9 Dec 2012

Is he a dreamer?

Danny Alexander: No triple dip recession in UK economy

Last week, the Office for Budget Responsibility (OBR) forecast that the economy was set to shrink in the final three months of 2012.

Mr Alexander said he accepted this, but added "steady growth" in 2013 meant the UK would avoid another recession.
A lot of economists disagree with him. If he's wrong will he resign?

3 Dec 2012

Why are we holding back?

On the FundWeb page Tomas Hirst has posted an article about the problem of reserves. Corporates Sitting on Piles of Cash. The strap line is
"When the UK corporate sector reacted to the onset of the financial crisis by hoarding cash reserves, it set in train a phenomenon that is now casting long shadows over the UK recovery."
As he says a report has put the cash reserves at £729bn. To put this in perspective the total private debt in the UK is £7.4 trillion. So the cash reserves are about 10% of the total debt. He then goes on to outline the problems caused by lack of business investment - based on various other reports. But none of these reports are able to see that lack of business investment is also a problem with a cause - massive private debt.

I tried to post a comment on the website but it kept self-borking, so I'm putting it here instead. (Always write long comments in Notepad before posting them!)

There is certainly some evidence to suggest that business is sitting on reserves. But there is also evidence (from the 2011 Budget Report and a subsequent McKinsey Report) that private debt in this country is around 490% of GDP, and McKinsey thought this on the increase at the end of 2011.

Now I've asked every economist I come across the same question: what are the interest payments on ~ £7 trillion of debt likely to be? They uniformly ignore me, even the one's that argue that we should be looking at private debt.

We can see that every 1% of interest rate requires about 5% of GDP. But what is the average interest rate? 1% 5% 10% 20%? No one seems to know or care.

In an economy where interest payments alone amount to a significant proportion of GDP (my guess is about 50% each year) we don't have to theorise why demand is low. It's because everyone is busy deleveraging (including the finance sector who account for about half the total debt). As Richard Koo observed: right now business is not maximising profit, it's minimising debt.

But what it also means is that investing right now is not going to produce much return because the choke is on demand not supply. People are simply buying the absolute minimum of stuff at every level of the economy. More supply of anything in an economy saturated with debt is not going to stimulate much in the way of demand. At the same time government is busy squeezing the economy - and undermining confidence. And meanwhile we know that 1000's of zombie companies are being kept afloat by the banks in the hope that things will improve soon. But even the one-eyed, head-in-the-sand government are starting to realise that a recovery is a long way off. Those zombie companies are going to be wound up soon - let's see how Christmas goes...

So what would a sensible individual or business do with their reserves right now? Buy gold? I don't know. But investing in a new business venture would not be sensible right now in general. Of course some people are doing it and doing well. But they are a drop in the £1.5 trillion GDP bucket. And the Bank of Dave is happily and profitably lending money. But a few thousand at a time.

Those reserves could be quite huge, but until the debt problem is sorted, which will take another 10-15 years, there won't be much incentive to make risky investments.

I don't disagree that there might be reserves, and they'd be better spent than not. But in the broader perspective it's not sensible to risk your capital in business ventures right now. Which is partly why banks are loathe to lend - they've sobered up and realised that, given their reserves, they loaned far too much money at far to high a risk, in the 1990s and early 2000s. And now it's being said that they're under-capitalised - which is arse about face.

21 Nov 2012

Osborne Problem in Two Sentences

From today's Guardian:
UK government monthly borrowing rises more than expected to £8.6bn.

Fall in corporation tax receipts hits George Osborne's chances of meeting his deficit reduction targets for this year.
Or more succinctly, as the  IMF has been saying since this time last year, the government's approach to managing the economy is causing tax revenues to shrink exacerbating the government's problem.

You have no idea how much it pains me to agree with the IMF. But there is it. However the article also contains this:
A Treasury spokesman said: "The economy is healing, but it still faces many challenges..."
Now the first part of this statement is just bullshit. The economy is not healing, it is actively haemorrhaging still. Which is why government borrowing is rising still.

Remember the falling unemployment figures? Puzzling. But here we see the truth - business might be creating a lot of part-time jobs, but it is paying less tax. This either means that everyone is doing better at exploiting tax loopholes, or that they are making less profit. Only the government can do anything about the former, and despite the fact that they are long on rhetoric on this subject, to date there is not even a substantive proposal for tax reform, despite all the other reforms pursued by this so-called "Conservative" government.

One of the chief reasons revenues continue to fall is that demand is low, and one of the chief reasons demand is low is that debt repayment is soaking up a huge proportion of GDP. When debt is 492% of GDP (according to Robert Peston) what are the payments on it likely to be - I've asked many economists to offer a guess and they uniformly ignore me. Perhaps the answer doesn't bear thinking about?

A conservative is someone who seeks to preserve the status quo. The so called Conservative element of the coalition government is strongly reformists and has been shaking up the establishment from top to bottom to no great purpose. The Conservatives have morphed into the NeoLiberal Party.

14 Nov 2012

Bank of England no Longer Predicting Recovery.

The Bank of England's Inflation Report for Nov 2011 is out today. The outlook is fairly pessimistic.
"The UK economy has barely grown over the past two years, as it has laboured against the consequences of the financial crisis and its impact on global demand, a sharp squeeze in domestic spending power and a necessary fiscal consolidation. The period of weak demand has been accompanied by stagnant productivity, raising questions about the extent to which the supply capacity of the economy has expanded. Increases in energy and other import prices and in VAT have meant that CPI inflation has been well above its 2% target for much of this period."

The chart above shows that BoE's GDP projections are on the low side, and that for the last 18 months at least the real GDP measured by the ONS has been on the low side of their projections. The model produces a bounce back, probably because this is programmed into the model. Throughout the 20th century the UK bounced back to historical trends of growth after recessions. A quick look at our GDP curve (below) shows that this recession is different. We aren't going to bounce back this time. This time it's different. (see also Past, Present and Future of GDP Growth)

Quarterly GDP 1955-2011

We don't have to look far for the reason it's different this time. From 1990 - 2010 UK private sector debt increased by 700%, as virtually all limits and oversight were withdrawn from the finance sector. Massive indebtedness means were busy paying off debt instead of spending or investing.

Any sensible government would be looking for ways to decrease the debt burden - a debt jubilee or debt relief program - which would be the best stimulus for growth, because it would stimulate demand by freeing up disposable income. Indirectly it would help the government balance the budget by boosting their choking revenue stream.

However "sensible government" appears to be an oxymoron. The Tories still seem fixated on cuts as the way forward despite mounting evidence of the deleterious effects. And despite the fact that Vince Cable identified the problem with consumer credit in 2006 and predicted trouble on that basis. He didn't quite foresee the crash in the way that other's did, but he did ring alarm bells. However Mr Cable appears to have forgotten that he ever knew about the problems of high debt levels now that he is Business Secretary and in a position to do something about it.

On the plus side unemployment came down this week, though it seems many jobs are being converted into part-time work. And there is the hidden effect of the government shuffling people around in work schemes. Claims for benefits went up which is probably a truer reflection of the state of employment.

12 Nov 2012

Privatisation and the Deficit

A few weeks back the IMF published from information showing that the UK deficit was primarily caused by a reduction in revenue, rather than increase in spending. This is partly why they are now also saying that austerity won't help. Cutting spending won't deal with the problem of reduced revenue in the long term, and will in fact have a negative impact on revenue because of the consequent shrinking of the economy. We know this, and we know that the government is in denial about it. And taking £35 billion from the BoE as a fig leaf is not going to convince anyone. The Tories are naked and refusing to admit it.

Over the weekend the Observer, more usually a light-weight, published a story showing that three of the largest water companies in the UK have parent companies in Jersey, and pay no, or next to no, tax in the UK despite making enormous profits - and note profits not simply turnover:

So these companies that benefited so hugely from the free market experiment repay us by sucking money out of the UK economy. Money that all used to go to the government.

We've also been hearing about how other large companies such as Amazon, Google, and Starbucks make fools of the UK people and its government by avoiding paying tax here, again despite making healthy profits.

