Where did all the stimulus go?

The government keeps telling us borrowing more, spending more and printing more boosts the economy. They should look at the figures and ask themselves Where has all the stimulus gone? The figures are amazing.

Since 2005 the government has doubled central government borrowing (on its own understated figures ) from £469 billion to £922 billion – an injection of £452 billion.

Since 2004-5 money supply (M4) has surged from £1,212 billion (£1.2tn) to £2,100bn (£2.1 tn) – it has also almost doubled. Notes and coin have gone up from £42 billion to £55 billion.

And what has happened to real output? It is almost the same in Q4 2009 as it was in Q3 2005! No growth at all for 5 years.

So where did all the stimulus go? Much of the public borrowing went on inefficiencies and on imports. Some of the extra money went into price inflation, and some is just circulating less rapidly now, given the poor state of the banks and the new regulatory toughness.

The government needs to go back to the drawing board on whether these sorts of stimuli work. If they had studied Japan over the last twenty years they could have seen for themselves that huge boosts to public spending and public borrowing just put the state more into debt but did not lift the growth rate. It could have saved us a lot of money and false hopes.


  1. michael mcgrath
    January 27, 2010

    300 million on the car scrappage scheme plus 200 BILLION QE without counting the cost of bailing out RBS and Lloyds and the national GDP increases by 0.1%in the 4th qtr 2009…Do I even believe this figure??
    It's no wonder the Dear Leader is hiding in Belfast

    With the return of VAT to 17.5% and the ending of car scrappage input it seems more likely than ever that 1st qtr 2010 will see a return to negative growth (what a wonderful term!!)

    This must, surely, shorten the odds on an election before the next quarter's figures are published

  2. JimF
    January 27, 2010

    Any stimulus should have resulted in some public benefit – either from better transport systems, investment in housing to be rented out at a commercial rent which would give the government income, genuine business investment which would generate a return via banks and so on.

    I have the feeling this has just been p!ssed down the pan on extra benefits, wages for councils, quangos, police etc. i.e. a completely fruitless subsidy/bribe to the Labour luvvy clientele without any prospect of a return.

  3. Robert K, Oxford
    January 27, 2010

    Thank goodness there is one senior parliamentarian who is able to articulate in a few sentences the catastrophe that NuLab is unleashing on this country. I knew the money supply had exploded, but had not seen the numbers. What has happened, in fact, is that we have gone through a period of massive monetary inflation. It’s just that because the measures chosen by the government do not reflect it. If you need evidence, look at asset prices rather than retail prices. The house price boom has not even begun to correct whilst the stock market is almost back to its boom time levels. As soon as the velocity of money starts to increase the consequence will be savage retail price inflation. At which point the authorities will be forced to hike interest rates and plunge us all into the really big collapse. The solution is to cut public spending and debt, cut taxes, cut regulation and for the state to GET OUT OF THE BLOODY WAY (thank you for that phrase, Lola).
    You know, the only thing wrong with this blog is that you are preaching to the converted. WHY WILL YOUR COLLEAGUES IN PARLIAMENT NOT LISTEN??

  4. Man in a Shed
    January 27, 2010

    If borrowing now to spend of the public sector was such a great idea I wonder why Labour doesn't argue for even higher spending given all the goodness the claim it produces.

    Or perhaps its just an argument of convenience to get them past the general election.

  5. oldrightie
    January 27, 2010

    Where did all the stimulus go?

    Down the same bottomless pit of the last 13 years of tax and spend.

  6. FatBigot
    January 27, 2010

    I have long been troubled by the use of "stimulus" to describe the state trying to replace lost private spending by increasing public spending. To my mind it is not a stimulant because that suggests it is causing growth whereas, at best, it is attempting to minimise contraction in GDP.

    The real problem is that government is in no position to dictate the "proper" level of economic activity. We had apparent growth on the back of unsustainable levels of credit, in substance it was not growth at all but a mere bubble; one could liken it to parents saying their baby has gained two pounds in weight when all that has happened is that the child has been put in a heavy coat and then weighed.

