Gordon Brown as Saviour? How Did That Happen?

In my post of yesterday, I suggested that I would not be posting so often. However, there is a disturbing acceptance, even amongst the critics of Gordon Brown, that the bank nationalisation has 'saved' the banking system. I will not rehash my arguments over why the bank nationalisation is a disaster, which can be found in a post here.

Here is an example from the Times columnist Daniel Finkelstein:

'Gordon Brown is enjoying himself so much at the moment that it is sometimes hard to recall whether the aim of the exercise is for him to save the banks or vice versa. But to have to spend billions of pounds of taxpayers money to save the entire British banking system from collapse is an odd sort of triumph,'

Daniel Finkelstein is quite rightly critical of the record of Gordon Brown but, as can be seen in the above quote, but is accepting that the UK banking system has been 'saved'. There are two basic problems with this assertion. The first is that it is very, very early days yet, so one must ask on what evidence the system has been 'saved'. The second is to ask at what cost? By this I mean, at what cost to the viability of the wider economy. That second question may be answered in the near future by government default on the debt it has accumulated, and by the costs imposed upon business and consumers to pay for this bailout. It is borrowed money that has 'saved' the system, and that means it must be paid for, and that means the UK economy has new structural costs. These additional costs will, of course, be buried amongst a host of other costs, such that their effects will be hard to strip out and isolate. However, the difficulty of isolating them will not mean that they are not there.

The really dismal part of the news is that Gordon Brown apparently has gained 'political capital' and is now proposing leadership of an exercise to rewrite the rules of the international trading system. This is like asking the captain of the Titanic to rewrite the rules of seamanship on the basis that he arranged the evacuation of the ship efficiently. However, in this case, we still do not know whether Gordon Brown has even saved the 'passengers'. As just one example, there is news that unemployment is soaring in the UK (exactly as I predicted), and rose at the fastest rate for 17 years in the three months to August.

The idea that Gordon Brown has gained 'political capital' is very worrying, and further increases my doubts about leadership through this crisis. I have consistently been worried about the leadership in the Western world, but this is very worrying indeed. I can only hope that the leaders of other countries start to see through vacuity of Gordon Brown's thinking. In the meantime, with Gordon Brown ascendant, what hope for the UK economy?

A very short post but I am very disturbed by this sudden lift in the reputation of Gordon Brown. It does not bode well at all for the future, but suggests that the reality of the economic situation will continue to be ignored in favour of the magic wand solution of debt led recovery. As I have said so many times, this is just postponing the disaster, and postponing at a price.

Note for Ishmael (comment below): I am afraid that I did not receive your last comment, so I am unable to reply to it. It seems that some comments are not getting through to me (though most are). I am not sure why this is the case. I have had one other commentator mention that their post did not appear. All I can do is apologise. I chose Blogger on the basis that it was a well known service, and has a good reputation. It seems that, despite this, it has some glitches. Please accept my apologies for inconvenience as, at the end of the day, I chose this service, and therefore my poor choice is responsible for causing this inconvenience. Unfortunately at this stage, it is a little late to change services, so I am in the unhappy position of having to accept these gltiches will occur. I can only apologise for this again.

Note 2: Another commentator has posted on the New World Order conspiracy theory as follows:

'Do some more research on NWO,
This conspiracy theory had been planned since before 911, 2001. One World Bank , One world currency standard.
The only way this could happen was through a melt down or collapse of the market, not just our but a world market.
There are only a few that can plan such a thing, but those are the ones pulling all the strings. (Men in Black)
Don't be foolish. I knew this was going to happen years ago.
Remember we only get what is spoon fed by the media.

Here take a number SS or CC and be a part of a system, if not good luck in surviving in Babylon.'

Who are the conspirators, how are they operating, what have they actually done, and why is this conspiracy theory more convincing than the reasons I have detailed throughout this blog?

