Why have the markets crashed?

 

               Markets have been in the limelight because they have simultaneously decided there will be too little growth ahead to sustain the massive debts the west has built up. The spend now pay later model followed by the US, and  much of Euroland, only works if enough of the money is spent wisely on productive investments which can pay the interest and repay the capital in due course. If public and private sectors borrow to spend too much on current consumption, eventually lenders  ask “How can you afford to pay us back?”

            The immediate triggers of this phase of the crisis were twofold. In the US the politicians were at war over whether to limit future  US borrowings. Republicans blame the President. He allowed markets to think the US might not pay the interest on all its debt if he did not get his way. Suddenly American bonds, the gold standard of government loans, were in doubt. He did  not point out that if the debt ceiling were kept too low for spending he could cut other spending whilst paying the interest from taxes. Democrats blame the Tea party. They say if the Tea party group had not made a big issue out of whether the US could afford to carry on borrowing, the markets would not have got into a spin. The debt was affordable, they say, until the Tea party said it was not.

              On the other side of the Atlantic a more serious crisis was ready to explode. In the EU the politicians did not alarm markets by a serious row about an important issue – how much should a country borrow?  They upset markets by an even more damaging  row over which countries might default or reschedule their debts, and over whether the Euro scheme could be trusted to manage “sovereign” or country  borrowing in any responsible way. As newspapers have been saying, the crisis this week in the EU has been where is the leadership? Who speaks for the Eurozone? When will there be any sensible answers to some fundamental questions about the conduct of monetary and state borrowing policy? The US had too many political voices over the last few weeks for the comfort of the markets . Euroland was inaudible. The US did debate a crucial issue – how much debt is wise? She did come to some kind of an answer. Euroland did not debate how to control her wayward members and did not come to an answer.

              In the US the sovereign was split by a family row between the Congress and the President, whilst in the EU there  is a continuing row over whether there is a Euro sovereign at all.

                 When markets are in a herd like emotional spasm, be it bearish or bullish, it requires the authorities to be clear, firm, and to boss the markets. Over the last week the Euro  authorities did too little too late, and came across as out of touch, indecisive and worried sick. It is not a good combination. Yesterday at the Euro news conference a range of financial journalists asked a range of crucial and well based questions. There were answers to practically  none.

                 We do not know when the latest fund to prop the Euro will be fully established and ratified. We do not know if they will expand it in case it is needed to intervene for Italy and Spain. We cannot be sure  how serious the ECB is about buying in bonds of Euro countries the market no longer trusts. We do not know when the EU will complete its plans to put in stronger economic governance to curb and control the deficits of the wayward members. We do not know how much extra if anything German and French taxpayers will put in to help the poorer countries. We do not know if there are plans to borrow much more on the Euro credit card, to lend on to individual countries that cannot afford the rates they have to pay now to borrow directly.

               What the markets now know is there will be slower growth ahead in both the US and Europe. The weight of debts on both sides of the Atlantic is too great. Debt needs limiting. Some debts need paying off. This will slow economies down whilst the debt is controlled. Share markets partly fell to discount slower growth.

              The most worrying feature of the crisis is the return of fears about banks. As predicted here, the Regulators set up this crisis by their response to the last one. They instructed banks to hold much more cash and reserve in the form of government bonds. They saw these bonds as risk free. Now the markets are saying many of these country bonds have fallen substantially in price. This has meant large losses for the banks holding Greek or Portuguese or Irish debt. As the individual  bond markets collapse, so the bank shares plunge. As the shares plunge markets become more suspicious about the weaker banks. Some of the European banks have been through falls in assets and share prices larger than  anything assumed in the most recent stress tests. Now the only way the weakest  banks can be kept functioning is through the plentiful supply of cash from the Central Bank.

            During the week US, German and UK government bonds did well compared to most of the rest. The strain was taken by Italian and  Spanish government bonds, by bank shares and by general equities.

