It wasn’t just ill chosen words by Euro leaders which triggered the Stock market crash. It was also a series of figures which pointed to a slowing of world growth in the US and elsewhere.
Many in markets have long understood that many western countries have been living on too much debt. The Credit Crunch shifted some of that debt from the private sector and banks, to the governments, in a desperate attempt to keep things going “as normal”. Now on both sides of the Atlantic people are questioning how much longer western countries can carry on spending on overdraft, before the costs of servicing the debts become too great to keep it all going.
There remains a fundamental imbalance in world economies that we have often discussed on this site. The emerging market economies have been expanding rapidly. They make an ever more astonishing array of goods, providing world markets with high quality products at affordable prices for the west. They are building large surpluses based on export, and lending money to the west to allow it to continue to buy their goods.
The western economies, with a few exceptions, are borrowing large sums to be able to consume more than they earn. Much of this borrowing and spending is now done in the public sector following the C redit Crunch. They export too little, import too much, and delay adjustments by flexing the credit card.
Neither side of this imbalance is healthy, but the debtor nations are in the weaker position. They have the more vulnerable living standards, maintained by too much borrowing. They either have to export much more, or cut back. The Emerging market economies now have the option of making and selling more to themselves, as the West reins back on its own consumption when it can no longer borrow so much.
The West has been in the business of trying to delay or avoid the adjustment, by switching from excessive private sector to heavy public sector borrowing. If growth now slows too much the west’s ability to borrow is damaged. Lenders will see tax revenues disappointing, and borrowing levels forced up above the government plans. At a certain point, as has happened for several EU countries already, markets effectively say they will lend no more, forcing more drastic measures on a reluctant country.
The messages for the UK are simple. The UK must distance itself as much as posssbile from the Euro crash. It must argue for less EU law and costs for the UK as we agree to whatever Euroland wants to do to try to keep itself going. The UK government has to do more to attract and stimulate business investment and activity here, and has to intensify its efforts to cut public borrowing. All overborrowed sovereigns will come under this spotlight, so the UK has to show solid achievement in deficit reduction to back up its plan to get the deficit down in the next four years. If revenue disappoints through slower world growth, it just means the government has to be better at controlling costs. It needs a productivity revolution in the public services.
August 5, 2011
Mr Redwood, there are times when you appear to be the sole voice of reason in our government, and possibly also the western hemisphere. Why you are not our prime minister, I do not understand.
August 5, 2011
Competence and experience has little relevance when it comes to political appointments. Anyone paying the slightest attention to the goings-on of all three parties must see this.
August 5, 2011
I totally agree with Mr Redwood and your comment. Why oh why can’t our leading politicians stop meddling in things that don’t or shouldn’t concern themselves with and ignore those that they should. Only essential public service provision should be available, the rest should be privatised and if people want those services pay for them. Taxes could then be reduced accordingly.
Canada performed this exercise a few years ago and cut public serive provision to balance its books. Why can’t we? Its a simple exercise in “must, should or coulds” with service provision
When is the current Government going to pull its finger out and stop immigration, give us a referendum on our continued membership of the EU, abolish the Human Rights Act and reduce our ridiculous foreign aid? If they can’t or won’t call an election as there is no point to them.
August 5, 2011
And who would you propose to elect – that is capable of winning an election? Miliband and Balls? Ha ha ha. Clegg and Cable with a majority?
Unless the Conservatives are likely to get a steam roller massive majority there is little point in calling an election. We can only hope that when the next fiasco is called the public learn their lesson.
August 7, 2011
Why would anyone elect the Conservatives if they’re going to remove public sector services? Those who use these services or may use them will obviously vote against the Conservatives.
