and forecasts.

- have a vision
- have an accurate analysis
- have a target profile
- look at the composition and structure of growth componenst and apply 'organic litmus testing'
- devise a strategy and plan
- explain the plan
- identify the key elements of the plan
- put all spare and other resources into the key elements
- above all ... use strategic planning and have a vision.

Is there any wonder why the quality of the UK's present economic profile UK has declined so much in recent years ... and wasting so much hot air on piddling percentage up and down movements and with no real qualitative conclusions being reached about the big picture.

We also need to think more in terms of 'GMO's' and not 'growth' otherwise we end up looking and talking like the Bank of England ... 'stupid'!

I'm all for cutting debt as the interest on it is astronomical but there doesn't seem to be any suggestion as to what will happen when the debt is cut. I'm assuming the plan is for growth to be achieved from more public sector projects - new schools and hospitals etc. Its going to take years and even if it is all cut which I doubt will ever happen, we would have to borrow again to finance these projects. The other option is to wait until we have a surplus then start the projects but this means waiting even longer. In the meantime, we will have more people claiming benefits which will increase the time needed to achieve the debt reduction. We're already hearing that businesses are losing out on council and government projects that have been scrapped or scaled back so not only will the public sector job losses increase, the private sector ones will aswell. Apart from export, I can't see where any growth will come from. But we're not really doing anything to promote exports and we don't even seem to have a plan how to it anyway.

56 Ruffie,
"You could have half the people in the country digging ditches and the other half filling them in again and you'd increase the GDP. It wouldn't be of any value to the economy though."

What have you got against the mining industry?

Seriously though, the extra spending power that public works programs generate means that new business are created and existing ones expanded, which employees these hole-diggers on better wages, and doing more productive and rewarding jobs.

The way to secure emplyment growth (the only measure of proper growth) without resorting to consumer credit, is for the government to spend money ex nihilo into the economy - in practice this means deficit-spending without a corresponding gilt auction. Since the end of Bretton Woods, this can be done indefinitely.

It would be political suicide to admit to changing course and then be accused of doing something that could be accused of being, pretty much, what Labour were planning to do. Or at least that would be what Labour would claim albeit with little justification since things have changed since they were in office and they did nothing for two years between the crash in 2008 and the election in 2010.

However, what the government can do is to change tack without it being noticed. Simply don't make civil servants redundant, take the natural wastage route (don't replace leavers in non-essential roles), don't cancel any more public expenditure unless it is clearly that there is no economic gain... etc.

Nobody will be any the wiser and they can always claim that they stuck to their strategy and that it worked.

58 bryhers, Notayesmanseconomics,
"For in government bond markets the US long bond (30 years) now has a higher yield at 4.53% than the UK 30 year equivalent of 4.45%. So I am not so sure that investors agree with this statement and they are the ones backing their position with their money."

It is natural that when investors believe an economy will grow strongly, that they diversify their investments into more risky things like equities. Government bonds are at least in part, a flight-to-safety in uncertain times.

You'll notice that bond yields went down across the world as the GFC took hold and times became uncertain.

They inevitably increase as economies improve and the outlook seems more positive.

This is the opposite of what mainstream economists actually expected, and exposes why their neo liberal models are so flawed.

53. At 1:12pm on 29 Jan 2011, new_germany wrote:
May I complete your view of the US and the UK by considering another economic giant, Japan, facing a similar public debt.

Surprisingly the financial agency Standard and Poor´s (S&P) rated Japan down form tripple A to only AA+ which caused a lot of anger in Japan. Japan is therefore urged to put up plans for tough spending cuts to escape from this situation. It is still unclear if spending cuts will be put on track.

I do have admit that I have problems with Timothy Geithner, US Treasury, for teaching other economies what they are supposed to do. It is clear he critisises the UK for the spending cuts by rejecting such a rigid policy for the US.
He recently told Germany to take down their export rate as the world´s secondest largest exporter after China in order to improve the competitiveness of US companies for export.
Germany doesn´t need any tips in that direction, and so it would be a good idea if Mr Geithner would stay within his limits instead of teaching others what they are supposed to do."

You save more and therefore spend less,you have had good public services for a long time and had no need to engage in an accelerated programme of spending like the UK,your public finances were in better shape before,during and after the recession.

You are both technologically adept and advanced, with excellent training and work for young people.Your export led recovery depends on it, although this made you vulnerable in the recession as world trade slumped and the decline in your GDP was over 6%.Presumably this was why you co-operated with Mr.Brown`s plan to spend your way out of recession and did not discourage others from doing so even though this was against all your instincts?

However,with the buoyancy of overseas markets for your high value goods,especially China,you are now in a dominant position in the Eurozone to impose your own view of economic recovery on others.This includes deep cuts in public expenditure for Greece and Ireland,more to come if Spain,Portugal or Italy follow them.

Is this wise? The German model doesn`t work for everyone. "The Economist" last week recommends Greece and Ireland default on at least part of their debt, with further repercussions for other economies,especially their banks.

While your political commitment to the Euro is admirable,it is also harsh and could be counter productive.




54. At

55. At 1:59pm on 29 Jan 2011, Ben

You are correct in saying that it should have been spotted by examining trends and extrapolating. Were I think you are incorrect is by saying, it should have been spotted, I think it was in 2001 but we blindly followed the US and tried to buy ourselves out of it. In the short term it worked but as we know in the long term it lead to the 2008 crisis!

But was it 2008 or was it 2005 when it started to hit?