               UK bonds have had a good period because the government has been crystal clear in its commitment to deficit reduction in all that it has said. It now needs to deliver the figures to show the policy is being successfully implemented. I would be happier if the UK was taking stronger action to control the government overhead and  less desirable spending.

               US bonds have benefitted from rumours that the US might print some more money to buy more of them up, given the new weakness in the economy. There has also been some relief that a deal was stitched together, and that action is now envisaged to cut future spending. The US has to negotiate the downgrade of its credit rating, and then to deliver better borrowing numbers in the months ahead.

                Germany deserves a strong credit rating for herself, but will increasingly be questioned if she accepts the need to underwrite or subsidise the large deficits elsewhere in the Euro zone. Socialising the Euro risk between all members will help Greece and Portugal  but impose new costs on Germany.

             “The flight to quality” is itself a risky strategy in a western world where there is too much debt, too many imports, and not enough exports. The west has to get better at earning its living in a very competitive world. Cutting the borrowings is not an easy task. It is  task that cannot now be avoided. Too many western countries have got used to borrowing 10% of their National Income each year through some combination of private and public sector borrowing. Increasingly the borrowing is public sector, as the private sector takes the painful steps to rebuild its overstretched balance sheet.  The markets are merely stating the obvious when they say governments cannot carry on like that.

62 Comments

  1. Stuart Fairney
    August 6, 2011

    “It now needs to deliver the figures to show the policy is being successfully implemented”

    Something in which, its failure thusfar had been total. There is desperate danger for the conservatives here. If the markets come after Sterling (and there must at least be a chance of this after Italy, Spain and Belgium) what might happen? Well….

    1. Borrowing, if possible at all becomes more expensive
    2. So the cost of debt servicing increases, so
    3. Cuts are forced on the UK

    better to make actual cuts of our own choosing and not being clobbered with punitive interest rates. This could be another ‘black Wednesday’ moment when you lose the 2015 election in the next few months.

    1. Paul B
      August 6, 2011

      “Something in which, its failure thusfar had been total”

      Yup.

      http://www.statistics.gov.uk/cci/nugget.asp?id=206

    2. lifelogic
      August 6, 2011

      You say – ‘black Wednesday’ moment when you lose the 2015 election in the next few months.

      It looks lost already to me (hopefully not for 3 full terms like the dope Major achieved with his entirely predicable jump off a cliff) and hopefully a proper Tory party will finally emerge. I however my money and businesses will be gone however – I cannot wait that long.

  2. Bill
    August 6, 2011

    Either a euro marriage or a break up called for
    Marriage would see Germans supporting med countries with aid in the same way as the wealthy parts of the uk support the less wealthy parts.

    The Germans have done well from the euro it has held their currency back and helped their exports.

    Trouble is who makes the decisions?

    Sobering to see the Spanish and Irish economies growing more than ours.

    1. RDM
      August 8, 2011

      Yes, but based on ECB loans! Where’s the real growth?

  3. Martin Cole
    August 6, 2011

    An important contribution at a critical moment. The poster makes this point in which we must surely all join I would be happier if the UK was taking stronger action to control the government overhead and less desirable spending.

    Now that the US has been stripped of its triple A status with Standard & Poors the moment to impress this obvious fact on the Coaltion Government is now, this very weekend.

    Vince Cable last evening on TV was totally unconvicing in suggesting the Government was firmly in contol, while all more senior ministers, were vacationing, after fifteen months of idleness and missed opportunities.

    This post is the first glimmer of hope for Britain, that at least somewhere on the government benches there is a grasp of what is necessary for Britain!

  4. Mike Stallard
    August 6, 2011

    First of all, thank you for an outstandingly simple and comprehensible account of the crisis facing us in the Western World. As far as I am concerned, you didn’t put a foot wrong.

    Yesterday my wife asked me this question: “Is our investment safe? Ought we to move it?” She was talking about the pocket money her Dad hoarded over the years to provide for her old age……..

    That got to me.

