11 Dec 2013

Sack The Economists


The disastrous flaws in mainstream economics and how economics can serve our total wellbeing.

This book looks very promising and is endorsed by Steve Keen amongst others. The author begins with what we know. Economists did not understand the global economic crisis or it's causes - and witness the fact that they are now setting up the same conditions. The argument that economists don't know what they are talking about is painfully obvious to everyone outside the profession it seems, but even well presented arguments have no effect on the juggernaut of the "free" market.
"Well, I think it’s clear we can’t be too subtle.  We need to speak in plain English, to everyone, and get straight to the point.  Economists don’t know what they’re talking about.  We should remove economists from positions of power and influence.  Get them out of treasuries, central banks, media, universities, where ever they spread their baleful ignorance." - Geoff Davies.
Publishers are offering a free download of the Kindle edition for Dec 10-11.

Website: http://sacktheeconomists.com/buy/ also available via Amazon.com (Amazon UK simply redirects you to .com)

9 Dec 2013

We're drunk

My thought for the morning is that the world is a bit like my alcoholic landlady. We're just out of an economic crisis caused by too much private debt, complex financial derivatives based on that debt, and insufficient oversight of the business dealings of large financial institutions. And, at least in the UK, we are putting in place the identical conditions. Private debt is rising, people are encouraged to take on debts they won't be able to afford when interest rates rise, complex products based on these debts are on sale, and the supervision of the finance industry is hardly any better than it was.

Having set the conditions in place we're pretending that, just like last time, economic "growth" that is resulting from this debt is somehow good news and that things are turning around. But being based on debt it's a house of cards. And with each recessions since 1973 we are more vulnerable that the previous because the debts are never quite paid back before we set off again.

So at present politicians, business people, and citizens are all saying "I'm not drinking" or "I can stop any time" or "I can handle it" or whatever and refusing to change their behaviour. At some point they'll get legless again, and fall down the stairs. But now they're older their bones are more fragile and falling means broken bones, time in hospital.

The government want us to believe in another economic miracle called Austerity. The last economic miracle resulted in a global financial crisis. Before that, every country the IMF and World Bank forced into free market policies subsequently experienced an economic crisis of massive proportions. Of course a small number of people do actually benefit from this drunk behind the wheel approach to economics. The 1% are accumulating wealth at a faster and faster rate as the 99% becomes poorer.

The trouble is that we've had all the warning signs but no one is changing their behaviour. Politicians and business people (and these two groups substantially overlap); and ordinary citizens: we're all trying to pretend that we can get back to business as usual. Economically are alcoholics that can't wait to get out of rehab and start drinking again.

5 Dec 2013

A New Statement of Aims

Recently Andrew Simms wrote in the Guardian concerning the origins of so-called Neoliberalism in 1947 at a meeting in Mont-Pèlerin, Siwtzerland where:
"Philosophers, academics and historians gathered at the Hotel du Lac to discuss how to halt the spread of ideas that emphasised common purpose and governments acting directly in the public interest."
Or in their words, after World War II "many of the values of Western civilization were imperiled [sic]." What were those values? The Society "see danger in the expansion of government, not least in state welfare, in the power of trade unions and business monopoly, and in the continuing threat and reality of inflation." Thus their concerns are more libertarian than liberal. The attitude is very similar to that expressed by Lewis Powell in his Memo entitled "Attack on American Free Enterprise System", though clearly Powell has gone much further down the road of tactics.

The Mont-Pèlerin Society is still meeting regularly. Simms did the interesting exercise of taking the original statement of aims from that meeting and tweaking it to suit the current situation. There are also a few little notes in square brackets.

Statement of Aims

The central values of civilisation are in danger. Over large stretches of the earth's surface the essential conditions for human prosperity, dignity, justice, and the free expression of dissent without intimidation have already disappeared.

In others they are under constant menace from the development of current tendencies of policy. State intrusion into our private lives marches alongside the punishment of those in poverty due to an economic crisis they did not create, and energy policies guaranteed to ensure climatic upheaval.

The position of the individual, community and campaign group is incrementally undermined by extensions of arbitrary power. Even those most precious possessions of enlightened society—the celebration of difference, freedom to expose corruption and hold elites accountable—are threatened by the spread of creeds which, claiming the defence of freedom when representing a privileged minority, seek only to establish a position of power in which they can suppress and obliterate all views but their own.

The market, whose diffused power was meant to guarantee against such abuse, has instead undermined democracy, allowing a previously unimagined concentration of control.
We hold that these developments have been fostered by a rejection of history, empathy and curiosity about consequences that substitutes self-interest for common morality, and by the growth of theories which question the necessity of preserving convivial conditions for life on earth.

We hold further they have been fostered by a decline of belief in public purpose and cooperative exchange; for without the deep resilience, openness and ambition associated with these projects it is difficult to imagine a society in which we may be free, survive and thrive.

Believing that what is essentially an ideological movement must be met by reality, argument and the reassertion of valid ideals, the group, having made a preliminary exploration of the ground, is of the opinion that further study is desirable inter alia in regard to the following matters:

1. The analysis and exploration of the nature of the present crisis so as to bring home to others its essential physical, moral and economic origins. [nb: one word added, 'physical' to include the real world]

2. The redefinition of the functions of the market so as to distinguish more clearly between the totalitarian and the liberal order. [A single word changed, guess which?]

3. Methods of re-establishing the role of society and of assuring its development in such manner that the market and other forms of centralised, unaccountable power are not in a position to threaten the environment in which civilisation evolved and the bonds which hold it together.

4. The possibility of establishing optimal standards by means not inimical to initiative, creativity, community and healthy functioning of ecosystems.

5. Methods of combating the misuse of history for the furtherance of creeds hostile to freedom or in the service of predatory power.

6. The problem of the creation of an international order conducive to the safeguarding of life, peace and liberty and permitting the establishment of harmonious international economic relations.

The group does not aspire to conduct propaganda. It seeks to establish no meticulous and hampering orthodoxy. It aligns itself with no particular party. Its object is solely, by facilitating the exchange of views among minds inspired by certain ideals and broad conceptions held in common, to contribute to the preservation and improvement of the conditions for life and the open society.

At the very least it's thought provoking.

9 Sep 2013

This Recovery

From Prime Economics on Twitter: "About this recovery.
  • US jobs flat
  • BRICS slow
  • German trade & indust flat
  • EZ flat/down
  • UK trade down, industry flat
But House Prices up!"

Could add wages falling, zero hours contracts taking over real jobs, chronic underemployment, static 7.8% unemployment. Residential rents, food and energy are all rising faster than average inflation. Savings are falling.

But worst of all UK private debt is rising:

Graph by 3spoken: UK Sectoral Balances and Private Debt Levels - Q1 2013. All credit to the author Neil Wilson. As he says "The UK is back on the borrowing drug."

This is not a recipe for economic success. If this is a recovery then it is very narrowly based on rising house prices. So yeah, rising GDP is a good thing (while we rely on an infinitely expanding economy to sustain our standards of living) but its not accompanied by other more encouraging signs.

3 Sep 2013

In Dependence on Causes: Buddhism and Political Engagement

As I write this Western politicians are striving to convince their colleagues that we must begin a "limited" military action against Syria for the use of chemical weapons (though doubts emerged from the USA today about what "limited" might mean). Few if any Western politicians are mentioning the International Criminal Court which was set up to prosecute war-crimes. It's as though a violent assault in the UK or the USA was dealt with by dragging the alleged perpetrator into an alley and giving them a beating. In other words it is extra-judicial punishment. The fictional lawyer Horace Rumpole was frequently made to say that the right to a trial before a jury of one's peers was a "golden thread" that runs through British justice. If Assad is a war-criminal, and on balance I think this is the most likely conclusion, then there is a process we can go through to bring him to trial and justice. Slow though it may have been, people like Slobodan Milošević were brought to trial. The more we use this means, the more resources we give the court, the more effective it will be as a deterrent. If we subvert it, then we subvert our very civilisation.

