Austerity plans: Where do you stand?
Which side is right in the debate over spending cuts and the economy? The truth is that no-one can know. Because the only thing everyone can agree on is that we live in extraordinarily uncertain times.
Everyone brings ideological baggage to these questions. If you believe in smaller government, you're more likely to support Mr Osborne. If you tend to favour a big welfare state, you'll probably be more worried by the prospect of steep cuts.
But the more urgent debate I've been focussing on this week isn't really about the proper size of the state. It's about timing - and the size and nature of the economic risks we now face.
In fact, you can be a firm believer in markets and smaller government and still feel that the coalition is taking the dangerous path: Martin Wolf, the FT's chief economic commentator, who has been talking up the risks of austerity for many months.
The best way to work out what you think is to ask yourself three questions.
1) Is this recession more or less like the others that we've seen in the past 50 years - or a once in a lifetime global crisis?
Everyone agrees that this has been a serious crisis. But the recessions of the 1970s and early 80s also felt pretty bad at the time. There are many who think the comparisons between now and the 1930s are overdone.
Yes, there was a moment in the autumn of 2008 when the global financial system could have collapsed. But, say the normalists, all that emergency support by governments took us back from the brink. Now everything's back on course for a normal, or nearly normal, recovery.
This is the view of most mainstream economists, and the hope of most central bankers. But others - the likes of Paul Krugman, or Brad De Long take a darker line. They say countries like the US have not yet turned the corner - in fact, all the pieces are in place for a long, Japanese-style slump.
If you think they're right - that the private sector is too laden with debt to support an economic recovery - you're probably feeling pretty gloomy about the future.
But you still have to answer question number 2:
2) Even if we're looking at a long and painful road out of this - what do you think government can do to help?
Krugman and others call for more fiscal stimulus to insure against a double-dip recession in the US. In a large, relatively closed economy like the US, that could make a difference. But many economists think fiscal pump-priming is less effective in a small open economy like the UK, because a lot of the extra demand - if there is any - will leak overseas.
As we know, Mr Osborne agrees. He thinks that monetary policy is the only reliable way to support our economy. And the only reliable way to encourage the Bank to keep rates low is by cutting public borrowing. He thinks that's especially true when public borrowing is as high as it is today - and many in the city agree.
After a financial crisis, it's probably more difficult for low interest rates to spur lending and economic growth. For some, that's reason to go back to fiscal policy (see my post on The case against Mr Osborne's austerity). But you could also conclude that the world has changed and we just have to make the best of things.
Carmen and Vincent Reinhart - distinguished experts in the impact of financial crises - argue in their latest paper [687.18KB PDF] that part of the reason financial crises are so costly is that policy makers don't realise that the path they were on before the crisis is gone for good.
3) How do you weigh the short-term risk of a weak recovery - or even a return to recession - against the long-term cost of excess borrowing? And how far do you trust politicians to get the balance right?
Maybe you think today is all that matters - that another downturn would be so disastrous, the job of preventing one trumps everything else.
On the other hand, even supporters of the spend now, cut later school accept that it does have costs long-term. Public debt will be higher. Probably interest rates too. If governments overdo it insuring themselves against a double-dip, you could get high inflation - and a loss of financial market confidence - as well.
You might think those long-term risks are more important than the risk of a weak recovery. Or maybe you just don't believe politicians when they tell you they have to borrow more today - in order to borrow less tomorrow. Both will make you more likely to side with the coalition.
So, to sum up:
You will worry most about the coalition's policies if you think that this is a once-in-a -lifetime crisis; that government spending can help avert disaster; that the short-term risk to the recovery trumps everything else; and that policy makers can be trusted to cut borrowing as soon as the danger is past.
You'll be most supportive of Mr Osborne if you think that this economic cycle will be similar to the past; that more borrowing can't do much to support growth; that it's the long-term risk of inflation and a loss of market confidence that we should be focussed on; and that politicians have a hard time keeping their promises.
So now maybe you know where you stand.
But like it or not, it's the government's approach that is now going to be tested - in that sense, we should all be hoping that it is right.
~RS~q~RS~~RS~z~RS~07~RS~)
I'm 
© MMXI
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1) Is this recession more or less like the others that we've seen in the past 50 years - or a once in a lifetime global crisis?
It's definitely global but in real terms i.e. goods and services, output will still be consumed by a finite global population. Output needs be maintained as do jobs.
2) Even if we're looking at a long and painful road out of this - what do you think government can do to help?
Spend on maintaining jobs and output.
3) How do you weigh the short-term risk of a weak recovery against the long-term cost of excess borrowing? And how far do you trust politicians to get the balance right?
The borrowing argument is a fantasy. Spend to recover. Control the banks.
Do not trust the politicians.
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I fear debt as it controls your life and so you are never free to make the right decisions. There is always something constraining you from doing what needs to be done. Couple this to a dour nature and austere values then I am by instinct a cutter.
As I have said previously this is not a rational argument but a visceral reaction to conditions.
However, we have to accept the reality that whilst the debt has ballooned in recent years as a direct consequence of ineptitude and ignorance amongst those who have put themselves over us, we have been trickling towards more and more debt for decades in both the public and private sectors of the economy.
This has been driven by a misplaced optimism that there will always be jam tomorrow but as we know, tomorrow never comes. Our economy has become more dependent upon financial services and something I don't understand called the `knowledge economy'. This has been a terrible error.
The metal bashing, wood shaping and thing-making that was the world us older folks grew up in has gone. Now we need it back if just to keep or put people in work. Welfare for the able is not an option.
I can recall David Steele remarking back in the early Eighties at the height of the Thatcher Revolution that an economy in which we sell insurance and houses to each other will not work. That we have made it work for about a generation is quite remarkable but all it has done is hollow out our industry, our economy and put decent people on the scrapheap.
There is no clear route as to how this is going to work through. I expect what is called a double-dip not necessarily solely due to government action but from a wider range of circumstances. Then after that we will have years of lumpy stagnant activity in which no clear pattern will emerge. In that period we need to remodel our economy.
We will know when we have got to the other end of this when house prices are affordable, money has value, industrial estates are fully functional and there are no boarded up shops. We are a long way from that and there is a lot of life to get through in the interim.
At the moment austerity has to be the policy, but once that is in progress the government needs to begin to facilitate economic development across the country which is local, self-sustaining and sufficient to keep the wolves from the doors of the people. This may not be fulfilled through traditional business but also by people cooperating
and supporting each other. How to bring those ideas to fruition will help us move a long way forward.
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Good summary, Ms Flanders. Of course, even that is simplistic. This is similar to the past, but not exactly the same. You can never have the same "initial conditions" for any two financial experiments.
Like many other people I've seen commenting here and elsewhere, I view the national finances as "household finances writ large." Most of us know that if the mortgage and credit cards and store card debts grow too much, then the interest rates go up too, we face misery. We know that the solution cannot be borrowing a bit more. So I'm in Camp 2, with Mr Osborne. I have been made redundant and resent it, but I understand why companies have to do this. And I also know that I have to economise so that I don't build up debt.
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Well, the alcoholic parent has drunk away the wages, and the responsible parent is left to feed the children. So the pawn-brokers looked like an attractive option. Sadly the silverware, furniture, clothes, shoes and kitchen sink have already been sold off.
So the children get sold into slavery.
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The direction is downward, and no tinkering with structural deficits is going to change that. Britain is not competitive, has few natural resources, is overcrowded and out of date.
The outgoing government used to be known as the party of "Tax and Spend". They added to that policy a new one of "Borrow and Spend".
Famously, when they departed, it was said "There's no money left". I don't see that situation changing any time soon.
While they were in power, they instigated a minimum wage, but failed to protect British jobs against offshoring to low-labour cost nations. They created "multicultural Britain, but couln't remember how many people had come through the ports. They gave away our sovereignty to Brussels, but chose to allow EU migrants to undercut their own minumum wage. They sold off our infrastructure, but failed to put price caps in place. They de-regulated finance, then taxed the public to shore up the failed banks.
In short, the previous Government bled Britain dry. (The patient wasn't well in any case.)
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In poverty, your options are restricted to:-
A. go hungry today and perhaps be too weak to eat tomorrow, or
B. eat today and maybe not find food tomorrow.
Not a good set of options for an incoming government to have to choose between. Thanks Gordon.
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As I see it the Osborne approach looks to the Bank of England to do the stimulus heavy-lifting whilst the politicians do the cutting. I dont have confidence that QE delivers an effective boost to the real home economy.It just disappears in to a financial balck hole. As such, I believe his policy is lacking as this country has not really had an effective fiscal stimulus. You dont make mention of the state of banks and credit markets. This is the real drag against recovery led by private capital.I cant remember when this was such a dangerous threat.The Bank of England could find itself having to tighten policy to preserve its credibility on inflation.
On the other hand, I believe there is a bubble in the safe-haven bond markets which is giving us a temporary advantage. However, we are vulnerable to self-interested financial market strategems which could exaggerate a reversal of fund inflows into sovereign safe-haven bonds or fan contagions.This could be made worse if the Bank of England either expands its balance sheet further or contracts it.
A pragmatist politician would prefer to proceed extremely prudently and re-gear his fiscal consolidation quickly to incentivise private business growth and deal with the state of banks.He or she will be wary of hedge funds and the powers of the too-big-to-fails.Its easy for opposition politicians to call for more risk to be taken with public spending boosts because history will forget them. It will remember those in power.
This is no easy call.There's a tipping point here where prudence can morph in to self harm.
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I am getting more mystified as the debate goes on. It is centred about this word 'growth'. I am not sure that there is any agreement on what this word means. Different 'solutions' will produce different types of growth and different types of society. There really needs to be a zeroth question. The starting point of the debate - what type of society do we want? David Cameron has said that sorting out the economy is the highest priority. Gordon Brown's authority before he became PM was based on having a stable economy (or an illusion of one!). But to do what?
At certain stages of my life I organised my finances so I could achieve certain things. Now, later in my life, my finances are organised in a different way. The point is they were organised with certain objectives in mind. The government is no different. The economy should be structured to deliver certain objectives. The economy is a tool not an objective.
Quick question - to show what I mean. Which should have a higher priority full employment or large company profits? (they may be linked but they are not the same)
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Come, come, Stephanie, you are giving far too much leeway to the poorly (if expensively) educated here.
You know perfectly well, as a good economist, and as do the (hardly left-leaning) Kaletsky and Wolfe, that to reduce public spending before private investment picks up is economic suicide.
If National Income bears a positive relationship to employment (which it does) and is the product of private investment, consumption, net foreign trade and net government contribution etc then to reduce any one of these is to reduce employment. To reduce employment is tantamopunt to reducing consumption, which is in turn a sure fire way to discourage private investment. The classic downward spiral. This before even considering the issue of expectations etc on consumption and investment.
I sometimes think of the economy as a lifeboat carrying us all around in a heavy sea. As a direct consequence of the 2007/8 hurricane the boat is damaged and leaking. To set the crew bailing out before fixing the leak is stupid - they just drown more knackered. The right thing is to fix the leak (i.e. get economic growth firmly establihed) then bail. The Irish Spanish and Greeks are bailing like mad just now and look where it gets them. Lower in the water every month.
Good debate, though.
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I don't think it helps that we refer to this "deficit reduction" exercise as "Austerity plans", that immediately puts a negative spin on any discussion...
The word "austerity" immediately makes me thing back to the 1950's, but we're clearly not going back to those days.
Once the deficit is under control and the fat has been cut from public services, there is actually great potential for things to be much better overall, in a few years time.
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Why doesn't the BBC ever point out that if the massive overspend of the country's budget is not addressed by spending cuts, then the only alternative is massive tax hikes on everyone who is working for a living? It's a simple choice: EITHER spending cuts OR tax hikes. Anything else belongs to cloud cuckoo land. So there is no point in the BBC or anyone else whinging about spending cuts unless it is at the same time prepared to demand, indeed insist upon, massive tax hikes. For every "cuts" story, why don't you tell us how much extra tax payer money will be needed to replace the cut?
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Fixing the deficit is not fixing the right problem. Private debt is the problem that needs fixing more than public debt. If private debt is not deflated any economic recovery will die in its tracks.
Like most politicians they go fro the easy achievable target rather that the real one. Fortunately their austerity will help catalyse repossessions and stall the housing market in not collapse it which is a requirement for private debt deflation.
The banks are still bust and we will still have to bail them out, but as austerity will be very slow and painful and last a long long time the Government have chosen the worst possible way ahead - which is to be expected!
Stick interest rates up to rational levels (5% now!) this will cause a rapid debt deflation and then we can move to a rapid recovery. What they are doing is to prolong the agony which is almost the worst possible thing to do! Avoiding the arithmetically inevitable is like slowly pulling teeth and it will last a minimum of a decade - all the time the economy will stagger from crisis to crisis. It is a far far better way to get the necessary adjustment over rapidly.
As to the probably method (of firing people) this is again the worst way for the country. It is far far better to keep everyone employed and reduce their pay.
as to the comment above:
"There are many who think the comparisons between now and the 1930s are overdone. "
Hell no, this is like the 1870s - The Long Depression - because of the nature of the debt bubble. We are in for 20 years of pain.....
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How can you be for cuts when all they have to do is print their own money that does not involve banks?
The only part of the budget not being cut is the INTERNATIONAL AID budget and this is because the IMF's greasy fingers is within that budget!
IMF = IN MY (fiat) FOOTSTEPS
Recapitalising the system by decapitalising the people
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SF: 'You will worry most about the coalition's policies if you think that this is a once-in-a -lifetime crisis; that government spending can help avert disaster; that the short-term risk to the recovery trumps everything else; and that policy makers can be trusted to cut borrowing as soon as the danger is past.
You'll be most supportive of Mr Osborne if you think that this economic cycle will be similar to the past; that more borrowing can't do much to support growth; that it's the long-term risk of inflation and a loss of market confidence that we should be focussed on; and that politicians should be judged by what they do now - not what they promise for the future.
So now you know where you stand.'
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Thanks Steffie! Stuck in the middle ...
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I think Stanilic is absolutely right about the need to get back to 'making things': lots of other people have been saying this. George Osborne and David Cameron said the same thing during the election campaign and correctly pointed out that we cannot keep on importing manufactured goods. In effect, the trade deficit needs to be eliminated.
The problem is: how do we get there? The options I can think of seem to be: 1)old-fashioned exchange controls; 2)overtly protectionist restrictions on trade with countries which are themselves protectionist (but that leaves open the possibility of allowing imports to come from other countries instead; 3) using higher taxes to reduce the level of personal spending and directing those taxes to recreate British ndustry.
I do not pretend to be an economist and am sure other correspondents will tell me why none of these ideas will work. However, I am quite clear as to what has to be achieved. The debate needs to be about HOW it is achieved. Ideas anyone?
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Thanks Stephanie. Whilst they may not be the questions that I would have used for the start-point of my personal analysis, they are pertinent. Therefore I will use them as the framework for my response:
1) Is this recession more or less like the others that we've seen in the past 50 years - or a once in a lifetime global crisis?
If only beause this crisis is still in progress, then it is different from any that have gone before. However, it won't be a once in a lifetime global crisis if we stick to the political and economic philosophies that are currently in-play.
More seriously, a number of factors are now in play, both globally and domestically that does make this crisis different:
(a) The fatal imbalance in the UK economy.
We now have off-shored a critical amount of both our manufacturing and service activities. The financial services industry, whilst providing tax revenues is divorced from the wellbeing of its host economy.
(b) Globalisation
This strategically inept philosophy has led the developed economies to far more than financial bankruptcy and the developing economies into a potentially critical bubble.
(c) Concentration
Never in our current economic history has wealth been so concentrated in so few hands - to the point where power has passed from nation states. As an adjunct to that is the fact that this wealth is now defined almost totally in money terms and has little true realtionship to the value of the assets that it is derived from.
(d) Debt
Never before has the whole economy been so mired in debt. Now we can argue about the deficit, the structural deficit and the national debt and their relationship with the bond market. However, very few comentators are seriously forwarding proposals for paying down corporate, household and personal debt - which now stands at record values. Those who do comment upon it appear to take some strange stances eg claiming that companies and households are paying-down debt whilst the levels of debt are still increasing!
2) Even if we're looking at a long and painful road out of this - what do you think government can do to help?
Stop claiming economic necessity for philosophical policies. To develop policies for the nurture of UK manufacturing and services. To join with our EU partners in developing protctionist policies before they are forced to. To actually make the pain of their policies universal and not just direct the pain at the poor.
3) How do you weigh the short-term risk of a weak recovery against the long-term cost of excess borrowing? And how far do you trust politicians to get the balance right?
There are fatal flaws in this question.
A weak recovery is the absolute best that will be achieved by the ConDem policies - and the odds on that are very long indeed. Far more likely is that we return to recession and stay there for far longer than is good for the economy.
Costs are just that costs! For far too long we have been ruled by the bean counters and know the cost of everything and the value of nothing. Costs can be repayed but, if we don't have a viable economic base with which to do so, only at the expense of society itself.
As for the politicans, irrespective of party, I wouldn't trust them to get anything right!
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In a different post I suggested redeeming all gilts ccurrently redeemable 5 years or more hence by Govt crediting the bond holders bank accounts. Naturally I was advised that if the money did not stay in bank accounts and hit the high st perceived wisdom indicates hyper inflation.
My understanding is that a high percentage of the debt is held by pension funds so how does this hit the high st? Surely the incentive would be for those incredibly talented fund managers to invest in businesses with growth potential creating jobs and facilitating the 'recovery'.
In either case you have virtually eliminated public debt and future interest payments (if you believe thats a problem.) You have of course created the potential for another asset bubble (ok not bonds) but at least there would not be this very thin excuse for killing off public services.
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There are a few throw away comments in your last few blogs that make disturbing reading.
1. 'the government says we need to shrink the public sector - to allow the private sector to climb out from under the dead hand of the state. That's a reasonable philosophical position to take.'
so using the phrase 'dead hand of the state' is reasonable.
2. 'You will worry most about the coalition's policies if you think ... that the short-term risk to the recovery trumps everything else; and that policy makers can be trusted to cut borrowing as soon as the danger is past.'
coupled with
'You'll be most supportive of Mr Osborne if you think ... that politicians should be judged by what they do now - not what they promise for the future.'
so if you're against him then you're only focused on the short term and you will support Mr Osbourne if you think politicians should be judged on what they do and not what they say, a convienient argument for the only party with the ability to put their policies into action.
Is this a party political broadcast script of some description.
As an aside related to judging politicians on actions not words - let's see what the coalition come up with to replace the BSF program, which they claim was only cancelled due to it's waste of resources, but they are fully committed to building new schools. BTW the reason 10% of the cost of an office are spent before construction and 30% of the BSF cost were spent before construction is because planning an effective office involves asking how many sockets/desks/offices you need while planning an effective school requires analysis of the pupils needs/learning styles and analysis of other schools/countries projects to make sure the most suitable school is built for the catchment area, but it's not news that the Tory's don't give a monkey's about education.
The argument isn't for or against cuts, it's moderate 'get the deficit under control' cuts vs savage ideological small government at all costs cuts. The argument against the cuts is that it very likely will prolong the recession and slow the eventual recovery down, reducing tax revenues and tying the governments hands in the future.
Another part of the blog which I take issue with is this -
'But you could also conclude that the world has changed and we just have to make the best of things.
Carmen and Vincent Reinhart - distinguished experts in the impact of financial crises - argue in their latest paper [687.18KB PDF] that part of the reason financial crises are so costly is that policy makers don't realise that the path they were on before the crisis is gone for good.'
I agree with the sentiments just not the interpretation. The financial crisis and current problems weren't caused by the previous government overspending (#4 puzzledmushroom really needs to take his blue tinted specs off and look at this http://www.ukpublicspending.co.uk/downchart_ukgs.php?year=1960_2010&state=UK&view=1&expand=&units=p&fy=2010&chart=F0-total&bar=0&stack=1&size=m&color=c&title=UK%20Government%20Spending%20As%20Percent%20Of%20GDP) but by the previous government putting too much faith in the markets, something this government isn't changing but is taking to a new extreme.
I'm seriously getting worried because the content and tone of these blogs has changed considerably in recent times, from reporting on the dangers to european banks and sovereign debt worries to telling people how to make up their mind on Mr Osbourbe's policies using Daily Mail style selective truths and phrasing.
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9. At 6:44pm on 10 Sep 2010, halford wrote:
Why doesn't the BBC ever point out that if the massive overspend of the country's budget is not addressed by spending cuts, then the only alternative is massive tax hikes on everyone who is working for a living?
Because it is untrue. Govt spending does not need to be financed by taxation or debt. Don't let let anybody convince you otherwise.
It may sound logical but the Govt is the sovereign issuer of sterling currency (ok at the moment through private banks) and tax collector of same and as such does not need to finance its spending.
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Stephanie said:
Even if we're looking at a long and painful road out of this - what do you think government can do to help?
This is an easy one: take control.
Direct intervention in banks. Heavy spending on technology.
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...also:
How do you weigh the short-term risk of a weak recovery against the long-term cost of excess borrowing?
False dichotomy. Why does the government need to borrow to spend?
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#14. foredeckdave wrote:
"However, very few commentators are seriously forwarding proposals for paying down corporate, household and personal debt"
The two words in the above with stick a bit are "paying down". I don't think this is possible in the sense of paying off a credit card bill. I think the sums are so unmanageable in the cases of many individuals that the debts will need to be repossessed and the bailiffs will need to sent in and their assets ceased and sold at what the market will pay and the balance of the unpaid debt written off - and we will have to bail out the banks again. I see no other way. This is a very terrible prospect, but as I have long maintained it has to be faced if we are to recover in the foreseeable future (say by mid century).
It is no solution for us to become like the Japanese who have had the same problem from roughly the same cause for over a decade and they have so far made no impression on the problem.
We can't run any kind of society (big or otherwise) with houses costing 12 times average incomes in London and first time buyers having to wait till they are 52 to save for the deposit (and 59 in the case of women). We must do something drastic quickly.
We know what to do. Put interest rates up to 5 to 7 % to catalyses the credit deflation that must happen and provide social housing for the dispossessed families. What the Government proposes will also do the same thing but in a much less managed way, by making large number of govenrment employees redundant and so unable to pay their mortgages and other debts. Even my preferred way (see above) of pay reductions for all civil servants will do the same thing, but my way, at least, payments for unemployment benefit will not rocket.
PS I've been 'seriously examining' this for ages (since the mid noughties) - I guess I must not be serious by your definition, but admittedly I see no way of 'paying down' the debt mountain as I can't make the arithmetic add up.
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"How do you weigh the short-term risk of a weak recovery against the long-term cost of excess borrowing?"
As others here have said, the government does not need to borrow money to spend, it only does so because it has bought into Monetarist neoliberal dogma.
Yet, even if it did continue to borrow, it has the power to almost endlessly restructure its debt (unlike Eurozone countries) - just look at Japan's debt of about 200%GDP or more, and yep, it is still able to pay those debts when they become due, and nope, bond yields are still very low. So even under this silly neoliberal paradigm the long term risks are just not there.
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Oblivion - yeah heavy spending in tech. How about we start with an integrated IT system for the NHS. A new tax office IT system. MoD. Ah wait. They already tried that.
Labour had "control" in that spending approached 50% of GDP. Unfortunately they blew loads of this on total garbage. A recent radio 4 program on MoD IT spending was hilarious. Sounding like they wanted something Dr Evil's HQ twinned with one of those silly detective shows where everyone has translucent touch-screens and low lighting.
And yes, you need to borrow to spend. Printing money erodes your currency via depreciation relative to others, which as we purchase foreign goods, is the same as borrowing.
For another public sector IT breakthrough: BBC IPlayer cost £6 to develop. Seems other channels did just fine reusing existing software. Took a freedom of information request to get it out of them.
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Oh dear, in any popular discussion on the UK economy, it won't be long before we are told that the country must get back to "making things" as if the path to wealth still consisted in knocking out millions of low margin consumer durables. That era is over for developed economies which wish to remain wealthy, only low GDP per capita countries do that now.
There is an important role for UK manufacture in specialist engineering products (which is doing quite well), but generally high margin services are where we need to compete. Government policy should focus on stimulating exports in these areas by keeping sterling competitive.
Reducing the deficit is necessarily a judgement call. It's possible to cut too much and too little. My guess is Osborne's hatchet will deliberately not be as sharp as he says it will. There is a lot of expectation management going on here.
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Charles Jurcich - yep. Keep on spending the next generation's future. Boom baby boom...
Alesha Soba - the BBC don't point out the true scale of the debt because they are absolutely bricking it about the cuts. ie a conflict of interest!
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#22 Ben,
"And yes, you need to borrow to spend. Printing money erodes your currency via depreciation relative to others, which as we purchase foreign goods, is the same as borrowing."
In the years between this recession and the last, the banks expanded the money supply by typically 5% to 7% of GDP per year. So that happens normally anyway, and given that the banks are not net lending at the moment, government issued money would not depreciate our currency any more than normal. Add to that, our trading partners will also inevitably have to increase their money supply at some time or other (or they won't recover), in the long run much of the depreciation will reverse.
Kind Regards
Charlie
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# JFH,
John,
A small cry of "unfair" escapes my lips. When I said "few commentators" I was refering to media commentators, politicians and the majority of academics. A brief trawl of the past threads on this blog alone will clearly demonstrate that you have consistantly made proposals to address this issue and I am more than willing to acknowledge that.
The major points that I was trying to make are:
The total debt level is way beyond anything that we have seen before - as you acknowledge
That corporate, household and personal debt is a totally different problem and needs to be addressed via different policies.
I have never suggested that you are not serious about the opinions you forward and trust that even when we disagree (eg protectionism) you reciprocate that.
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This crisis is centred on the financial system itself; therefore it is different.
The problems are at the heart of many countries financial operations for controlling their economies. I believe that George Osborne's proposed way forward is madness and I expect a double dip recession. Worse than that, it will rip the heart out of the private sector. They won't invest because too many people will not be able to afford to buy the goods they produce, either here or abroad.
The people likely to be affected will come from all walks of life and a much wide range job classes. Previous downturns have not really affected the public sector; jobs in many areas stayed secure. Now virtually all departments are under threat like never before. This is another significant difference.
Many pensions, which once collected by passing 65, are now under threat. Pensioners allowances, like the winter fuel allowance, seem likely to be means tested or altered in some way to reduce the governments expenditure. This too is different. The government are saying that they will reduce the money they spend by a huge amount. A couple of months ago, the talk was of 25-40% for some departments. Significantly, the timescale for implementation was rarely mentioned. Now, in the last week, I notice that politicians and reporters are mentioning the timescale that this will happen over the next 4 years! As if this made it better; so the cut this year will be an average of only ~6%. This to me means that the uncertain for most of the people in this country will last 4 years; if you don't loose your job in year one and you watch friends and colleagues suffer unemployment, it could still happen to you and your family in years 2, 3 or 4. So with this uncertainty over a long period, how will many react. They will save more, pay off debts and become more canny about their finances. The effect will be that the economy will decline as expenditure reduces.
One problem not mentioned in Stephanie's article, is that the economists seem incapable of understanding how the real economy works. Many of their proposed measures are based on incorrect theories and so are doomed to be sub-optimal at best and severely damaging at worst.
The other problem is that this government's policies are going to knowingly harm many people, driving down living standards. As it hasn't really started to bit, I believe few have any real idea how bad things might become; I'm not sure I do yet, but I am expecting high unemployment. In the past, there were benefits available to help keep people afloat; but now this too is under attack, and I fear for the consequences. Another difference -
Stephanie doesn't mention the effect of many countries being in roughly the same state financially at the same time and pursuing similar-ish policies. No / little hope from exports then! Again a significant difference.
In the past, banks would lend in recessions if the business were sound. Perhaps not this time – the banks need to bolster their capital and are likely to very choosy about their lending. Capital needs to rise from2 to at least 7%. Again a difference, in my view likely to exacerbate the down-turn. It certainly won't help!
If it is a short sharp recession, then the coalition may just get away with it. It is, however, the fact that we have a coalition that gives the UK, unlike many other nations, the possibility of relief. The ConDems have to hang together, but I cannot see this happening if the downturn becomes a double dip recession. The Liberals Democrats will know for certain that they will be wiped out if they stay in a coalition during a recession. Their only hope would be to go it alone by forcing an election; they might/probably will still take a severe beating, but they might just hold a small number of seats from which they could rebuild. Labour would be the only beneficiary. Again a difference for this time compared with many before.
So at what point will the clamour from the people cause the LibDems nerve to snap? Your guess is as good as mine; but it may well come sooner that we think once we have seen the contents of the spending review. GO could make a mockery of all this by backing down/ changing the emphasis of his policies, but it is, I think a forlorn hope.
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History has shown that the only guaranteed way of getting out of a crisis like this is for the public to spend their way out of it. Spending cash that they possess and not through credit. Investment creates jobs, Jobs create disposable income. Increased revenue increases business confidence which results in investment which creates jobs... we have to speculate to accumulate. We need to ensure that appropriate, relevant and targeted investment continues whilst identifying and actioning manageable efficiency savings. Evolution not revolution. We must also lower the availability of invisible cash i.e credit by the banking institutions and make them start lending money to businesses.
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Cuts or not, the debate is pointless. As others have posted above the problem is the level of debt. Thats is both the private debt and the public debt. The first step is monetary reform, ie removal of fractioanl reserve banking, and money creation passed back to the state. THis will get rid of virtually all of the government debt, and saving £50b annually. THis need not be inflationary, as the commercial banks who loaned money to the government created it out of thin air in the first place and it will be destroyed when they are repaid. The next step is to reduce private debt (60% is in housing alone). If you reduce it enough, the public will be able to pay sufficient taxes to cover the cost of public services once again and the books will balance. THis could be achieved by printing more money, and inflating it away, or by taxing those with higher levels of accumulated wealth (i.e the board room). Traditional measures wont work this time, we need to think outside the box, and cut the banking system down to size, which is literally sucking the life blood out of the economy, simply to balance their books. Once the books are balanced,the government should start investing in the future by spending rather than borrowing, in businesses that will lead to a more sustainable future, eg the worlds greatest renewable energy schemes, and get us off oil dependency. The politicians and there vested interests are simply holding us back, the solutions are there for the taking.
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#20 At 8:03pm on 10 Sep 2010, John_from_Hendon wrote:
“PS I've been 'seriously examining' this for ages (since the mid noughties) - I guess I must not be serious by your definition, but admittedly I see no way of 'paying down' the debt mountain as I can't make the arithmetic add up”
The personal debt mountain will be solved as individuals die and their estates are wound up. The debts will be paid off or the financial sector will have to take the loss. A few years ago the value of property could be expected to mean that the losses would be small-ish. As the recession bites, property prices will fall leading to larger personal losses and also in the financial sector.
The private business sector's debt (excluding the financial sector) will only be solved if the systematic fleecing of them is stopped. If they are not able to sell their products due to a large scale recession, then I have to agree that many of their debts will remain or they go broke.
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There was a financial crisis there never was an economic crisis (it was an election fable). The financial crisis was solved in 2008/9. Now we have an incompetent government collapsing the real economy by inappropriate spending cuts. Large numbers of people will have worse four or five years t han they should have done.
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11. At 6:54pm on 10 Sep 2010, PetersKitchen wrote:
'IMF = IN MY (fiat) FOOTSTEPS'
'Recapitalising the system by decapitalising the people'
What an absolutely wonderful description.
Average Joes right. Monetary reform is the only thing that offers salvation for the next generation.
In a previous post I put links to various videos.
Anyone who watches them, will likely have what Alesha Soba describes as a ‘revelation’.
A short animated film by Paul Grignon, ‘Money as Debt’ (link below).
http://www.youtube.com/watch?annotation_id=annotation_942534&feature=iv&v=z5vC_8azMFk
The documentary Secrets of OZ, explains our debt based system of government finance (link below)
http://www.youtube.com/watch?v=D22TlYA8F2E
The meaning of 'Austerity' the IMF and the reality (link below)
http://www.youtube.com/watch?v=jUmQbf1AyA8&feature=related
Two groups wishing to make changes to the system, see links below.
http://www.bankofenglandact.co.uk/act/
http://www.prosperityuk.com/prosperity/prosperity.html
Take a chance, it may well change your perception of things.
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Stephanie
I look forward to your articles and this time I had to wade in
on question 1
Governments need to creat times of crisis as its easier to exert control and what person goes into politics unless they want to change something. So is it real somewhat but I know of some companies that expect to grow their turnover 300% over the next two years with investment. So its not the worst ever at all
2 can governmet help well yes go on holiday for a year people arnt thick when it come to sorting themselves out they just need stable conditions and if government took time off we would stop the bankers to ministers and ministers to bankers round about.
There were many casander's in the late 1990's predicting a bubble burst then again in the mid 2000's now we make documentaries about them but why because no one listens to anyone when there is a posibility to get rich. I know bankers that in 2002 realised it was all built on sand because I asked them and there reply was "I kept going because i wanted my share". So if all the info was there in the past 10 years and nothing was done then why should we expect evidence based decision making from PPE and history graduates when they cannot even follow the tenets of what they were supposed to be taught between the drinking and the societies.
3 never ever ever trust politicians there is a difference between conviction voting and negociated compromise. with one you get a true reflection of what the will is with the other you get - adulteration of purpose - they are supposed to be our government but whatever the electorate decides is spun / changed into whatever they can get away with.
even writing this i realise the futility of this debate I cannot change anyones opinion all I can continue to do is grow my business and not move production overseas- continue to plan for apprentceships and maybe fund a degree or two for employees.
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It's all fine as far as it goes, Stephanie. But where do you stand? What do you think is the right course of action? As the BBC's economics correspondent, I expect you have a view. Let's hear it!
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To the Mrs Flanders, the BBC and all who work there.
I believe that Monetary reform is needed, and I believe it because it is in the younger generation best interests.
Are we really going to sit back and watch our children enter, what can best be described as debt slavery?
Debate on our debt based monetary system is so important, if only to give people an insight into how it works, and the alternatives.
The articles written on this website have prompted curiosity, and such curiosity has led at least me, and likely a few others to this point.
Given the current ‘Austerity Measures’ about to be imposed upon people and the effects on the younger generation, if ever there was a time to discuss monetary reform, this must surely be it.
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28. At 8:59pm on 10 Sep 2010, Graham Stephenson wrote:
History has shown that the only guaranteed way of getting out of a crisis like this is for the public to spend their way out of it. Spending cash that they possess and not through credit.
------------------------------------------------------------------------
There are two dilemmas.
One: People do not have money to spend because their income after tax is too low. Reduce the tax? OK. Reduce what the tax is spent on? People don't like that, it means cuts in services. [There is worse. People do not have money to save for their future as pensioners. Therefore no more spending after working life is done!]
Two: Even people on relatively modest incomes can get to the point where they do not need to buy more stuff. In fact it is possible these days, to have lots of stuff sitting around unused. It does not wear out much in that sort of situation and therefore doesn't need replacing so often.
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#26. foredeckdave
"The major points that I was trying to make are: The total debt level is way beyond anything that we have seen before - as you acknowledge" etc..
Dave, I share your opinions on this aspect of policy and sorry if I was a bit touchy about pointing out the importance of the problem as in the past I have taken a lot of flack for my persistence!
Turning to
#30. SleepyDormouse who wrote:
"The personal debt mountain will be solved as individuals die and their estates are wound up."