    So I am going to be very angry indeed if it gets lost or handed over to someone who does not deserve it. In 2008 it was the Bankers who copped the blame. In Weimar Germany, allow me to remind you, it was the Jews that copped the blame. We in the West therefore face national peril if the money system goes down, and I mean war, dictatorship and the rule of thugs and lunatics (EDL? Mr Berwick from Norway?).

    So, yes, it is getting serious.

    1. alan jutson
      August 6, 2011

      Mike

      I agree a simple but very comprehensive post by JR, which should be made manditory reading for all media reporters and political leaders.

      I think many of us share your and your wifes concerns about modest investments which have taken a lifetime of hardwork and prudent saving to put in place.

      Those who have done “the right thing” seem to be in danger losing out again.

  5. Javelin
    August 6, 2011

    A reason the markets crashed is they did not make good enough predictions. They had too much trust in political leaders. John, on this site you have posted a gradual escalation in the crisis. Had the markets followed your predictions there would be no crash. We would be where we are now but the market would have got to this position more gradually.

    1. Javelin
      August 6, 2011

      A further point. Some people will make money either by buying sticks whilst they are cheap, or by buying the right to sell them (Ie shorting). It’s important to understand both sets of people will make money through good predictions.

  6. Gary
    August 6, 2011

    The US debt was downgraded by S and P.

    Our problems in the west are legion. A classic Austrian business cycle. Oversupply of credit for decades forcing rates down, discouraging saving, and spawning a malinvestment binge. Anyone with a pulse could get a loan for a mortgage, and banks became massively wealthy as their loan books grew and they crowded productive industry out. Trillions of dollars of derivative bets were written by the banks on the back of the mortgages. Until we reached debt saturation. Now that credit expansion process is unwinding , the derivatives are worthless,and we are experiencing a domino collapse of debt. This total debt, 2, 3 or 4 times gdp in most cases , and in Britain’s case, 5 times gdp, is impossible to repay.

    In addition we have demographic problems in an aging society. Aging people are net takers from pension and health pots rather than contributers. The socialist state is breaking from an inverted demographic pyramid.

    We no longer have sufficient exports, and we are involved in ruinous wars. Our north sea oil is dwindling and we now import our oil and gas. The mighty financial sector is now in retreat (except for banker bonuses).

    Govts are attempting to pay down debt with fresh debt and praying for growth. They are foolish on both counts. The former is mathematically impossible, the latter, given that we are in a deleveraging process, folly.

    Until the debt is wrung out, we cannot move forward. And when it is, we had better get a sound monetary system to prevent this reoccurring.

    1. Mike Stallard
      August 6, 2011

      ……and we have simply given up.

    2. Mark Whitenstall
      August 6, 2011

      ‘Our problems in the west are legion. A classic Austrian business cycle.’
      The Austrian school is a load of tripe; just saying.

      ‘This total debt, 2, 3 or 4 times gdp in most cases , and in Britain’s case, 5 times gdp, is impossible to repay.’
      Not if you spread it out – let the private sector deleverage first, and speed it up with tax cuts, and then let the public sector wind down (no cuts until private debt is sustainable!). Remember, we’ve been in much greater debt before.

      1. RDM
        August 8, 2011

        Not as much crap as Keynes! All he had to say was how too spend even more money when it was spending too much (on consumption) that got us there in the first place. Time to put the house in order, time too start generating real wealth!

        1. Mark Whitenstall
          August 8, 2011

          People seem to forget this about Keynes – he only argued for deficit spending in bust years, not boom years. So he didn’t say we should spend ‘too much’.

          Oh, and overconsumption wasn’t the only cause of this. It was a deregulated financial sector that used its profits to bring down borrowing costs for consumers, thus incentivising borrowing to fuel overconsumption. So if anything, it was a symptom.

      2. Robert
        August 8, 2011

        Mark – it all depends on the maturity of teh debt and who holds it! It is not as simple as you suggest!