Should we be surprised that large corporation have no sense of social responsibility? Well, no. Let's not be naive, these companies are set up to transfer wealth to the wealthy and no other reason. The service they provide has become incidental. The naivety has been on the part of successive governments. The ideology of the free market religion is that by allowing companies free reign (and all the while piling more and more regulations on individuals) that we all benefit. There never was evidence to support this ideology, its just something that some rather brilliant, but completely unrealistic, theorists came up with and won Nobel Prizes for. It never related to the real world, and still does not.

We now have 40 years worth of evidence now. And what the evidence shows is that free markets lead to long term economic instability - crisis after crisis across the planet; and to increasing economic inequality, which also leads to social unrest. Regarding inequality the free market religion facilitates the greed of the already wealthy and allows them to circumvent regulations requiring them to be good citizens. When people behave that way they are labelled anti-social and given punishments. But the free market religion does not see the dark side of business, it only sees the light.

It is true that privatisation has often produced benefits in terms of service. It's not all bad. But the cost has yet to be really counted. Indeed I think we are beginning to see the true cost in articles such as the one in the Observer. How long can we afford to pander to these companies that have no loyalty to the community which feeds them. It's like having a pit-bull terrier as a pet. It's only a matter of time before it turns on us or our family and decides to bite us.

I think we also have a problem with the middle classes in the UK. They are too comfortable, and too willing to put up with the squeeze. They are happy if they can maintain their standard of living, or a semblance of it. But they aren't paying attention to the consequences of having their heads in the sand. A happy middle class existence is dependent on social cohesion, and long term stability. We're in danger of losing both of these. 

Governments need to stop being so naive about the intentions of business. If the aim of government is stability and prosperity for all, which is what it should be, then some kind of decisive reform is necessary. If a business is operating at a considerable profit in the UK and paying no tax on it's income then something has gone disastrously wrong. If we're going to tax wages and profit, and profit is adept at avoiding paying any tax, then all of the burden falls on wages. Such a situation cannot be allowed to continue. If that company is the healthy beneficiary of a government sponsored monopoly like a water company, then the fact that they don't pay any tax is an indictment of both the company and the government. Making a profit and paying no tax is immoral, even if the law is so stupid as to allow it.

The dark side of privatisation then is the huge negative impact that it's had on government revenue. That government is in denial about the real impact of small government and privatisation is not helpful. Just as the UK was in denial about Jimmy Saville and his child abuse. Companies like Anglian Water are abusing this country. We can't just stand by and watch it happen. Or maybe we can?

For a government staking its reputation on balancing the budget, the obsession with spending at the expense of revenue, the abject failure to deal with rich cheats while continually bashing the poor, leaves it looking more naive than average, more clumsy and blindly ideologically driven than any government since the 1970s. And that is saying something.

10 Nov 2012

Occupy Wall St's Rolling Jubilee!

This is such a brilliant idea. Occupy Wall St's Jubilee idea is to use donated funds to buy up poorly performing debts - which can be done for pennies in the dollar. Then they just forgive the debt. They call it a Rolling Jubilee (http://rollingjubilee.org/).

In America Banks sell debts which are bought up by debt collectors who then extort money from the debtor. A little bit of money goes a long way. With $50k they can buy $1 million worth of debt and forgive it. 

As well as the website there is a YouTube video:

One of the organisers, David Rees, also has his own blog How to Sharpen Pencils, and he describes how in the test run they used $500 to buy up $14,000 worth of debt, and just forgave it. There is a fund-raising event on 15 Nov which will be streamed on rollingjubilee.org.

The industrialised world is heavily over-burdened with debt. It is sucking the life out of our economies. We desperately need a debt forgiveness program - a Modern Debt Jubilee. I have been advocating Steve Keen's version of this, but it assumes that the government will face up to the private debt problem. The fact is that if we wait for the UK government to do something about private debt we'll probably die waiting. The government is deep in denial about private debt and have no policy to deal with it. So we need to help ourselves and this Rolling Jubilee idea is an excellent approach to it.

If you are American I urge you to donate money to this project. It doesn't have to be a huge amount, a lot of little amounts will do the job. $1 of debt costs around 4c to buy. So $1 buys ~ $28 of debt.

I will help promote & donate money to a UK version of this if someone will organise it.

9 Nov 2012

What is the UK Spending on Debt Servicing?

Since 1 Oct  I've been telling people that the interest payments on our debt take up a significant proportion of GDP each year. I estimated that the interest on the £7 trillions of private debt might amount to about 45% of GDP each year - assuming an average 10% interest rate.

Now in an online review of the 2012 edition Occupy Money, It’s the Interest, Stupid! Why Bankers Rule the World, Ellen brown reports that an economist has calculated the amount in the USA as 35-40% of GDP.

This is bad news for the UK as our private debt is much higher than the USA - which is a factor in why their economy is in recovery and ours is not. Their private debt peaked at 303% of GDP, whereas UK debt peaked at 475% of GDP (according to the 2011 Budget Report). Current rates are about 250% in the USA (according to Steve Keen and this graph) and 450% in the UK.

USA Private Debt 1920-present
UK Private Debt 1987-2010

And note Steve Keen's important point that even now private debt is much higher as a percentage of GDP than it was at the peak that caused the Great Depression.

Now if the USA is losing 35-40% of it's GDP then proportionally the UK is losing much more. I'm hesitant to put a figure on it based on this information it has to be more than 50%. And this is a chilling figure. Imagine if Camoron was right and we were to treat the UK like we were running a credit card. More than half our income is going on interest payments, let alone paying off the principle.

And just a note to acknowledge that Robert Peston wrote about this on the BBC Website in November last year.  His figures are from a different source, I prefer to use the government's own figures - the differences reflect the difficulty in calculating these figures. He has UK private debt at 481% of GDP in 2008 and rising to 492% in 2011 (or £7.4 trillion). The rise is being driven by financial institutions. So actually Peston's analysis is even more pessimistic than mine. I've tweeted him to ask what he thinks the interest payments might be. Chance of an answer is about zero, but one has to try.

30 Oct 2012

On the Radio

An email I wrote to Call You and Yours was read out today. The discussion was about the economy and the significance of the 1% rise in GDP for Q3 2012. It was under my civil name* --Michael Attwood--and pointed out the problem of private sector debt.

The gist will be familiar to people who read this blog: private sector debt is very much larger than public debt, and choking demand in the UK generally. Though I did not say that the same holds for much of the industrialised world. I pointed out that our situation is much like Japan near the beginning of their 15 year recessions and has some of the same features, particularly the phenomenon of minimising debt taking precedence over maximising profit (a quote from Richard Koo).

Deleveraging (paying off debt or going bankrupt) will take a long time, ten years might be optimistic. And this does not factor in the Euro-Zone crisis, the Chinese Property Bubble, the USA Fiscal cliff, soaring food prices, and surging energy prices. All of which threaten to reduce our prosperity.

I also did not say that this is the true legacy of the free market experiment pursued by UK governments since the 1970s. That New Labour's toxic residue after allowing private debt to expand by 700% during their time in government ranks on a par with the Thatcher and Major governments.

I did not point out that the best idea I have ever heard for dealing with this problem is Steve Keen's Modern Debt Jubilee.  The idea that we print money (aka Quantitative Easing) and give it to ordinary people with the single proviso that they must pay off debt before spending. If we gave, say, £5000 to each of 50 million adults = £250 billion, then it would make a substantial dent in the levels of personal indebtedness and allow people to spend more. Those who're not in debt will also spend more.  That spending will increase demand generally, which will stimulate growth and improve the government's tax revenue. The latter would drastically improve the budget deficit without any budget cuts. The banks would suffer in the short term because they make money from debt and if it's paid off they don't get interest payments. The answer for them would be to lend more - precisely what we need them to do.

But we won't do this because it's not in the standard economic textbooks. And politicians are afraid of any innovation. On the whole economists are educated in economic paradigms that are divorced from the real world and do not understand the real economy.