As you suggest it should have happened in 2005; may I suggest that it did and it was retail that suffered. It was only the instruction to councils to lower retail rates that prevented the collapse then. In Jan/Feb/Mar 2005 high street shops suffered as their customers paid off their maxed credit cards but what astounded me is that this didn’t prompt a recession at this time? Could it be that although retail was in recession the manipulated housing market more than compensated?

"Two Countries - divided by a deficit" is the title of Stephanie Flanders blog.

Globalisation of bad banking behaviour and globalisation of economies are still the two infected elephants in the room that politicians gaze upon - but refuse to treat with the right medication?

Economies, for all countries, are as individual as their own own people and what their country has to offer.

What one nation prospers from, may not fit with another. This has been shown with the problems in the Eurozone?

When a country grows it's own food and exports surplus - that's fine. But when that same country grows just for export - that's when problems arise due to speculation brokers that drive up food prices globally.

Obviously, globalisation is too much for my feeble brain - all I do recognise is that basic resources like drinking water and food required within countries are being traded on, or exported - thus making these basics increasingly unaffordable to the people within those countries?

It's now too complex. Globalisation appears to be failing everyone in most nations, and too much of what affects ordinary working people is in, or depends upon, the hands of the few.

But, what do I know? Just a few thoughts.

Ben:

"Ok so if it's wisdom we are agreed it's correct? Firstly I didn't see this retrospectively. It was clear to me back in 2000 that housing and debt were out of control. The only part that wasn't obvious was how far the government would try to carry the ponzi scheme. I thought it would have imploded say 5 years ago. In this I was wrong, however I think that delaying the fall so Labour could try to win the last election will lead to more pain in the long run."

In 1997,public debt was 39.9% of GDP,by 2000 it fell to 36.3%,and this was the launching pad for the increase in public spending. For the IFS figures and the course of spending under Labour see, (Election briefing IFS 2010).

I told you to look at evidence before rushing into print.If you don`t you will go on getting egg on your face.

Incidentally the vanity of retrospective wisdom is the opposite of what you claim.

Messrs Cameron and Osborne are too arrogant and stubborn to admit that their deficit reduction strategy is too harsh. That is the trouble with politicians who are out of touch with the majority of the ordinary folk in this country - workers, unemployed, disabled, pensioners and students - all of whom are bearing the heaviest share of the financial burdens. They cannot see that we are heading for a double dip recession and that they could be the ultimate losers in a vote of no confidence when this actually happens. William Hill, the bookmakers, have the situation weighed up with their odds of 7-2 for a general election in 2011. Those odds are a real indicator of what many punters are thinking but probably not saying out loud to their friends.

common_man_123

yes, you may suggest that, and I would agree. Hence my use of terms like ponzi. The taxes from this fake boom were then wasted, meaning that we have no lasting benefit from one huge mess.

Again it depends on your perspective. If you love the UK and want the best for it's people, you would rightly say not dealing with the issue in 2005 is a tragedy. If you are Merv King you might say you got another 6 years on a great big pay packet. Or Brown desperately betting everything to get another term "because he's worth it".

I would not argue with your assertion that those in the know saw this coming. IMHO you would have to be brain dead not to. As I said, what would we have heard Brown say after his "no more boom and bust" speeches if he'd forgotten to take his microphone off?

Afternoon Stephanie,
to compare the US and its economy with the UK is pointless as they have very different dynamics.
The reason that nice Mr Cameron is pushing ahead with austerity measures (which haven't really started yet) is to give confidence to the money men to lend to the UK without paying a ruinous rate of interest al la Greece and Ireland. The measures proposed have been endorsed by the IMF and the money men continue to back the £UK and the gilt issues. So no matter what politicians say, it is the money men who decide where to invest.
As an importing nation, we need a strong pound to have any hope of controlling the horrendous hyper-inflation which is to come.

Energy costs and distribution are the next bogie men which will hit the UK very hard. No one seems to care, the Greens are always right, let the consumers pay, VAT is a luxury tax, and other doctrines of the very well off are all alive and kicking.
Wind power, feed-in tariffs, green energy, are all flawed concepts peddled to consumers who are ignorant of the facts and who are just trying to make ends meet at the moment.
Nobody asks the more important question which is how can we individually reduce our energy consumption?
Insulating homes to an agreed standard would be a good start. It would employ tens of thousands of low skilled workers,use up some of our glass bottle mountains, produce a valuable asset and cost a fraction of the money being spent on renewable energy.
Why is this not done out of the public purse?
Could it be that the energy sales companies want energy usage to increase to boost their profits which are then paid as dividends to shareholders abroad? Surely not.
2010 was the twelfth coldest year in the UK since 1910.
For those eco-warriors, I have to tell you that oil and gas are not about to disappear any time soon, but to conserve stocks, we need to insulate more now!

69 Ben and others,
"I would not argue with your assertion that those in the know saw this coming. IMHO you would have to be brain dead not to. As I said, what would we have heard Brown say after his "no more boom and bust" speeches if he'd forgotten to take his microphone off?"

The idea of "no more boom and bust" has its origins in a neo liberal theory called "The Great Moderation" - (yes GB was mostly neo liberal when he made that remark) - This theory says that the business cycle (boom and bust) is the fault of inefficient labour markets, caused by the uemployed being too lazy, trade union collective bargaining, and too much job security. It says all these things distort the labour market.

