I thought I would start today's post with something a little lighter than usual, before moving into darker matters. I found the following quote pertaining to the request for a bailout for the UK car industry:
Unite joint general secretary Derek Simpson said that intervention must come within the next week. "What is being asked for from the Government is not a handout, not a gift, it is access to strategic funding for a sector that is key to our economy's global stature and one that will play a lead role in its emergence from this recession."So there you have it. It is not a houndout or a gift, but 'strategic funding'.
Meanwhile, in the US, the bailout of the motor industry has started for real. As I have mentioned in this blog previously, the US 'big three' were in trouble long before the economic crisis arrived, and there is no reason to believe that the fundamental problems of the US car industry can be rectified in the few months of operations covered by the bailout. In other words the bailout is very much akin to burning of money, as it is certain that the auto companies will need more help in March, or will fall into bankruptcy. It is interesting to note that Cerberus, the owner of Chrysler, is unwilling to put further capital into their sickly child....
I wrote about the symbolism of the US car industry a couple of months ago. In particular Ford (the least unhealthy of the big three) is symbolic of the US as an economic power. I mentioned at that time that there was a view that the company was 'too big to fail', and related this to the attitude of the US as a whole. Just as the car companies are too big to fail, there has been an attitude that the same is true of the US as a whole. However, the car companies are failing because, just like the US economy as a whole, they are bloated with fat. We are living in times when assumptions are going to be tested, and the assumption that the US will always be an economic power is an assumption that looks very shaky. As yet, there is still an ingrained belief that the US can not fail...
I have read an interesting article in the Times, regarding the weasel worded quantitative easing in the US (printing money for those who have not had the expression explained).
Quantitative easing is, in essence, what you do as a central bank when you have run out of things to do to avert catastrophe. It is that moment in the horror movie when you are backed up into the kitchen by the intruder and you start pulling out the kitchen sink as your last weapon.The columnist is quite right that it is a measure of the desperation of governments to reverse the slide. The columnist discusses the dangers of deflation, and places printing of money in this context. However, at least he is aware of the risks:
The biggest risk is in storing up trouble for the future. When inflation gets going, the central bank will have to be very quick to reverse course: mop up all that excess money and push interest rates much higher. That won't be a pleasant policy for an economy just starting to recover. But it's a problem that the Fed would love to have right now. Not that those central bankers would put it quite that colourfully.At the moment, the US is getting away with this policy, as there is still a prevailing view that the US is too big to fail, that the $US is 'the' reserve currency, that so much trade is conducted in $US and so forth. I have long argued that the fate of the US economy is symbolically tied to the fate of the UK economy. The UK is a major Western economy, and the failure of the UK economy will be a major step in raising the question of the viability of the US economy. At its most basic, if the UK can fail, then why not the US? I will therefore discuss the failure of the UK economy, which is even now collapsing, but with the government trying to hide the reality of that collapse.
The UK is now at the stage where the markets are now seriously confronting the fact that it is a basket case. I had the following to say, back in November of 2007:
All the while this is happening the government will fall into crisis. With a falling pound, an economy collapsing around them, and an already overstretched borrowing position, they will be faced with ever more expensive borrowing, meaning higher interest rates, or massive cuts in public expenditure. There will be no room to manoeuvre. The only solution will be to cut back on expenditure. Continuing to borrow will be too expensive, and would destroy the value of the pound, as well as creating an even deeper crisis of credibility that theThere is no cut back in expenditure, borrowing is out of control, and the currency is responding exactly as I predicted it would. We have this article on the relentless collapse of the £GB:
government can manage the economy. UK
The devaluation is only matched by the moment in 1931 when, under Ramsay MacDonald, the UK was forced to abandon the gold standard, plunging by more than 24pc against the dollar. The parallel is significant, since many economists have attributed the gold standard exit as one of the main reasons the UK enjoyed a relatively mild depression in the 1930s, while the US suffered mass unemployment and saw its economy shrink by a third.It is an interesting comparison. However, today is not the 1930s. The UK was not saddled with the bloated infrastructure, bloated government, and still had a massive manufacturing sector. I can not emphasise enough - it is not the 1930s. It is a new century, and the UK has a very different economy from that time. It no longer has the huge manufacturing base to allow for an export led recovery. The devaluation of the £GB will not create an overnight competitive edge for the UK economy, as manufacturing will take a long time to respond to the new competitiveness. There is simply not enough of a manufacturing base to make up for the collapsing service economy (including the collapse of financial services). The same can be said of the US, where the state of the car industry is symbolic of a widespread decline in manufacturing in favour of the 'service economy'.
