Friday, February 5, 2010

Why the Risk of Sovereign Debt Crisis?

The subject of this post will be familiar to long term readers of the blog, but I will nevertheless plunge on with newer readers in mind. I have just read a column by Jeremy Warner in the Telegraph, in which he describes how he sees the progression of the economic crisis. It is an analysis with which most analysts, politicians and commentators would broadly agree. The problem is that it is wrong.

The interesting thing about the analysis is that it is made in the context of the sovereign debt worries about the PIIGS (Portugal, Ireland, Italy, Greece Spain), and the broader worries about the AAA rated larger economies such as the US and UK. His view is that this is a new potentially damaging phase in the crisis. This is how he describes the first two phases:
The first was a fairly conventional, if extreme, banking crisis where a cyclical overexpansion of credit and lending suddenly, and violently, corrects itself in a great outpouring of risk aversion.

In the second phase, governments and central banks attempt to counter the economic consequences of this crunch with unprecedented levels of fiscal and monetary support. Temporarily, at least, it seemed to work.

The reason that this is wrong is that the first phase is not actually the first phase at all. Something else entirely caused the current economic mess, and the risk of sovereign default naturally flows from the real first phase (it is a long post, but if you stick with it, it will be clear why the sovereign debt crises are inevitable). I first discussed the real causes of the economic crisis in a series of posts that steadily built a picture of what was going wrong in the world economy. The posts tracked my evolving thinking on the problem, up to the point where I identified the real cause of the current economic crisis (some of the key posts in the development of the ideas are here, here, here, and here).

My cause for the crisis does not originate with the financial crisis, but with shifts in the world market for labour. In particular, I track the economic crisis to the massive expansion in the world labour market that commenced with the full entry of China and India into the world economy (as well as a more broad expansion e.g. Vietnam, but these are the two major factors). It might be noted that the labour was already in place in these markets, but the key difference was that there was a change such that these labour markets were connected with world markets, capital and technology. It is impossible to pick a specific date when they started to impact upon the world economy, but I consider the late 90s as an approximate starting point.

If we want to understand the degree of impact of such a change, we just have to think of labour as a factor of production. The greater the supply, the lower the cost of the supply. Both in China and India there are vast pools of labour that is still not fully connected into the labour force, but with potential to be connected. The migration of lower value manufacturing to the West of China is an example of how partially connected labour is continuing to be brought into the world economic system.

What this amounts to is a massive expansion of availability of one of the key factors of production, such that there is an oversupply of labour. However, in order to make this labour productive, it is necessary that the labour has access to the other factors of production, such that the labour might be utilised. These other factors commence with the supply of commodities. I will try to illustrate the point with a simple illustration.

If the world standard of productivity is such that each unit of labour can process 1 unit of commodity, and there are 100 units of labour, the available commodity supply must exceed or equal 100 units for the labour to be fully utilised. If the commodity supply is less than 100, then there will be unemployment/underemployment until the supply of commodities catches up with the supply of labour.

We know that life is not that simple, with variable levels of productivity, but the underlying principle nevertheless applies. In order for labour to be productive, it needs to have a supply of commodity that matches demand according to the potential productivity of the time commensurate with the available supply of the input factor of labour.

What we have seen with the entry of emerging economies is a massive labour supply shock, which is a supply shock that might be regarded as unprecedented in world history (perhaps new world silver supply expansion might be comparable?). The important point about the supply shock is how the supply of the other key input factor responded - the supply of commodities. I will quote from a previous post rather than rewriting the section.
The best example of the problem can be found in oil, as it is still so central to economic activity. In 1997 output was around 75 million bpd, and output had only climbed to about 85 million bpd in 2007 (a chart here shows the output - not a good source but the chart is usefully clear and conforms to charts from better sources). Copper has seen higher growth in output from around 11 million tons to 16 million tons over the same period, but this would still suggest that the growth is still probably not matching growth in labour.