The reason why no economists and politicians saw the GFC coming was because they had applied so many labour "reforms" (new Deal etc) that they had succeeded in eliminating the business cycle. Clearly we now know this was wrong, and indeed, these "reforms"(?) made the economic downturn much harsher than normal.

So Ben @ 69, 99.9% of all politicians, bankers, regulators, central bankers, economists and 99.99% of common people were brain dead to what lay ahead. Humble you and a handful of others saw it but unfortunately no-one listened.

Solution - sort out financial regulation (which Brown was saying back as early as 1998), educate people on personal/public finance (starting at school) and encourage politicians to tell the truth (hmmm). And lots more...

What won't help is saying things like all so-called 'over' spending has been wasted. That is a politically facile opinion that doesn't stand up to scrutiny. By all means argue about levels of spending but grandiose statements that dismiss other approaches weakens your argument. Our NHS and Education has benefited from increased public spending 2001-2010 compared to before. Did we get 100% value for money - no we didn't - but we didn't get 0% either.

Oh how interesting - a comparative analysis of UK and US defcits, all based on official funny numbers.

Meanwhile in the real world quantitative revolution takes hold. You know revolutions that are inspired by soaring commodity prices which are themselves a creation of Quantitative Easing AKA starve the poor.

Still at least John Paulson will probably continue to get enough to eat, after all he only "earned" $5 billion last year - Will David Tepper respond? Maybe you remember how proud he was of "earning" $3 billion last year and moving slightly ahead of Mr. Paulson in the earnings league.

How do they make all this money? Why they invest in commodities, which are bound to move ever higher thanks to King Merv and the Bernank.

Still it´s all a long way away so why bother? What a nice tie Mr. Osbourne was wearing...

59 continued

Sorry its a bit long ... but with a quality sustainable approach to GDP the argument I think follows the premis that if strategic key Growth Measurement Outcomes (GMO's) are measured in the approach of sustainable growth analysis - then GDP analysis takes a giant leap forward in looking at optimal GMO values for a given economic profile (econometrics, modelling to be used).

This means that optimum output values are compared/calculated/sought (£'s/unit output?) rather than using a larger overall consolidated GDP growth value - a quantum leap in govt economic thinking! A massive difference in emphasis, thinking and enabling radical and measured policy implementation.

In practical terms this should mean that e.g. the UK money supply or the amount and frequency of public sector cuts can be assessed by optimal values relative to the strategic plan/profile. This is significant because cuts in e.g public sector can be planned economically rather than being decided by arbitrary political judgement alone.

This can also mean that the GMO value of a refuse bin worker can be measured against effects of chosen costs centres for e.g contribution to green energy costs reduction etc.

Again all related to the strategic target profile of the economy - which has large elements political choice.

What does this all mean ... stick with it ... if this is all done properly then it should mean that using GMO's in stead of £'s GDP as economic management criteria would introduce value management and sustainable growth outcome management and measurement into govt thinking, planning and policy.

This should enable much better economic analysis and measurement and establsih benchmaking GMO's for industries and sectors and enable sustainability criteria to be introduced and be embedded in govt planning and governance.

This could also be used to e.g. allow the role of the banking industry to be fully evaluated for optimal output values as the banking sector looks very high until the risks and liabilities are included in the optimal attainment values. When all is complete should enable to indicate the optimal output value of a banker in the overall economy for e.g calculation of their remuneration.

Sounds complicated ...? Not really the logic and axiom of choice is sound ... in analysing GDP it is necessary to measure growth output values in the economy and consider their optimum values ... and integarte this with strategic planning and full fiscal analysis of govt incomes/ spending.

The complicated bit is in constructing an economic model to handle all of this ... a large undertaking but should be entirely possible for a research institute or University. This would produce a UK growth sustainability index as a by product of the analysis.

The point being is that unless the govt/BOE properly analyses the sustainable growth elements -(GMO's) and is able to start putting monetary and other values to these e.g. carbon credits etc) and making some sense of all of this ... proper strategic planning and management of the UK economy will not be achieved.

Proper strategic management of the UK economy should not be left to UK our politician's spin and guesswork and a printing press in the BOE!

BTW - if the UK govt is already doing any of this, please let us se the details.

This is what is known as a 'plan'.

As for the EURO, Mrs Merkel admitted it had has a "birth mistake", and there she called for a "common economic policy" and an obligation to get public debt in all countries all right.

It looks like Mr Merkel has been urged by Mr Sarkozy to the statenment "The the EURO fails, Europe fails" - this might be a pretty pathetic rhetoric statement, an attempt to justify the weak construction behind the Euro, that didn´t consider the case how it is to deal with the situation when countries are probably bancrupt like Greece.

It came out that it has been a little naive and blue-eyed that such a case is unthinkable because a country has to qualify for the Euro by fullfilling the criteria to join the Euro zone.

However, Greece only managed to enter the Euro zone by faked data, by getting a credit by Goldman Sachs. Everyone wondered, Oh, how on earth has Greece such good economic data that improved rapidly in such a short time. How naive to believe these data were correct.

It is not the intention to humiliate Greece for that, but the ordinary citizen thinks it is simply unfair that civil servants in Germany have by far to work more hours a week, get by far less extra payments for holiday etc., have to sacrify by far more than the Greek civil servants and - to top that all - give money to rescue Greece.

The reality can´t be denied that there is a deep economic gap between north and south Europe which can hardly be overbridged.

As far as tax payer´s money is needed for the rescue of Greece, it is justified how mismanagement and corruption in Greece is encountered, and how austerity measures (high pensions for civil servants in Greece, pension age in Germany is 67 - don´t ask me how it is in Greece).