*I use my Buddhist Order name, Jayarava, under most circumstances

25 Oct 2012


I've been watching The Thick of It. Although Camoron has been warned that it shouldn't be used as an instruction manual by one of the stars, Rebecca Front, it does provide us with some insights into the minds of the people in power.

Today there was a tiny increase in the GDP figures which is almost certainly a blip caused by the Jubilee and the Olympics, and almost certainly an over-estimate as several people have pointed out today (e.g. here, and here).

But the way politics works is that this tiny bit of good news is spun as a massive confirmation of government policy - despite the fact that even the IMF is now saying that austerity is choking our economy. Government seems to have no choice in this. Despite multiple u-turns on various (mostly minor) issues, the government has staked it's reputation on a policy thought up just before the election in 2010. If it shifts on this, it is in effect admitting that it's hard-arsed attitude was wrong all along.

The problem with being a Tory is that one is committed to a morality which is kind of neo-Darwinism at it's worst. Their motto might well be Herbert Spenser's 'survival of the fittest' (with the corollary 'death to the weak'). Right-wing politics is embedded in a self-help morality in which success is a sign of hard work, determination and perseverance. In this world view success, especially in business or politics, is associated with moral fitness. Failure to succeed is, ergo, a moral failure. The poor are immoral in this world-view. Now the nasty party are quite capable of dressing their morality up as 'compassionate conservatism', but it is a wolf in sheep's clothing. The left have other problems, but they're not in power.

This is one of the reasons Tories are so reluctant to go after the rich even when they are dishonest. Somewhere deep inside the Tory believes that in order to become rich one must be fundamentally moral. With this kind of world view, they are loath to attack the ultra-rich and the corrupt bankers. It doesn't seem right to them, though they may not be capable of articulating why. Moral beliefs are often deeply held and experienced as emotions rather than concepts.

So the Tories, in order to appeal to their core voters, and to be seen to be representing the Tory values, need to be hard men. This is why so few women succeed. They don't do that kind of hard as well as men. To my mind this is very far from being a flaw. These hard men do a lot of damage with their rigidity and brittleness. They don't have any Dao, they don't flow and change very well. Hence they are conserve-atives - though what they seek to conserve is their own power. Everything else needs changing.

So faced with a crisis they don't really understand they're left with posturing and playing the hard man with the immoral (criminals, the disabled, the poor, people with a lot of children, etc). So something like the announcement today must be seized and inflated. While the rest of us look at 0.5% increase in GDP and say 'meh' the Tories are constitutionally and morally (by their code) obliged to make a big deal out of it and at the same time ignore any bad news, or at least blame it on someone else.

The trouble with all this is that it doesn't amount to intelligent public debate. The media, bless them, were mostly trained in the same kind of cockmamie economic paradigms and don't utilise the rhetoric of the heterodox economists to really tear the politicians to shreds. They sort of barrack from the sidelines, but you can tell they're just as confused as the politicians. They implicitly believe in the same kind of economic lies as the rest of the mainstream.  So we're still getting swamped in bullshit about deficit reduction and austerity, and the 'problem' of sovereign debt (there is no austerity as overall spending is up, and we don't have a sovereign debt problem). Still no one is talking about private sector debt which dwarfs public.

Personally I find it all profoundly depressing. When the news is all that and paedophilia I find myself just switching off. The appeals to our outrage, fear, and appetites leave us intellectually impoverished. The government clearly lost the ability to think years ago. New Labour were no better, and I have no confidence in post-New Labour-Labour being very much different. The LibDems have just massively disappointed everyone - which is a shame because Vince Cable did call the overload of consumer credit in 2006. He missed the scale of finance and business sector debt, but give him his due.

So yes the government take this tiny isolated positive result (with an unknown margin of error) as confirmation of all their economic policies. But this is instinctual. It represents the first stage of a devolution away from rationality and humanity. In Buddhist terms the government is now in the animal realm where emotions and instinct overwhelm any semblance of intellect.  Politicians are no longer full members of the human race because they deny their human faculties, they deliberately operate at less than their human potential. They're not quite farmyard animals yet, but something is definitely amiss. The same thing is evidently happening in the USA.

I see a dystopian apocalyptic future for us. My plan if things turn to custard is to join a monastery and try to preserve books and learning. It worked in the last dark ages.

24 Oct 2012

IMF and Austerity

Ann Pettifor explains the IMF's u-turn on austerity in the Huffington Post.

16 Oct 2012

Lord Turner for BoE?

Head of the Financial Services Authority Lord Turner calls for 'unconventional' economic policies. In particular I note:
The financial crisis of 2008 was "not a bolt from the blue," he said.

"It arose from poor supervision, from bad rules and structures, from dangerous cultures - and the errors were made by regulators, economists, central bankers and public policy makers, as well as bankers themselves."

He said the amount of capital held by banks as a buffer to protect against any potential crisis was a "small fraction of safe levels".
I'm not sure that I agree that good work has been done on this problem, but at least he's mentioning private debt and is talking about the actual problems that we faced. I take this problem to be the removal of regulations put in place after the Great Depression to limit the amount of credit the finance sector could create.

Deregulation is one hallmarks of free market economics. The idea was that the less the government could interfere in the markets the fairer they would be. In reality it has created massive instability and a sustained transfer of wealth from poor to rich - trickle up economics.

By removing the safe-guards put in place after the fiasco and catastrophe of 1929 and the Depression, the free marketeers opened the way for the present crisis. The people who lobbied for this change in policy did benefit, and average wealth increased, but at the expense of lower and middle income earners. We now work more for less, while the rich do less for more.

I'm heartened to see something more realistic being said in public about the economy and the crisis. We have a long way to go however.

Lord Turner hasn't quite advocated a Modern Debt Jubilee, but commentators say he's in favour of helicoptering money, in the sense that he advocates forgiving loans made to the Treasury by the Bank of England. It's debt forgiveness (which we need) but not quite in the right place for my money.

14 Oct 2012

Gloomy News

I was pondering the popularity of prophets of doom today. Regarding the economy I'm far more predisposed to believe a gloomy forecast than an optimistic one. Last week John Major (out promoting his new book) was giving optimistic forecasts ('green shoots' blah blah).

Today the UN Warns of Global Food Crisis & the IMF says UK austerity is 'costing and extra £76bn'. While they used IMF backing to justify government policy in the early days, now that the IMF have changed their tune the government is ignoring them. And UK construction sector contracts again in August. It will be interesting to see what employment figures are like.

I'm persuaded by those people who say that deleveraging in the private sector has only just begun, and that it will be a long time before we see growth again. One of the questions that is raised by another correspondent on Renegade Economist is the possibility that growth will never get back to the point where we can afford the interest on our loans (which remember are about £7tn at present vs. GDP of £1.5tn). Japan in a similar situation took 15 years to get out of technical recession in 2005, then the credit crunch hit in 2007. They've had near zero growth for 17 years with no change in sight.

What happens to the UK if we have 17 years of near zero growth? Is anyone actually thinking about or planning for this? Or does the blind optimism of the government that this recession is like all the others and we'll bounce back?

If we can't pay our loans we'll end up defaulting. I've already noted the upward trend in business insolvencies. I think we'll see this trend continue. As businesses overburdened with debt during the madness of the debt bubble of the 90's and 00's succumb as Travelodge and Biffa both recently did.

And If we don't bounce back can I get a job as a special advisor to the government?

11 Oct 2012

What is Tax For?

An answer in six tweets by Richard Murphy ‏@RichardJMurphy

What does tax do? It pays for what we need, corrects market failures, makes gov’t accountable, delivers justice & creates prosperity.

Tax reorganises the economy. When the chips are down, like now, it’s tax that lets government intervene to get the economy going again.

Tax raises accountability. Politicians are accountable for tax. Companies must be accountable for the tax they pay. Tax makes us count.

Tax redistributes income and wealth, making the UK a fairer place. All evidence says increased equality improves life quality, for everyone.

Tax can be used to reprice goods and services we don’t like. Like pollution & tobacco. And subsidise the things we need, like food & health.

What’s tax for? Raising money, of course. But it’s so much more than that. Tax is the most powerful tool we have to change our economy.

