The overborrowed drag down the prudent

This Credit Crunch started when the Us authorities and the UK authorities decided to call time on the respective bubbles they had helped create in their economies. We know the UK thought it was necessary to teach those who had borrowed too much and those who had lent too much a lesson, for both the Chancellor and the Governor of the Bank told us so in speeches in the autumn of 2007.

Now they are discovering they cannot just teach the imprudent some financial arithmetic. The low interest rates they have set are clobbering the savers. Many running good businesses are struggling for custom and cash as the credit and the orders dry up. Worse than that, the most imprudent banks are the ones that are walking off with the cash, as the government frantically pumps new share capital into them instead of making them address their underlying business problems .We all know that if we work hard and save for the future, it will be us who pay the higher taxes and pick up all the huge bills they are now running up. Policy seems to be based around the proposition that there is no limit to how much taxpayers should borrow collectively, to remedy a problem brought on by some taxpayers and some taxpaying banks and companies borrowing too much individually! Nor is there any apparent limit to how much taxpayers are made to put into weak banks, who carry on paying large salaries and bonuses.

To some extent it is the same pattern globally with the different countries. Japan, Germany and China worked hard, saved a lot and exported good well priced products to many parts of the world. Where we imported they exported. Where we borrowed, they saved. Where we failed to provide for the future, they put lots by for a rainy day.

Now we see a much faster rate of job loss in China as her exporting industries hit the brick wall of low demand. We heard this week of a 10% cut in industrial production in Japan – and similar bad news for workers in good Japanese car plants in the UK. German industry is being hit hard, owing to its reliance on the particularly troubled auto sector.

Some will say it is only fair that all are suffering. Some may even enjoy in that peculiarly British way to see success brought down. It is certainly true that it takes two sides to create such a massive imbalance – there was a huge and ultimately unfinanceable gap between how much the successful exporters saved and how much the unsuccessful importers borrowed.It is a gap which has to be adjusted on both sides. Part of the adjustment will follow from the large currency price changes we have seen for the yen and to a lesser extent the Euro. The USA seems to want a further appreciation of the Chinese currency. This at one and the same time devalues all China’s holdings in dollar bonds, and makes it more difficult for them to carry on exporting to the USA. It means fewer jobs in China.

On current policies we will not avoid having to take some of the hit ourselves as part of a borrower nation. There is a price to pay for past excess and past regulatory errors. It is about to come through in the form of much higher import prices, cutting how much we can afford. It will be a tragedy if British industry and service businesses are unable to find the cash and talent they need to fill the gap. We need a quick response from business at a time when it is much weakened, so we can make for ourselves which we have in he past borrowed to buy from abroad.

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18 Comments

  1. yarnesfromhorsham
    Posted January 31, 2009 at 10:00 am | Permalink

    John – I would expect industry to manage the situation no matter how difficult but as for HMG it seems to be a case of throwing money at the problem – which to some extent might be warranted BUT surely there must also be some savings that can be made. We will all have to trim our budgets yet HMG appears to be in another world. OK its small beer but they could make a start on the Great Games of 2012

  2. chris southern
    Posted January 31, 2009 at 10:02 am | Permalink

    If countries stopped relying on gdp to see how well they are doing (as the figures now are so false it’s ridiculous) they would be able to create more stable economies.

    I agree about countries needing to be more self reliant with the minority of work being about export.
    Banking needs to change as well, it needs to be kept away from the stock market as well as having 100% reserve banking instead of what we currently have (the pyramid of debt dealing needs to be ended)

    Taxes in this country need to be drasticly reduced as well, scrap VAT and reintroduce sales tax on non essential items. Get rid of income tax and people will have more money to spend or save as they choose, With a reduced state their won’t be the need for the ridiculous amount of taxes, which will help more small business survive.

    I do feel sorry for workers in countries like china as they have on the whole acted responsible, yet have been caught up in the problems caused by others (a bit like a lot of us in the west as well.)

  3. David b
    Posted January 31, 2009 at 11:26 am | Permalink

    The Chinese are no angels. By hoovering up dollars to buy US T bonds they have kept their own currency undervalued while encouraging Americans to overindulge in a spending boom financed in part by artificially low interest rates. Its not really fair competition.

    The UK has had an overvalued currency for some years. Financed by oil revenues, carry trade conversions of overseas currencies by our ( pariah now ) finance whizzkids, and the sale of assets like our utilities, ports and airports, etc to foreign buyers.

    We can only hope there is enough productive capacity left for the UK PLC to recover, but I m afraid I ain’t got no sympathy for China.

    • Adam Collyer
      Posted February 1, 2009 at 12:22 am | Permalink

      The Chinese wouldn’t have been able to buy US Treasury bonds if the bonds weren’t issued in the first place! Those bonds were issued because the US government was running a huge deficit.

      Mr Obama’s cunning plan to deal with this is to borrow another $800 billion to “stimulate the economy”. I guess he’s competing with Gordon to be saviour of the world.

