Thursday, March 11, 2010

The Use of the Expression 'Sterling Crisis' Increases Day by Day

It seems to be that jury is still out on the prospects for the UK economy; there are still a few analysts that believe that the UK might suddenly motor ahead. However, increasingly the commentators, analysts, and even some politicians, are coming to the view that the UK is in deep, deep trouble. For regular readers of this blog, this will come as no surprise, as they will know that the brewing crisis in the UK was apparent many years ago, and that the government's action has only served to increase the scope of any coming crisis.

One particular commentary in the Telegraph sums up many of the concerns for the UK economy, as follows:
Is it remotely possible that Mr Brown has succeeded not just in delaying the pain, but suspending it entirely? Here's why not. The key questions are these. Given the amount of policy action that has already been thrown at the problem, how come there is still so little sign of recovery? And by extension, will continuing to provide life support eventually produce the sustained recovery the Prime Minister promises, or will it only bankrupt the country before we get there?
When I first started this blog, I suggested that the UK was already bankrupt, and that it was just a question of time before this was accepted. I proposed that it would be necessary for either the UK to print money or default on debt and, lo and behold, the money printing solution appeared from nowhere with the Bank of England inventing justifications for the policy. When quantitative easing (QE- the euphemism for printing money) was finally introduced, I argued that it was nothing more than a method to pay for government profligacy, but nevertheless the vast majority of commentators and analysts bought into the Bank of England's justifications. It seems that they are increasingly rumbling the game:

Ian Stannard, currency strategist at BNP Paribas, said markets are fretting over how the UK will cover its deficit following the pause in quantitative easing by the Bank of England. The Bank has absorbed £200bn of debt, more than total Treasury issuance over the last year.

"The UK may have difficulty in attracting extra investors to fill the gap. We think they will have to do more QE as recovery falters," he said.

It has taken a long while, but it is starting to look like the game is up for QE. The Bank of England has described the current ending of QE as a 'pause', but that they may restart if they deem that the economic situation warrants it. The problem that the Bank of England faces is this; they originally justified QE through spreading fear of Consumer Price Index (CPI) deflation, even though no such deflation had yet occurred. They also, as I pointed out at the time, sought to mix in the use of the RPI measures, even though this was beyond their remit. As things stand, the UK inflation rate is high at the moment, and climbing:


It might be noted that RPI went into deflation, but RPI includes housing costs, which are determined by the Bank of England interest rates. At the time QE started, I predicted inflation being imported through currency devaluation. The same situation applies now, with the £GB continuing to sink:
LONDON, March 10 (Reuters) - The Bank of England's trade-weighted sterling index fell to a fresh 11-month low on Wednesday in the wake of data showing an unexpected fall in British manufacturing output in January.
The much hoped for improvement of the balance of trade has also not taken place. In fact, the opposite has taken place. The increase in imports, alongside a devaluing currency, does not bode well for inflation.



The current account situation is also seeing no improvement. As I have suggested before, the importation of inflation through currency devaluation takes time to fully impact, as many contracts and goods in transit take time to adjust to the new situation. As such, we can expect ongoing inflationary pressures lagging the devaluations.

In this circumstance, with inflation climbing, and realistic prospects of even more inflation, how might the Bank of England explain any further QE? When the Bank of England last started QE, they justified the policy with projections of CPI deflation, but the deflation never took place. It might be argued that this was because of QE, but even before the policy might have had an effect, there was no deflation (also, the idea that deflation is an inherently bad thing is something I have contested in previous posts). I doubt the Bank of England will get away with QE so easily this time around, as too many analysts are becoming cynical.

What we are now seeing in the UK is the brewing of a perfect storm. The underlying size of the UK economy, the size of the economy without borrowing, is very much smaller than many imagine. It simply can not support the level of borrowing that has been undertaken by the government. This was true even before the borrowing binge following the onset of the economic crisis, but the difference is now that the borrowing is concentrated in the government rather than consumers. The real size of the economy in relation to borrowing is the underlying problem, but other factors are adding to this fundamental problem.

One of these, which is commonly reported as a reason for weakness in the £GB and gilts (UK government bonds), is the political instability, and the prospect of an ineffective government after the coming election. This from the Wall Street Journal:
NEW YORK (Dow Jones)--The U.K. pound tumbled against the dollar and the euro Monday as investors worried that the upcoming national election could result in political gridlock, hampering the country's ability to deal with its growing debt levels.
Such sentiments are not rare, but there are other concerns, and in particular the relative health of the UK economy in relation to other economies. As governments issue record levels of debt, the competition for who is funded is intensifying. Again, it is an argument that I made long ago, and it is now an argument that is gaining a broader airing. Whilst other economies may look very bad, the credit will flow to the countries that look least bad and the UK is not well placed in such a competition. The result is that yields on gilts are climbing, meaning that funding the government is already becoming more expensive:
Yields on 10-year gilts have already crept up to 4.14pc, compared to 3.94pc for Italian bonds, 3.48pc for French bonds, and 3.19pc for German Bunds, though part of this reflects worries about higher inflation in Britain.
I undertook a search for 'sterling crisis', and the results speak for themselves. Some examples of the articles including the term can be found here and here. It is the increasing frequency of the discussion that is of real concern. As the £GB falls, as the doubts about fiscal policy gather more weight, as the prospects of a return to QE are discussed, the attractiveness of funding UK government debt diminishes. As concerns grow, the £GB weakens further, and as the £GB weakens the doubts are reinforced. However, underneath it all, the core problem is doubt about the solvency of the UK.