3 Oct 2012

Business Debt, the Media, and the need for a debt jubilee.

One of my personal aphorisms is that media is all about entertainment. Forget about their pretensions to educate and inform, because they'll always be secondary to titillation and diversion. I got a smile out of page one of the Business section of the 30.09.12 Sunday Times. (no links because of the pay wall).

Centre left, with a large bold heading

FSA calls banks' bluff on lending 
- byline Dominic O'Connell.

The Financial Services Authority and the government are desperate to get banks lending more to the real economy. At present banks mainly lend for gambling on financial instruments, and just 10% of loans go to the real economy. And one of the obvious consequences is that business investment is well below what's required for GDP growth. And everything in mainstream economics is predicated on growth. Government, including LibDem Business Secretary, Vince Cable, are using carrot and stick to get the banks to lend. But banks have sobered up now.

Below this, at bottom left is another story:

HSBC forced to rescue rubbish collector Biffa from scrapheap 
- byline Ben Marlow.

In this story we learn that Biffa, like Travelodge, was subject to massive debts. Biffa was bought outright and taken off the stock market in 2008 in a deal financed by £1.1 billion of borrowing. Note that this is after the Credit Crunch began. And note that it was Biffa itself that was left paying the interest on the loans that the buyers took out. The interest burden has, as in the case of Travelodge, driven the company into insolvency. The Times reports this thus:
"Like many private equity deals during the credit boom, Biffa took on more debt than it could bear. Profits were wiped out by large interest payments while debts stayed the same."
After, Ben, it was after the Credit Crunch began. And Biffa did not "take on debt" the idiots who bought the company took on the debt and somehow (no one has yet been able to explain this to me), somehow the company itself ending up paying off the debts of these idiots.  The total value of stock was £1.7 and they borrowed 65% of this. Another going concern wrecked.

The Sunday Times mentions my favourite example Travelodge, and adds Fitness First and EMI as victims of this bizarre practice.

As I pointed out in my last post, the level of debt in the UK is massive. Various measures are hard to put in context. Collectively we owe 4.5 time the total output of the UK. Collectively we owe 135% of the total net worth of the country. Collective we each owe about £120,000. A lot of it is down to these 'private equity deals'. The word equity seems strangely misplaced in that sentence, doesn't it?

And the government and the FSA see the only way forward as being to squeeze even more debt into UK plc? Even the greedy banks who, stripped of any over-sight and rules, created this problem by blithely creating such massive amounts of debt in the first place, even these fat cats can see that it's a problem. The UK is massively over-indebted and the interest payments are killing demand.

Meanwhile the banks are happy to use interest rates of 0.5% to refinance all their loans and improve their own situation viz interest payments. But they must be worried as these insolvency cases increase - the number of business insolvencies is on the rise, because banks' cashflow is dependent on solvent debtors.

The last little tidbit in the first story is this:
"Regulators have made several, but largely unreported, changes to the rules on capital reserves and liquidity buffers."
At first sight this looks like good news. But then as you read on you realise that for every measure to force the banks to behave more responsibility, the panic induced by the prolonged recession, has led the FSA to build in loopholes that banks can easily exploit to get around any restrictions. It's business as usual but with spin to make it look like things are changing.

The quandary is this. In a prolonged recession caused by too much debt, we need the banks to be restrained in creating more debt. Even the FSA seem to dimly understand this. But they also fervently believe that the only way to produce growth is for the banks to lend even more money (hopefully to different people and businesses). But more debt will only make the problem worse because the burden of interest payments will magnify the problems we have.

Vince Cable wants to get around this by creating a large Bank of Dave - that lends to business. But instead of using savings, he's going to borrow the money to do it. So he's not going to be paying 5% on savings, even if the government can borrow at almost zero interest at the moment.

I'm obviously in favour of a debt jubilee. However it's never made more sense than it does right now. In the Modern Debt Jubilee the government uses quantitative easing to give money to people, with the proviso that the money must be used to pay off debt before spending (this helps to ensure that the money goes to the right place, and makes it fairer on the prudent who have saved money). Their are 50 million adults in the UK. I think the government should every adult  £10,000. That's £500 billion or a little more than QE to date.

Personal indebtedness drops dramatically. This means people spend more. A lot of those 50 million spend everything they earn, and they're likely to spend all of the £10k. Business picks up because demand picks up, and interest payments become affordable again. Government tax revenue picks up, which is the only way they're going to deal with the deficit.

The downside is that banks experience a precipitous drop in income. Maybe some would become insolvent. This time we let them and distribute their assets into smaller banks. This helps to break up the monopoly of the big banks. The first thing that creditors have to do when a company goes bust and they take control of it, is to forgive a big chunk of debt (40% for Travelodge).

However this is a relatively short-term solution. It solves out immediate problem. But it's going to happen again. We need to think about the longer term. We need to have a wider discussion of concepts like steady state economics in which growth is not the imperative. We have to ask ourselves whether endless consumption of shit we don't need is really what life is all about.

1 Oct 2012

Debt & asset/debt ratios 2010

I've been having an extended Twitter debate with a Gordon Brown  acolyte. This person started off by referring to me as an ignoramus in that wonderfully oblique way that the English have of insulting someone. But a few figures have emerged from this that I'll spell out here.

According to government figures private debt peaked in Q1 of 2010 at 475% of GDP.

At the time GDP was about £1500 billion so total debt was £7125 billion.

2010 Networth was is ~ £6000 billion, but government indebtedness reduces this by ~ £600 billion. So our actual net worth is £5200 billion. (ONS Figures)

2010 debt/asset ratio is £7125 bn/£5200bn = 135%

That is to say that in 2010 our borrowing totalled 135% of our assets. The UK was 135% mortgaged. This is known as highly leveraged.

Back in 1990 UK private debt was just ~ 180% of GDP (this is still higher than the peak of the Great Depression in the USA). GDP then was £570 billion so debt was £1026 billion. Total net worth was about £2500 billion. So in 1990 asset/debt ratio was about 55%.

Over the 20 years from 1990 - 2010 GDP increased by about 260%; net worth increased by about 210%; while debt increased by about 700%. This is the legacy of the Blair Government with Brown as Chancellor, and the Brown Govt with Darling as Chancellor. The succumbed to lobbyists from the finance and business sectors who were given free range to mortgage the entire country. Our debts are now about £7 trillion and goodness only knows what the interest payments are on that! But if Travelodge is anything to go by then the interest is about £1.4 trillion or about 90% of GDP.

Is anyone still surprised that we have low demand?

20 Sep 2012

Commercial activity contracts in all nine monitored sectors

Last week John Major, former PM, was saying he could see green shoots.

Meanwhile Markit Economics says in a 12 Sept press-release "Commercial activity contracts in all nine monitored sectors". Note that this is a survey rather than a forecast so is less likely to be bullshit, though their methodology and error rates are still entirely obscured.

Meanwhile in Europe “The Eurozone downturn gathered further momentum in September, suggesting that the region suffered the worst quarter for three years.

You have to ask what the fuck Major had been smoking - or why anyone is interested in what he has to say anyway (I think he has a new agent because he's been popping up quite a lot lately).

14 Sep 2012

Tony Blair for hire to Central Asian dictatorships

Buckraking Around the World with Tony Blair
- article in The New republic.

Some choice quotes:

"Last year, former British Prime Minister Tony Blair appeared in a dreary neo-Stalinist propaganda video produced by a Kazakh TV station..."

"But for the pious, moralistic leader who wagered his career on bringing down Saddam Hussein through a war he portrayed as a humanitarian imperative, the contrast with his public sector service is striking."

"Meanwhile, Blair has set up a complex, deliberately opaque corporate structure that makes it impossible to know how much money he is making."

"Blair’s transformation into a human cash register has outraged many in Britain, and he continues to collect a pension and benefits that cost taxpayers more than $250,000 per year."

Bombs Away

Guided missiles, but misguided leaders.

Remote controlled drones versus leaders who are remote, out of control drones.

Smart Bombs and dumb leaders.

Any others?

3 Sep 2012

Austerity? What Austerity?