      • David b
        Posted February 1, 2009 at 8:42 am | Permalink

        The US would have been forced to confront the deficit if they had not been able to fund the debt. It would appear that the status of world reserve currency is what’s allowing them to fund the new debt the US is proposing. In our own country it is only the likely knowledge that they face electoral defeat which is encouraging Baldrick’s reckless binge. We will have to face the problem when the buyers of gilts no longer want them or our currency collapses completely or when the new government is finally elected.

        The Chinese have some responsibility for the current mess by deliberately maintaining an undervalued currency. They are not really victims therefore in my mind.

  4. Matthew Reynolds
    Posted January 31, 2009 at 12:01 pm | Permalink

    With savings & share incomes having taken a hit in this recession and many pensioners relying on that cash might I suggest a few tax changes to help ? Ending basic rate tax on income from pensions , savings & shares would simplify taxation while helping those who can least afford the fall-out from the Brown Recession ( coping classes , OAP’s and the working poor ) . This would stimulate wealth creation by making it pay – something Gordon Brown might want to consider as the opposite policies have helped cause mayhem.

    It also seems unfair that the income threshold for age related allowances is just £22,900 and will be £100,000 p/a for the basic personal tax allowance . That is just ageist and will not impress the over 65’s who form an increasing share of the population and who are more likely to vote and who find themselves working longer and paying tax due to the pensions crisis. Bringing in a £15,000 p/a basic personal tax allowance for the over 60’s with the claw-back threshold set at £100,000 p/a would encourage people to work longer which we will need as having the retirement age at 65 is untenable demographically speaking. By having the claw back threshold you target help that those who need it most and would avoid allegations of ‘ tax cuts for the rich .’

    With a public sector budget of £640 billion containing £100 billion of wastage ( as highlighted by the Tax Payers Alliance ) there is the scope to cut taxes & public spending and thus move money from the bloated client state ( a drag on growth as the evidence shows ) to the private sector ( the engine of growth). You could bolster productivity growth and social mobility – two areas that Brown has failed in very badly. How is that for a vote winning economic policy ?

  5. Adrian Peirson
    Posted January 31, 2009 at 12:49 pm | Permalink

    It is unrestrained Credit and Spending that has go tus into this mess, Gordon’s solution is more Unrestrained spending.

    Globalisation has not helped had we kept our Industrial base, protected our Farmers for EU interferenec, and retained our Fishing Grounds we would be better placed to weather this.
    Gordon’s Solution, More Globalisation.

    He is planning on giving 100’s of Billions to the Banks, Well I don’t like this, personally I think we should hit the reset Button.

    Let market forces prevail, the banks should be allowed to fail, if they did not forsee this then they are operating on a flawed model and should be alllowed to fail.

    Grant the People their homes, cars and Businesses, wipe out all bank loans, and mortgages.

    Slavery was not abolished, Our money is Worthless paper is not backed by anything more than a promise of your and your childrens future Labour hidden behind the smoke and mrrors of Govt Bonds and Gilts.

    Every time Gordon Prints (Borrows) money he devalues that money which we already have.
    Worse he commits your future labour to working for the Globalists (Banks) to the tune of the face vale of this worthless paper money that only costs 1p to print.

    Gordon Prints a £50 Gilt ( which costs about 1p to actually print) The Banks come along, take the Gilt and Print a £50 note ( this too only costs them 1p to print)

    Gordon and the Bank have now Committed you and your children to working for the FULL FACE VALUE OF THIS ‘MONEY’
    to pay it back, when it only ever cost 1 pence.

    Wake up, you are enslaved to a fraud.

    We should have sound honest mony.

    If you bought a quality suit 50 yrs ago it could have cost you the equivalent of one Gold Sovereign.

    If you bought a similar quality suit today you coud buy it for one gold Soveriegn.

    Gold has maintained its value over time, it only looks like it has gone up in value because the Value, the purchasing power of the Pound or the dollar, or the Yen or the Euro COMPARED to Good old honest Gold has gone down.
    It has to Go down because these notes come into existance as a debt.

    Our money is Borrowed into existance, if Gordon Borrows £100 Billion we have to pay back £110 Billion.
    Where does the money come from to pay this loan back. Well of course Gordon Borrows it.
    That is why we have more and more money in circulation which devalues it.
    We can NEVER pay off what we borrow because there is always interest attached to the loan.

    We shouldn’t be borrowing it anyway, if we can print Gilts, why cant we print the money in the first place.
    What happens when the Banks ‘buys’ a Gilt, it Prints some money and hands it to Gordon.
    Well if the Bank can do that, Why can’t we.

    It’s a scam.

    They couln’t do this with sound honest money.

    http://www.gold-eagle.com/editorials_03/weber062703.html

    • chris southern
      Posted January 31, 2009 at 4:44 pm | Permalink

      Whilst i do agree, the problem with the gold linked currencies is that all it takes is one idiot with a printing press to devalue it all as was done before.

      We need to get away from the credit creation of reserve banking and stop goverments (and banks) from printing more paper currencies, bonds etc.
      Goverments shouldn’t be allowed to place people into debt (economic slavery, of which you explained above,) instead they should work alongside business to build up infrastures.
      We also need to get away from inflation (printing of currency) as it will allow a more balanced pay-living cost/lifestyle to be brought back in.

