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.
Showing posts with label History. Show all posts
Showing posts with label History. Show all posts
17 Aug 2012
Past, Present and Future of GDP Growth in the UK.
This post was inspired by one by Mark Thomas: Does This Ease Your Worries?: US GDP from 1870-2008 where he shows that USA is getting back on trend for GDP growth. In the UK things look very different and so no, it doesn't ease my worries.
The Guardian conveniently provide a spread sheet of all the GDP figures from 1955--Q2 2012. Below is a plain graph of quarterly GDP figures with an exponential trend line courtesy of Excel.
What the graph shows however is that the trend overall is exponential growth - a shallow exponential curve, but with an R2 value of 0.9917 the fit of the line is very good. There were ups and downs but basically we got back to trend until the global economic crisis. If we graph from 1955-1997 an exponential line is still the best fit, though the R2 value is less at 0.9873.
Thatcher (1979-1990) inherited a recession and a period of below trend growth from Callaghan (1976-79) though the problem probably dates from earlier - witness the hiccough in 1973 that was followed by several years of stagnation. When Thatcher handed on to Major (1990-1997) things were picking up, but recession and below trend growth followed. And as Blair took over in 1997 growth had returned to trend and growth was about 1% per quarter. It had been a turbulent few years since the early seventies and the collapse of the Gold Standard, the end of the Bretton Woods agreement, and the UK's Competition & Credit Control Act. Now things seemed to be looking up.
After 1997 growth in GDP began to accelerate, rising above trend at an increasing rate. However growth in this period is more accurately described as linear (R2 = 0.9974) rather than exponential (R2 = 0.9965). Clearly we got a long way ahead of the trend of the previous 43 years, further ahead than any previous period. This was Gordon Brown's economic miracle.
In fact the period of above trend growth (1997-2008) is the debt bubble caused by New Labour's deregulation of the finance industry. It caused a sustained period of GDP growth which Gordon Brown called "the end of boom and bust". It was part of a global phenomenon. In the USA they called it "the Great Moderation".
However in 2008 it all came tumbling down.
With GDP still shrinking we are unlikely to ever get back to the pre-crash trend. Having risen about 6% or £25 billion above the trend by 2008, today, four years later we are about 12% or £47 billion below trend (and remembering that these are quarterly figures). In pre-1997 terms we've lost 35 quarters or nearly 9 years of growth and counting.
I actually lean to the left in politics and I think the present Chancellor is a moron. His legacy will be the extension of the worst recession in modern times as the graph from the NYT shows. The UK has been mismanaged. The USA is about to head back down unfortunately and German is likely to be devastated by the breakup of the Euro if they don't act soon. That said our part in the global financial crisis was facilitated by the New Labour government with Gordon Brown as chancellor. He didn't end boom and bust, he increased it by an order of magnitude!
There are a couple of key differences between the USA and UK trends. In the UK we had no great perturbation of GDP in the Great Depression. For the UK the post-World War One recession was much worse. And whereas we see in the graph above the USA returning to growth, albeit possibly weakening, in the UK we started up and faltered. We're now so far off trend that we probably will never get back.
When economists say that this recession is different they do mean that it is both qualitatively and quantitatively different. What is happening now is unique in the post-War period and we're unlikely ever to make up those nine years. In previous recessions the economy has always bounced back and got back on track. Not this time.
Below is Japan's GDP Curve (from http://professorpinch.wordpress.com/).
This is going to be the shape our the UK's GDP curve now. Basically an extended period of stagnation at best. All those predictions of a return to growth? Just forget it. The game has changed. And the difference is levels of private debt.The USA and Germany are further ahead because they have half the level of private debt that the UK has.
In political terms I don't see anyone really getting to grips with this, so we'll just have to ride it out. A lots decade looks optimistic given our political leadership at present.
The Guardian conveniently provide a spread sheet of all the GDP figures from 1955--Q2 2012. Below is a plain graph of quarterly GDP figures with an exponential trend line courtesy of Excel.
What the graph shows however is that the trend overall is exponential growth - a shallow exponential curve, but with an R2 value of 0.9917 the fit of the line is very good. There were ups and downs but basically we got back to trend until the global economic crisis. If we graph from 1955-1997 an exponential line is still the best fit, though the R2 value is less at 0.9873.