August 5, 2011
You are of course correct but you are not going to get the public sector, the EU or vested interests to change their selfish ways. Taxes need to be much much lower and many regulations need to be scrapped. Despite the evidence that left wing and green policies do not work they have been allowed to be implemented on a massive scale. The right have compounded the problem by being led by the nose by the left fearful of the electorate who have succumbed the the siren voices of the left. True democracy can only be seen in a truly capitalist system, not corporatism or statism but free markets. Governments have tried to suppress and/or interfere with them and the result is now plain to see, economic chaos and societies that have lower standards and suffer from incompetence and corruption. The chickens are coming home to roost and edifice that the socialists have erected is about to fall down. Most of the countries of the West are going to get their comeuppance those who refused to embrace the changes needed to put their economies and social structure right will have it forced on them. Standards of living are going to fall dramatically and laws will be changed to accommodate the new reality. The irony being is that those who resisted change to their cozy life will have that shattered much worse than if they had not resisted change in the fist place and those who wanted change will suffer for the intransigence of those who did not.
August 5, 2011
As good a summary of the situation as I’ve seen anywhere. The tragedy is that our politicians just can’t see what is obvious and even when they do are not strong enough to do anything, not helped by the overwhelming left wing bias in parliament and the cabinet.
August 5, 2011
Absolutely right. The glimmer of hope in all this mess is that socialist constructs will come tumbling down. So, will someone please throw the ‘ring’ (Euro) back into Mount Doom, so we can bring it all down; and then maybe we can start rebuilding again.
August 7, 2011
The only truly capitalist system I’ve ever heard of was the USA at the start of the 20th century. It worked up until the point the stock market crashed and caused the great depression. Capitalists need Socialists to save them from themselves.
Also if taxes and socialism are so bad then why haven’t Denmark, Sweden, or Norway collapsed?
August 5, 2011
I read History all my life and I have come to this melancholy conclusion: we humans are capable of the most incredible stupidity. We need to factor this in.
Appeasement, Versailles, Hitler, the abdication of the Kaiser, the drift to the First World War……How much more do you want?
The Euro is utterly wrong. We all know that. But we drift on towards disaster.
On Newsnight last night there was a shouty man and Kirsty Wark lost control which was a great pity because he knew what he was on about. His point was that USA is in serious trouble. Never mind, no doubt China will still be making all its manufactured products.
We face a serious choice in the West. Either keep slave products out. Or else go under.
August 5, 2011
We face no such choice ~tarriff barriers would be a disaster. True enough we can’t compete on wage costs, but if you want to boost UK manufacturing as never before, here’s how
1. Abolish business rates on manufacturing premises
2. Abolish corporation tax on UK manufacturers
3. Abolish Employers NI on employees of manufacturing companies.
4. Sit back and watch the trade deficit shrink and become a surplus as unemployment disappears along with budget deficits.
None of these obvious measures will happen with our three clone parties and our decline will continue.
August 7, 2011
None of your ideas will work. Trying to compete in manufacture by making the UK the lowest cost producer won’t work because India and China will always be able to make products cheaper.
If you want to boost manufacture then trying looking at the systems in developed countries which have a strong manufacturing sector, such as Germany and Japan.
Here are some ways that will actually boost manufacture:
1) Offer secure jobs. Employees are far more loyal and hard-working if they’re unlikely to be fired.
2) Offer well paid jobs. No one is going to become an engineer if they could make much more money as a banker.
3) The vast majority of managers and senior managers should be promoted employees. This will ensure that those at the top understand how the business works. In Germany almost every CEO is an engineer.
4) Companies should actually value engineers and treat them as professionals, rather than technicians.
This would ensure that the brightest students go into manufacture and that our manufacturing industry was staffed with competent people. Unfortunately these are unlikely to be implemented as it would involve manufacturing companies admitting that the reason these companies are failing is because they’re badly run and that their staff are underpaid.
August 5, 2011
You are absolutely right to keep on banging the drum.
There is clearly denial going on amongst the Italian, EU and for that matter world leaders, with denial contagion to some extent infecting Cameron and Osborne.