Just as in Greece, it appears that the electorate in the UK are taking their creditors for granted, and have not accepted (yet) that it is possible for the credit taps to switched off. The Labour Party and the Conservative Party are running scared of the polls, and are afraid to propose the cuts necessary to restore the UK's fiscal situation. The Conservatives talk of concern for the credit rating of the UK, but are not offering the policy proposals that might reassure creditors. Meanwhile, the Labour government is suggesting that the coming pre-election budget will be 'business as usual', even whilst a currency and funding crisis is brewing. At some point, the UK electorate needs to wake up and accept reality, but the prospects for this are dim.

In a recent article in the Economist (last week's print edition), they discussed the coming battle between the interests of the older generation and the younger, and the private and public sector. Of note is that, with an increasingly large share of the UK economy in the hands of government, the government us building a client state - where any serious cuts to government expenditure threatens the livelihoods of ever more individuals. The more the government spends, the more people are dependent on government expenditure, and the harder it becomes to develop the political will to cut expenditure. My guess (and it is no more than a guess) is that underlying the uncertain outcome of the coming election is the imbalance between a growing client state, and those in the private sector.

The Economist, which seems to be returning to better analysis, suggests that, in the end, it will finally be necessary for countries like the UK to have reform imposed upon them from outside. In other words, the politicians will need a crisis for them to tackle the structural problems within their economy. It is rather a depressing indictment of the politicians that are supposed to lead us, that they need such a crisis to do what should in any case be done. Within all of this is the concern that the UK is supposed to be a 'mature' democracy, in which the electorate should know better. It seems though, that they lack the maturity to face up to the severity of the economic situation.

The truth is this; if the UK continues on the current course, there will be wider and deeper damage when resolution is imposed from outside, and the wider and deeper the damage the more people who will lose their livelihoods, including the current clients of the government. In other words, nobody will win from carrying on with the current situation. Those who live as clients of the government need to recognise that their interests are inextricably bound up with the private sector. It is in not in the interest of anybody to risk a funding and sterling crisis. In the end, everybody will bear a share of the pain. Somehow, I doubt that this will be learnt before the coming election, but we can but hope....perhaps then the politicians will have the courage to do what must be done?

Note 1: Thanks for the many comments on the last post.

Lemming asks how we might determine sustainable economic growth. I am not sure that there is an easy answer to this in the current system. In particular, the manipulations of the money supply by central banks, in conjunction with fiscal tinkering, serve to bury what the real state of economies might be. A particular problem is that the policy of government 'x' can have unexpected impacts on country 'y', such as the way that QE and zero interest rates encouraged asset price inflation in countries like the US. How is it possible to untangle such effects? I long ago provided (what I believe to be) a solution to these problems, but doubt the solution would ever be adopted.

A commentator called 'D' noted that there is a situation in which government is in bed with select businesses, and suggests that this means not all blame should be placed with the government. I would argue that this is still a problem of government, as government should not put itself in this position. The more honey in the government pot, the greater the number of bees buzzing around the pot. The solution is less honey in the pot, and some fierce constitutional constraints. Sorry, a short answer, but all I have time for.

An anonymous poster corrected me that, in the event of default, somebody still pays; in this case the creditor. You are quite right, but I hope that this was implicit in the rest of the post.

'Rural Idiocy' added an interesting quote as follows:
"The Bank for International Settlements says Britain needs a primary surplus of 5.8pc of GDP for a decade to stabilise debt at pre-crisis levels, given the ageing crunch as well. The figure is 6.4pc for Japan, 4.3pc for the US and France."
Certainly food for thought.

As ever, Lord Keynes also posted several comments which challenge the views of this blog. It is always good to see the alternative views presented. As for the other comments, I have read them with interest, but do not have time to respond to them all. However, they reflect the high standards of commentary on this blog, and I feel privileged to have such a thoughtful readership.

Note 2: As with many posts, there is much else that I could say, and many subjects that might demand more attention. For example, I could talk more about the other indicators for the UK economy, but will leave that for this time. If time allows, I may try a full review of the UK in the future.













42 comments:

  1. It seems that the mainstream is moving towards my view of the world, and the problems of the UK, at least in some respects. As such, I may take a more speculative approach in my next post, which is to say what will happen next. I emphasise the word speculative as, if I am correct about the process of sovereign default (direct or indirect) spreading to the US, then we will enter into a period of economic chaos.

    As things stand, I have a model of the world in mind, but once the chaos starts, it is hard to see what might happen next. However, I can at least do my best to paint some scenarios. the trouble is that the policy makers and politicians will likely flail around, and it hard to therefore see how they might respond.

    There will be a few hard to accept realities, but they will only partially dictate the course of action.

    What do you think? Is it worthwhile on that basis?

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  2. Hi Cynicus,

    Here is a link to an excellent article by Matthew Parris:

    http://www.timesonline.co.uk/tol/comment/columnists/matthew_parris/article7051875.ece

    Reading some of his old stuff, I've always thought he reads your blog.

    -----

    Mohamed El-Erian wrote an ace column in the FT yesterday, well worth a read. PIMCO are seriously on the ball, funny thing is that Ed Ball's brother work's are PIMCO :-)

    -----

    I think you are right, the MSM are slowly waking up, hopefully they will realise that Kick-the-Can-Onomics is leading us to armageddon.

    "Central banks hate recessions. So they keep interest rates low. People borrow to buy homes and other assets. The bankers see the bubble and rein back. Borrowers and their banks run out of cash. Governments bail everyone out and print more money. Public debt soars and the currency falls in value. Foreign investors get cold feet. Bankers raise interest rates to restore confidence. Everyone is squeezed, and consumer spending falls. There's a recession. Governments bail everyone out and print more money, and off the cycle goes off again, round and round, until eventually you get stagflation, hyperinflation, and a huge collapse."