        1. Mark Whitenstall
          August 8, 2011

          http://www.economist.com/blogs/dailychart/2011/07/world-debt-guide
          Read the table and look at our average debt maturity, then look at everyone else’s.

    3. John Galt
      August 7, 2011

      Oh so true, but try telling that to even the most alert of the remaining doped masses.

      A gradual creeping socialism has reeked its havoc since the end of the 2nd world war, ever feel like your now living in the Ayn Rand novel ?

      The words Capitalism and Conservative have been corrupted beyond recognition in the English language, dumbed and numbed by the useful idiots of the socialist liberal left MSM and celebrity fools that have replaced the greatness of English Society built by centuries of the proud protestant work ethic and philanthopy based on our Christian/Judaea heritage.

      Oh well
      Atlas Shrugged

    4. RDM
      August 8, 2011

      I very much agree, but …

      Not everyone could get a Loan/mortgage:

      – Technology startups could not get a Tip, let alone a loan! Technology needing two+ years development cannot use personal collaterol for security.

      – Contractors; If you are single and less then 50% you had no chance!

      There are quite a few examples I can come up with!

      You meant; Borrow to CONSUME or backed by a reprossesable asset (House)!

  7. lojolondon
    August 6, 2011

    John, I agree with almost all you say, but fundamentally, although markets are affected by emotion, and people saying things, these are not long term influencers. So the markets marked down the US because their debt is approaching 100% of GDP and they have promised a plan, but it is too long term. The markets are marking down Italy and Spain, again, I believe, not because anyone said anything, but because they have been given lots of time and opportunity to fix their situation and have failed. I expect (and desperately hope) that this situation will never improve and that the Euro will be torn apart, followed shortly by the misguided, corrupt, self-serving tyrannical EU.

  8. Brian Tomkinson
    August 6, 2011

    JR: “Yesterday at the Euro news conference a range of financial journalists asked a range of crucial and well based questions. There were answers to practically none.”

    This happens whenever these Euro leaders have a press conference. They always come across as having no real grasp of the problem but plenty of political speak which they hope will spin them through – it’s often called “bull***t baffles brains”. The same can be seen when listening to Obama. These people are primarily interested in their own careers and too much of what they do, or object to, is based on their own political calculations for their own future rather than the general good.

  9. alan jutson
    August 6, 2011

    John

    Other posters have picked up on the theme, “we now have to walk the walk, and not just talk the talk any more” in cutting our own spending.

    You suggest that so far the talk has bought us time, which is good news providing such talk delivers results, present and projeted figures suggest that will not be the case.

    I listened to both Sir Vince and William Hague yesterday on the radio whilst driving, both of them seem absolutely convinced the action we (the Government) have taken thus far will secure our future.

    Are they deluded, or simply looking at a different set of figures to the rest of us ?.

    Aware they have to try and keep confidence going, but if and when they are proved to be wrong, we will be hammered !

    Do they not realise that we are one of the biggest debtors in the developed world and it is getting worse, not better !

    Never mind the mansion tax may make everything in the garden rosy again, what absolute drivel !

    reply: I am glad Ministers are confident thyey will bring down the deficit. Communicating commitment to that is crucial. As I have explained, if you look at the figures, it would be good to slow the growth rate of spending more right now, just in case growth disappoints, yielding less tax revenue than planned.

    1. APL
      August 6, 2011

      JR: “I am glad Ministers are confident thyey will bring down the deficit. ”

      The problem is they have had eighteen months to deal with a sterling zone crisis of excessive spending and excessive borrowing and in actual fact have managed to choose the worst of all possible paths, increase spending and increase borrowing.

      Just look at the Eurozone politicians and you will realize that there comes a time when the divergence between political rhetoric and economic reality becomes so great the the politicians are drained of credibility.

      The same phenomena has started to impact the UK cabinet. Soon there will be no faith that they even intend to deliver what they have promised.

      Oh, but Cameron et al, have such a good track record of delivering on their promises!!