However, not all of the commodities have seen a similar pattern to these examples, with iron ore output nearly doubling over the same period. Whilst this might suggest that there is no problem, it is necessary to remember that countries such as China have been growing infrastructure at an astounding rate, such that their demand for steel will be exceptionally high in comparison with a 'developed' economy (take a look the pictures of Pudong in Shanghai, or Chongqing and you will get a visual sense of one source of demand).
The point here is that there has been a major bottle neck in the supply of one of the key inputs to production, and that the supply of other commodities has not fully reflected the extraordinary demands created by emerging economies. The increase in the supply of labour in the world economy was not accompanied by a commensurate increase in supply of materials for labour to process, and for the extraordinary infrastructure development of the emerging economies.

The other side of this coin is, of course, that the final output of commodities and labour is consumption of the value created by labour in conjunction with commodities. As fast as new labour enters the market, there is a demand for supply of commodities to process, but also increase in demand for consumption of the output of the factors of labour and commodities. Again, a simple illustration will make the point.

If an average Western consumer is consuming one unit of commodities per year, and there are 100 consumers and 100 units of available commodity, it is possible for the one unit of commodity consumption to be sustained. However, if we add 20 consumers per year, and then add only 10 units of commodity per year, it is possible to see that the world average of consumption per person is falling. This, of course, does not make sense. In particular, countries such as China have grown richer, such that the Chinese consumer now has the means to buy more goods and services than before. The point here is that countries like China were so poor, they barely registered per unit as consumers, just as they did not register as labour in the world economy. What is really taking place is a reduction per person of available commodity, alongside a redistribution of this lower per person supply.

In essence, the supply of commodities has increased, but not in a way sufficient for each person to utilise the same amount of commodity as a pre-economic crisis developed world consumer. As such the proportion of available commodities available to places like China is increasing in proportion to the developed world, at the cost of the availability of those commodities in the developed world. The available resources of the world are steadily transferring to countries like China, and the only way for the developed world to maintain the current standards of living is if there is a massive expansion in the supply of commodities.

The big question is how this relates to the sovereign debt crises that are looming. I am afraid this requires more explanation.

If we jump back in time to, for example, the entry of Chinese labour into the world market in relation to the US economy. We see that the Chinese were savers and the US were debtors. It is no secret now that China has been playing a large part in funding the US government deficit and that there have been ongoing negative current account balances in the US. Whilst the US has remained an industrial power house, in aggregate the country has been consuming more than it produces. If we think of the real shift in the balance of resources that has taken place, what we can see is that the Chinese share of the available resources has been increasing, and that it has taken a proportion of that increased resource, and handed it back to the US as credit. This has hidden the real shift in the balance of resource allocation.

In the US, the lending of that proportion of Chinese resource has allowed consumption to continue as if the rebalancing did not take place. In China, it has hidden the real increase in wealth of the Chinese. In the short term, it has appeared that the US is wealthier than it is, and that China is less wealthy than it is. However, the reality is that it is the lending of one country's resource share to another country, and needs to be repaid. If the US does pay, then China will start to increasingly appear as it really is - a far more wealthy country than is presently apparent.

At this stage, you will note that I have not mentioned the financial crisis at all. This despite the fact that nearly every analyst points to the idea that the current crisis was all due to irresponsible lending by the banks. How does this fit into the cause of the crisis that I have discussed here?

There are a multitude of factors that contributed to the crisis, such as the nature of financial regulation, the role of central banks, and the role of government policy more broadly. However, the real root of the financial crisis lay in the provision of ever greater levels of credit to consumers. The source of that credit was from many sources, such as the petro-economies who benefited from rising prices of oil, which in turn reflected the lack of supply matching the increasing demand from the increase in labour. Then there was the supply of credit, exemplified by Chinese lending into the US. Finally, there was central bank policy, best exemplified by the Japanese carry trade, which flooded the rest of the world with Japanese credit, fresh from the Japanese bank's printing press (takes some explanation, see here).