Thatcher (1979-1990) inherited a recession and a period of below trend growth from Callaghan (1976-79) though the problem probably dates from earlier - witness the hiccough in 1973 that was followed by several years of stagnation. When Thatcher handed on to Major (1990-1997) things were picking up, but recession and below trend growth followed. And as Blair took over in 1997 growth had returned to trend and growth was about 1% per quarter. It had been a turbulent few years since the early seventies and the collapse of the Gold Standard, the end of the Bretton Woods agreement, and the UK's Competition & Credit Control Act. Now things seemed to be looking up.
After 1997 growth in GDP began to accelerate, rising above trend at an increasing rate. However growth in this period is more accurately described as linear (R2 = 0.9974) rather than exponential (R2 = 0.9965). Clearly we got a long way ahead of the trend of the previous 43 years, further ahead than any previous period. This was Gordon Brown's economic miracle.
In fact the period of above trend growth (1997-2008) is the debt bubble caused by New Labour's deregulation of the finance industry. It caused a sustained period of GDP growth which Gordon Brown called "the end of boom and bust". It was part of a global phenomenon. In the USA they called it "the Great Moderation".
However in 2008 it all came tumbling down.
With GDP still shrinking we are unlikely to ever get back to the pre-crash trend. Having risen about 6% or £25 billion above the trend by 2008, today, four years later we are about 12% or £47 billion below trend (and remembering that these are quarterly figures). In pre-1997 terms we've lost 35 quarters or nearly 9 years of growth and counting.
I actually lean to the left in politics and I think the present Chancellor is a moron. His legacy will be the extension of the worst recession in modern times as the graph from the NYT shows. The UK has been mismanaged. The USA is about to head back down unfortunately and German is likely to be devastated by the breakup of the Euro if they don't act soon. That said our part in the global financial crisis was facilitated by the New Labour government with Gordon Brown as chancellor. He didn't end boom and bust, he increased it by an order of magnitude!
There are a couple of key differences between the USA and UK trends. In the UK we had no great perturbation of GDP in the Great Depression. For the UK the post-World War One recession was much worse. And whereas we see in the graph above the USA returning to growth, albeit possibly weakening, in the UK we started up and faltered. We're now so far off trend that we probably will never get back.
When economists say that this recession is different they do mean that it is both qualitatively and quantitatively different. What is happening now is unique in the post-War period and we're unlikely ever to make up those nine years. In previous recessions the economy has always bounced back and got back on track. Not this time.
Below is Japan's GDP Curve (from http://professorpinch.wordpress.com/).
This is going to be the shape our the UK's GDP curve now. Basically an extended period of stagnation at best. All those predictions of a return to growth? Just forget it. The game has changed. And the difference is levels of private debt.The USA and Germany are further ahead because they have half the level of private debt that the UK has.
In political terms I don't see anyone really getting to grips with this, so we'll just have to ride it out. A lots decade looks optimistic given our political leadership at present.
6 Aug 2012
Analysis of the European Debt Crisis
Some of the Economists I follow on Twitter pointed me towards this article.
Lane analyses the causes of the European sovereign debt crisis. I think he shows that except in the case of Greece, and perhaps Italy, the crisis did not begin in the public sector. As for the UK, the problem began in the private sector. Government borrowing did not start in earnest until the 2007 credit crunch. The exceptions are Italy and Greece which were already approaching debts of +90% of GDP by the end of the 1980s.
Indeed Ireland's and Spain's government debt were the lowest of the countries in the study and trending downwards. As Lane says Ireland and Spain were not net borrowers from 2003 to 2007. At the same time private credit was rising exponentially partly because when they joined the Euro banks in these countries could suddenly source loans in Euros from outside their national borders.
This is the same pattern as we see across the first world. Private debt sky-rockets up leading to the credit crunch. Lane does not understand how credit grew so fast:
But actually I think we do have an explanation of this. Deregulation of the finance sector allowed banks to create huge amounts of money, and lend far more than would have been wise. At the same time the loose regulatory environment encouraged banks to gamble on derivatives, and to pursue more and more risky, and ultimately illegal, practices in pursuit of higher and higher profits. That Lane doesn't understand this is obvious in later comments such as:
During this period rating agencies, paid by financial institutions, were giving junk derivatives AAA gilt ratings so that pension funds could 'invest' in them. Goldman Sachs in particular used the AAA rating to continue selling what they knew to be a junk product as gilt, and to take advantage of low insurance rates to create hedges on loans they knew would default. The effects of this were felt worldwide. Especially when the market collapsed.