Assume this 'solution' dominates - just consider how long it will take to unwind the debt this way. These are the buyers in negative equity who cannot sell and who can keep up the payments (and not all will be able to do so) - it may take 50 to 60 years until their estates are wound up. This equates to a 30 year depression (30 = half life) - just about the same as the 23 year Long Depression of the 1870s given that life expectancy has increased. (Note: the Long Depression centred on property and excess debt too.)
My solution is to accelerate the process of debt deflation (by reverting to rational levels of interest rates 5%-7%) as this will be a way of getting over the problem far quicker and thus the general impression will be that as soon as the worse is behind us then people will be happier and be able to look forward in a more positive way - something that will be very unlikely to occur in a long grinding depression envisaged in #30.
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The public spending surge was due to a booming economy followed by the crunch , with the resultant swelling of the deficit because of the need to keep the banks afloat and the sudden fall in the tax take from businesses and self-employed , and contractor-type pseudo-self-employed.
I know many, many people who owe the taxman a fortune and who are having to sell up houses and assets and scramble for loans ......that is partly what is keeping house prices low .The taxman is due a huge backlog of unpaid tax.
Masses and masses of cash........
.............because the sixpercent plunge in GDP was accompanied by a near-halving of tax take......and that is because hardly anyone running a business was able to pay their tax.....but no-one can escape the taxman's clutches.
Watch this space for a massive rebound in tax receipts.....remember the huge penalties that are being imposed, which will also generate loadsamoney.
Alot of these downsizers are renting, but they will eventually need to buy and that will trigger another housing recovery.
And then public finances will look a heck of a lot rosier than they are now ......... so in that regard the cuts are overkill.
George is showing his lack of experience and it is really sad for Britain.
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This is a really important, critical debate. And it is depressing, given it's significance, the poverty of the coverage in the wider press. However, I have recently become diverted by a new distraction: spotting the interventions of the party spin doctors.
It's great fun. Try it at home. It's quite safe.
In the previous thread on this subject, I'm pretty sure that I spotted both the Labour and Tory spin interventions (though, not yet in this thread, after all, it is Friday night). I am, though, torn. Part of me screams out for them to leave us (the public) alone, we're fed up with them (or I am anyway). However, another part of me hankers for this new sport, whether on blogs, twitter, facebook, or wherever. Spotting these total frauds, masquerading as members of the public, is such fun. They are such sad acts.
It will be interesting to see if they complain about this post and get it blocked.
Back on topic, the deficit is eye-poppingly horrible. It is, by a huge margin, the worst peace-time, adverse fiscal event this country has seen, in centuries, if not ever. And was already pretty nasty, even before the "global economic crisis". It has to be addressed. The, so far, benign attitude of the bond markets (who we collectively borrow from, to fund the deficit), is because of the prevalent assumption that the government will address the issue. Were those markets to even suspect that we would not address the problem, or worse, inflate it away, then we're toast. And once that searchlight of doubt is pointed towards us, it is very, very hard to escape. And the cost of our debt then rockets. Our collective pips would collectively squeak (as would our children's, still paying our debt, decades into the future - some of us actually feel guilty about that).
I am convinced that at least one Euro country will default on it's debt, within three years: probably Greece, perhaps Ireland or Portugal or others.
So, logically, we have only three options: (1) borrow even more than we already intend to (which, as it stands, is gut wrenchingly nasty), (2) cut government spending or (3) increase taxes (or some mix of the three).
Well (1) is not an option (sorry Ed, if we do this, the impending scene is us going cap in hand to the IMF and then we're back to (2) or (3), and even worse off). This is only an opinion, but I am far from alone in this conclusion.
So, to tax or to cut (the only two remaining options). Well, the previous Government answered that question. By raising the tax take, as a proportion of GDP, to about as high as it has ever been, raising taxes much further is very hard, unless you want to risk civil disorder.
Where does that leave us: cuts.
Yet! Ed has a good point (well not his, but Keynes), cuts will undermine demand and risk a further recession. However, we have no real alternative choice. That does lead me to my actual point:
Cutting, right now, is horribly dangerous, but we have little choice. So, we need extraordinary measures to encourage the private sector to fill the vacuum and compensate (sorry George, but you are not even out of the blocks on this yet, and it's really, really worrying). Not half measures. Not gestures. Extraordinary measures. In my opinion these have to be in two areas: (1) access to finance, targetted at new business, wealth creating opportunities and (2) temporary tax reliefs, similarly targetted, (these are not tax cuts as they relate to wealth creation, not yet there).
I manage my own pension (you don't imagine that I'd let those robbers in the City or financial services industry near it, do you?) and it is all in safe havens (well as safe as I can get). I am deeply gloomy. Cutting is our only viable core strategy, but I see no evidence of anything approaching adequate compensating policies.
Brace, brace, brace.
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Ben
Well...I am afraid that's just all wrong. If you think otherwise, supply evidence...
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Tory ideologies are price that we have to pay for the follies of others whether you blame Labour, bankers or the poor for the problems.
We are heading for a bigger recession, created to satisfy the ideological policies of a group of ministers who do not use the services they are cutting or can afford to pay for alternatives if they need to do so. Thus they can afford not to worry about getting the decison wrong because its the peasants that will suffer. If they get it right they will deservedly get the credit for it. But if they get it wrong they can focus on their businesses and wash their hands of the mess, so crime is up, the NHS is too expensive for the poor to use, so what?
If only the Lib Dems had the courage of their convictions to moderate these ideologies we might have a more reasoned path out of the present difficulties. Sadly the future Conservative Candidate for Sheffield Hallam is having too wonderful a time embracing these ideologies to care.
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It is incumbent upon each generation, to do that which is right and proper by the next generation. To allow the next generation to enter debt slavery is possibly the most heinous dereliction of duty that is possible.
Monetary reform is needed.
Abolish debt slavery, if only for the young.
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Hi Stephanie,
I've perused the BBC website, as well as the media generally, and would like the following question answered:
"To what extent is the current debt crisis a result of the Labour governments fiscal stimulous and a notional debt because of the "bail-out" of the banks, and to what extent is it a direct result of any over-investment in the public sector, such as schools, hospitals and benefits?"
Ball-park figures, please, if nothing else. It sounds like a loaded question but honestly I am after an honest assessment; as I don't believe this issue has been directly accounted for since the 2008 collapse.
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You know, I have never been an anti-capitalist but the truth is now clear. We live in a world where there is (currently) enough, finite, resources to feed the poor of Africa, Asia and South America but the right, big business, and their allies would try to convince us that we are in store for hardship and need to "tighten our belts" whereas bankers still walk away with multi-million bonuses.
Isn't the truth that the current economic system is exactly that? A system devised by man. With a 'feed-back loop' which the Labour government was trying to cultivate to eradicate poverty in the UK and beyond, and which the Tories are trying to kill in the name of "Austerity"?
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Stephanie said: "You will worry most about the coalition's policies if you think that this is a once-in-a -lifetime crisis; OR - You'll be most supportive of Mr Osborne if you think that this economic cycle will be similar to the past".
It seems to me, Stephanie, that each recession has been a once in a lifetime crisis. All of the recessions, mid 70's, early 80's and early 90's had different causes and hence different effects. However they all seem to be characterised by the fact that it took 13-14 quarters from the start of the recession to get back to where we had been in GDP and employment terms.
Will this recession be different - possibly! It's certainly deeper than previous recessions and the characteristic of a liquidity crisis is that it takes longer to fix. The other factor is that we have precious little room to manoeuvre this time using policies such as increased Government spending.
So, if you believe like me, that Mr Osborne is doing the right thing in bringing down Government spending to match tax take, you are probably left only with increasing the money supply if the economy nosedives, with the consequent dangers of inflation.
So if we undertake pump priming, perhaps, John from Hendon's favourite Banker, Merve the Swerve had better look the other way when inflation continues to climb above 2%.
However if you look at previous recessions they seem to have been characterised, obviously by large unemployment and also by house price reductions, poor business profits and the loss of many companies. It doesn't seem like that has happened this time. This might be a good sign in that credit drought not with standing, the underlying economy is still reasonable robust. Whose with me to raise the half full glass?
Personally I more concerned that a mad as a hatter Middle Eastern country is on the verge of going nuclear. Perhaps we should be worrying more about that?
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This comment was removed because the moderators found it broke the House Rules.
I'm scared by Osborne's rhetoric, talking about culture of idleness, already he's back on the old Tory tack of blaming the ills of the world on the unemployed- how long before he calls them scroungers?
But the truth is we are still a rich country and if you doubt that, tell me why there are more and more new cars on the road, and they're getting bigger (and seemingly usually German) too.
Science has debunked the right wing theories that wealth is somehow (magically) a measure of virtue, how "fit" one is in some make-believe world of economic natural selection. Humans are (unless damaged) born pretty much the same: the differences, particularly in brain function minute, and in any case not hard- wired and therefore easily overcome. So why do we categorise and stereotype people, particularly the young, into "clever", or "stupid", when we know now that this is not the case? It's a self- fulfilling prophecy because people end up believing it at whichever end of the scale they were categorised into.
Labour had its faults, but they did introduce the concept of valuing people, and trying to give everyone a good start in life by investing in education and social welfare programs. They screwed up over taxation, failed to reverse the industrial decline, allowed way too much private education and dumbed us down though.
Osborne is taking away the net at the bottom, especially where children are concerned. We're going back to "know your place" and the only ones who will crawl up the social ladder will be the ultra- competitive types willing to tread on others (remember Thatchers Children?).
Austerity is a bitter pill to swallow when the problem was caused by greedy incompetent arrogant bankers. If we were all in the same boat then the Big Society might stand a chance. But i think it has little hope when really the cuts and inevitable distress are being put in place to keep an undeserving minority in luxury and grandeur.
There is a different way. Just look across the Channel.
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# 45 dontmakeawave,
"However if you look at previous recessions they seem to have been characterised, obviously by large unemployment and also by house price reductions, poor business profits and the loss of many companies. It doesn't seem like that has happened this time. This might be a good sign in that credit drought not with standing, the underlying economy is still reasonable robust. Whose with me to raise the half full glass?"
You appear to be making the mistake of thinking that this crisis has passed. Along with the majority of economists and commentators I feel that there is far more to come in this saga (both nationally and globally) than has yet been revealed.
As for our economy being "reasonably robust", I truly hope that you are flexing your chuckle muscle. I doubt that you will find more than a handful of people (even in the Coalition government) that would share your opinion.
I would share a drink with you but the half full glass is merely an illusion.
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Cyclical aspect----I think the tech bubble in 1999 wasn't allowed to 'properly' deflate but was transferred (if you can transfer a bubble) into property both commercial and domestic.
When everyone's house is 'earning' more than they are at work then that's a big signal something's wrong--and when it goes on for years then something's really wrong.
It's telling that in the mid nineties people thought it was a no-brainer: Save for a pension---by the middle of the first decade of this century only numpties, did that because the smart thing to do was borrow up as high as one could, because the house(s) would pay for everything---- the equity release would enable everyone to live happily ever after, we didn't need productive work either personally or as a country...or perhaps we did.
Perhaps it's a good thing that we're not repeating all those mistakes from the past and are clearly working out bigger and better brand new ones.
Structural aspect----------- The effects of digitisation and the velocity of change they are driving mean there is not going to be a 'back to normal' --Normal in 1910 in Glasgow, Newcastle, Liverpool was powerhouse Cities at the heart of regions enjoying being at the centre of an ongoing sunny mid-day of Empire.
It took 60 or 70 years for that to turn into the rainy November their economies resemble today.
Digitisation of information could do to the professional service industries what the social changes did for the Northern industrial cities--- it's doing it to entertainment, music, journalism and TV and these changes won't take 60 years to work through.
Maybe they won't be as devastating in comparative terms, or maybe they'll be more devastating--I haven't a clue...but I am certain their isn't any 'back to normal' from this (Super) Cyclical recession because there is no 'normal' to get back to.
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24. At 8:40pm on 10 Sep 2010, Ben wrote:
Alesha Soba - the BBC don't point out the true scale of the debt because they are absolutely bricking it about the cuts. ie a conflict of interest!
The debt, the debt The debt....
Private debt (Corporate, business and household) is reducing naturally because people are wising up or simply are unable to borrow more.
Now public debt.
The QE total was how much? £200 billion. Take, i don't know lets say a 7% reserve ratio. That equates to a maximum £2.5 trillion injection to the money supply which presumably was the intention (a stimulus). Thats two and a half times the National Debt. In actuality the £200 billion has probably gone straight back to the Govt and is now classed as more debt because the Govt chooses to finance its spending by issuing bonds.
But if follow the logic of the intention Public debt could have been wiped out by simply redeeming Govt bonds and raising the Reserve rate on private banks to something sensible imo 100%
Take FRB away from Private banks and put it in the hands a state bank and don't let them use 'Debt' as an excuse to kill off the welfare state.
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34. At 10:10pm on 10 Sep 2010, canarytim wrote:
It's all fine as far as it goes, Stephanie. But where do you stand? What do you think is the right course of action? As the BBC's economics correspondent, I expect you have a view. Let's hear it!
As a BBC correspondent Stephanie is unable to give her view but I for one would love to hear it. That goes for RP too.
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OK, this is what I believe.....the standard of living that we enjoy in the UK is unsustainable given our economic earning power, this is blindingly obvious if as I do, you work in the private sector, we are just not generating enough real income to pay for the services that we all enjoy, at a rough guess, it feels to me as if the state has been spending about double what we are earning , the population is soft and we have two generations that have had an easy life, expect to retire in their 50's or early 60's and then spend 30 years consuming, whilst the rest of the developing world powers ahead working for a fraction of what we earn and for decades longer.
Under Labour, I am convinced that we were heading for total disaster, the coalition "may" be able to keep the show on the road for a little longer, but unless the population wakes up, accepts that we need a drastic reduction in all of our living standards we are heading for massive problems within a decade or two (as is much of the western capitalist world)
This need not be as dire as it sounds, we need to move away from the obsession with economic growth as the engine for the economy, we need to organise our economy on a more local basis, we need to grow more of our own food, we need to import less trash from China and make useful high quality products that we really need, we need to drive less and drastically improve public transport, so do I think we need to make cuts ?....you bet I do, will the overfed soft populus accept it and wake up ?....not so sure
I would say that unless we radically change over the next decade or two, we really are in big trouble
PS, I stood as the candidate for the Green Party for South West Devon at the last election, I have some reservations about the green manifesto, but it makes more sense than most of the lunacy we here from the mainstream parties, I listened to Clegg on Today prog the other day, he did well IMO, but they need to be even more radical if the UK is to survive
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Sorry this is not a fascinating academic exercise the policies to be followed by the Coalition will ruin or damage millions of lives of people who were not responsible for the position we are in. Once again Complex, not tough decisions. with tough consequences for people other than those who make the decisions.
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Oblivion. Wow that was a really lucid reply. All wrong?
iplayer: http://en.wikipedia.org/wiki/BBC_iPlayer
it projects: http://www.information-age.com/channels/management-and-skills/news/1095512/it-projects-among-governments-biggest-failures.thtml and thousands more links. google it
50% gdp: http://www.telegraph.co.uk/comment/telegraph-view/7494248/A-shocking-statistic-that-sums-up-Britains-plight.html
The point about printing cash for a fiat money system reducing the value of said cash is, I'd say, pretty obvious.
So you say all wrong - here is the evidence :-)
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This article by Stephanie Flanders is a wonderful example of the Value of Economic Analysis.
Notice that the choice is : For or Against further Deficit Spending. That's a binary 50/50 choice. And notice that it is impossible for all the Economic Intelligence in the world to determine which is the better choice!
And it's nice to add a human touch to economics, by adding that whichever 50/50 choice we have to live by, "Let's hope it's the right one".
My goodness, men and women of ancient religions could barely come up with less. Speaking of less not more, no wonder Tim Harford has decided it's more important to teach people how to count. For example, how many cars did you see in your traffic jam today that had only one driver in them? How many fewer loaves of bread can you buy with £1.00 today than you could have bought 7 years ago? How many fingers am I holding up? (None - I'm too busy using them to type. By the way, None is the same as ZERO. Zero is the same as 0).
And how many Economists does it take to make a 50/50 decision?
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# 37. At 10:39pm on 10 Sep 2010, John_from_Hendon wrote:
******
Of course you are right about the extended period it would take to unwind the present situation, but I was trying to be optimistic! There is a very dim light at the end of a very long, long tunnel. It forms the default fallback solution for many. Many of the population will not earn enough after the neoliberal policies have impoverished the nation. Its happening now and has been really for the last 30-40 years, but most don't realise it - not even now after all that has happened.
We need to get away from the debt based society in which we now live. For youngsters, they have an opportunity to eschew debt, but that will be difficult for them when their peers behave so differently. But for anyone of around 35+, it is going to be far more difficult, particularly if the expected downturn written about in this blog does come to pass; [so I really do hope we are all so wrong and GO is right; but I fear it will prove otherwise].
We can change the system, its man made, so it can be altered; but only if the stranglehold of the current monied class is broken. Their attitude of "Its mine - all mine; and I want all yours too!" must be changed somehow. Maybe it will only be when the middleclasses are badly hurt financially that real change will come about. Additionally, some economists who actually know how the financial system works would help also.
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@54. At 09:32am on 11 Sep 2010, Ben wrote:
----------------
We have had debt free money in the past. See YouTube The Secret of Oz
http://www.youtube.com/watch?v=D22TlYA8F2E
It worked then until the money hungry got into the act.
I don't understand what changes if the government pays interest for the money it issues compared with a system where they just issue it. Of course there has to be visible, enforced, workable controls to stop inflation. Actually, we pay tax now to stop inflation, not to fund government expenditure. My evidence is a paper by Stephanie Bell 'Can taxes and bonds Finance Government Spending'. Available as a download if you google it or use link
http://econpapers.repec.org/paper/wpawuwpma/9808008.htm
to get at a pdf file
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Idiots’ guide to macro economics for chancellors
Wealth = consumed output
Imports increase wealth because we consume other countries’ output
Exports decrease wealth because we don’t consume our own output unless the foreign currency used to pay for them is spent on imports
Governments should have maximum output, full employment or both as primary goals
Sterling money is a means of exchange that facilitates trade that, along with employment, produces said output, imports, exports i.e. wealth.
As sovereign issue of the fiat currency Sterling the Government controls the provision of money to the economy. As such double entry accounting rules do not apply to Government finance.
It can add money to the public sector by spending. At that point money is created. It can then enter the private sector where it is combined with private sector spending to facilitate the production of output i.e. wealth and jobs.
It can take money out of the private sector by taxation. At that point money is extinguished forever along with its spending power.
It does not need to tax or borrow (issue gilts) in order to spend.
Given the primary aim of maximising output and employment, what you don’t ever do is reduce Government spending at the same time as private spending is depressed and at the same time increase taxation unless you are confident that other countries will continue to send us their output.
(I think China will found out quite soon that sending us all their goods and hoarding US dollars is not the way forward)
Such action would have a catastrophic effect on output and employment which are your primary goals as elected representatives.
Does anybody know if George ever studies A-level economics ?
Shift your focus away from the debt people. It’s a red herring.
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#54 Ben (not having read what monetary reform advocates have been saying) says: "The point about printing cash for a fiat money system reducing the value of said cash is, I'd say, pretty obvious".
The point increasingly well, comprehensively and clearly made above (e.g. by #2,11, 14,21,25,29 and especially 32) is that we already have a system which is at least 93% fiat. The problem is it is operated by the BANKS, who charge us and our government not a commission but INTEREST on credit they simply AUTHORISE (it is made real by the people who accept it in exchange for goods, work and services).
The point which ISN'T being made is that we have to EAT etc what we already have before we can work to PRODUCE more than enough for next time round - so we are able to MAINTAIN skills and equipment and INVEST in improving our working and social cultures.
Thatcher had and it seems Osborne still has the idea that "necessity is the mother of invention", forgetting that we have to eat from surplus created by other people in order to be able to invent, and to work in order to maintain our surplus (to say nothing of our skills and our different types of motivation). #4 Puzzledmushroom might have had it about right, if his timescales had stretched back even as far as Thatcher.
#11 "Recapitalising the system by decapitalising the people ...".
The truth is, an under-employed nation will be best able to recapitalise itself by decapitalising money and recapitalising its people: not central but local government authorising creation and WRITING OFF of local credit properly used, with central government regenerating largely self-sufficient communities by basing them on communal property rights and duties (e.g. operation and control by residents and employees rather than credit-money purchasers of legal title and contracts).
In the mean time, I understand Ian Duncan Smith is proposing something like a BASIC INCOME coupled with incentives to work. CREDIT FIRST, WORK LATER, instead of workers having to give credit to employers in the form of working "a month in hand".
That might succeed, if interest payments via local banking services can also be replaced by commitment to voluntary work for the good of the community. Someone is going to make good the public services the Tories are proposing to cut.
Let me join the chorus wondering what Stephanie thinks, in light of the comments on her arguments, both for and against. Can she at least reassure us she READS our comments?
On the other side of the story
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Yes, Austerity is the order of the day.
Growth is no more and the next 20 years will be different from the previous period.
We are in a Global recession.
Why is it such a bleak picture....Because Growth is and has always been associated with OIL production/ consumption.
We have reached peak oil...Oil companies now search for oil with billion pound rigs in deeper and deeper ocean areas...desperate measures are now being taken...even going to war (Gulf wars).
OIL = GROWTH
We have lived through unprecedented growth over the past 100 years or so, but the party is over as we approach diminishing oil resources.
We have technology, science, education etc, but nothing I can see, can replace or be a substitute for oil...
You see, talk of an alternative for oil, inevitably means that rare earth materials, come into the equation and the operative word here is "rare"...
In the next 20 years, if growth world wide was to double, (i.e. 3.5% per annum growth), then the oil consumption/ production during the next 20 years would exceed all the oil production ever produced since day dot (simple arithmetic...work it out)....Obviously not sustainable.
So whatever political views one may hold, change is inevitable.
The fear is that during this transition, which is going to be extremely painful, the majority will have to sacrifice their standard of living, whilst a few will fight tooth and nail to maintain their standard of living....and who do you think the few, who are in power at the moment are.??....
But really, to see where all this is going to take us, we have only to watch the USA, because that is where all the consumption is at the most and that is where we shall see the effects of austerity first....Watch and learn from the events that is going to take place in the USA...
Unfortuneately we have already witnessed an event in the Iraq war, instigated by the USA and backed by a UK Governmenmt....What next one may wonder.?
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A couple of thoughts
1. It's not just public sector debt that matters. It's private sector debt as well. Indeed the extremely high levels of private sector debt are already a bigger concern than the current (relatively manageable) levels of public sector debt. If the Governement's "austerity" programme just results in public sector debt being transfered to private sector debt, then that will make things worse rather than better.
2. There's a good argument that the root cause of growing levels of both private and public sector debt is actually the historically high levels of inequality in our society
- the rich (say the richest 5-10%) get richer and the rest get poorer
- the rich run out of consumables to spend things on, so they save instead
- increasing levels of saving by the rich is either spent on assets (causing asset prices to
rise) or lent to everyone else, either via the banking system or via government borrowing/
spending.
- this lending (at interest of course) is needed/justified so that demand in the economy is
maintained, and so the non-rich can afford to continue to buy over-inflated assets (aka
houses).
- the interest on the increasing levels of debt means the rich get richer and the rest get
poorer....
So what really matters is not the size of the austerity package, but how it is done and who suffers most. Cutting benefits/increasing taxes for the rich is fine. Cutting benefits/spending on the rest will just dig us deeper into the inequality hole and cause overall debt to continue to rise.
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Austerity plans: ?
This surely is a biased pointed question/statement by the BBC?
George Osborne does not have any plan or plans for 'austerity' .. he has a plan for the short, medium and long term effective and responsible management of the UK economy and national finances.
The plans are not for or in the interests of 'austerity' - the 'plan(s)' are to ensure that Britain can pay its way in the world and deal with the next financial storm ... which may well be on its way ... we just don't know when.
I'm afraid what could have been a good opportunity for an interesting economic debate on this blog for the possible shape and detail and extent of the plan(s) ... has been lost in the partisan political rhetoric.
The wayward assumption that the way to govern Britain is with an increasingly enlarged, inefficient and bloated public sector ... paid for partly by the taxes of private individuals and partly by the taxes paid by the private sector is naive in the extreme.
'A spoonful of sugar helps the medicine go down
The medicine go down, the medicine go down
A spoonful of sugar helps the medicine go down
In the most delightful way'
The main question is not just what is cut but what else will the Chancellor to do (besides implement 'savings') to 'add value' ... something out of nothing ... by better planning, management, co-ordination of govt. policy and resources, organization.
The private sector will not invest until the bureacracy on British business, the uncertainty about the govt on taxation, legislation etc is clarified.
The private sector will not make an effort to employ and retrain many of the British unemployed until there is is a tax penalty/incentive scheme in place for employers to evaluate this.
Mr Osborne has to be bold with the concurrent activity besides the savings that have to be achieved ... and this means bringing forward e.g. welfare reforms and creating productive jobs with public private local partnerships where they are most needed and for those who prefer work rather than dole.
Hopefully, the debate can move beyond 'cuts' to the big picture ... but cuts cuts and nothing but cuts will be a govt mistake in the absence of some concurrent govt initiative and intervention where it is needed most.
Uk businesses have a responsibility to try and take on at least one unemployed person if only on a part time basis ... they all fiddle enough on their taxes to pays something back ... this in itself would make a massive difference. George Osborne needs to reflect this in his 'plan(s)' and make it easier and less costly for UK businesses to take on a new British employee.
There is plenty that can be done to add value and do more with less ... it needs some hard work by govt to deliver this quickly ... timing is crucial.
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Ben
You seem to miss the point. What difference does it make whether it cost 6GBP or 60GBP of government spending to make an iPlayer? Does the money somehow disappear into a blackhole in your mind, or does it get spent on other, presumably more important things? Why is it important to me that someone overspent on tech when the government is overspending in the hundreds of millions propping up some fat bankers I would prefer to see imprisoned, in the name of free enterprise and the Western model?
Ben, look at the first 3 links, it might help you:
http://www.3spoken.co.uk/2010/04/primer-on-modern-monetary-theory-mmt.html
Your assertion that printing money is inflationary does not make sense, and is not supported.
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Ben
Regarding spending on technology, I was referring to energy and energy infrastructure. The real root of the crisis is the end of the petrodollar. This means the end of the system of international trade and the system of energy distribution that went with it. The two were coupled and now need decoupling.
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Political debate in UK left-right politics used to be about the balance of private vs. public spending, where cuts in public spending were balanced by tax cuts that fed back into the economy - the money was still spent, but by individuals not Whitehall - and we voted for which way we wanted the balance to fall.
THIS IS NOT THE SAME! Gorgeous George is proposing to take o/o/m £100 Bn out of the economy - and as every £ tends to be re-spent about 10 times before returning to deposit/savings, that's A TRILLION POUNDS of demand being taken out of the economy.
That trillion would have generated tax receipts - VAT, income tax, excise duties, etc. which will now not happen, so cutting public spending without cutting taxes will reduce the government's income in the future.
At the same time the cuts in spending will throw at least 1.2 M people who were directly employed in the public sector out of a job - and many of those working in the private sector on government contracts will also lose their jobs too - in construction alone this is more than 500,000 people. They will all sign on for jobseekers' allowance, housing benefit, council tax rebates, etc. so driving the cost of welfare payments from the government up.
REDUCED GOVERNMENT INCOME - INCREASED GOVERNMENT SPENDING - SO THERE IS A VERY REAL RISK THAT GOVERNMENT BORROWING WILL THEREFORE RISE, NOT FALL.
The ConDems answer to this is that there will be a renaissance in the private sector that will be "set free" as it will no longer be "crowded out" the the public sector's "bloated control" of so much of the economy, so private enterprise will create an additional 2.7 M new jobs over the parliament, invest £400 Bn in new capacity and boost our exports by a third, so generating new tax income, taking government welfare cost out through creating employment and addessing our unsustainable balance of payments deficit, building confidence in the UK economy to keep the costing of borrowing low.
To expect us to believe this is going to happen flies in the face of mathematics, basic economics, the lessons fo history and commonsense. Taking £1 Tn of demand out of the economy is BOUND to impact businesses as consumers will cut their spending as total income falls, which will lead to fewer jobs, not more. The Scottish CBI admitted this on SKY NEWS earlier this week by saying the private sector can't even replace the lost public sector jobs north of the border let alone increase overall employment.
The idea that there is going to be an export-led recovery is quite frankly laughable, when you look at the state of our main exports markets in Europe and the USA and that one of our main sources of imports is from China, which is running a trade surplus of $20 Bn per MONTH with the rest of the world.
We are not competitive, we don't have the industrial base for an export-led recovery and our traditional trading partners in Europe and N. America are as deeply mired in debt and the aftermath of the banking crisis as we are, so quite why anyone thinks we are going to outperform even the best economies in the world by boosting our exports by a thid simply escapes me.
Therefore my verdict on George Osborne's austerity plans is not based on political allegance or what he proposes to cut - it's based on whether it is going to achieve his objective of reducing government borrowing or not and the clear result for me is that it is a high risk strategy with little or no chance of working.
The other consequence is that people will be driven to increase their level of personal indebtedness, cutting their savings/pension contributions and so UK PLC will end up having increased it level of public and private debt, whilst making deep cuts in public services, reducing our standard of living and our quality of life.
We're simply shooting at the wrong target - the real problem lies with TRADE, INDUSTRY and EMPLOYMENT because we allowed our manufacturing industry to go to hell in a handcart in the 1980s and our finanical services industry to run amok.
We need to get back to making what we consume, employing our own people to make what we need and to stop importing food, energy and manufactured goods on the unsustainable level that we currently do.
This would mean Government playing a MORE active role in the economy, taking the appropriate action to restrict imports and to boost domestic production - i.e. unravelling just about everything the last Conservative Government did in the 1980s to drive our strategic industries to the wall and let loose the maniacs in the City of London by deregulating and privatising our economy.
THe other thing that has changed is the addition of a new Fig Leaf for Gorgeous George to hide behind - the Offfice for Budgetary Responsibility.
Just as Gordon Brown attempted to deflect criticism of monetary policy by making the Bank of England responsible for interest rates, now the OBR is cast as providing independent analysis of economic policy to take fiscal policy out of direct accountability.
Given the failure and apparent powerlessness of the BoE to control interest rates and their recourse to effectively zero interest rates and QE combined with the OBR's incredible acceptance of these ludicrous employment, investment and export forecasts, is see the MPC and OBR as the Tweedledum and Tweedledee.
The characters are perhaps best known from Lewis Carroll's Through the Looking-Glass and what Alice Found There. Carroll, having introduced two fat little men named Tweedledum and Tweedledee, quotes the nursery rhyme, which the two brothers then go on to enact.
They agree to have a battle, but never have one. When they see a monstrous black crow swooping down, they take to their heels. The Tweedle brothers never contradict each other, even when one of them, according to the rhyme, "agrees to have a battle". Rather, they complement each other's words.
Sounds very prophetic to me....
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#62 nautonier,
It's a bit ich to state that the thread has been hijackd by political rehetoric and then say:
"The wayward assumption that the way to govern Britain is with an increasingly enlarged, inefficient and bloated public sector ... paid for partly by the taxes of private individuals and partly by the taxes paid by the private sector is naive in the extreme."
Let alone your little ditty.
After that you make some good points. Trouble is Boy George has made no
no tangible efforts to try and address your hopes. It's not just timing that is crucial. Joined-up thinking is even more vital
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#2 Stanilic I browsed briefly the comments for the answer to your (figurative?) question about the knowledge economy, or "knowledge based economy" and found no reference. My dilettante guess is that it is what it "says on the tin". It's an economy where you are very economical (sorry for bad English) about your knowledge. You don't give it out for free. You either barter it or sell it for money. Any knowledge in such a kind of economy, even very basic, has its cost and price. In this way although we dispose of our physical capital we keep our technological and social capital (or at least the upper layers to them) protected. And, of course, that must be all as what I say here is self contradictory already.
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Aside from the country's digging deep to rescue the banks from financial meltdown, which was probably necessary, there have been two attempts to stall a deep recession.
The first was wholesale borrowing by the government. Face it; we are in a recession but it is hidden behind government spending. Whilst this spending has the appearance of creating jobs, it is a ridiculous sham, since it doesn't stimulate self sustaining job creation from the private sector, but quite the opposite - they take skills out of the private sector. Unless these jobs are released again during an economic upturn a jobs shortage is the result, and we still have the deficit to pay back.
The second was the 'quantative easing' by the Bank of England. In other words printing money, and the stubborn inflation figures over 3% are the result of that. Inflating our way out of the deficit robs everyone with assets and is a shabby way to run a government.
George Osborne is right. Control of public finances, cutting red tape and encouraging private enterprise is the only way we'll ever see our way out of this mess and still maintain the trust of foreign investors.
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Oblivion. From that first blog post:
"Suffice to say that the Federal government, as the monopoly issuer of its own currency is not revenue-constrained. This means it does not have to “finance” its spending unlike a household, which uses the fiat currency."
How on earth can that be correct. Granted if the UK gov created an extra 5bn that wouldn't matter, much, but as this gets larger and larger the confidence in the fiat currency is eroded, and foreign countries refuse to accept it. Witness our scaling down of operations in Pakistan as they demanded more money following a 25% fall in the pound. I guess they don't understand MMT either, and are labouring under the false assumption that bullets cost money. Fiat money sucks but it is still confidence based.
Finally, yeah the iplayer money (and the NHS IT project) has disappeared. You might as well get half of them to dig a hole and the other half to fill it in. Yes those employees went and spent the money which provided other jobs, but taking this to it's extreme, if everyone did that how would we eat? Create more money in a screen and then spend it to buy grain off another country? Maybe I'm just not smart enough to understand this latest bolt of thunder from our excellent economic friends.
I really should copy in Ethiopia on this so they can start running a massive deficit and get their own NHS up and running. Oh that's right, nobody would loan them any money to pay for all the staff they would need, because they would never be paid back. Let's tell them about MMT as well then maybe we can get everyone running a deficit and everyone can have everything they ever wanted.
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#67 Suav,
look at Drucker's work and follow the links from there
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Also the banking bailout, whilst outrageous, and caused entirely by Brown's "light touch", was a one-off cost. All the cuts are related to the deficit, not the debt. The deficit is caused by Labour spending money like, well, a bunch of crazy socialists. The banking bailout costs have little to do with this, other than the interest payments on the debt. Also the banking bailout was down to the housing collapse, which in fact benefited many in this country for a long time. It wasn't just spend on cigars by fat men in braces.
Don't blame the banks entirely. Why not look at ourselves as a nation of , lazy consumers. That is how your children will see the boomer generation, like it or not.
Who caused a greater decline in manufacturing? Nu Labour or Thatcher?
Also I'm pleased to read that 100bn spending generates 1trn demand which then goes in to taxes. Wow - that sounds like we should increase govt spending from 50% gdp to 100% as it's free money. Another economic miracle that doesn't appear to have worked in practice but is in fact still true.
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#69. At 1:34pm on 11 Sep 2010, Ben wrote:
Oblivion. From that first blog post:
"Suffice to say that the Federal government, as the monopoly issuer of its own currency is not revenue-constrained. This means it does not have to “finance” its spending unlike a household, which uses the fiat currency."