Scott's been saying in comments that "there is no austerity". What do the figures look like? This the graph produced by publicspending.co.uk with the treasury estimate for 2012 (which the government are likely to overshoot).

A rise of £6.63 billion, 
from £681.33 billion to £687.96 billion

 Clearly the rate of increase in spending has slowed, but the total of government spending has continued to increase. So in a sense Scott is right - there is no austerity. In terms of a percentage of GDP total government spending will drop from 45.13% to 44.11% a drop of 1.2%. However we know that the government are likely to overshoot and so it's likely that even in %GDP terms the government will have spent more.

But some sectors have had real cuts. Comparing the 2011 figures with the OBR projections for 2012 (which are unlikely to be very accurate, but are all we have to go on at present).

A cut of £140 million.

A drop of about £20 million 
which is much less than 1%.

A drop of £1.6 billion

Up, then down, and now on the way up again

By Contrast some departments have seen massive increases:

Interest payments spiked in 2011 and continue to rise, 
though we're supposed to have low interest rates

Spending on defence is expected to increase by £170 million; 
but welfare by £2.4 billion, and pensions by £7.8 billion.

The increase in spending is clearly being drive by increases in welfare and pensions from this point of view. Though the IMF points to a drop in government revenue as the primary driver of increased borrowing overall.

Consider that older people are more likely to vote, and tend to vote Conservative. Cutting pensions would be a disaster for a Conservative government. And consider that the government have spent a huge, but undisclosed, amount on anti-welfare propaganda since taking office, and have made every effort to popularise the idea of welfare as payments to the unworthy.

Since they cast the main economic problem as one of too much government debt, this has made welfare cuts a popular policy. This has allowed government to attack people on out of work, illness and disability payments. And note that unemployment is 8% so a lot of people are out of work. Seen in this light the government scramble to cut welfare, thereby placing a heavier burden on the poor and disadvantaged makes good political sense - it not only protects Tory voters, but appeals to Tory moral arguments about the undeserving poor. They may be economic morons, but they have political cunning.

Meanwhile the country is slowly going downhill. The latest reports suggests that removing more regulations (i.e. protections from rapacious business) is the way to prosperity. The trend is to maximise regulations for people and minimise regulations for business. And I can't help thinking that the equation can not add up to anything very prosperous or happy for the masses.

29 Aug 2012

Keynes Quotes

I follow Stephanie Kelton @deficitowl on Twitter. Lately she posted a series of quotes from Keynes. I liked them very much so here they are with only minimal editing:
"employment...depends on the amount of the proceeds which the entrepreneurs expect to receive.." -JM Keynes. (Expected) Sales create Jobs.

The notion that "supply creates its own demand..still underlies the whole classical theory, which would collapse without it." -JM Keynes

1936 Keynes complained that classical econ treated money as something that could be "introduced perfunctorily in a later chapter" Still does

"workers..are instinctively more reasonable economists than the classical school [b/c] they resist reductions of money-wages.." JM Keynes

"Never in history was there a method devised..for setting each country's advantage at variance with its neighbors' as the inter'l gold std"

Gold bugs champion gold's "inelasticity of supply", but that that is "precisely the characteristic..at the bottom of the trouble" -JM Keynes

"gold-mining is the only pretext for digging holes in the ground which has recommended itself to bankers as sound finance" - JM Keynes, 1936

"It would..be more sensible to build houses and the like; but if there r political..difficulties in the way..[bottles] better than nothing"

"If the Treasury were to fill old bottles with banknotes, bury them..and leave it to private enterprise..to dig [them] up there need be no more unemployment" -JM Keynes

"..digging holes in the ground known as gold-mining..adds nothing whatever to the real wealth of the world.." -JM Keynes

"..the deep divergences of opinion b/w fellow economists..have almost destroyed the practical influence of economic theory.."JM Keynes, 1936

27 Aug 2012

Delusional economics and the economic consequences of Mr Osborne

New Talk From Ann Pettifor

This is a very good summary of what's going wrong from a Keynesian point of view. AP has in common with other commentators who warned of crisis the idea that the problem is private debt, which in turn is a consequence of deregulation.

AP kind of skips over things, and I'd like to see the same talk but with more time.

25 Aug 2012

Error in GDP Numbers is Obscured by the ONS

It's really rather difficult to find information on the statistical errors in GDP figures released by the Office for National Statistics (ONS). Today's release for instance gives no direct information, but only refers the reader to another document: Quality and Methodology Information for Gross Domestic Product. It says:
Validation and quality assurance
The degree of closeness between an estimate and the true value.
There is no simple way of measuring the accuracy of GDP, that is, the extent to which the estimate measures the underlying ‘true’ value of GDP in the UK for a particular period. Blue Book 1 2008 (pp 27-30) provides more information on this.
One dimension of measuring accuracy is reliability, which is measured using evidence from analyses of revisions to assess the closeness of early estimates to subsequently estimated values. The results of revisions analysis are regularly presented in the background notes of GDP Statistical Bulletins and revisions spreadsheets containing the data behind this.

The QMI:GDP document doesn't discuss error generally but does give figures for the revisions. They say that the total revisions are not statistically different from zero for 2011. This might be difficult to accept for those of us used to non-zero revisions, such as the revision from -0.7% to -0.5% for Q2 2012; which is very far from being zero! Indeed in recent years the revisions between the first and the current estimates have been very much non-zero and increasingly volatile. The graph below shows the difference in percentage points per quarter from Q1 1997 to Q2 2012 (not including the most recent revision).

However this document does lead to a third document Accuracy Assessment of National Accounts Statistics (2002). The author of this paper doesn't really come out and say what the margin of error is, but does discuss sources of error and gives some indication of the magnitude of errors. This is partly due to the complexity of the calculation. But let's recall that when we add to uncertain figures the margin of errors are added together as well.

GDP is calculated in different ways and, as best as I can tell from these obscure documents this leads to an error of between 1.5% and 3.5% depending on the method. However this is far from being clear, and the way the figures are stated seems designed to hedge and fudge.

Contrarily we have the document Understanding the quality of early estimates of Gross Domestic Product. This document estimates the change in the estimates of GDP to average around 0.05 percentage points. But of course the data for this claim are in a separate document! The graphs are presented so as to obscure any differences between first estimates and subsequent estimates - which seems to be what this one is about, rather than error margins generally. The conclusion here is that the
"since the mid-1990s, revisions have been smaller than in previous periods. Over maturities up to T+24 [months], when most of the non-methodological changes will have been taken on board, the average revision is only +0.05 percentage points."
However in the graph I show above the average may be 0.05 percentage points but the standard deviation must be large because changes of 1 percentage per quarter (which could be 4 points over a year) are not uncommon.

As far as I can work out--though I have hardly exhausted all of the many OND documents available--the ONS do not supply error margins with their GDP figures.They do supply information on the differences between first estimates and later estimates.

Why Is It So Hard Get a Straight Answer About the Margin of Error?

Flying in the face of all good practice when dealing with statistics, the figures produced are treated as absolute. Not only the media (who probably can't be expected to know better), but the ONS themselves skate over the issue of statistical errors. It is reprehensible of ONS not to indicate the level of confidence they have in these figures at every point. No figure should be quoted without an indication at least of the calculated margin of error.

What this pattern of interlocking documents reminds me of is ISO9000 Quality Control documentation of a process. This in no way defines the quality of the product, but only provides for the process to happen the same each time. That is it guarantees that reports will be produced with figures in them, and the figures will be produced by the same method, but in fact says nothing at all about the quality of those figures.

The GDP guestimate we get from the ONS have a built in margin of error. It's unlikely to be small since it involves compounding errors from a series of other statistical measures. A lot rides on small changes in GDP, but the irony is that the smaller the change the less confidence we can have that it isn't just a statistical blip. 

21 Aug 2012

Putting the Cart Before the Horse

The use of Game Theory in economics have become quite fashionable. Game theory seems to offer an alternative to the Utilitarian ideas that came to nought with the discovery that aggregate demand doesn't follow the Law of Demand.