The overall net effect of this was a flood of money into the developed industrial economies. When a bank is offered money, it is highly unlikely to turn it down, and will seek to profit from utilising that money in pursuit of profit for itself and the originator. The problem that arose in this situation of the flood of money is the question of where it might go. If there is a huge supply of money, the first tranche is likely to go into investments in which the risks are well balanced, the second tranche is likely to go into a slightly higher risk investment, and so forth. At any given moment, there are only so many good investment opportunities, and problems arise if there is more available money for investment than good opportunities. However, if there are a dearth of opportunities, then the bank will still find opportunities, even if these are higher risk.

Thus was the consumer boom born, and the service economy built on asset price inflation and debt. This 'new economy' was (in most analysts' minds) different from previous booms, as a virtuous cycle of increasing asset prices supported increased credit, which supported increased service activity and consumption, which increased employment and so forth. The trouble was that, it was not different, but was a massive expansion in credit fuelled by the lending of resource from the rest of the world that needed repayment. The wall of money that was being introduced into the developed world economy was not being invested, but being consumed. If you wanted to invest in productive output, long term investment with a return in wealth generation, all the 'action' was in the emerging economies.

Sure, there were investments in many sectors of the developed world economies, but these investments were largely made in support of the boom in consumption. That consumption was achieved by a combination of internally generated resource, but also with the loaned share of the resource of the overseas creditor. Large sectors of economies were, in the long term, unsustainable.

The financial crisis was simply the unwinding of the many mal-investments as the unsustainable nature of the credit boom became apparent. As the banks made losses, the overseas creditors turned off the taps to the banks. As fast as governments poured money into the financial system, the money flooded out the back door to repay the losses of overseas creditors. If we think about it, as the government bailed out bank A, if the problem was internal creditors, the money would have reappeared in bank B as new credit for lending. Instead, as fast as governments poured in money, it appeared to vanish. The only way that governments could keep the whole system up in the air was to use quantitative easing and massive purchases of distressed assets. In doing so, the losses of the banks, and the losses of overseas creditors appeared on (in the broadest terms) government balance sheets.

Effectively, the overseas credit spigots were turned off, and the only way that credit could be obtained was through the government. The direct credit from overseas lending was simply rechanneled through the government, and thence again appeared in the banking system or as direct spending in the economy. The government had become the debt fuelled consumer of last resort, in an attempt to hide the fact that the economy no longer had the underlying wealth of the past.

If we return to the point about resources in relation to labour, it is very clear that, if the emerging economies were utilising a greater share of a diminishing per person availability of resource, someone somewhere was, by definition, poorer. I was in China in 1997, as a boom in television manufacture took place, along with a boom in the consumption of this good within China. Each television that was consumed in China represented a redistribution of the allocation of the resource of the world into the hands of Chinese consumption, and a move of resource into the hands of Chinese labour. Had the world increased the supply of resources, or commodities, commensurate to the growing supply of labour, this would have presented no problem.

This is not what happened.

We can make an analogy of the resources as a pie. Even as the resource pie is growing, you are confronted with a zero sum game. The number of people sharing the pie is outstripping the growth of the pie, and somebody therefore has to lose. If we want to understand why sovereign defaults are inevitable, we just have to see the actions of governments for what they are. They are pretending that the share of the pie has not moved, and are borrowing the share of pie of others in order to convince their electorates that nothing has changed. The problem is that, even as they borrow a proportion of that pie from others, there is an expectation that it will be returned in the future. Even as the developed world governments borrow, their relative share of the pie continues to diminish, leaving them in a situation where they are committing an ever greater share of a diminishing share of the pie to the creditors.

It is all unsustainable, and no amount of monetary tinkering will change the reality. As labour entered the world economy at a faster pace than resource growth, somebody was going to lose. Monetary tinkering and borrowing will not be able to change this reality, which must somehow emerge.

Note: I have not discussed why the emerging markets have won a greater share of the resources, as the post was already very long. Apologies for this, as it is an important component of the argument, but I am sure there will be many suggestions provided in the comments. There is a great deal more detail that could be added, but I wanted to keep the arguments as simple as I could. I hope that it is clear, and that I have made no significant errors (sometimes it is hard to summarise these kinds of ideas).