How on earth can that be correct. Granted if the UK gov created an extra 5bn that wouldn't matter, much, but as this gets larger and larger the confidence in the fiat currency is eroded, and foreign countries refuse to accept it.
---------------
Ben - please look at my post at #57 to you and the Youtube piece in particular. Ignore the music, it has a serious message and may help.
I would like to hope that it will make you wonder why a number of us writing here pursue the line we do about debt free money. It took me a while earlier this year to get my head around it, but I can now see it isn't crazy.
It will only be by gradually spreading the word that the current policies arre wrong that we stand a chance of getting out of this. If we do not convince you, please write back, and maybe we can show you what we hope is a better way forward.
If we do convince you [or have started to], come back anyway! Its nice to know when we have changed someones mind [or at least started to].
I'll be looking out for your response, either here or in a later post from Stephanie
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Re: 68
"George Osborne is right. Control of public finances, cutting red tape and encouraging private enterprise is the only way we'll ever see our way out of this mess and still maintain the trust of foreign investors."
"Private enterprise" covers many things. As David Cameron says, our economy is now too dependent on the financial services sector.
HE IS RIGHT.
I'm not advocating more debt or cutting unecessary red tape - all I'm saying is that ISN'T ENOUGH ON ITS OWN to solve our economic problems - and if that is all you do, there is a very real risk of driving the economy over a cliff because it is acutely deflationary - in fact o/o/m £1 Tn worth of deflation - of demand being taken out of the economy as a whole.
So our manufacturing industry must expand to not only replace public sector jobs, but also to generate exports, tax receipts and even more jobs to replace a hefty slab of parasite financial services industry. But everyone goes on about small businesses - unfortunately they don't really export very much or replace imports - so the SME sector could help to soak up some unemployed people, but even it it did, we'd still be lumbered with a structural problem - too few BIG companies that would export and replace our imports with home produced goods, creating new employment, getting our balance of payments out of the red and generating tax income for HMG.
IMHO, given the rigged nature of global trade - OPEC, the Chinese Communist Party's manipulation of its exchange rate / labour market, plus the credit crisis, the Euro Crisis and the recession in the USA etc, I simply don't see a renaissance of British industry happening without state intervention to limit imports and to create the climate where investment happens.
We've tried deregulation, privatisation and the hands off approach to ship building, coal mining, steel production, the car industry, electronics, the list of decimated industries goes on and on. The developed countries that still have strong manufacturing industries are those that have a partnership approach involving the private sector, the community and the state - regional and national. Why else is Germany growing whilst others are not? Take a Trip to Wolfsberg and visit VW - the partnership approach in action.
The libertarians have had their fun - they are to be found in the ranks of the Tories, LibDem and New Labour - the mantra that "the market knows best" does not work - it very nearly destroyed the entire financial system and would have done so without the state stepping in - I simply do not see UK business building the economy out of the hole without the state manipulating the domestic market to make home production more competitive and to drive the investment we need to rebuild manufacturing. This should be targeted at emerging technologies and import substitution in manufacturing, food production and energy.
Please explain to me why the state should invest in educating and training people, but not in the buildings and infrastructure they will work in? Why should we be expected to pick up the welfare bill for unemployed people here in the UK so that some multinational can make more money using repressed Chinese ex-peasants to produce goods on the other side of the world to seel to British consumers, whilst individually and as a nation we are getting deeper and deeper into debt to pay of our imports?
The problem is not too many public sector jobs, it's too few private sector ones paying a decent wage. All the cuts will do is to transfer the cost of the people about to lose their jobs from a payslip to a welfare payment. A pointless exercise in rearranging the deckchairs. To avoid the iceberg, we ned to change course.
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SleepyDormouse and co I've just watched the Wizard of Oz video on youtube as you suggested. It makes some sense and debt free money controlled by an elected government would certainly be a huge improvement in achieving social justice for all.
However, I can see some problems that this will not address:
We in the UK have a problem in that we are reliant upon imports from the outside world to survive. In particular I'm thinking of the basic need of food and less essential but still very important needs of oil, other commodities, and goods. We have to have an exchange mechanism whereby we can use money which is accepted by others in the world as valid payment for these goods. This whole exchange rate mechanism is ultimately based upon how highly others value what we have to trade with them in return and this is where I see our problem arising. We don't have enough to trade with them of any real value in return any longer that they can't get cheaper or better elsewhere.
In short we are living well beyond our means and whatever money system we come up with I don't see how this can change this fundamental problem. What do we have to trade to pay for our food and other imports that we can't produce enough of ourselves?
The USA a much larger country with a much lower population per unit of area does not have such a problem as doesn't Canada, Australia, China etc.
Europe and the UK in particular have grown in population well beyond anything that can be sustainable by anything other than other nations charity as far as I can see.
Can you explain how we can pay our way in the world? I agree debt free money is desirable but it doesn't solve the UK problem of living beyond our means internationally way beyond our ability to sustain ourselves from our own resources as a nation.
We arrived in this predicament by being the workshop of the world and being able to make huge profits on what we made and sold abroad. This enabled us to grow well beyond our own self sufficiency. Those days are now gone and how can we sustain ourselves internationally with such an over large population?
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66. At 12:45pm on 11 Sep 2010, foredeckdave wrote:
#62 nautonier,
It's a bit ich to state that the thread has been hijackd by political rehetoric and then say:
"The wayward assumption that the way to govern Britain is with an increasingly enlarged, inefficient and bloated public sector ... paid for partly by the taxes of private individuals and partly by the taxes paid by the private sector is naive in the extreme."
Let alone your little ditty.
........................
Hiya Foredeckdave
I don't think that the quoted paragraph is political rhetoric ... it is I consider a matter of fact and the only question is at what point does an over-sized public sector become inefficient and unsustainable for the private sector to maintain it from tax revenues since although employees in the public sector also of course, pay taxes; ultimateley, all public sector salaries and wages are paid by the private sector taxes as the public sector simply does not produce enough economic output to sustain itself.
The 'little ditty' is taken from from the 'Sound of Music', I recall, but seems very poignant for the occasion.
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As I understand it, in our debt based monetary system:
If the amount of new debt created is less than the amount of capital and interest that is required to be repaid, then there are going to be defaults.
Now if private sector demand for new debt falls (as it has done, and presumably will carry on doing), and government demand for new debt does likewise, then the number of defaults will rise dramatically and we will have significant deflation of assets that are based in this country.
In a debt based monetary system such as ours, it is important that:
New debt created each year ≥ amount of capital and interest required to be repaid on existing debt.
Problem is, unless you want significant defaults, the level of debt must grow each year, which is why I, along with others advocate monetary reform.
Various links below will help explain this issue:
A short animated film by Paul Grignon, ‘Money as Debt’ (link below).
http://www.youtube.com/watch?annotation_id=annotation_942534&feature=iv&v=z5vC_8azMFk
The documentary Secrets of OZ, explains our debt based system of government finance, this is nearly 2 hours long, but well worth watching (link below)
http://www.youtube.com/watch?v=D22TlYA8F2E
The meaning of Austerity IMF and the reality (link below)
http://www.youtube.com/watch?v=jUmQbf1AyA8&feature=related
Two groups wishing to make changes to the system, see links below.
http://www.bankofenglandact.co.uk/act/
http://www.prosperityuk.com/prosperity/prosperity.html
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Stephanie says:
"He [Osbourne] thinks ...
the only reliable way to encourage the Bank to keep rates low is by cutting public borrowing ... "
But does not the Bank belong to us. It is our servant and can be told to do what is necessary for the health of the UK economy.
This crisis is different, because the pattern of bank lending has changed, certainly for the medium to long term, if not for good. Before 2008, easy credit was an important driver of the world economy. After the trauma of the crunch, banks will no longer lend as freely as they did, even if the new Basle rules are not adopted.
Something must be done to compensate, if a long term slump is to be avoided.
The 1930's slump was finally ended by increasing public expenditure in preparation for world war 2. It seems that even right wingers can overcome their anti public expenditure prejudice when war is in prospect. Can world leaders not be wise enough do this now, without war?
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Following on and concluding the points made in Post 50.
Time to tackle the public debt myth.
What exactly happens when the Government issues Debt i.e. Gilts.
Have you ever thought about it?
All that happens is that money is replaced by a bond. The money goes to the Government and so like tax it is extinguished. It disappears along with its spending power.
Government borrowing does not finance Government spending so why issue the debt?
Remember the Government creates money by spending where it chooses to spend. At that point money is created. This is exactly how money should be created. Unfortunately it seems to think that money should also be created by allowing private banks to operate Fractional Reserve Banking. That is the problem. It allows the parasites to extract massive bonuses for no good reason. It does not need to allow this. It can create money itself by its own spending in accordance with the primary goals of maximum output and full employment and operate its own form of FRB through a state bank if necessary. In this way it would also have better control of the money supply.
I can only think of one possible good reason for issuing so many gilts. To mop up money in the economy that is is not being used to produce output or wealth i.e. pension funds. With that money extinguished there would be more scope to create (spend) money in areas which would contribute to the economy if there is spare capacity in terms of resources and unemployment.
If you understand double entry bookkeeping you will be programmed to think of both sides of any financial transaction. You must not do this when money is received or spent by the Government (the sovereign issuer of a fiat currency) when it comes to Government accounting but it obviously applies in Corporate and Household accounting because they are revenue constrained. The government is not.
I repeat the Government creates money when it spends. When tax is paid or gilts purchased the money paid to the Government disappears forever.
Lose any idea of a Government balance sheet even if it thinks it has one.
Please rip me to pieces here but this is not rocket science. They either think we are still tied to a gold standard or are up to their necks in it with the banks. You may think these guys are fully dressed but they are in fact starkers.
There is no problem with the debt. It will be repaid when it falls due.
Have they really convinced the middle classes that massive spending cuts are the right thing to do based on an inability to grasp basic economics?
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Sorry when i referred to the previous post I meant 58 not 50
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Alesha - so let's imagine the UK as a big household. We want to get grain in from Russia because we are a net importer of food. What are we to pay them with? A bottomless pit of IOUs, with "There is no problem with the debt. It will be repaid when it falls due" and your signature on the back?
I grant you we don't need the current financial services creaming off the top of transactions. Let's imagine we get rid of them so they don't distract from the main point. How do we buy grain from Russia when our government just keeps on creating money whenever it needs it? Surely it has to be tied to something that provides a measure of worth in order to trade with Russia. Surely the bottom line is we can't run a deficit every year, however you measure it.
I just don't see how the debt will be repaid, if like the current generation we spend more than the next one will earn, in real terms. Let's not start talking about increased productivity as a justification for stealing stuff from the next generation either.
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80. At 7:16pm on 11 Sep 2010, Ben wrote
'Alesha - so let's imagine the UK as a big household. We want to get grain in from Russia because we are a net importer of food. What are we to pay them with?'
Exactly in the same way as we do now
'How do we buy grain from Russia when our government just keeps on creating money whenever it needs it?'
Its not creating money when it needs it. It is replacing private banks operating FRB and it controls the money supply. Obviously when we are at full capacity it will not create additional money.
'Surely the bottom line is we can't run a deficit every year, however you measure it.'
The deficit is the difference between Govt spending and taxation.
what happens when the economy operates at full capacity ? taxation rises welfare spending reduces. The deficit falls. It is a mirror image of what goes on in the economy not something that needs to be controlled. A deficit is in fact essential when private spending is depressed.
'I just don't see how the debt will be repaid'
Simple. No 1 Dont issue any more debt. No.2 When the debt falls due credit the bank accounts of the bondholders.
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Totally disagree with that prosperity site:
"This money should be spent, not lent, into society on the basis of proven need." (by the government "independent" body)
No thanks. I'd rather have decentralised lending than a centralised socialist pie shop. What happens when government bodies (independent or whatever) have a monopoly? Usually at best incompetence. At worst corruption.
They can't even means test a flat rate child benefit at the moment. This is socialist, academic fantasy. No doubt like socialism it will persist and where it fails proponents will say it hasn't been "tried in it's purest form".
The state already have enough of a role in my life thanks. I don't want to go to my comrade (a gift of friendship brother /hands bottle of wine to officical /) to get a mortgage.
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Ah I see. Operating at full capacity. I did wonder where in the logic the magical step occurred. Just keep on spending and it's cool as you will definitely get there. Unless the market looses faith before you get there and refuses your currency. Then you can't buy grain.
http://www.sciencecartoonsplus.com/images/miracle_sharris.gif
People say the last 10 years were a bubble and then says "of course when we get back to full capacity" where full capacity is in fact the bubble. That was above capacity, hence the deficit. We aren't going back there.
So we don't issue more debt, but we do until we get back to full capacity. However long that period is who knows. Let's hope we get there before the demographic time bomb blows as those olds won't be working at all but still need feeding.
Again I must mail Ethiopia to tell them about this. They can start issuing their own currency and work towards "full capacity". Once they have explained this to engineers and doctors in other countries they will all come over and have rhetoric for tea.
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Alesha Soba
"I can only think of one possible good reason for issuing so many gilts. To mop up money in the economy that is is not being used to produce output or wealth i.e. pension funds. With that money extinguished there would be more scope to create (spend) money in areas which would contribute to the economy if there is spare capacity in terms of resources and unemployment."
Yes, the same thing ocurred to me too. I suppose the implication is that high deficit spending is acknowledgement that a high net savings situation is happening and the aim is to recycle those savings back into circulation via the government.
However, if I remember rightly, weren't they simply using the money to buy securities from banks and corporates, who then used it to clear balance sheets with no economic stimulus via the man on the street?
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The question is still not answered by the debt free issuance of money when it comes to imports that we need to survive.
See my earlier post 74.
How do we pay foreign suppliers? We have to have something of value to trade in return to underpin whatever currency we use?
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Ben
"I'd rather have decentralised lending than"
Davos? How is a handful of private banks owned by a small elite group of shareholders "decentralised". The free market kool-aid is elitism of a different kind, that's all.
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83. At 7:45pm on 11 Sep 2010, Ben wrote:
'Just keep on spending and it's cool as you will definitely get there. Unless the market looses faith before you get there and refuses your currency.'
Spending is targeted to produce output and full employment.
What exactly is 'the market' you are referring to?
'So we don't issue more debt, but we do until we get back to full capacity'
No we stop issuing more debt now
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84. At 7:46pm on 11 Sep 2010, Oblivion wrote:
'Yes, the same thing ocurred to me too. I suppose the implication is that high deficit spending is acknowledgement that a high net savings situation is happening and the aim is to recycle those savings back into circulation via the government.'
We would be giving them perhaps too much credit if that was the case. Remember they are using the that as an excuse for massive cuts which is criminal.
'However, if I remember rightly, weren't they simply using the money to buy securities from banks and corporates, who then used it to clear balance sheets with no economic stimulus via the man on the street?'
It is key to recognise that once the money enters 'Govt' it disappears otherwise we will get lost. However that may have been the thinking of these talented people. When you follow their logic and the money, everything is going round in circles. The money goes back where it came from and the logic disappears up their own backsides
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The last time I looked the banks were owned by private shareholders. In fact two of them are largely owned by the UK government (you and me). This is complete conspiracy theorist rhetoric that it's just a few rich guys who own everything and they're supressing the masses to keep it that way.
FACT: all of the richest people in the world have worked their way to that state in their own lifetimes through their own inventions and efforts. (Gates, Mittal, Buffet, Jobs, Branson etc).
Don't pedal the old Wolfie Smith failed ideology stuff.
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85. At 7:48pm on 11 Sep 2010, Sage_of_Cromerarrh wrote:
How do we pay foreign suppliers? We have to have something of value to trade in return to underpin whatever currency we use?
I think that imports increase our wealth because we get to consume stuff we don't produce and we are dependent on them.
It does appear that countries want to sell us stuff. What are they getting in return ? Their own currency at an exchange rate or perhaps they take sterling or dollars. In either case our money supply is unchanged.
Yes at the end of the day we have to produce tangible output for export. I think we are capable of that. I think the changes I've mentioned would increase the likelihood of that.
Sorry I'm all over the place here but I dont see why our exchange rate strength should be affected for the worse by anything I've said if your question was aimed at my comments. If not, apologies.
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Ben,
You make perfect sense. Money is purely a lubricant for trade. It is the value of what you have to trade that ultimately dictates worth. Wasting earnings on servicing debt for consumption and non-jobs is a loser.
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89. At 8:12pm on 11 Sep 2010, Sage_of_Cromerarrh wrote:
The last time I looked the banks were owned by private shareholders. In fact two of them are largely owned by the UK government (you and me). This is complete conspiracy theorist rhetoric that it's just a few rich guys who own everything and they're supressing the masses to keep it that way.
You are ignoring the bonuses
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Bertram Bird wrote @3:
"Good summary, Ms Flanders. Of course, even that is simplistic. This is similar to the past, but not exactly the same. You can never have the same "initial conditions" for any two financial experiments...."
.
Hi, Bertram,
being retired, I have time for pedantries.
Try running your experiments in parallel rather than in series ;-)
Geoff.
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63. At 12:11pm on 11 Sep 2010, Oblivion wrote:
Ben
You seem to miss the point. What difference does it make whether it cost 6GBP or 60GBP of government spending to make an iPlayer? Does the money somehow disappear into a blackhole in your mind, or does it get spent on other, presumably more important things? Why is it important to me that someone overspent on tech when the government is overspending in the hundreds of millions propping up some fat bankers I would prefer to see imprisoned, in the name of free enterprise and the Western model?
Ben, look at the first 3 links, it might help you:
http://www.3spoken.co.uk/2010/04/primer-on-modern-monetary-theory-mmt.html
Your assertion that printing money is inflationary does not make sense, and is not supported.
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At the risk of intruding into something of a two-way debate, Ben is technically correct. But he is not necessarily practically correct. Other factors can come into play around and into the expansion of money supply.
One of the problems with economics is that you can know what is in the textbook, you can remember or read about what has happened in the past, and then you find yourself in a particular new situation and apply the economic text book and/or the history book and find that the accepted theory and practice doesn't quite fit or suit the new situation.
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Alesha its a bit more basic than you think. We NEED imports and they have to be paid for. We can not grow anywhere near enough food to sustain our 62 million population. Trade is now international much more than it is national. We buy food and other commodities from abroad and pay with currency that is ultimately based on what the overseas producers see it being worth. This is ultimately based upon our exports and their perceived value. Money is just a lubricant to trade, it's how your goods and services are valued that ultimately set your wealth.
My argument is that the real value of our exports is insufficient to sustain the standard of living we have come to expect and this is why we have indebtedness. We have continued to think we can grow in all directions without actually performing to sustain this. We have to put a stop to it and live within our means.
Secondly we then have to do something about our runaway population which is unsustainable and a drag on our ability to improve our quality of life in the future.
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78. At 6:47pm on 11 Sep 2010, Alesha Soba wrote:
Following on and concluding the points made in Post 50.
Time to tackle the public debt myth.
What exactly happens when the Government issues Debt i.e. Gilts.
Have you ever thought about it?
All that happens is that money is replaced by a bond. The money goes to the Government and so like tax it is extinguished. It disappears along with its spending power.
Government borrowing does not finance Government spending so why issue the debt?
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Again. and this is linked to #63.
Firstly, the issue of gilts can be used to adjust money that is out there to buy goods and affect deflationary/inflationary pressures.
Alesha, you are not quite right, in that the money raised doesn't just disappear. The gilts proceeds are either held by Government against a liability elsewhere in Government, or spent by them, ie public spending.
Want to keep public spending going and not enough tax revenues? Sell gilts. (Or as a lot of posters would be quick to point out - go into debt as a State.) The money doesn't disappear but trickles out. All those State employees that have mortgages are saving a chunk of it while paying a bit to bankers with big salaries and big bonuses and a bit to savers as well as employing mortgage brokers, bank clerks, estate agents, conveyancers, removal firms, DIY stores, garden centres, builders, electricians, gas fitters, painters and decorators, HM Treasury {stamp duty}, Local Authority {searches}, that get that State-employed person a home to live in.
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'How is a handful of private banks owned by a small elite group of shareholders "decentralised"'. - millions of different people in the uk alone own shares in said banks.
"Spending is targeted to produce output and full employment." - ah ok. Like in the former USSR. How did that work out BTW? Or was it not exercised "in it's purest form"? Have you any idea how silly that sounds?
"What exactly is 'the market' you are referring to?" - the money markets who buy government gilts that allow us to continue to import food and oil even though we are taking more from the world than we contribute.
I still don't understand how we clear the deficit. Do we default and then start on this new scheme, and if so, how do we trade?
Alesha - as I said in an earlier post the banking bailout was a one-off cost, nothing to do with the deficit. If a private company pays a bonus how does that effect you? Plus the total provided in bonuses is chicken feed relative to the deficit. It's like the parliament expenses. The cost of that is a drop in the ocean compared to the debt and the deficit. The principle matters but my kids can't eat rhetoric so I'd prefer if Labour hadn't run us into the ground.
It might seem important to you because socialists you know bang on about it, but it's a distraction. Put your brain into gear - how will we trade?
I've said this before on this forum - where do you these guys all meet for a conspiracy? In a room like on Austin Powers?
Up2Snuff - good double speak, comrade.
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95. At 8:33pm on 11 Sep 2010, Sage_of_Cromerarrh
Sage I don't see how providing the conditions for a vibrant private and public sector with the aim of maximum output and full employment can affect our ability to import for the worse.
What I'm saying is that unless we make the changes I've suggested in previous posts we are unlikely to reach a point where we can make that happen.
I am saying the Government is totally misreading the current situation, banks should be controlled, money should be created by the state rather than private banks and the Government should target full employment and maximum output. It can do this and and and control the money supply if it wants to. It is the wrong thing to do to cut public spending now.
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17. At 7:30pm on 10 Sep 2010, Alesha Soba wrote:
9. At 6:44pm on 10 Sep 2010, halford wrote:
Why doesn't the BBC ever point out that if the massive overspend of the country's budget is not addressed by spending cuts, then the only alternative is massive tax hikes on everyone who is working for a living?
Because it is untrue. Govt spending does not need to be financed by taxation or debt. Don't let let anybody convince you otherwise.
It may sound logical but the Govt is the sovereign issuer of sterling currency (ok at the moment through private banks) and tax collector of same and as such does not need to finance its spending.
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Oh, how I wish? Would it not be wonderful to just produce money to pay for things without any, any er.., - I want to say but perhaps should not - 'quid pro quo'.
Goverment doesn't have any money. It's our money. Government is effectively a group of us getting together and organising something as a group. Apologies if that explanation sounds patronising - it is not intended to be - but ramp things up by several layers of complication and multiply by umpteen levels of magnitutde, and Goverment is like a very large club.
Members pay subs to finance the activities of the club. The club provides services to the members. The club may be big enough to employ people. The club may start to own property but has to take on a loan to acquire it. The club has elections to its Committee. The Treasurer may be too generous with guest speakers fees or the refreshments at meetings and next years subs have to be increased.
Trouble at AGM!
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The polticians/govt in the UK and in many other countries see macro economic management almost entirely as a matter of a 'big fiscal fix' or a series of 'big fiscal fixes' for the overall economy and which is of course largely true in terms of 'government finances'.
However, the current situation facing the UK Colaition govt. is that it needs to break with 10 Downing and 11 Downing St traditions and look beyond the fiscal solutions ... the task facing George Osborne is as much about resource and other planning, organisation, structure, rebalancing of the UK economy and on a massive scale as it is to with money ... these are issues which no previous post war UK Chancellor has had to face on the same scale (probably since 1945).
This requires a 'paradigm shift' in thinking for the Coalition govt from a 'bankers fix' for the fiscal element of the UK economy to an 'administrators fix' for the entire economy including much better co-ordination of govt policy and resources ... with govt departments communicating with each other, much more effectively. This means a 'shake out' of Whitehall and which I think the indications are that something along these lines is coming in October.
This is now the real primary task of UK government in a global economic world and which has been lacking in the UK, especially in recent years, as our global economic position continues to slide ... its not just a money managmenet situation for the Chancellor ... much better real resource planning ... a 'big plan' is needed for all UK resources and not just the money supply/debt deficit or govt policy has no direction and cannot be implemented effectively.
Let's hope there is the 'big plan' with a much better planning and resourcing mechanism being put in place in Whitehall, for implementing proposals for the UK economy ... as 'cuts, cuts and cuts' are not by themsleves ... 'enough'.
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"It can do this and and and control the money supply if it wants to."
Ok answer these three as you don't address any questions directly, beyond the above quoted which is, err, light.
How do I get a mortgage? Go to the government? They can't even means test child benefit so I suggest this idea is insane.
Given that the amount other countries trade with us is less than we trade with them, if we stopped issuing debt now, what would you do next month? I'm thinking we slowly have less and less food. Or do we get the government to create it as we move magically to step 2 where we have full employment / max output?
We have increased public spending massively in the last 10 years. At the start of that time would you have advocated not doing this so that we didn't have to issue debt? If so then why can't we go back to that level now?
Your image of government coffers is like Mary Poppin's handbag. She just keeps taking stuff out...
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96. At 8:42pm on 11 Sep 2010, Up2snuff wrote:
'Firstly, the issue of gilts can be used to adjust money that is out there to buy goods and affect deflationary/inflationary pressures'.
I agree there is a money market role for gilts but not £1 trillion worth.
'Alesha, you are not quite right, in that the money raised doesn't just disappear. The gilts proceeds are either held by Government against a liability elsewhere in Government, or spent by them, ie public spending'.
They may be recorded as such but once the tax or gilt purchase price is debited out of the payers bank account it disappears. This is the most important point to grasp. Think it through.
I'll say it again. Even though the money supply has to be controlled when near full capacity Government spending does not need to be financed by debt or taxation. When Government spends money is created. When tax is received money disappears forever. Ditto for gilt purchases.
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Alesha,
it's not a question of whether cutting public spending is the wrong thing to do because it is the only thing we can do. We are not a self-contained economy. We have to trade to survive and we are living well beyond what our goods and service exports are worth to the rest of the world on whom we depend for the basics of life. Fundamentally there are too many people for too few jobs in this country. Our cost base is much too high for the value of what we can sell to the rest of the world.
If we are to have a wealth creating exporting private sector in the future to sustain a desirable public sector for our quality of life we have to increase our productivity rapidly and this means living with a public sector that a tax level on the private sector can afford.
Unfortunately we will all have to see our living standards drop considerably for the next generation at least. I know I certainly am seeing this already with my lifestyle. We have to become focussed more on creation of new products and services rather than on being more competitive.
Above all we have to realise that we live on a finite planet and that we either plan our population reduction urgently and humanely or it will be done for us naturally in a much nastier and perhaps even apocalyptic way.
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99. At 8:59pm on 11 Sep 2010, Up2snuff wrote:
'Oh, how I wish? Would it not be wonderful to just produce money to pay for things without any, any er.., - I want to say but perhaps should not - 'quid pro quo'.'
The government does, but it creates it as debt the penalty for which is interest payments.
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10. At 6:46pm on 10 Sep 2010, John_from_Hendon wrote:
Fixing the deficit is not fixing the right problem. Private debt is the problem that needs fixing more than public debt. If private debt is not deflated any economic recovery will die in its tracks.
Like most politicians they go fro the easy achievable target rather that the real one. Fortunately their austerity will help catalyse repossessions and stall the housing market in not collapse it which is a requirement for private debt deflation.
The banks are still bust and we will still have to bail them out, but as austerity will be very slow and painful and last a long long time the Government have chosen the worst possible way ahead - which is to be expected!
Stick interest rates up to rational levels (5% now!) this will cause a rapid debt deflation and then we can move to a rapid recovery. What they are doing is to prolong the agony which is almost the worst possible thing to do! Avoiding the arithmetically inevitable is like slowly pulling teeth and it will last a minimum of a decade - all the time the economy will stagger from crisis to crisis. It is a far far better way to get the necessary adjustment over rapidly.
As to the probably method (of firing people) this is again the worst way for the country. It is far far better to keep everyone employed and reduce their pay.
as to the comment above:
"There are many who think the comparisons between now and the 1930s are overdone. "
Hell no, this is like the 1870s - The Long Depression - because of the nature of the debt bubble. We are in for 20 years of pain.....
>>>>
John - can you explain something for me. Why is putting interest rates up going to 'deflate' private debt. surely this will increase the burden on existing borrowers (especially Mortgage payers etc). Isn't a more effective way to deflate the private debt to actually allow inflation to increase (as it is doing now, nudge nudge wink wink say no more) so that the real value of existing debt decreases?
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97. At 8:46pm on 11 Sep 2010, Ben
I am sorry Ben. You have started to rant.
I am interested in any serious critique out there i promise. I am willing to be convinced I've got it wrong.
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Alesha Soba has had her ‘revelation’ and I have had mine.
So here’s one for Alesha:
The level of debt created money has to rise if existing capital and interest payments are to be met. If it doesn’t rise or worse still falls, defaults will rise.
Now if you wanted to promote more debt, who would you target?
You’re not going to have much chance at targeting the prudent, they’re not going to start borrowing now, if they have not done so in the past.
The imprudent can’t pay anyway being mired in debt.
So who does that leave?
Well you could target the young, if you could entice them into start borrowing more, you could create more debt and thereby create more money.
But then the young aren’t fools, and you may have to pretty much force them into it.
How about student loans. If you significantly increased the cost of tuition fess, you would significantly increase the amount that they had to borrow, and thereby increase the amount of money.
Debt slavery for the young?
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EmKay - agree totally. But voters would not accept it. Politics is the art of the possible. It may be taken out of their hands, in which case when the tide goes out a lot of people won't be wearing any pants. I say bring it on :-)
Wow - nice to see someone who thinks the BoE is deliberately walking an inflation tight-rope to erode the debt.
House price correction has to happen, whatever the time scale. Instead we will, as you say, have a hellish decade (at least) for young people as they work like slaves to pay off money that has already left the country so their parents can have holidays, big tvs and ipods, even if they have rubbish jobs, leaving the next generation (as Dempster says) to pay off the interest (and the repayments).
The one thing about inflation is that it's not a free lunch for the boomers as it is eroding their pensions too.
Alesha - Sorry you think so. So not answering the actual questions then?
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Sage
I agree we have to build a strong private sector trading base.
I agree we need to import and be able to export our goods.
We are being hindered in acheiving that by the things I and others are trying to change.
Understanding basic economics is surely the first step. People bang on about public debt and it is clear that they do not understand its nature. But because they understand private debt they reach the obvious conclusions which are wrong wrong wrong.
I have to sign off but look forward to continuing the debate another time. I'm not going away.
Cheers
Alesha
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Hi Dempster, just caught you.
I agree that Private Debt is a massive problem and we both know the root of that evil.
If we remove the power of private banks to create money, as we both want, hopefully we can help create a happy future for our kids.
Cheers
Alesha
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Dempster,
Student loans and tuition fees are a drop in the debt ocean. The only reason we need them at all is that Nu Labour seemed to live under the illusion that everyone should go to university and that is both unaffordable and unnecessary.
Revelations that you guys have had seem to think the UK economy is a self contained economic zone. It isn't and we depend on world trade for survival (food to eat for example). We aren't paying our way for our current lifestyle and we need to wake up to this reality voluntarily and quickly or the adjustment in our standard of living will be much more painful than it already has to be.
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come on mods - keep up!
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Alesha - this is a debate. If you forward a theory I am entitled as part of the analysis of that theory to ask you questions relating to it. If you cannot answer these then that fact reflects poorly on the structure of this theory.
It's not for me to prove your argument is incorrect in isolation. I too would love to be convinced of an easier solution to this problem than the current situation we face.
Maybe you can come back tomorrow and answer those questions ;-)
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Alesha,
There is not a big bank conspiracy going on to keep the masses indebted. The big banks are populated with individuals just like you and me who have worked their way up to where they are in life.
We all want a better future for our kids and everybody elses for that matter.
My revelation has been that I have come to realise that we have been living unsustainably for many years now and it is getting worse. Our economic thinking has to recognise this simple basic fact and we would be wise to do so quickly. Sustainability has to be at the heart of all our decisions from now on NOT growth.
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Public debts are no different to private debts in an international world.
Governments borrow from their own citizens, the citizens of other countries, and the governments of other countries (collective citizenry).
We do not live in the isolated marketplaces of nation states anymore and haven't for a very long time.
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There is a good case for encouraging those who can work to do so. But the venom of Osborne makes little sense in an economy when there are so few jobs for them to do. Pursuing such policies in such an ideological manner now is shameful. The time to do this is when the economy is recovering and there are more jobs.
At last two principled Lib Dem MPs Mike Hancock and Bob Russell have indicated that Osborne's crusade to punish the poor is neither fair nor consistent with the coalition agreement.
When will Clegg, Alexander and Cable realise that their personal ambitions are damaging the party? They should be standing up to more measured approaches to economic management instead of nodding them through in a poodle like manner. They should stand up for what their electors voted for them to do. Where are the rest of the Lib Dems? Now is the time for them to standup and be counted, otherwise they will be tarred with the same brush. Come the next election Lib DEms need to offer the electorate a reasonable alternative to Labour expanding the public sector or the Tories feathering the nest of big business and punishing the poor. Sadly Clegg is giving Lib Dem voters a reason not to vote for them.
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114. At 9:52pm on 11 Sep 2010, Sage_of_Cromerarrh wrote:
'Alesha, There is not a big bank conspiracy going on to keep the masses indebted. The big banks are populated with individuals just like you and me who have worked their way up to where they are in life'
To the Sage, as much as I wish it were untrue, Alesha is in fact correct.
However its not a conspiracy, its just the way the system works.
Love it or hate, depends on your location in it, but that's how it is.
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MaxWax,
Have you ever thought that perhaps Clegg, Alexander, Cable, Osbourne, and Cameron are just doing what is necessary?
The whole point is that the economy will not recover if they do not do this. We are living beyond our means and have been doing so on the back of an oil surplus until 2004 and unsustainable borrowing to fuel unrealistic consumption and employment levels in particular in the public sector.
I feel all of the guys you seem to label as evil and self-serving are simply doing what is necessary with maximum compassion and honesty now that they are faced with the reality of government and power.
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I'm not indebted. I'm in credit. How have I done this? I live within my means, resist greedy urges and don't live above my station in life.
I haven't beat the system though as my savings are eroded via inflation to pay for the debt of others who don't live within their means. But I'm proof it can be done.
ps I rent and I've not had any help from mommy and daddy.
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Ben
Mortgages were good for two things:
a) Allowing people to fund housing development and expand the amount of property available to live in
b) Driving up the price of property
The banks, deregulated, were allowed to issue more and more debt, secured against property. People could borrow money and speculate on house prices. An unregulated ponzi scheme. The more that people borrowed in the belief that house prices would rise, the more debt they could issue.
As Alesha rightly points out: why would they issue more debt? Sage of Crom, here's your answer : for short term gain (aka bonuses). Everyone must have known that you could construct derivatives off this ponzi farce for a while and accumulate wealth in your direction for the short term, but everyone must have known that the minority investor was doomed in the long run.
FreOne of the great achievements in the West, was persuading women they had the right to zero maternity leave, late child birth, maybe no children, and 'a career', so that her and her husband could spend 20 or 30 years paying a mortgage on a property that was only twice as expensive as it should have been because joint mortgages drove house prices up that way.
Up2Snuff
Technically correct = neoclassical economics = debunked. But, yes, you are right - maybe a gentle disillusionment would be kinder.
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To Alesha Soba
Here’s a funny take on things
The only Prime Minister in my life time that has actually managed to run the economy on a non debt based system is Gordon Brown.