In particular the theories of John Nash became popular. Nash devised a series of game scenarios in which theoretically rational participants interacted in idea ways. It's thought that this branch of mathematics shows what ideal rational behaviour would look like and has thus been interesting to economists.

But it's all a farce. Human beings are not rational choice making machines. We make decisions using our emotional responses to situations and events. I've written about this elsewhere (Facts and Feelings) based on Antonio Demasio's book Descartes' Error. While no economist seems to be ready to take this on, the advertising profession has increasingly shown sensitivity to this fact in the design of advertising campaigns. Remember when cars were sold on the basis of engine size, fuel efficiency, or special features like limited slip differentials? None of that is relevant any more. Car ads speak directly to our emotions now, bypassing the rational completely: BMW sells "joy".

I wanted to learn a little more about Nash so I checked out a paper supposed to be a 'Classic' hosted on the website of the Proceedings of the National Academy of Sciences of the United States of America (PNAS).

An economist called Robert Weber is cited in this classic: "Nash's theory of noncooperative games should now be recognized as one of the outstanding intellectual advances of the twentieth century" but elsewhere we find it said:
The Nash equilibrium concept does not necessarily predict how people will behave in the real world. Rather, it provides a measure for how purely rational people might behave.

"The Nash equilibrium tells us what we might expect to see in a world where no one does anything wrong," Weber says. 
In fact the Nash equilibrium does not predict how people will behave in the real world except by accident. It creates a particular kind of fantasy about a "rational person". The definition of "rational" is left aside. We know the old Utilitarian definition of rationality as maximising one's own pleasure without regard for other people. This is seen as "rational" because of the conceits of a few Victorian English gentlemen. In fact if we met someone like this we would think they were crazy, a sociopath if not a psychopath.

In Nash's model humans were inherently suspicious of each other, selfish and constantly struggled with other people as competitors. And Nash did actually succumb to paranoid schizophrenia not long after he published these results. "Rational" in other words means inhuman or insane in these models!

But these people are so convinced that their worldview is Truth in an absolute sense that they put the cart before the horse and say things like:
"In some settings, people routinely deviate from the kind of behavior the Nash equilibrium predicts," Weber says. "These deviations have led to the discovery of pervasive psychological phenomena that pull people away from rational behavior." 
The assumption here is that the weird definition of reality included in Nash's models is normal, and that ordinary human beings deviate from that norm. Here I think we have to conclude that Weber is also a lunatic. Human beings have never conformed to the norms that Utilitarianism or Game Theory have sought to impose on them. To turn around and suggest that human beings are deviant for not following the models is madness. I can think of no other discipline which constructs arbitrary models in the abstract and then criticises phenomena which fail to conform.

Economists try to make people fit their theories, whereas scientists make their theories fit people. And this is fundamentally wrong. In grasping simple theories that give consistent answers, economists typically ignore the disconnect from the real world - the make a series of unwarranted assumptions that hide the implausibility of the theory.

And indeed Nash himself admits that his assumptions about people do not stand up to scrutiny in an interview with Adam Curtis for his film "The Trap".

The Economist anticipated some of my criticisms in 1998 - they say that a. people don't understand how economist use words like rational; and b. "rationality has proved a useful [simplification]." I think I do understand how they are defining rational and my point is that they define it in a way that is aberrant.

I'd have liked them to define "useful" since their models seem to be bloody useless at predicting the economy at present - we keep getting "shock" deviations from predictions these days. These "useful" models failed to predict one of the greatest perturbations of the economy since records began. The failure is on a scale that would render the theory irrelevant in any other discipline. It would be like suddenly observing anti-gravity, or neutrinos that really did travel faster than light. Such a result should signal the end of the old order, and an exciting race to provide the new more complete and accurate paradigm - in economics there are many contenders.

20 Aug 2012

Savings, Debt and the Deficit

Edward Harrison, of the Credit Writedowns blog, makes a very good point in these two blog posts
The first has given me much food for thought and I think will continue to do so. He says that the approach he takes here is "an Austrian-styled interpretation of the origins of the crisis", but it's pretty consistent with what the Post-Keynesians are saying too. The guts of it is this:
"When the government sector runs a deficit, the non-government sector runs a surplus of equivalent size.
The government budget cannot be seen in isolation. It must be seen in the light of private and trade sector balances. If the government runs a deficit or a surplus then we need to think about how that impacts the rest of the economy. At the end of the day the books have to balance. Someone's debt is someone else's asset.

I'd interject here to emphasise that a build up of debt is not neutral - Harrison seems to understand this but it doesn't yet feature strongly in public discourse so I feel I need to keep saying it.

It took me a while to get this, and this is where the Chart of the Day post comes in because it shows the relationship between public sector spending and private sector savings in the Eurozone (the chart is already 3rd hand).

I've looked up the UK savings ratio which is a similar shape:

Source ONS

Savings gradually fell throughout the 1990s and up to beginning of the Great Recession. Savings shot up in 2008 and have been gradually, but not smoothly, falling since 2010. Of course the expectation was that the recession would not last. Austerity measures and inflation, and particularly the very low (below inflation) returns seem to account for the decline in saving, but note that it does not seem to be going into spending - presumably it is going into debt repayments.

In June the Guardian was commenting: "The amount people are saving has increased at the expense of reducing debt levels, with consumers paying back 7p for every pound saved during the first three months of 2011." By July the it was opposite story "Savings fall as Austerity Squeezes Household Budgets."

So, according to Harrison, we can conceive the present problem this way:
The non-government surplus is too large, we need to reduce it now before it gets out of control.
"What we want to do is target the cause of the deficits, insufficient demand which I believe is the result of the overhang of debt after a period of excess private sector credit growth. What you want to do is eliminate that debt overhang by reducing the debt or increasing private sector incomes to support the debt. That’s getting at root causes."
This seems consistent with what others are saying, though not of course in the government or the Bank of England! Harrison does not give his preferred solution to this problem. Mine would be direct debt relief in the form of SK's modern debt jubilee. Other options would be to use QE to directly fund investment in business. An alternate take on this is to specifically fund green business that will lessen our dependence on oil.

Debunking Economics IV: Aggregate Demand

In a previous post I worked through the ideas contained in the first part of chapter 3 of Steve Keen's book Debunking Economics outlining the so-called Law of Demand. This is not an empirical law such as Newton's Laws of Motion, or the Laws of Thermodynamics. That is to say it's not an attempt to explain the real world based on measurement. The Law of Demand is an attempt to create a mathematical model of theory about how the world works which is based on the 19th century Utilitarian philosophy of Jeremy Bentham. As it happens the Law of Demand works OK for one consumer consuming one product.

However as early as 1953 it became apparent that the Law of Demand as stated does not apply to two or more consumers. The first mathematical proof was by a chap called William Moore "Terence" Gorman (wiki) in this journal article:
Gorman, W. M. (1953) 'Community preference fields,' Econometrica, 21(1):63-80. JSTOR.
The abstract of this paper is visible even though the article itself is behind a paywall or tucked away in a university library. What it says is this:
A series of formal relationships between community indifference maps and the utility possibility maps are stated and it is proved that a given system of personal indifference maps yield a unique community indifference map if, and only if, the personal Engel curves are parallel straight lines for different individuals at the same prices. [emphasis in the original]
What Steve Keen does is decode this - he's not saying anything new here, he's just pointing out what was said in 1953 and drawing out the most obvious implications. Having reviewed his chapter to date I can see the obvious implications of this too - and I have zero background in economics.

I covered Engel curves in part II. These are the curves that are constructed by tracing the points of intersection with various individual indifference curves in the indifference map for one commodity vs all other commodities at different levels of income. Engel curves tell us predict how much of a commodity an individual will purchase at any given income level.

Now SK points out that at zero income the consumer will spend zero dollars on zero of all commodities. So all Engel curves pass through the origin (i.e. through the point where the axes of the graph intersect). He further points out that if two lines which share at least one point (in this case the origin) are parallel lines, then they share all their points, they are in fact the same line. So the upshot of Gorman's mathematical proof is that you can only construct what he calls a community indifference map and we are calling an aggregate indifference map if and only if, all consumers are identical.