Lane points to a failure of fiscal policy in the period 2003-2007. But during this period, which Ben Bernanke dubbed the Great Moderation, economists who were, and remain, blind to the problems of private debt, convinced themselves and western governments that growth would continue for ever. They were saying so right up to the eve of the credit crunch. The failure of governments during this period was not fiscal but regulatory. During this period an increasing number of economists began to warn about the growing private debt, but were ignored by deluded governments.
Lane also sees large current account deficits as contributory to the problem. [I need to work on understanding this a bit more so no comment yet from me]
Ultimate Lane blames the crisis on the design of the Euro beginning in 1999, though I'm not convinced this is the answer because we see the same kind of crisis in the UK, and the USA. I'm more inclined, following Steve Keen and Ann Pettifor, to see private debt as the central problem. Certainly the Euro design has hampered all efforts to deal with the crisis, but then none of these countries has even acknowledge that they have a private debt problem caused by deregulation of finance. And as such the regulatory environment remains unchanged, and banks are still pumping money into casino investments rather than the real economy.
Until banks and other financial institutions are properly regulated and policed there is little hope of recovery, and every danger of it happening all over again. Indeed those foresighted economists who predicted the crisis on the basis of private debt problems have predicted a further major credit crunch in the near future. In the short term some kind of debt relief program--Keen's modern debt jubilee--will help to kick start growth, but ultimately the finance industry must be properly regulated.
Lane concludes on a cautiously pessimistic note:
The BBC provided some very good background info-graphics to the Eurozone crisis earlier in the year.
If it's all too miserable then John Finnemore explains it in a humorous way here.
Philip R. Lane. 'The European Sovereign Debt Crisis.'
Journal of Economic Perspectives. 26 (3). Summer 2012: 49–68.
http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.26.3.49
Lane analyses the causes of the European sovereign debt crisis. I think he shows that except in the case of Greece, and perhaps Italy, the crisis did not begin in the public sector. As for the UK, the problem began in the private sector. Government borrowing did not start in earnest until the 2007 credit crunch. The exceptions are Italy and Greece which were already approaching debts of +90% of GDP by the end of the 1980s.
Indeed Ireland's and Spain's government debt were the lowest of the countries in the study and trending downwards. As Lane says Ireland and Spain were not net borrowers from 2003 to 2007. At the same time private credit was rising exponentially partly because when they joined the Euro banks in these countries could suddenly source loans in Euros from outside their national borders.
This is the same pattern as we see across the first world. Private debt sky-rockets up leading to the credit crunch. Lane does not understand how credit grew so fast:
"A complete explanation for the timing of this second, more intense phase
of current account deficits and credit booms is still lacking."
But actually I think we do have an explanation of this. Deregulation of the finance sector allowed banks to create huge amounts of money, and lend far more than would have been wise. At the same time the loose regulatory environment encouraged banks to gamble on derivatives, and to pursue more and more risky, and ultimately illegal, practices in pursuit of higher and higher profits. That Lane doesn't understand this is obvious in later comments such as:
"Rather, households were the primary borrowers in Ireland and corporations in Spain, with the property boom fueling debt accumulation in both countries."If I understand Steve Keen's arguments about this then the effect was precisely the opposite, i.e. debt fuelled a property boom, not the other way around. Debt did not simply accumulate which makes it sound passive, but the banks were actively creating debt and pursuing customers to become debtors and go deeper into debt. Especially in the USA mortgage brokers were disconnected from the consequences of bad loans - hence the sub-prime mortgage market was centred in the USA. Vast numbers of loans were issued which could not realistically be paid back in a boom, let alone a slump.
During this period rating agencies, paid by financial institutions, were giving junk derivatives AAA gilt ratings so that pension funds could 'invest' in them. Goldman Sachs in particular used the AAA rating to continue selling what they knew to be a junk product as gilt, and to take advantage of low insurance rates to create hedges on loans they knew would default. The effects of this were felt worldwide. Especially when the market collapsed.
Lane points to a failure of fiscal policy in the period 2003-2007. But during this period, which Ben Bernanke dubbed the Great Moderation, economists who were, and remain, blind to the problems of private debt, convinced themselves and western governments that growth would continue for ever. They were saying so right up to the eve of the credit crunch. The failure of governments during this period was not fiscal but regulatory. During this period an increasing number of economists began to warn about the growing private debt, but were ignored by deluded governments.