Is THIS your fairness, equality and social justice among citizens of the EU?

#75 new_germany. How is Greece humiliated? They had no money, they fixed their economic data points in a pretty amateurish way, and yet still got an invite to the great Euro fest party.

No-one in Germany seemed to notice this, and no-one in Germany seemed to think that this kind of fraud may have consequences somewhere down the line. How smart do you need to be to work out that if you are the only guy with any money that when the bill comes due it is you that will get to pay.

How does this fit with hard working German Civil Servants? "It aint what you do, its that way that you do it"

But was it only Greece...? Or are you still waiting for the knock out punch that will be delivered by those Iberian pugalists?

Well I bow to you economists in confusion and awe at the complexity of your various ideas.... but fail to see how any of your schemes will work when in economic terms Britain doesn`t really exist at all.

I fully understand what you mean by "our" economy and "our" body politic but where is the evidence that we have the power...autonomy..independence etc.. to plough our own economic furrow and future using the medium of Westminster politics... when even "our" City of London is in truth a conduit for the transfer of international finance largely under the influence of Wall Street and the much vaunted financial "markets".

It seems to me that there`s a case for saying that British people are hostages of the markets ....rather authors of their own political and economic future.

Just look at "our" economic and political government policies and ask yourselves how they reflect the wishes of the general public or are designed to benefit British people in economic terms.

Someone..half jokingly ...promoted George Soros into GO`s position earlier in the thread ....but for a long time now I have been watching the EU develop along "open society" lines with Soros seeming to be directing it...so is it so fanciful to at least engage in dialogue with a man who appears far more in control of our future than Westminster politicians appear to be?

Perhaps it`s time to talk to the organ grinder and stop fantasising about the power of a monkey in Downing Street?

61 Charles,

"Seriously though, the extra spending power that public works programs generate means that new business are created and existing ones expanded, which employees these hole-diggers on better wages, and doing more productive and rewarding jobs."

Public work programs may keep people busy, but they are only of economic value if they produce something worthwhile - something that can be consumed or exported. Take again the example of ditch diggers (for the purpose of illustration). If half the workforce was digging ditches and the other half coming along behind them filling them in again, then everyone would starve to death. No one would be spending their labour producing food. Nor could food be imported as the country would be producing nothing of value to swap for the imported food.

Public work programs also have an opportunity cost. They take resources (labour & money) away from the private sector where they might have been used more productively.

"The way to secure emplyment growth (the only measure of proper growth) without resorting to consumer credit, is for the government to spend money ex nihilo into the economy - in practice this means deficit-spending without a corresponding gilt auction. Since the end of Bretton Woods, this can be done indefinitely."

Employment is not a goal in itself. The majority of people don't work because they want to. They work to be able to earn money to buy stuff. People want stuff not jobs. Real prosperity is based on what your labour is worth in terms of how much stuff it can buy. As an economy produces more, so consumption can increase. If productivity can be increased with less labour (via capital investment) then we can have more time to enjoy the stuff we buy.

As far as the government spending "money ex nihilo into the economy" ...

Contracting consumer credit deflates the money supply and this leads to a recession (as there is insufficient money around to enable the previous level of transactions to occur). This is uncomfortable when it follows a boom period as during the boom there is a huge amount of money sloshing about. But that money was simply based on credit - promises to pay. Once repaid or defaulted upon, those promises (and the money) is gone. Businesses and people that have relied on that credit money to exist must then fail.

QE can attempt to fill that gap by inflating the money supply to offset the deflation. The problem though is the assumption that this new money will result in an increase in production to give it value. It is just as likely that the money will go on further consumption (via imports), support artificially high asset prices, or keep businesses going that are not paying their way by producing real wealth (stuff that people want or that can be exported). A stubborn willingness to follow Keynesian economics is likely to result in further rounds of QE as one after the other they fail to produce real economic productivity.

If printing money solved the problems then no one need ever bother working. The printing presses could just be run continuously and we'd all be trillionaires - trillionaires with nothing to buy. I believe they tried this experiment in Zimbabwe.

New Germany:

The reality can´t be denied that there is a deep economic gap between north and south Europe which can hardly be overbridged.

As far as tax payer´s money is needed for the rescue of Greece, it is justified how mismanagement and corruption in Greece is encountered, and how austerity measures (high pensions for civil servants in Greece, pension age in Germany is 67 - don´t ask me how it is in Greece).

Is THIS your fairness, equality and social justice among citizens of the EU?

"Beware of Greeks bearing gifts",(Roman proverb).

They don`t pay their taxes,(Neither do some British billionaires),and have a cavalier attitude to public finances.Sure,but the problems are much wider than Greece and are dangerous residues of the banking collapse.

Is it just that Germany is the chief paymaster of errant Euro economies? No,nor do your electorate think so.The problem is the interdependence of the banks,their cargo of toxic debt and the resulting contagion if one defaults.

It was this which laid our deficitus sufferer in chief,Mr.Osborne, to wing to Brussels with a suitcase full of cash and pay the Irish 3.5 Billion.This is the man who is squeezing every item of public spending in Britain.Proud warships retired,jump jets hidden from view,surveillance aircraft broken up behind a screen to spare the feelings of onlookers like a public execution,grannies turned out of their homes at midnight!

I am drawing your attention to the element of self interest in your government`s Euro posture in relation to the Greeks,and whether this is best served by a policy which is inhibiting growth,increasing the deficit and making sovereign default more likely? If it happen,it will certainly spread.