  1. It all makes perfect sense to me, but I'm guessing that another commenter will explain that our share of the pie need not diminish if we will it not to, and invest borrowed money in as-yet-unforeseen growth industries, whose products we can sell to other countries... who all have exactly the same idea as us.

  2. Good to see new posts!

    The overall net effect of this was a flood of money into the developed industrial economies. When a bank is offered money, it is highly unlikely to turn it down, and will seek to profit from utilizing that money in pursuit of profit for itself and the originator. The problem that arose in this situation of the flood of money is the question of where it might go. If there is a huge supply of money, the first tranche is likely to go into investments in which the risks are well balanced, the second tranche is likely to go into a slightly higher risk investment, and so forth

    In a badly regulated financial system, the banks can do what they like with the money. In an efficiently regulated one, they will be prevented from pumping the money into damaging asset bubbles (which actually happened in Canada which didn’t see its financial system collapse in 2008).

    And in fact the situation was not unprecedented. There is an obvious historical parallel: the petrodollars that started flooding into London and New York banks in 1973–1974 and 1979 after the “oil shock” price surge. In 1974, the Arab oil-producing countries had a current account surplus of $68 billion US, which they mostly invested in the West (in 2007 inflation-adjusted US dollars that would be the equivalent of $285 billion entering the US economy). In 1975, these countries had a surplus of US $92 billion, an even greater amount.

    And yet the Western financial system was not destroyed by large destructive asset bubbles in these years. Why?

    The reason is that we had effective financial regulation that still existed before the onslaught of deregulation in the 1980s and 1990s.

    International financial centres at Paris and Frankfort remained heavily regulated until the 1980s. As late as the 1970s, both Switzerland and Germany imposed controls on capital inflows to prevent currency appreciation and too rapid an expansion of their domestic money supplies from foreign inflows. Germany, in particular, did so during 1971–1975 and from 1977–1981, precisely the time when petrodollars were flooding into Europe through Eurodollar markets. It is no surprise that, despite the massive flood of money in the 1970s, there were no destructive asset bubbles in the West.

    Since the flood of money could have been prevented from creating destructive asset bubbles, it follows that it was not the root cause of the crisis.

    The real cause was the dysfunctional financial system.

    I have a more detailed analysis of this on my blog here:

    Capital Controls, Financial Regulation and the Global Economic Crisis of 2008–2009

    And further proof of the importance of financial regulation can be found in Canada’s history during the crisis.

    If it is the case that financial regulation is totally ineffective in preventing asset bubbles and bad lending, then why were Canada’s banks spared this crisis?:

    Canada’s Sound Regulation Resulted in a Sound Banking System Even During the Credit Crisis

    Worldwide Financial Crisis Largely Bypasses Canada

    See my in-depth post here:

    Financial Deregulation and Origin of the Financial Crisis of 2008.

  3. Comments on the Pause in Quantitative Easing

    The concerns over sovereign debt extends further, with the ongoing saga of the PIGS (Portugal, Italy, Greece and Spain):

    The sovereign debt problems in Greece, Spain and Portugal etc are the result of them not having currency sovereignty. Instead, they have the Euro and have given up the power to control monetary policy to the unelected ECB, so they are in a completely different position from the UK or the US or Japan. I can’t stress that enough.

    Joining the EU and giving up their own domestic currencies is what is killing the PIGS.

    They are forced to borrow in what is effectively a foreign currency, just like Argentina did.

    Stark, raving, mad.

    They should leave the EU and restore their domestic currencies.

    The result is the prospect of a downgrade of US debt… This might again be seen as a positive for the UK, but the position of the ratings agencies on the UK is equally as concerned, and preceded the worries about the US. Moreover, this is a comparison of a bad situation with a bad situation, and does not detract from the underlying reality that both countries are looking increasingly risky places to invest money

    Japan’s credit rating was downgraded by the ratings agencies (the same ones, I might add, who proclaimed that toxic mortgage-backed securities were AAA rated!), but its interest ratings and government borrowing hasn’t been affected.