In 2009 he instructed the BOE to create £200 billion but borrowed less.
The BOE is of course owned by us, and we are in the rather odd position of currently paying interest to ourselves on our own debt.
So how about that one, God save Gordon Brown perhaps?
Well probably not, but still, there’s the paradox of Gordon Brown.
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Dempster,
could you be specific about what you feel Alesha is correct about?
Government is after all just an elected committee to run our nation on our behalf. Rather like someone earlier alluded to.
It has to fund purchases by raising taxes or borrowing. What's complicated about that? It has to pay interest to get anyone to lend it money just like individuals do.
I can see the greenback/ colonies/ Roman republic argument in a marketplace that is mostly internal to one nation state, but we are in an international marketplace now and we are not self-sufficeint. Our money has to be of value to foreign lenders and trading partners and is ultimately set at a value by this marketplace dependent upon its quantity in circulation and the perceived value of our export goods to our trading partners.
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#110 Alesha
Ironically, I think the root of that evil lies in the Nixon shock. Although I don't advocate a return to the gold standard, I think since that event the world has not figured out how to cope with the trade imbalances that ensued, apart from the USA who milked them to their advantage.
I think Keynes's bancor, originally proposed at Bretton Woods and rejected by the US, might be the answer. I think gold is too tangible: it puts power in the hands of the military.
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Sage - it's actually pretty funny to see the Lib Dems having to carry the can rather than saying "wouldn't it be great if we gave all things to all men? if we were in, we would!". To their credit at least they are biting the bullet, unlike the worst Chancellor / PM in modern times - Mr Brooooon.
This is why we can't raise interest rates - negative news has to be piped through the back door lest the general public catch wind that everything isn't all peaches and cream all day every day. Witness survey after survey on "what would you cut". No to police, education, health, even arts. Instead lets just save it through efficiency savings, then nobody looses out. My child is 2 and some of his stories are moving beyond this level of realism.
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119 Ben,
Well said. Debt should only be taken on for investment that will yield you a profit. It is not necessary to be indebted.
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Sage of Cromerarrh
"There is not a big bank conspiracy going on to keep the masses indebted."
This is just not true. The whole point of the banks was to issue debt, generate profit on this debt, and to sell off the risk through SPVs to fuel financial markets into which it could then invest. This was the ponzi scheme they wanted and lobbied for since the late 70s. This was the model that is behind a lot of the free market propaganda for deregulation.
If you want more info and exact details, order a book called: "The dollar crisis: causes consequences and cures" by one Richard Duncan. I can't do it justice here.
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Ben
"I'm in credit. How have I done this? I live within my means, resist greedy urges and don't live above my station in life. "
This statement says simply that you do not have a mortgage and have chosen to rent. For young families this is often not an option. However, even it were practical, the social model you are proposing is that all young families should rent until they have saved enough to buy some property. Since the existing generation cannot fund the next generation's accomodation, unless the population is on a sharp downward trend, the only investors capable of funding that is the government, or a lender. Since your example rejects borrowing, you must accept the state sponsored housing. Thus, if you want to lead by example, you are advocating a socialist policy, are you not?
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"People could borrow money and speculate on house prices. An unregulated ponzi scheme."
I could afford to buy in the early 2000s but decided that the price of a house was not worth the money, so I didn't buy. Many thought: "wow, I can get money for nothing here", and jumped in. I hear lots of people moaning when they loose money but I've yet to have anyone knock on my door to give me £5 as a share of the risk I unknowingly took on when they bought a house and then sold it for a profit. How about they take responsibility for their own affairs instead of rushing in like children and getting burnt?
Yes they issue more debt for bonuses. How did they manage it - Labour were asleep at the wheel. Light touch. Everyone knew about liar loans except Brooooon. The government were warned about a housing bubble years before it happened. It was clearly unsustainable, as was the spending of the last government, hence the cuts.
Agree about women working being a work trap. The middle classes do still have a choice. More time with kids and a smaller house, less holidays, one modest car etc. Many have chosen more debt and loads of consumerist stuff and kids in nursery. Our family hasn't made this choice and so we live carefully as a result.
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To 122. At 10:32pm on 11 Sep 2010, Sage_of_Cromerarrh wrote:
'Dempster, could you be specific about what you feel Alesha is correct about?'
Here’s a short journey in answer to your question:
A short animated film by Paul Grignon, ‘Money as Debt’ (link below).
http://www.youtube.com/watch?annotation_id=annotation_942534&feature=iv&v=z5vC_8azMFk
The documentary Secrets of OZ, explains our debt based system of government finance (link below)
http://www.youtube.com/watch?v=D22TlYA8F2E
The meaning of Austerity IMF and the reality (link below)
http://www.youtube.com/watch?v=jUmQbf1AyA8&feature=related
Two groups wishing to make changes to the system, see links below.
http://www.bankofenglandact.co.uk/act/
http://www.prosperityuk.com/prosperity/prosperity.html
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#122 Sage
"It has to fund purchases by raising taxes or borrowing. What's complicated about that?"
Turn it around. Banks have to fund purchases by issuing debt. The main risk in issuing (securitised) debt is that security will decrease in value. Debt defaults result in real wealth transfers. Profits result in real wealth transfers. Banks issue debt and get real wealth.
Another point: government does not have to fund purchases by raising taxes or borrowing. Government can directly intervene in banks, can it not? If not, why not? When is it going to become politically correct to be able to suggest that commercial banks should have their debt obligations neutralised at democratic will?
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102. At 9:08pm on 11 Sep 2010, Alesha Soba wrote:
'They may be recorded as such but once the tax or gilt purchase price is debited out of the payers bank account it disappears. This is the most important point to grasp. Think it through.
I'll say it again. Even though the money supply has to be controlled when near full capacity Government spending does not need to be financed by debt or taxation. When Government spends money is created. When tax is received money disappears forever. Ditto for gilt purchases.'
------------------------------------------------------------------------
To deal with the last point first, the Government doesn't actually have money. It's always referred to like that by the media but it's shorthand for saying money provided by the taxpayer or debt provider.
'They may be recorded as such but once the tax or gilt purchase price is debited out of the payers bank account it disappears. This is the most important point to grasp. Think it through.'
------------------------------------------------------------------------
I have thought it through. Albeit some time ago. These posts are making me feel old. I realised the other day that the media were talking rubbish about the HMRC tax over/under-payments according to my working knowledge from twenty-years ago. But also that the rules might have changed in that time and they might be right. But back to borrowing money ...
As Dempster correctly points out in his post, the penalty is interest payments on the borrowed money (gilt) and we must not forget that the gilt has a redemption date when it is repaid at a non-discounted (nominal) figure. So if our Government issues [Trident Replacement] Treasury Stock - £50bn worth at a coupon of, say 1% and at a discount of 10% with a redemption date of 2035, the Trident replacement will be part way through its normal service life when the Government repays £50bn, having paid 1% pa for 25 years, to raise £45bn to pay for £40bn cost of Trident replacment plus £5bn of cost overrun. {I added that last bit. I'm actually mostly in favour of not replacing Trident and winding the whole thing down while extending the service life of the existing kit. But that's another debate!}
In the meantime the money is spent on its purpose. The new Trident is built - contractors and workers get paid. The base continues to be staffed. The Navy keeps on employing sailors, etc etc.
The initial gilt transaction is actually the start of something big. (Too big for some of us.) It doesn't just go 'whoosh' the moment the hammer goes down on the gilt sale as you seem to imply. Unless we are completely misunderstanding you or you are really trying to explain something else.
It's getting late. My head is spinning. Got to sleep. Night night all - sleep tight. Don't worry about the debt. It'll still be there tomorrow for us to kick around.
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Oblivion - nice chaining, but if one of the links is wrong the rest are invalid :-)
We agree housing is a ponzi scheme, for whatever reason. It's not going to rise in real terms indefinitely. You phrase your ideas at the macro level, so I'll follow suit. If all first-time buyers don't play, the ponzi scheme collapses, as all such schemes require new members.
I'm not saying no mortgages. I'm just saying I'm not playing as it's a fools game right now.
The winners in such schemes are the early joiners who get out before the end. The biggest loosers are those who join near the end. I don't intend for that to be me.
Frankly I'd rather leave the country than pay a fortune for a dump in London that will take me a lifetime to pay off to support this scheme.
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That's really weird! Did you know the word p**f - as in magician's, aka illusionist's, exploding stuff at the end of the magic wand - that I was originally using instead of whoosh in the above post is considered profanity by the Beeb's filter?
Now there's a thing. Can learn something new every day!
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Clearly the mods didn't receive enough state funding. I am off to bed.
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Sorry not to have been around this evening, its been an interesting discussion to read through. Sorry to Alesha not to be here to agree with many of the points being made. I've been wrestling with an old central heating boiler – not fixed yet – there's always tomorrow!
This is a bit long, but I hope someone sticks with it.
The main sticking point seems to be the current account deficit and if we don't carry on the way we are now and moved towards a debt free money system, we will suffer at the hands of the market. Anyone who has been following my contributions here will know that I am actually searching for answers and certainly don't claim to have them. I can however put forward points for you to consider and respond to.
I would agree that we have been living beyond our means in the sense that we have run a current account or trade deficit. We have been doing this for many, many years. Whilst we were on the gold standard or any other system that required exchange rates to be kept within certain bounds, then yes, absolutely there is a problem and we do need to balance imports and exports. But as the Pound is a fiat currency now [since 1971], the exchange rate floats. The value is determined by the market. Reading some of the posts, I get the impression that the expectation is that if the UK issued debt free money in any amount, the pound's value would immediately fall through the floor. I doubt this. It is true we have a trade deficit but that has been getting bigger year on year for virtually all my life. I don't understand why the markets are happy if our currency is ensnared in debt for us to continue as we are, but if it is debt free they would just turn against the UK . Please consider that most / many of the bonds issued at present are denominated in Pounds and are bought by UK financial institutions; so the interest on the bonds is being used by financial institutions to pay the pensions etc. Thus the government is, in effect, paying interest to fund private sector pensions and actually it doesn't need to, it can just spend. [Pardon me for saying this, but its a huge subsidy to private sector pensions from the public purse and some commentators rant on about public sector pensions! But that's another discussion].
A slight digression, but in Australia in the early years of this decade, Australia ran budget surpluses, it had no need to borrow, it could reduce its debt, it didn't need to sell any bonds. However, their financial industry forced it to sell bonds; why? I believe to allow it to invest, risk free for the above purpose. I would suggest that, by generalising this example, the main reason for bond sales is the financial sectors demand for them, it is not because any sovereign government that issues and spends its own currency really needs to sell them. The government must know that it can issue debt free money whenever it wants to, but maybe is concerned about the reaction of the markets; maybe they are correct to be concerned, but the current way of working can only end in tears, as we are now seeing.
Each country that exports to us is willing to exchange food, goods, services for our currency. They do this now, knowing our exchange rate is flexible. We don't 'defend' any particular rate value. They are content to accept our pounds or another currency that has been bought on the open market. We get what we want, they get our currency that the government has the right is issue as much as it needs to.
The current account deficit will last for as long as other countries are willing to exchange their goods and services for our currency. Whether it is debt laden or debt free at the time the government first spent it, seems to me to be highly irrelevant. The attitude of our trading partners may change and we could be in difficulties, yes I agree absolutely, this could happen at any time, and we do need to have policies that reduce our current account deficit, but what might these be?
An infrastructure [in the broadest sense] that is very efficient that means that UK cost of production is lower than our competitors would be a good start. A highly educated and motivated work force would also be essential, [so why are we forcing our children into debt when they want/need to enter teriary education?]. Continual investment in innovation and R&D for new products and production methods would help a lot also. Being a country that foreign countries like to invest in would help also, even if it meant we had a budget deficit. These are the sort of things that the UK Government need to pursue for the benefit of all UK citizens, as well as ensuring that all have a reasonable standard of living.
A few thoughts to be going on with …..[more if the old boiler allows!!] but matbe your all in bed by now
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To other bloggers;
A year or so ago a group of bloggers on this site wrote a speech for a blogger known as devilsadvocate, he’s sorely missed by me by me, but still here it is:
'I note there has been much discussion on the debt of this nation.
I believe that in passing this debt to our children, our school leavers, our university graduates we will give them a mountain of debt to climb, when they should be setting out on a level playing field.
I have heard much talk about bank’s balance sheets.
But nations have balance sheets to, and long ones at that.
This nation’s has a ledger, upon whose pages the good and great deeds of its citizens are chronicled. It records lives sacrificed, the ceaseless toil of men and women, the great inventions and the gift of freedom gratefully received by so many.
The size of this ledger would obliterate any desk and its weight likely crush any individual who would dare carry it.
I may dust off its cover, but I am not worthy to open it.
We may talk of this Nation’s debt, but a single page of this mighty ledger would annihilate it in an instant.
I have considered the nature of banks and others who extend credit, I have considered the limited tax receipts received by the treasury, and I have considered the great effort and good that our public services are engaged in.
I bring to your attention that many years ago this nation introduced the most outstanding public body ever created, the National Health Service. It did not do this for profit, but because it believed in the business of saving lives, I put it to you that it was a right and proper endeavour.
This great nation of ours has freely given of its self to all and it will not suffer any individual or any business to act so recklessly that they endanger that which it provides freely to its citizens.
You financial institutions will so arrange your business that you will not cause such economic instability in the future, and if you are unable to rise to this challenge, it will be done for you.
As regards the bonus structure which so many regard as being the route cause of your demise. Do not to act so recklessly from this point on, for the Government on behalf of the people of this country may well open the nation’s ledger and demand settlement for the lives so dutifully given and the toil of its citizens that provide the very fabric of the country in which you trade.
I must now look at government and more particularly the members that form part of it.
The people of this nation believe that in the past members of the house of commons have been improving their own financial position, whilst the country as a whole was immersed in a most deep and grievous recession. This business will also now cease. Expenses will now be based on the distance from the House of Commons of the parliamentary constituency that each member serves. The amount per annum received by each member will be based on this and this alone.
As for those that have previously abused the trust of the nation, they will have to repay any amount that is above and beyond that which is reasonable. I will instruct an accountant to consider the matter and report his findings and his reasoning for them.
There will be a restriction in the amount of money available to the various departments of government, but we will not destroy public service, we will lift the yoke of bureaucracy and red tape which so binds and suffocates our lives and the growth of business.
Both business and public service will be treated fairly and I will not compare private sector with public sector in an attempt to show a greater value in one over the other, because such is a most futile task.
Finally I turn to the nation, I ask every man, woman and child for your patience, for the Government will need time to bring the economy and its finances back to a stable state.
The gradient of the road ahead is steep, its surface is uneven, but we have seen difficult and arduous times before, we have surmounted them, and we will again.
The Minister for Justice
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126. At 10:37pm on 11 Sep 2010, Oblivion responded to Sage of Cromerarrh statement:"There is not a big bank conspiracy going on to keep the masses indebted." Oblivion said; "This is just not true."
This going to sound daft but you are both right. Undoubtedly there was in the States a financial process aided by Clinton's encouragement to expand sub-prime that led to the cycle of mortgages being given to applicants, who didn't qualify (see CNBC's fantastic video called "House of Cards" - truly scary), repackaging them to sell as Derivatives aka. as commercial funds to capital hungry European Banks.
But was it a conspiracy or just plain greed? What is more disturbing is that the Regulatory Authorities didn't see it happening.
Many of the Bloggers on this site love the idea of a new Monetary System or Chartalism (which I believe it's called) but I think we need a more alert FSA, or it's ilk, using modern forensic tools to see what's happening in the economy, allied to much tighter restrictions on lending money.
The big mistake, and the last Government were just as guilty as previous Governments, was to let the Financial Markets get on with it - light touch regulation. We don't need a new Monetary System, we need to employ the Poachers - say some Rocket Scientists from Goldman Sachs or JP Morgan, to work for the FSA, or it's ilk, as Gamekeepers!
I don't think the process was conspiratorial
The whole point of the banks was to issue debt, generate profit on this debt, and to sell off the risk through SPVs to fuel financial markets into which it could then invest. This was the ponzi scheme they wanted and lobbied for since the late 70s. This was the model that is behind a lot of the free market propaganda for deregulation.
If you want more info and exact details, order a book called: "The dollar crisis: causes consequences and cures" by one Richard Duncan. I can't do it justice here.
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#122. At 10:32pm on 11 Sep 2010, Sage_of_Cromerarrh wrote:
Dempster,
....
It has to fund purchases by raising taxes or borrowing. What's complicated about that? It has to pay interest to get anyone to lend it money just like individuals do.
*****
Sage of ... Sorry but I believe you are absolutely wrong about this point, I provided a reference at #57 and reproduce it below. If this paper is wrong, can you provide evidence? If it is correct, the implications are profound and far-reaching [by the way, this was correct for the gold standard era, I believe] It is a false neoliberal economic idea they insist on propagating
I don't understand what changes if the government pays interest for the money it issues compared with a system where they just issue it. Of course there has to be visible, enforced, workable controls to stop inflation. Actually, we pay tax now to stop inflation, not to fund government expenditure. My evidence is a paper by Stephanie Bell 'Can taxes and bonds Finance Government Spending'. Available as a download if you google it or use link
http://econpapers.repec.org/paper/wpawuwpma/9808008.htm
to get at a pdf file
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132. At 11:03pm on 11 Sep 2010, Ben wrote:
"We (i.e. he and oblivion) agree housing is a ponzi scheme, for whatever reason."
Housing isn't a ponzi scheme. You can kick a house, if you're daft enough to do it, you can't kick or even see the results of a Ponzi scheme.
The problem with housing is that there is a finite supply of land and housing so demand drives up prices. The other issue is that most people have to fund houses with debt (sorry simplistic statement) which is paid back by future earnings. So long as wages continue to rise house prices will always rise over the long run.
However it is likely the liquidity squeeze and Government spending cuts are likely to stall or reduce house price rises for the next few years OR maybe not - who knows?
"It's (house prices) not going to rise in real terms indefinitely."
Ben, why not? I bought my first flat in 1971 for £9250 in W.London. That same flat is now worth over £300,000 (I have moved on). Why is not going to be worth say £6-700,000 in another 30-40 years?
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At my #59, sorry for a couple of editing errors: an extra line and what should have read:
"Someone is going to HAVE TO make good the public services the Tories are proposing to cut".
Stephanie, you say "Which side is right ... ? The truth is that no-one can know. Because the only thing everyone can agree on is that we live in extraordinarily uncertain times."
I have to disagree; we can know something is wrong even when we are still vague about the details of an adequate alternative.
And truth doesn't depend on whether we agree about it: it depends on statements corresponding to facts and processes being capable of achieving what is claimed for them.
It is wrong for the banks to charge citizens (and governments to allow them to charge) vast amounts of interest on credit which in the Reserve banking system is created as a credit limit at negligible cost, being c.93% fictitious and 7% other people's surplus money.
Logically, their doing so amounts to THEIR charging interest over the term of a credit limit they have authorised, when credit within the limit is actually given by suppliers of goods and services, who in general soon return their credit note money to the banking system anyway.
The simplest change to create an honest alternative to what we now do would be for representatives of our communities rather than profit-seeking bankers to receive the income from money creation, and to use this in lieu of tax to fund the maintenance of community infrastructure on which businesses and communities rely.
Were one to nationalise all the banks the bankers would then be paid as civil servants (preferably on modest, nationally agreed pay scales as in the days before Thatcher started recruiting "high-flyers" from business). Not that any of the monetary reformers we have mentioned are suggesting quite this, but in my opinion banking has deserved no better.
I personally agree with Ben that Big Government is no more to be trusted than Big Banking, so I envisage Governments reduced to advisers, with its treasury advising on allocation of credit between industries as well as departments. Local banking should adviselocals they know and supply housing finance, a fair "ration" of credit for personal maintenance, and motivation the form of prizes rather than profits, subject to responsibility for making the best of our own communities and limited to what the nation could earn or produce for itself. I believe we also need to radically rethink the way we timeshare our activities so as to share work, reduce costly commuting and get involved in our local communities and personal/group development projects.
The crunch is, the question is not whether we can afford what what we've already got; the costs of that are already water under the bridge. It is whether (and how) to use what we don't need (vast amounts of food, skills and property lying underused for lack of the monetarised credit circulating uselessly in the black holes which are the stock exchanges).
Regretfully, I'm going to have to leave this debate now. Try not to throw its babies out with the bathwater, everyone! It's been good.
All the best
Dave
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Thanks, Dempster @ 136,
The 'Minister of Justice''s words of wisdom were much appreciated and have been passed to my Brazilian friends who have corruptions in all areas of activities throughout the nation. If only the peoples of this great nation understood that this is not the way it has to be.
As this nation descends further into national socialism, I hope your missive will trigger a few thoughts and even consciences.
Geoff.
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SleepyDormouse good luck with the boiler. I hope you can continue to run it in the relatively near future because this is the problem I forsee.
We rely on international trade because we can not survive on national (UK) trade only. In order to trade internationally we have to use a method of payment to foreign suppliers that they have confidence that they will be able to spend one way or another themselves in the future.
If we issue debt free money or any money to pay for government spending it will acquire a market value in perceived worth by foreign suppliers. This market value will depend upon two things, firstly how the market values what we sell in the market place and lets call this figure A (our exports), and secondly how much of our currency there is in the whole system lets call this figure B. Thus currency value = A/B. If we keep on wanting to spend more on public or private consumption then we will need to raise the value of A. Nothing else works. Lowering or raising B gives inflation either way and does nothing to raise our national purchasing power on the international markets. I say inflation either way because increasing the money supply reduces the purchasing power of each unit of currency (devaluation), and decreasing the money supply increases the unit cost of any item to be purchased (wage reduction).
So government swapping debt free money for just money changes nothing. It is the market determined value of our exports of goods and services that ultimately underpin the value of our currency as we are dependent on imports of the basic commodities to survive.
The only thing I like about the idea of government issued debt free money is that it takes out a layer of greedy parasites who currently provide no social function and as you and many have advocated in fact weaken the patient that is the world economy. (Investment bankers and their like). However, they have not caused the problem they only accelerated it's occurence through their crazy ponzi derivative schemes of recents years.
The underlying fundamental here is that our economy (the world) for the past 150 years has been based upon the availability of a very low cost energy source to mass produce food and other goods and enable their cheap transportation around the globe. This has lead to a seven to eight fold increase in world population in that time. Growth, growth, growth has been the only focus of our economies in living memory and longer. Now it's time to pay the piper and we need to focus our collective energies and intelligences on mitigating the consequences of this huge problem.
This consumption mantra is unsustainable and it will be obvious to all in the next short period of time that it is so. We have come too far too fast by squandering a finite global resource too cheaply.
We have to try our best to return to a sustainable economy as quickly as possible. Look at the various Peak Oil materials available on Youtube for a start. (Professor Albert Bartlett, The Oil Drum, Chris Martenson etc).
As I have said earlier debt free money may well be one small part of the future economy, but how we generate our currency is not the underlying issue, sustainable population and it's consumption of resources is.
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i think that this gov is taking things a bit to far if anything wants cutting it is the money we give away to other countries ,,charity begins at home
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#142. At 08:01am on 12 Sep 2010, Sage_of_Cromerarrh wrote:
*****
Thanks, I think I see now where you are coming from. To try to repeat it back and see if we agree, you are not rejecting the idea of debt free money at all, in fact you seem to accept that it might be part of the immediate way forward. I believe it has to be because, as all our money at the moment is derived from debt, therefore we can never get out of debt. My suggestion is that, as this is the case, the driving force will always be for more production to try o buy off those to whom we owe money. But without debt, the nation is suddenly freed to be more independent and far-sighted. So I see debt free money as an essential first step to a more sustainable future, which is your much larger point.
Here I cannot disagree with the thrust of your argument. Sorry I don't have time now to respond more fully on this point. So, I think we are in broad agreement
My breakfast and the boiler is calling ...........
By the way, I appreciate your response, many thanks
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SleepyDormouse, #135.
Well, if I were a country and I had no guarantee that in between selling some goods to you and using your currency to purchase goods later you weren't going to issue more funny munny, I wouldn't trade with you.
I also wouldn't take your currency if it wasn't backed by someone repaying the amount you had created out of thin air.
This debt-free stuff seems to be a cult local to this forum. It's not going to happen because it's totally unworkable for the reasons mentioned, and it's clouded debate on this thread about what cuts (if any) to make, be replacing a debate about balancing the books with: "just invent more money". Advocates of debt-free money aside, I doubt anyone has found this debate worth reading.
Hell will freeze over _twice_ before this comes to pass.
dontmakeawave. I am speaking "in real terms" of course. I'm pretty surprised to have to clarify that. I do however agree with you that it wasn't a conspiracy. The debt-free proponents mix a totally simplistic, contained system view together with what would be the most absurdly complex conspiracy ever. I hope they make a film about it.
Do you think Northern Rock bankers just spent all the money on champagne? Most of it went to greedy landlords who then spent the money they "earned", bootstrapped by 100% Loan to value. The people who spent the majority of the money lost in the banking crisis are all over the UK. And this doesn't even matter because it's the deficit that is urgent, because all fiat economies are confidence based.
All I've learned during this thread is that the link to that prosperity site had a load of stuff I think is just totally wrong. Are you guys privy to an exciting idea that will come to sweep humanity for the good? Or are you just posting stuff on a left wing forum that nobody else thinks is credible?
Nobody has answered the three questions I asked Alesha in #101 without the use of some "magic step" eg after everything is at full capacity or "I don't know why our exchange rate doesn't go down" after we issue more debt but it doesn't so issuing it direct should be ok to.
I know the BBC is more left-wing but why is this forum full of this debt-free cult that has no basis in reality and whenever you ask a question I get a link to a couple of sites that contain muddled information and a cartoon on youtube? Mixed in with "it's them bankers init", which again is a really easy, not me guv, explanation of the problems this country faces.
ps sorry but just seen these from Dave:
"lack of the monetarised credit circulating uselessly in the black holes which are the stock exchanges"
companies spend the money they make on the stock exchange to invest which creates jobs. The stock exchange is then a secondary market in these instruments, but that secondary market would not exist without the flotation which creates jobs. It might not be perfect but it's not a black hole.
"The simplest change to create an honest alternative to what we now do would be for representatives of our communities rather than profit-seeking bankers to receive the income from money creation" - no thanks. Socialism.
"It is wrong for the banks to charge citizens (and governments to allow them to charge) vast amounts of interest on credit"
Yeah because cheap credit has worked out great. People are often idiots (sorry comrade) and interest rates create a barrier to entry, along with tight lending controls.
Many of these debt-free points are like your BBC news page is stuck in 1988. Hit F5 to refresh. The wall is down and cheap credit sucks!
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101. At 9:04pm on 11 Sep 2010, Ben Ok Ben
'How do I get a mortgage? Go to the government? They can't even means test child benefit so I suggest this idea is insane.'
From a state bank that works in the interest of the people not bankers
'Given that the amount other countries trade with us is less than we trade with them....,'
Not quite sure of the logic of that
'..if we stopped issuing debt now, what would you do next month? I'm thinking we slowly have less and less food. Or do we get the government to create it as we move magically to step 2 where we have full employment / max output?'
The Government doesn't buy the food. The private sector buys the food with the money that ultimately comes from Govt.
We have increased public spending massively in the last 10 years. At the start of that time would you have advocated not doing this so that we didn't have to issue debt? If so then why can't we go back to that level now?
No I was ignorant at that time. I now accept public spending is an essential part of a civilised country as is private sector production financed by both public and private spending.
We can go back to it once the private sector increases production.
My main point here is that our politicians and economists have completely misunderstood the nature of the monetary system we operate in.
Cutting public spending now would be a disaster
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#145. At 08:47am on 12 Sep 2010, Ben wrote:
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I have been trying to understand the financial system in this country for some months and over the same period have been reading and contributing here. My conclusion, that is firm, is that current economic theory [mainstream economics/neoliberal call it what you will] and policies are at best going to produce sub-optimal solutions and at worst will lead us to exactly the wrong thing.
I have been seeking an alternative; I don't have a right answer, but I have been looking for ideas, both for and against propositions I have written about.
I have tried to keep an open mind to ideas. Debt free money is not just this blog, it is part of the ideas within Modern Monetary Theory [MMT, other times called Chartalism]. It is taken seriously by a number of academic institutions and professors, Professors James Galbraith, William Mitchell and Scot Fullwiler to name a few. I can provide references to their work if you wish.
I see many difficultes with MMT but cannot reject it because it is based in the reality of what happens now in much of the financial system. So I try to find out more, to learn at least something.
I am sorry that you seem so closed to new ideas that don't fit within your own knowledge space. New thoughts and ideas are my lifeblood; want a metaphorical transfusion? It is also a shame that you cannot see that debt free money is actually part of the solution to our problems. The cuts that are coming won't work.
Our current economic performance is due to the money injected into the system since 2007. Now there is no more, we see a slowdown starting; it won't be a monotonic slowing down in the economic data, but the trend over the next year I expect to show a slowdown.
However, please keep writing here, if we all agree all the time it will be dull. Those who have contrary views are most likely to show up errors and falsehoods in what is written - so many thanks for your various contributions both here and out into the future
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Have a look here:
http://www.debtdeflation.com/blogs/2009/09/27/it%E2%80%99s-hard-being-a-bear-part-sixgood-alternative-theory/
It might be worth reading on talkfinance.net for more discussion on the same topic.
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Also look at Prof Keen's response at post #23:
http://www.debtdeflation.com/blogs/2009/09/27/it%E2%80%99s-hard-being-a-bear-part-sixgood-alternative-theory/
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145. At 08:47am on 12 Sep 2010, Ben wrote:
'Well, if I were a country and I had no guarantee that in between selling some goods to you and using your currency to purchase goods later you weren't going to issue more funny munny, I wouldn't trade with you.'
Is non-debt based money any more 'funny' than debt based, if so why?
Conventional logic suggests that there is only one thing that can cause inflation, and that is increasing quantity of money. The converse is true, decrease the amount of money and you get deflation.
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Thanks Stephanie for the usual excellent analysis on the two options to deal with the economy.
One comment I would like to make is that there is a third option, and I have not seen it explored anywhere. That option is called 'doing nothing'. In other words, no big economic stimulus packages but also no spending cuts. Perhaps look at government spending from the point of view of getting a bigger economic bang for our buck, for example by spending less overseas and more in the UK. But overall neither cut nor increase government spending.
On the face of it 'doing nothing' could strike a balance between not pushing us too deep into the mud in the short term, and not running up a too high deficit for the long run.
Are all politicians jumping one way or the other because they don't want to be accused of 'doing nothing'?
Or are there good economic reasons why the 'doing nothing' option really ain't gonna fly?
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Without doubt government spending cuts are needed - especially in Defence (are we still kidding ourselves about our world policing status) and invest some of that saving in Education. But whatever happens this and future governments must enable this country to begin manufacturing again and adding value to real products. I'm no economist but if this government does not have a vision about stimulating our manufacturing again then all these cuts won't mean a thing.
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One thing that has surprised me is that monetary theory never seems to be discussed by economists in the mainstream media.
Everything to do with ‘economics’ is discussed, save the very debt based monetary system we operate under.
It appears that there is an unwritten rule that the debt based monetary system must never be questioned.
Everything around it can be discussed but nothing about it.
The debt based system means that every year more money (debt) has to be created to satisfy the repayment of capital and interest. If it is not then default, destitution and misery has to follow.
In essence you have a choice between ever increasing debt or destitution and misery.
Surely this must be worthy of discussion by ‘economics journalists’.
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It is perfectly reasonable and perfectly possible to believe in small government and a large welfare provision. What Chancellor Osbourne believes in is substituting Business for Government. The nett worth of Government activities is large, hence Mister Osbourne claims that he will reduce the size of Government. This will be achieved by transferring the nett worth of activities into the Private Sector. Thus substituting Bigger Business for Big Government. This automatically inflation of cost will be borne by the electorate as a matter of contract. Much the same as the disaster of Penalty Charge Notices - but on a much larger scale.
The truth is that the situation is both a normal part of capitalism and a once in a lifetime experience. It is, generally, only possible for capitalism to go so badly wrong "once in a lifetime" - or thereabouts. What the Government chooses to do about it depends upon if they see capitalism as the only viable economic system. They do and so the economic crisis will be long, hard and borne by people obliged to work for a living.
The recovery will be driven by a long transfer of nett wealth from individuals to businesses - particularly banks - through purchasing goods and services. The working population will shrink due to public sector being decimated and the private sector unable to get finance to pay anybody and so, the rate at which the transfer of personal wealth takes place will be low and slows for a long time.
The "short term weak recovery and long term debt" problems are an artifact of the way banks choose to act in the market. By refusing to acknowledge that it was they, the Banks, that made huge losses (and by extension: they that owe the debts) the rest of the economy is plunged into an economic trap. Pay for the Banks debts willingly or have recession imposed to pay the Banks debts unwillingly.
Osborne has chosen to impose recession. This is the much vaunted "double dip". The normal economy is in the process of recovery yet the Banking sector is in a "Japan Style Slump". The whole process of making Business Big and Government Small by asset transfer entrenches the Banking problems into the General Economy. Osbourne has confused "big" with "expensive".
The Truth us that it is possible to have miniscule Government with big bills. The Big Bills do not make the government big. What George Osborne is proposing is making democracy smaller. With the transfer of assets from public ownership to private ownership comes the transfer of voting rights from the ballot box to the shareholder. Democracy becomes a matter of commerce: the ideological trappings of capitalism. The Government could be made smaller without a massive transfer of assets from public to private, but that would not suit the ideology of Mister Osbourne.
The ideology of Mister Osborne is that the crisis created by the banks is something to be accepted for the "gift" of a free market. The truth is that his naive ideological commitments are driving a weak, disorganised banking controlled economy into the controlling position of all public life. The banks that created the crisis are going to be the ones that manage the recession. They have shareholders to pander to.
So expect several decades of increasing poverty, rising crime and social ills. Perhaps mister Osbourne might light to visit Toxteth: just to see how long it takes to regenerate an area after enforced economic disaster. Toxteth, Moss Side, Bootle and Saint Pauls were the flagships of Monetarist "we are all in this together". The truth about the "small government" of Mister Osbourne is that the deprivation of Toxteth and Bootle is about to be rolled out across the whole of the UK.
It is not a matter of hoping that the policies of austerity are right. They will work: but to what end? It is a matter of asking: do you really want your life run by people in call centres for the benefit of shareholders? That seems to be the nature of the "recovery" that Osbourne is engineering: small Government, Big Business and a profit premium on all goods, services and activities.
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'..if we stopped issuing debt now, what would you do next month? I'm thinking we slowly have less and less food. Or do we get the government to create it as we move magically to step 2 where we have full employment / max output?'
The Government doesn't buy the food. The private sector buys the food with the money that ultimately comes from Govt.
--------
If you think that is an acceptable answer then maybe critical argument has changed since I went to uni.
We had 50% spending by the government last year and it's left us in a complete mess that required QE, which requires selling bonds to investors. They purchased these on the understanding that it was temporary. If we had said we were going to do QE every month they wouldn't have bought them. You basically want the government in charge of 100% of funding as they would issue the 97% of all money in circulation. That is socialism and it doesn't work.
I'm saying the above doesn't answer my question as the private sector wouldn't be able to find foreign suppliers who would take money not tied to thin air. Debt is a circle ultimately tied to assets. You propose breaking that circle and having a block with "And then a miracle occurs", as in the cartoon link I gave earlier. Anyone else care to try?