Ruffie's analogy (@56) explains the recent US and UK GDP numbers most elegantly.

As long as the budget deficit is larger than GDP growth for the same period of time, we have to wonder if we are seeing economic growth or just spending borrowed money.

Anytime you attempt to break a bad habit, you are likely see some withdrawal symptoms. Dear UK, you may have a hangover, but I believe the US is headed for a real headbanger!

It is fundamental to the nature of debt that it makes the borrowers life better in the short term at the expense of the future. There are cases where that makes sense, of course. But has government use of this tool been judicious or habitual? For those who think that government borrowing can escalate indefinitely, that darn future just keeps arriving!

72. At 3:17pm on 29 Jan 2011, TheGingerF wrote:

“Our NHS and Education has benefited from increased public spending 2001-2010 compared to before.”

Are you sure about this statement?

Before lets say 1999 if I went to A&E, I got seen in 2 to 3 hrs. in 2006 it took 8hrs! BUT! That’s not what the figures say! I hear you protest.

Lets just check shall we: I arrive at A&E and I am assessed within 4hrs, the clock now starts again, I am now called through within 4hrs and I am moved into a cubical and a nurse visits me and says the doctor will be along soon, the clock now starts again, within 4 hrs the doctor comes. I am not suggesting it takes 11hrs 57min but in theory it can and still meet the imposed limit and as thus shown as a positive statistic.

Throwing money at it and introducing such as the 4hr rule is the road to inefficiency.

The same is true of schools. All teachers teach differently so if you make them all teach the same (robots) you take away teachers ability to teach. Most of the money that as gone into schools as gone on ancillary staff not more teaching staff. My wife is a teacher and at her school (primary) there are 14 teachers and 2 nursery nurses, including the head and 4 assistant heads there is a total staff of 31 excluding caretaker and cleaners. You do the maths.

We talk here of US v UK, but I think due to the difference in both size, economy and population you cannot compare the two effectively.

Ruffie,
Thanks for your considerate reply:
"Public work programs may keep people busy, but they are only of economic value if they produce something worthwhile - something that can be consumed or exported."

Agreed - it is much better for workers to produce goods and services which are valued. Public works programmes should be designed to preserve workers in an employable condition (used to work etc) which improves a country's long term growth potential.They can also be used to stimulate the economy in the short term.

"If half the workforce was digging ditches and the other half coming along behind them filling them in again, then everyone would starve to death. No one would be spending their labour producing food."

Agreed, which is why you would not have them digging ditches, you would have them working in the fields producing food, or building infrastructure to attract private investment.

"Public work programs also have an opportunity cost. They take resources (labour & money) away from the private sector where they might have been used more productively."

Public works programmes usually pay the minimum wage, which means that all private enterprise needs to do is offer to pay slightly higher in order to attract those workers. When there is high unemployment your argument breaks down, as when the state employs the unemployed, they are using labour that would otherwise be surplus to the requirements of the private sector - zero opportunity cost!

"Employment is not a goal in itself. The majority of people don't work because they want to. They work to be able to earn money to buy stuff."

Certainly there are many who are motivated this way, but there are many who are not. Public works programmes are for people to obtain work if they want it, whether that be to buy stuff, or because they want the engagement and self respect they feel comes with work....

"If productivity can be increased with less labour (via capital investment) then we can have more time to enjoy the stuff we buy."

Yes but with less labour you get fewer people who can afford to by that same stuff - this is related to what Keynes called 'fallacy of composition'.

"Contracting consumer credit deflates the money supply and this leads to a recession...... "

Agreed, and is so far consistent with what I have said.

As far as your comments about QE go, I agree that it is a very blunt intrument similar to the way you describe - it mostly goes to the big corporates, and is spent all over the world not just in the UK and generally does not create employment.

But that is not what I was talking about - I was saying that rather than the BoE creating money, it should be the Treasury, who can spend in very specific ways to boost employment and productivity.

As for the argument that we should not spend money employing people in case they import something - well that's just business as usual - when is that NOT going to happen - even when the economy is healthy. There is no reason why the government cannot invest this money into improvements in export potential.

As for Zimbabwe, that was caused by land being given to people who did not know how to farm it! This generated a supply-shock (the people were unable to feed themselves), yet the government thought that spending more into the economy would fix that automatically. Increasing the money supply made the problem worse because the government did not spend this money fixing the supply-shock. A similar story can be found in all recent hyperinflation episodes, I'm told.

Why is an increase in the money supply through bank net-lending, any less inflationary than government spending?

Kind Regards

#17. bryhers wrote:

“If your approach reduces revenues faster than debt, then your debt will grow. This is the case with Greece and Ireland who fit your criteria of a declining economy, even if the cause of their decline was not raw material shortage”.

This is a fair point and I don’t disagree with it. The issue for me is the lack of awareness by our political elites, whatever their political persuasion, as to the fundamental reason for our developing economic predicament. All you ever hear them banging on about is the need for economic growth, a laudable objective, but without realising that growth depends on the ever increasing extraction of finite natural resources needed to meet the ever increasing demand for goods and services by a growing global population. When Adam Smith wrote the “Wealth of Nations” in 1776, the global economy was small in relation to the size of the world’s natural resource base, so the expectation of increasing economic growth as the best mechanism for lifting people out of poverty was, to a first approximation, not unreasonable. Now that the global economy has expanded to the point where limits to growth are finally starting to manifest themselves, continuing the standard “business as usual” (BAU) approach becomes increasingly difficult, and no longer represents a viable long term option. Thus attempts to extend the growth phase of our complex industrial society will progressively make things worse for all but the very wealthy.