The public therefore hasn’t by and large been exposed to the fact that the wall of debt will, at some stage fall on them if it isn’t dismantled. We need all that glowing PR ability at the heart of the Gov. to spread that message here rather than “keep calm and carry on spending”, which seems to be the prevailing message.
August 5, 2011
Your recommendations are bang on. You have omitted the critical importance of getting inflation under control.
August 5, 2011
For all the stick the BoE get they are managing inflation well. We can’t afford to let it run amok but we can’t afford to let it go down below 4%. Inflation or default are the only games in town and as painful as inflation is it beats wipeout.
Reality dictates that savers are screwed whatever happens so no point even trying to put forward a policy that doesn’t accept that. Paying back a trillion pounds is never going to happen.
August 5, 2011
“the BoE get they are managing inflation well”
Not according to their own targets they aren’t. And why shouldn’t prices come down as production becomes more efficient? Inflation is crypto-theft and we are conditioned to accept it via fiat currency.
Say No.
August 5, 2011
Ludwig Mises – Human Action : A Treatise on
Economics (1966 )
“There is no means of avoiding the
final collapse of a boom brought
about by credit expansion . The
alternative is only whether the crisis
should come sooner as the result of
voluntary abandonment of further
credit expansion , or later as a final
and total catastrophe of the currency
system involved.”
You have to wish that the King Canutes who govern and rig the monetary system had an ounce of common sense. Perpetual growth with perpetual credit is no more possible than Perpetual Motion.
August 5, 2011
Productivity. Producing more for less cost.
Now the PS won’t reduce its costs. It’s costs are going up. The reason is that bundled in with the price of PS services is the cost of debts. 1 trillion of gilts. 1.3 trillion of civil service pensions. 2.4 trillion of state pension debt, (state second pension???, and the rest).
What is needed is the option to opt out of state services. Very quickly people will find that the cost of the rump is too much, and then it goes bang.
Going bust early minimises the damage. Hanging on just makes it worse.
August 7, 2011
If the public sector goes bankrupt then schools and hospitals will close. Is this what you really want?
Reply: Some of us are trying to stave off public bankruptcy by telling the public sector to live within its means.
August 5, 2011
JR: “The messages for the UK are simple. The UK must distance itself as much as possible from the Euro crash”
RBS has already written off £733m for its exposure to Greek government bonds. Were we not told that Greece was not in default? Just the tip of the Eurozone debt iceberg affecting the UK directly.
August 5, 2011
Ahh, that must be why these talented bankers are awarding themselves yet another £14bn in bonuses. Success of failure it is all the same to them. After all, they might take their amazing talent elsewhere if we don’t keep coughing up for their lifestyles. We should be so lucky if they take their genius away to some other poor suckers.
August 5, 2011
You are absolutely right. The only way out of this is by growing our “exportable value-added”. Non-exportable services and the public sector cannot contribute – we cannot get richer as a nation by cutting each other’s hair. We must reduce barriers to growth such a tax and EU regulation and, as President Reagan once declared, “turn the people loose”.
August 5, 2011
The excellence of the rational argument for the break up of the EU in an orderly fashion is unquestionable. The common sense to do this does not exist, unfortunately. The excellent post and the sensible comments prove the terrible bubble that is The EU. Peeing out or in is not an option, unlike a broader tent!
August 5, 2011
I think I have read that China has acquired a large percentageof the USA debt. I also remember a saying, either Nostradamus, the Bible or both, that the World will be run by an oriental race?
However as the Maya predicted that the World will end on 21st December 2012 perhaps we should ignore everything and follow the lead of our European leaders and go on vacation?
Things really are serious though are they not!
August 5, 2011
Where in the bible does it say that?
August 7, 2011
According to my calendar the world is going to end on 31st December 2012 unless I purchase another calendar. I have to wonder if it will really be worth it.