All this political upheaval and conflict in the Middle-East is often presented without any sense of historical context. For example how many of us realise that the USA has taken action against Syrian governments in the past, including the toppling of an elected leader and his replacement with a violent military dictator? In living memory. Does this sound familiar? It ought to, because it has played out time and again in the history of Western imperialism in the Middle East. 

As Buddhists we are taught to seek the causes of events and phenomena. Ultimately, we are told, our own minds are inextricably linked to the creation of our world. On the one hand the search for causes leads us to question the status quo, but on the other the idea that it is our own minds which determine reality, leads us to naval gazing and indifference to the world. Indeed I've argued that most Buddhists are stuck in an unhelpful kind of mind/body dualism which makes the physical world, the world of human endeavour, ugly to us. We constantly seek to get beyond the human realm, to create "sacred spaces" in which we are insulated from that ugliness. When that ugliness follows us into the sacred space we can become quite vicious in response (as I have discovered to my great personal cost over the years). 

At present the idea of causes and conditions ought to be at the forefront of our attempts to understand the present. Why is what is happening, happening? If we don't understand why it is happening, how can we respond effectively? And as Buddhists claim to be the masters of this kind of analysis, we ought to be at the forefront of the public discussion, pointing out how past actions have lead to current consequences. But Buddhists are nowhere in the public discourse. Indeed we are mentioned in recent times only in connection with Buddhists taking up arms against their Muslim neighbours in Burma, egged on by 'fully ordained' bhikkhus (funny how we drop that phrase 'fully ordained' when the PR is negative). 

When it comes to history, Buddhists often simply shrug and make an oblique reference to the faults of saṃsāra. Political disengagement is casts a dismal pall over public life at present, and Buddhists are leading the retreat. Compare fundamentalist Christians in the USA and the power they now have to install presidents and lead policy. If we are going to change the world, it won't be by naval gazing.

In any case we could do with some historical perspective on the Middle East. The Arabic speaking peoples of the world don't hate the West without reason. For a couple of centuries most of the Middle East was under the yoke of the Ottoman Empire. When presented with an opportunity to throw off their oppressor with British help during World War One, they overcame sectarians divides and fought together. The person who brokered the alliance was T. E. Lawrence aka Lawrence of Arabia. Lawrence, on behalf of the British Government offered the Arabs self-rule if they would help fight the Turks. An Arab state, under Prince Faisal with it's capital in Damascus was the prize they fought for. 

This vision of self-rule and freedom from Imperial power inspired the Arabs who drove the Turks back. When the Brits arrived via Egypt, the Arab forces had already liberated Damascus. It was a great victory and they were on the verge of a new world. However the British government had no intention of honouring the agreement made through Lawrence. They hung him out to dry and with the French divided Arabia up and took over. Under the Sykes-Picot Agreement the British got the south: Egypt, Jordan and the, then new, oil fields of Southern Iraq. France took control of Northern Iraq, Syria and Lebanon. A number of artificial boundaries were set up. Straight lines on maps that cut through religious and ethnic communities. The Kurds fared worse than average being scattered through 3 or 4 of the new 'countries'. This happened in 1916, with the blessing of Imperial Russia. 

Not many Westerners remember the Sykes-Picot agreement, but I gather it is still a hot topic of conversation in the Middle East. Having thrown off the Turkish overlords, they got landed with Western European overlords instead. Imperial Britain has seldom been any better than any other imperium, and at times as bad as any empire in history. 

The various new countries gained their freedom and by the early post-war years Syria, Lebanon, Iraq and Egypt were all democratic to some extent. Well, elections were being held, though they were widely corrupt. Much like Britain in the early 1800s, wealthy landowners controlled the power and forced people to vote for their choices or bought votes where force won't work. The story of the USA's secret and not-so secret attempts to subvert the political processes in Syria are recounted in a book called 'The Game of Nations' (1968) and more recently in Adam Curtis's blog from 2011: The Baby and the Baath Water. At first they tried to nudge Syria towards a freer society. When that did not work they engineered a military coup which put a violent military dictator in power in 1949. He had promised to support American interests before the coup d'etat but immediately reneged. For several years Syria was racked by political unrest and coups. 

Then in 1954 democracy was restored. However: 
"The politicians - and most of the Syrian people - were now terrified of America, not just because of the interventions and the coup, but also because of their support for Israel. In response the new government turned to the Soviet Union for economic aid and friendship."
Already we start to see why Russia is reluctant to endorse the use of military force in Syria. In 1957 another CIA plot to overthrow the democratic government of Syria was uncovered. The plot was real. 

The vision of a Pan-Arab nation had not died with Sykes-Picot. President Nasser of Egypt nurtured such dream. So did the secular and modernising Baath (or Renaissance) Party. Amongst the Baathists in various places were a young Saddam Hussein and Hafez al-Assad. The recent history of military coups and the dream of a united Arab republic helped the Baath Party to come to power, just as the recent instability helped the Muslim Brotherhood come to power in Egypt, only to be thrown out in a military coup. Across Arabia the people are looking for an alternative to the past. That past is dominated by sectarian divides, military coups, and US interference. Is it any wonder than people look to Islam to unite them and bring stability? 

The Ba'athist vision was submerged in sectarian politics and power plays. In Iraq Hussein was manipulated by the CIA into attacking their enemy, Iran (and Western nations sold arms to both sides of that war). In Syria Assad eliminated opposition and consolidated his power. He brutally put down a rebellion by the Sunni majority, lead by the Muslim Brotherhood in 1982. 

As Adam Curtis says:
"Back in the 1950s America set out to create democracy in Syria, but it led to disaster. It was by no means the only factor that led to the violence and horror of the Assad dictatorship, but its unforeseen consequences played an important role in shaping the feverish paranoia in Syria in the late 1950s - which helped the Baath party come to power. And while the Western powers no longer remember this history, the Syrians surely do."
One can read a similar story in the history of Iran where CIA plots put the Shah in power for 25 years only to be replaced in an Islamic revolution. And in most countries of the Middle East Western powers have played a deadly game of manipulation and greed. 

Actions have consequences. For complex actions in complex situations there are almost always unintended consequences. The conclusion for Buddhists seems to be a determined step away from the world. In the early days of my involvement in Buddhism I asked why we did not contest elections and try to influence decision making. I was told that the world of politics corrupts people. Twenty years on I can see that it does. Witness the great liberal hope, President Obama, condoning drone strikes in Afghanistan and Pakistan and now urging US politicians to subvert International legal processes and, to use the buzz words of the day, "degrade the Assad regime". 

I submit that even if we only drop bombs on Assad himself we won't win any friends in Syria. US bombs dropping on Syria will be a long-term disaster because people in Syria have not forgotten the reasons Assad was able to come to power and the role of the US in that rise. 