    Dr E. Butler

    Maybe one day the MSM / populace will realise that is was "state sponsored inflation" that caused this bust.


    Death to Bubble Addicts

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  3. Have a look at the LEAP2020 site and their GEAB notes (Global Euro Anticipation Bulletins) for ideas if you don't already know about them. They are predicting much of the same stuff, have been for a while now.

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  4. A large question in my mind is who "owns" the UK? This is in the sense of the real productive assets in industry and commerce. The other "ownership" is the public sector, but if this is dependent on government, agency and municipal debt then who are the creditors?

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  5. I'd love to read a few 'Nostradamus' style posts.

    In the meantime, some 'comic' relief....

    http://www.theonion.com/content/news/u_s_economy_grinds_to_halt_as

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  6. Ludwig von CrisesMarch 12, 2010 at 8:05 AM

    Re your comment #1: I've been reading this blog since Sep 08. It's been time well spent, and I appreciate especially your ability to cut through the opacity of the pundits and other self-appointed experts. So I would be fascinated to know your thoughts on the next steps.

    If you have the time, could you perhaps outline a 'best case', 'worst case' and 'most likely' option? I accept this will be difficult, as the election will have some effect; but if you could state some assumptions up front, that might help. Even if not everything comes to pass, the underlying analysis will be invaluable.

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  7. Plenty of politicians, particularly those on the center-right, are well aware of the trouble we are in, CE.

    I'm not anywhere near senior enough to be able to tell you if the Conservative leadership are willing to enact the sort of changes needed to save the country and its economy. But I can honestly say we are the only party who is even on the right wavelength.

    My hope is that it will turn out that the situation has been understated for reasons of electoral 'strategy'. I must add that I have never been in favour of strategy over clarity - but that's probably why im not a political advisor or leader. :)

    If the Conservatives win the coming election I have high hopes our leaders will set about cutting back the waste, making the savings, slimming down the bloated public sector and deregulating and low-taxing business to make us competitive again.

    If they don't? Well - there's the rub. Perhaps it will take a disaster. I hope not. But I'm just a little voice.

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  8. Tim Martin, the founder and chairman of the pace-setting pub company Wetherspoon (JD), observed that “in the six months ended 25 January 2009, Wetherspoon made profit after tax of £17.3 million. Yet taxes generated were £190 million (this includes: VAT (£79 million); Excise Duty (£53 million); PAYE and National Insurance (£30 million); property taxes (£18 million) and corporation tax (£10 million)). On an annualised basis, this equates to JDW making £50,000 after-tax profit per pub, while generating tax of about £530,000 per pub.”

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  9. Reply To Anonymous

    "Central banks hate recessions. So they keep interest rates low. People borrow to buy homes and other assets. The bankers see the bubble and rein back. Borrowers and their banks run out of cash. Governments bail everyone out and print more money. Public debt soars and the currency falls in value. Foreign investors get cold feet. Bankers raise interest rates to restore confidence. Everyone is squeezed, and consumer spending falls. There's a recession. Governments bail everyone out and print more money, and off the cycle goes off again, round and round,

    What you describe is a characteristic of neoliberal business cycles from the 1980s.

    You fail to understand that the business cycle changed fundamentally from the 1970s/1980s, after neoliberal deregulation.

    During the Keynesian period, post-World War II business cycles were different from pre-1945 business cycles and from neo-liberal business cycles after about 1979.

    After WWII, financial regulation virtually eliminated financial crises and asset bubbles. Investment went mainly to businesses to increase output or creditworthy borrowers. The result was rapid and very impressive economic growth – much higher growth rates than what followed from 1979 or growth before the 1930s.

    Most of the post WWII recessions were generally “inventory recessions”, an excess of inventory stock build up which had to be liquidated.

    After financial deregulation, we returned to elements of the pre-1930s business cycle: excessive private debt, asset bubbles and financial crises.

    The solution is financial regulation, and sensible trade and industrial policies.

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  10. Here is an outstanding interview with Marshall Auerback:

    Fighting Deficit Hysteria

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  11. Lord Keynes,

    I struggle to take an expert with a fake tan & peroxided hair seriously. Maybe that’s just me.

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  12. I think this short & sharp piece of analysis from Bill Bonner summs up recent economic history:

    There are more clowns in economics than in the circus. They invented an economic model that has been very popular for more than 50 years – particularly in the US and Britain. It began with a bogus insight; John Maynard Keynes thought consumer spending was the key to prosperity; he saw savings as a threat. He had it backwards. Consumer spending is made possible by savings, investment and hard work – not the other way around. Then, William Phillips thought he saw a cause and effect relationship between inflation and employment; increase prices and you increase employment too, he said.

    Jacques Rueff had already explained that the Phillips Curve was just a flimflam. Inflation surreptitiously reduced wages. It was lower wages that made it easier to hire people, not enlightened central bank management. But the scam proved attractive. The economy has been biased towards inflation ever since. Economists enjoyed the illusion of competence; they could hold their heads up at cocktail parties and pretend to know what they were talking about. Now they were movers and shakers, not just observers. The new theories seemed to give everyone what they most wanted. Politicians could spend even more money that didn’t belong to them. Consumers could enjoy a standard of living they couldn’t afford. And the financial industry could earn huge fees by selling debt to people who couldn’t pay it back.