    In fact, as you point out, QE has been used successfully to indirectly support the UK bond market. It could be done again, if necssary, if private investors don’t buy all government bonds.

    The solution to the problem that is proposed by governments is that they must ensure that their economies return to growth. When they say growth, they actually mean debt based growth, meaning replicating the ersatz growth that took place before the economic crisis.

    Here I agree completely.

    That is why they need to nationalize banks, tightly regulate them, control allocation of capital to productive investments, adopt aggressive trade and industrial policies and rebuild manufacturing and output of tradable goods and services.

    This model will require post Keynesian economics.

    I would like to see how the Tories will do this….
    Savage cuts to social spending and free market economics? How will that rebuild industries?

    Some analysts argue that Japan is looking high risk, others that the PIGS are ready to topple, and so forth.

    As I pointed out above, Japan is in a completely differently category from the PIGS, not just because of its dynamic manufacturing sector or trade surpluses.

    The key is this: it’s a sovereign country with its own sovereign currency and the government isn’t afraid of controlling monetary policy and interest rates to support government debt.

    The PIGS have given up monetary and currency sovereignty. That was insane, as is the result: their sovereign debt troubles.

    Greece, in other words, is the fiscal Petri dish that reveals in gory detail what could happen in the UK if this Government – or the next – fails to maintain the confidence of investors

    Edmund Conway completely misses the point that Greece, and Spain and Portugal etc, are not a sovereign nations any more and have no sovereign currency, unlike the UK or the US or Japan.

    Their policy positions are thus severely restricted – but unnecessarily so.

  4. See this excellent article in the Guardian by Robert Skidelsky:

    But what about the vast quantitative easing (printing of money) that has been occurring? .... For those who have had a couple of lessons in the quantity theory of money, this seems a plausible conclusion ... But, as John Maynard Keynes never stopped pointing out, the quantity theory of money is true only at full employment. If there is unused capacity in the economy, part of any increase in the quantity of money will be spent on increasing output rather than just buying existing output.

    The bogey of inflation

  5. Lord Keynes,

    It is good that you introduce opposing views. However the regularity & quantity of idealised academia that you are submitting has become a turn off.

    Please tone it down some what.

  6. I remember reading that china had .75 billion people working in agiculture pre joining world markets.
    i am guessing that would be 75 % of the working population.
    Now in uk usa its about 1% or 2.5% indirect.
    China wonts to mechanise agiculture.
    So it is on the road to find work for 730,000,000 people. They are 15 years :approx: down that road to date.
    As they work 16 hr days for every one in work,that could mean two out of :productive: work in the west.
    Just go to the shops and look for goods made in the uk.You will soon see the problem.
    I can only see a planned retreat from free world trade,saving the west.Its in the US hands,to end this globalisation

  7. Good analysis but there are also other factors to consider regarding the decline of the US (and to a lesser extent of Europe) such as the low level of net investment over the past 30 years. From the US Bureau of Economic Analysis NIPA tables ( the net private investment in equipment and software has grown from $55.2bn in 1980 to $144.4bn in 2008 (both in nominal dollars from table 5.2.5 "Gross and Net Domestic Investment by Major Type (A)") i.e. 2.6 times. Nominal GDP in the same time-frame grew from $2,788.1bn to $14,441.4bn i.e. 5.2 times). Official inflation in the period (CPI-U) has also totaled 2.6 times and some alternate sources that remove all the adjustments (hedonics, substitution, etc.) of the past 20 years in calculating inflation such as John William's SGS indicate a total price rise of 7.3 times in the 1980 to 2008 time-frame. Let's use for sake of argument an inflation total factor of 5.0 between 1980 and 2008. Also, let's factor in the fact that the US population has grown from 226.5m in 1980 to 304.1m in 2008. Using the official inflation data we have a net domestic investment in equipment and software per capita that has declined by 25% in real term between 1980 and 2008. Using a total inflation factor of 5.0 we have got a decline of 61% and using John William's factor of 7.3 we have got a decline of 73%. The picture does not change that much if we take the average of the past cycle (the net private investment in equipment and structure was as follow in nominal dollars from the 2003 bottom: 2003 $119.5bn, 2004 $153.2bn, 2005 $193.3bn, 2006 $225.1bn, 2007 $210.1bn, 2008 $144.4bn). By the way, 2009 data will become available in August 2010 and it will not be pretty.