    2. Brian Tomkinson
      August 6, 2011

      John,
      You know that they are not doing enough to bring down the deficit despite their confident talk. We have heard confident talk from the EU and Obama but the facts show them to be disingenuous. Our own politicians are no different and what has happened in the EU and USA will arrive at our door. Soon you will need to put your party loyalty aside if you really do care about the future of the British economy.

      Reply: I have given clear advice on ways to control spending more to take more risk out of our situation.

      1. Duyfken
        August 6, 2011

        JR, I have utmost respect for your views and your competence. But who is listening in government to what you say?

        You also state Ministers are confident they will bring the deficit down but I am less than convinced by the soporific assurances of Hague and Cable – why do they not give us particularised evidence to support their claims? Then, we might (or might not) place some weight on their pronouncements.

        And where are our leaders in this time of economic volatility and when are they going to provide any real determination in protecting us from the effects of the Euro-zone debacle?

        To pick up on your last point, why does not the government now slow the rate of spending, rather than just talking about it?

        reply: I have given my advice, as you can see from, this site. I passed on the advice in piece I wrote about cutting enough from the growth in public spending to keep the deficit falling.

        1. Martyn
          August 6, 2011

          John, I also respect your comprehensive grasp of these situations and are of a like mind with most of those who respond to you. But I do wonder if you are a lone political voice in the wilderness of the real world that we ordinary fold live in, such that those in power see you as a respected member of the House whose real function in their eyes is to act as a lightning rod for those who disagree with what is going on? Thus your and our views may thus be safely ignored.
          I also wonder if we have reached the stage whereby the UK and EU Civil Service and not the politicians now effectively control what is going on. If that is the case, there is little hope of us ever withdrawing from the EU, even if only to the extent of retaining the right to rule ourselves with a sensible degree of isolation from what may well turn out to be the doomed Euro…

      2. Morningstar
        August 6, 2011

        But do you think Cameron will give you a seat in his cabinet replacing one/all of those who do not really have any economic vision !

        By now you would have assumed that he would have seen that having people who know what they are talking about (on the TV) rather than self inflated ego mongers (- who really do not either inspire confidence or have a clue about the economic reality) making a mockery of the government position. Cameron appears to have extremely bad judgement in everything he touches, we the public do not want spin and niceness – we want the facts produced in order to enlighten the public as to why we have to have much more severe cuts ! Those who need to lose their public sector jobs HAVE to know why it is so !
        Cameron may as well have a go at governing properly because he has done naff all to show that he deserves a second term !

  10. Alison Granger
    August 6, 2011

    The biggest reason that people are losing faith is that for all the talk of reducing deficits there is no explanation of how the debt will be repaid. With no growth and no real prospect of any there is no way that the debt will ever be repaid and people are starting to realise it. Governments have brought us to this point and now they have no control.

    1. Brian Tomkinson
      August 6, 2011

      Alison,
      Don’t you think that politicians see running the debt as a giant ponzi scheme?
      They never intend to repay it but just roll it over and as long as they can take enough from us to pay the interest they think how clever they are.

    2. John Galt
      August 7, 2011

      Alison
      Your basic premise is wrong.
      The government is what we the electorate put in place. We collectively are what is responsible.
      Just as the government has no money, just money it takes from producers or what it borrows in our name. Generations have voted for consecutive administrations that have brought the UK to this place.
      I see no indication of a grasp of understanding of the problems even today, even after this week that would give any hope that the lemmings are not about to go straight over the cliff.
      Which is why as I travel the world I find so so many expatriates just amazed that I keep returning.
      The gene pool has been depleted to such an extent that generations of stupidity and entitlement continue to breed more of the same.
      Change it, I think we are way past that point.

      1. alan jutson
        August 7, 2011

        John Galt

        In reponse to your comment about stupidity, you are not I fear far wrong, given we have now so many takers who contribute nothing financially to the society of which we are all members, and who vote in large numbers for any party that promises, something for nothing.

        I wonder if any government would think the unthinkable.

        That only Taxpayers be given the right to vote !.