    Attempts to maintain the extra GDP created by the unsustainable bubble is to fly in the face of reality. Substantive economic activity is GDP minus the bubble. Pretending that the bubble has substance and that GDP must be kept up to the post-bubble level is a recipe for certain disaster.

    I can see a case (albeit a thin one) for government spending increasing to help ensure only the bubble is deflated and that affordable economic activity is not also lost, but this requires government to pick winners and we all know what that means.

    The reality is that reported GDP over the last few years has been artificially overstated and the recession is merely returning it to its long-term sustainable level. Government cannot "stimulate" anything other than the bank accounts of those from whom it borrows by seeking to maintain GDP at an artificially high level.

  7. Blank Xavier
    January 27, 2010

    I may be completely wrong, for I am not a trained economist; but is it not the case that money is not wealth?

    Weatlh is *wealth*. Money *represents* wealth. Print all the money you want. The amount of wealth is unchanged.

    How could printing money ever effect the economy?

    1. Neil
      January 29, 2010

      Oh, printing money definitely affects the economy – every pound printed slightly diminishes the purchasing power of the pounds you have in your wallet and bank account. When the government uses the printing press it is transferring wealth from you to itself – exactly the same as if they had raised taxes, but without all the fuss and publicity.

      It's a stealth tax. Nothing more to it.

  8. Lola
    January 27, 2010

    When will lefty governments ever get it through their thick heads that they can not ever make growth happen. What they can do, and do do in spades is to destroy growth. The only way they can 'make growth happen' is to stop doing things and give us back all our money so we can save and invest and spend it as we like and create wealth and growth.

    1. waramess
      January 28, 2010

      Absolutely right. It's a bit like the HR department of a widgit maker frantically buying widgets with the companies money in order to bolster the companies sales. It's a nonsense and as observed many times before, if printing more money created growth and wealth then we could eliminate world poverty at a stroke.

  9. JohnRS
    January 27, 2010

    The problem is that Mr Blair and his Chancellor marched boldly into the future assuring us they would take us to the Promised Land, without ever looking back to see what they could learn from history. I remember the mood in many offices and in the media in 1997, it was a kind of "Year Zero" feeling, nothing from the past mattered, "things could only get better".

    So the lessons from Japan were never sought, and if they had been I believe they would have been ignored anyway. We are now paying for this arrogance.

  10. Brian Tomkinson
    January 27, 2010

    Does anybody in government know what they are doing other than trying to hold on to political office? We all pay for their self-serving maladministration and economic vandalism. There needs to be proper legal accountability to prevent politicians behaving in such ways with severe punishments. Perhaps then they will think twice before they condemn us all to an impecunious future.

    January 27, 2010

    "And what has happened to real output? It is almost the same in Q4 2009 as it was in Q3 2005! No growth at all for 5 years."

    3 thoughts on understanding the figures:

    1. As one who likes to show an accurate picture you have gone back to the quantum figures rather than relying on comparing successive sets of percentages which can baffle us all. For example what does yesterday's +0.1% figure really mean unless put in context? Presumably that our output – or 40% of it – was slightly higher than the previous quarter but without advising if this is a genaral trend in the final quarter of any year.
    There are many other cases where an analysis of the quantum figures would help reveal the truth.

    2. In our early days as marketing analysts we were also taught the value of Moving Annual Totals (MATs) whereby in tracking trends we drop off the oldest month/quarter/year as we add the latest. This generally reveals a far truer picture.

    3. A further confusion on which we'd like to see some clarification and consistency is on the annualisation of expenditure and savings. So often a 3 or 5-year figure is quoted making either seem bigger than it is. We believe that such announcements should always include the 'average annual' figure.

    1. APL
      January 28, 2010

      The Essex Boys: "For example what does yesterday’s +0.1% figure really mean unless put in context?"

      It is a manufactured figure based on the scrappage scheme, QE which has gone directlyinto the stock market and propped up housing prices and the VAT cut.