    Never before had so many people been so happily engaged in acts of reckless larceny and legerdemain. But as the system aged, its promises increased. Beginning in the ’30s, the government took it upon itself to guarantee the essentials in life – retirement, employment, and to some extent, health care. These were expanded over the years to include minimum salary levels, unemployment compensation, disability payments, free drugs, food stamps and so forth. Households no longer needed to save. As time wore on, more and more people lived at someone else’s expense. Lobbying and lawyering became lucrative professions. Bucket shops and banks neared respectability. Every imperfection was a call for legislation. Every traffic accident was an opportunity for wealth redistribution. And every trend was fully leveraged.

    If there was anyone still solvent in America or Britain in the 21st century, it was not the fault of the banks. They invented subprime loans and securitizations to profit from segments of the market that had theretofore been spared. By 2005 even jobless people could get themselves into debt. Then, the bankers found ways to hide debt…and ways to allow the public sector to borrow more heavily. Goldman Sachs did for Greece essentially what it had done for the subprime borrowers in the private sector – it helped them to go broke.

    As long as people thought they were getting something for nothing, this economic model enjoyed wide support. But now that they are getting nothing for something, the masses are unhappy. Half the US states are insolvent. Nearly all of them are preparing to increase taxes. In Europe too, taxes are going up. Services are going down. And taxpayers are being asked to pay for the banks’ losses…and pay interest on money spent years ago. Until now, they were borrowing money that would have to be repaid sometime in the future. But today is the tomorrow they didn’t worry about yesterday. So, the patsies are in revolt.

    Several countries are already past the point of no return. Even if America taxed 100% of all household wealth, it would not be enough to put its balance sheet in the black. And Professors Rogoff and Reinhart show that when external debt passes 73% of GDP or 239% of exports, the result is default, hyperinflation, or both. IMF data show the US already too far gone on both scores, with external debt at 96% of GDP and 748% of exports. The rioters can go home, in other words. The system will collapse on its own."

    -----

    Death to Bubble Addicts

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  13. "The few who can understand the system will be either so interested in its profits, or so dependent on its favours, that there will be no opposition from that class, while, on the other hand, that great body of people, mentally incapable of comprehending the tremendous advantage that Capital derives from the system, will bear its burden without complaint and, perhaps, without even suspecting that the system is inimical to their interests."

    Pretty much says it all, really.

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  14. LK. I think you will find the "impressive" growth was a result of post war rebuilding and baby boomers and too just recently with the waves of immigrant boomers.

    Yup sure you can easily create GDP growth with lots of new people, but in the end they and we are all dead and its the children who are left with the bill, all cost loaded into taxes and prices courtesy of Mr Keynes. though I have to admit his work on probabilities was a masterpiece, maybe that was the reason he thought economics was just some form of mathematics which it certainly is not.

    Comparing now with 1930, 1967, 72 ect is just useless, its like fighting WW1 with bow and arrows, the economy and its make up are just so quantitatively different. The only thing that does not change is human behavior. economics is not and has never been a science.

    Simples, ""Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.""

    You cannot borrow your way out of a debt crisis, growth will only come when the economy is in an efficient state to deliver growth that can deal with debt burden, unfortunately NuLab have loadd up the economy with too much costs, and the workforce is getting on a bit, A true catch 21, a perfect storm as the post rightly says.

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  15. Reply to Sean

    I think you will find the "impressive" growth was a result of post war rebuilding and baby boomers and too just recently with the waves of immigrant boomers.

    Nonsense, post war rebuilding ended in the decade and a half after 1945, but very strong economic growth still continued even after it ended. As for the baby boomers, they were the result of the economic prosperity, not its cause.

    As for post-war immigration into the US in the Keynesian era, I suggest you look at the statistics here:

    Immigration to the United States

    America had much greater immigration in the 19th century down to about 1921 than in the post war period before 1980.

    The highest average intake of immigrants occurred between 1900-1914.

    After the 1920s, immigration fell as the US passed laws like the Emergency Quota Act (1921) and the Immigration Act of 1924. Immigration was much more restrictive even after 1945 than before the 1920s. Yet economic growth in the 19th century was still inferior to that after 1945 – despite the larger number of immigrants then.

    And US economic growth from 1990 down to today (when immigration picked up again) is still inferior to the post war era (1945-1973).

    Yup sure you can easily create GDP growth with lots of new people, but in the end they and we are all dead and its the children who are left with the bill, all cost loaded into taxes and prices courtesy of Mr Keynes.

    Post-war economic growth was not the result of excessive private debt and government debts levels fell very rapidly. What “bill” are you talking about?

    Post-war growth was the result of abandoning the inherently deflationary gold standard, regulating financial markets and largely eliminating financial crises, adopting discretionary monetary and fiscal policies, Keynesian demand management, the welfare state and a much greater role for government funding of R&D.

    You cannot borrow your way out of a debt crisis, growth will only come when the economy is in an efficient state to deliver growth that can deal with debt burden

    Government debt under a sovereign fiat money system is fundamentally different from private debt. Always was – and always will be.

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  16. Reply to Death to Bubble Addicts on Keynesianism

    Bill Bonner is, quite simply, wrong.

    There are more clowns in economics than in the circus. They invented an economic model that has been very popular for more than 50 years – particularly in the US and Britain. It began with a bogus insight; John Maynard Keynes thought consumer spending was the key to prosperity; he saw savings as a threat.

    We have had 2 different economic systems over the past 50 years:

    (1) Keynesianism from 1945 to about 1979.
    (2) Neoliberalism / Washington consensus / Globalization from 1979-today.

    Bonner conflates the 2 as though the mess that we got from neoliberalism after 1979 is fault of Keynes. It is absurd and ignorant in the extreme to blame Keynes for US policy in 1990s or 2000s that led to the 2008 financial crisis.