        Bit of a wild card, but at least they are the ones who have a financial stake in who, and how, the Country is run.

        We live in testing times at the moment.

        1. alan jutson
          August 7, 2011

          For clarification:

          By taxpayers, I mean those who pay UK tax on earnings, savings, and investments.

          1. John Galt
            August 8, 2011

            Alan
            Sorry, appears a computer or operator glitch took my reply to you to the bottom of the comments.
            Essentially, yes. But its going to be a thing of dreams. I don’t believe we have the political leadership left in this country. I could have imagined Lord Tebbit championing something like this but the pygmies we now have ?
            Perhaps John would like to give us his views on the subject?

  11. oldtimer
    August 6, 2011

    That is a very clear analysis of the situation and of the differences between the USA and Euroland.

    So far the UK has been fortunate not to be in the immediate firing line. I have even seen some (in the USA) wondering whether the £ sterling might be a safe haven for the time being! That would not help. The UK does not need hot money to raise the £fx rate and to induce a false sense of confidence in our situation.

    I regret to say that I remain unconvinced by the Coalition`s overall approach to getting the UK economy and its finances back on track. You have pointed out, on numerous occasions, areas where more could and should be done to control spending and encourage enterprise. Mr Cable appeared on TV yesterday and came across as a complacent buffer. The charitable explanation is that it was a deliberate attempt not to rock the markets. The uncharitable explanation is that he has his head in the sand. The present course is not sustainable. Can its authors summon the ideas and the will to make the changes that are needed? I wish I had the confidence that they can do so.

  12. Freeborn John
    August 6, 2011

    I don’t believe the euro-crisis is one of political leadership. Rather it is due to what Angela Merkel calls ‘the primacy of politics’ over economics, and bad economics at that. The one-size-fits-all eurozone interest rate unleashes irresistible forces like the movement of tectonic plates, crushing the economies of weaker members. The current Market turmoil is akin to a volcano or earthquake caused by the shifting tectonic plates; one cannot say precisely when they come but one can be sure they will come at some point because if you take away the pressure release mechanism of floating exchange rates the economic forces must be released some other way. To say this is a crisis of political leadership indicates it will go away when the holiday season is over, when it cannot go away so long as the underlying cause of the one-size-fits-all monetary policy (and the continental mentality of the primacy of ever-closer-union) remain in place.

    reply: it is a crisis of leadership. They either need to split it up or stitch it together convincingly, yet they do neither.

    1. Freeborn John
      August 6, 2011

      King Canute demonstrated political leadership in commanding the tide not to come in. John Major demonstrated political leadership during the ERM crisis doing what some are asking of continental leaders during this euro-zone crisis. It won’t work because there are areas beyond the reach of politics to control. The one-size-fits-all interest rate is distorting investment decisions continent wide and so long as that remains in place any political decision to give this or that EU institution more power or budget can only temporarilly mask the problem but not restore long-term economic stability. 

      Politicians who know the limits of politics are a rare beast. Yet those that overstep this bound can still cause the type of trouble we see in the eurozone today and saw in the UK during the ERM crisis. That is political foolhardiness rather than leadership.

  13. Acorn
    August 6, 2011

    I can’t ever remember reading that there is a “debt ceiling” requirement in Keynesian economics. In Keynes world, sovereign debt can increase for ever, that is the beauty of fiat currency systems. You will always be paying back with pieces of paper that are worth less and less as more and more of them are printed. Debts are always inflated away over time. Savings are always inflated away unless you can build them numerically at a faster rate. Only a privileged few are allowed to do the latter. It is the ultimate in socialism.

    The feckless and indolent debtors are forgiven. The diligent savers have there store of wealth diminished, starting with the middle classes. The trick is to own the ruling class and their agents (politicians), who arrange the rules to their advantage. There will always be enough fiat money to buy the debt. Some sovereigns will try and game the system from time to time to gain a local advantage but the others will print more money to devalue their fiat currency to re-balance the game. Hence the US borrows from China to buy Chinese goods. China ends up with a lot of US fiat currency which relentlessly looses its purchasing power over time. So, China has to buy lots of assets with the US fiat currency from whomever will take that currency – or related IOUs – as payment, this to circumvent the printing of even more US fiat currency. You have to admit, it is a beautiful system, how can it possibly go wrong? Well, for a start, someone always gets greedy.