      Someone else pointed out the announcement we are now out of recession by the slimmest of margins and that a new delcaration of recession will require three more quarters of negative growth – which I think we will get, means;

      Talk of the longest recession since the war will be shelved until the election is long past.

      In short, the government has gerrymandered the statistics as an electoral ploy.

        January 28, 2010

        Absolutely APL!

        In fact, despite the artificial boosters you mention, +0.1% is statistically zero meaning that the UK is still at its lowest ebb as the comparison is with the previous quarter rather than the same period a year ago which would be more meaningful in our view.

        Did anybody read the tale today of the quango costing us £9.4m pa with plush Bristol offices, an army of staff, a 4-day a week/ £184k pa chairman – and nothing to do!

        Doesn't it make your blood boil when you listen to Labour's tosh that we can't start cutting for fear of harming the recovery!

  12. Anoneumouse
    January 27, 2010

    Off Topic

    Just listened to you on radio 4 with the bbc Nick the Prick and the failed NHS secretary of state (George of rainbow fame) about booze + price.

    The stateists really don't get it. Price goes up to punish the Demos…what happens……. we all start to brew our own.

    You want to know how……..Google 'Home brew' hic ,,Cheers

    1. andy dan
      January 28, 2010

      Shut up Anonemouse! Some of us have been quietly brewing our own for years, and can make beer of a high quality for about 30p a pint. When gordo realises this, he'll slap a huge tax on malt extract and spoil the party!

  13. Sally C.
    January 27, 2010

    The Bank of England, by intervening in the market to keep Base Rate artificially low, provided the high street banks with excess bank reserves and thereby put them in a position where they could expand the supply of checking deposit accounts, and therefore fiduciary media, by a vast multiple of those additional reserves, leading to the increase in M4, that you quote, from £1.2 trillion to £2.1 trillion. This means that M4 grew at a compound rate of 12% a year for the last five years! At the same time the government went on an unsustainable spending spree, splurging huge amounts of money on the NHS, and the benefit system. The one million plus people employed by the NHS were the major beneficiaries of the government’s largesse. The funds created by the Bank of England’s credit expansion, and the government’s vast spending programme, poured into the housing market, commercial real estate and the stock market, as is obvious from a cursory glance at a graph of the FTSE from 2004 to 2008. People and companies saddled themselves with debt, and the banks engaged in ever more risky borrowing and lending strategies. The inevitable result was the collapse of Northern Rock, followed swiftly by RBS, HBOS, and Bradford and Bingley. Together, Gordon Brown and Mervyn King have presided over the bankrupting of Britain, although you would never know it to look at them – no sign of sleepless nights or guilt there! QE and near zero interest rates are their attempt to prop up this edifice built on debt. We can totter along like this but we cannot grow.

  14. Javelin
    January 27, 2010

    I have another question. Who is taking the risks on QE and who is getting the rewards?

    As the aim of QE is to Buy bonds off the banks using made up money. Then the banks get the reward of swapping cash for bonds (over valued) and getting extra cash to splash on profitable investments. So the BoE now holds over valued bonds and large counterparty risks on the bank.

    Where's the economy in that – eh?

    I was chatting to a prop trader 9 months ago who said they were simply off setting the QE money to buy other assets with the banks free cash. They made record profits last year. Remember in a recession asset prices are lower and companies have a legal obligation to their shareholders. So if you want to know why the stock market is surging ahead – simple the banks have bought the Equity assets.

    Now you could argue that the QE stimulus has worked because money has poured into stocks, which have boosted investment. But FTSE shares are international. So it hasn't helped UK Plc that much, but it has helped the International economy.

    Stopping QE will simply stop banks buying stocks. It won't slow down lending because they're not lending out using QE cash – why would they when house prices might fall again and lots of companies will go to the wall next year.

    Eventually the banks will take the profits from stocks and I expect investment banks to make record profits. I don't expect QE to have helped UK Plc.

  15. Grumpy Optimist
    January 27, 2010

    These are sobering if not staggering numbers – and as they are officials statistics you could say that they are incontrovertible. Of course I know that by their very nature official statistics are anything but that. Even so…..