    Inflation surreptitiously reduced wages. It was lower wages that made it easier to hire people, not enlightened central bank management. But the scam proved attractive.

    A complete falsehood.

    Both nominal and real wages rose very rapidly in the Keynesian era, and people’s living standards rose rapidly as well. This is universally acknowledged.

    When Bretton Woods and Keynesian demand management were abandoned (1973-1979), real wages fell sharply.

    Consumers could enjoy a standard of living they couldn’t afford. And the financial industry could earn huge fees by selling debt to people who couldn’t pay it back.

    The era of growth based on consumption from excessive private debt began long after Keynesianism was abandoned.

    Beginning in the ’30s, the government took it upon itself to guarantee the essentials in life – retirement, employment, and to some extent, health care. These were expanded over the years to include minimum salary levels, unemployment compensation, disability payments, free drugs, food stamps and so forth. Households no longer needed to save. As time wore on, more and more people lived at someone else’s expense.

    Rubbish.

    The historical US savings rate in the Keynesian era was between 7 and 10%. It actually rose during the 1960s at the height of the US welfare state under Johnson’s Great Society, as you can see here.

    It then collapsed from the mid-1980s after Keynesian was abandoned and the welfare state was attacked by Reagan and then Clinton. The sharpest fall came in the 1990s when Clinton slashed welfare.

    If Bill Bonner’s statement were true, then the US saving rate should have collapsed in the 1960s. Instead it rose.

    You couldn’t have a clearer empirical refutation of Bill Bonner’s nonsense.

    Moreover, in France and other European countries that still have very generous welfare states, the savings rate has stayed the same or increased,
    as you can see here.

    How does he account for that?

    And Professors Rogoff and Reinhart show that when external debt passes 73% of GDP or 239% of exports, the result is default, hyperinflation, or both.

    The thesis of Rogoff and Reinhart has been refuted here:

    It Takes Two to Tango: Look At The Numerator and Denominator

    It is also refuted completely by the fact that most Western countries had debt to GDP ratios over 120% in 1945. Did any go bankrupt or suffer hyperinflation?

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  17. More on US saving rate

    An amusing comment on the decline in the US savings rate:

    http://yglesias.thinkprogress.org/archives/2009/05/personal-savings-and-the-age-of-reagan.php

    You cant blame government debt for the massive fall in the 1990s either, because Clinton was running budget surpluses.

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  18. Just because the mainstream moves towards your view means nothing really. Most mainstream commentators including economists don't know their onions. Countries with sovereign currencies such as UK & US (see Japan also) have no risk of default or bankruptcy. EMU/Euro countries unfortunately do have these risks. Tory proposals for austerity will be disastrous in the short AND long term. The UK SHOULD be running a deficit focussed on priorities to boost growth and allow some private saving to run down private debt.

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  19. Hi Cynicus,

    Firstly thanks for writing such an excellent blog, I've been following it for about a year and a half now and you always seem to provide a picture that is far more clear and honest than most of our media or politicians.

    I've never commented here before but found this news snippet on sky 'Biggest lender urges overpaying on mortgages',

    http://news.sky.com/skynews/Home/Business/Lloyds-Bank-Urges-Customers-To-Overpay-On-Their-Mortgage-Payments-Amid-Low-Interest-Rates/Article/201003315573929?lpos=Business_Second_Home_Page_Article_Teaser_Region_4&lid=ARTICLE_15573929_Lloyds_Bank_Urges_Customers_To_Overpay_On_Their_Mortgage_Payments_Amid_Low_Interest_Rates

    In all honesty I've never heard of a bank suggesting people over pay more likely they want people to take out bigger loans.

    If I were being just a little cynical here I would think that maybe the banks are suspecting a big jump in interest rates in the near future and do not want to be blamed when they have to start repossessing large number of houses. Just a thought!

    However maybe the really scary thing is I know people who see low interest rates as a way of decreasing monthly repayments for their interest only mortgages. To increase current spending, I can only despair! (I think partly the reason for this is that they have such large mortgages £150,000+ they see no realistic way of ever paying it off so are having a good time today and will put off the hard decisions until later or until forced to... maybe a little like the whole country? )

    Lets hope when the financial Tsunami does hit the UK it's not as bad as we all fear it could be.

    Cheers for now,

    Paul M

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  20. Having been asking for your thoughts for a while now I would love to read your speculative post.

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  21. K, Your evidence always seems to confirm your ideological biases, this seems to me to be the big problem in economics, very few from all schools predicted it, but it must be said it was those from or near to the Austrian school that had in the main but not exclusively a far better track record.

    Your second big mistake is to mistake things that make things worse with things that cause things to happen. and indeed the other way around, things that make things better ect.
    (see your post war analysis)

    Low interest rates lead to bad investments, they make us lazy, fiat money and fractional reserve banking are at the centre of the storm. No I am not an Gold Standard man btw.

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  22. Reply to Sean 2

    The issue of the prediction of the crisis is an important one

    As it happens, post Keynesian economists did predict the current crisis!

    They have an outstanding track record.

    There are 11 prominent economists who predicted the crash:

    Dean Baker,US
    Wynne Godley, UK
    Fred Harrison, UK
    Michael Hudson, US
    Eric Janszen, US
    Steve Keen, Australia
    Jakob Brochner Madsen and Jens Kjaer Sorenson, Denmark
    Kurt Richebacher, US
    Nouriel Roubini, US
    Peter Schiff, US
    Robert Shiller, US.