With respect to the Middle East the problem is not so much that the people are incapable of participating in a democracy, but that the powerful, both locally and internationally, won't let them participate. In the UK the gradual release of power to the disenfranchised was a long, painful process. Women got the vote in the UK less that a century ago, and then it was only for women over 30. Almost a century later women are chronically under-represented in public life, at least in part because the powerful are slow to relinquish power. Indeed in the UK we can say that the powerful have made a substantial grab for power in the last 30 or 40 years and that democracy has been seriously undermined and even compromised. Wealthy international business empires, controlled by a smallish group of men with no loyalty to anyone but themselves, have far too much power at present. They collude with professional politicians from privileged backgrounds, whose road to power is smoothed by nepotism, to subvert the will of the people, to directly manipulate that will using powerful psychological techniques via the mass media. We're caught up in the technological spectacle of multimedia entertainment while we are gradually being disinherited and disenfranchised. We sold our soul for another season of The Wire. Frank Zappa presciently said decades ago that government is the entertainment wing of the military industrial complex. 

I complained about the disadvantages of our Western Buddhist demographic recently, but one of the advantages of our demographic is that we are more than averagely educated and articulate. Without much effort we can all write to our MPs and tell them what we think. I don't presume for a moment that there will be a single Buddhist view of things, but I can hope that we will reflect on causes and conditions and understand that our previous interventions have gone awry most of the time. We can articulate our views to politicians and decision makers. As voters our sole advantage of the wealthy and powerful is that we out-number them. If we consistently speak up in our millions then we will carry the day. If the Buddhist message is going to make a difference beyond the confines of our tiny lives then we must actively engage with society and argue for change. 

It's been said that "all it takes for evil to triumph is that good people do nothing". And most of us are not even good, we're just ordinary. I guess that most people see no other option at present, which may be why anti-depressant prescriptions are so popular. Thoughts of hopelessness are a key symptom of depression. 

12 Aug 2013

Krugman Sees the Light

Paul Krugman, Noble Prize winner and influential US economist, has called time on Neoclassical Economics, which might be the turning point in the insane experiment with laissez-faire markets. This seems to me to be a very significant moment in history. The call comes in his New York Times Blog under the title "Synthesis Lost".
"So the neoclassical synthesis — the idea that we can use monetary and fiscal policy to make the world safe for laissez-faire everywhere else — has failed the test." 
"At the very least it means that we need “macroprudential” policies — regulations and taxes designed to limit the risk of crisis — even during good years, because we now know that we can’t count on an effective cleanup when crisis strikes. " [emphasis added]
This is a huge admission of failure on the part of Neoclassical Economics since the Reagan/Thatcher era. The deregulation of finance created a dangerous situation that lead to economic crisis and made it much more difficult to deal with it when it happened.

Having helped to recreat the conditions for the Great Depression one of the mainstream has admitted that it simply lead to disaster all over again, and that the impulse to put controls in place in the post-war years was the right one.

Lest we forget the post-war years were years of steadily growing prosperity and a lack of economic instability, and the contrast with the present could hardly be more stark. The UK started off with massive debts and a lot of damage to repair. And it responded by building: houses, roads, the NHS. And it paid off those debts. There were no recessions from 1945 to 1973. Yes, there were problems, by the end of that period, but they were not because of the controls, but in spite of them.

This opens the door to wider public debate of the alternatives and opens up the possibility of real change in the way we run our economy. This is the first genuinely optimistic news I have read about the economy since I started taking an interest in it a couple of years ago.

Other Responses

Duncan Weldon. Political Economy Trumps Macroeconomics.
"Yesterday Paul Krugman wrote [one] of the most significant blog posts on economics I’ve ever read."
"Essentially Krugman’s (and indeed Kalecki’s) point is this – we have the macroeconomic tools to restart a robust recovery and get unemployment down but these tools are not being used for political reasons." 

Dan Kervick. Escaping from the Friedman Paradigm.
"Aspects of Friedman’s macroeconomics might be in trouble; but Friedman’s broader paradigm for political economy is still, regrettably, too much with us. In fact, Krugman himself doesn’t seem to have moved much outside that paradigm, as I will try to show."
"What Krugman might have pursued further here [but didn't] is that not only have Friedman’s views about central bank policy been proven wrong, but his broader views on the decisive role of monetary aggregates and monetary policy on economic activity are flawed as well." 
"On the whole, [Krugman's] view seems to be that central bank management of macroeconomic affairs is effective except in the unique circumstances of a liquidity trap."
"Krugman...is working within a framework that is based on a natural real equilibrium rate of interest." [Which is to say that he still accepts the idea that aspects of the economy will tend towards an equilibrium value. This central assumption of Neoclassical economics is demonstrably wrong. Complex systems, like national economies or weather, do not tend to equilibrium at all.]
"So, in substantial measure, Krugman embraces the Friedman paradigm prescribing central bank direction of macroeconomic policy, but has sought to repair the flaws in that paradigm with the addition of a few epicycles." 
Matias Vernengo. Krugman on Friedman, Austrians, and Paradise Lost.
The Neoclassical Synthesis, was based on Hicks ISLM and Modigliani's fixed wages. The fundamental idea is that with wage flexibility the system would lead to full employment, a proposition that Keynes denied in the General Theory.

John Quiggin. Krugman, Keynes, Kalecki, Konczal. Crooked Timber.
"Still, this marks a striking shift in macroeconomics, where only five years ago, the leading figures were congratulating themselves on the convergence between saltwater and freshwater schools, under the banner of dynamic stochastic general equilibrium. As I argued in Zombie Economics, it’s precisely the centre ground of convergence that has been rendered most thoroughly untenable by the crisis. Yet that is still where the majority of academic work being published in journals is grounded."

11 Aug 2013


For the last three years Osborne and Cameron have had a mantra that they repeat. They invoke the recklessness of the last government which left the "finances in a mess" and saddled the government with massive debts. Their response to this has been to minimise debt at any cost. Then they tell us that the answer is for banks to lend to business and for business to invest; and for banks to lend to home owners.

In short the govt wants the private sector to borrow its way out of the depression, while the govt refuses to borrow. They want the private sector to invest, while the govt refuses to invest. This is economic Neoliberalism: free markets and small government which plays little or no active role in the economy. Unfortunately every where and every time these kinds of policies have been enacted the result has been growing inequality and instability - with frequent descent into chaos.

The government stands alongside business and households as a major sector in the economy.

At present government debt is about 75% of GDP and still rising.

As previously note the last government started borrowing more after the crisis of 2009 in order to meet the costs to the nation of the worst recession on record. On the other hand, according to the Governments own figures, private debt is more like 440% of GDP.

2013 Budget Report, Chp 1, p.12.
But more to the point the non-finance sector debt is about 110% of GDP and household debt is about 100% of GDP. So just to put these together:
  • Government debt = 75% of GDP.
  • Non-finance business = 110% of GDP.
  • household debt = 100% of GDP. 
Now if economic growth is the answer to our problems, and that is in itself a vexed question, then investment of capital is required. It is true that there is a lot of capital tied up in savings at present. Though we noted recently that household savings are declining. The depressing likelihood is that the depression has gone on so long that people are either desperate enough to spend their savings on basics. Note that due to high unemployment there is an over-supply of labour at present. But during a long period of stagnant demand does it make sense to invest precious capital in more supply? It does not. The only obvious area of excess demand in the UK is housing where we have both a significant shortfall in supply and over-pricing and there are complex reasons why the market is unwilling to supply more housing. But if there is overall reluctance to invest capital to create growth then what do we do? Many economists argue that it is the role of government to invest when the private sector cannot or will not, and to save when the private sector is investing.