Given that the world’s political elites are mostly drawn from a privileged and increasingly wealthy minority, it’s unrealistic to expect them to move away from the continuing growth economic paradigm because it is not in their interest, nor that of their party political sponsors. For an insightful analysis of this resistance to political and economic direction, despite it being in everyone's best interest, J K Galbraith’s mordant book “The Culture of Contentment” is an essential read.

To quote Arthur Koestler (The Sleepwalkers):-

“It all looks beautifully obvious – in the rear view mirror. But there are situations where it needs great imaginative power, combined with disrespect for traditional currents of thought, to discover the obvious.”

Unfortunately those with political and economic power appear to lack any great imaginative power.

The headline is "Two countries, divided by a deficit" - well, their high deficit unites them, their approach divides them.

David C. and Timothy G. find themselves in troubled waters - why? It has not been the financial meltdown of 2008 and its aftermath, the rescue packages for banks, starting by the Lehman Brothers bank.

But that´s not the real cause, responsible are the economic and financial
conditions, namely the conditions for credits, for mortgages, housing, real estates.

The basic mistake that caused the financial disaster were that the US banks didn´t demand security for giving mortgages, for borrowing money. In contrast to this, legislation at the financial market plays it more safe, banks demand security for the case that mortgages can´t be payed back.

In the background stood the key term "deregulation" - the economic policy of President George W. B. believed in liberalism. Banks borrowed meny, gave mortgages according to the offically credo "there´s no limit".

So the basic mistake lied in the tainted financial policy in the era of George W. B., followed by PM Tony B. - o.k., firstly all worked well, very well, although there were concerns about the highly risky Hedge Fonds, concentrated in the banks of London.

O.k., why changing successful policy? It all went well from 2000 on for the US and the UK until the unexpected big financial crash.

The big banks, said to be essential for providing credits to all kind of businesses, got the tax payer´s money (so-called "rescue packages"), introduced by former PM Gordon B.

However, the wanted effect for the recovered banks for giving fair credits to all kinds of businesses didn´t fully work, yes, it failed, the banks hold their regained money back.

As a consequence, the economic recovery goes slow, the much wanted rebound of the US and UK economies has still to come, whereas Germany rebounded in an impressive way.

Unfortunately banks are not agencies for social welfare, they just care about their own business, their own profit, they pay fantastic bonuses to their managers.

In good economic times it is easy to do cuts, to rise taxes, in bad times
stimulus for the economy is needed according to Keynes.

Timothy G. apparently believes in Keynes´ theory, whereas David C. sees it the other way round!!!

New Germany- your assessment of the north south divide is correct but look at the longer term problems. Even if Ireland, Portugal and Greece had debts cancelled tomorrow they still have the problem of lack of competitiveness and inability to make significant foreign earnings. Their foreign earnings depend upon tourism and agriculture to a significant degree and these sectors employ huge numbers of people. Unfortunately their prices went up in the 'good' years and they are no longer attractive destinations and their exports are expensive. To be fair to Portugal they have recognised this and are doing something about it but not Ireland and Greece. In the past they would have devalued their currency.Germany's problem is that these countries are going to need a weak Euro just at the time Germany needs to cool it's economy. Germany will also have to continue to support the peripheral economies for years. Debt is only one part of the problem - growth and foreign earning power is the other.

The most fundamental difference between the the attempts of the UK and the USA to deal with the economic crisis is that the USA has a choice and the UK doesn't. The markets made it quite clear that our economic policy had to take the current route if we wanted to be able to sell our gilts and maintain our credit rating. As a result all any of the main parties could do at the election was quibble about details rather than propose an alternative and it's the same now. Given the UKs basic policy has been determined for it, the government needs to find a way to make it work, arguing over choices that are not available serves no practical purpose. As for the choice the USA has made, there are a great many there who think that they has made the wrong choice.

Shortly after he became chancellor, George Osbourne stopped off in China where he said "I am keen on the British economy developing in a way that is more export-driven, with more investment and a different model of growth to that pursued in the last decade or so. "If you are looking at Britain and saying where is growth going to come from, I think exports to an economy the size of China is one place we should be looking."
Which makes sense, if there's, at best, static demand at home due to cuts then use external demand to provide growth.
More recently however all the talk seems to along the lines of (the Keynes interpretation) of Say's law which is "Supply creates its own demand", at least to the extent that all the talk is of stimulating supply with no mention of the demand side. I'm not saying its wrong to stimulate supply but I'd quite like to know where they think the demand is going to come from.
Does anyone here fancy investing their money in some manufacturing businesses so they can produce more goods when they have no orders, even tentative ones for the extra goods? No I thought not.

co. 86 zorba:
Portugal and Greece are more comparable with each other, for tourism and agriculture.

But with Ireland it is a different story. The "Celtic tiger" economy of the 1990 attracted new businesses and banks because they had almost no tax on companies. This was an advantage of the Irish economy as for Ireland as a place for business in comparison to higher taxes on companies in Germany.

However, the high economic growth of Ireland in the 1990s has been on thin ice, unsubstantial and one-sided, with the final crash of public debt.

Germany did not fully reach the economic level before the crisis, but managed it good so far. We are all still on the road to recovery, but the outlook for the socalled PIIGS is not very well, of course.