  14. Mark
    August 6, 2011

    “Well if you knows of a better ‘ole, go to it” – Bruce Bairnsfather’s famous WW I cartoon of the trenches under heavy shelling – is appropriate at the moment. We really should not be complacent about the hot money that has been flooding in to UK gilts, driven by downgrade in the US and meltdown in the EU. It is not a signal that the market considers we have cracked the problems – merely that we are the ‘ole they can see while they look for a better one. When they leave, the debt crater will remain.

    Another famous WW I poster: “Your country needs you!”

  15. NickW
    August 6, 2011

    What is needed is decisiveness on the part of political leaders.

    Those countries which face supercritical decisions about their future, (Germany in particular) need speedy referenda to allow their citizens to make their choice, and allow their politicians to implement the necessary action.

    German politicians have no right or mandate to take on huge and permanent liabilities forever without asking the people first.

    Those countries which can only survive either outside the Euro or by losing their fiscal independence completely, need to put that choice to their electorate.

    There are hard choices to be made which need to be made quickly. This is the way to do it, whilst minimising the chances of a resulting revolution if the wrong choices are imposed against the people’s will.

  16. Neil Craig
    August 6, 2011

    Ity rather looks as if the Republican’s only fault was to go to easy on Obama and not demand either immediate substantial cuts or to raise the borrowing limit only slightly. I doubt the markets are so silly as not to be able to wotk out that borrowing forever won’t work, untyil the Tea Partyists mentioned it.

  17. Oldrightie
    August 6, 2011

    Unless Government payrolls are substantially reduced our borrowing requirements will not change. The EU in particular is a gigantic, ineffectual bureaucracy that produces absolutely nothing but a huge money pit. Break up this ridiculous and corrupt organisation and significant savings will be made throughout Europe. Furthermore debt provision to the poorer nations would be market and competitively funded. Ergo sensible and intelligent without the political stigma of incompetence and failure.

  18. Mr Leslie Smith
    August 6, 2011

    Jon,

    Are we close to being at a “Northern Rock” situation again? Should we start taking our cash out of British Banks? We can then store it under the mattress, buy gold, silver or maybe Chinese equities? I am feeling the gentle rumblings of a very bad week next week… The Politicans of all the European Countries have not woken up at all yet, to this Sovereign Debt crisis, which can and will take down many European Banks if the sums get too big. I feel FEAR in the markets, similar to 1987 and more recently when the queues formed outside Northern Rock some four years ago now. Are we there yet again?

  19. Bernard Otway
    August 6, 2011

    John Redwood ‘an island of common sense in a stormy sea’, Javelin said yesterday that IF/When Belgium gets in the firing line [It did yesterday] then we are next to be crossed off on his trading room wall LIST, NOW WHAT????? Javelin my friend,also you spoke of the overvalued house market,sometime in the last week the Daily Express had a front page that said house prices increase by £5000 in the last few months,and the average semi in the UK was £201,000.While the average salary in the UK was £25000 which makes a price multiple of 8,this multiple SHOULD be at the most 5 therefore the average semi [and any other property for that matter] is overvalued by a factor of 3,IMHO any one buying a house and paying any where near asking price is MAD,as they are putting themselves in IMMEDIATE NEGATIVE EQUITY,another question NOW WHAT????.Yesterday I commented that the state sector must be immediately cut to a maximum of 40% of GDP
    it is THE ONLY ANSWER,I also said 20% efficiency savings could be achieved IMMEDIATELY,a business would do so IMMEDIATELY so WHY NOT.John what happened to the bonfire of Quangos.