Once again, I would ask anyone who believes in the conspiracy to offer some evidence from a reputable source. I followed a link given to me and found that it led to a video of a white supremacist showing an 'Amero' coin. This was hardly convincing. I am genuinely open to being persuaded on this, but would appreciate any references that the conspiracy theorists might be able to offer to convince me. Until such a time, I can only assume that there is no conspiracy. In my original post on the subject, I presented an argument as to why a conspiracy is unlikely. Having followed up the subject, I have yet to have my mind changed.

Note 3:

LordSidcup (see comment below) makes a perfectly fair point in saying that Gordon Brown is not alone in making the errors that have led to this crisis. The reason for my worry that he is in the ascendent is that he represents a good example of the delusions that have been at the heart of the cause of the crisis. Were it George Bush, Bill Clinton, or any other of the world leaders, who failed in their analysis, I would make the same comments, were they striding high on the world stage. My selection of Gordon Brown is without any partisan basis, but is based upon his record in running the economy, and on the basisthat he seems to be taking a lead in the management of the crisis.

Yes, others made the same errors. This does not mean that Gordon Brown did not have the opportunity of making a correct analysis of the economic situation all those years ago. In this sense it is not personal, and my point is that it is indicative of the problems of the leadership in the Western world. The same leaders who made the wrong analysis, are now the same leaders analysing the results of their first failed analysis, and proposing solutions to the problems they helped to create. It is hardly encouraging.

However, a perfectly fair comment. I should have been clearer in why I selected Gordon Brown as the basis for my critique. It is because he is in the ascendent. My worry is that there should be economists and politicians who are striding the world stage who are offering the media and public a more realistic evaluation of the situation. In short, the ascendency of Gordon Brown is symbolic of the continuation of the dream that more debt is an answer, and yet more poor analysis of the situation.

I write this blog in the probably vain hope that the blog, and views of other commentators who share more realistic views, will eventually have some influence. It is the hope that politicians/ the media / the public will finally look at the underlying reasons for this crisis square in the face, and look to remedies that will help reconstruct the economy in the medium and long term. Gordon Brown's ascendency is the symbolic antithesis of such hopes.

Note 4: I have just made a (very quick) survey of the new editions online. It seems that any hope that there is any boost in confidence from the bailouts is diminishing fast, as economic reality bites (as I proposed in a previous post). I also proposed that markets might go through ups and downs, but perhaps the sheer scale of the bad economic news will lead to a negative tracjectory only? Meanwhile there is more news of high borrowing countries crumpling under the weight of their own loans, and more calls on the IMF. Nervousness about the UK and US will no doubt be mounting in foreign creditors, even as I am writing. I proposed that a crisis in government insolvency was about 3 months away, but am now thinking that, just possibly, it may be sooner. As for the EU, I think Hubris comes to mind, when reading the following quote:

'The monetary blitz was welcomed in Brussels, where EU leaders were meeting yet again, just days after agreeing to the most comprehensive bank bail-out in history. "We are not at the end of the crisis, we are still living in dangerous times," said Jean-Claude Juncker, Luxembourg premier and Eurogroup chair.

He issued a stark reminder that life is going be very different for the banking elite as governments move to restore the lost discipline of the Bretton Woods financial order and attempt to "civilise" capitalism, the code word for clamping down on the City – dubbed "the Casino" in Europe.

"Let everyone remember after this crisis, who solved it. Politicians did, not bankers," he said. Mr Juncker added that this episode would have a profound effect on the euro debate in Britain.'

Yet again, apparently, the crisis is being solved. Perhaps some of these politicians should read the news?

I will try to write a proper review of the situation soon, as ever more problems are emerging, and the situation appears to be moving in an even worse direction than my own already very pessimistic predictions. I will try to round up all of the news, into a more integrated picture, and see where it will leave the world economy, and the economies in the UK and US, and to a lesser extent Europe.

Markets Fall, But Still They Chase the Elusive Confidence...