    So we are faced with a declining real per capita net private investment in equipment and software for the past three decades while it should have grown roughly in line with GPD to keep the same level of competitiveness. What we call emerging countries (e.g. China, India, Brasil) have vastly increased their capital stock so the relative picture is even worse and we do leave in a global economy.

    The system is very complex with a lot of moving parts but one thing must be clear: the depth of the structural problems in the US (and also Europe) is unprecedented and our capital base has been declining. There is no quick way out, only decades of hard work and high saving rates to rebuild our capital base and this is a best case scenario assuming no truly major crisis disrupt the process.

    Best Regards, APM

  8. It seems to me that those who have a pre-occupation with getting the UK out of Europe have an overriding obsession with, as Lord Keynes eloquently demonstrates, 'the unelected ECB'. Of course, the criticism is often also raised in other continental spheres, one good example being the countless 'unelected' beaurocrats that infest the European Commission and other places in Brussells and Strasbourg.

    It is strange then that these same people never seem to demonstrate equal concern for people like Mervyn King and his colleagues on the MPC and, unless I am greatly mistaken, I did not have the opportunity to vote for any of them!

    It is very easy also to moan and whinge about unaccountability and lack of democracy in the European Union but never do these same people express any concern about the lamentable state of democracy in the UK.

    Whereas the EU has a written constitution, that in the UK remains unwritten, undefined and unavailable for public inspection, as it lies in the hands of the royal elite and those who are profficient in the language of legalese. It contains very little, if anything, for the common man whose 'rights', as a result, can be removed at royal whim.

    Who elected our head of state, a monarch that, despite the claims of countless bowing and scraping sycophants, remains just as powerful, if not more so, than her counterparts of the 17th and 18th centuries?

    Who elected our upper house, the House of Lords?

    Why do our so-called elected representatives, before they take their seats at Westminster, take an oath of allegiance to an all powerful unelected monarch, rather than to the people who sent them there, or to a written constitution?

    Why, if the UK is so democratic, has Section 40, 2 (g) of the Crown Proceedings Act (1947) given the Duke of Cornwall the right to 'control or otherwise intervene in proceedings that affect his rights, property and profits'?

    To be continued

  9. Part 2

    Why has Article 13 of the European Convention on Human Rights (not to mention Protocol 12) been omitted, without explanation, from the Human Rights Act 1998? For those unfamiliar, Article 13 would, on a level playing field, give us (the people) the right to an effective remedy in the event that our rights are breached by persons acting in an official capacity.

    Why, in a democracy, are conversations between the Monarch and her Prime-Minister, exempt from the Freedom of Information Act 2000 (Sections 37 and 38)? Because of this extra-ordinary exemption, it is extremely difficult, neigh impossible, to establish who is telling whom!!

    Why is the Duke of Cornwall exercising the Royal prerogative rights of foreshore, bona vacantia, wrecks, wines and royal fish when Halsbury's Laws of England states that the 'exercise of the royal prerogative by the rightful heir out of possession is void and of no legal effect'? The Duchy of Cornwall was founded under charter in 1337/8. The first Duchy charter was equated to an act of parliament by Lord Coke in 1607 and elvated to the status of Constitutional Law 10 in 1976. Subsequent to this date, governments of any political colour refer to this body, that still has governmental, executive and judicial functions in Cornwall, as a 'private estate'. The Duchy of Cornwall is, by such a baseless official definition, excused from answering prying questions from the public since, unlike its larger counterpart in the UK, the Crown Estates, it is exempt from the Freedom of Information Act.