The alternative which seems to be favoured by the Neoliberals is to just wait until the market corrects itself. Low demand ought to lead to lower prices. Certainly we are seeing real wages fall (pay rises are less than inflation) in a market over-supplied with labour. But food and energy, for example, are going up in price due to external forces. With housing, food and energy costs all going up at a time when wages are going down it suggests that domestic demand for all commodities will stay stagnant at best. And given that our major trading partners are all going through a similar process, having also embraced Neoliberalism, then foreign demand is also low. Where a few months ago people were pointing to China and Brazil as untapped sources of demand, we are seeing their economies slowing down as well.

In terms of business you have to be a mug to start investing in increased supply at present unless you build houses. For banks the risks of lending in an economy already super-saturated with debt, and with chronic low demand, are too high to be worth it. Bank of Dave notwithstanding. Of course the economy continues to turnover £1.5 trillion. There is a huge amount of economic activity happening. Loans are being made and even paid off in good time throughout the land. Houses are being built. It's just that its not enough to make a difference to the big picture. And while the big picture is depression then investing is going to be on a small scale. if we want to turn around the high unemployment and falling wages then we need the economy to grow at an appreciable rate (4-5% per annum) for about 5 years. That would be a recovery. What we have at present is stagnation - those who look at the surface seem optimistic and throw the word recovery around, while those who look beneath seem pessimistic and are reluctant to use the word recovery.

Of the three main sectors: government, business and households, only the government is free to act at present. Since the government can act, it seems to me that there is a moral imperative to act.

The government needs to do one of two things.
  1. They could borrow money to build many new houses - perhaps a million of them to bring the cost of housing down, provide employment, and stimulate spending which would in turn make investment seem sensible.
  2. They could use QE (money printing) to have a modern debt jubilee - aka helicopter money. They could give money to the people, especially the poorest people who spend all their income. This would stimulate demand in the short-term at least. Steve Keen's answer to the problem that this indirectly punishes those who were prudent enough to save money (and a lot of people were prudent), is to require recipients of jubilee money to pay off debts before spending. This will cramp the cashflow of lenders. Wonga might go out of business, but that is no great loss. 
They won't chose the first option because this would be an electoral disaster. For most people their home is also their main investment. If you bought a house in the last 20 years it's now massively over-valued. If housing sank to something like it's true value, vast numbers of the middle classes would have more debt than the worth of your asset (negative equity).

In terms of making tough decisions this is one that our tough-talking government will almost certainly not do. It's one thing to oppress and undercut the poor and the sick, but making the middle classes uncomfortable is not something a populist government would do. Also most of the government have their own money invested in property and have a vested interest in high property values. Instead they are complicit in keeping house building at a minimal level and the cost of housing obscenely high. This is how free markets work when one party is both free not to participate and extremely greedy and the other party is compelled to participate (or be homeless in this case).

They won't chose the second option because they are deeply imbued with the ideology that inheriting money is good - though it is wealth obtained with no effort or application of effort - while giving money to the poor and ill is encouraging dependence and laziness. Trust-fund good. Dole bad. Though both are something for nothing. Again I don't think we can expect the government to change the focus of their money printing from banks to households.

What the government are in fact doing is minimising government debt at a time when government debt has never been cheaper, madly encouraging the private sector to borrow more (and trying to cajole banks to lend them more), and crossing their fingers that historical patterns of recovery from recessions will eventually reassert themselves. Like back pain, 80% of recessions cure themselves. But in this case a vertebrae is fractured and they haven't realised it yet.

In the meantime private sector debt is still 440% of GDP and non-finance and household debt are both a or a little over 100% of GDP.

10 Aug 2013

Manufacturing and Production

We heard last week from the ONS that manufacturing and production figures went up in Q1 2013. While this is certainly good news, it's still too early to be talking about a recovery.

Following Frances Coppola I note that the rise is pretty small and we're still well below the levels of 2007/2008. Again it's far to soon to call this a recovery. We've already seen a much larger increase in both manufacturing and production fritter away in recent years. Indeed the trend in both lines on this graph is headed downwards still.

It's all too easy to latch onto good news as being yet another round of "we're past the worst" but that narrative has been an almost constant refrain since 2008. Just as one quarter of negative growth does not make a recession, one quarter of positive growth does not make a recovery (and we have yet to see one quarter of above trend growth since 2007).

Everyone is a bit desperate for good news and that is understandable. But the government have failed to address the fundamental problems with the UK economy and we probably won't see sustained growth for some years to come.

9 Aug 2013

Barclays vs UK GDP

When I commented on Shaun Richards's blog about Barclays Bank he responded:
"The next number two numbers may also provide some food for thought on the amount of credit around. Barclays balance sheet size £1.56 trillion. UK GDP (seasonally adjusted) for the latest 4 quarters £1.51 trillion...."
The basic formula for a balance sheet is

Assets = Liabilities + Shareholders' Equity

And for a bank it's assets are made up of reserves, buildings, and its investments and loans. And the total, just for Barclays Bank, is more than the GDP of the UK.

This is how they can report half year profits of £3.6bn. And while this seems a huge number, it is only about 0.25% of their assets. But it's also what makes them "too big to fail". A disruption on a par with the GDP of the UK would be a disaster.

HSBC has total assets of £1.7 trillion.
RBS has total assets of  £1.4 trillion.

This is also suggests why bankers salaries and bonuses are so high - each bank manages assets on the scale of a moderately sized country. By comparison US based Goldman Sachs has assets of ca. £6.18 trillion and the net worth of the UK (effectively the county's balance sheet) was £6.8 trillion.

7 Aug 2013

Good news?

If you were listening to Radio 4 last night at about 10:30pm you would have heard France Coppola being interviewed about the recent goods news on the economy. She pointed out that growth in economic activity is correlated to a rise in consumer credit and a decrease in savings. This is "heading down the same track" as before the crash. 

We need to be clear that if we base growth on spending savings and borrowed money that it will end in tears.

UK GDP is about £1.4 trillion. According to Humber Debt Solutions in July 2013:
Outstanding personal debt stood at £1.424 trillion at the end of May 2013.
This is up from £1.410 trillion at the end of May 2012. 
Average household debt in the UK (including mortgages) was £54,024 in May.
This is up from a revised £54,002 in April. 
The Office for Budget Responsibility (OBR) predicted in March 2013 that total household debt will reach £1.931 trillion in Q1 2018. This would mean that average household debt would reach £73,284 (assuming that the number of households in the UK remained the same between now and Q1 2018).
The levels of debt that we are sustaining at present is a significant drag on the economy. We cannot add more debt and expect positive results in the long term. Any growth we get is likely to be short-term.

30 Jul 2013

Barclays' Under-capitalisation

Just reading Shaun Richard's excellent blog on this. Barlays is being forced to get up to a 3% capitalisation level. This means that it currently has loaned out £427 billion too much in loans.

That 0.6% growth we experienced in Q1 2013 took GDP up to £365 billion. Gives you an idea of the scale of the UK's private debt problem when a single major bank has loaned out more than a good quarter of growth and only holds 2% of that in deposits. This is an important insight into how banking really works, and why even this supposed drastic action by the Bank of England is a drop in the bucket.

The under-regulated banking sector is at the heart of the global economic crisis because it is their that the mad policies of free-marketeers are most perfectly implemented - and to be clear Labour have been as complicit in this as the Tories.

Even under the new levels set by the BoE Barclays only requires 3% capitalisation.

What is an economic recovery?

