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.

UK Unemployment

I have long been predicting an accelerating increase in the levels of unemployment, going back to November of last year, and more recently said this:

However, also expect the rate of rise in unemployment to increase more quickly in the coming months (original post here)

In my original essay (November) I pointed out that it was likely that the position on unemployment would be ameliorated by Central European workers returning home, but that this would not be enough to stop the rise in unemployment, a point reiterated in my later post.

Today the newspapers are announcing that 'UK Unemployment Jumps Most in 16 Years'. This headline, under normal circumstances would be a cause for worry. However, bearing in mind that the predicted return of the Central Europeans is taking place, the extremity of the situation is even worse than the headline appears. As ever, the statistics on the Central Europeans are lacking but anecdote suggests that they are returning home in large number - a trend likely to be accelerated by the fall in the £GB, as their wages will be worth relatively less.

What this means in real terms is that unemployment is going up, but levels of employment are going down faster. This is indicative of the dire straits into which the UK economy has plunged. However, the consequences are going to be far deeper than imagined. One of the main sources of revenue for the government is the tax receipts from income taxation (I include National Insurance as Income Tax, as that is what it really is), at just under half of all revenue. We can do some back of cigarette calculations as follows:

Let's say that the total tax take (all taxes) on an average worker being laid off, or returning home to central Europe, is a conservative average of £8000 per annum. If we take a conservative guess at 200,000 Central Europeans having returned home in the last six months or so, that gives us a figure of lost revenue for the government of £1,600,000,000 per annum. These job losses will not show up as unemployment, but in a drop in employment. Furthermore, as the economy turns down, the number returning home will certainly be increasing. We should also consider that many of these workers are young, single and healthy, such that their net contribution to the economy was extremely high. As such their relative net contribution was likely raising the average net contribution per worker on average, such that their departure will bring down the average net contribution. As such the impact of their departure will be greater than for example, the magical disappearance of an average UK worker will be.

To this, we need to add the increase in unemployment among UK workers, which do show up in the unemployment figures. As these workers will be claiming benefits their impact will be even greater than the return home of Central Europeans (If you read the above carefully, you will see that I am not contradicting myself). Not only do they stop contributing to government revenue, but they also become an additional cost for the government. In the case of July alone, the figures show an additional 20,000 workers becoming unemployed, and the figures suggest that the rate of rise is increasing fast, with July's figures exceeding forecasts.

In short, the situation for the governments finances are dire. I have not even mentioned the falling tax take from VAT, Corporation Tax and so forth. Basically, every type of revenue is plummeting.

What I have also not mentioned is another impact of the Central Europeans return home. Many of the workers will have saved a significant amount of money, as that was why they were working here in the first place (money to return home with). As such, each of those central European workers will be returning home with a significant lump of cash, and we might guess that the average savings per Central European worker at £3000-5000 per annum. If we were to guess at the average length of stay in the UK as two years, that would give a lump sum of money withdrawn from the UK economy of about £8000. This is the equivaent to the import of a small car. This is a big lump of money to be withdrawn from the UK economy, and will have even greater impact than might initially be thought, due to the multiplier effect. The multiplier effect means that the loss of this cash to the UK economy means that this represents a considerable loss of economic activity in the economy as a whole. This loss of activity will also translate into a further loss of revenue for the government.

The rise in unemployment and the drop in employment are just starting to accelerate significantly. I actually suspect that there will be a substantial number of people who are actually unemployed but not yet claiming benefits yet. I can imagine (and it is no more than that) that there will be large numbers of people who will be living on redundancy money and/or credit for a couple of months in the hope that 'something will turn up'. I can also imagine these people appearing on the unemployment roll in the next month or two. For this reason the rate of unemployment increase will lag the drop in employment by a 2-3 months. As such, the unemployment figures of today may not fully reveal the drop in employment of UK workers. Again, there is a high likelihood that the the situation is even more dire than the headline numbers suggest.

I do not think I am alone in realising the severity of the situation. I note that the Bank of England is increasingly gloomy, and is starting to accept that the economy is in real trouble. However, even with their newly discovered pessimism, they are still not recognising how bad things will get. The UK economy is sinking like a stone.

I keep on mentioning it, but the rise in unemployment is going to start the second credit crisis. If we look at the headline figures of 20,000 increase in unemployment in July, you can see the harbinger of this crisis. Defaults on mortgages have been steadily rising over the last six months, and that rise lags unemployment rises. If we think of those 20,000 people, many will have mortgages and significant personal credit exposure, and will start falling behind in payments in a very short while. With the majority of UK households heavily indebted, each rise in unemployment will see mounting losses for the banks. With no ability to recover their money through repossession of housing (as the value of the house will increasingly be worth less than the debt), each default will represent a huge loss. These losses will now be starting to hit the banks hard and, even as I write, there are probably panicked meetings being held in all of the major retail lending institutions.

As I keep on saying, the situation is getting to get much worse yet.....