I'm open to new ideas. I've considered this one and asked questions to which I've got answers I believe mean the underlying theory is fanciful. I'm willing to call out an idea as garbage rather than the liberal "hey - it's great you had an idea and everyone's idea is as valid as another. It doesn't seem workable but lets sort out the details later as it sounds like what I want to hear". This is the kind of thinking that saw arts degrees get funding ahead of engineering and spending run out of control.
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It is with increasing fascination I wonder why the media never discuss the debt based monetary system.
In respect of the ‘economic crisis, in the ‘media’ we’ve seen discussions on just about everything that you can possibly think of, but not the debt based monetary system which is at the damn centre of it all.
The media are currently discussing ‘austerity’.
And as one internet commentator put it:
Austerity implies discipline and self restraint, austerity is prudent, austerity is modest, austerity is a virtue.
When in reality ‘austerity’ is simply being poorer.
We are currently enticed into discussing how we are going to be poorer, not why we are going to be poorer.
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This comment was removed because the moderators found it broke the House Rules.
This comment was removed because the moderators found it broke the House Rules.
Ben I agree with what you are saying about how the government HAS TO raise money when it can't tax enough to cover it's outgoings. It has to be done by tempting investors at home and abroad to buy it's I O U's (bonds). If these don't pay interest then nobody will buy them and they will be forced to print money and we end up in a cold weather Zimbabwe.
Debt free money in an international marketplace can only work if everybody does it. As this won't happen until circumstances force it (and that could very likely happen in the next couple of decades or less) we have to play by the rules of the international game if we want others to play with us.
The only viable solution I can see is cut back and live within our means quickly. This will be very very hard but it will happen whether we like it or not and it will be much better if we manage it ahead of the curve of the rest of the world such as the US and EU who will not do this willingly and will suffer even more seriously as a consequence.
Once we have learnt to live within our means and only borrow for wealth building and resource preserving infrastructure investment we then need to make our policies put sustainability and the medium to long term standard of living and quality of life at the forefront. This may involve debt free government issued money but only if the rest of the major economies go along with it as well and agree exchange rates between currencies.
I accept your concerns about government running the money supply versus private banks though.
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Thoughts on the Lost Decade (and Lessons from)
Is it all right for the UK to pursue the path that led the Japanese economy to where it is today?
So where is the Japanese economy after the lost decade - 16% (some 20 million) are below the poverty line. Shocking levels of un and under employment - overvalued currency - homes that are still unaffordable and negative interest rates and still on the way down.
Ten years of not tackling the problem of excessive PRIVATE debt! We cannot afford not to tackle the problem of excessive PRIVATE debt. But this is exactly the path chosen by our Nation (the Bank of England, All Governments etc etc). They must be blind as well as stupid!
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A few points most people should be able to agree on:
1. The budget deficit is unsubstainable and we need a clear and detailed plan for reducing it.
2. The private sector is treading water at the minute, there isn't enough consumer demand due to job insecurity and personal debt.
3. Unregulated markets (or self regulating markets) have been proven volatile, unreliable and detrimental to society as a whole.
My points in addition to above would be that the Tory's attempts to deal with point 1 have been hasty, lacking detail are being clearly influenced by ideology rather than common sense and whilst their big words are currently reassuring the bond markets, the ideological influence is blinding them to the obvious medium/long term effects on consumer demand and the private sectors ability (or more accurately willingness) to fill the gap left.
The above needs some explanation of course, I say the Tory's have been hasty because they have made grandiose statements about percentage budget cuts before departments have even had the chance to start to analyse the effects those cuts might have, which of course is where the lack of detail comes in. The only actual details we get are terrifying snippets (such as greater manchester police having to cut their staff by 25%). I say they are clearly influenced by ideology because nobody has clearly explained why a 12% budget deficit requires departmental cuts of 25-40% (in recent history the country has virtually always run at deficit or between 2-5%), our national debt is low compared to countries in real trouble like greece (although of course it wouldn't stay that way for long with a deficit of 12% per year) and the only country to have tried this approach so far, Ireland, are still suffering at the hands of nervous markets.
As for point 2, the private sector has probably weathered the most recebt storm in better shape than expected, the truely weak have already perished but those left are treading water with little room for expansion. Private debt is already far beyond saturation point and the only way to increase consumer demand is to increase consumer debt which only puts off the inevitable need for the people of this country to pay back what they owe. The housing market is still over valued, there is only the posibility of stabalisation or decline, with the later far more likely given the job losses on the way.
So we're left with a situation where the public has massive personal debt, job insecurity, massive mortgages on houses that aren't worth what they paid and are likely to fall further in value and a deep distrust of the financiers/politicians who are entrusted with protecting our futures.
In an environment such as this where are the opportunities for investors which will provide a return commensurate with risk? Which brings us back to my previous point about the hasty and ill thought out way the government has gone about tackling the deficit. Their approach only makes sense if the private sector can fill the gap they leave and that clearly isn't going to happen given the state of personal finances.
This also leads me on to my 3rd point and the fallacy of un(self)regulated markets. Don't get me wrong, I agree with most arguments in support of free markets, they are far more efficient at allocaton of resources and exploitation of opportunities than governments, the problem comes with the belief that what is good for the rich is good for everyone. This obvious isn't true at the extremes, what would be best for an individual company would be to pay their employees just enough to feed, clothe and house themselves and thier children, or better yet to keep their workers as slaves, this would minimise production costs but is obviously not good for society as a whole so we have laws to prevent it. Why isn't this understanding expanded to less obvious/immediate conflicts of interest between personal greed and the collective needs of the country, why don't people understand that markets are simply a collection of human beings, just like governments and communities, and are just as susceptible to collective failings such as over confidence, fear, poor judgements, misplaced faith and every other human failing you can name. We have created/allowed the creation of a financial system where almost no one making the decisions has a personal interest in the long term effects of the decisions being made, a system so complex that I doubt there is a person alive with the intellect/time to understand all it's details and anticipate the possible repercussions of decisions being made. It seems fairly obvious to me that the logical conclusion of free markets is self destruction, without government intervention it would have happened in 2008 and without real regulation with our interests at their heart a recurrence of our current problems is inevitable, whether it's 1, 10 or 50 years down the line.
To our current situation, there are obviously many factors involved but I believe the main long term problem for our economy isn't the budget deficit or the national debt, it's the nations personal indebtedness. The government has the ability to change this but won't because it's ideologically abhorrent to them and the daily mail only has to whisper 'nanny state' to get idiots backs up.
The path this Conservative government has laid out for us WILL lead to loss of jobs that won't be replaced for a very long time, it WILL lead to another house price crash as those losing their jobs default on their mortgages, it WILL lead to further problems for the banks (which we underwrite don't forget) as the losses on those mortgages and the inevitable defaults on credit cards and loans mount up, it WILL lead to the most vunerable in society suffering the most and it WILL lead to the market having reduced confidence in the governments ability to service the national debt.
All of these things have a high probablity of happening whatever path we choose and may even be inevitable, it may well be the current government thinks so as the most obvious reason for the creation of the OBR is to provide political cover for the inevitable repercussions of their policies.
There's a phrase that's stuck with me as I read various economists opinions on what governments should be doing - 'do what you've always done and you'll get what you've always got' - what we've done for the past 30 years is trust that free markets benefit us all in the end, and what we've got is a boom bust cycle that get's worse with every iteration. We all have more power than we realise, we have the power to do anything within our imagination when it comes to tackling problems of this magnitude, it's just our imagination is limited by the constrant stream of spin from those with vested interests.
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156. At 10:55am on 12 Sep 2010, Dempster wrote: "It is with increasing fascination I wonder why the media never discuss the debt based monetary system."
Probably two reasons - one, they don't use that terminology and two, it doesn't sell newspapers or TV advertising.
"We are currently enticed into discussing how we are going to be poorer, not why we are going to be poorer."
You know why, the population of the UK know why, why do you ask that question?
If we don't cut our cloth to suit our circumstances now, it will be much worse later. Our Government debt is growing at the rate of around £140-150 billion per year. Even Private debt is still mooted to keep growing. If that doesn't frighten you into austerity nothing will!
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159. At 11:59am on 12 Sep 2010, Sage_of_Cromerarrh wrote:
'Debt free money in an international marketplace can only work if everybody does it'
I disagree, it doesn't matter who does it, and who doesn't do it.
It didn't matter in the past, and it won't matter in the future.
Money is a means of exchange, it makes no difference whether its debt based or not.
In my view it is only the quantity of money that really matters.
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Good to see the monetary reforms on here, its such a key issue. I dont know if its mentioned above but there is something I would like to add. The key problem with a debt based monetary system is the fact that it requires to constantly expand with more businesses taking on debt each year to service existing debt. THis means you need constant economic growth. As far as I can tell the money supply is compounding or growing exponentially as a direct result. Now as the world is of fixed size and has limited resources, then any process that continually requires economic growth directly contradicts this fact. It also constantly erodes the value of the currency. So it simply is not fit for purpose. We need an economic approach that reflects the fact that that resources are inevitably running out, and that needs a monetary system that has no need to constantly expand, ie a debt free monetary system. One other point, the primary purpose of money is simply a means of transaction, as an alternative to bartering. Why on earth should we have to in effect lease it from private banks!!! What gives them the right to control the means of transaction? It should be provide free (of interest) by the state, and then for the first time it would be democratically accountable. Its secondary role is a temporary store of value. The fact that the value is constantly being eroded, also strengthens the need for reform.
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Ben I agree with what you are saying about how the government HAS TO raise money when it can't tax enough to cover it's outgoings
..........
If it wasn't for the private debt levels, people could afford to pay more tax and the public spending deficit wouldn't exist. Instead the public are paying a fortune in interest to private banks, what a waste of resources, and conversely such a rich bunch of bankers. The injustice as a result.
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I'm saying the above doesn't answer my question as the private sector wouldn't be able to find foreign suppliers who would take money not tied to thin air. Debt is a circle ultimately tied to assets. You propose breaking that circle and having a block with "And then a miracle occurs", as in the cartoon link I gave earlier. Anyone else care to try?
........................
Ben I see no difference between the private banks creating the money supply or the state. Both create it out of thin air, you are simply shifting the starting point. Private banks currently do it but charge a fee called interest. If the government did it the only difference would be the fact it would be interest free. The fiscal responsibility not to create more than theeconomy needs would be the same at present, the difference is that the government would become directly responsible and if they created too much you would get inflation as at present. But They could be held to account at the ballot box. Currently the private banks do it and they are not accountable to anyone other than a handful of shareholders. The current situation is like the government are driving a car but the accelerater and brake are in the hands of private companies. Why should then be? What gives them the right? At the end of the day banks are driven by there own interests and pursuit of profit, the need for economic stability of the currency and the economy is a secondary concern, The boom a bust cycle is a direct result of their inability to sensibly control the money supply. They have proven they are no longer fit for purpose.
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Dempster,
My concern with unilateral debt free money is that I don't think there is a precedent for it in a truly international market such as we have in the modern world. In particular I don't see how we could maintain a currency (Sterling) at any kind of decent level to be able to afford our essential imports when we run such a trade imbalance and budget deficit. Our creditors abroad would disown any future trading with us as we would have effectively welched on paying them back what we owed them and the interest agreed.
The key is we are in hock to FOREIGN suppliers and investors. This is not a UK internal issue. Once we loose our good name as a debtor abroad we will literally starve.
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Averagejoe,
If it were interest free no foreign investor or supplier would accept investing in us or our currency. These systems worked in the past in internal marketplaces such as empires and colonies for local and nation state transactions. They would not work for us as we are indebted abroad and remain in constant deficit at the moment.
This is what we have to change and become an investor again not a borrower.
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So expect several decades of increasing poverty, rising crime and social ills. Perhaps mister Osbourne might light to visit Toxteth: just to see how long it takes to regenerate an area after enforced economic disaster. Toxteth, Moss Side, Bootle and Saint Pauls were the flagships of Monetarist "we are all in this together". The truth about the "small government" of Mister Osbourne is that the deprivation of Toxteth and Bootle is about to be rolled out across the whole of the UK.
It is not a matter of hoping that the policies of austerity are right. They will work: but to what end? It is a matter of asking: do you really want your life run by people in call centres for the benefit of shareholders? That seems to be the nature of the "recovery" that Osbourne is engineering: small Government, Big Business and a profit premium on all goods, services and activities.
...............
The government are assuming that the public as a whole will accept this. The difference this time compared with previous recessions are the Educated working class (middle class), a large proportion who work in the public sector, are going to be hit like never before. I'm in that category as well. I dont take to kindly to the ideolgy. I provide a service not for profit but to meet the needs of society. I do not wish to be accountable to bunch of rich business board, and its shareholders. I see a move towards even more inequality, the rich getting richer and the masses having even less. A trend like this can only last so long before the masses start to protest, especially those that are educated.
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Averagejoe, I agree with your sentiments about mass disruption. However, due to our humungous over exploitation of our planet and our much too large population there is no alternative. Hopefully our better education will enable most of us to be realistic about what is possible, curb blatant wealth imbalances, and collectively pull together to put things right over the next couple of generations. The alternative of anarchy suits nobody.
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I personally can't see anyway out of this, but cutting spending and control future spending, we have to look at what we can afford and make sure every penny is well spent, the previous Labour goverment spent like mad, but didn't check on what they were spending the money on and was it well spent. The current goverment has a massive deficit to worry about, an aging population, public sector pension deficit, PPI contracts, energy problems and finally how to make sure the country will have enough food in the future, I would not like to be Prime Minister trying to solve that lot, if there is an answer. The population of the UK has to get real about the problems we face in the future.
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Where we are now is the result of a political failure, not an economic one. There are a number of inter-linked factors, but to my mind the chief one has been the transformation of popular outlook over the last 20 - 30 years from hopeful realism to over-optimistic fantasy. As the 24/7 drip-feed of the deceit of commercial advertising weakened the attachment of everyday people to basic truth and straightforwardness, so the politics of power changed from being a comparison of competences to being a comparison of promoted expectation. Whoever promised the most got the votes.
But this has been a slippery slope of over-promise and under-delivery where populations have been divided into those who realise the nonsense that political manoeuvring has become, and those who, often out of fear, remain in a dreamworld of thinking that it's all still cutting-edge, objective social decision-making. Political debate is always dissolving into the protagonists talking at cross-purposes - one side dealing in likelihoods and the other in possibilities. Until we realise that we'll get nowhere this way, we'll go on making decisions that ruffle the fewest feathers, short-term, rather than those that most appropriately address the difficulties we are encountering.
Without change, we might as well accept that the most important thing for our children to learn is how to say "Yes Sir, No Sir, Three bags full Sir" in Mandarin.
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An exclusive analysis of pay and remuneration for The Sunday Telegraph and The Daily Telegraph found FTSE 100 chief executives were paid a basic salary of £751,459 on average in 2009-10, an increase of 5pc on the previous 12 months.
The research by RTF Navigator shows bonus payments also rose by 12pc in 2009-10 compared to the previous year. In 2008-09, bonuses fell by 24pc.
I take it that these directors/ executives will support any public sector union asking for a similar pay rise, after all there are many employees earning the minimum pay or very near the minimum pay, so the five percent rise to the director/ executive is quite massive in comparison. Having worked in the public sector for thirty years I have never seen anyone get a bonus, we just did our job for our pay.
Probably do as I say not as I do British management attitude! The rich richer the poor poorer, Thanks Vince and Nick for such a fair system, still hitting the poorer sections with taxes, while some multimillionaires pay less tax than those on minimum pay, we are all in htis together, don't make me laugh!
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One thing Steve Keen's site opened my eyes to is the following revelation:
There is nothing wrong with constantly increasing debt-money (endogenous money supply). If the money is invested into productive ventures then the GDP will always rise relative to the amount of debt. In this way the debt-to-GDP ratio remains constant and only nominal changes occur.
What causes debt levels to rise, relative to GDP, is when borrowed money is used to speculate on and drive up the price of assets. This forms bubbles. When the bubbles burst, the asset values are lost, no increase in GDP occurs, the debt level remains high. What is fundamentally wrong then with the current monetary system is leveraged asset speculation.
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155. At 10:48am on 12 Sep 2010, Ben
Ben
thank you for your advice on critical argument
I think i will need to read your post again a couple of times to fully understand it but if I have been unable to explain my idea to you clearly in my posts 58 and 78 then i have failed and must try harder.
In the meantime if it's ok with you I'll carry on discussing it with anyone who's interested.
Cheers
Alesha
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159. At 11:59am on 12 Sep 2010, Sage_of_Cromerarrh wrote:
Ben I agree with what you are saying about how the government HAS TO raise money when it can't tax enough to cover it's outgoings
Just a small intuitive point which I'm sure you cand find a way out of.
Ig Govt needs to raise tax to spend how did taxpayers get the money to pay the Govt when it started spending for the first time ?
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168. At 1:27pm on 12 Sep 2010, Sage_of_Cromerarrh wrote:
If it were interest free no foreign investor or supplier would accept investing in us or our currency
What does interest free money mean? Do you mean like benefits ?
What do you mean by investing in our currency? Do you mean gambling that it will hold or increase its value?
What does this have to do with not having to issue gilts to finance Govt spending ?
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Never in the field if human finances will so many lives be impacted upon by the actions of so few.
Whilst the rank and file will struggle the well off will continue to prosper as their share portfolio's continue to pay dividends.
Profits will continue to rise as the supermarkets, retailers and fuek suppliers continue to raise their prices whilst cutting the amount paid to suppliers, leaving many destitute, homeless and impoverished.
The banking fat cats will continue to enjoy their highlife.
I'm afraid Bob Crowe's prediction of civil unrest is inevitable - people more than ever are empowered to recognise injustice, discrimination & imbalance - they will rise like never before to show the Condem pact the error of their ways.
The infant recovery is being strangled at birth.
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Alesha,
So I think you are advocating that there is no limit to what government can spend? They print the money and so they can just print as much as they want?
Come on get real. This Maybe fine or may have been fine in a closed and limited economy but not in an international one. As we have grown way beyond being able to survive with just a national economy how do we pay our international suppliers and creditors? We are running a very large trade deficit and budget deficit which can not be funded by printing money to pay foreign suppliers and creditors because they wont value it and accept it.
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179. At 6:30pm on 12 Sep 2010, Sage_of_Cromerarrh wrote:
'Alesha,
So I think you are advocating that there is no limit to what government can spend? They print the money and so they can just print as much as they want?'
Sage how can you seriously suggest that is whay I am saying?
How can we possibly have a discussion if you don't take any notice of what i actually write?
If you have your own agenda fine just state it but trying to make out I'm saying something i'm quite clearly not will just mean that fewer people take you seriously.
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#179 Sage
I fail to see where you draw the difference between money created by banks and money created by government in this regard. The US has been inflating its money supply exponentially since 1971, and the end result is constant shifting of capital to Asia and oil rich nations. Does it not equally bother you that we are increasingly importing deflation from Asia at our own manufacturing industry's expense?
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161. At 12:41pm on 12 Sep 2010, errrrrrrrrrm wrote:
A few points most people should be able to agree on:
1. The budget deficit is unsubstainable and we need a clear and detailed plan for reducing it.
Disagree, the budget deficit is misunderstood.
What happens when the budget is in surplus. taxation is greater than Govt spending. everbody thinks Yippee. In actual fact net money is leaving the economy and continual surpluses will lead bring on the next recession.
When a budget deficit is run net money is entering the economy and continual deficits will lead to recovery providing there is enough spare capacity in terms of resources and willing workers.
2. The private sector is treading water at the minute, there isn't enough consumer demand due to job insecurity and personal debt.
Agreed so do not attack the deficit.
3. Unregulated markets (or self regulating markets) have been proven volatile, unreliable and detrimental to society as a whole.
Absolutely godamm right.
I also agree with your last paragraph. There are far too many Frasers around and probably far too many spinners.
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Alesha Soba
I'm getting a sinking feeling you are a Labour party member. I have read most of your various posts but it seems to be summed up by your position that deficits dont matter because governments dont have to balance the books.
If so then there would no need to worry about government debt and the 20b or so we are paying in interest on it because we could have a couple of nightshifts in the printing shed and just pay it all off!
Simples!
I am troubled by this approach as Weimar and Zimbabwe went for this in a big way and the outcome wasnt all that pleasant.
Even keynes said that , as you say, deficit spending was the correct thing to do during a downturn.
But.
The bit that is converniently forgotten is that he also said that surpluses were to be accumulated during the good times. Just like the much maligned King Herod did thus staving off starvation during a drought.
That bit is missing from the western economic practice this time. We owe huge amounts , and our current existence to "the kindness of strangers" mostly in the east.
And they are goint to want their money back at some point.
So what do we do Alesha? Print some nice crisp tenners off and pay them back?
Is it REALLY that simple?
If so why have we got an economic downturn at all?
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178. At 6:21pm on 12 Sep 2010, Mackem_Man wrote:
" The banking fat cats will continue to enjoy their highlife.I'm afraid Bob Crowe's prediction of civil unrest is inevitable - people more than ever are empowered to recognise injustice, discrimination & imbalance - they will rise like never before to show the Condem pact the error of their ways."
Spoken like a true Union member. Crowbar is a typical example. He allegedly earns in excess of £100.000 per year and therefore needs to bring his members out on strike for no reason at least once a year. Why? To justify his salary and the salaries of his other Union mates.
Who destroyed our Industrial base - Thatcher cry the Unions - I worked in industry during the disruptive 60's and 70's and unequivocally it was the Communist Unions who stuffed our manufacturing and logistics industries. Thanks a lot!
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I get the impression that one or two posters havent got a proper handle on this chartalism concept.
Go and read the first 2 sections here slowly and carefully. THen come back with a critique: http://www.3spoken.co.uk/2010/04/primer-on-modern-monetary-theory-mmt.html
I mean these sections:
http://bilbo.economicoutlook.net/blog/?p=332
http://bilbo.economicoutlook.net/blog/?p=352
Also check out the debtdeflation links in my earlier post for some thoughts about it.
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Oblivion:
"There is nothing wrong with constantly increasing debt-money (endogenous money supply). If the money is invested into productive ventures then the GDP will always rise relative to the amount of debt. In this way the debt-to-GDP ratio remains constant and only nominal changes occur."
If the government invests all our money, as you are advocating as they would choose who gets given cash, that will not lead to productive ventures. This is effectively socialism and the government always screw up. They had 50% of GDP and made a totally unproductive mess. You want to give them 100%.
This is the point - Labour wasted pots of cash on total tripe. We have no assets to show for this, just a load of civil servants. The Tories are saying rather than tax to cover the deficit, let the people spend it as they see fit. I don't want to subsidise a load of art projects. Let them fund themselves if they are so good.
Luckily none of the stuff you and Alesha are talking about (on this thread about what to cut) will ever happen.
Alesha:
I'm not the only one who cannot understand what you are on about. Why didn't you try to clarify to Sage instead of just castigating him for not following your train of "thought"?
"Just a small intuitive point which I'm sure you cand find a way out of.
If Govt needs to raise tax to spend how did taxpayers get the money to pay the Govt when it started spending for the first time ?"
Again don't make oblique points like you are smarter. Explain your point clearly. Such style is not nice.
I can't understand your point. Money was first tied to physical goods, a sort of gold standard. Then banks came in with promissory notes. Then the government started to tax to pay for wars to defend the country.
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#174. At 6:05pm on 12 Sep 2010, Oblivion wrote:
One thing Steve Keen's site opened my eyes to is the following revelation:
There is nothing wrong with constantly increasing debt-money (endogenous money supply). etc etc...
------------------
Oblivion, many thanks for this post; its great to see eyes being opened to MMT.
May I suggest some further reading (Intro only as a taster, but the meat is in part 1. Ignore the rest if you want to.
You can download a book by Warren Mosler for free at
http://moslereconomics.com/2009/12/10/7-deadly-innocent-frauds/ gives a page with a pdf
Its called Seven Deadly Frauds of Economic Policy
I enjoyed it and it makes a lot of sense to me.
Many others out there might also like it, but it turned my thinking and appreciation of economics upside down for some things
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184. At 7:39pm on 12 Sep 2010, dontmakeawave wrote:
"Spoken like a true Union member."
Way off the mark toryboy.
You cannot lay this crisis at the unions door - Thatcher rightly made them draw in their claws, no this crisis lies firmly at the door of the rich & greedy bankers.
That is undeniable.
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To 186. At 8:07pm on 12 Sep 2010, Ben
It's about how government money is created.
Governments currently create money as debt bearing interest.
Why not create money without bearing interest.
Why pay banks interest for creating money for us, when we have the perfect right to create without paying banks interest?
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Dempster:
because I don't want the government in total control of the money. I'd rather have a decentralised model than some kind of socialist nightmare.
My main disbelief was caused by the assertion that once the state creates money it can create as much as it likes so we don't need to worry about a balance of trade. I've posed this as a question after reading some of the "reading list" but still don't get it. If we still have to balance trade then we still need to make cuts to balance the books, whatever the origin of the cash.
Mackem_man - I deny. How have the bankers effected the bulk of the deficit, which is the driver for the cuts?
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Ben
This crisis is basically the result of excessive private debt. In 1971 when Nixon decided that he would no longer make good on promises to exchange dollars for gold, he basically defaulted on all US obligations and made the world realise that their post WW2 paradigm called Bretton Woods had come to and end. The West had squandered its gold in less than 20 years on ideological wars and mismanagement in the US hub. Up until that point the world had been on a fixed exchange rate gold-based system.
At that point the oil rich exporters and Asian goods exporters were all about to receive payment for their good and oil in US paper no longer exchangeable for gold. Their assets and current account surpluses were all dominated in USD. Each had their own dillemma: the asians could try to exchange their USD for local currency or try to reinvest the worthless paper back where it came from, the oil suppliers could try to prop up their usd assets somehow or sink bank into the sand.
So what happened? The asians primarily concerned with unemployment decided to reinvest their dollas back into the USA, so that :
a) the USA could continue to buy the asian goods and keep the asians employed
b) they would not drive up the price of their own currency by converting it, so they would remain competitive exporters.
The oil producing nations decided to form OPEC and declared that as long as they could buy US weapons with US paper, they would mandate that all nations could only buy oil in USD, so all central banks would need to main reserves of USD just to meet national energy needs. (This is by the way why the US does not like either Hussein, Chavez, Putin or Ahmedinejad: they sell oil globally in foreign currency)
The USA was suddenly placed in a position where it had to keep the dollar cycle turning, or it's position as the centre of the financial hub would be over. It had to keep reasonable opportunities of investment open to the arabs and the asians, so that they could invest the dollars back somewhere (t-bonds, corporate bonds, direct invesments etc), so that the americans could buy their oil and goods. As soon as this stops, and it still hasn't quite, though it is winding down, the USD will be over.
The US institutions, in 1971, suddenly became the agents of China and Saudi Arabia (funny that the Taleban are condemned as Islamic extremists, while the house of Saud that burns schoolgirls alive are personal friends of the Bush family, receive US weaponry and rarely appear in the media?)
The US had to keep on providing opportunities and avenues for investment. If "growth" were to stop, the dollar cycle would stop, the USD would collapse and the Western model would die.
In order to maintain this growth, increasing pressure for deregulation led to the creation of various SPVs for taking risk from banks. It led to the Fed increases in dollar amounts. Dollars increased exponentially until 2007 from 1971. The dollars were being constantly recycled in a vast ponzi scheme. This increasing liquidity led to various global bubbles. The asian bubbles, the dotcom bubbles, the real estate bubbles. Pressure for growth in large corporates and excess liquidity led to corporate mismanagement. Enron went down. Worldcom went down. And so on.
The pressure on banks to create more debt, to fuel more spending, to drive more imports, to keep up the value of the dollar and recirculation of the dollar kept mounting. Finally it burst in the wake of post dotcom and the real estate bubble.
Now the post Bretton Woods framework of ever increasing debt, driven by need to recirculate dollars, is over. The world hasn't found an alternative it can agree on, the West is deleveraging, the asians are divesting and diversifying slowly, the world leaders are keen to make some semblence of a status quo to avoid global chaos, and OPEC does not want to switch off the USD just yet though they are toying with the idea (links available via Google).
It has been shown that the key problem with this ever increasing endogenous money creation is that leveraged asset speculation leads to increasing debt to GDP ratios that are ultimately unsustainable. It is specifically leveraged asset speculation that does this. Not endogenous debtmoney creation. You can have a system that increases the debtmoney levels constantly, just so long as GDP rises at the same rate.
You can solve this problem in two ways:
a) Direct intervention in banks to assist deleveraging and prevent leveraged asset speculation
b) Prevent debt money synthesis from resulting in a dynamic that depends on it (hijacking the government money) and replace it with state money.
In both cases you have to opt for increased state control.
There is no other choice.
If your basic problem is that states should not have this amount of control, then you need to switch your debate from economics and look at political alternatives. Perhaps the user democracythreat here on this blog will give you some inspiration. He likes the Swiss model.
Read the links I posted.
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#190 Ben
It doesn't make sense. If the commercial banks with little regulation can synthesise debt money at the behest of commercial demand, what is the impact on exchange rates? Is it not that interest in growth will actually INCREASE demand for the currency? Look at the USA. It's money supply has increases EXPONENTIALLY since 1971. Do you see inflation?
Why would a democratically elected government spend into the PRIVATE SECTOR to such an extent that it would destroy the balance of trade?
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188. At 9:01pm on 12 Sep 2010, Mackem_Man wrote:
"You cannot lay this crisis at the unions door - Thatcher rightly made them draw in their claws, no this crisis lies firmly at the door of the rich & greedy bankers. That is undeniable."
You didn't read what I wrote, mate. I didn't say the Unions caused this problem. I was responding and disagreeing with your elevation of Crowbar as an example to look up to.
Yes, this crisis is a banking crisis, caused by greed, myopic Bankers and lack of proper financial controls. However we do appoint Governments to look after our common interests. The previous lot splurged money like there was no tomorrow and we have to balance the books.
We are all in the doodoo now and comedians like Crowbar are just as selfish as the bankers, albeit with less financial horsepower. Me, I'd slap controls on both parties.
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67 Suav
Many thanks for making enquiries on my behalf.
My question was more rhetorical based on the many definitions there are of a `knowledge economy' some of which are grotesquely opportunistic.
The idea is that knowledge empowers but there are others who wish to use it to control.
Humanity is such a sad case!
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190 Ben,
The way a government might create extra money (over-and-above what it destroys with taxation) would be as part of 'tap-on / tap-off' formula linked to Unemployment and CPI: When unemployment goes above a certain level, and if CPI is below a certain level, the government would then inject money into the economy at the level of low-paid workers (e.g. via extra Tax Credits) who will spend most of it into the economy. Another complimentary approach is to use a Job Guarantee scheme which pays unemployed workers a reasonable minimum wage for community work - this method has an inbuilt anti-inflation mechanism.
Provided the fiscal policies chosen are transparent to everyone and agreed in parliament, then investors and the markets would have the 'certainty' they crave.
I don't think that the Balance of Trade is a problem per se (unless it causes imported inflation, but then that would be covered as above). It doesn't matter too much if our currency devalues somewhat as the Trade deficit simply indicates that it is over-valued anyway. Just as China should be allowing its currency to appreciate in value naturally, we should be allowing our currency to depreciate naturally too. The lower value £ in turn would help our exports and therefore gradually close the trade gap automatically.
That's the beauty of a floating exchange rate.
Kind Regards
Charlie
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Oblivion. Well regarding #195, you either type quick or you have that in reserve and paste it in! Either way good effort. I don't doubt the dollar etc is in a terminal decline. It's been debased, it just hasn't hit the wall yet.
My initial query right at the top of this painful thread was down to this kind of thing from Alesha:
"It does not need to tax or borrow (issue gilts) in order to spend. "
How can we trade internationally when we don't tie lending to debt and instead just create it out of thin air when we need it.
Charlie
"Provided the fiscal policies chosen are transparent to everyone and agreed in parliament, then investors and the markets would have the 'certainty' they crave."
what would our fiscal policy be now then? Live way beyond our means, importing more than we export. Surely we would have to produce a sustainable plan, which given our current unsustainable path would involve cuts.
----
I understand what you guys are saying about a new paradigm in debt etc. I don't like it much but to each his own. My problem is with the posts from Alesha where we are told that MMT means we don't have to borrow in order to spend because double entry book-keeping doesn't apply to governments. Surely this has to be offset ie imports vs exports. Can someone just answer me that without digressing?
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With a bit of luck all the public sector will go on strike for 3 months this year and will save 25% of our expenditure straight away.
The real issue with public expenditure is pensions, at present we are pumping 20% of our budget into this black hole . Labour and the Tories have ducked this issue for years and have done no one any favours .We need to get back to the point where pensions were invested to provide real growth rather than sun into gilts and bonds that only cover inflation. As a rule you should only get out what you have put in. I would guess this measure alone would make a 10% reduction in costs within 4 y
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190. At 9:41pm on 12 Sep 2010, Ben wrote:
Dempster: because I don't want the government in total control of the money. I'd rather have a decentralised model than some kind of socialist nightmare.
My main disbelief was caused by the assertion that once the state creates money it can create as much as it likes so we don't need to worry about a balance of trade.
We can create as much as we like anyway, But only as debt.
Who do wish to control the amount of money we create? …….. Private corporations?
Whether you elect good or bad politicians is up to you, and the consequences thereof will be felt by you.
But take away our chance of influencing that which controls our lives, and you are left with nothing, but debt slavery. And the plain truth is, that’s where we’re at.
I do not believe that it is right that we pay ‘banks’ for the creation of money, that we, the state, can do without paying them anything.
I can think of an awful lot better ways of spending the money we pay in interest.
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#184 donmakeawave,
"Who destroyed our Industrial base - Thatcher cry the Unions - I worked in industry during the disruptive 60's and 70's and unequivocally it was the Communist Unions who stuffed our manufacturing and logistics industries. Thanks a lot!"
If we are talking the history of the 60's & 70's, then we also have to look at the record of abismal managment that coincided with the politicisation of the unions. It cerainly was not a one way street.
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An economist making references to other material from another economist! .. Steph you have my admiration that you can sit on that pointed picket fence for so long!
What do you bring to the table? Its a serious question.
I have read more on the internet from researchers and analysts who proudly proclaim they are NOT economists and who have presented CLEAR COMPELLING evidence that we are in a moment of history unlike any other previously.
..and you are asking these questions about how bad does one think it is and where does one stand?
If the government wants the support of the people, the government needs to persuade the people of its integrity. And one sure fire way of doing that is to visibly transparently bring some weighted austerity polices against the protagonists of this disaster .. and it is a disaster that is unfolding (depite your persistent hands-over-eyes, fingers-in-ears and head-in-sand blogs).
Of course it wont cure our ills, but it will persuade the people that although we have no option but to endure what must be endured, we shall do so in the knowledge that the architects of this demise have incurred just penalties for their cataclysmic greed.
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196 Ben,
"what would our fiscal policy be now then? Live way beyond our means, importing more than we export. Surely we would have to produce a sustainable plan, which given our current unsustainable path would involve cuts."
I'm still learning this stuff myself, but I've found out that it's more-like the other way round (if I understand you're question right). While the UK is a net importer, we have to run a deficit to compensate for this leakage of money out of the economy. Running a deficit (not financed by borrowing) in turn gradually reduces the value of our currency, which in turn increases our exports - which in turn reduces our trade deficit. This is called a 'counter-cyclical' policy. Making cuts is 'pro-cyclical' and little effect on our trade deficit and makes our budget deficit worse.