    That is probably enough for now on this diversion. To bring my rant back to topic, I will just add the following remark.

    If this country is to regain its balance, economically and politically, steps must be taken to ensure that legal privileges, favours, exemptions from the law etc etc are removed entirely from our society. This would ensure that all citizens can expect fair treatment based on the principle of equality before the law. Such a fundamentally important principle, a constituent of written constitutions the World over, including the much aligned EU constitution, is quite unbelievably not available to 'subjects' in the UK - there is neither a constitutional nor statutory guarantee of this principle that others the World over take for granted. Unless these provisions and omissions that officially sanction lying, cheating and swindling by tthe few who are more equal than the vast majority, are rectified, how on Earth can British people be sure that their elected representatives are acting in their interests and not in those of the elites of the royal family and banksters in the City of London?

  10. A company, Widgets Inc, is the leading firm producing widgets in Widgettown. It is so successful that it decides (for the best of reasons) to change the nature of work for its employees.

    The company introduces a free creche for the workers children. It subsidises breakfast and lunch, offers 9 weeks a year holiday, it allows flexitime and extensive leave for personal and emotional issues. It puts water coolers, coffee machines and donut carts in every office. It encourages sabbatical years (on full pay) for its staff to explore the world.

    In short, it becomes a fantastic company to work for - the envy of other firms - the most wonderful place to earn your wage.

    Elsewhere in Widgettown a small, lean, hungry firm opens up - EasyWidgets Inc. It takes the people who couldn't get a job in Widgets Inc.It makes the same widgets, with minimal staff on minimal wages. There is no creche, no paid leave and if you want a coffee and a donut you have to bring them in and eat them during one of the very short alloted breaks each day. with so few overheads it makes the widgets for a fraction of the cost and undercuts Widgets Inc dramatically and consistently.

    Widgets Inc. can huff and puff and demand protective regulation and point to its successes and progressive stance to its heart's content. Nevertheless, its days are numbered.

  11. CE, what I don't get is how the West was supposed to avoid the impending calamity. In previous posts you have made it clear that you believe that a genuine free market spontaneously produces the optimum outcome - Adam Smith and all that - and clearly the West does not abide by those principles: welfare state, banking bailouts, scrappage scheme etc. But surely even by following the purest free market principles the West would still have ended up more-or-less where it is now. The Chinese played dirty, but the blind, dumb free market could not have discerned that. All it was capable of doing was responding to simple economic signals that, in this case, resulted in the West shipping all its industry and intellectual property to the place prepared to charge the lowest price, and which was even prepared to lend a wall of money back to it, amplifying the effect. Isn't this a total indictment of the free market unless all participants are abiding by 'rules' - which will never happen?

  12. An Apology:

    I have just spent two hours writing some long responses to many of the comments, in particular Lord Keynes. Unfortunately, my comment did not publish (???). Lacking in time, I will just ask a brief question.

    I am concerned that my posts are increasingly repeating previous thoughts and ideas. Much of what I have to say has been said, and it is now simply a waiting game to see if it is possible to defy gravity.

    As such, if there is a subject that I have not covered that readers would like to see covered, I will be happy to look at this for future posts (if I have a coherent view on the subject).

    Apologies again for my loss of my responses - there was a long response to Lord Keynes on QE, and a long response to Lemming amongst the many comments lost. Sorry for that.

  13. Sorry, a quick response to Steve - I think you have covered my ommission very well....

  14. I'm not familiar with how I am affected by the Royals, apart from presumably some direct taxation to pay for them. Not wanting President Blair, who would cost a lot more I imagine, I don't mind stumping up. The Queen is a constitutional monarch. She has some theoretical powers but doesn't seem to use them.

    The people that really scare me the most are our elected politicians. People are easily deceived, Goebbels explained it in his famous 'Big Lie' quote, though he claimed to have got the idea from the English. He also said the lie can only be maintained as long as the state can shield the people from its political and economic consequences. Oops...