Some definitions of "Economic Recovery"
An economic recovery is the phase of the business cycle following a recession, during which an economy regains and exceeds peak employment and output levels achieved prior to downturn. A recovery period is typically characterized by abnormally high levels of growth in real gross domestic product, employment, corporate profits, and other indicators. - Wikipedia
A early expansionary phase of the business cycle shortly after a contraction has ended, but before a full-blown expansion begins. During a recovery, the unemployment rate remains relatively high, but it is beginning to fall. Real gross domestic product has begun to increase, usually rapidly. However, because the contraction remains fresh in the minds of many, it may not be immediately clear that the trough of the contraction has been reached. - Economic Glossary
Phase in an economic cycle where employment and output begin to rise to their normal levels after a recession or slump. - Business Dictionary
A period of increasing business activity signaling the end of a recession. Much like a recession, an economic recovery is not always easy to recognize until at least several months after it has begun. Economists use a variety of indicators, including GDP, inflation, financial markets and unemployment to analyze the state of the economy and determine whether a recovery is in progress. - Investopedia.

So let's take a brief look at some of the relevant quantities: GDP, unemployment and inflation.

source: UK Public Spending
We already know that GDP is rising very slowly, and that many commentators are saying the the 0.6% growth of Q1 2013 is unsustainable. If anything the fall in real wages is likely to contribute to reduced demand for basics. I've dealt with recent GDP trends recently. And with changes in the way GDP is adjusted for inflation which have resulted in higher GDP estimates since 2011.

Source: BBC
Unemployment is still or around the levels that resulted directly from the 2008 crisis. There was a spike in 2011 that subsided, leaving us at the levels of mid 2009. The trend seems to be flat at present. These figures do not encompass the under-employed either. This is a growing problem pointed to by some pundits. With the workforce being pushed into zero hour contracts and so on we're seeing the workforce unable to make enough money to make ends meet - they want to work more but can't. And many of these people have to avail themselves of the Landlord Subsidy (aka Housing Benefit) in order to keep a roof over their heads.

Source: BBC
Inflation has jumped about quite a bit over the last few years - especially the RPI which includes housing costs. But generally speaking it has been higher than government targets and higher than wage rises. Indeed wage rises have been below inflation for a long time now. The ONS is reported as saying the current wage levels are about the same as in 2003. The recent Bank of England inflation report said that inflation was likely to remain above its target of 2% until 2016, suggesting that real wages will continue to fall.

On the bright side, and I'm sure the government see this as a positive, driving wages down ought to help with the unemployment figures in theory. Lower wages means that firms are more likely to take on new staff. Unfortunately with demand stagnant there is no real potential for expansion in the economy as a whole.

These are broad brush-stroke figures. Not the kind of detailed info that professional economic pundits use. That said I do not see a recovery here. I see stagnation. It might be argued that I expect to see stagnation because of the economists who influence my thinking. But if someone else can see a recovery in these figures then I'd be interested to know how.

29 Jul 2013

Did We really Avoid Double Dip Recession?

In her article The ‘secret deflator’ used to fiddle the GDP figures, Merryn Somerset Webb of Money Week, points out an oddity in the way the ONS calculates inflation for adjusting GDP changes. In this graph the GDP adjusted by the Retail Price Index (RPI one of the main measures of inflation, in blue) is compared to GDP adjusted by the ONS figures (grey).

Note that since 2011 the figure used for inflation has been very much lower than the RPI. So at present the ONS figures on GDP are much higher than they would be if they used the RPI figure for inflation. 

In a comment on the blog by Shaun Richards points to another blog, Why was the calculation of UK GDP changed? Lower recorded inflation so higher growth?, where he explains the difference. It is because in 2011 the ONS made the decision to switch from using a figure based on the RPI to a figure based on the Consumer Prices Index (CPI). He cites the ONS:
However, CPI has a number of advantages over the RPI for this purpose, as discussed below, and the international guidance is clear that the CPI should be using [sic] in preference.
And he comments: 
"Missing in the list of advantages is that fact that the CPI tends to give a lower number for inflation than the RPI sometimes substantially lower!" 
One of the main reasons for the CPI giving lower figures is that RPI includes housing costs. And housing costs have been steadily rising for years now due to the chronic shortage of housing in the UK. The logic of excluding the cost of housing escapes me.

Had we continued to use the same measure of inflation to adjust the figures throughout, then GDP growth would still be negative. Not on did we not avoid a double dip recession, but we are still in that recession! Ah the joy of statistics.

All credit to the two authors whose work I am citing here. Please read the original stories. It is worth reading the comments on both blogs for further informed comment on this issue. 

27 Jul 2013

Government Expenditure and the Long recession

This is a very interesting chart from the IMF's World Economic Output Report (April 2013).

What is shows is that in most cases, and certainly in the UK, government expenditure was only slightly above average leading up to the recession (USA being the exception and they were fighting two major overseas wars). Government expenditure seems not to be tightly correlated with the recession. Which is not what we'd expect if the government's rhetoric were true. Instead the figures contradict all the rhetoric about profligacy in the previous government - and yet the opposition seem unable to capitalise on this, but that's another story. These figures are what we'd expect if private debt were the driver of the recession, and in the years leading up to the recession various governments had begun to believe that their economies were now literally exempt from boom and bust (what we might call the Greenspan fallacy).

The thing to note however is that this recession is lasting a long time. And correlated with this is post-recession expenditure well below averages. That is to say that cuts in government spending are correlated with an extended recession. Of course correlation is not causation, but it would be very interesting to look more closely at this.

In the past governments generally continued to steadily increase their spending post-recession. In the world's advanced economies government spending is considerably below the average at present. In emerging market economies (the economies that are still growing at an appreciable rate) government expenditure is presently above average.

One of the factors is that government revenues have collapsed in this recession in a way that is almost unprecedented. With the debt fuelled economic bubble, government tax takes were high for a lengthy period and governments, especially the UK government, became complaisant about spending at boom levels. When the banks collapsed it was necessary to borrow a lot of money to prop them up, raising interest costs and decreasing the amount available to spend.

25 Jul 2013

0.6% GDP Growth in Context

The Q1 2013 GDP figures are out. 0.6% growth would probably have been seen quite favourably in the pre-2008 world.

But it doesn't make up any lost ground. It's about average and doesn't therefore constitute a recovery. The red line shows quarterly GDP seasonally adjusted from 1955-2007. The dotted red trend line is a shallow exponential curve with an R2 of 0.9927 (and extended out 20 quarters from the end of 2007).

Click image to embiggen

Had growth continued on the trend of those 52 years then we'd expect GDP in this quarter to be ca. £415 billion. What we have is GDP of ca. £365 billion. A shortfall of £50 billion this quarter. This means we're about 12% below the GDP we'd expect given the 50 year trend. And note that the dotted red and solid blue lines are still diverging which means that we are still drifting away from the long term trend of GDP growth.

We are not making up the shortfall and the shortfall is increasing. Until we turn this around and start to move back towards the trend we have two options:
  1. Shut up about 'recovery'. 
  2. Redefine the long term trend to be roughly zero growth.
Since the government are crowing about 0.6% growth we can probably assume that they have abandoned the idea of recouping our losses, and have accepted that the lost income of the last 5 years is not recoverable. The UK economy has simply lost 12% of it's value (so far) and is continuing on a new trend of flat growth.

The dotted blue line is a linear regression of the figures from 2010-2013 - since the recession officially ended.

Click image to embiggen

Interesting if you draw a straight line through 2010-2013 the line does indeed slope up and gets to the same level as Q1 2008 (£375 bn) in about 2018. So the people who were predicting 10 years of depression 2 or 3 years ago seem to be about tight. At that point the long term trend line predicts GDP of £475 bn. So we will be 21% below trend and counting.