Lane also sees large current account deficits as contributory to the problem. [I need to work on understanding this a bit more so no comment yet from me]
Ultimate Lane blames the crisis on the design of the Euro beginning in 1999, though I'm not convinced this is the answer because we see the same kind of crisis in the UK, and the USA. I'm more inclined, following Steve Keen and Ann Pettifor, to see private debt as the central problem. Certainly the Euro design has hampered all efforts to deal with the crisis, but then none of these countries has even acknowledge that they have a private debt problem caused by deregulation of finance. And as such the regulatory environment remains unchanged, and banks are still pumping money into casino investments rather than the real economy.
Until banks and other financial institutions are properly regulated and policed there is little hope of recovery, and every danger of it happening all over again. Indeed those foresighted economists who predicted the crisis on the basis of private debt problems have predicted a further major credit crunch in the near future. In the short term some kind of debt relief program--Keen's modern debt jubilee--will help to kick start growth, but ultimately the finance industry must be properly regulated.
Lane concludes on a cautiously pessimistic note:
However, the alternative scenario in which the single European currency implodes is no longer unthinkable, even if it would unleash the “mother of all financial crises”I think those of us not bound by the formalistic conventions of academic publishing can be far more boldly pessimistic. There is every likelihood of another global credit crunch. The Euro cannot stand as it is because it's foundations are insubstantial, the mechanisms they have to deal with the problem won't work, and they have yet to acknowledge the underlying problems regarding financial institutions and endogenous money creation. One or more countries--certainly Greece, but probably Italy, Ireland and Spain--will be forced out of the Euro. Finland may go as well. What's left of the Eurozone will, like the UK and the USA, remain stagnant for a decade or more, like Japan in the 1990s.
(Eichengreen 2010).
---
The BBC provided some very good background info-graphics to the Eurozone crisis earlier in the year.
If it's all too miserable then John Finnemore explains it in a humorous way here.
14 Jul 2012
Six Ages of Empire
Below is is General Sir John Glubb's own summary of the main points in his essay The Fate of Empires written in 1976. It is always good to see a writer who takes the time time to provide a summary at the end of a long essay - it seems to be a lost art in academia. Glubb studied a number of major Empires in Europe and the Near East: including Assyria, Achemanid Persia, Roman Republic and Empire, and the Ottomans. Unfortunately he doesn't consider any of the Indian, Chinese or Japanese Empires. Note that he considers the British Empire to have lasted from 1700-1950. He says approximate dates are fine for his purposes and that empires seldom begin and end on exact dates, but are preceded by a period of expansion and followed by a period of decline that makes them hard to locate exactly in time.
No doubt the points Glubb makes are contestable, and unfortunately I'm not in a position to judge his effort. But it is interesting that his list of characteristics which he sees as common to the final age of all empires are rampant across the first world. This is certainly a subject it would be interesting to follow up on. If searching on this subject be sure to include Glubb's name as otherwise you'll be swamped by references to the game The Age of Empires.
As numerous points of interest have arisen in the course of this essay, I close with a brief summary, to refresh the reader’s mind.
(a) We do not learn from history because our studies are brief and prejudiced.
(b) In a surprising manner, 250 years emerges as the average length of national greatness.
(c) This average has not varied for 3,000 years. Does it represent ten generations?
(d) The stages of the rise and fall of great nations seem to be:
The Age of Pioneers (outburst)(e) Decadence is marked by:
The Age of Conquests
The Age of Commerce
The Age of Affluence
The Age of Intellect
The Age of Decadence.
Defensiveness(f) Decadence is due to:
Pessimism
Materialism
Frivolity
An influx of foreigners
The Welfare State
A weakening of religion.
Too long a period of wealth and power(g) The life histories of great states are amazingly similar, and are due to internal factors.
Selfishness
Love of money
The loss of a sense of duty.
(h) Their falls are diverse, because they are largely the result of external causes.
(i) History should be taught as the history of the human race, though of course with emphasis on the history of the student’s own country.
No doubt the points Glubb makes are contestable, and unfortunately I'm not in a position to judge his effort. But it is interesting that his list of characteristics which he sees as common to the final age of all empires are rampant across the first world. This is certainly a subject it would be interesting to follow up on. If searching on this subject be sure to include Glubb's name as otherwise you'll be swamped by references to the game The Age of Empires.
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