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.

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Keep is seemly & on-topic. Thanks.