It is a very curious thing. The pouring of taxpayers money into the banking system was supposed to restore confidence. In the event, nothing has changed. Stocks are still falling and banks are still not lending to each other. It is now apparent that the severity of the problems are very deep indeed, in particular for UK banks. Iceland is now a basket case, and is a precursor to the carnage in the rest of the western banking system. Meanwhile, in a move that he will regret, Gordon Brown is threatening legal action as a result of the Icelandic meltdown and Iceland is blaming the UK for its troubles.

Quite frankly, as taxpayers money is poured into this insatiable black hole, the reactions and events are taking on the mantle of a very, very sick farce. It is clear that the bailouts have not been working, and that pouring in more money will really make no difference. Despite this, the politicians cling on to the belief that they can turn back the tides. Their concerted action on interest rates - no effect. The continual provision of liquidity, the headline bailouts - no effect. At what point, after spending how much money in supporting the financial system, will they accept that it will not work?

Perhaps the most disturbing part is that Gordon Brown, an individual who felt that he was entitled to lecture the rest of the world on the way to run the economy, is now grandstanding on the world stage, as if he has saved the UK banking system. Whilst he lectured the world on the success of the UK economy he watched the debt bubble grow, borrowed money during the so called 'good times' and allowed the money supply to get out of control.

I could comment on every detail of the crisis here, but do not feel that I have anything to add from my previous analysis, except for an expression of complete dismay. Normally I only aim to post if I can offer some analysis. However, my sense of dismay overcame my reticence. It is all just quite unbelievably farcical.

For new readers, I would suggest that you take a look at the links at the top left of the page (I suggest starting here). If you want to find out where this crisis really came from, and why all of this 'activity' by governments is both pointless and dangerous, then you will find all of the answers in these posts. Most people who have read the blog seem to find it illuminating, and I hope you will too. If you are really interested, dig into the archives and you will find more depth.

Some Replies to Comments:

Anonymous left the following comment:

'I just wonder. US, UK, EU countries are going to borrow all that money on top of what they borrow to function. Who has all that money to lend it to them? Does Asia have that kind of money? '

A very pertinent question. Yes, the money is out there in the rest of the world, but the big question will be whether they will continue lending. As regular readers are aware, that is why I believe that governments like the UK, and possibly the US, are going to have a terrible crisis. They will not be able to borrow, and this will either mean printing money (and hyper-inflation), or savage cuts in expenditure. I think this is, in part, what is driving these desperate measures, as I suspect they realise what will happen if they do not 'fix' the crisis. It is only a suspicion, but it looks increasingly looking like a roulette gambler who believes that they have one last chance to win on number 32, red. However, we will not know what they were really thinking until the crisis comes to conclusion.

On a similar vein, another commentator asks:

'My interest is what are the likely developments on the ground from here? I fear it will mean: civil unrest, rioting and instability.

What happens if the Government defaults?'

Your own analysis points to the possible answers. I am more than a little worried that the West in general is not prepared to deal with this crisis, meaning ordinary people are not. It sometimes seems that the good life is seen as a right. However, this is idle speculation. For your second question, see above. I can not predict which way they will jump, but suspect hyper-inflation.

Lemming asked:

An interesting little aside from Polly Toynbee in her column today where she comments alarmingly "Just-in-time food delivery, paid for with what?". To the people I know, the idea that food shortages might become a problem would just not be taken seriously, but there is no reason to think that it couldn't happen is there?

Whilst I am (as regular readers will know) not the most optimistic person, I do not think that the economy will fall to a level where there are food shortages. What is coming will be bad, but I do not believe that bad. Unemployment will be the biggest single problem, and many people will see a dramatic drop in their living standards. Many of the safety nets that we have become accustomed to will look more than a little threadbare.

Another anonymous poster asks:

'What do you suppose is motivating so many people to see the world through rose colored glasses?'