I forgot to say earlier, a big Buy British campaign could help increase domestic demand and improve our balance of payments too, if people can't afford, or don't have the confidence to buy more, then we could at least try to get them to buy less from abroad. It's a sticking plaster not a cure though, more importantly there needs to be a strong export drive. If George Osbourne wants to secure "consistent growth" as he said he did at Davos then it's not enough to "remove the supply side obstacles to growth" and produce more, we need to sell more too.

Herring choker 80


"As long as the budget deficit is larger than GDP growth for the same period of time, we have to wonder if we are seeing economic growth or just spending borrowed money.
Anytime you attempt to break a bad habit, you are likely see some withdrawal symptoms. Dear UK, you may have a hangover, but I believe the US is headed for a real headbanger"

"The same period of time is the relevant question in making comparisons.If you are comparing a quarter`s growth with a 10% deficit then all economies would fail, so you would need to extend the period of comparison.Until you determined that,the question you pose is meaningless.

87. At 6:59pm on 29 Jan 2011, Freda Peeple wrote:
"The most fundamental difference between the the attempts of the UK and the USA to deal with the economic crisis is that the USA has a choice and the UK doesn't. The markets made it quite clear that our economic policy had to take the current route if we wanted to be able to sell our gilts and maintain our credit rating. As a result all any of the main parties could do at the election was quibble about details rather than propose an alternative and it's the same now. Given the UKs basic policy has been determined for it, the government needs to find a way to make it work, arguing over choices that are not available serves no practical purpose. As for the choice the USA has made, there are a great many there who think that they has made the wrong choice."

The UK does have a choice and did so before the election.Bond yields were stable and so was our credit rating.The diffence between the UK and Ireland,touted by Mr.Osborne as an object lesson for Britain,is that our debt is long dated, given us more chance of recuperating organically through growth.Ireland and Greece with short dated debt didn`t have this opportunity.

As for Keynes,you have got our most distinguished economist upside down.Supply side economics is Milton Friedmann and the monetarists,Keynes was the architect of effective demand, dominating much of post-war economics.

New Germany - you are correct about what drove the Celtic Tiger years but an lot of the money earned by companies based in Ireland went straight back out again! These companies employed quite a number of Irish but did not contribute much in the way of foreign earnings that were kept in Ireland. If one looks at what earned the most in the years just prior to the Celtic tiger ( when everything became distorted by house building ) then it was tourism and agriculture - with the UK as the main market for both. Unfortunately Ireland is a very expensive destination for tourists and it's high labour costs have pushed up agricultural prices.

In Greece the situation is really bad - I just do not know how we are ever going to get going again without devaluation to restore competitiveness. Greece recently scored very badly on a survey of tourism costs compared to other destinations. Tourism is a big and important foreign currency earner for the country and it's declining. Other business is also bad. Sorry to despair but I am not optimistic at all!

91 bryhers
"As for Keynes,you have got our most distinguished economist upside down [re: "supply brings forth its own demand"].Supply side economics is Milton Friedmann and the monetarists,Keynes was the architect of effective demand, dominating much of post-war economics."

It would not suprise me if Keynes would say something like this because it is true if you think about it. When companies employ more people to pruduce more stuff - those extra people now have incomes to spend on that (and other) stuff - this is "endogenous growth". However Freeda Peeple is correct to argue that a company will not go to the bank and get the investment necessary to hire more staff and equipment if their order books / sales are not growing - hence the need for government to fill the spending gap (provide the demand) and create the orders (directly or indirectly) to justify the investment.

Also note that there were a group of economists who followed on from Keynes who called themselves "New Keynesians", and in a very Orwellian way set about dismissing or re-interpreting much of what Keynes said, and only keeping the bits which suited their agendas - brand jamming - i'm not sure if Friedman was one of them.

bryhers @90 said:
"The same period of time is the relevant question in making comparisons.If you are comparing a quarter`s growth with a 10% deficit then all economies would fail, so you would need to extend the period of comparison.Until you determined that,the question you pose is meaningless."

Yes, I am looking at a US deficit running at about 10% of GDP per year, and the most recent quarter's GDP growing at 3.2% annualized - so a year versus a year. If you are saying that short term measurements can distort the picture, then I agree. Perhaps four quarterly numbers added together would be better, but that doesn't change the big picture.

As for "all economies would fail", let's remember that there are such things as surpluses and balanced budgets.

Best Regards

81 - Common_man

So you are a 0% person from my post 72 - we got nothing from Labour's extra spending and if there had been a different govt who spent less it would have been far more efficient and we would have ended up in the same position but in less debt/deficit.

When we polarise the argument like this is when it goes nowhere. Tories who believe public sector bad and Labours who believe in nothing else will mean we are perpetually inbalanced.

Ask a broad range of people in the UK and you will get a broad range of answers on how they have benefited or not from experience of the public sector. My own example - I am on my kids primary school parent council - the teachers on it talk about their fears that the investment of the last 10 years will now disappear and the progress made go to waste.

Thats one side of the story, just like yours.