    Did Heterodox Economists Do Better At "Calling It" Than Mainstream Ones?

    Now of these 5 are Post Keynesian (Baker, Godley, Hudson, Keen, Sorenson), and 1 a combination of an Austrian and Post Keynesian (Janszen).

    That is to say, over half of them were post-Keynesians.

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  23. Low interest rates lead to bad investments, they make us lazy, fiat money and fractional reserve banking are at the centre of the storm.

    In a well regulated financial system that prevents bubbles and separates commercial from investment banking, low interest rates increases credit to productive businesses and borrowers, increasing real economic growth. The proof of this is in the higher growth rates from 1945 down to the 1970s.

    I have to laugh every time Austrians complain about fractional reserve banking. It has always been a fundamental characteristic of modern Western capitalism.
    The mythical world of 100% reserve banking has never existed - if it did it would probably cause growth to become so slow that economcies would stagnate.

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  24. If Lord Keynes wants to return to the post 1945 pre 1980 financial system, that all fine and dandy.

    But as so much of our entire GDP now seems to depend on people buying stuff they don't really need, with money they don't have (ie credit), or buying property with increasingly large sums of borrowed cash, it suggests to me that a lot of people would be considerably poorer as a result.

    Don't get me wrong, I don't agree with the easy credit, have it now, pay later philosophy. But I think you may find it a hard sell to todays younger people who have never had to live under a system where consumer credit was rationed and mortages were only available after years of saving and proving the reliability of your salary and career.

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  25. More on Fractional reserve banking

    From 1836 until 1913, the US had no central bank, yet fractional reserve banking was the norm:

    Federal Reserve System: background, analyses and bibliography

    In reality, fractional reserve banking was a major invention of the free market.

    What government ever forced banks or the public to engage in the practice?

    The only way to end it, even in the 18th or 19th centuries, would have been by government intervention.

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  26. @ Lord Keys
    I think there's something off about that book. His premise is that money backed by gold would cause the money supply to increase too slowly for capitalism to be viable, and that economic growth is based on debt creation. If that is so, then how can you be apposed to financial deregulation? Quite a paradox, if you ask me.

    By Woodward's definition of the Federal Reserve, it is totally correct in manipulating interest rates to get people to buy homes they can't afford because there is no consequence. Debt is healthy and in a healthy economy there is "plenty of it".

    By Lord Keys, definition of the Federal Reserve, it can do whatever it wants when it wants to. It can borrow whatever it wants because its debt isn't like other debt. Continuous printing money doesn't devalue currency and even through some inconceivable way, the United States devalues or rolls over its debt, it doesn't matter even though the United States promised it wouldn't devalue or roll over our debt. So there's nothing to fret over.* All we need to do is more or less de-globalalize finance (That will be areal easy task. All the gov will do is just put a firewall on the entire internet to prevent financial transactions. That way, no money leaves the country.)and the developed world's economic problems will come to a grinding halt.




    *The reason why people are worried about public debt is that the maturation time on bonds has been shortened.

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  27. Fractional reserve banking has several authors and many admirers. Therefore, it's difficult to see when the affair with it began. Some say America fell in love with it when Nixon wanted to finance Vietnam while preserving the welfare state. Others say that it was the bankers who became taken with it in the 1980s. Woodward suggested America was betrothen with it all along.Perhaps, he's right. Maybe we've always been a buy now, pay later kind of people.

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  28. This is a fascinating article http://www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/7364/2/?

    which seems to back up - in some cases at least - what Lord Keynes is saying. The author worked for the IMF for many years and he says that the one thing that always marked out emerging economies was the free market methods used and the cronyism between government and the countries oligarchs. He says that the only way for the crisis to be contained is for the oligarchs to take a hit - but the government and powers that be are scared to do that so they make the rest of the populace take the hit. Despite knowing that this policy will never work.

    His bold claim is that ever since Reagan the US has operated on the same level as many corrupt, emerging economies. And the oligarchs have taken over the running of the government - for their own ends. The oligarchs in question are of course this time based in Financial Services.

    I have to say that Lord Keys is right too that the US had the most sustained period of growth in its entire history from the period 1945 to 1970. It does seem to indicate that the economic system used then served that country fairly well. I would say that things started to go wrong when governments moved towards more monetarist policies in the mid seventies.

    For those who think the free market is the answer - look at history. In times of free market excess the results have always been crises, depressions and war. During the 1920's productivity shot up but the benefits were concentrated at the top. Real wages stagnated and debt bubbles grew. Those in very senior positions however saw their renumeration and wealth rise massively. The wealthiest saw taxes cut by a huge amount. Inequality stretched to obscene levels. We all know the results of this and it is echoed by what has happened over the last decade.

    In fact it could be argued that the free marketeers were in sway throughout the start of the last century - and many nations never really had a 'roaring twenties' anyway. The UK had many problems in the twenties and before then had faced possible revolution in the lead up to the first world war conditions were so bad for many. In Europe Germany was suffering hyper inflation and turning to fascism.

    'Free' markets, liberalism, neoliberalism, laissez faire - call it what you will - always seems to end in tears. Yet we never seem to learn.
    PCC.

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  29. More on fractional reserve banking:

    Rozeff, Michael S., “Rothbard on Fractional Reserve Banking: A Critique,” Independent Review 14.4 (Spring, 2010): 497-512.

    Rozeff shows that Rothbard's and other Austrians' view of fractional reserve banking as fraudulent is wrong.