    Thank you John for bringing them to our attention. Might they become part of the new Tory attack dog strategy?

  16. StevenL
    January 27, 2010

    It went into house price inflation and bank balance sheet expansion.

  17. ikh
    January 27, 2010

    Its good to see someone finally taking a look at the money supply figures and particularly M4. When the credit bubble burst and became a crunch reported M4 will have dived, and effective M4 has fallen off a cliff. This is what collapsed a nearly 6% inflation rate and rising to negative territory in 3 months.

    Real and reported M4 has been propped up by the bank bailouts and may even have been expanded somewhat by Q.E. However, effective M4 is still through the floor because most credit derivatives are untradeable. The banks have written off probably more than they have lost ( They traditionally are conservative about that sort of thing ).

    The whole purpose of Credit Derivatives was to move mortgages from the Fixed Asset part of the balance sheet to liquid Assets. This is what caused M4 to grow by 300% from 1997 to 2007. It is what fuelled the credit bubble and what Gordon Brown absolutely failed to regulate and control.

    However, because the credit derivatives market is now very illiquid, a huge chunk of M4 is still on the books and exists but might as well not exist because it is frozen solid. this is why, although the banks balance sheets are now looking reasonable, the reality is somewhat different.

    This is why the banks are limited in their lending both to commerce and to each other. A large chunk of what are supposed to be liquid assets are frozen solid.

    We need to help the banks to gently thaw these assets and at the same time make sure that they can never become toxic again. This means that they must be traded on an exchange. An exchange with reporting requirements will give the transparency and liquidity needed to stop them becoming toxic.

    The gently is starting only with loans issued since Jan 2008. These are all high quality since they came after the crunch began. Get the reporting requirements correct and very high quality CDOs can begin to be traded on an exchange. If no one commercial will take on the credit default swap contract then the BoE could write these at slightly more than the commercial rate so that they can be easily undercut as the market builds up confidence.

    Finally, you allow the banks to start to bring their frozen assets to the market. At this point you may need to consider Quantitative Tightening to prevent another bubble occurring.


    1. Mark
      January 28, 2010

      Credit Derivative Swaps (CDS) have already had a fairly massive bailout from the Fed, as discussed in this article:

      The toxicity of CDOs already in issue can't be changed by trying to trade them on an exchange. It depends on the (lack of) quality of underlying mortgages, and the risk that higher nominal interest rates will push more mortgages into default. Note that default can occur even with negative real interest rates, simply because the payment consumes too large a share of income. The only ways to reduce the toxicity of existing CDOs is to encourage the early repayment of mortgages or to artificially keep interest rates down to reduce the default risk. The risk will remain until house prices have deflated from bubble values in real terms so that mortgages once again return to sensible limits on income multiples and LTV ratios. That can be achieved through letting nominal prices resume their fall, or by letting inflation rip. In the former case, nominal interest rates remain lowish although positive in real terms, whilst in the latter case we could see the 15%+ rates that deflated the UK's bubbles before.

      Trading CDOs is simply playing a game of pass the parcel, hoping you won't be holding it when the music stops. The model of mortgage securitisation and wholesale funding is bust. Wholesale funding is very lumpy and subject to renewal risk, as several lenders have found. Individual mortgages are not large enough to justify syndication, but they are small enough to make it far too difficult for a secondary investor to evaluate them efficiently – hence why CDOs remain illiquid markets. Where the mortgagee retains the risk, they have the incentive to evaluate it properly when issuing the mortgage. If they can shed the risk, the incentive is to maximise business volume and pass off toxic risk. You may argue that a package of mortgages that is concentrated on a geographical area or some other market specialisation is a concentration of risk that needs to be diversified. I would suggest that risk can be mitigated by conservative lending practices, and by business diversification: it is best for the rural bank to open branches in towns rather than be overexposed to the peculiar risks of farming.