Most economists and many of the bloggers here still havent accepted or even noticed what the problem is. (there ar exceptions)

The majority acted hurt and surprised in 2008 when the economies of most of the world crashed. Now they are 'surprised' or 'disappointed' when the growth figures show a contraction. Apart from the fact that these figures are based on a nonsense statistic (GDP), the reason they keep getting these predicts wrong is that the economic theory they are using is wrong. Its not just unable to predict the events that are happening, the whole basis is broken, founded on bad assumptions, uses calculations that ignore the facts, in fact is just plain wrong. Anyone, except apparently economists and politicians, can see that a system that depends on continuous growth and ignores the limits of resources will eventually fail. The current system has been running for many decades now and is reaching the point where it won't continue. The natural resources are running out, growth has caused the debt volume to grow out of control along with the human population. Davos is an irrelevance until the participants give up the old/bau economics and grasp the nettle and start to tackle the real issues, peak everything, peak population, etc etc

83 - Charles,

"Public works programmes usually pay the minimum wage, which means that all private enterprise needs to do is offer to pay slightly higher in order to attract those workers. When there is high unemployment your argument breaks down, as when the state employs the unemployed, they are using labour that would otherwise be surplus to the requirements of the private sector - zero opportunity cost!"

But there is the cost of employing them (unless social security pays out exactly the same as minimum wage). There is also the cost of equipping them and training them. The government can only get the money to do this by taxing, more borrowing or printing it. All the ways of paying for it result in an effective tax on the private sector - which reduces its ability to invest and produce real wealth creating jobs.

"But that is not what I was talking about - I was saying that rather than the BoE creating money, it should be the Treasury, who can spend in very specific ways to boost employment and productivity."

But spend what? More raised from taxes? More raised from borrowing? The government has no money except that it can get from tax or borrowing. Either way results in the private sector ultimately paying for it. Also, assuming that the government can decide how to allocate these resources more efficiently than the private sector strikes me as optimistic to say the least.

Yes, it could work if politicians were very clever and not influenced by short term pressures (such as election popularity - or business interests wanting a handout). I fear that's not the case.

"As for the argument that we should not spend money employing people in case they import something - well that's just business as usual - when is that NOT going to happen - even when the economy is healthy. There is no reason why the government cannot invest this money into improvements in export potential."

I don't think importing stuff is a bad thing in itself, but it needs to be balanced by exports. Pumping extra money into the economy in the hope that it will somehow be spent on production rather than consumption is the problem. It is much easier to consume than produce.

Private enterprises must produce to survive. Governments have no such issue - when they employ people they don't require that the jobs they create produce wealth. In addition, government jobs are likely to be non-exportable service sector jobs. If their employees then spend their wages on imports we have an imbalance.

"Why is an increase in the money supply through bank net-lending, any less inflationary than government spending?"

It's not. I don't think either form as it currently exists is a particularly good idea. Credit is only a good idea when used for investment that is likely to increase production. Too often it is mal-invested or used for consumption. I think that we would have a sounder less volatile monetary system if money was backed by currently available goods & services rather than future promises.

Regards.

10. At 10:06pm on 28 Jan 2011, davidbrent wrote:
"You will be surprised to hear that the Chancellor didn't choose to share any back-up strategy with me when we spoke Friday afternoon. Let alone a Plan B."

I posted the following on the 'Google at Davros' blog, but it's worth repeating here since you brought up the subject of plans.

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

Did anyone see Will Self on Question Time last night? A question regarding the latest GDP figures asked if it was OK to use bad weather as an excuse. This was his answer...

I used to an heroin addict, does GDP stand for Get (me) Drugs Please....The government is skint , we are not, stupid wars, allowing people with no income to breed, the House of Lords ? The media showing violent films to the young. Criminals who torture and murder people allowed to live.(and vote,) Gambling sites, flooding the country with people we can't house or feed, Game shows, WOTW, the BNP, Pesto, Steffi and her Graphs and uncle Tom Cobbley and Ed Balls.... God, we are really scraping the barrel if the only person we rely on for advice is an ex-junkie.

96 - Peter,

"Most economists and many of the bloggers here still havent accepted or even noticed what the problem is."

There does seem to be an obsession amongst politicians and economists about 'sustainable growth'.

In economics it usually means a year on year percentage rate of growth in GDP. This is, however, physically impossible. Here's why...

A sustained GDP growth rate of say 3% (although the exact percentage is unimportant as long as it is positive) represents a relative growth rate (i.e. a compound growth rate). 3% of next year's economy is a bigger value in absolute terms than 3% this year, and 3% the year after next is even more - and so on.

In fact it is an exponential growth rate, and NOTHING can ever continue to grow at an exponential rate. Eventually all real systems (including economies) must either stabilize or die.

The doubling time for exponential growth can be figured out from the 'rule of 70'. A sustained 3% growth rate means a doubling of GDP every 23 years. So if we wanted a sustained 3% growth rate in GDP then GDP will double by 2034. By 2057 it will be 4 time its current size, and by 2080 it will be 8 times the size.

As GDP represents economic activity then this means in 23 years we have to double our economic activity. That's twice as much impact on the world's resources than we currently make. Before the century is out we will have to have nearly 16 times the current rate of economic activity.

And things only get worse from there, with an ever accelerating increase and real world impact. All for a modest 3% growth rate.

Seeing as we are already seeing real world key resource scarcity (as you say, peak this - peak that), it seems unlikely to me that we (and the rest of the world) could even achieve a single doubling in GDP.

The only truly sustainable rate of growth is 0%.

96 Peter ....My hunch is that for any idea to become accepted generally it must first be adopted by the powerful in a society.

Plenty of people would see the sense in what you say but our elites currently believe that they stand or fall on whether "growth" continues.

The trick will be to convince them that anything less than radical change in a more sustainable direction will adversely affect them as well as us serfs in the New Feudal Financial Global order.