GDP growth was 0.6% in Q1 2013. But from 2011 to 2013 it was only 0.06%

23 Jul 2013

Everyone Pays Taxes and Everyone Benefits from Welfare.

In the UK it's easy to end up feeling guilty about living on social welfare. Most people don't choose that life but have it thrust on them and do what they can to get out of it. But the media seem to join with politicians in wanting us to believe that only income earners pay tax or that income tax is the only tax. It is not. Income tax is only about 25% of the government's income.

Everyone in the UK pays VAT. This is a 20% surcharge on goods and services. Food is excluded, but most other things you buy include tax. of the so-called indirect taxes, VAT alone accounts for about 17% of government revenue. Other taxes such as alcohol duty affect nearly everyone in the UK. So even if you pay no income tax because you have no income, you still pay taxes. So this mantra 'my taxes are paying your wages' is inaccurate. Everyone pays tax.

Housing Benefit is a government subsidy of some
£17 billion per year to the housing sector.

What's more the benefit system represents a subsidy on many sectors. For example, despite the economic crisis and falling house prices, rental accommodation has steadily increased in cost. Housing Benefit is paid to many people who work as well as those with no regular income. This is a government subsidy of some £17 billion per year to the housing sector. And the scale of it helps to keep rental costs high.

The alternative to subsidised housing in the short-term, however, would not be lower rental costs. No, it would be mass homelessness, because demand so outstrips supply that even without subsidies the demand would be more than could be supplied.

The housing shortage has been left to the market to fix, but the market has a vested interest in not fixing the problems, in keeping supply restricted so as to keep rents high and rising. Especially when other forms of investment are struggling during the Long Recession. Some estimates suggest the UK needs 2 million more houses as of now. Immigration keeps the population growing, despite the baby boomer bulge now squeezing out of the top of the population pyramid.

At present it seems that the UK government are content to allow this situation to continue on the landlord side, probably because so many of the government are themselves landlords. But they are undermining it from the tenant side and so homeless and poverty are about to start rising.

Since people who accept social welfare payments tend to spend all of it, the government also subsidises supermarkets and pubs and all sorts of other businesses. About £167 billion per year is spent by the DWP and most of that finds it's way back into circulation in supermarkets, shops and pubs - and a percentage makes its way back to the government as tax, but most of it is either spent again (hence the infamous multiplier effect) or saved. Just imagine what would happen if this subsidy was suddenly withdrawn. On top of homelessness and all the other problems of poverty, many of the struggling businesses would go bankrupt. More especially in the present since so many companies are teetering on the edge of solvency anyway, or are zombie companies, technically insolvent but allowed by banks to continue trading because banks, themselves close to insolvent, can't afford to lose the revenue stream.

Those receiving welfare payments could think of themselves as low-paid civil servants distributing government subsidies to local businesses. 

I've often wondered why we call social welfare payments "benefits" in the UK. After all it seems strange to think in terms of the benefits of losing your job or becoming too ill to work. Social welfare is more of a consolation for misfortune. But society as a whole does benefit from supporting those people who cannot work. The benefit is for society as a whole, not one particular individual - hence in most places it is called social welfare. Keeping those who lose jobs or become ill in the loop of society makes the transition back into work smoother. It keeps people from becoming homeless for example, or from completely dropping out of society.

Far from being a burden on society, welfare is a massive subsidy that is helping to keep the nation afloat in a crisis. It's the remains of a from of economic thinking that is not based in the fantasy of the market will solve all our problems. Social welfare is still predicated on the idea that the market will not provide fairness and as such is one of the few remaining counter-weights to the fantasies of NeoLiberalism. It also provides a cohesive factor when centripetal economic forces are sending many people to the margins of the economy and beyond.

But make no mistake. The social welfare system is under attack by NeoLiberals aided and abetted by mainstream media who are largely uncritical of the NeoLiberal agenda. The real benefits of social welfare are systematically hidden and mirages of disadvantage are being created. The mythical "tax-payer" is told they are missing out when someone else gets welfare. The working person who has seen 40 consecutive months of contracting wages only knows that their money doesn't go as far as it used to. It's all too easily for them to buy into blaming the social welfare system, because the government are spinning it with everything they've got. Working people are squeezed because of government policies which are designed to maximise the wealth of the wealthy at any cost, but the government is seeking to deflect responsibility away from themselves. And such governments traditionally blame the poor for being poor. Being rich is a measure of moral goodness in their worldview, and being poor is laziness at best. There is not enough critique of these kinds of assumptions, no substantive opposition from the left, and precious little public discourse which does not come from spin doctors.

This same attitude means that political parties are unwilling to consider alternatives to the status quo of NeoLiberal values and NeoClassical economics. And not just the traditionally right-wing parties, but the left as well. The possibility that instead of using QE to directly subsidise banks with no great effect on the economy, that we might use it to stimulate the economy by giving money to individuals, especially poor individuals is not even considered. Not even by the left. Sadly I no longer see any possibility of the Modern Debt Jubilee taking place. Or anything like it. Combating government propaganda, combined with the propaganda of big business, is not yet effective - despite the state of the UK economy there is no sign of anyone offering a credible alternative.

2 Jun 2013

Debt Ratios and the Comparison with WWII

Recently I've seen a lot of people saying things like "UK has had higher debt for 204 of the last 250 year." This is true and it is part of the criticism of the present government. We should certainly be worried about high levels of public debt, but having looked at the arguments I agree with those who say now is not the time to cut public spending. As far as I can make out the govt continue to argue using the moronic household finances model, which ought to convince no one.

The fact is that the UK's immediate post-war government debt was about 260% of GDP and then fell sharply over the following decades to below 50%. And people who disagree with the government find this comforting.

However what they don't seem to factor in is the levels of private debt (figures on private debt are based on the 2013 Budget Report, but other estimates put private debt much higher). At the end of WWII we had very low levels of private debt - consumer credit had yet to be invented! Back then there was a real possibility that private enterprise would borrow to invest and get things growing. Back then there was huge demand for products created by shortages.

NOW the situation is very different. Household debt is about 100% of GDP. Far from having an excess of demand we have stagnant demand. Retail spending is steady but not growing. And in an economy predicated on steady but infinite growth this is a problem. Inflation is higher than growth and thus the value of everything is being eroded. People are also saving, but I need to cover what's happening in business before looking at this.

In business the situation is complex. Non-finance sector debt is about 105-110% of GDP. In the household finance model this would require drastic cuts. But the government is looking to business to invest, expand, and kick start "the recovery"/ On the face of it business is mortgaged to the hilt. With demand flat there is no incentive to invest in increasing supply. In addition banks are reluctant to lend more to business because they are already carrying a great deal of debt. And to top it off we know that they are supporting 100s of zombie companies - companies that cannot afford to service their debts, but that are being kept afloat because bankruptcy would mean an outright loss for the banks. So while good companies cannot get loans, bad companies are being being extended credit they can't afford.

And it does not end there. In the boom years many companies were bought by the buyer mortgaging the company they were buying (a so-called leveraged buyout). This has left a lot of companies carrying enormous debts. I have cited the case of Travelodge numerous times. Saddled with £500 million in debt by Dubai International Capital when they "bought" the company, it could not service it's debts despite making £50 million in profit. Thus is was handed back to Goldman Sachs et al. and immediately 40% of it's debt was written off. Many other companies have been less fortunate and have declared bankruptcy. A lot of companies are carrying such debt, which was barely serviceable in boom years, and is not in the Long Bust. And these loans are due to be re-negotiated soon.