    Rractional reserve banking is totally consistent with free markets:

    Rothbard’s firm belief that fractional-reserve banking constitutes fraud [to him] rules out fractional-reserve free banking even in a free market. This position, I argue, goes against basic ideas of liberty and the free market, both of which Rothbard champions. When he regards fractional-reserve banking as fraudulent and proposes its illegality, he introduces his own ethical judgment based on his own assessment of the merits of any and all exchange transactions that may occur between banker and depositor. He introduces his own idea of the appropriate property rights in a bank deposit, his own idea of what appropriate money must be, and his own idea of libertarian law. Although he is entitled to his opinions, the market participants in a condition of liberty in free markets decide all these matters for themselves, and their reasoning and valuations may differ from Rothbard’s. They may not regard fractional-reserve banking as fraudulent, and they may want to transact via fractional-reserve banking arrangements. They may wish to circulate media of exchange that are someone else’s liabilities.

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  30. Also see Selgin, George, “Should We Let Banks Create Money?” Independent Review 5.1 (Summer, 2000): 93-100:

    In a recent twist on the [fractional reserve]... fraud argument, Hans-Hermann Hoppe and his co-authors (1998) argue that holders of fiduciary media are, in fact, not victims of bank fraud at all but co-conspirators who assist bankers' fraudulent undertakings by misrepresenting themselves "as the owners of a quantity of property that they do not own and that plainly does not exist" (21-22). Apart from begging the question of who are the victims, this novel fraud argument is based on a simple failure to recognize that redeemable banknotes and deposit credits are not "titles," as Hoppe and his co-authors claim. They are instead IOUs, so there is nothing inherently fraudulent about there being more of them in existence at any moment than the total stock of what they promise to deliver. (If all IOUs had to represent existing property in order to be nonfraudulent, most loan transactions would be fraudulent.) A person who deposits gold in a bank in exchange for a redeemable banknote does not retain ownership of the gold, but instead gives it up, albeit for an indefinite period of time. (I return to this issue later.) The bank, in issuing IOUs against itself, is not analogous to a counterfeiter, as Hoppe and his co-authors claim, for the simple reason that the bank acknowledges its own debts, whereas a counterfeiter issues IOUs with someone else's name on them.

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  31. Intereesting article :-


    http://fxmarketanalysis.wordpress.com/2010/03/19/the-eu-debt-crisis-two-minute-dummies-summary-how-to-profit/

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  32. no LK

    Your list is not good enough, plenty of people had understood the fall that was coming in or around the end of 2007, what I am interested in, is before then and from your list I can only in 2 cases down for that period. As a interested observer I award the prize to the Austrians, the earliest predictor i would say was Lew Rockwell but strangley enough it was an Aussie politico former PM Paul Keting who was very critical of the current US treasurer head Timothy Geithner, when Geithner put together a solution to the Asian congregation in 1998, which lead to the build up of US debt held by China.

    Steve Keen is an interesting one, more Schumpeter than anything else I would say.

    LK, Japan has had 15 plus years of deflation economics which we are trying now, And it has not worked, in fact they have helped exported their problems to us.

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  33. Reply to Sean

    As a interested observer I award the prize to the Austrians, the earliest predictor i would say was Lew Rockwell

    When did he predict it? You have links to back this up?

    Steve Keen is an interesting one, more Schumpeter than anything else I would say.

    Dead wrong, Steve Keen is a well known post Keyensian:

    Steve Keen is an Associate Professor in economics and finance at the University of Western Sydney. He identifies as post-Keynesian, criticizing both modern neoclassical economics and (some of) Marxian economics as inconsistent, unscientific and empirically unsupported. The major influences on Keen's thinking about economics include Hyman Minsky [a post Keynesian], Piero Sraffa [related to early Keynesian] and Joseph Alois Schumpeter.

    Steve Keen

    Just because he was influenced by Schumpeter, it doesn’t make him a neo-classical economist or a follower of Schumpeter. Schumpeter was a classical liberal who rejected Keynesianism (see under “2.3 Schumpeter and Keynesianism”).

    Moreover, Steve Keen predicted the Global Financial Crisis as long ago as December 2005 (see under “Biography”).

    LK, Japan has had 15 plus years of deflation economics which we are trying now, And it has not worked, in fact they have helped exported their problems to us.

    I think you are rather confused. Keynesians don’t advocate “deflation economics”.

    Japan suffered a severe financial crisis in 1992. The Japanese took forever to fix their zombie banks.

    In 1995, the government passed a large stimulus package and they got strong growth in 1996.

    But in 1996-1997, the Japanese government tried to balance its budget, and in 1997 the government raised its consumption tax from 3 to 5 percent – a disastrous move, which had nothing to do with Keynesianism.

    The economy plunged into recession again, as any Keynesian could have predicted.

    They returned to fiscal stimulus in 1998 and started to fix their banks, and by the early 2000s returned to growth - proving taht fiscal policy works. They suffered the 2001-2003 recession, but all countries did.

    They didn’t get deflation until 1999, but got out of it by the end of 2006.

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  34. Reply to Sean 2

    Also, Dean Baker predicted the real estate buble an crisis in 2002:

    Basing his outlook on house-price data-sets produced by the US government and Yale economist Robert Shiller, Baker was among the first economists to assert there was a bubble in the US housing market in 2002, well before its peak in late 2005 and one of the few economists to predict that the collapse of this bubble would lead to recession

    http://en.wikipedia.org/wiki/Dean_Baker

    Michael Hudson predicted it in 2006:

    http://en.wikipedia.org/wiki/Michael_Hudson_(economist)

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  35. James Galbraith explains how US banks can be cleaned up by simple and standard regulation:

    Economist James Galbraith on bank stress tests - 07 May 09.