      I have other ideas as well to do with this line of thought, i’m not that good at explaining them in type unfortunately.

  6. jpt
    Posted January 31, 2009 at 6:46 pm | Permalink

    ‘The overborrowed drag down the prudent’

    I could have told you that years ago!!

    • Adrian Peirson
      Posted February 1, 2009 at 2:01 am | Permalink

      Now he tells us.

  7. Dennis
    Posted January 31, 2009 at 8:08 pm | Permalink

    Where else can the government get any money, except from those who have some?

    I’ve noticed that all the £20 notes I have been issued recently have been brand new. Clearly the printing presses are working overtime.

    I have started spending money while it still has some value. So far a new German car, costing £16,000; a new Macintosh, costing £1,000. Of that £17,000 I estimate that less than £3,000 will have gone into the British economy: the rest has gone abroad.

    Later this year, when prices have dipped even further, I intend to buy another house with plenty of land.

    Inflation is the classic ruse used by governments to steal people’s savings. My family was clobbered by Labour in the 1970s; amazingly, the best investment you could make then was to stock up on goods from the supermarket.

    Brown is not going to do it to me again.

  8. mikestallard
    Posted January 31, 2009 at 8:40 pm | Permalink

    OK, we all know the Brown government is not only the cause of the terrible debts which the country now faces, but also the cause of the bloated and clumsy government which the country now suffers. He is not going to change: he is not even listening.
    I have just had someone on the phone who I had always thought had a very secure job. His boss called a meeting last Wednesday in which he announced that the company had enough to pay the firm’s wages for three more months only. He then suggested that the firm went onto a four day week, that everyone in the firm was paid exactly the same, whatever their position and that all little extras would be cancelled across the board. In return, he offered that nobody would lose their jobs for a year.
    Maddeningly they all have a lot of work – quite enough for five days.
    And the cause of all this? Well two people, currently driving round in large cars, were not paying their bills “because of the current situation”.
    He began running down the government, although I know that he voted Labour consistently. But that isn’t the question. The thing that will bring his company back to life, through inflation (see above) and yet more ridiculous and unfair taxation will be the banks. When they start lending again, he will be OK.
    I assured him that this would happen within a year and I really think it will. Unemployment is not funny when you have three young children and wife.
    Meanwhile, I am off to see, no doubt for the last time, my daughter in Australia and my son in Thailand.
    Bummer, innit?

    • mikestallard
      Posted January 31, 2009 at 8:43 pm | Permalink

      PS The boss of the company himself took the same wages as his staff and forewent (?) all his perks too, just to keep the company on the road for a year.
      I do not see MPs, MEPs, Peers and Ministers doing the same thing, do you? Let alone the fat Quangocrats and bankers.

  9. Harry Fredericks
    Posted January 31, 2009 at 10:30 pm | Permalink

    Yes that is what is said: That the banks are walking away with the loot. It would be nice to see some evidence of this however. The government is publishing no account of what happens one the loot is handed over. Likewise the banks seem willing to keep the secret.

    Well the 3rd Qtr report from washington seems to be saying that all this stimulus as a total waste of time. Ok, I am willing to believe that, as the sums shown imply I would be an idiot not to. But then all of our glorious leaders, god bless their little clay feet, must have read this report and so must likewise realise the Billions they they are tossing away in such a cavalier fashion is pure criminal waste and utterly irresponsible. For those who have not read the report, I will post it here. Have a stiff brandy ready for when the shock sets in.

    http://www.occ.treas.gov/ftp/release/2008-152a.pdf

    We really could do with you Mr Redwood in the shadow cabinet. My fears for the future now extend to three generations hence.

  10. Ian Jones
    Posted February 1, 2009 at 12:16 am | Permalink

    It seems to be a common problem for Governments in this country with policy aimed at fixing symptoms rather than causes leading to moral hazard and ultimately a far worse longer term.

    Unfortunately once started it seems more and more difficult to go back, this is not only the banks but also taxation, social policies, immigration etc etc. It would be nice to think that the Govt could at least start slashing the massive pay and bonuses in banks, I still cannot believe that a business which is bust is paying bonuses at all!!!

    Maybe things will change but I doubt it! Is it any wonder that if people think politics has failed they start taking things into their own hands or voting for unpleasant parties!

  11. anoneumouse
    Posted February 1, 2009 at 12:14 pm | Permalink

    Lets have some “more on” Reactionary Pprogressives

  12. anoneumouse
    Posted February 1, 2009 at 12:16 pm | Permalink

    opps, my last comment has been made on the wrong post

  13. Sava Zxivanovich
    Posted February 2, 2009 at 3:41 pm | Permalink

    Not all the savers were prudent – they invested in non-prudent banks (Northern Rock) and they should not have been saved.

    Nationalisation and full guaranty for Northern Rock’s savings accounts introduced moral hazard on a scale unseen yet.

    Cost of that bear we all, some more and some less. Drop of sterling is only one part, housing bubble introduced by imprudent savers is another, bubble in banking jobs is third, demise of manufacturing is forth etc

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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