August 5, 2011
John, you are too kind to the idiots out there. The EU leadership keep insisting that they have solved the problem. At the same time we read that it is inevitable that Greece, Ireland, Italy, and Spain will default. Italy has debts of 120% of GDP. So even if Berlusconi insists that their banks have ‘passed the stress test’ (which has been criticised as too easy to be meaningful) – that means nothing. Investors do not listen to the managing director’s words, they look at the cold hard facts, otherwise Enron would still be a growing company, with increasing share price. And Enron was probably in a better financial position than some of these economies! These countries are going to default, the Euro is headed for complete change at the very least, and in trying to protect their dream and their jobs, a handful of bureaucrats are going to make every citizen in Europe poor for the next generation. The Emperor’s new clothes are visible to the citizens, it is just the courtiers who still like the cut of the cloth. You are absolutely correct, we need to distance ourselves, refuse to waste our taxpayer’s money, make the pound a safe haven by reducing the inflation rate, and the investments will come. And short-sell Euros as fast as possible!
August 7, 2011
As long as they don’t all default at the same time there’s no problem.
August 5, 2011
It is difficult to see how the changes that are needed in the UK are going to be delivered by the Coalition and its current leadership. They have talked the talk about controlling the deficit but, so far, they have not delivered nor do they look like doing so.
Moreover they have adopted policies that seem to me to be perverse in the extreme, given the economic perils we now face. They have failed to get spending under control, tax policies are a disincentive to enterprise. Then there is the biggest scandal of them all – the combination of green taxes and subsidies that seem calculated to bring the country to its knees.
August 5, 2011
I think those reading this might be inclined to misinterpret your words to mean we must distance our selves from the Euro. I also believe we must distance ourselves from the European Union’s political ambition of a Big State full of rules and regulations.
THIS CRISIS SHOWS US THAT ALL THE REGULATIONS MEAN ALMOST NOTHING
The EU has introduced thousands of rules and regulations. But look where we are?! The Eurozone is near to economic disaster. Big Government and intrusive rules are regulations have hindered and not helped economic progress. The rules have reduced our competitiveness and increased our indebtedness. These two aspects have worked against each other to take us to the brink of world economic melt down.
The road to hell is paved with good intentions. We can see the gates. Can we see the poorly constructed good intentions that have brought us here?
August 5, 2011
I read in the current Private Eye- Rotten Boroughs column- that Sheffield Council has made 26 employees voluntarily redundant, handed over the cash, and then re-employed them in new posts. While Kent has made 13 experienced directors redundant and is employing consultants instead. The communications director is paid around £800 a day according to the Eye.
It will be interesting to see how many councils actually achieve savings by employing consultants. The changes in my area seem to waste the time of officers and the public.
Your advice about re deploying staff seems to be unheard.
August 5, 2011
Sadly that won’t be enough – John is being too hopeful! Simply radical cuts are the only way out. The government is in no way equipped to solve disasters driven by insolvency. Governments cannot create wealth. They can only siphon it away from their citizens, through austerity, taxation, and inflation. To believe otherwise is astonishing folly. The ultimate problem underlying the tactic of shifting debt rather than paying off debt is that it only works for so long. As I’m sure many have noticed, with each new bailout, QE, or debt deal, the time between visible crises grows shorter. Each subsequent downturn is sharper, more disheartening, and more frightening to those who are unprepared.
A common argument made is the assertion that to cut spending now would end in a painful loss of stability. The delusion inherent in this argument is that we can somehow avoid such pain indefinitely. Like a terminal cancerous growth, our national debt along with our vast entitlement programme obligations must be removed, and they will be removed, whether by our own hand, or by the hand of fate. If you cannot pay for a thing, you cannot keep a thing. Debating over whether or not social security, nhs, welfare, and other nanny state programmes are right or wrong becomes irrelevant. In the end, it all comes down to what you can afford, versus what you cannot afford. At this point in the game, the UK will soon be able to afford very little.
August 7, 2011
What do expect Local Councils to do. If the Government says to reduce the number of employees by firing X number of employees, they’ll fire X number of employees then make them consultants because it means they’re complying with the Government and still have enough people to do the work.