In any case this simple analysis makes it seem very unlikely that the private sector will lead investment growth. The government is sadly mistaken in waiting for business to kick things off under these conditions. There is no demand at present. And if the government does not wish to get involved then we'll be waiting a long time for demand to increase.

The finance sector holds more debt than all the other sectors put together, including government, but this it owes mainly to itself. The workings of this sector are something of a mystery to me. But their debt servicing costs must be taken into account.

Now, although I've asked many economists what it costs to service our private debts, none has ever been able to tell me. Say the average interest on all the loans is 10% pa. That would mean the interest alone amounts to 44% of GDP every year! This is difficult to believe, but when are the experts going to explain it better?

So with the dearth of good investments and the high risk environment householders with cash are simply saving it. Capitalism is where people with leftover wealth invest it in the creation of new wealth. What we have at the moment is barely worth the name.

Now we got this way because successive governments removed controls put in place after the Great Depression to stop it happening again. Economic theorists apparently believed that they had found a way to avoid the consequences of banks being allowed to create money through issuing debt. At best this was misguided, but since some of them benefited financially (according to interviews in Adam Curtis's film The Trap), we must assume that it was partly deliberate. The rise of free market economics coincided with a rise of NeoLiberalism which sought to reduce the role of government in people getting rich, i.e. to removed other kinds of social safeguards enabling the rich to become richer. And thus not only have we seen repeated recessions and economic disasters culminating in the Long Bust, we have seen wealth inequality growing exponentially. The super rich have continued to increase their wealth despite the Long Bust, whereas most people have less wealth.

So the present cannot be usefully compared to the past just by looking at government debt. Other variables have changed. In particular private debt is very, very much higher than it was in 1945. And this means that we cannot expect a gradual return to prosperity with everyone's wealth keeping pace. We can expect something more like the Japanese experience. Many years of economic stagnation.

That said the UK is still one of the largest economies in the world. We still do £1.5 trillion worth of business each year. Inflation is relatively low. And compared to the rest of Europe unemployment is low. Standards of living are amongst the highest in the world. Things could be a lot worse. They may yet be worse, but for now we're afloat.

22 May 2013

Consumers still paying off debts

15 May 2013

Update on Debt

Found a new source on UK total debt on Economics Help. Which includes this graph:

This is sort of helpful and sort of not. Help in that it shows total debt rose steeply during the period covered by the graph (could do with a but more). But's it's hard to see what was going on in the early 1990's for instance where we have a couple of little peaks. However, ca. 1994 debt started rising from about 240% of GDP and carried on until it peaked in ca. 2009 since when it has hovered around 500% of GDP.

Note that government debt only really started to rise around 2008 after the crisis hit. Before the crisis UK had low government borrowing. Actually I think Gordon Brown did start to run a deficit before the crash because he believed in the "end of boom and bust". The lack of vertical scale and the fat line on this graph obscures some detail.

However it doesn't change the overall picture. Business and households are in two main positions:

  1. too much debt and busy paying it off.
  2. saving money while waiting for better investment opportunities

5 May 2013

Richard Koo at INET

This video shows Richard Koo debating Ken Rogoff at the inaugural INET conference in 2010. Richard Koo makes a great deal of sense but he has yet to find mainstream support. Rogoff's ideas about debt have since been discredited by a graduate student

Koo's point that in a balance sheet recession things are different - our attitude to government debt must change. "The is a different disease!" His point is that with private debt levels so high there will be a continuing impact on demand - because the private sector are either paying off debt or saving, government must take up the slack to keep the economy going. Clearly austerity is doing the opposite and prolonging the recession.

Rogoff was one of the main proponents of focussing on government debt and cutting spending to bring it down. Now he and his colleague Carmen Reinhart are said to be "Furiously Away From Austerity Movement."

29 Apr 2013

Assessment of Game Theory

At best, game theory predicts reality in the same way as “The Emperor’s New Clothes” predicts the future political path of Yair Lapid. (Israel's Minister of Finance)
How game theory will stop Iranian nukes
I've devoted most of my life to economic theory and game theory. I believe that I would like to do some good for humankind and, in particular, for the people of Israel.
by Ariel Rubinstein for Haaretz.
(via Steve Keen on Twitter).

Game theory is mentioned often in economic circles, to some extent it held out hope of making economics a science by replacing outdated and entirely erroneous assumptions about consumer behaviour. I'm very doubtful about the use of these hypothetical and abstract models for predicting real human behaviour.

Rubinstein, who has studied game theory for 40 years, confirms many of my suspicions:
Nearly every book on game theory begins with the sentence: “Game theory is relevant to ...” and is followed by an endless list of fields, such as nuclear strategy, financial markets, the world of butterflies and flowers, and intimate situations between men and women. Articles citing game theory as a source for resolving the world’s problems are frequently published in the daily press. But after nearly 40 years of engaging in this field, I have yet to encounter even a single application of game theory in my daily life. [my emphasis]
Like the use of quasi-medical Latin terminology in translations of Freud's vernacular German (e.g. ego for Ich) the fact that game theory is presented in formal mathematical language "creates an illusion that the theory is scientific."
"some have recently contended that the euro bloc crisis is like the games called Prisoner’s Dilemma, Chicken or Diner’s Dilemma. The crisis includes characteristics that are reminiscent of each of these situations. But such statements include nothing more profound than saying that the euro crisis is like a Greek tragedy."
Steve keen merely says "Realistic assessment." At the end of the article Rubinstein confesses that his first choice for a title for the article was "Why game theory doesn’t solve the problems of the euro bloc and won’t stop Iranian nukes" but he thought it might put people off.

27 Apr 2013

What does "Economic Recovery" mean in the present.

The 2013 GDP estimates were out this week. 0.3% growth for the quarter is OK for an economy in crisis. Hardly a vindication of the coalition government's economic acumen, but it might have been worse. However the figure is historically low.  During the 1990's for example quarterly growth averaged about 0.65%.

The pattern of recessions in the past was that a relatively brief period of contraction was followed by above trend growth that returned the economy to trend. We can see this in NIESR's chart showing the path of recession and recovery in various previous downturns, updated for their estimate of monthly GDP, published March 12, 2013.

from Not the Treasury View

The black line is the present. What it looks like is that zero growth is the new trend. Indeed there was growth in the period 2009-2010 that looked like a recovery, but since then growth has averaged about 0.04%. With margins of error this is zero. Though I have yet to find a margin of error figure for GDP estimates, the figures are stated to the nearest 0.1% and anything less that that is probably noise.

And why is growth so low? Well it's widely acknowledged to be because demand is low - both consumer and business, in the UK and Europe. Now why demand is low is the subject of debate, but those economists who take note of levels of private debt point out that it is still high. Household and business debt are very high. Thus spending is low while people pay off their debts.

To be sure, other people are saving and have piles of cash or capital waiting to be invested. But while demand remains stubbornly low it doesn't make good business sense to invest. Because effectively what is meant by "investment" is an expansion of supply of goods and services. And when demand is low it is counter-intuitive to argue for increasing supply. So an investment led recovery is a non-starter.

Though of course the government have been banking on this for 3 years now. Indeed the government are keen to make the banks lend more. But with so much debt in the system, and the disastrous results from too much debt, the banks (newly sober) are reluctant to lend. Lending to business in a chronically depressed economy is a high-risk enterprise. So even with a great deal of carrot and stick government has failed to get banks to lend more. A debt led recovery is also a non-starter.

Ideally consumers would start to spend more and demand would rise and everyone would become optimistic and start investing again. But this is wishful thinking. Consumers as an aggregate have very high debt levels. What's more real wages are falling at present. So a consumer led recovery is also a non-starter.