I find this difficult to answer, as I can not understand why people can not see what is in front of them. As such, I am afraid I have to pass on this answer. In this case 'I just don't get it'.

Jim asks the following:

'All over the world people study subjects like History, Philosophy and to a certain extent Psychology. Does anyone ever bother asking them for some insight?'

It is quite possible that this answers the previous question. Perhaps we can see why people are behaving in the way that they are from these disciplines. However, I have studied all of these subjects to varying depths, and am not sure that I can see the answer still. With regards to one of them, it is perhaps history that explains some of the solutions. I read an article in the economist that was suggesting that, this time, it is not as bad as the Great Depression. Meanwhile, Paulson is a student of the Great Depression. There are many comparisons being made, but the danger in those comparisons is that the world, and the problems of the economy are not the same. The main commonality, is that in both cases, people believed that wealth was a one way bet. Other than this, the circumstances are very different, and the bailout is an imagined solution to a different problem, in the different world of over 70 years ago.

I have also had many other comments, many of which deserve replies. However, I must make my apologies, and leave it there.

The UK Economy - Destroyed by Gordon Brown

I am in complete shock after reading the latest headlines. I imagine that it is impossible to miss the news of £500 billion bailout of the financial system in the UK, so you will all be familiar with the news. My only hope, n reading the news, is that this includes double counting (a habit of the Labour administration), but I suspect that the government is actually really about to borrow this amount of money. This is to ignore the £billions that have already been committed to the banking bailout through the SLA, and other measures.

It is necessary to take a step back and examine what this bailout really means.....but first of all a quote from the Telegraph that summarises what the bailout comprises:

'The package includes:

• £50bn to recapitalise banks

• £250bn to underwrite debt

• £200bn injection into the money markets

Admitting that Government borrowing will have to be drastically increased to fund the package, Mr Brown insisted that "for every family in the country, the stability of the banking system matters."'

The first point to note here is that it suggests that the money will be borrowed. Will all of it be borrowed, or will some of it be 'printed'? It is not entirely clear at this stage. Both have different consequences but, without more detail, it is not worthwhile to speculate on these questions. Notwithstanding this very important detail, the central question remains of what it actually will mean. Those familiar with this blog will be aware that the UK is already in a very dangerous position with total external debt ov over $12 trillion (the same level as the much larger US economy, at the last point of measure), dangerously devaluing assets on the other side of the balance sheet, and with very high government borrowing and liabilities. In other words, the UK is already mired in debt and is probably already structurally bankrupt, or very nearly so.

Now one of the most interesting things in all of the excitement, and the most worrying part, is the way in which everyone is measuring the scale of the new debt against GDP as a benchmark. Returning to the Telegraph article it has this to say:

'The potential liability of £500 billion amounts to more than a third of the annual value of the British economy and is approaching the almost £600 billion of total government spending.'

It is here that we come to the really shocking part, though perhaps not for regular readers. It is here that we must contemplate real GDP, which is in the process of being revealed by this crisis. I return here to my essay 'A Funny View of Wealth'. For those that are new to the blog, it is a long essay, but you really need to read it if this is going to become 'real' for you. In the essay, I look for the real growth in wealth in the UK economy over the last ten years, going through each sector, and fail to find any growth in wealth creation during that period. At the same time I see a massive growth in debt which, as a result of the multiplier effect, has given an illusion of economic growth, but in reality represented the utilisation of future wealth. Instead of a growth in wealth, I argue that we have been progressively been exporting wealth.

Why does this matter? If I am only partly correct, and most of the GDP growth can be accounted for by debt, then that would mean that the UK economy has appeared to be at least 25% larger than it really was in terms of output. The problem here is, that the massive debt binge also means that, in addition to the economy being much smaller than it appears, the debt binge must be paid for. I use the word binge here, deliberately using an emotive word, because my aim is to point out the stupidity of what has happened. The point is that the UK economy is going to see the wealth it does create flowing out of the country in order to service the existing debt obligations, a kind of negative multiplier effect if you will. As such the situation is far worse even than the 25% figure suggests, and this figure is any case very conservative. To this unpleasant cocktail, we can add in that the world has changed since 10 years ago, and China and India have emerged as fearsome competitors in the world market. Even without all of the problems within the UK economy, if there had been no debt binge and so forth, the UK would be struggling to compete.