This is just the basics, and it's a bit more complicated, so I recommend reading more about this. As for the fiscal policy we should have now, I have given examples above.
Kind Regards
Charlie
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108. At 9:28pm on 11 Sep 2010, Ben wrote:
EmKay - agree totally. But voters would not accept it. Politics is the art of the possible. It may be taken out of their hands, in which case when the tide goes out a lot of people won't be wearing any pants. I say bring it on :-)
Wow - nice to see someone who thinks the BoE is deliberately walking an inflation tight-rope to erode the debt.
House price correction has to happen, whatever the time scale. Instead we will, as you say, have a hellish decade (at least) for young people as they work like slaves to pay off money that has already left the country so their parents can have holidays, big tvs and ipods, even if they have rubbish jobs, leaving the next generation (as Dempster says) to pay off the interest (and the repayments).
The one thing about inflation is that it's not a free lunch for the boomers as it is eroding their pensions too.
>>>>
Ben, nice to see a new contributor but I think you are wrong about the voters not accepting it. Why? Because I honestly think its already happening. Consider this, why is the BOE refusing to increase interest rates from its historic low despite inflation well above its target?
This is part of a plan to manage the economy. It is clear that the cuts will have a deflationary effect so higher inflation at the moment is acceptable. Should the cuts cause another sharp downturn (note I say if beacuse I believe the sabre rattling about cuts is about managing expectations - they will be severe but wont be as brutal as anticipated - I might be wrong but this is just a negotiating tactic by the government) then fully expect the BOE to do some more QE but this time maybe in a different way to the last lot (I hope so - some of it went to the bankers). There is no explicit agreement between government and BOE for this but its implicit in the actions.
If the BOE were to follow its remit to keep inflation at 2% it would have started raising interest rates some time ago but it knows full well there would probably be more defaults and so the banks would take another hit on their balance sheets etc and all the fall out that would imply plus another taxpayer bail out - NOT politically acceptable.
Also consider the political dimension. Higher inflation actually increases GDP in an artificial way(it may also increase the deficit) but if the BOE were to actually go fo a 4% inflation rate than 2% over 10 years this makes a big difference because its compounded rather like interest. Eg if a loaf of bread were to cost 100p, after 10 years at 2% inflation, it would cost 122p but at 4% inflation pa it would cost 148p. Thus 'real' costs increase but the existing debt in real terms decreases. Of course the people who are hit are the savers and the people on fixed incomes. So before the next election the government says, GDP is a record high havent we done well conveniently ignoring the fact that most people in real terms have become poorer.
This is actually a politically sensible way of managing the economy in the short term since the alternatives are actually worse.
Note that I don't have a particular political axe to grind over this, I just think it is what is actually happening.
Regards
EmKay
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Re: 191
Right on the money!
But I think that it is inevitable that at some point confidence in the dollar will collapse and that the huge confidence trick of printing endless dollars to pay for US imports, then the oil/manufacturing countries recycling the dollars to buy US assets - assets that are rapidly turning to dust - the tensions this now generates are simply too much and the global scale of the dollar heap is getting to big to manage - take a look at Chicago and Detroit to get a sense of what's coming.
The sheer greed of big business to exploit low cost foreign production and then import it to milk the developed world domestic consumers as well is not sustainable.
What does a post-dollar world look like? Well, firstly its going to have a much lower aggregate GDP, as the energy, food and manufactured goods the US consumes today will not be being bought. Secondly, the producer countries, NB China, will suddenly find their markets have dried up.
Living standards in the USA are going to plummet and national government's ability to keep the lid on such a big country with widespread civil unrest is doubtful. Ditto China.
Money is simply a means to exchange value - but when it becomes valueless, the comodities it was used to buy are still in demand and retain their value - so barter will return, with value being expressed in those terms. I think local currencies issued by communities will replace national currencies where these break down.
The key question for us is what happens if the pound goes the same way? Indeed it is probably even more at risk than the dollar but without the scale of the dollar or Euro to give defence in depth....
I always thought the US survivalists were mad, deluded and wasting their time - now I'm not so sure. The risk of total dislocation of the UK economy is getting real - I've moved to the country, got my own energy, food, water and security together and would be able to survive without Tescos or the national grid for quite a while - but let's hope we don't have to....
What would happen if the wheels really did came off the world's finanicial system and your home, you job, your savings all became worthless? That the shops were all empty, no electricity, water or gas anymore? No fuel for vehicles or public services? what would happen?
Anarchy I suppose - cue the survivalists - and the only law left would be the law of the gun - so that's why in their deepest, darkest fears the USA knows this is the endgame for the individual, and that's why bearing arms is a constitutional right - the ultimate free market - in life & death.
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The following might prove a useful read in the context of this subject ...
It is a link to an officially published memorandum from the treasury that I found whilst looking around some of the links posted earlier.
http://www.publications.parliament.uk/pa/cm200809/cmselect/cmtreasy/144/144w254.htm
This is actually originally from the blog below (where the author also answers questions regarding his viewpoint).
http://gregpytel.blogspot.com/2009/04/largest-heist-in-history.html
Sorry if these have been posted before. I just found the argument itself quite interesting, not to mention the fact that it has also been through the treasury.
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The way everything to do with Cuts are being decided upon at a fast rate, then what are we going to Cut back upon during Terms 2,3,4 and 5 of this Con-Demed Government, since by the time they have made all the Budget Cuts and Skinted the Old Age Pensioners, The Sick and Disabled, The Unemployed and Low Paid Workers etc: then after this Years Spending Review, everybody will effectively be either Unemployed and Pennyless, or Begging and Living on the Streets, ALL of course except Milllionaire MPs' and the Bankers, and the Elite Classes.
Therefore, it is NOT going to be a Question as to whether, - have any Austerity Plans work if we imprement to Deeper Cuts too soon, for then where and what effectively will be the choice of Cut - Backs over the remainder of this current Parliament, for I cannot see the Day that this Con-Demned Government will effectively Tax Themselves and their Friends of the Elite - Classes, since that WILL be going to far against the Grain, and will cause an out-rage amongst the Gentry Set, for afterall the Rich cannot be expected to get Poorer. CAN THEY NOW.
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201. At 11:35pm on 12 Sep 2010, Charles Jurcich wrote:
While the UK is a net importer, we have to run a deficit to compensate for this leakage of money out of the economy. Running a deficit (not financed by borrowing) in turn gradually reduces the value of our currency,
Hi Charles
Regarding imports, lets follow the money.
I've said before that imports are good because the allow us to consume someone' elses output.
When a buyer pays for an import he either gives the overseas supplier sterling or he exchanges it with a bank.
If the supplier accepts sterling it must believe that at some time in the future it will purchase assets denominated in sterling.
If the sterling ends up with the bank it is the banks role to lend it out again so that the real economy can produce output.
I don't see how it is the net importing that damages the currency. Surely it is more the fact the exchanged sterling instead of being directed back into real economy is more likely to end up purchasing gilts at which point the money leaves the economy forever. Now thats what I call a leakage but what do you understand by 'leakage'?
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196. At 10:46pm on 12 Sep 2010, Ben wrote:
"It does not need to tax or borrow (issue gilts) in order to spend. "
How can we trade internationally when we don't tie lending to debt and instead just create it out of thin air when we need it
Ben
Govt spending is not financed by taxing or issuing gilts.
Govt however does not 'trade internationally' Private businesses do and they have to pay for their borrowings. No doubt about it or arguments there.
But the two things are totally different animals
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183. At 7:36pm on 12 Sep 2010, forgottenman wrote:
Alesha Soba
I'm getting a sinking feeling you are a Labour party member.
Please don't associate me with politicians or economist for that matter.
I'm just someone who's interested.
I've read most of your various posts but it seems to be summed up by your position that deficits dont matter because governments dont have to balance the books.
Nearly right. They do have to manage the money supply though and they do need to target spending to produce full empoyment, maximise output and maybe a nice place to live too.
If so then there would no need to worry about government debt and the 20b or so we are paying in interest on it because we could have a couple of nightshifts in the printing shed and just pay it all off!
Simples!
The Govt debt is unnecessary. I am not certain as to why they issued so much of it. As I said previously I think it is related to mopping up pension funds or more likely they do not understand the monetary system we operate in.
My advice would be dont issue any more gilts and pay it off as it falls due.
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191. At 10:05pm on 12 Sep 2010, Oblivion
Wow. Great post. Fascinating.
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182. At 7:06pm on 12 Sep 2010, Alesha Soba wrote:
161. At 12:41pm on 12 Sep 2010, errrrrrrrrrm wrote:
A few points most people should be able to agree on:
1. The budget deficit is unsubstainable and we need a clear and detailed plan for reducing it.
Disagree, the budget deficit is misunderstood.
What happens when the budget is in surplus. taxation is greater than Govt spending. everbody thinks Yippee. In actual fact net money is leaving the economy and continual surpluses will lead bring on the next recession.
When a budget deficit is run net money is entering the economy and continual deficits will lead to recovery providing there is enough spare capacity in terms of resources and willing workers.
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you misunderstand me, a deficit of 12% is unsubstainable, as I pointed out later a deficit of 2 to 5% is pefectly substainable as long as economic growth is at least as high.
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190. At 9:41pm on 12 Sep 2010, Ben wrote:
Dempster:
Mackem_man - I deny. How have the bankers effected the bulk of the deficit, which is the driver for the cuts?
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well before the bankers got us into this financial mess we had consistent economic growth and a deficit on a par with Thatcher in the 80's and much less than the 70's. Their failures directly caused the reduction in GDP, hence a reduction in tax income and directly influenced the decision to have a stimulus package (something the whole world did, not just us).
Thats how the bankers directly influenced the deficit, not admitting it is just political bias.
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Is a government a parasite or a symbiote?
Keep in mind the purpose of actually having one: its role is to provide services which the individual citizen cannot provide for himself. Moreover, that is the sole reason why we provide them with funds... it has to be remembered that there is no such thing as 'government money' - it is OUR money.
If you purchase something, the company from which you buy it gets your money in return for goods and services, they now own the money and you own the item. Tax doesn't quite work like that, ownership of the money is NOT relinquished. Hence we, the tax-payers, have the right to instruct our employees, the government, on how we want our money spent on our behalf.
I believe that it is essential to get these perhaps rather philosophical concepts straight, so that we know what we are doing and how best to direct the politicians in the matter of governmental spending. If the politicians fail to meet their obligations to us, they must be held to account.
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210. At 07:08am on 13 Sep 2010, errrrrrrrrrm wrote:
.....Thats how the bankers directly influenced the deficit, not admitting it is just political bias.
Sorry Dempster you're out of the discussion because you are now classed at politically biased.
Are you laughing or crying ?
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Some of the posters are trying to kid themselves that they know better than the world's rating agencies regarding national debt levels, import levels currencies etc regarding a nation's internal efficiency rating with its internal national government and money supply finances, interest rates etc in terms of a nation's internal monetary efficiency rating (and which I have never seen discussed on this blog).
Don't kid yourselves that the UK is anything but on on a knife edge with its finances with the lowest interest rates in 300 hundred years and UK industry scarcely able to mount any real overall improvement.
Fail to cut the UK structural deficit and the UK economy can very easily spiral out of control into bankcruptcy where the UK £GBP is worthless and we'll all be queing up at soup kitchens ... that's how serious the UK's predicament has become.
The monetary model that exists for the global economy means that the banking system has virtually instant contol of trillions of $'s of money which is shuffled every day and which can be managed to more and flow in massive amounts virtually instantaneously. The markets proved that they were bigger than the UK on 'Black Wednesday' and with improvements in technology ... the money and other markets, speculators etc are much more powerful now and still not properly regulated.
Don't kid yourselves that running a huge UK budget or other deficits is sustainable or good economic management.
The only UK choice is now about making harsh economic choices about how govt money is spent ... the only alternative is bankcruptcy, chaos and mayhem. This is because the UK is not like China or the USA i.e big enough to run long term giant budget deficits (although, of course China does not need to do this anyway) because of the unique advantages of their economies and resource base and cicumstances.
The 'something for nothing culture' based on taxing the endeavour of others (and skimming bank profits also) to the point of stalemate and uncertainty and complete lack of trust and confidence has now run its course in the UK.
Don't kid yourselves that there is New Labour big debt fix to the current UK govenment deficit(s) crisi(e)s ... that is as stupid as bombing our way around the world in the absence of any direct threat!
Many many people in this country depend on the UK govt living beyond its means in terms of govt borrowing ... what is needed is a more radical shake up of taxation and welfare and looking at items such as import tariffs etc ... shuffling the income tax %'s up and down a penny or two is not enough.
The government can create demand and new UK business opportunities by getting tough on import tariffs and this can be done on a regional basis.
The government can e.g. move the UK Parliament to e.g. the North East region or midlands and decentralise govt further and create new demand and jobs where they are needed most. Invest in Birmingham and Teeside with rail and import improvements ... take the crush off London and use the nation's finances better (too much is polarised on London and this is not efficient for the rest of the UK)... infrastructure building and spending is the way forward to strengthen the UK doemstic economy ... foreign aid must be cut ... how can this expenditure be justified when cuts are coming in the UK?
Too much of the UK money supply is leeching overseas ... never see this discussed anywhere ... what effect does this have on the UK economy?
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212. At 08:08am on 13 Sep 2010, Alesha Soba wrote:
Sorry Dempster you're out of the discussion because you are now classed at politically biased.
Are you laughing or crying ?
Both!
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Oblivion 191 and Richard 203 perfect summing up and logical analysis of our tangled and unsustainable economic web.
Alesha Governments just spending what they feel they need to is just totally impossible (see Germany 1919, Zimbabwe now). Governments need money to pay all of their employees and other costs etc.
We in the west have been living well beyond our means for many decades and I agree with Oblivion that the Nixon decoupling from the gold standard together with cheap resource rich willing partners (Saudi (Oil) and China (cheap labour)) enabled this to run away into the current bubble of all bubbles.
Unfortunately the reality is that plentiful cheap gourmet food, foreign travel and holidays, multiple private cars, etcc are now viewed by almost everyone as either their birthright or short-term aspiration. This has always been unsustainable because we have not invested as a world our profits from the surpluses provided by cheap oil for decades now into development of new equally versatile and cheap sources of energy, and we have allowed our population and hence total resource consumption to grow like common bacteria in a bottle of broth.
Most people have not and do not want to see this and governments being slaves to media and hence voter short-sighted opinion have convinced themselves to keep stoking the boiler of the runaway juggernaut speeding towards oblivion.
Ask any doctor, patients are not interested in prevention if it entails them having to do anything slightly unpleasant such as exercise regularly, avoid intake of certain items and quantities etc. Everybody wants miracle cures and the economy is no exception.
Alesha, full employment is impossible in the UK because there are too many of us for the amount of real work that is required. Due to our unrealistic lifestyle expectations that have been growing up for over a century now together with our huge population of available labour and the price we are willing to work for there isn't enough work for us to do. (Well paid work anyway).
The root cause of all our economic woes is we have gotten way ahead of ourselves in terms of lifestyle and population. This has been enabled by an abundant source of cheap energy and material for production of all manner of manufactured goods, namely oil.
We are now roughly halfway through the world's available oil. The next half gets ever more expensive to extract and use.
We can either urgently focus our attention on realistically managing sustainability quickly and educating the masses to see this or someone needs to invent the equivalent of cold fusion sharpish!
Even then we still need to sort out population or have nature and economics sort it for us in ways we won't like at all.
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Well, looks like you had a good session while I had a great day off!
Some great posts in there with the occasional whoopsie. It's fascinating to see over two months most folks starting to appreciate the scale of the problem while one or two still wish to live in denial. There are some great contributions, too, that I would like to pat on the head or award 'Oscars' to. I could make a shed load of comments but don't have time as I would have to be on here all day.
For those who want to live in a (national as opposed to personal) debt free existence with a debt free money system, you have got to start explaining how you will get there from here, what will have to be faced by us as the rest of the world responds and what that response is likely to be.
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215. At 09:10am on 13 Sep 2010, Sage_of_Cromerarrh
I'm sorry Sage. There is not one postive or optimistic paragraph in your post. I'm getting on a bit too but I'm not ready to give up yet.
I don't think I can persuade you that I am right in thinking that politicians and economists have completely misunderstood the economic model we operate in and thats fine. That is the nature of debate.
I will carry on believing that until someone can spell out in a bit more detail than I have been given so far where exactly my logic falls down.
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199. At 11:06pm on 12 Sep 2010, foredeckdave wrote:
"If we are talking the history of the 60's & 70's, then we also have to look at the record of abysmal management that coincided with the politicisation of the unions. It certainly was not a one way street."
FDD you are right. The Japanese came over to study our car industry in the 60's and left shaking their heads. Management was often poor in those days because of the lack of external competition and too much arrogance. I am afraid class war and communist infiltration by the Unions didn't help either.
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Alesha,
To be convinced of the real economic problem just look at the most obvious resource issue, oil.
Examine everything that makes up the basics of modern life and you will find it has oil as it's most significant or certainly as a vital component.
Now imagine oil costing $200, S300, $500... a barrel.
Do you think this would cause a problem of starvation, lack of clean drinking water, heat light and power?
You bet it would, and that's where our consumption model economy is taking us very soon.
Sorry to be perceived as negative, I'm just trying to stop you all discussing the best deck chair arrangements on the titanic when we should be considering a better design and more lifeboats.
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Critical to Osborne's plans is whether his austerity regime can be implemented without causing a greater collapse in consumer spending?
If householders continue to fear for their futures. And if they pay down their debts instead of going shopping, there won't be enough sales of goods and services to generate the tax revenues he needs. With continued low tax revenues from commerce, Osborne's vision will become our disaster. And his Corporation Tax cuts will simply add pain to our misery.
Neither Osborne, Cameron nor Clegg need bother themselves - their jobs and incomes will be safe for a while. But yours won't be!
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Most people agree that only growth in the private sector will restore the national economy to health. The private sector therefore needs stick and carrot. As long as private sector firms can live off government contracts and spending, they'll have no incentive to change. "Growth" based in private sector firms living off government spending, which itself is underpinned by borrowing, gets us nowhere. Delay the cuts and we achieve only greater national debt and a private sector feating on that debt.
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#218 dontmakeawave,
Somewhere in this discussion of the 60's and 70's lies a clue as to how we can find a solution to our present predicament. I wish I could find it though! :)
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leftie, a collapse in consumer spending is essential. That's why we are in the mess we are today, over consumption and over population.
More consumption is like telling an alcoholic to drink themselves sober.
Anselm, all true but it's deckchair arranging on the titanic I'm afraid.
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216. At 09:12am on 13 Sep 2010, Up2snuff wrote:
'For those who want to live in a (national as opposed to personal) debt free existence with a debt free money system, you have got to start explaining how you will get there from here, what will have to be faced by us as the rest of the world responds and what that response is likely to be'
The links below have some ideas on that issue:
http://www.bankofenglandact.co.uk/act/
http://www.prosperityuk.com/prosperity/prosperity.html
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#215 Sage_of_Cromerarrh,
"Unfortunately the reality is that plentiful cheap gourmet food, foreign travel and holidays, multiple private cars, etcc are now viewed by almost everyone as either their birthright or short-term aspiration. This has always been unsustainable because we have not invested as a world our profits from the surpluses provided by cheap oil for decades now into development of new equally versatile and cheap sources of energy, and we have allowed our population and hence total resource consumption to grow like common bacteria in a bottle of broth."
So can you please identify what, in your eyes, a sustainable lifestyle would look like?
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219. At 09:54am on 13 Sep 2010, Sage_of_Cromerarrh
I agree we need to get off Oil. Have we not made a start even if it is tiny ?
I agree that we also have to find a way to live with sustainable consumption.
I think we can do that but running our economy for the benefit of private bankers and 'individual financial' wealth have to be controlled for the greater good if we are going to achieve the latter.
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George Osborne's proposed budget plans to tackle the UK structural deficit make economic sense (and for which he has a democratic mandate to implement) but maybe not political sense ... in an opportunistic view of the UK economic situation (I can think of at least one Chancellor and Two Prime Ministers who have comprehesnively reneged on their own political party election manifesto in recent years in so called 'national interest'.
The Coalition govt would be wise to scale back their budget cut proposals to be the same as Alastiar Darling's and then put pressure on the opposition to explain what they would have done differently ... in terms of cuts.
At the same time, the UK govt could then spend as much as possible on UK infrastructure and critically:
1)Manipulate UK import tariffs and create domestic demand and business opportunities by restrictions on 'suitable imports' ... just a few %'s points here extra tariff and this is enough to give UK operators a faint flicker of a margin to be had. Also, invest in UK infrastructure and create some jobs!
2)Have the political rows over import tariffs internationally and not exacerbate a confrontation with the UK Trade Unions and lower income sector of the economy ... as many of the people represented here are now missing out on the millions of jobs handed out to immigrants by New Labour during the last 13 years as denying the UK British workforce hundreds of billions of pounds in wages/salary each year.
3)This is the time to sort out British membership and financial issues with the EU and not run aground on domestic issues.
We'll very soon find out how smart George Osborne really is !!!
However, we can't see the books and numbers of HM Treasury for ourselves and so much of the debate is speculative anyway ... perhaps George Osborne really does know what most of us do not know ourselves?
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GDP is a measure of spending.
I have wittered on before about GDP being a poor measure.
Its a very poor measure if much of that spending is based on borrowed money, private or public but this is the measure that is used to 'determine' the state of the economy.
This is most apparent when growth, government spending or government debt is discussed as a percentage of GDP.
If you look at the the data for the last decade, most of the increase in GDPis is growth in government spending and much of that was debt financed. The income (tax take) received by government was also, in part, based on debt fuelled expenditure.
Some of the personal expenditure came directly from government subsidy/benefits/allowances/pay which was borrowed money.
Eventually, most citizens cannot borrow any more and their expenditure drops off. Likewise for government.
GDP may fall as a result. So what? Get out of the competitive GDP game. Stop pretending it matters whether we are number 2/5/7/10 in the world. This is the 21st century not the 19th and perhaps we should be thinking quite differently - about the future not the past, less about rights and more about needs, less about entitlement and more about essentials.
So forget cuts to this or that here are the big questions....
Where is our electricity going to come from, at what cost and how is this to be secured?
Where is our gas going to come from, at what cost and how can it be secured?
How can we maintain excellent standards of public health including clean water?
Where are necessary stocks of food going to come from?
How do we encourage citizens to save for their old age?
How do we encourage citizens to care for themselves, their families and their environment?
Fundamentally, the big questions are not being asked because there is too much wittering about entitlement and pecking order.
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I think in the short term reducing government spending is the only option because there are no other solutions that can easily be implemented given the state we are in, ie massive public and private indebtedness.
For the cuts to work they must be
1) perceived as fair which means there must be pay cuts for high and middle ranking public employees and high paid private individuals should be leaned on to take pay cuts too, they should be warned that once people see their own standard of living fall they may stop being blind to the excesses of the rich, it must truely be we are all in it together.
2) no more bailouts of financial institutions, as we cant afford it and it is the height of unfairness, ie banks must immediatly start operating knowing too big to fail doesnt exist any more.
3) some of the money saved from public finances must be spent on tax breaks for manufacturing and training in skills needed for this country to maintain and grow its engineering sector. If a thing is made in this country from its original intellectual development to its physical creation and mass production that makes lots of jobs, lots of people with money to spend not taking benefits but paying taxes and buying services from others. Rather than one person taking profits from importing something from offshore. We need to make sure the country is self sufficient in talent to make the things it needs and to look to securing an energy supply for the future
In the long term the ultimate goal should be to get to grips with who controls the money supply in this country ie the terrible power of the banks must be constrained. That is I think we need a smaller public sector but at the same time more power to the state in the matter of creating and allocating money. This will help us to do things for the long term future of the country rather than short term individuals profits.
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The Osborne Tory cut approach is fundamentally miss-guided. I could stop there but I will not.
Clearly debt needs to be paid back but this can only be achieved to a minor extent by the cuts process as when it goes too far it will essentially reduce the economic potential of the economy. In 5 to 10 years time we will have a resurrection of the sink estates that characterised the late 80's and 90's, with Crime and economic inactivity surpassing current or recent levels; We will have faltering infrastructure making UK a bad place to invest for UK and foreign investors; We will have over the next 3 years maybe not another winter of discontent but a continuous sustained period of industrial action that will further make this country less appealing as somewhere to invest; We will lack the skilled workforce to generate the jobs we will need to compete economically.
The fiscal orthodoxy of this government is sending us back to the future so to speak, with gains of the last decade thrown back, and increasing the weakness of the recovery and its duration exponentially, leaving us without the capacity to pay back the debt in any meaningful way.
Private business does this: they invest for tomorrow and reap higher returns than the initial capital outlay. For such a supposedly business/private sector orientated government they lack some of the fundamentals that businessmen require..... Is this why they became politicians because they where so inept at business they could not quite hack it like their chums!
We need to smash this orthodoxy and narrow sightedness, the lack of imagination on how to achieve savings without jeopardising lives is lamentable, the Lib-Dems are a shameless group, given a ministerial car they appear capable of the same malicious ignorance that we all accept the Tories have.
Labour may have been horrible to foreigners (e.g. Iraqi etc) but at least they did not inflict Kabul living standards on their own, including the weakest most vulnerable in society. 25% cuts, with thousands in every local area, more if you have a large govt. department in your area becoming dependant on the state for handouts not work that improves communities, this comes on top of many thousands of already planned redundancies. Not a question of pay today and play tomorrow (they already scrapped the new playing fields), more like Pain today Pain tomorrow.
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Foredeckdave, now we're getting somewhere with your excellent question.
This is very complex in implementation but simple in guiding values. It requires a lot of inputs from many shades of opinion to achieve implementation but some facts dominate the reality.
Sustainability has to be at the heart of our policy making and actions. I argue that our number one problem is we are over consuming and plundering the environment and this needs to be addressed urgently.
We are where we are in terms of population but we need to reduce this over this century and start doing it immediately. We can not keep ignoring this elephant in the room.
We need to invest the proceeds of oil (less cheap from now on of course) into developing new sources of energy and materials such as pesticides, fertiliser, alternatives to plastic, medicines etc.
We all need to accept less material possessions and environmentally costly items such as foreign holidays and cheap imported goods that can be made much more sustainably locally.
The shock to our system will be huge. Standards of convenience will drop drastically. However, if we manage and invest our resources and labour into developing a sustainable way of life we can build a better future for our grandchildren.
Sorry children but your generation will bear the full brunt. But hopefully we can help you out for as long as we are able.
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mrsbloggs, brilliantly put!
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the arrogance of the head of the tax collection service just highlights the need for wholesale privatisation of the civil service, if he was head of a private company he would almost certainly be sacked, there would be no need for the drastic cuts required due to the gross economic mismanagement by the previous government (as yet still no apology), private entreprise would do the job a lot cheaper and more efficently and cost a lot less, in the interim a a massive reduction in the number of civil servants, an immediate stop to bonus`s (it seems the more expensive and spectacular the cock up the higher the bonus) and an immediate end to unfunded pension contributions and and a 20% pay reduction for any civil servant earning over £25k per year, that should save enough money to stop at least some of the cuts.
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230. At 10:33am on 13 Sep 2010, Usually-Right wrote:
The Osborne Tory cut approach is fundamentally miss-guided. I could stop there but I will not.
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It is a pity you didn't........
There are many questions that need to be asked however you appear to want just to ignore these and deny all the facts regarding how we got where we are and call for much of the same. You sir are in denial!
Forget party politics and just look at the facts, the last goverment had the fortune to preside over the country during the longest period of growth. However they also were at the helm when we hit the rocks.
They increased public spending way above what any of us could have hoped for. Unfortunately they did not make any improvements in the institutions and throwing money at a problem never was going to be sustainable.
So we find ourselves in a position of unsustainable debts which are continuing to grow. How we reduce our overall spending and improve our public services through efficiencies should be the questions and also what if any taxes need to be raised.
Our economy and that of most of the developed world is currentley running on paper money that has little backing it. Quantitative easing still has to be paid for. No country can just print money without damaging its economy. If the markets thought that the QE was a grant rather than an investment we would see a wholesale crash.
There are still many sharks in the water waiting to surface ans bite us. The PIIGS are still teetering around the edge of the cliff and even the BRIC countries have had slips in the resent past.
And finally we still appear to have inflation well above the target range and it does not look as if it is going to come down of its own accord in the near future, in fact the country is now more likely with food prices set to rise along with oil.
No Sir, action is required and it is needed now. What action is up for debate but we all know that we will not be able to spend ourselves out of this one or even depend on an artificial housing boom to see us through.
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Some recent news:
Douglas Carswell MP leads the way on monetary reform
This Wednesday, Douglas Carswell MP (Conservative, Clacton) will introduce legislation into the UK parliament that takes the first step towards ending fractional reserve banking. As Steve Baker MP describes:
'Douglas's Bill would assert property rights over demand deposits. Real savings - term deposits - would be loaned to entrepreneurs, delivering an economy built on save and invest.'
This would have the effect of making fractional reserve banking impossible, requiring a shift to full-reserve banking (where the bank either lends your money, or keeps it safe, but doesn't claim to do both at the same time!). In plain English, it would stop private banks being able to create money as debt.
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here is a question for the stimulus brigade:
how much growth would be necessary to reach a balanced budget over 5, 10 and 15 years say?
It's all well and good people like Ed Balls calling for no cuts, but he really needs to set out what the alternative fiscal roadmap would be and what the impact on departmental spend a higher debt interest payment would make. I dont see how we can avoid a debt spiral without significant cuts as its nigh on impossible to generate enought growth to counteract the overspend.
The Coalition have a roadmap to arrive at a balanced budget by 2015. Balanced Budget means we are not spending more tax revenues than we take in. That basically gets us to an even keel and involves doubling the National Debt to well over £1.5 Trillion (its about £900Billion now) Add in Public Sector Pension Liabilities and PFI and the4 Bank bailouts and we are earmarked on the current governments spending plans to have Debt Interest Payments well over £70 Billion a eyar. Thats the entire defense or schools budget spent on servicing our debt.
A less austere roadmap would make this figure considerably bigger, how big is too big? None of the spending doves really like to contemplate the repercussions for their ideological stabnce of stimulus injection and public spending increases.
Everyones loves to proclaim the negative aspects of Cuts, but nobody has the guts to do the same for a stimulus package.
We are NOT going to ever get 5% growth a year in this country and thats probably whats needed to justify a big stimulus package.
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213 wrote "Too much of the UK money supply is leeching overseas ... never see this discussed anywhere ... what effect does this have on the UK economy?"
The balance of payments is the elephant in the room, at the heart of the issue of making the nation pay for itself in the long term.
Fundamentally as we have run large balance of payment deficits for decades this is essentially exporting the national wealth overseas. We are not creating enough wealth to offset the export - so either we start doing it soon or we run out of wealth to export (and wealth is not money since that we can endelessly print or borrow into existence - the problem is not money export but wealth export)
Each year more and more money has to be created to export it overseas to pay for the things we think we need, food, clothes used a few times and then disposed of, here today broken tomorrow electronic gizmos, multiple cheap foreign holidays per year. All these things suck pounds out and replace it with nothing of lasting value (or wealth by another name).
When we used to make stuff by importing raw mateirals and re-exporting the products this was a positive - since we just import finished goods the value generated is simply from exploiting low wages and living standards elsewhere to fund our lifestyles. This cannot continue forever.
Even at the heights of our banking boom these invisible earnings (and they are earnings since they are the money/wealth extracted from other countries economies by these institutions) failed to offset our habits of sucking in cheap rubbish to buy from the shops at the expense of local industries who are shackled by the need to fund high property, rental and employment costs for things we also feel we deserve - i.e.NHS, social benefits, a nuclear armed military etc.
Most of this tat was bought with borrowed money - and so we borrowed to send the money overseas where it is used to fund development of their economies or fund inflated values of what wealth/assets remained in the UK.
So fundamentally to fix the long decline movements which return balance of payments to neutral/positive territory are needed.
Hence the (rather feeble IMHO) mutterings over the summer from the PM of holidaying in the UK being good (stops export of capital - reduces balance of payments), increasing tourism into the UK (brings money in from overseas - hence lets try to bring more Chinnese (amongst others) tourists here so they can bring the pounds we sent them to buy the cheap tat back thus reducing the balance of payments and how we must have an export led recovery (yes it provides jobs making the goods to export but more importantly it reduces the outflow of money).
The only reason Japan is still afloat is that it runs large surpluses in balance of payments which it's citizens dutifully reinvest in government bonds - a tiny proportion are held overseas compared to other countries (since fundamentally Japan has no resources and thus must fund itself from exports almost entirely).
Balancing government budgets and deficits etc are all about managed decline rather than tipping into a spiralling decline. The benefits are for the lenders who can continue to suck out most of the wealth inflow whilst the country as a whole continues to sink further into the mire as it exports it's wealth. The difference is made up with money - which far too many in this country confuse with wealth, a fatal mistake for any population since all they then do is hand power to those who do understand the difference, the money men.
The debate on how the country is to pay for itself is the unspoken one - supply side solutions such as export business (rely on competitive edges be that high employment but low waged, unique capabilities/knowledge or productivity/automation), import wealth (e.g. tourism from overseas, selling off the countries assets i.e land (as opposed to property which is a depreciating asset) which are positive sociologically and politically - since they are painless locally (even as those you outcompete suffer the loss).
However demand side adjustments can also be used - tax hikes on foreign holidays to reduce demand, import taxes, restriction of exchange. All which drive up import costs thus rebalancing however these are negative and tend to have feedback loops - you won't buy mine so I won't buy yours so there.
So the question that underlies all these debates on cuts/budgets etc. is how does UK plc plan to pay it's way in the world.
This government appears to be heading the same way the last one plumped for - banking as it is short term by nature and a quick fix.
How it plans to address longer term wealth generation by manufacturing, knowledge or other methods is less obvious - it appears to expect the banks to fund that as well, but since it is difficult and less attractive than short term making money out of moving money about they are unlikely to bother with it.
Until we start running surpluses in balance of payments the country will continue to get less wealthy - and therefore our standard of living will inevitably start to decline, we cannot prop it up by selling state assets, printing money and borrowing money forever. As Liam Byrne put it - there is no more money, this is untrue as we can always make more, however the real question is whether there is enough wealth left to turn it around.
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#62 & #75 nautonier
The term "age of austerity" was the title that the Rt Hon David Cameron gave to a speech about the economy and wider political blueprint to his own faithful party members at the Spring Conference of 2009. It was the term of choice for the current Prime Minister; part of the prospectus, or manifesto for the General Election earlier this year. I attach a link to the Conservative Party's website.
http://www.conservatives.com/News/Speeches/2009/04/The_age_of_austerity_speech_to_the_2009_Spring_Forum.aspx
By using this term Stephanie has shown bias towards the Conservative Party; using its election slogan, according to your argument. Journalists from across the political spectrum from the BBC and beyond used the Labour Party's phraseology of "boom and bust" for many years. They also reused Gordon Brown's much cited mantra for economic policy "prudence".
If the phrase "age of austerity" was good enough for the Party Leader and now PM, then it would seem fair enough for the BBC to use it in reference to government policy.