The Government should have thought through its plans to reduce the public sector better.
August 5, 2011
Will you be publishing on this site the answers I read that you got from various departments as to their net hirings since the election? It does not seem that the Government can be committed to reduced spending if the bureaucracy is continuing to expand. MPs need to press for the abolition of quangos and other redundant state bodies, – thats the only way to get the numbers down. Its no good everybody complaining about the EU when we have £100 millions spent on quangos to do with human rights, global warming etc.
Reply: I am waiting until I have the full set of answers – some departments are very slow to reply. The press has gone off with a quarter of the sotry, which is fine by me. I have not yet released anything
August 5, 2011
As long as “productivity” translates as “doing less but with a propotionately greater reduction in cost” then I agree.
The loss of private productivity if the public sector wastrels started doing more “work” with the same resources would be a nightmare.
August 5, 2011
For a very good example of what should be done you might look at the map of public sector assets published for the first time by DCLG. It shows that many assets are owned which could be sold to repay debt and reduce overheads. I was able to zoom into my local area and see what assets are owned and am pleased that we own very few and those that we own are probably necessary. However the story in the adjacent borough of Tower Hamlets is quite different. http://publicassets.communities.gov.uk/
While it is necessary to have a grand plan there are many smaller measures that the public sector can take to get its finances in order . HSBC has announced that it is reducing its workforce by 10% and RBS has already laid off 35,000 yet the public sector talks in small numbers of posts lost, but no mention of how many have been created. I suspect the net figure of posts lost may be lower than the 17,000 announced.
There is now a greater than 50% chance that the US will dip back into recession. Meanwhile the EU politicians cannot agree fiscal union and so cannot guarantee that the austerity measures will be delivered by the peripheral countries. The markets are not prepared to wait until September while politicians are away for their summer break. Regrettably our own parliamentarians have not reduced their summer recess assuring us that they can ‘stay in touch’ by twitter and blackberry instead!
I am optimistic about the UK economy but only if the politicians in government can show resolve to tackle the crisis head-on. As the economy slows it is even more pressing that public sector spending is reined in, and pronto. If we follow the other EU politicians kicking the can down the road then we cannot expect a better outcome for our own economy.
August 5, 2011
JR: ” The Credit Crunch shifted some of that debt from the private sector and banks, to the governments, in a desperate attempt to keep things going “as normal””
The ‘credit crunch’ didn’t do that, the politicians did it, in a desperate attempt to keep their pals in the Banking sector solvent.
It was obvious at the time three years ago that shifting private losses onto sovereign balance sheets was a foolish thing to do. Reckless during a period of economic de-leveraging.
August 5, 2011
There simply isn’t a “slowing world economy”. There is a slowing European & US economy, purely because these areas are controlled by politicians who resolutely refuse to allow growth.
The world economy is growing at 5% annually and has been for over a decade. China, Taiwan and India are growing at over 10% annually, Singaporse managed 14.4% according to the latest figures. We could be doing the same if our political class weren’t totally opposed to profress. The deficit is not a problem, it is a consequence of out politician’s deliberate destructive parasitism.
Reply: China and India have slapped on the brakes and are slowing their economies too
August 5, 2011
Just looked at the e-petition website.
Why are the petitions not listed by the number of votes/petitioners.
It seems there is an awful lot of similar petitions as a result of the design of the site.
It seems like a divide and conquer approach. It should be improved asap otherwise hopefully an alternative may well take its place.
August 7, 2011
It’s possible to view petitions by the number of votes; just click on the ‘Signatures’ header.
August 5, 2011
We need a lot more government action to remove the small things which get in the way of increasing our exports, reducing our borrowing etc. To take just those two examples. Firstly a reduction in employer paid national insurance, even if only for the under 25s would reduce the cost of our exports, increase employment, help the public bodies reduce their costs etc. and could actually prove to not cost the exchequer very much once the positive results take effect. Secondly legislation that makes it illegal to ban or penalise early repayment of loans would cause the financial institutes involved to look for other places to lend the extra money made available to them.