From the same article:
It is in the last paragraph that my concerns are rooted. The big question for the last point in the quote is who exactly is buying the UK government bonds? Is it the UK banks, attempting to shore up their balance sheets? If so the government is lending money into the same banks, who are then lending it back to them. It is for this reason, I suspect, that the Bank of England is planning to print money, and the same reason why they changed the law in the banking in an Act of this year as follows:
Although some are warning of a full-blown sterling crisis, the Bank believes that the fall in the pound, provided it does not accelerate, could benefit the economy by pushing up exports and boosting UK revenues in the coming years.
It may also prevent rates from having to fall to zero, since a weaker currency tends to generate inflation. Importantly, investors are not shunning UK government bonds, indicating that they have not yet lost faith in the authorities' ability to deal with the economic crisis.
235 Weekly returnThe act can be found here, and the relevant section is on page 115. Here are the words from the original act of 1844 that has been repealed (to be found on the first page of the pdf copy on the BoE website):
Section 6 of the Bank Charter Act 1844 (Bank to produce weekly account) shall
cease to have effect.
6 Weekly account in form in schedule (A.) to be rendered by the Bank of EnglandEssentially, it now possible for the Bank of England to print money and not tell anyone about it. I was originally made aware of this on the Guido Fawkes blog here. I have previously quoted several reports that there have been problems for the government in raising finance. I will once again quote one of the articles I used before:
… An account of the amount of Bank of England notes issued by the Issue Department of the Bank of England, and of gold coin and of gold and silver bullion respectively, and of securities in the said issue department, and also an account of the capital stock, and the deposits, and of the money and securities belonging to the said governor and company in the banking department of the Bank of England, on some day in every week to be fixed by the [Commissioners for Her Majesty’s Revenue and Customs], shall be transmitted by the said governor and company weekly to the said commissioners, in the form prescribed in the schedule hereto annexed marked (A.), and shall be published by the said commissioners, in the next succeeding London Gazette in which the same may be conveniently inserted.
The UK and Italy struggled to sell bonds on Thursday in a fresh sign of the difficulties governments are facing because of the debt needed for economic stimulus packages and bank recapitalisations.Back in November of 2007, when I wrote 'A Funny View of Wealth', my argument was that the UK's economic growth for the last ten years was built on a bubble of debt. This has now been partially accepted by mainstream economists and the media. However, they have never really fully accepted the implications - possibly until now. My belief, and it is no more than a belief, is that the government, and the Bank of England have finally realised the scale of the difficulty. The wall of cheap credit that flooded into the UK market is gone, and nothing much is left of the UK economy without that financing. I have estimated previously that the UK GDP has been overstated by about 30 % (I am being conservative in this estimate), due to the multiplier effect of all the borrowed money flooding into the economy. The economy is now contracting back to the level of non-debt inflated output.
The two bond auctions saw both governments forced to pay higher yields to attract investors and Italy scaled back the amount on offer.
Analysts say it is an “ominous” warning that debt raising is likely to become even tougher in the coming months if problems are emerging so soon after government announcements to increase issuance. A record of more than €1,000bn ($1,290bn) of debt is expected to be issued in Europe next year
As a result, we are now in a position where the government finances are sinking faster than the already pessimistic predictions of the government. From the Telegraph:
And now, my prediction from 'A Funny View of Wealth':
Official figures show that the budget deficit climbed to £16 billion in November, the largest since records began in 1993. In the same month last year borrowing was £10.7 billion.
Over the first eight months of the current financial year, the Government borrowed £56.1, nearly twice the £29.2 borrowed in the same period last year.
The public finances are worsening sharply as companies lay off staff and unemployment rises. Gordon Brown's moves to bring forward some public spending projects amid the recession has also put the budget under more pressure.
Government receipts fell by £2 billion in November from the previous year, to £35 billion. Income tax receipts were down by £1.4 billion.
Meanwhile, spending was £47.6 billion, up by £2.9 billion from last year. Benefits payments rose by £1 billion as more people lost their jobs and started claiming welfare.
In the Pre-Budget Report last month, the Treasury set out plans to borrow £78 billion this year. Over the next five years, borrowing will rise by £500 billion and the Government's stock of debt will exceed £1 trillion.
The second implication of a recession, or depression, in the UK economy is that government spending will almost certainly rise in relation to government income, as tax receipts will inevitably fall [italics added]. In this case the proportion of borrowing going towards spending will rise to pay for unemployment benefits, managing increased crime and all of the other associated ills of a poorly performing economy - unless the government chooses to cut spending overall.In other words, as expected, government revenues are collapsing, whilst costs are sky-rocketing. When I wrote these words, I had no idea that the government would also dig themselves ever deeper into a financial hole with the string of bailouts. As such, the situation is far worse than I ever envisioned....
Here we come to the crux of the issue. Even as I am writing this article, the UK government is sinking into bankruptcy. I am not a conspiracy theorist, in that I do not believe there is any grand plan to create a new world order. However, I do believe that individuals and governments do occasionally conspire to deceive the public.