The lyric from the song "A Spoonful of Sugar" originates from the children's film: "Mary Poppins", in fact and not "The Sound of Music" as you suggest above. That it should be used to form the government's economic policy and its approach to public spending is probably more open to question and quite neatly sums up the level of seriousness, which should be attached to all the views expressed above in #'s 62, 75. Much of your international and trade policies mentioned later are reminiscent of those that led to WWI and the great international conflicts and bellicose bloodbaths of the C20th.
Any points advocated, which may have been worth further discussion in the later posts 100, 213, 227 are completely undermined by the lack of credibility created by misperception of bias and inaccuracy of quotation, contained in those earlier posts.
If on the other hand you have found evidence that Messrs Cameron and Osborne or the coalition have retracted from their use of the term "austerity" in the last year, then the credibility of their plans for the economy deserves much greater scrutiny. Stephanie and the BBC more widely have attempted and continue to give these plans that deserved detailed scrutiny in an impartial manner.
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Chris London, I agree with you whole-heartedly. Apparently there's even more QE (thin-air money printing) coming down the tube around November time!
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Whistling Neil, keep on whistling. Great stuff.
Over consumption of finite resources without investing in suitable alternatives, and unsustainable levels of population are two huge elephants that you didn't emphasise however.
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#228 mrsbloggs13c2 and #231 Sage_of_Cromerarrh,
Thanks to both of you for your posts. Whilst I will try and respond to both independantly, they are clearly linked and I hope that my overall response will help rather than hinder the discussion:
mrsbloggs.
I totally accept your clear demolition of the value of GDP as an indicator of economic (and hence social) health. From my stance I believe that we should be trying to measure economic value. However, for value to become an adequate measure, the relationship between value and wealth has to be re-established (exactly how this can be done is open for debate).
To try and answer your specific questions:
Where is our electricity going to come from, at what cost and how is this to be secured?
Where is our gas going to come from, at what cost and how can it be secured?
These are clearly strategic questions and should be viewed from that standpoint rather than from a market orientated cost-effective standpoint.
We presently have a mix of 'power' resources within our control - gas, oil, nuclear, coal, wind, wave and maybe other future sources. All of these resources must be brought under national strategic direction. We are potentially resource rich in both the short, medium and long terms and to sacrifice this wealth to self-interested market forces will I believe be viewed as tantamount to treason by future commentators.
How can we maintain excellent standards of public health including clean water?
Only by taxation. That will offend many right-wing commentators but all of us have to accept that these standards are the true value indicators of a civilised society. Hence the maintenance of such standards are the true costs which have to be met by both the state and the private sector.
Where are necessary stocks of food going to come from?
It is vital that more of our food production is domestically produced. To do so will require major investment and an almost complete change in thinking (the power of the intermediary in the process must be curtailed). In the same way that we are being forced to research alternative ways of power production we also need to put far more effort into researching alternative food production - even if that includes genetics.
How do we encourage citizens to save for their old age?
By closing all of the existing pension schemes - both public and private - and establishing a national scheme into which all people in employment are required to pay linked to specific benefits (as an agreed proportion of national wealth). The funds to be invested in wealth/value development in both public and private sectors. However, control of this fund would have to be legally remved from political control.
How do we encourage citizens to care for themselves, their families and their environment?
I honestly don't know. I think it may have something to do with creating a society in which people feel themselves to be valued.
On re-reading this post it may appear that I am proposing an almost marxist future. Please believe me that is NOT my intention. I do want to see a viable and effective private sector engaged in this process. What I don't want to see is a continuation of the cost-efficiency to the detriment of effectiveness that has blightd us since the 1980's.
Thanks for the opportunity to share.
#231 Sage,
When I re-read my #225 I hoped that you would not find it confrontational and your reply confirms that you didn't! - thanks.
As you say, the answer is very complex. However, if we crack our power deficit we can ameloirate many of the problems.
The population question is another matter. On a global stance, there is little that we can do about it. Nationally, the only control that we can have is immigration. Hre we have started to make some changes with the points system but I don't know how we can reconcile millions of uemployed/non-productive people with our real immigation needs and ICTs
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239. At 11:54am on 13 Sep 2010, Sage_of_Cromerarrh wrote:
Chris London, I agree with you whole-heartedly. Apparently there's even more QE (thin-air money printing) coming down the tube around November time!
Sage Suppose the new QE was just used to redeem Govt Debt ?
Good or bad ?
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EmKay - sorry, I wasn't clear there. I meant they wouldn't accept interest rate hikes. I agree they are managing things cleverly, both in terms of stealth inflation and expectations.
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While this is a very clear and balanced analysis, I have to say that to most of us it is not a dry academic debate. For may of us, our jobs are on the line and so ultimulty is our home. The repercussions if you are hit by these cuts cannot be overstated.
What about those of us who are loosing our jobs and the young people (some in my family) who cannot even get ordinary shop jobs?
We live in the real world, we suffer the consequences, those who embark us on an already failed monitrist knuckel headed approach are well off enough not to live with this reality. What if we end up with huge unemployment (like they had in Chile under Pinochet, when he went all out for monitry policy).
At the end of the day we will never pay back debt if the country is full of poeple not earning and not paying tax; even if their benefits were not paid, there would be no revenue.
I agree that a 1930's crash was avoided, but this government looks like it is making the worst of a bad situation and may even cause a 1930's depression. What about law and order, loads of disaffected unemployed, higher crime and a cut back police and judicial system. How does that work?
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The economy of the nation is not like the household economy we all have to deal with. Thsi si a gross oversimplification and is very misleading. I twas Mrs Thatchers favorite analogy I beleieve. An interantionally leading economy is not like the average middle clas family budget rather it is more like the budget of a Howard Hughes or a Maharajah from days of yore in India. The main difference being the availability of loans internationally is not like borrowing from the high street banks and complex dynamic between commercially competative states eg UK & China or Greece & Germany. This is diplomacy , politics and globalism at the utmost it is bone headed to think solving the problems facing the world are like not having money to pay the dry cleaner.
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Alesha:
"well before the bankers got us into this financial mess we had consistent economic growth and a deficit on a par with Thatcher in the 80's and much less than the 70's. Their failures directly caused the reduction in GDP, hence a reduction in tax income and directly influenced the decision to have a stimulus package (something the whole world did, not just us)."
I'd argue that much of the "growth" in the UK for the past 10 years was in fact false. We were booming off the back of credit, so it's wasn't a real boom. We all stoked up house prices, the state borrowed loads and employed people doing jobs that didn't add value, then we all went home, saw our house had gone up, patted ourselves on the back and then went out to a restaurant. But we were spending money that was a bubble. I find that most people talk about "getting back to normal" but that wasn't normal. It was a bubble. And we spent money we didn't have.
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We often hear the term "the dead hand of Government".
But what does it actually mean?
Recently I saw a survey in The Times of SME's and the top 10 reasons why they thought business was being held back.
Nine of the ten reasons were directly related to Government - no's 1 and 2 being a taxation system that was overly complex and too high a level of business taxation.
On this basis, there is plenty that Government can do to assist in economic recovery - by removing and/or reducing these Government imposed barriers to trade.
However, despite a growing issue with Government debt, there does not appear to be any sense of urgency in making the required changes to free up business - the dead hand is unfortunately very much alive in the Government bureaucracy.
Somebody needs to howl through Whitehall like a banshee.
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246. At 12:22pm on 13 Sep 2010, Ben
Err.. Ben, I think you will find I didn't write that and that the person that did may want to take the credit for it
Is there another alesha here ?
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foredeckdave,
Thanks for your thoughts and ideas, and yes you are right that they are very Marxist sounding.
We may well end up in a Marxist state if the need for state imposed law and order arises as it very well could.
You will not have a viable private sector if you have high levels of taxation because it will make our private industry uncompetitive abroad against low tax and low cost competitors.
We can not produce anywhere near enough food at home to feed our predominantly city based population. We couldn't in WW2 and we had a much smaller population then with more people growing their own and working in small-holdings.
Controlling immigration is a must, but also we have to be realistic about birth rates. We should start immediately by saying no more child benefit or child tax credit etc to any children born after Aug1 2011.
This gives everyone fair warning and if they want more kids in an over-populated world they will have to bear the responsibility and cost alone. Sorry about the accidents that happen but life's tough and it's going to get a lot tougher.
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Alesha, Bad. It's owed abroad and they won't accept thin air money.
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It seems to me that the kind of spending we do is important.
If people are forced to borrow for education, health, skills, tools, transport and shelter & have no time with kids etc. and tax cuts are introduced for bankers forcing more people to borrow, then it is absolutely crazy and will lead to seas of unemployable failure and more debt.
UK is plummeting down the league tables, losing it's historical education and research advantage for conservative inequality dogma.
All we get is an economy where the rich feed off the population and call it success. Conservatism is a man eating his own hand and calling it food. efficiency; eating a leg, why bother with a second one.
Investing in growing food? communism !!!!
Inequality continues to rise, people are less able to compete in markets where robot engineers and designers are required.
What is Cameron's plan? save the UK by making everybody work in a call centre or push a broom about?
It sounds exaggerated, however that is precisely what has crippled the UK and other free market style economies, it is all some know, a lot of it comes from cold war propaganda and right wing ideology. conservative trickle down scams and Ponzi scheme hype.
We need to be thinking about an educated population, healthy, inclusive, low crime, innovative, flexible, good infrastructure.
Sport and social involvement not free market rat race alienation.
I recall Thatcher saying that USA style ghettos breed entrepreneurs.. They didn't they brought crime, misery and expensive social failure.
No boom. trickle down.. no boom, we never got a boom, we just sold off the family silver, even oil.
In Norway, the oil is state owned. they have an environmental record without rival, the money went to people, education etc.
What did the Tories do with our oil? sold it off to make Thatcher look good for a day.. sheer waste. neglect and corruption.
Picking each other up works. It is the reason Northern Europe is doing so well. Highest tax on the top 2% in the world in Norway and Denmark. Best standards of living. Innovative, high teck, informed democracies.
Kerela was historically India's communist state. derided by capitalist media as a boring socialist backwater. They taxed the rich, regulated, there were no people dying on the streets, kids were educated. Kerela has now become India's Silicon Valley, the power house of the Indian economy.
Investment in regular people, for a genuine informed democracy, where the rich thieves and psychopathic con artists are put in prison or made to STFU will bring decency, society and wealth to the UK.
We need positive models, not conservative, new Labour negative liverty greed religion.
If heavy cuts come.. there will be industrial action on a scale not seen in generations.
Taking this country down the road of more trickle down scams is too damaging and everybody is beginning to get sick if the iniquity & cons for the benefit of Cameron's greedy pals.
We are at a time like pre Solidarity in Poland.. it will only take a spark to see a tripple dip, quadruple dip recession if unfairness increases. It will be worth it to finally dump UK's free market thugs.
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Incidentally, just for the record, IMHO, we became a failed 'fantasy island' because politicians eventually realised that three or four decades of broadly failing educational policies had produced a workforce that is generally not capable of inventing, designing and producing the goods and services that the world needs, in sufficient quantity to sustain the economy.
Hence, the artifical bubble that policy-makers (read Brown and Balls) embarked upon in 2002 through 2007/8, which apart from inflating house prices (a direct correlation between house-prices and ease of borrowing money)has left a National Debt some £400Bn north of where it might otherwise be, notwithstanding bank bailouts.
We should get back to where we once belonged - inventors, engineers, scientists - following through to the goods and services that people will want - the politicians essentially bought us to this low point - now they have to fix it.
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Alesha - oops! Sorry. Should have been errrrrrm.
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marscubed,
Unfortunately educated people don't want to work in factories, lay bricks, repair plumbing, work the land, repair the sewers etc.
We have been over educating an over large population for non-jobs.
There can be all the industrial action you like. Most people realise that we have a lot of pain to come.
I'm under-employed, my son has three a-star a'levels in Maths, Chem, and Biology, and he couldn't get into med school. He is reapplying and working part time at the local coop and voluntarily with the elderly and dying in the meantime.
Life's tough and it's going to get tougher.
Let's wake up and smell the coffee and as Winston said "do what is necessary"
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239. At 11:54am on 13 Sep 2010, Sage_of_Cromerarrh wrote:
Chris London, I agree with you whole-heartedly. Apparently there's even more QE (thin-air money printing) coming down the tube around November time!
Sage Suppose the new QE was just used to redeem Govt Debt ?
Good or bad ?
Alesha, Bad. It's owed abroad and they won't accept thin air money.
I think you'll find that's its payable in good old fiat sterling or am I missing something?
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Alesha,
You are correct most of it is valued in Sterling.
The key word there is VALUED.
Thin air money lowers the value of the currency and so it would have the effect of devaluing our currency, making imports much more expensive (food, oil, gas, etcc), and it would obliterate trust in our bonds (promises). Hence we would be shunned in trade in the future as we will have shown we do not play by the rules agreed when the funds were lent to us in the first place.
In short we become a G7 version of Zimbabwe.
This would have huge downsides for us personally and world trade and stability in general.
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Put #219 and #220 together with another trigger or two - a serious shortage of another commodity, a wrong-headed tax increase, a new military conflict somewhere - and Credit Crunch/Bank Crisis/World Recession Pt 2 gets underway.
So, as Stephanie was asking, in effect, in this Blog - how and where do we place the corrective measures? The two extremes she suggests? Or somewhere in the middle?
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213 & 237 Nautonier & Whistling Neil - 'Balance of Payments"
Both excellent posts and difficult reading for anyone who truly cares about how we are going to pay our way in the rest of this century and beyond.
There is no doubt we have gone very wrong. Just compare ourselves to France an economy of similar size to the UK and with a similar population but one that is self-sufficient and self financing. It is self sufficient in food (with the obvious exception of products that it's climate cannot sustain)- the majority of it's population holiday in France (who can blame them) it is the world's favourite tourist destination (approx 80M visitors per year spending in shops bars restaurants hotels etc. very often on French goods and produce - plus contibuting to national infrastructure as they pay road tolls and travel on trains). Two thirds of cars sold in France are made in France. French wealth stays in France unlike ours which is leaking away.
We need a new approach - and it will require a big change - can I give up my German cars and foreign holidays not forgetting fine Cahmpagne and Cognac?
Perhaps a start would be to reduce VAT on UK holiday accommodation and tourist attractions? And we must become self-sufficient in energy for may reasons not just this as other posters have alluded to. Also, in timber pulp and paper which we mport huge amounts of but could be more self-sufficient in.
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re #252
Just to cheer you up a bit, John, we haven't entirely left the world of science, engineering and production. At the risk of having the Mods block this, I'll mention BBC R4's 'In Business' from yesterday evening.
Got to agree with the tenor of the education aspect of your post. Our erstwhile PM addressed the CBI just before Christmas last year and effectively said "We have the worst educated workforce in Europe". This was from the man who chucked shed loads of our money at the education system while charging graduates more for their degrees over the previous twelve years.
What did the 'system' do with all that money? OK, teachers pay levels improved. Good. But what happened to the rest?
Strikes me that Govey would be much better off concentrating on getting better results and better value for money from the DfE rather than inventing new types of school.
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#241 >>However, for value to become an adequate measure, the relationship between value and wealth has to be re-established (exactly how this can be done is open for debate).
Historically, a pound (i.e. quid) used to be the value of one pound of gold !! Nowadays, it will probably buy a few specks of it, if that !! Hence, your assertion that the mechanism to re-establish a real value to the quid is open to discussion !!
One generally accepted (but not fool-proof) means is to compare the "value" of the quid with the "value" of the currencies of other countries !! Unfortunately, some countries support the "value" of their currencies with massive debts that are/were rated as AAA+ when they are not !!
Perhaps we could use *a barrel of a known quality of oil* as a unit of measurement and value currencies against that !! Alternatively, we could use SDRs as the standard (as had been demanded by the BRIC countries) and value/measure our currencies against that !!
However it is done, it is guaranteed that there will be heated debate (and, probably, worse) over the means and methods !!
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I've just heard two union dinosaurs on the world at one publicising civil disobedience. This is outright thuggery and shameful.
There's two non-jobs that should be removed immediately.
Union members, if you're not happy with your pay and conditions or job losses try getting another job. The reality is there aren't enough to go around so think yourselves the lucky ones or resign. I'm sure there'll be plenty stepping up for the newly created vacancy.
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#249 Sage,
All that I am really asking for is that the government (of any persuasion) actually takes responsibility for the strategic wellbeing of the nation. Now, if you wish to classify that as maxist so be it. In earlier posts on this blog, I have gone out of my way to clearly state that my stance is a socialist one and that I firmly believe that we need a mixed-economy. There is nothing in my reply that was at variance with this stance and neither is there any call for marxism.
In response to your #254.
So who is going to determin what level of education is necessary for the population and then allocate who should recieve it?
Many potential under-graduates fail to achieve their preferred course of study - your son just happens to be one of them. Did he ask why his 3 A-star A levels was not sufficient? Could it be that, at interview his potential in medicine was found wanting? Now that doesn't mean he is a failure as an individual but perhaps others proved themselves to be more worthy IN THAT PARTICULAR FIELD.
I think that you are limiting yourself when you consider national food production. We are not in the same circumstances that we were during WW2. Yes we have a bigger population but our yields per acre are now considerably higher and it is now possible to grow non-domestic foodstuffs under cover. I accept that we will never be totally self-sufficient but then do we really want to be? If we can produce the majority of our own staples then we will be well on the way. The problem here is not will but cost. Despite their protestations to the contrary the supermarkets are not exploiting the food chain for the benefit of their customers but for their own profitability.
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#247 JohnConstable
The question of taxation is the subject of a series of programmes on Radio4 by Stephanie's colleague and predecessor Evan Davis this week.
There is probably a greater level of consensus about the first of the two complaints made; that the current tax system is too complex, though that refrain probably has greater resonance about personal than business taxation.
It may be a great deal more difficult to secure a consensus about the second complaint. Every individual and corporate taxpayer would almost invariably like to pay less tax, when asked that question. The budget deficit has begun to force government's hand. The current government has adovcated an 80/20% split in favour of spending cuts. The fiscal position means tax rises are inevitable, not tax cuts.
Evan Davis neatly explained how the political debate in the UK, dating back all the way to the time of Margaret Thatcher has been completely dominated by the question of income tax, an item personal taxation; one of the main alternatives to corporate taxation. It became a truism in the 1980s and 1990s that a political party advocating higher income tax could never become elected to government.
If the argument from business about taxes is simply one about the level of corporate taxation, then the news that the Chancellor's July budget will see corporate taxation reduced progressively from 28% to 24% will presumably have been well received in those quarters. If it is a more generalised complaint about a range of different taxes levied on business, then presumably the reaction will be mixed and much more difficult to fix.
Balancing the budget, reducing the deficit and steering the economy out of recession, whilst retaining political popularity is virtually impossible.
When times are tough for business, as during a deep recession, it is easy to seek solutions from or worse blame "government". Government does not impose all the costs on business; the wages paid to directors or owners etc, dividends to shareholders and the costs of borrowing money all affect profitability. The interest rate differentials between base rate and bank loan and other credit services and the bureaucracy involved in borrowing money may be even larger costs currently.
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#242 >Sage Suppose the new QE was just used to redeem Govt Debt ?
Good or bad ?
Which onwers of the Government debt will accept Monopoly Money in payment of their debt holding(s); aside from the government itself ??
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206 Alesha,
"I don't see how it is the net importing that damages the currency. Surely it is more the fact the exchanged sterling instead of being directed back into real economy is more likely to end up purchasing gilts at which point the money leaves the economy forever. Now thats what I call a leakage but what do you understand by 'leakage'? "
Yes, I see it a similar way, though my knowledge with regards to the foreign sector is a little shaky, as I am still learning. Sooner or later, if anyone holding £s wants to spend them, they have to do so on UK goods and services (financial or real).
Correct me if I'm wrong, but when a foreigner is holding £s, it is like someone in the domestic sector 'saving', and just as the government sector may have to run a deficit in a given period to accomodate the private sector's desire to save, I assume they also have to accomodate the external secor's desire to hold £s - I'm not sure if I have that right. Please, please, please correct me if i'm wong!
I don't think net importing damages the currency per se, but I assume that running a deficit (not borrowed) can put downward pressure on its value (but not necessarily), but that has to be taken alongside what is happening to the percieved value of other currencies too, and either way, we get the benefit as real goods and services. Again correct me if you think i'm wrong.
Kind Regards
Charlie
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"But like it or not, it's the government's approach that is now going to be tested - in that sense, we should all be hoping that it is right."
I'm certainly not an economist, so I can only speak from what could be considered to be a more limited perspective but that final line sums it up.
I find the debate interesting and I have my views but the government chooses the path for the rest of us to follow so I certainly hope that the government gets it right.
As we can't see the future, we can rely on theories and past events to come up with possibilities of future events but until we get there we will never know. Also, as we will only be following the government's path we will never know the end results of what would have happened if we had taken a different path. As the world has moved on a bit since the last time the country faced a recession, things have changed and that means the recession we currently face is different to past events.
I certainly don't know if the government are making the right decisions and I certainly can't foresee the future with any accuracy or detail. What I do think though is that this country is in a mess and cuts need to happen.
If we invest only to face a future that compounds our debt problems further then we have problems.
If we cut only to face a problem where we enter a cycle of cuts -> job losses -> welfare benefits, loss of GDP -> increasing debts, loss of market confidence and investment -> more cuts
then clearly we also face problems.
This only proves that the infrastructure within our country supporting the economy is completely out of balance but unless you know the weights to apply on each side of the scales to reach balancing point again then you face a trial and error situation of trying out different options to move closer to that point.
I feel that there is potential in the private sector but fears of uncertainty are preventing people from making investment decisions as they would rather wait to weather the storm before working out what to do with the cash they've had stored under the bed.
Unfortunately, the public finances are in a bad state and cuts need to happen. However, do they have to be on the scale as proposed by the government? I can't answer that one as I only have limited information available to me but my personal view is that in order to reach that bright future we need to establish more solid economic foundations in the present.
In Monty Python & The Holy Grail, I always remember the King who built his castle on the swamp a number of times until it stayed up. To use that as an example, do we want to keep trying to build on a swamp of public debt until the structure stands or do we want to deal with the swamp of debt first to see where we are and then decide what to do?
Now, maybe the castle may have stayed up the first time but without knowing the future, what do we consider to be an acceptable risk?
Right now, the majority of the people in this country are facing the facts of being too indebted themselves and are paying off debts rather than driving the economy simply because better planning can be made once you have cleared the debt without it constantly hanging around in the back of your mind interfering with decisions that you may need to be made.
I hate it when I get my wages in each month knowing that with so much going out on living costs, do I really want to live with a burden of debt always over my shoulder preventing me from utilising my income more effectively each month and planning for the future. Yes, I am in some debt, excluding the mortgage, and I am in the process of making it a priority to clear the debt so that I know where I currently stand once it is clear. Then I will be able to lay the foundations of some better financial management from the start before I end up taking on more debt again.
This is why I agree that cuts should take up the majority of the action taken as the public finances are completely out of control and after years of recklessness they need to be reigned in. Instead of constantly pumping money in to the public finances to fund ever growing problems we need to tackle the economic mismanagement, bureaucracy and waste that runs more rampant in the public sector.
It's like throwing money at a Landlord to fix a house, if the Landlord can get away with spending the money how they like then maybe they could use an expensive car or wo, maybe a villa in another country, a few expensive holidays, etc. while using what little money remains to plaster over the problems but even though appearances may fool people in to believing that a problem is solved, the problems are still there and constantly re-emerge. We need fundamental reform of the public sector and part of this is cuts.
Yes, public services will be hit, of which I work in the NHS but I understand that money is a finite resource (excluding simply printing more and more and more...) and now we need to make better use of that finite resource to tackle the problems of today so that we can face a better tomorrow rather than letting a problem potentially run wild for the sake of an uncertain future that may or may not happen anyway. It's better to be at a starting point you control than to assume you will be in control at the end point.
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241. At 12:06pm on 13 Sep 2010, foredeckdave wrote:
mrsbloggs.
These are clearly strategic questions and should be viewed from that standpoint rather than from a market orientated cost-effective standpoint.
We presently have a mix of 'power' resources within our control - gas, oil, nuclear, coal, wind, wave and maybe other future sources. All of these resources must be brought under national strategic direction. We are potentially resource rich in both the short, medium and long terms and to sacrifice this wealth to self-interested market forces will I believe be viewed as tantamount to treason by future commentators.
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Not Marxist at all. This small c conservative has been worried about that for a long time.
To add a voice of balance, I would point out that 'we' (some of 'our' companies) own chunks of the utilities in other countries. But how do we get back control of our resources and utilities? A majority stake might suffice in the short term.
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STARTAGAIN - the French analogy is useful but they have their problems too.
Fundamentally they have a much larger country for the same sized population as us. Hence they are more sustainable than we are.
They have placed food security at the pinnacle of their political agenda so won't starve if they can't import food anymore and they have enough agricultural land to just about feed themselves.
However, they have immigration (population growth) issues as do we, and they do not have sustainable energy production either. They too rely on hitherto cheap oil to farm their fields and transport most of their goods around.
Though in the round they are much better situated than we are in terms of their economic structure, I agree.
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256 Sage_of_Cromerarrh
All money is created from thin-air, every £ in your bank account has been created from thin-air by bank lending. Why is government issued money any different? Since all the nations of the world abandoned the gold standard, and embraced a flexible exchange rate, all money is Fiat.
Charlie
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#256 Sage
This I do not understand. I've asked you before, but I think I did not get a reply: most money is 'thin air money' at the moment. It is created from nothing by commercial banks. If you are saying this is OK because the money is associated with some debt component, why do you think that the UK being burdened with private debt reduces inflation?
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re #237 Good post, Whistling Neil.
How electorally successful is a policy of going back to a point where we consume a lot less? At the risk of being known as the bloke that goes on about flat screen tvs, please let me use them as an example.
If HMG had said TV is staying analogue in the UK, how popular would they have been? Instead they decided to scrap analogue TV (despite the GW/CC downside and potential disasters) because they would get loads of tax in from importers', shippers' and retailers' profits and the VAT. You could argue that this was mortgaging our future as much as selling gilts to fund expenditure or charging university fees.
In the period up to and including the 1960's there were all sorts of restrictions on imports (a few of which still exist - video camcorders, I believe) AND restrictions on credit.
Would the electorate want to return to those days? And which party would be brave enough to put it on their manifesto?
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260. At 1:35pm on 13 Sep 2010, ishkandar wrote:
#241 >>However, for value to become an adequate measure, the relationship between value and wealth has to be re-established (exactly how this can be done is open for debate).
Historically, a pound (i.e. quid) used to be the value of one pound of gold !! Nowadays, it will probably buy a few specks of it, if that !! Hence, your assertion that the mechanism to re-establish a real value to the quid is open to discussion !!
Silver actually - also won't buy much of that either, especially when inflation takes off good and proper and the QE pesees start turning again.
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240. At 11:57am on 13 Sep 2010, Sage_of_Cromerarrh wrote:
Over consumption of finite resources without investing in suitable alternatives, and unsustainable levels of population are two huge elephants that you didn't emphasise however.
============================
These are indeed issues which link into how we as a nation pay our way in the world I would agree. They are recognised but the questions are above the emotinal intelligence level of the species to deal with properly - we are probably closer with sustainability to being able to answer it or put of the day of reckoning - which cannot be addressed until we answer population growth which is not a purely economic question despite the proposition that more money will answer the question which of course it won't.
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#260 ishkandar,
Therein lies the rub. One of the major problems in todays global economy is that comparisons are based upon money and not true value.
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FOREDECKDAVE,
Your request of any government is a perfectly reasonable one.
A mixed economy I agree is both desirable and achievable. However, I believe that the state has been trying to do too much now for many years. In my opinion large state does not equal innovation and progress but rather equals apathy, inaction and procrastination, and abdication of personal responsibility and motivation.
State should set the boundaries for society and as Smith said 240 years ago provide security and justice for all.
I think you are too optimistic about our capacity to feed ourselves sustainably as much of our current productivity arises from unrealistically cheap oil for tractors, fertiliser, and pesticides. Even so with this there is not enough quality farmland to feed 62 million Britons (1941 - 48 million).
On education I am saying too much emphasis has been placed on promoting middle-class lifestyles as the holy grail. We should have been producing more manual workers with skills society needs and with no social stigma attached to working with one's hands.
As for my son, to give up after one attempt would indeed be shallow. He is determined to succeed this time and is working to address any perceived short-comings of last year. Unfortunately there is not a lot he can do to address one short-coming of not having parents who are already doctors or dentists. (It's still who you know to a large extent in that profession unfortunately). Failure is a distinct possibility but he can but try.
I agree with your sentiments on supermarkets, although if we are unhappy with them we ought to show this by supporting local shopkeepers and buying their produce instead.
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217. At 09:22am on 13 Sep 2010, Alesha Soba wrote:
"I will carry on believing that until someone can spell out in a bit more detail than I have been given so far where exactly my logic falls down."
may I suggest:
Henry Hazlitt ..... ECONOMICS IN ONE LESSON
[Unsuitable/Broken URL removed by Moderator]
The title may make it look like I'm being faceatious but I'm serious, it is a good and surprisingly short book.
As for my earlier (nu)labour comment, I know several of that ilk and they all have very similar economic world views to you. Bearing in mind we are enduring the fall out of 13 years of the application of this very same world view you can proably understand why I ventured that possibility.
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CHARLES,
Government issued money or money issued by banks licensed to issue it by the government I agree is no different.
My argument is that printing extra money simply to pay of our debts is a surefire recipe for hyper-inflation. I don't care where the printing press is located and who is operating it.
Fiat currencies require universal confidence to survive. If we simply start printing money to pay off debts incurred to fund permanent deficits our currency will become worthless and so to will our economy.
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Oblivion,
I don't think that the UK being burdened with private debt reduces inflation. You've lost me on that one can you be more specific. (I'll get back to you in an hour or so the speed the mods are running at)
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#275 Sage,
It's sad to say that our education system failed when the Butler Act (1948) was not fully implemented. If you look again at the model of education proposed in the Act, you will find that it called for the establishment of a vocational stream of education holding the same value as the grammer schools. This was never implemented. Hence we ended up with Secondry Moderns which became unfocused 'sink' schools and engendered the development of comprehensive education which merely exacerbated the problem.
I do wish your son future success in his endeavours.
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Sage,
"My argument is that printing extra money simply to pay of our debts is a surefire recipe for hyper-inflation. I don't care where the printing press is located and who is operating it."
If this money is used to increase productivity or resources (and that includes reducing unemployment by definition), then the value of the money is backed by that increase in productivity / resources. Therefore no pressure on inflation.
If the money is used to pay down government debt, then provided the money that was borrowed and spent increased productivity / resources, then the same applies.
Charlie
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276. At 2:37pm on 13 Sep 2010, forgottenman wrote:
As for my earlier (nu)labour comment, I know several of that ilk ...
Right that may explain why we wouldn't get on.
this will proabbly break the rules but there is probably no kind of person I despise more than nu(labour) types especially lawyers. I plan my day around avoiding them if possible.
Don't try and classify me Forgottenman, just make your point and we will manage to co-exist.
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239. At 11:54am on 13 Sep 2010, Sage_of_Cromerarrh wrote:
Chris London, I agree with you whole-heartedly. Apparently there's even more QE (thin-air money printing) coming down the tube around November time!
Sage Suppose the new QE was just used to redeem Govt Debt ?
Good or bad ?
Alesha, Bad. It's owed abroad and they won't accept thin air money.
I think you'll find that's its payable in good old fiat sterling or am I missing something?
You are correct most of it is valued in Sterling.
The key word there is VALUED.
Naughty Sage you are doing it again I said 'payable in' not 'valued'.
If it's payable in sterling the coupon and the capital get paid in sterling Endof. It doesn't need to exchanged.
So I'm still not understanding the 'thin air money' reference. Sorry.
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An economy that continues to be based on financial services will only tip us further into a boom bust society. We desperately need to start the twenty year cycle it will take to make us a fully fledged manufacturing & agrocultural exporting country as we once were during the industrial revolution foriegn income needs to be based on high value goods (like making ipods, iphones in the UK not China) and on a resurgence in self supporting food production like WW2.
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"If this money is used to increase productivity or resources (and that includes reducing unemployment by definition), then the value of the money is backed by that increase in productivity / resources. Therefore no pressure on inflation.
If the money is used to pay down government debt, then provided the money that was borrowed and spent increased productivity / resources, then the same applies."
I've said it earlier and I'll say it now! The government are pretty useless at getting value for money. Labour had 50% GDP and totally failed to translate that into resources. Their reign will leave almost no footprint in 2 years. Now you want to give them 100%? This is the fatal flaw in this reasoning!
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CHARLES,
You wrote:
If this money is used to increase productivity or resources (and that includes reducing unemployment by definition), then the value of the money is backed by that increase in productivity / resources. Therefore no pressure on inflation.
If the money is used to pay down government debt, then provided the money that was borrowed and spent increased productivity / resources, then the same applies.
I say :
Not necessarily and not probably.
Productivity can only be an investment if that productivity produces something that can be sold for a higher profit than previously. Productivity I feel is a bad description of measuring performance in the public services, efficiency and value for money are better ones.
This is unfortunately immaterial I believe because with a large and virtually permanent public deficit we can't afford to borrow to fund such a large public sector, end of story. The public sector exists to serve the nation as a whole with services. It's current size and cost along with personal debt is an example of living beyond our means which is completely unsustainable.
Borrowing has been overdone and we need to get it paid down as quickly as possible, public and private.
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52. At 09:18am on 11 Sep 2010, mangizmo wrote:
"OK, this is what I believe.....the standard of living that we enjoy in the UK is unsustainable given our economic earning power, ... we are just not generating enough real income to pay for the services that we all enjoy, ... the population is soft"
Agreed.
156. At 10:55am on 12 Sep 2010, Dempster wrote:
"... in reality ‘austerity’ is simply being poorer.
We are currently enticed into discussing how we are going to be poorer, not why we are going to be poorer."
I disagree. Austerity is what hits when you've overspent and the debt has to be paid back. If you/we/anyone hadn't spent what they didn't have, it wouldn't need to be paid back; with interest.
You confuse buying on credit with being richer. If the borrowed money is well-spent causing more profit then the debt which is owed, the exercise is worthy. Unfortunately this has not happened. We have not earned the standard of living that we have been accustomed to.
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282 ALESHA,
Well I'll try to be clear. I said valued because it is crucial in the absence of a tangible standard to back the currency to how confidence in our money works. Yes technically we can print money and pay off all existing debt as it becomes due.
However, we won't get any more if we do that. Confidence in our money will be shot and our ratings will plummet. Exchange value of our currency will nosedive, and interest on future borrowings will skyrocket if we can get anyone to buy our bonds at all.
Holders of our bonds need the confidence that interest paid on them and the coupon value will be exchangeable for real purchases somewhere down the line internationally not just in the UK.
Similarly we could all ring up the treasury and ask them to print us off £100K or whatever we need to pay off our mortgages and credit cards. We would be in an impoverished barter economy before Christmas.
Now if you want the UK to go it alone in the world then maybe that wont be a problem for you, but I suggest this is not what we should be doing.
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#241
Dear Foredeckdave
Thank you for your response. I believe that all my questions are strategic in nature and therefore require contemplation and resolution by government and elected members.
I believe that they all require top down, directive resolution through legislation, regulation, instruction and communication.