August 5, 2011
All the comments plus your excellent analysis John ,are good and well,but as others have said, would that you and those like you were there to implement them,are those in charge
likely to any of what has been said.I feel that DC and his lot are incapable,especially as they still are TERRIFIED of the NASTY nomenclature,I expect NOTHING of the libdems,even
though I heard lord oakshot on Sky about an hour ago saying that Greece SHOULD have been allowed to DEFAULT AND PULL OUT OF THE EURO,I actually had to sit down as I thought at first I was having a hallucination,luckily my wife confirmed what I had heard.
The libdems in so supporting would then have to admit their whole stance on the EU and the Euro has been WRONG from the start,as well as the belief a la UNCLE HALO VINCE
that BIG STATE works. The state sector must be SHRUNK IMMEDIATELY to less than 40% of GDP,and can be as efficiency can reduce it’s overall costs by at least 20%.
I will give an example of the last 2 months,I have a friend who lives in a housing association block who until very recently prior to retiring was paying his own rent,he had built up a small surplus on his account as a cushion,when he retired he claimed housing benefit and received it,which paid all his rent [he has only the state pension,as his final salary scheme was decimated by Brown’s raid],on 9th June he asked for a refund of his
surplus [in writing] and had it confirmed ,it has taken until today to sort out [5th august]
2 months due to mistakes on the part of the council in the amount of benefit first paid [£1.50 a week too little] NOW RECTIFIED and BACKDATED which for some reason stopped the surplus he himself had built up [to the associations advantage given that their average arrears are sitting at over 25% from other tenants] during this time because he needed the money ,he phoned and chased them on a toll free line at their cost,several times
he got excuses all along until he got mad,my comment is WHAT did this cost EXTRA
when all they had to do was refund the money and WHY did the local authority miscalculate the amount to be paid and then get it right,surely when dealing with the Thousands of claims they do calculating should be second nature. We as a nation and the western world [mostly] are staring at financial armageddon Yet those in charge are
hoping that they can engineer somehow it’s disappearance .
August 5, 2011
Don’t worry Dave will bung more of our money at the Euro to save it!
August 5, 2011
We are all in deep,deep “Doo Doo” Let Dave stay on holiday with his cronies and maybe Jon can step in for say 90 days?
August 5, 2011
As I suspect you know… ‘It wasn’t just ill chosen words by Euro leaders which triggered the Stock market crash’…They were not ill chosen words but the Eurocrats are quite happy because this situation is pushing quicker and more completely into their hands. They do not care so much about a small drop in living standards but are intent on quickly gaining effective political and economic control of Euroland. This crisis is allowing them to do it with minimal opposition compared to what they would face in normal times.
zorro
August 6, 2011
Amid the gyrations William Hague postulated that the UK was out of the firing line, with gilts at record low yields. Presumably he understands that hot money from liquidating assets in Euroland (and the USA) has been parked here temporarily – the exchange rate movements offer the clue. Those flows will evaporate and reverse into other assets soon enough – perhaps creating real pressure on the pound and government financing as a gilts sell-off occurs.
If the BoE was being canny, it would have sold a bunch of its QE gilts portfolio in a mopping up operation so as not to let the hot money flows become destabilising on the way out. By actually financing some of the QE deficit properly it would also impress the markets and recharge the muskets of monetary policy.
August 6, 2011
The level of political denial, disconnection and dysfunction is the most alarming part of the past six months. The belief that the consequences of indebtedness can be indefinitely suspended seems ingrained in most of the ruling elite both sides of the Atlantic, to the extent that it is either wilful or pathological blindness. Does power make politicians mad? If they’re deluded, they are not the right people to be in place to clean up the mess post collapse. It is literally a crazy world. John, you’re the only sane one out there.