And recall that the demand curve is constructed from the indifference map at fixed income and fixed price. So what Gorman is saying is that it is only possible for the Law of Demand to apply to aggregate demand curves if, and only if, all the individual demand curves are identical. As Steve Keen says quite often: "you couldn't make it up!" Just to drive the point home let's say it another way the Law of Demand does not hold for the real world if you have more than one consumer.

Something less obvious from the abstract is that the Engel curves have to be a straight line. The implications of this is that the share of the consumers income spent on commodities remains the same no matter what their income - i.e. that all commodities must be homothetic. This means that a if person earning £10k pounds spends £1k, then a person earning £10 million pounds would spend £1 million, and a person earning £10 billion pounds would spend £1 billion pounds. There is no such commodity in existence. The only condition in which this is true is if there is only one commodity and all consumers spend 100% of their income on it.

But economists have accepted these conditions as valid and proceed to use "aggregate" demand curves. Gorman himself concluded "The necessary and sufficient condition quoted above is intuitively reasonable". (quoted in Debunking Economics p.56) And it seems that those who bothered to read Gorman agree with him that it was "intuitively reasonable" to treat the economy as having a single consumer and a single commodity. And indeed today mainstream economists agree at some point in their careers to pretend that there is only one consumer, and that there is only one product in the economy.

You'd have to be a moron wouldn't you? You start to see why Steve Keen is sardonic, and why economists have screwed things up so badly.

But to be fair quite a bit of the remainder of the chapter deals with how textbooks hide this remarkable proof that the Law of Demand is simply false, and how economists gradually have had the wool pulled over their eyes as they go along.

With an education in science we're presented with simplistic models at first. Then at each stage we go back and examine the weaknesses in those models, and either introduce more sophisticated models or completely new models. From age 13 to age 21 I followed the progress of the history of chemistry from the 19th century up to the present. It seems that in economics one takes all the assumptions economists make as read, and at each stage one incorporates simplifying assumptions as one goes. As I progressed in chemistry I gained an increasing sophisticated knowledge of the subject so that at the end I was able to synthesise complex molecules and understand the process from first principles; and I was able to take an unidentified white powder and determine it's chemical structure. The economist however moves gradually away from the real world and becomes an expert on the model. And almost exactly five years ago we saw the biggest economic crisis in modern times hit virtually every country in the world all at once, and none of the mainstream saw it coming. Indeed they claim no one could have. No one, that is, who was using their economic ideas and models. Other economists did. Quite a few non-economists also saw trouble brewing. The fault lies in the models!

Since Gorman himself failed to grasp the import of his own discovery, and since few economists were numerate enough to understand Gorman's paper the result made little impact. It was rediscovered independently however in the 1970's by three researchers and the conditions of Engel curves being straight and parallel are known as the Sonneschein-Mantel-Debreu (SMD) conditions. However even these economists failed to grasp the implications for the Law of Demand, and since their writing and their mathematics was even more abstruse than Gorman's it seems as though very few economists have even heard of the SMD conditions.

The key papers are:
  • Debreu, G. (1974) 'Excess demand functions,' Journal of Mathematical Economics. 1(1): 15-21. doi:10.1016/0304-4068(74)90032-9.
  • Mantel, R. (1974). "On the characterization of aggregate excess demand". Journal of Economic Theory 7 (3): 348–353. doi:10.1016/0022-0531(74)90100-8
  • Sonnenschein, Hugo. (1972) 'Market Excess Demand Functions.' Econometrica 40 (3): 549-563. JSTOR.

A nice result that falls out of their work is the statement that an aggregate demand curve can be any shape that can be described by a polynomial - any curvy line with one y value for every x value. For any given price there is not one level of demand, but arbitrarily many.

SK argues that this result completely invalidates Neo-classical economics with it's assumption of equilibrium (we'll get this to) because it requires a single intersection of supply curve with demand curve, and this can only happen when we assume there is a single consumer and a single product.  The assumption of the standardised individual making rational choices is just wrong, but when we attempt to aggregate the behaviour of such theoretical individuals the model goes awry.


Just this result would seem to be a death blow to Neo-classical economics. The theory simply doesn't produce realistic or sensible results, largely because the accumulation of the simplifying (often over-simplifying) assumptions it makes result in unrealistic distortions. But Neo-classical economists have pushed on. S. Abu Turab Rizvi notes:
As the results in SMD theory became well known, for example through Wayne Shafer and Hugo Sonnenschein’s survey (1982), economists began to question the centrality of general equilibrium theory and put forward alternatives to it. Thus in the ten years following the Shafer-Sonnenschein survey, we find a number of new directions in economic theory. It was around this time that rational-choice game theory methods came to be adopted throughout the profession, and they represented a thoroughgoing change in the mode of economic theory. (p.230)

Rizvi. S. Abu Turab . (2006) 'The Sonnenschein-Mantel-Debreu Results after Thirty Years,' History of Political Economy 38 (annual suppl.). doi 10.1215/00182702-2005-024 [pdf]
Now this is interesting because the introduction of game theory, particularly the theories developed by mathematician John Nash feature in Adam Curtis's 2007 documentary The Trap which I discussed in an earlier post. While John Nash is now recovered, at the time he was developing these theories he suffered from paranoid schizophrenia, and it's arguable that the theories reflect this. Indeed Nash in an interview with Curtis admits that the individuals he modelled were not at all like real people. They're like the ideal rational Victorian gentlemen envisaged by the Utilitarians, but utterly selfish and, well, paranoid. These ideas expressed in economic terms began to influence politicians like Margaret Thatcher and Ronald Reagan. A prominent proponent of game theory called Alain Enthoven, who envisaged the "body count" as a way to measure the efficiency of the Vietnam War, was called into the UK in 1984 to restructure the NHS.

I think this illustrates the danger we face. Economic theory is divorced to a large extent from inputs from the real world. The model is all. It takes real world data and interprets it according to this distorted view, and then creates policy by which we order the world. In doing so it appears to strive towards transforming the world to become more like the model, not the other way around.

Another result of the SMD conditions has been the development of Behavioural Economics, but I have not yet looked into this.

There's a lot more material towards the end of the chapter, that I haven't covered here. It's worth reading through but I think most of it is of less general interest - I'm trying to get my head around the basics. Next we'll move on to looking at the other half of the 'iconic supply and demand model' - and since the first section is headed "Why there is no supply curve" I think we can expect a polemical treat.

19 Aug 2012

The Follies of Forecasting

A broad based recovery started in end–2009, but faces significant headwinds during 2011, which can be mitigated by monetary policy remaining supportive. The planned fiscal consolidation is needed to ensure that the fiscal position will be sustainable over time. Nonetheless, it adds to the headwinds from weak real income growth and a fading rebound in global trade. Monetary policy should hence remain expansionary, even if headline inflation is significantly above target, to support the recovery. OECD Report Mar 2011.

The Organisation of Economic Co-operation and Development according to their website the mission of the OECD is "to promote policies that will improve the economic and social well-being of people around the world." No doubt they are sincere in this. But look at what they were saying about the UK in 2011:
  • broad based recovery
  • "headwinds" can be mitigated by monetary policy
  • fiscal consolidation (i.e. cuts in public spending) needed to ensure sustainability

The recovery turned out to be a mirage. Far from being "broad based" the emergence from technical recession was tentative and weak, and now we are back in technical recession with shrinking GDP and declining production. This week we learned that employers have been putting off redundancies so unemployment is likely to rise sharply within a year.

The "headwinds" can not, apparently, be mitigated by monetary policy (low inflation rates & quantitative easing). The base interest rate has been 0.5% for two years now and the best we can say is that it's helping to prevent runaway inflation, but it has not lead to more investment in the real economy. Instead actual lending interest rates remain high due to the high risk, and the amount of lending has stagnated.

If anything fiscal consolidation has stymied demand and growth and is extending the recession.