      The main justification for creating CDOs is to create a variety of risk/reward profiles associated with the various tranches, supposedly to meet varying investor risk appetites. This argument has often puzzled me, since it seems that the design of derivative instruments is often dictated by mathematical tractability of the risk model or some perceived competitive advantage rather than any real desire in the marketplace for the particular risk profile. Economic theory states that any desired risk portfolio can be created from forward markets and plain vanilla options in Arrow-Debreu commodities – nothing else is needed.

      1. ikh
        January 28, 2010

        CDSs are Credit Default Swaps i.e. a default insurance and yes, they have had an $80 billion bail out from the Fed for AIG. Half of that will benefit London branches of US and UK banks.

        However, you completely ms-understand toxicity with regard to CDOs. CDOs are toxic not because of default rates, but because the default rates are not known. A particular CDO could be worth 95%, 75%, or 55% of face value but no one knows. They need to have reporting requirements forced on them so that they can be valued.

        Before they were taken over Bear Sterns had a fire sale of CDOs to raise money. As a result, every other bank with the same types of CDOs was forced by the 'Mark to Market' rules to down value their holdings to the price Bear Sterns got. This made them seriously under value these CDOs and therefore unnecessarily weaken their balance sheets.

        OTC trading is usually reserved for small niche markets that are inherently illiquid. There smal size means it does not represent a risk to participants. The credit derivatives market is reckoned to be an approx 60 trillion dollar market. It is lunacy that this should be traded OTC. by forcing it to be traded on an exchange. the listing rules can force the transparency that is necessary for pricing. And public pricing is a huge aid to liquidity.



        1. Mark
          January 30, 2010

          I think I said above "Individual mortgages are not large enough to justify syndication, but they are small enough to make it far too difficult for a secondary investor to evaluate them efficiently – hence why CDOs remain illiquid markets" which precisely captures your sentiment about why CDOs remain toxic. I leave as a matter for future judgement as to whether CDOs have been adequately written down as yet, but I have evidence that people re-mortgaging on the expiry of a fixed deal in the UK tended to increase debt in line with the increase in house prices since their previous fix – i.e. MEWing – between 2001 and mid 2008, according to BoE data. Certainly banks have a long way to go to meet Roubini's estimates of how much they will need ultimately to write down.

          Probably the largest financial markets of all are forex and interest rate swaps. The bulk of the trades in both these are bilateral OTC deals. Anyone with access to page FXFX on a Reuters screen can watch the names of the institutions and the prices bid and offered on foreign exchange in the principal currencies. However, there is no central counterparty – merely well established deep liquid markets and pricing formulae, combined with netting and collateral agreements usually under ISDA rules. Forex trade on futures markets is very limited, and interest rate futures trade is confined to a tiny handful of contracts that have any liquidity.

          CDOs are highly diverse, and not well suited to exchange trading, which only prospers with highly liquid contracts with specifications that are precise and uniform. I made some further comments about relying on central counterparties in response to your comment

          but because the comment was made sometime after that thread was initiated it remains awaiting moderation.

  18. Kevin Peat
    January 28, 2010

    The counterpoint to spend yourself rich has to be to work yourself poor.

    (As already pointed out elsewhere.)

  19. Kevin Peat
    January 28, 2010

    A period of austerity would be good for Britain.

    – Forces useful people to stay, not use capital to emigrate
    – Forces people to stay at home rather than holiday abroad
    – Forces people to make this a place they want to live in
    – Forces people to bring politicians to account.
    – Forces people to demand value for money …


    Yes. That's sometimes what is needed.

  20. Adrian Peirson
    January 28, 2010

    I wish people would stop looking at these figures with such incredulity, it's really very simple.
    They are despots, they are bringing us and our country to our knees, then they have total control over you, and all the wealth.

    They do not say that of course, it's all dressed up as complex sounding economics gibberish.
    It is a Con Job, he is in your living room talking utter balderdash, all the while pocketing your valuables, and rifling through your wallet, wake up.

  21. Phil Kean
    January 28, 2010

    To produce an artificial growth figure of 0.1%, conveniently assisted by the Christmas 09 shopping season.