So now we come to the size of the bailout. It is reported in the Telegraph as representing more than a third of the output of the UK economy, or £2000 for every taxpayer in the UK. The reality is that it is much more than a third of the real output of the economy, and this scale of borrowing can only be described as grossly irresponsible.

Set against that, we have Gordon Brown (the person in the driving seat, not Alastair Darling) claiming that this will produce a return to the UK taxpayer. In other words, he is claiming that he is not taking on liabilities but is making an investment. What he is actually taking on is lending to both households and businesses in a rapidly contracting economy. I predicted that house prices will drop by an absolute minimum of 50% from their peak, and probably as much as 60%. The shrinking of the economy will see unemployment skyrocket, and that means that large portions of the consumer credit will go sour. As the economy contracts, businesses will go bankrupt in large numbers. All the while government finances will be falling to pieces, as receipts go down and expenditure soars.

All of this means that the government is borrowing and then lending into a collapsing economy. There will be no return on this 'investment', just catastrophic losses. The cost to the government of such losses will be huge, though how much they lose can only be guesswork. And what does the government get in return for this? They claim that it will restore confidence, but the US bailout suggests that such bailouts do not even do this for the short term. In any case, even if it did win confidence in the short term, economic reality will, in any case, intrude on any false optimism that might result from such action. You will note that there are no emotive arguments here about 'greedy' bankers, or any of the other populist arguments against this UK bailout. Just the simple point that they will not work, and will only serve to accelerate the UK economy over the cliff that it is any case rushing towards.

As I said at the start, the scale of this bailout is quite simply shocking. The foolishness of the bailout is even more shocking. I suspect that Gordon Brown will go down in history as the man that broke the UK. That is surely what will happen now. I am sorry, but there is not one element in this that can do anything positive, unless you consider providing a last push over a cliff a mercy killing.

Note: For those who are reading the blog for the first time, this may seem seem somewhat shocking. However, everything I have pointed to in this post is a part of a progressively building picture, and is not plucked out of the air. Throughout this blog I have built a model of the UK and world economy that is very different from the structure that mainstream economists use. The fundamental difference between the two versions is that mine (to date) has had accurate predictive capability, whereas the mainstream keep getting it wrong. It is always possible that I have just guessed right, the idea that if you put enough monkeys at typewriters for long enough they will write Romeo and Juliet, if only by chance. However, if you look at the posts that I have made, I am hoping that you will see a simple logic and cold rationality to them.

Note 2: I have just found this article. It says that Paulson is still predicting bank and business failures despite the bailout. It is a bit late to be telling everyone this simple fact, now that he has permission to waste this money........

Note 3: I am afraid, even more so than usual, this post shows signs of the haste. My apologies for this, and I hope that the central messages get through. I have also been neglecting those who have written comments. Apologies, and I hope to address some of these soon.

Note 4: A very quick response to a question about oil prices as it is simple to answer. The question:

Oil prices at the mo are averaging around $85 p/b.
Not so long back oil was creeping up to $150 p/b.

This is one heck of a drop in such a short time - can you please explain?

The price before was dictated by demand exceeding supply, and this in part triggered the correction that we are now seeing in the world economy. As the Western economies are shrinking demand has fallen back, and therefore there is once again a surplus of oil. The speed of the shrinkage means that output by OPEC is not being cut by sufficient levels to maintain the price. I have written about this elsewhere, but I am afraid that I do not have time to dig out the links, suffice to say that several months ago I was predicting a drop to $60 per barrel within two years. I now think maybe even lower.