Here is the graph accompanying the statement, covering the period 2000-2011 (GDP is indexed to 2007)

This is the graph of key indicators that accompanies the statement. It show GDP on a downward trend after a bounce which is not in fact a broad based recovery at all. It shows that the UK's GDP has consistently been at the bottom of the OEDC range. It shows that unemployment is high and possible trending down - though as I say we heard this week that employees have been delaying redundancies, so the downward trend is not going to continue. The graph shows that inflation is very volatile, but with an upward trend and with the base rate at 0.5% there is little the Bank of England can do to help, especially as their QE is a source of inflation. The present downward trend is unlikely to be sustained.

The OECD's most recent forecast is May 2012
The global economic slowdown and uncertainties in the euro area outlook, alongside fiscal retrenchment and private deleveraging, are generating headwinds to growth. Growth will remain weak in the first half of 2012, but should gain momentum thereafter, with private consumption supported by higher real incomes, as inflation slows, and exports and business investment revive with stronger external demand. Unemployment will continue to rise over the projection period, due to job cuts in public administration and weak output growth.

Budget deficit reduction remains on target, fostering fiscal policy credibility and leaving room to let the automatic stabilisers work. Structural reforms to promote fiscal sustainability, strengthen the financial sector and improve educational outcomes should help the necessary rebalancing of the economy from debt-financed private consumption and public spending to exports and investment. OECD.

Note that at least the OECD include private sector deleveraging as a cause of slow grow.  Nothing to be done about it though apparently.

My Non-professional Forecast

GDP shrank in H1 2012, and looks likely to shrink again in 2012, probably by about the same amount to give us -2% for the year. It might actually pick up but over the next 10 year at least nett growth will be zero. Both construction and exports are slowing and there is continuing lack of investment funding. Our markets are suffering the same problems that we are! Private sector deleveraging has only just begun, and won't make much difference for some years to come. Business insolvencies are beginning to rise again as the recession drags on and begins to make inroads into marginally profitable businesses - compare my comments on Travelodge.

So where is the growth going to come from? Burnley Savings & Loans? Answer: it isn't going to come

Unemployment is not rising as predicted, as employers unexpectedly hold back on redundancies, but it will rise sharply when employers finally realise that the recession is going to go on. At some point people will realise that the DWP are shuffling people between categories so many of the people who ought to be counted as unemployed are in government "work schemes" and the like - not sure why they hide this New Deal style policy as creating government funded jobs worked so well for the USA in the Great Depression.

Budget deficit reduction is actually far below the Osborne plan and looks more like the Darling plan (according to my MP). Budget deficit reduction received a blow as the trade deficit ballooned in H1. Also as revenues fell more borrowing was required to sustain even the reduced level of spending - this pattern carries with it a danger of becoming a vicious circle especially as the government seems to be deaf to any suggestion that they're going too fast.

Finally the government will fail to implement any major structural reforms in the finance sector. Their in-house review will grab headlines but not make the kind of changes that would protect us from parasitic financial practices. There will be some public displays of contrition from bankers, and perhaps a few high profile resignations (with full bonuses), and mean it will be business as usual. At best the government will implement the Vicker's Report ring-fencing which will protect savings (but not pension funds) and allow casino banking to carry on unhindered so that it can cause yet another debt bubble and collapse in the near future.

The Euro-zone can't hold, and Greece, Italy, Spain and probably Ireland will need to leave it. They're mad if they don't as it's destroying their economies. Even if Germany offers to take on their debts, they need to have a weaker currency to begin to rebalance their economies. Germany and France will take other countries with them, but with more stringent rules on budgets which Germany will eventually control (not that they were fiscally responsible according to the Maastrich Treaty).

OK. Let's come back to this early next year and compare my predictions to the OECDs.

18 Aug 2012

Travelodge Goes to Creditors

A couple of days ago I mentioned that Travelodge seemed to typify the problems with the UK economy. I also mentioned that Travelodge was a profitable company which saw a 16% increase in profit last year.

Travelodge was bought out in a highly leveraged deal in 2006. Dubai International Capital (aptly acronymed DIC). Though DIC borrowed the money, Travelodge got saddled with the debt - if anyone can explain that to me I'd be happy to hear from you. DIC borrowed £478 million. The result is that Travelodge pays £100 million per year in interest payments.

Now we find that Travelodge has been handed over to it's creditors: Goldman Sachs and two hedge Funds. Once again we find that banks have loaned a stupid amount of money and have wrecked a perfectly good company in the process.

The creditors are writing off 40% (£235 million) of the debt. This is an important fact. As Steve Keen has said, we just have to decide how not to pay back these debts. This is what needs to happen much more broadly - debt write off, the modern debt jubilee.

17 Aug 2012

Past, Present and Future of GDP Growth in the UK.

This post was inspired by one by Mark Thomas: Does This Ease Your Worries?: US GDP from 1870-2008 where he shows that USA is getting back on trend for GDP growth. In the UK things look very different and so no, it doesn't ease my worries.

The Guardian conveniently provide a spread sheet of all the GDP figures from 1955--Q2 2012. Below is a plain graph of quarterly GDP figures with an exponential trend line courtesy of Excel.

What the graph shows however is that the trend overall is exponential growth - a shallow exponential curve, but with an R2 value of 0.9917 the fit of the line is very good. There were ups and downs but basically we got back to trend until the global economic crisis. If we graph from 1955-1997 an exponential line is still the best fit, though the R2 value is less at 0.9873.

Thatcher (1979-1990) inherited a recession and a period of below trend growth from Callaghan (1976-79) though the problem probably dates from earlier - witness the hiccough in 1973 that was followed by several years of stagnation. When Thatcher handed on to Major (1990-1997) things were picking up, but recession and below trend growth followed. And as Blair took over in 1997 growth had  returned to trend and growth was about 1% per quarter. It had been a turbulent few years since the early seventies and the collapse of the Gold Standard, the end of the Bretton Woods agreement, and the UK's Competition & Credit Control Act. Now things seemed to be looking up.

After 1997 growth in GDP began to accelerate, rising above trend at an increasing rate. However growth in this period is more accurately described as linear (R2 = 0.9974) rather than exponential (R2 = 0.9965). Clearly we got a long way ahead of the trend of the previous 43 years, further ahead than any previous period. This was Gordon Brown's economic miracle.

In fact the period of above trend growth (1997-2008) is the debt bubble caused by New Labour's deregulation of the finance industry. It caused a sustained period of GDP growth which Gordon Brown called "the end of boom and bust". It was part of a global phenomenon. In the USA they called it "the Great Moderation".

However in 2008 it all came tumbling down.

With GDP still shrinking we are unlikely to ever get back to the pre-crash trend. Having risen about 6% or £25 billion above the trend by 2008, today, four years later we are about 12% or £47 billion below trend (and remembering that these are quarterly figures). In pre-1997 terms we've lost 35 quarters or nearly 9 years of growth and counting.

I actually lean to the left in politics and I think the present Chancellor is a moron. His legacy will be the extension of the worst recession in modern times as the graph from the NYT shows. The UK has been mismanaged. The USA is about to head back down unfortunately and German is likely to be devastated by the breakup of the Euro if they don't act soon. That said our part in the global financial crisis was facilitated by the New Labour government with Gordon Brown as chancellor. He didn't end boom and bust, he increased it by an order of magnitude!

There are a couple of key differences between the USA and UK trends. In the UK we had no great perturbation of GDP in the Great Depression. For the UK the post-World War One recession was much worse. And whereas we see in the graph above the USA returning to growth, albeit possibly weakening, in the UK we started up and faltered. We're now so far off trend that we probably will never get back.

When economists say that this recession is different they do mean that it is both qualitatively and quantitatively different. What is happening now is unique in the post-War period and we're unlikely ever to make up those nine years. In previous recessions the economy has always bounced back and got back on track. Not this time.

Below is Japan's GDP Curve (from http://professorpinch.wordpress.com/).

This is going to be the shape our the UK's GDP curve now. Basically an extended period of stagnation at best. All those predictions of a return to growth? Just forget it. The game has changed. And the difference is levels of private debt.The USA and Germany are further ahead because they have half the level of private debt that the UK has.

In political terms I don't see anyone really getting to grips with this, so we'll just have to ride it out. A lots decade looks optimistic given our political leadership at present.