What's left? There really is only one sector of the economy that can invest under the present conditions. That is the government. If the government continue to pursue austerity and make only token gestures towards investment then nothing is going to change. Indeed rather worryingly the reduction of debt stopped in 2012. Debt levels in the private sector remained static at 440% of GDP.

So the way things are looking zero growth will be the new trend. Some people have described this as a plateau, but really this is a valley floor - we're still below the peak of 2008. And we're bumping along the bottom. Present government ideology driven economic policy is now widely perceived outside the Treasury to be harming the economy. Even that bastion of monetarism, the IMF, is having second thoughts about the austerity that has crippled Europe and the UK. While the mainstream continue to ignore the role of private debt in the economy nothing much will change.

7 Apr 2013

Steve Keen at INET

Professor Steve Keen recently spoke at the INET conference. It was a short talk, but full of his usual gems. His talk starts at 20.45 (I can't seem to embed with a time reference).

Notable quotes
"Workers pay for higher [private sector] debt via a lower shares of wages."
"Inequality leads to economic collapse"
"The most important driving force in a capitalist economy is private debt."

4 Apr 2013

Spending vs Investing - updated

There seems to be some confusion amongst people who comment on news articles online and politicians about the distinction between spending and investing. Thus when the people say things like "So in a nutshell, what will you do? Spend or not spend?" it completely overlooks the other possibility.

We spend money when we get what we pay for and nothing much else. However the govt is in the enviable position of getting multipliers. As it spends money on welfare, those receiving the payments spend almost all their welfare in the real economy - on rent, food and basic services. This helps to keep money flowing through the economy - like cash flow in a business. And since tax is paid on what is earned and spent a lot of what they spend comes right back to government, to go through the system again.

Investing is a totally different proposition. If I invest in building a house I pay the money up front but then I sell the house at a profit once it's built. Building houses in the UK is very profitable because houses sell for about 5x what they cost to build. You spend £50,000 and sell the house for £250,000. This is the essence of capitalism - investing capital in order to make a profit. And that £50,000 is also spent - so a lot of it goes through the same cycle as other spending and comes back to the govt as taxes.

The IMF have confirmed that the major contribution to government borrowing at present is reduced revenue due to the depression. Demand for goods and services has dropped off dramatically so that the economy is now hovering around zero growth (with a few ups and downs). Thus tax revenues have fallen off and the government has spending commitments which it must meet by borrowing.

The present government has a strong ideological commitment to allowing the real economy ('the market') to take care of themselves and to reduce spending by making cuts. They have made minimal attempts to encourage lending for investment but these seem to have been in ignorance of the massive debts held by the private sector (despite this information coming from government Budget Reports - esp 2011 and 2013).

The other option, the one that the Chancellor had built his hopes on was that part of the private sector is sitting on a large surplus. This surplus capital is of a scale that if it was invested it would stimulate the UK economy. However while demand is low investors are rationally and understandably reluctant to risk their capital, and more or less unable to borrow to invest as banks see the same economic conditions as making loans risky (this is aside from the fact that the banks created this problem by lending too much money in the first place).

In addition the government's austerity policies (again according to the IMF) are depressing demand in the short term. While demand is low the private sector cannot (because of too much debt) or will not (because of too much risk) invest in the UK economy and we stagnate. And this will simply go on until the levels of debt fall low enough to make an impact on demand. No one knows how long this will take. The March figures from the ONS show that household and private sector deleveraging is more or less stagnant - we stopped paying off debts in 2012. So the process could take a very long time indeed.

And what is more, while the private sector is running a surplus (hoarding money) the government must run a deficit (i.e. must borrow more than it earns, ratcheting up the national debt). What we need is the converse - the private sector running a deficit - borrowing to invest and making profit - and the government to run a surplus (paying down debt with the extra as well as investing in infrastructure).

The govt is the one with the power to take a different path - to move more decisively from spending to investing. It can borrow at much lower rates than the private sector over longer terms and has a huge asset base so the risk is very low. There is risk of course, but the is greater risk from the current strategy of austerity and inaction.

The failure on the part of the public to distinguish between spending and investing has been exploited by the government to pursue their ideologically driven policies. They won't borrow and spend as they say, but in this they include borrowing for investment as though spending and investment were exactly the same. Their investment program is far too small to make any difference. Plans to invest more always involve spending less in other areas. The extra investment is too small, and the impact on demand of less spending is far more significant. With investment lumped in with spending the government is able to maintain minimal support for their policies - though cracks are beginning to show.

Beyond the present government it's not clear whether Labour, the current opposition, are any more able to make the distinction and exploit it than the Tories and their LibDem sidekicks are. labour have said they would cut less, but not whether they would invest more.

3 Apr 2013

National Accounting

In his excellent blog on national accounting, Edward Harrison makes the point that when the private sector is in surplus the government must run a deficit. Very clear evidence of this can be found in today ONS Economic Review for March 2013. By regraphing chart 4 we can see the inverse relationship between public and private finances. At present the private sector are running a large (but diminishing) surplus. And the government is not saving but borrowing. This graph only shows from 2008 onwards, but it is striking how closely these two amounts mirror each other.

Harrison argues (from the Austrian school of economic thought) that the sum of the sectoral financial balances must net to zero. And he points out that a government deficit is an effect of activity in the private sector, not a cause
"Budget deficits are the result of the ex-post accounting identity between the sectoral balances and should not be a primary goal of public policy."

29 Mar 2013

The End Is Nigh

Money Week are predicting a financial Armageddon in the near future.

The basic idea is that we've over-committed ourselves to welfare spending. At the same time private debt (my hobby horse) has also sky-rocketed. Money Week put the UK's total debt at something like 900% of GDP though I struggle to see where they get this figure. Private debt is about 440% and static, and government debt is 73% and rising. They seem to derive the other 400% from welfare spending commitments. We can just about get away with it for now because interest rates have been getting lower for 30 years. The problem will hit when interest rates start to go up again and the government will not be able to afford to pay it's debts. This will trigger a downward spiral. And interest rates have reached their nadir according to Money Week. Sometime soon they'll be going up.

Since their track record of predicting disasters appears to be pretty good this seems to be worth taking seriously. They also have history on their side. No nation in history with this level of debt has avoided financial collapse. It's only a matter of time. They're offering some free advice on the problem, and some free issues, so tying the prediction into a circulation drive. This looks a little cynical, but they do appear to be sincere in the warning.

In the Video version you see the text on the screen one sentence at a time and some one reads it out in a detached and emotionless voice. It ain't hardly Max Keisier. Frankly I think they wasted their money creating a video that is mainly the same text and audio - and has no controls, no timer (it's over 30 mins long) and no way to embed it elsewhere. I don't think it adds much to reading it for yourself. And in the video the charts tend to flash by too fast. I'd suggest reading it for yourself and lingering over the charts.

Now the charts are problematic. They present all their charts in £ terms. So government spending is going sky high in real terms, but such a chart doesn't take into account population growth or the growth of the economy (which both grew exponentially till 2008). I think this detracts from the story a little as it's choosing rhetoric over clarity. Spending as a percentage of GDP is a totally different picture. It's still going up, but the situation is less bad than say 1945 - and Money Week choose to make it look much, much worse.

Yes, the British population is ageing, but immigrants tend to be young and have larger families. What is this doing to the population profile?

I asked a couple of the heterodox economists I know on Twitter and they reckon it's scaremongering in search of customers. "They're trying to sell stuff". Probably true - they are a business. But perhaps it's worth having a gander at the argument to see for yourself.