    Look for a 2010 Q1 figure of – 0.8%

    1. Phil Kean
      January 28, 2010

      I meant to say 'the bouyant 09 Christmas shopping season'.

  22. AWS
    January 28, 2010

    Japan increased its public debt massively and let its zombie banks totter on without a proper audit. Twenty years on, what do we have? The worst performing economy in the G8. Japan has been living on Keynesian stimulus for the last few decades – and look where it is now! The TSE is still nowhere near the heights it commanded at the end of the 80s.

    If we let Labour stifle the private sector with its irresponsible spending we can look forward to a lost decade or two of our own.

  23. Javelin - the Obama
    January 28, 2010

    Rumor is they are calling it "the Obama bonus". A week before Obama announced his clampdown on gambling with customer deposits a particular bank stated a fixed amount to buy shares as part of their bonus scheme. Shares then fell on the announcement by 8%. Hey presto – employees get another 8% shares for the fixed amount. The timing seems coincidental, almost as if Obana had the wool pulled over his eyes.   

    Furthermore the bank doesn't have a retail arm, so has largely escaped Obamas clamp down, so the shares will rise, whilst their competitors will be hit hard.

    Obama was also conned by the C02 climate alarmists. Now a certain set of bankers are making more sacks of gold. He speaks well but doesn't do details – does he?   

  24. Billy Blofeld
    January 28, 2010

    This is the most powerful analogy which explains the folly of the stimulus yet.

    I hope the press bother to pick it up and challenge ministers with it.

  25. Lindsay McDougall
    January 28, 2010

    Fiscal stimulus and monetary laxity do not generate medium or long term economic growth and never have done. At best, you get one year of growth followed by several years of stagnation.

    So why is anybody surprised at what is happening?

  26. Marcellus
    January 28, 2010

    Everyone is warning that an immediate recovery is unlikely, possibly for years.

    However, Labour and their BBC robots are currently saying that it is vital not to cut spending now as that would harm the recovery.

    This is merely a typically deceitful Labour trap to catch the Tories. They are planning ahead. It is to give Labour a bullet proof attack narrative against an incoming Tory government

    If the spending cuts that everyone says are essential are indeed made by the Tories and the economy does not surge ahead immediately – the Labour-BBC machine will say that the economy is not growing BECAUSE of "Tory cuts".

    Their attack along these lines will go on for years and years.

    I hope the Tories are aware of what Labour are doing, and prepare NOW to counter it.

    John Redwood's argument in this excellent post is the basis of the defence against that deceitful argument.

  27. rose
    January 29, 2010

    I wish everyone would stop knocking Japan. If we had their stability we would be fortunate indeed. Instead we live in very obvious and frightening decline, brought about by many other bad policies than just economic mismanagement.

  28. Cedric Talbot
    January 30, 2010

    I agree with Rose.
    I left the UK 32 years ago to get away from the last Labour government and have lived in Japan ever since. The Japanese still have a tremendous work ethic and there is no wasteful culture of mollycoddling welfare. People work as a matter of pride rather than necessity and there is great respect for craftsmanship, technology and professionalism at all levels.
    Everything works well because of proper maintenance of the infrastructure and there is a genuine ethos of willing customer service which simply does not seem to exist in the UK. Public transport is efficient and cheap and the Shinkansen bullet train system has been on time since it started in 1964. Japan has a vibrant manufacturing industry, is a world leader in nanotechnology, robotics, flat screen TV, solar panels, etc, etc and intends to remain so.
    What Britain needs is an end to politically correct leftie bullshit and a good kick up the backside to make the country competitive in the 21st century. It has the brains and skills to rebuild high tech industries such as nuclear power so criminally neglected by our almost entirely technically ignorant political classes.
    It requires very strong leadership to get us out of the losers' mentality created by Labour and I do wonder whether Cameron has the understanding or determination to take on such a task.

  29. James
    February 11, 2010

    Please keep me informed of any updates to your blog. I would really like to continue to read your writings. Thanks

Comments are closed.