I don't think its marxist. I think its what government should do, that is it should focus on the things we can't do for ourselves and lets face it we're a highly concentrated, urban population that only needs to defend itself from an inability to meet basic needs most of which we can't meet individually.
While the right honourable members are focussing on whether this or that person is entitled to this or that, they are failing us. On a small scale, I have experienced the inevitable outcomes of failures to be strategic by pandering to personal wants and its not pretty, costs more than might have been the case and leads to anxiety, discomfort, distress and a great deal of effort to put right. I do not need politicians to address the failures of the past. Right now, I want them to plan to avoid the potential disasters of the future.
Although it might sound as though I favour some sort of back to basics benign dictatorship, I am greatly in favour of individual responsibility so any rules, regulations, policy, whatever should err on the side of enabling citizens to help themselves as far as possible, providing support merely for the equivalent of the widows and orphans rather than our current situation where there is a little hand out for almost everyone.
Strangely, I find myself believing that borrowing 150 billion per annum would be OK if it were for power stations, technology that helped reduce power usage, water treatment plants, recycling facilities, new trains and tracks and buses etc. rather than the revenue related money go round we seem to be saddled with.
Whilst I'm at it, we also need government to set legislative and regulatory frameworks that encourage businesses to set up here not somewhere else. Perhaps there's a link between the two!
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Is it only me?
On the one hand we are talking about the perceived necessity for more QE i.e. pumping more money into the economy whilst at the same time talking about the need for tax increases and borrowing and spending cuts to take money out of the economy.
Round and round we go. Isn't there a medical name for this kind of mass delusion?
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To 286. At 4:17pm on 13 Sep 2010, healthytoes
I understand credit, I understand its implications.
And I'm now starting to understand the debt based monetary system.
What I'm questioning is why the 'system' is not discussed.
Here are some interesting links:
A short animated film by Paul Grignon, ‘Money as Debt’ (link below).
http://www.youtube.com/watch?annotation_id=annotation_942534&feature=iv&v=z5vC_8azMFk
The documentary Secrets of OZ (link below)
http://www.youtube.com/watch?v=D22TlYA8F2E
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287. At 4:21pm on 13 Sep 2010, Sage_of_Cromerarrh
Thanks. I think i'm starting to get it.
Am I right in thinking that you believe that when banks create money, because it they do it by way of loans(hopefully for productive purposes) that money has more value than say if the Govt paid benefits only in terms of backing the currency of course? I'm not implying anything about social benefits here
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ALESHA,
You said:
Thanks. I think i'm starting to get it.
Am I right in thinking that you believe that when banks create money, because it they do it by way of loans(hopefully for productive purposes) that money has more value than say if the Govt paid benefits only in terms of backing the currency of course? I'm not implying anything about social benefits here
I say:
I'm not sure what you are asking here can you have another go at rewording it and I'll get back to you?
Thanks
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Ok what if I clarified it like this.
Are you saying that giving benefits say to the unemployed with printed money damages the exchange rate of the currency ?
Forget any comparison with bank loans as far as the effect on the exchange rate is concerned if you like.
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Alesha
I think it would if the money given to those people was not translated into added value. Eg if they spend all the money provided on alcohol made in Spain. This is my assertion - that not all money spent by the government is translated into value for money.
An exaggeration to bring it to a macro level! If 1 million people spent 100 quid a week on Spanish booze, apart from a few shopkeepers getting a bit of a lift, for 52 weeks of a year, would that be good for our country or not?
If this carried on for 10 years and the Spanish makers built a factory to make cars with the proceeds, thereby skilling up through reinvestment, who is in a better position?
I hope you see the spirit of the question and don't use some syntax discrepancy to not answer it.
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294. At 6:19pm on 13 Sep 2010, Ben
Ben I'm beginning to like you.
I think you need to re-assess what people on benefits do with their money but you did see the direction in which I was heading.
Thank you
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I'm beginning to think you are a troll. And I'm out, happy that you don't reply to concise questions.
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ALESHA,
I see what you are saying now, thanks for the clarification.
Giving benefits to the unemployed, elderly, sick citizens etc.. has to be paid for by the state (tax revenues and borrowing from the markets). In the case of benefits the state is giving people the means with which to purchase goods and services with no labour in return (or subsidising labour in the case of tax credits).
I see this as a noble and civilised activity when people are unemployed or incapacitated by accident or no fault of their own, but one that has to be affordable and not financed by constant deficit. If it is financed by constant deficit then it will either have an impact on the exchange rate of the currency, if we print excessive money to pay the benefits. Or, as is more likely the scenario, it will impact our ability to continue borrowing if we exceed what creditors in the marketplace see as a never ending increasing deficit.
It's basically no different to a personal borrower. If lenders see your requests as reasonable and for something you can afford they will lend to you (provided they have spare liquidity). If you keep coming to them for new and ever larger loans they will start to question whether you are good for the money and eventually demand higher interest to cover the higher risk, and finally not lend at all.
So I hope this clarifies my position on benefits. In summary they are noble and civilised but like all things in our public and private budgets have to be sustainable. This means just like other public spending that we have to set them at a level we can afford without borrowing for any longer than a short period of time.
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Sage
A couple of things:
a)
Well I'll try to be clear. I said valued because it is crucial in the absence of a tangible standard to back the currency to how confidence in our money works. Yes technically we can print money and pay off all existing debt as it becomes due.
However, we won't get any more if we do that. Confidence in our money will be shot and our ratings will plummet.
I disagree with this. I think you have to carefully explain this assertion and back it with evidence, rather than declare this as some a priori truth, for the simple reason that it makes sense at first glance but is for other less informed readers very misleading. If deficit public spending results in a private sector stimulus and assists deleveraging, then the opposite would be true, and investors would take advantage of the growth. Indeed, the Chinese have been doing precisely that for the last 30 years, and actually hope for the kind of printing you talk about. So no, your assertion is not supported by evidence.
b) Earlier you mentioned that in your mind there is no difference between increasing debt money and increasing printed state money, both would be inflationary. Now we have deleveraging. This means the private sector is trying to pay down debt. (Look up Minksy and Debt Deflation) With what can they pay down debt? All money is debt. The result without government stimulus? Debt deflation. The debt deflationary situation demands new money: it must come from the state and it must be targeted to the average joe.
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Sage
Thank you but you do not address the point I was trying to make to Ben about the effect of the spending power given to the payees
.
That money will be spent, and not on financial assets, but in the real economy. That money will do exactly what money is meant to do, generate trade which will be subject to the same multiplier effect as debt money.
In other words it will more than pay for itself in the effect it has aggregate demand, GDP, output, wealth whatever you want to call it.
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Alesha,
It doesn't more than pay for itself because it is not invested but consumed, often on imported goods enriching other nations more than our own. This is how capital has effectively flowed from West to East in recent decades.
If I was being completely faithful to the doctrine of there being too many people on the Earth consuming too many resources I would also say that we were perpetuating unsustainable over population.
However, starving poor people to death to reduce the world population is not the answer any civilized person would advocate although we do have to address population and consumption urgently or it will address itself for us in some very nasty ways.
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I have been reading this discussion all weekend and have been finding it hugely interesting. Thank you to everyone who has posted.
Interesting as it has been I find I am still somewhat unclear about the definitive role of gilts in all this. In the hope of better elucidating the matter is anyone able to definitively answer these questions:
1. Is the difference between Government spending and tax receipts for a given time period always exactly balanced by the value of gilts issued in cases where spending exceeds tax revenues?
2. If a Government was to persistently run a budget surplus would the Government cease to issue gilts?
I hope someone can shed light on this. Please.
Kind Regards
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I agree that a sensible solution to population control needs to be addressed. I don't hold out much hope for that I must admit.
I'm not sure though that it is not ourselves that gain from importing rather than the other way round. after all we get to consume their output for what, their currency at current exchange rates while our currency, that paid in exchange for theirs, is available again for circulation at your local friendy bank.
I'm probably signing off soon so have a good evening.
Cheers
Alesha
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Alesha, have a good evening and I look forward to debating with you again soon.
MISERY_INDEX
Gilts are UK government bonds or IOU's. They are sold by government to investors in return for money. Gilts promise to pay a certain rate of interest annually and then be bought back by the government for the same price paid for them some time later (5 years, 10 years, 30 years etc).
Governments don't tend to run huge surpluses. They either reduce taxes if this is the case or they use their surpluses to buy other investments, often the gilts of other countries. (This is what Saudi and China have been doing with US and UK gilts).
But if they did run surpluses there would technically be no need for gilts. Citizens in a democracy would be clamouring for tax cuts if their governments ran large consistent surpluses though so it doesn't usually happen.
I hope this helps.
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@Sage - Thank you. It does help to an extent.
What was behind my first question was an attempt to understand what lags there are, if any, in issuing new gilts with respect to the time frame in which Government spending occurred and taxes were collected and what issues, consequences or instabilities may arise from any such lags.
I appreciate the point about clamour for tax cuts if Governments ran persistent surpluses and so I equally appreciate the unreality of the scenario. The subtext is that I was trying to establish if it would be viewed as a good or a bad thing should there cease to be a market in UK gilts - eg. might it affect our credit rating?
Regards
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301. At 7:46pm on 13 Sep 2010, misery_index wrote:
I have been reading this discussion all weekend and have been finding it hugely interesting. Thank you to everyone who has posted.
Interesting as it has been I find I am still somewhat unclear about the definitive role of gilts in all this. In the hope of better elucidating the matter is anyone able to definitively answer these questions:
1. Is the difference between Government spending and tax receipts for a given time period always exactly balanced by the value of gilts issued in cases where spending exceeds tax revenues?
2. If a Government was to persistently run a budget surplus would the Government cease to issue gilts?
I hope someone can shed light on this. Please.
Kind Regards
----------------------------------------------------------------------
Hi! Sage has answered 2. Here is my go at 1.
Unfortunately it's a bit of a yes and no answer because economies and tax never stand still. So, a Government might choose, if it thinks tax receipts are too low or are going to be and the market for gilts will be unfavourable, to cut spending. Or it could try some sort of stimulus to the economy to increase GDP and thus the tax take. But if the Govt does nothing, then yes - it has got to raise money - by gilt sales - to make up the difference. A lot of licking a finger and holding it up in the wind plus crossing fingers is involved - otherwise known as Budget Day.
Hope this also helps. Best wishes, keep posting and reading.
The posts on this particular Blog/thread have been outstanding.
Meanwhile all the joking/laughs are on RP's Blog. Anyone know where Nick Robinson has gone?
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Thank you for the answers.
I'll come clean: I've been trying to find a way to make Alesha's notion of printing money instead of issuing gilts work but I reckon I have just about come full circle and must return to the view that the issue of gilts is essential when Government runs a budget deficit even if national income accounting describes a flow of income and expenditure and the Government budget balance is not a facet of double entry accounting.
Is it fair to say that if a Government is running a budget deficit its currency is underpinned by the gilts it issues?
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It is my firm belief that Austerity Cuts means: Austerity Cuts for the taxpayers and unemployed, but ballooning social welfare for banks and bankers. This will be further illustrated soon with the next round of quantitave easing (printing money). If our Governments had any balls they would have let the irresponsible and careless banks go broke two years ago. We could now be in real recovery. Dont expect any group of politicians to do the right thing for the country. Expect them to do the right thing for politicians. Dont even waste time/energy discussing what should be done by Government. INSTEAD, LOOK AFTER YOURSELF and your families and friends. Take your money out of banks, equities and other paper investments. Put your money instead into physical gold and silver. Gold and silver has/is/will increase in value as the markets crash and as the British Pound along with most other currencies collapse. Gold and silver is/will be the currency/commodity that preserves your/our wealth. A financial adviser will not give you this advice partly because there are no fees/commissions to be gained. Buy gold and silver now. Dont be a sheep(following the pack) or a chicken(wings that wont fly), be an Eagle,fly high and see the bigger picture. (I am not in the precious metals business, but have all my cash in gold and silver) Brothers and sisters, good luck.
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"An exaggeration to bring it to a macro level! If 1 million people spent 100 quid a week on Spanish booze, apart from a few shopkeepers getting a bit of a lift, for 52 weeks of a year, would that be good for our country or not?"
Ben,
First of all, if 1 Million people spent a bit more on anything (alcohol or not), quite a lot of new employees would have to be taken on to serve them. This would boost GDP and tax revenue.
Second, most of the money made by selling alcohol is made close to the point of sale - this is true for most things.
Third, you failed to take it to a 'Macro' level - all you did was take a microeconomic argument and aggregate it! This does not constitute macroeconomics. The difference between microeconomics (aggregated or not) and macroeconomics is to do with something called 'Fallacy of Composition'. I'll leave you to research this on your own.
Charlie
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"Is it fair to say that if a Government is running a budget deficit its currency is underpinned by the gilts it issues?"
misery_index,
Under the current (unnecessary) arrangements, a budget deficit is underpinned by issueing debt as Gilts. This means the government has to pay it back with interest. The only upside to this is that it has no affect on the value of the currency. The Uk can do this for a good long time without it becoming a problem though.
Better is to issue money without borrowing it first. There is no interest and it does not have to be paid back, but it can affect the value of the currency. This is better because if you increase the money supply by say 10%, it will not necessarily devalue the currency by as much as that. Even if it does, it just makes our exports more attractive. As I understand it, most of our currency value is not really deteremined by this, but by the fundamentals of our economy - growth is more important.
Charlie
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#258 >>Two thirds of cars sold in France are made in France.
Having been in France fairly regularly these last few years and having just been back from Francs, I think I can safely dispute this statement. The majority of cars sold in France now are made outside France; including many "French" cars !! Many of them are made in Eastern European countries and shipped in !!
They, too, are getting the "English Disease", as they call it !!
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#279 It was also the view of Labour, in general, and NuLabour, in particular, that merely churning out masses of graduates of dubious value will *INSTANTLY* transform Britain from a nation of labourers to a nation which enjoys a middle-class lifestyle; quite forgetting that someone still have to flip the burgers and empty the bins !!
Our currently wasted generation is fed a diet of achieving wealth and an easy life *WITHOUT* having to work too hard for it !! Hence the great worship of Z-list "celebrities" and the desire to be WAGs !! As several have discovered recently, being a WAG is not all it's cracked out to be !!
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#298 >>Indeed, the Chinese have been doing precisely that for the last 30 years, and actually hope for the kind of printing you talk about.
Forgive me but how did the Chinese manage to practice deficit spending for the last 30 years whilst accummulating what is probably the world's largest pile of foreign reserves ?? It does not compute, Captain !!
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#301 In answer to your questions -
>>1. Is the difference between Government spending and tax receipts for a given time period always exactly balanced by the value of gilts issued in cases where spending exceeds tax revenues?
The answer is *NO* !! As was done by the Great Gordon, the government can also sell the family silver (or gold, in this instance) to cover the deficit. However, when the family silver is all sold, we, the country, will, in effect, be broke !! Meanwhile, the Great Gordon will be off somewhere else with his gold-plated, index-linked pension !!
>>2. If a Government was to persistently run a budget surplus would the Government cease to issue gilts?
Again, the answer is *NO* !! A prudent government will try to use the surplus to either pay off previous debts or run up reserves/savings for a rainy day. *PRUDENCE* !! Something the Great Gordon preached but never practiced !!
As an expansion of this answer, Gilts are (usually) a reasonably cheap form of borrowing. If the money is then used on infrastructure projects that produce far more value than the cost of borrowing, then it is used wisely and profitably. If it is just blown on frivolous imports, be they material or of services, then it is wasted and the country goes bust !! Did I hear someone say, "But surely, the Great Gordon had abolished Booms and Busts....." ??
A potted explanation on the use of Gilts !!
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#306 >>I've been trying to find a way to make Alesha's notion of printing money instead of issuing gilts work but I reckon I have just about come full circle and must return to the view that the issue of gilts is essential when Government runs a budget deficit even if national income accounting describes a flow of income and expenditure and the Government budget balance is not a facet of double entry accounting.
I suspect that the ultimate result of printing so much money is an inflation of Zimbabwean proportion - 1 trillion Zim dollars/GBP for a loaf of bread ?? A good place to seek some answers is the economic history of the Weimar Republic of Germany and the rise of the National Socialist Party !! The consequences were not pretty !!
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#309 >>As I understand it, most of our currency value is not really deteremined by this, but by the fundamentals of our economy - growth is more important.
From what I can usderstand of the international economic situation, I think economic stability is more important than growth !! Ergo, Japan has been in a stagflation situation for the "lost decades" (i.e. no or hardly any growth at all) and yet, recently, Japan is worried that the YEN is *Rising* in value !! Britin has been banging on endlessly about growth and yet the Quid has lost between 20% and 25% in value over the last two years or so !! What, therefore, is the value of growth at any cost ??
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314. At 03:35am on 14 Sep 2010, ishkandar
Well thank you for trying ishkandar. Let me persuade you to keep trying.
i take it you have read my posts 58 and 78. Where exactly does the logic break down? Is it just on an intuitive level?
I am willing to be persuaded but I need something solid to accept or argue against either way.
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306. At 9:55pm on 13 Sep 2010, misery_index wrote:
Sorry Misery index my post 316 should have been directed at you. I read it without looking at the earlier posts. I'll just tag the end of your original post on here.
... even if national income accounting describes a flow of income and expenditure and the Government budget balance is not a facet of double entry accounting.
You seem to accept that my way of looking at the accounting of Govt spending and taxing may be acceptable. Just to repeat it.
Because the UK Govt is the issuer of a soverign fiat currency sterling(the Creator if you like, the ultimate being when it comes to Sterling which remember is a means of exchange, nothing else), When it spends, money is created, when it taxes, money is destroyed forever therefore the idea of a Govt balance sheet or a liability in terms of money makes no sense.
Why then if you just about accept that idea would you go on to conclude that when it spends it needs to borrow?
Same question as I put to ishkandar in error. Is it just on an intuitive level. Give me something solid to argue against.
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246. At 12:22pm on 13 Sep 2010, Ben wrote:
I'd argue that much of the "growth" in the UK for the past 10 years was in fact false. We were booming off the back of credit, so it's wasn't a real boom. We all stoked up house prices, the state borrowed loads and employed people doing jobs that didn't add value, then we all went home, saw our house had gone up, patted ourselves on the back and then went out to a restaurant. But we were spending money that was a bubble. I find that most people talk about "getting back to normal" but that wasn't normal. It was a bubble. And we spent money we didn't have.
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Thats quite a myopic view, the economic growth of the last 10 years wasn't just built on an asset price bubble, and although that obviously made a contribution. The house price bubble also has to be viewed in a historical context, part of the rise was the natural rebound from the dip in the early 90's and the transition from households moving from 1 income to 2 income, it just lasted far too long and went far too high so the bust is harder.
The state also didn't 'borrow loads' as you say, they ran a budget deficit that in historical terms was below average. You could argue that during a long period of economic growth there's no need to run any kind of deficit, but the argument for it at the time was more taxation on those feeding the growth would have driven them overseas whilst less spending would have left the NHS, education and other vital services in the same or worse state than the Tory's had left them in 1997.
This is a long and complex argument with truths and lies on both sides, Brown made huge errors of judgement as chancellor and was rightly kicked out of office but essentially he was continuing Thatcher's policies of the 80's to their natural conclusion, only with a social conscience so he also increased spending with stealth taxation - something I don't have much of a problem with, although I'd rather it be more progressive direct taxation that pay for it.
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Misery Index
Apologies again. Reading posts backwards is not a good idea. I obviously overdid it on the Gin last night.
You are asking all the right questions. Now let me give you different answers those you have already been given.
301. At 7:46pm on 13 Sep 2010, misery_index wrote:
1. Is the difference between Government spending and tax receipts for a given time period always exactly balanced by the value of gilts issued in cases where spending exceeds tax revenues?
No. It is not. As I have said issuing gilts are not necessary to finance spending. I am confused as to why so many gilts have been issued. I've asked Neil Wilson on the latest Steph blog to give his opinion. At present the only conclusion i can come to is that they don't get it, which I have to admit is a bit scarey.
2. If a Government was to persistently run a budget surplus would the Government cease to issue gilts?
If you think about it. A budget surplus being excess of tax over spending would, if you follow conventional (not my) logic mean the govt would have more cash than it needs after the public debt was 'repaid' so if they carry on 'not getting it' they would think ok we dont need anymore money therefore we dont need to issue anymore gilts.
They would in effect be relying on the banks to provide the money for the greater good of the nation and next time for example where there was a liquidity problem that affected lending and consequently businesses were unable to get the loans they need to grow, jobs would go etc but most importantly, in terms of your question, tax receipts would go down, what would be the Govt response to this logic? I suppose it depends on the party in power but they would either cut public spending again to 'balance the books' or issue gilts again and borrow from the wealthy at a price. Eventually you come full circle and the clamour would grow for less borrowing, less spending Blah Blah.
I think this is where the phrase Boom and Bust comes from.
As you know i believe the whole logic is misguided.
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I still don't get an answer from Sage_of_C
What is the difference increasing volumes of debt money and increasing volumes of printed state money? If none, then, assuming GDP rises as both increase, why is the increasing volume inflationary?
The crux of Sage's argument is : "Printing money is inflationary," but where is the evidence to support that? What is the rationale? It's not good enough to just keep repeating the message. We have had exponential increases in debt money since 1971, as I pointed out, and the result is now deflation.
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320. At 07:45am on 14 Sep 2010, Oblivion
I think once people realise this, we might make faster progress.
If Govt can control both, then it has the flexibility to start shaping a totally different future for everyone. They would have to watched very closely but isn't that what we democracy is all about?
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OK ladies and gents.
Let's continue here:
http://www.talkfinance.net/f36/modern-monetary-theory-6591/
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238. At 11:49am on 13 Sep 2010, ashcroftmillions2010 wrote:
#62 & #75 nautonier
The term "age of austerity" was the title that the Rt Hon David Cameron gave to a speech about the economy and wider political blueprint to his own faithful party members at the Spring Conference of 2009. It was the term of choice for the current Prime Minister; part of the prospectus, or manifesto for the General Election earlier this year. I attach a link to the Conservative Party's website.
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As usual both the BBC's pro-left bias and you, yourself miss the point ... the issue about 'austerity' is surely not one of desirability for the Coalition govt ... but one of necessity due to the appalling condition of the nation's finances.
I'm not primarily interested in the political issues but if the BBC post a provocative statement that appears to be biased and does not reflect on the source or intention of that statement ... then it might be better for the BBC to ask George Osborne himself whether his budget plans are aimed at 'austerity' (per se) or the proper and responsible short, medium and long term management of the UK economy.
The BBC have access to 'Govt sources' and I don't.
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The article seems to be trying to summarise where one might stand on the government's spending cuts plans in relation to whether one believes this latest crisis is different, the real, enormous perfect storm, or not. My own view is that it's an economic recession like so many others in the past. Recessions, with the enormous damage they do in terms both of production and of people's lives (health, social stability, regression to barbarism)are an inevitable part of the way we organise our economic system. They merely have minor different features because they take place at different points in history, and because the economy changes throughout history. However, one factor remains constant in recessions: it's always the weakest and the most vulnerable who are called upon to pay the price. Those at the top of the social scale may lose money, those at the bottom have their whole lives turned upside down, impoverished and affected perhaps for as long as they live. Or, in the case of the Third World, more people die of starvation than they would have done if the recession hadn't 'happened'. I can't therefore see the government's plans for where the bulk of the cuts will fall as any different from what has gone before. They are a matter for neither support nor panic, just recognition that this is how we order things in our society.
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The austerity bit is on the last line of these words...
OIL could be the next international monetary exchange standard.
Because oil will be a diminishing resource, the world demand for oil will increase its value.
Prior to the 70s, there was the gold standard…the value of the dollar was guaranteed by the gold in Fort Knox.
We have got away from the gold standard. After all what is gold useful for…(electrical conacts)….and so the Dollar became the international currency standard.
However Dollars are easily printed……and the printing machines have been very busy recently….
The world needs oil, so it will become the international standard of currency..
1 barrel of oil = how many Dollars.?
1 barrel of oil = how many Euros.?
1 barrel of oil = how many Pounds .?
1 barrel of oil = how many Yen.?
1 barrel of oil = how many Yuan.? Etc. etc.
As Peak Oil is upon us, the value of a barrel of oil will escalate. (After all the international price of Gold has escalated recently)….This Gold bubble will burst soon when it is realised that OIL and not GOLD is the real world…Just like the black tulip.
So the three most important things about international currencies, will be..
OIL + OIL + OIL.
The grab for oil, will be frightening and possibly there will be wars over it. (Oh just realised, there already has been wars over oil recently …Kuwait and Iraq).
The weakest countries (i.e those countries that have no access to oil) , will be the ones to suffer first…Their currency will not buy a pint of oil.
It will not matter how many plastic cheap toys or cheap designer dresses or clever electronic goods that that country manages to produce in it’s sweat shops…It’s currency will depend on it’s access to oil.
So take Spain for example…has it got access to oil…or Italy….or Ireland??...Will the Euro maintain it’s value in the world, if some or most of it’s countries have no oil and don’t or can’t produce anything of value internationally.??...Where will it get it’s oil from, with diminishing currency value against a barrel of oil….
This recent international financial crisis and an international chase to austerity is a sign of things to come, as it is realised that the value of a currency will all depend on the price of a barrel of oil.
EVERYTHING WILL DEPEND ON OIL.
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When it comes down to it, the bankers have ran off with the money and left the country trying to run as normal. If we cut services, then how will the country move on. We need services to run.
What about the children of tomorrow, they have a bad life to look forward to due to these greedy bankers who have left this country is total debt. Why should the average person on the street have to pay for the debt, find these bankers and have them pay back into the country.
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290. At 4:39pm on 13 Sep 2010, Dempster wrote:
What I'm questioning is why the 'system' is not discussed.
Here are some interesting links:
A short animated film by Paul Grignon, ‘Money as Debt’ (link below).
http://www.youtube.com/watch?annotation_id=annotation_942534&feature=iv&v=z5vC_8azMFk
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Sorry, I misunderstood you. Have just watched this and need time to digest and think. I agree that the "system" is important and the vast majority of people are ignorant of the ins and outs. (including myself)
Changing the system, and I am not arguing for continuing what we have, does not necessarily solve human hypocrisy and all its other evils.
The system always has to be administered - whether by bankers, politicans, any toxic mix of both and/or whoever is next. Power is money is debt has the potential to be abused whoever is in charge.
I'll keep reading and thinking. Thanks.
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290. At 4:39pm on 13 Sep 2010, Dempster wrote:
To 286. At 4:17pm on 13 Sep 2010, healthytoes
I understand credit, I understand its implications.
And I'm now starting to understand the debt based monetary system.
What I'm questioning is why the 'system' is not discussed.
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I've just been indulging in some creative writing on Steffie's next Blog apparently at your expense. Not intended as such, just lightening the mood. [More a case of you set 'em up, I'll knock 'em in!] Am reminded that you asked this question on this one and wanted to respond.
I think we do discuss the system no end here. Various folk have their obsessions but whether it's gold, FRB, Debt, fuel duties (!*!) etc, we are usually digging away at some aspect. There has been some high quality thinking and posting of late, especially on Steffie's bit.
Are you really complaining about the shallowness of a lot of the stuff presented in the media in general, especially the broadcast media? Poor old Evan's effort on tax being a good example? I'd have to agree with you to an extent. But radio growth notwithstanding, the Radio 4 audience is still a minority of the population and even if they are a bit more 'thinking' or 'highbrow' than ITV3 or Channel 5, the broadcasters will always be concerned not to pitch what they do too high for the 'bottom' third of the audience.
So, is it a conspiracy? Much as I love a conspiracy - I think no.
I think it revolves around the fact that as much as some here hate bits of the system - eg fiat currency - and want it changed, there is no practical way of going back to where we were before. That is why the system does not get covered as whole by mainstream media just by faux or real radicals and revolutionaries using, in large part, the new media.
It should be remembered that we are not just stuck with what we've got but the 'system' could evolve further - cashless society, plastic free (electronic) society, etc. It is in a constant state of evolution (Star Trek 'hives' slip into mind here, as a picture - a bit cold and grim!) and the people 'operating it' are probably no more in control than we are.
So, it really comes down to fixing bits of the 'system' that are perceived as or are actually broken (in general terms - not necessarily what you, I, Copper, Puzzled, Sage, rita think is broken) and/or regulating it in 'better' ways - all according to the public mood and political will of the age. And it has to be done in a practical way. You will have realised that a lot of the posting here is tongue in cheek or wild and woolly - not practical, 'this is the bit we can fix now this way then we've got to tackle that but need a better tool' thinking.
I think that is what we need to do. Get down and dirty and fix it. I could get all apocalyptic with the best of them but between now and whenever that happens, we have got to get a consistent, sound UK economy {been waiting for that a lifetime, already}, sound and thorough banking regulation, a better balanced fiscal set up, less-good debt paid off and good debt at reasonable rates directed at building for the future.
There's lots to do. Perhaps in our discussions, too. But I gotta go do some work. Hope this slightly rambly response is helpful. Catch you later.
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Sticking with the real world, the problem is to estimate the coefficient that translates a pound of expenditure cuts into a reduction in the deficit. It's clear that making redundant a public sector worker earning £20,000 does not result in an immediate £20,000 reduction in the deficit. For a start, there are some generous redundancy terms for the state to pay. Then the exchequer loses the tax that the worker was paying. Then it loses the unemployment benefit that he or she claims, together with any other benefit entitlement. Reduced income results in reduced expenditure by the worker, so VAT receipts fall. Lower expenditure also results in lower turnover and profits in the hands of retailers, importers and manufacturers, so reduced import duty and corporation tax in future years. So what is the net result?
I have no means to estimate it, but it seems to me that it's at least an arguable proposition to say that the deficit cannot be reduced quickly. The attempt to do so, whether by cuts or increased taxation, will have such a cumulative impact that the effect is to increase the deficit rather than reduce it, the so-called deficit trap.
I would prefer to see a commitment to reduce the deficit as quickly as possible coupled with a clear-eyed understanding that savage cuts in expenditure -- or rises in taxation -- are not going to achieve such an outcome.
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1) Is this recession more or less like the others that we've seen in the past 50 years - or a once in a lifetime global crisis?
This is a different recession than those before. The recession of the 1930's was due to too much growth after WW1. The recession of the 1970's was due to the increase in oil price and the recession in 1980-90's was due to the collapse in manufacturing industry. The current recession is due to the financialisation of the economy. Money being passed from pillar to post and back again giving the illusion of wealth. Once the inflation levels of the 1980 - early 1990's had gone then the slight-of-hand that was used to disguise lack of real growth meant that the financial bubble was bound to burdt.
2) Even if we're looking at a long and painful road out of this - what do you think government can do to help?
Stop the financialisation of the economy. Put in measures to restrict finacial gimmicks like hedge-funds, sub-prime lending, off-balance sheet accounting. Return accountants to pure accounting rather than money-management, (Anderson who audited Enron only spent 20% of their time actually doing the accounts, thats Monday, Tuesday to Friday they were helping Enron to fiddle the books)
3) How do you weigh the short-term risk of a weak recovery against the long-term cost of excess borrowing? And how far do you trust politicians to get the balance right?
It doesn't matter how much you can cut it is the political sensitivity that will count. Politicians will cut funding where they will not get the blame or the backlash (milk for under 5's?). This means it will be highly unlikely that the government will achieve even 50% of it's planned cutbacks. If the government has the courage to fail they will change policy and accept that long-term borrowing has to be retained to ensure eventual recovery. If they do not then the chances are the electorate will go back to Labour as the less painfull solution at the next election.
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If the government relaxed its plans and made far less radical spending cuts along the lines the Labour party would advocate and certainly union leaders. Yes, jobs in the public (and private) sectors are preserved in the short term until the global recession recedes. But I have two observations.
The first is how do we decide when the global recession has gone. Is it when the media stops talking about it? is it when most FTSE 100 companies report a profit? is it when the UK has more or less inflation? less of a public spending deficit? I ask because lots of the criteria by which we could measure recession existed before the banking crisis and were almost certainly a result of policy. That does not excuse bankers by the way.
Secondly, if we wait for a recovery, will the public accept any government saying "ok we are now recovered; lets make spending cuts to become more prudent". If the answer is no, governments will never make an anti-cyclical argument.
My view is that much as it is painful there is no other way out of recession but the one the governement has chosen. This may cause turbulence but eventually there will be blue sky.
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There is a problem of perspective. As an oldie, my opinions are inevitably influenced by a longer and possibly more varied experience.
Austerity brings to mind the late 1940s with rationing of food and clothing, and the sheer lack of consumer products now seen as essential. So, having to turn down the heating, which we didn't have, or go without some of the modern luxeries we also didn't have doesn't seem quite so much of an issue, so long as it's other people.
Public Services have grown like Topsy over the years and have been gold plated with risk assessments and all the other regulations. There are many more things done, some quality of life rather than essentials, and they are done expensively. But the pavements don't get mended. Having spent a working life in industry, in Britain and abroad, my prejudices on productivity, service and quality are ingrained. Some years exposure to local government and regular use of the NHS has generated opinions about the functioning of the public sector. Not criticism of the staff, they are simply part of organisations with well established cultures, for which reform is long overdue.
I don't necessarily think that services need to be cut, although there are non core activities that should be questioned. My view is that we should demand that the essential services are maintained for less expense. When police chiefs and others talk of the dire consequences of economies, my question is: is there somebody else that is prepared to do their job and deliver what we need. Simply doing arithmetic and saying less money means less service is not acceptable. In the private sector it would be unthinkable; performance is driven forward with or without capital investment. Survival depends on it.
As I said, it's a perspective thing. And yes I'm well aware it means jobs going, but in the end it will happen anyway. Lets get some ideas of how to help these people get on with their lives.
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I don't know why everyone goes into a defensive mode when the subject of spending cuts comes on; especially in relation to cutting benefits. I am totally in favour of cutting the spending on benefits.
The benefits system in UK is apalling! It is a regressive policy making people lazy and allowing them to remain out of work while others toil hard to make a living.
Working as a GP I can clearly see how so many of my patients are defrauding the country by claiming benefits. Many of them are physically fit to work, but just don't want to. Many of these people have excuses of back pain or depression (or something similar)- obviously there is no proof/ test for these 'illnesses'. There are weird and wonderful diagnoses which you would come across only in Britain as these entitle people to claim incapacity benefits.
I hope the threshold for incapacity benefits is also raised quite a lot so that majority of the people of depression (and similar 'illnesses')should be made to work (which is what happens in most of the countries around the world- people with depression do work to make a living).
I can't imagine how a progressive/ developed society like Britain can have such regressive attitudes on benefits. It is a basic social understanding that everyone should work and contribute to the society. Please no more playing soft and being diplomatic. The country loses money not only on direct incapacity/ job seekers allowance, but also indirectly throuch the number of benefits that go with them.
Cutting in benefits should be totally supported and should be substantial.
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There are those that state catagorically that printing money and spending it on government projects is inflationary. This may or may not be true, nobody can know for sure.
However surely if this printed money was used to pay private dept owed to banks it would have a deflationary or at least zero net difference as once the private dept is paid the money in effect disappears?
The monetary system looks like it is on its last legs, continuous growth and borrowing is required to feed the debt spiral, this simply cannot happen in a time of population explosion and dwindling natural resources.
This world wide austerity could be the final nail in the coffin, as we all become japan and stagnate as our purchasing power is destroyed by inflation.
Ironic as it is proposed by the very people who are the puppets of the mega rich plutocracy!
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