    Now if you want real democracy, let us have a referendum system like the Swiss where if 100,000 signatures at least are collected the proposed idea goes to a referendum. I think things would change quite a lot, especially if the media weren't available as a tool for the political classes to swamp us with propaganda. All of which would only go to prove how our democratic process is rather manipulated and more apparent than real...

  15. Once again, I'm afraid that I shall need to split this posting!

    It is refreshing that someone, at least, shares a concern about the fragile state of democracy UK-style.

    However, one point made by 'anonymous' needs further exploration:

    'I'm not familiar with how I am affected by the Royals, apart from presumably some direct taxation to pay for them. Not wanting President Blair, who would cost a lot more I imagine, I don't mind stumping up. The Queen is a constitutional monarch. She has some theoretical powers but doesn't seem to use them.'

    This might be a reasonable statement on first examination. Why should anyone be prepared to stump up for something they know very little about? It must be born in mind that, although the Queen is, indeed, a constitutional monarch, she fulfils this role within the terms of a constitution that is neither written nor defined. Significantly, the UK constitution does not contain any provision to protect the rights of the individual citizen and its contents are familiar only to those who are qualified to interpret the strange language of legalese. It is no wonder, then, that the more probing and alert of our neighbours and allies, regard the UK as a constitutional laughing stock. Here in the UK, we are ALL 'subjects' of Her Majesty, the sole 'guarantor' of our rights and freedoms. Were they truly rights and freedoms, they would be inalienable. The reality unfortunately is that the monarch can remove them at whim and they are, therefore, not inalienable and they are not the rights and freedoms that others enjoy without question under a real, open constitution.

    The UK's constitution is unique in that it is secret and contains little for ordinary people. It does nothing to protect them from abuse of power by our leaders and public authority alike. Quite why people are prepared to stump up for such an unfair and iniquitous system that they do not underestand, is not at all clear. The fig-leaf to justify its retention is, as anonymous indicates, that the cost of an alternative presidential system would be far higher. I doubt very much whether that would be the case. At least with an elected president who turns out to be a bad one, he/she can be removed at the ballot-box!! That, in my view, is a price well worth paying for democracy!

    To be continued

  16. Coninuation of earlier posting:

    Unfortunately, the well-promoted reasons for retention of our UK-style monarchy are baseless and do not stand up to close scrutiny. If, as they tell us, it is so good for our tourist industry, why does it need the legion of special privileges, powers and exemptions under the law? If, as they always say, the monarch is only a figurehead, why should a figure head require such a plethora of special favourable protections, exclusions, tax advantages, not to mention powers, privileges and prerogatives? If she is only a figurehead, there would be no need for her to retain a wealth of feudal powers and favourable arrangements, so why do successive governments feel that such things are of no import? If they were revoked, it would make no difference, surely?

    I'm afraid that the great British public has been conned into swallowing buckets of codswallop in an act of collective blind faith that is consistent with the divine right of kings. It is, I am sad to say, nothing more than that. While such behaviour by our leaders is tolerated and sanctioned with total equanimity by the public, the UK stands not a chance in Hell of extricating itself from the dire economic/political mess in which we find ourselves today.

    Finally, if the British government felt that it was important that the citizens of post-Saddam Iraq be protected by the benefits of a written constitutional text, why did it not think that UK 'subjects' would benefit from similar arrangements in the UK? If a presidential system was beneficial for Iraqi citizens, why should it not be approprpiate for those of us who happen to reside in the UK? If our system is as good for us as they suggest it is, why, then, was a monarchy not promoted for the post-Saddam Iraq?

    At the end of the day, the reality is, of course, that the UK Establishment is protected from the people in a perverse system that does little to protect the ordinary citizen from abuses of the state/Establishment. On even superficial examination, I am afraid that our system, with all its supposed chacks and balances within, is paper thin.

  17. It nice to review and analyse the root cause, but if the intended outcome of the analysis is to find the root cause and the triggers I believe it is obviously and squarely rests with the Trade agreements and their Lobbyists and the policies propunded by them,being enforced in the world of Public fuding.


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