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?