I actually believe that, at this moment in time, there is a conspiracy. That conspiracy is not the result of a great master plan, but is the result of the ongoing incompetence of government, and is a desperate attempt to hide that same incompetence. Over the last ten years, the UK economy has effectively been supported by borrowing, and without that borrowing it is collapsing. The government does not want to admit to the public just how bad the situation actually is and, as a result, they have come to the point at which they are resorting to ever more desperate measures.
I believe that what we are witnessing is an appalling conspiracy. I believe that the government is planning to use printed money to finance the banking system, and as a quid pro quo, the banking system will finance the government borrowing with the printed money. The repeal of the provision of the 1844 Act is an attempt to cover up the actions of the government. If I am right, we do indeed have a conspiracy.
The most tragic part of all of this is that the conspiracy, the idea of printing money, will just make the final catastrophe even greater. It is a an economic Ponzi scheme. It will finally end in tragedy, and makes the government no less criminal than the now infamous Madoff fraud. Printing money to lend to banks to then lend to the government is completely unsustainable, and will lead to hyper-inflation. In the case of the US they are still getting away with money printing, because the $US has not weakened significantly, meaning that they are not yet importing inflation. In the case of the UK, the £GB is collapsing, and inflation will therefore be imported. There will be a lag in the importing of inflation as there is a time lag as contracts are renewed, and as previous contracts run their course. However, we have already seen the inflationary effects in the increase in the price of food, which is a far more responsive sector than, for example, imported electronic products from Asia.
Now, to return to the Ponzi scheme. Part of me hopes that I am wrong, but there is just too much coincidence and, when combined with the inevitable weakness of individuals trying to hide their failures/incompetence, we do have the makings of a potential conspiracy. The situation can be summarised as follows:
- The government has taken stakes in many banks, allowing them a direct line into the operations of the banks
- The banks are increasingly reliant on government finance for survival
- The £GB is already collapsing
- Government finances are in tatters, and the government is finding it increasingly difficult to raise finance
- The BoE has admitted consideration of printing money, and then there is the repeal of the 1844 Act
And the consequence, like all Ponzi schemes, will be a collapse, and then the dominoes will start to topple. The US will be next. The bubble of the value of the $US is set for collapse, and only a false confidence in the $US will continue to support it. When the UK Ponzi scheme collapses, it will take the US with it. As I stated, when the UK is seen to be built on foundations of sand, the same question will be asked of the US....
.....as there are too many commonalities between the problems for each of the economies, and commonalities of the 'fixes' being implemented. The countries are mirrors of each other.
After all - the US is already running the printing presses. They have outsourced swathes of their manufacturing. They have built a 'service economy' funded by debt. They are, and have, run comparable trade deficits. The government has bailed out the financial institutions, and has the same influence on banks. US bonds are selling despite negative yields. Government debt is spiralling. Unemployment is going up, as are government costs. Revenues are going down. I could go on....
Note: I sincerely hope that I am wrong in all of this. I have always been very gloomy about the prospects for both the UK and US economies (though initially I was more optimistic for the US - I shared the same false confidence that many hold). However, the magnitude of the foolishness I am contemplating in this post is of a scale I find hard to accept. There is a part of me that is suggesting that what I am writing must be mistaken. However, each time I have the thought, it is crowded out by what I can see before me. As I said, I hope that I am wrong....
Note 2: I will try to respond to some of the comments made on my last post, and also on the taxation post, later today or tomorrow.
Note 3: I have had the first comment on the post (see below) from 'anonymous' and it was such an excellent and well written comment that I thought I would respond immediately. Anonymous asks:
It's madness to think that once the ship, SS Gt. Britain (which is terminally holed below the waterline) has been righted, that everyone can climb back on board and resume partying.The answer, in short, is that there is no grand plan, no vision, just events and reaction to events, and a collective burying of heads in the sand. It is why I suspect that they are engaging in the deception, and it is why I am so concerned. There is no plan A worth speaking of, just scrabbling in the dirt, hoping (with a sense of despair) that it will all come right. There never was a clear plan, no thought to the long term, nothing but hopeless dreaming.
So what has got to be different? What new direction is capitalism to take? Have they a plan B?
Plan B, - without a plan A, I think not.
For the question of the new form of capitalism, I think I have answered this throughout the blog. Life is going to get tougher, as we live in a period of hyper-competition. As for the form of Western capitalism, I am not sure. Either we can dream alongside our leaders, in which case we are finished, and condemn ourselves to decline. Or we can accept the nature of the world that, day by day, is revealling itself to us. That means we accept that we have to change, and those changes will be hard to live with. That is why I also publish ideas on how we can move forward....
Thank you for an interesting comment, Anonymous.