    When a bank is trouble and is at risk of being insolvent – and even before it becomes insolvent – it must accept inspection by a team of regulators who audit it. If they find that it is at risk of insolvency, the regulators have to power to re-organise the bank and fire the management.

    They have the legal power to take the banks into a “pass-through receivership” and wipe out the equity and subordinated debt - while protecting depositors.

    The is no legal issue with taking the banks’ other debts onto the government’s books, because any bank that has signed onto deposit insurance with the Federal Deposit Insurance Corporation has already legally agreed to these conditions.

    If large banks require very large bailouts of depositors, the government can nationalise them and become the majority share holder – thereby earning the bank’s profits to pay back taxpayers and selling its shares back to the private market and making an additional profit.

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  36. Another great article by Galbraith:

    http://www.guardian.co.uk/commentisfree/2009/mar/27/g20-globalrecession

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  37. Sorry LK I am on the road at the moment and the internet is not always available.

    Rockwell and ron paul both and others many times stated that FF represented real systemic risk, as for back as 1999, when the CRA was revised.

    Going back even further Greenspan himself wrote about property bubbles in 1977 and how they come about, but by 2002 he had forgot.

    once again looking at things as objectively as I can (see Keeting who I do not share a political affiliation with) the Austrian business cycle best describes the events of 2000-2008, but what comes next is up for grabs but at the end of the day a recession is a price adjustment downwards and no amount of mathematical tricks changes that, Gravity always gets you.

    I also think with respect you confuse regulation with governance. Browns ideological stupidity of removing the risk management of banks to the FSA is a good case in point. If you believe in Fiat Money and FRB than its quite obvious even now that the BOE who balance the economic equation out with printing money are the only people this responsibility should lay with.

    Here is a question, If we are lucky UK debt might stabilise at around 80% of GDP and we get growth of around 1 and 3/4 a year, how many years will it take to a figure of around say 33% or one third gdp?

    Mr Keen can believe what he wants, at the end of the day its not a football match, its a battle of ideas or in this case models, or the lack off as with the Austrians.

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  38. ...In terms of predictions, I have vague memories of dire warnings in early 2007, I guess by Mish and other blogs. I had to move house at that time anyway, but sold up and moved into rented - but did not have the knowledge to foresee the Sterling crash. Ho Hum.
    Anyway - more predictions are here:
    http://www.ft.com/cms/s/0/4b980f64-3510-11df-9cfb-00144feabdc0.html
    See the charts showing the budget deficit - is it me or does anyone else think that the 2007 boom was the peak of taxable 'earnings' and will not be beaten in the short term / (ever)? The graphs show govt. revenue is expected to beat that in 2014 by £100bn.
    These figures are inflation adjusted as well!
    Not only that but due to the 'perpetual motion' machine that is the UK, where government spending is 1/2 of GDP, tax take will reduce by at least 1/2 the amount that govt. spending is cut by.
    All in all I think these predictions are the most optimistic I've seen.

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  39. Its clear we have driven off a cliff, isn't it. What scares me is that people are trying to apply some kind of logic that rule of law and morality actually exists in this country. It does not, not in any way. Letting other people run critical systems on your behalf is always asking for trouble. The majority didn't care, here is what you get.

    Lets be honest about this, what do human beings really need? Love, friendship, clean air, clean water and healthy food. The list goes on, a warm dry shelter, and plenty of firewood or hemp stalks to cook your food and heat your water. Do we need ipods, exchange traded funds, X factor to fulfil the above? No.

    I guess we were the first industrialists, and probably will be the first to go down, as we have forgotten in our frenzy that nature controls our destiny, but we can always utilise it to fulfil our needs if we choose to do so in a reasonable way.

    This system cannot react quickly enough to the real issue, oil production decline. There are strong competitiors for the resource, who weren't around when we were lording it a hundred years ago. We have spent our wealth on....what? Do we seriously expect to build wind turbines and nuclear power plants if we are broke? Can a homeless person build a dream home without any income?

    We have got to get back to basics. Grow our own food and wealth in a sustainable way. SHARE. It could be an amazing time, if we can let go of those essentials such as KFC, Iphones and those other devices that are so clearly critical to human existence.

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  40. The problem is we don't like each other all that much unless some of us agree on the same religion or something. Consumption is the only uniting experience that a multicultural society such as ours truely share and bond over. Take the Ipods away and we'll be just like people in rural parts of the developing world, or in a white trash trailer park in the United States, where three generations share a very small living space, with with little to no ambition on the part of the young people.


    As for love and friendship, those things are either very easy or hard to come by depending on the individual person's temperment and situation. Most interpersonal consumption is an attempt to buy loyalty , likeability,desire from other people.

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  41. In short we're talking about a potentially sharp decline in the general quality of living. It could mean more time with loved ones. It could also mean the return of things like famine.

    What I'm trying to say is that there's a price to pay for anything. Small towns and close-knit communites come with drawbacks

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  42. Interesting article and discussion.

    Thought I should bring this to the attention of those who may not have seen it already, as it fits into the discussion about government debt.

    According to the following blog entry, the debt of the united states seems to have hit a point of saturation.

    http://economicedge.blogspot.com/2010/03/most-important-chart-of-century.html

    The question of just how much debt a system can take is an interesting one. Maybe governments can take on large debts under some circumstances as Lord Keynes pointed out, but when debt piles upon debt for decades surely there has to be a point where it has to give.

    Maybe the chart in the blog is giving a misleading impression, maybe there are other factors at play that nullify it, but my gut, and many other things I have read mean I do not think you can dismiss government debt as easily as Lord Keynes does.

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