Wednesday, October 8, 2008

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.


  1. According to Will Hutton, Brown and Darling "will find themselves lionised at the IMF meetings in Washington this week as the one government that has finally risen to the occasion." Is this Gordon Brown's 'Tony Blair' moment when he receives a standing ovation from a bunch of powerful Americans?

    It brings to mind a scene from countless films where a high roller in a casino is surrounded by fascinated onlookers who are mesmerised by the risks he is taking, but melt away once he begins to lose.

  2. 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?

  3. I think your analysis is pretty spot.

    All that unearned money had to go somewhere. It did of course go somewhere.

    I know Gordon the Clown thinks pumping billions into banks and large building projects will save him, it will not. The world has changed, as the markets see the grand plan for what it is, money will flow eastwards. It will be a tide, flowing for years to come.

    Me, I'm trying to find the best place to invest.

  4. you analysis is bang on . .Wars are also a crippling expenditure we cannot afford!!!

  5. When, under the Conservatives, Maggie's destruction of the Unions led to the death of medium and heavy industry and manufacturing, in favour of the new, sophisticated 'Financial Services', whilst our National Treasures were being sold off cheap to line purses, it seemed for a while that things had changed....maybe for the good and maybe permanently.
    The dotcom and fund management boom seemed to herald green pastures for all, but being a simple 'HND' student, I could never get a grip on the basic principle that as a Nation, you must either have mineral wealth or skill to trade off against your imported commodities.(The difference being the Balance of Trade Surplus or Deficit as the case may be)
    As the oil started to run out in the 90's, skills disappeared, manufacturing went into meltdown, everyone was either in the service industry or employed directly or indirectly by the State, and yet we were told we had a strong economy, both by Clarke and Brown, but there seemed no foundation for any of these claims, where was it?
    This country started to make a loss, very early on under the well mantra'd 'prudence' of Blair/Brown. The principal requirements of economic stability were becoming blurred, employment figures were fudged, expenditure on the High Street became an indication of the health of the nation, the CSO were becoming political tools producing Newspeak figures.
    One simply cannot continue to believe that the situation is under control with such blatent failures staring you in the face. Brown has recycled most of his funding promises so often it seems like a Fawlty Towers repeat, and all the time those who think it through just cannot believe how he keeps convincing this dumbed down electorate that he is the man.
    I can't wait for the very sad moment when the minions realise they've been conned and well f*c*ed, but what I really fear is that he'll con them all again! squodgy


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