  20. Mr Leslie Smith
    August 6, 2011

    Jon, Can you and a few others like David Davies, launch an “Emergency Early Day Motion” to debate this Sovereign Debt crisis and its potential impact on British Voters and Taxpayers? Is RBS likely to tank?

    Reply: EDMs are never debated. Parliament has first to be recalled, then we could ask an urgent Question, or seek backbench business time.

    1. norman
      August 6, 2011

      Just a couple of months ago the Treasury was crowing about how the RBS shares it had bought were technically in credit, so another bit of good business (to add the the Greek (via IMF), Irish and Portuguese bailouts). I even remember Nick Clegg trying to buy votes by giving the shares away.

      Do the liabilities come with those shares Nick?

      Needless to say RBS shares have tanked and the bank is making more losses again.

      You’d think politicians would have learnt to keep their mouths shut when it comes to things they know nothing about but then it would make for a quiet Parliament!

      Still, makes for a nice farce to cheer us up in these tough times.

  21. Bob
    August 6, 2011

    This is the result of the few handling the money that belongs to the many.
    An example in the private sector is the current fad for investment funds. The finance houses have entry and exit charges, transaction charges and performance fees. As long as they keep buying and selling equities to each other at ever escalating prices the brokers will prosper. But, like musical chairs when the music stops, or a pyramid scheme that has reached saturation, someone will end up holding overvalued assets with no buyers to be found. By this time the brokers with be safely cashed up and living in a tax haven.

    The same goes for political parties that deceive voters into believing they can have something for nothing, eventually they run out of other peoples money. Unfortunately the education system and the state broadcaster perpetuate the myth that a country can prosper by paying it’s citizens to do nothing.

  22. sm
    August 6, 2011

    ” how much debt is wise? ”
    ” Debt needs limiting. Some debts need paying off ”

    Why is debt preferred to equity? – It is deductable for tax purposes. It can be created by banks seemingly at will – it can be created on and offshore.

    Should we not consider this and reduce the level of gearing deductable for tax as it ratchets up.

    It would help with economic stability as interest rates rise, tax collection, encourage cash into productive useage – reduce the impact of banks and potentially failing banks on the economy.

    You did not mention bad debt as a result of mal investment and how that should be dealt with. Currently i suspect the taxpayer/savers is funding this clearout via QE/ZIRP and other support.

    At what point can we allow capitalism to get to work on the those that shout the loudest for capitalism- our public sector bankers and their ‘earned’ bonuses, and other examples in the normally recognised public sector.

  23. Mike Fowle
    August 6, 2011

    I am probably showing my economic and historical ignorance here, but I wonder what would have happened if the banks had not been bailed out a couple of years ago. Yes, there would have been enormous hardship, a lot of innocent people would have suffered, and perhaps there would have followed a long and deep depression, but the impression remains that those who did so much to create these problems (as well the unworkability of the Euro) have escaped unscathed, and this has had a poisonous, undermining effect on confidence in capitalism. The consequences of their irresponsibility would also have been brought home to Labour. Now shoot me down in flames…

    1. Mark Whitenstall
      August 6, 2011

      Yes, but you’d punish the illiquid along with the insolvent, which makes no economic sense – the illiquid can easily be tided over with short-term loans and discouraged via high interest rates from not holding enough reserve capital.

  24. Bazman
    August 6, 2011

    Good to see Dave has dragged himself from his ten grand a week holiday in Tuscany. His fourth in as many months, and his mates, Gideon from California. Skiing season must be finished and Cleggy (cos he ain’t) from France to look into the problem.
    All in it together? Did you think it was going to be any different than this bunch of chancers behaving like absentee executives?

    1. Mike Stallard
      August 6, 2011

      Do you know what?
      If you are jealous, why not get up and earn some money too. Then you can behave like that yourself.
      Meanwhile, you can start a few factories and things and give employment to lots and lots of your fellow citizens.
      I find that people who are jealous are the very first to accept honours from Her Majesty the Queen when offered, invitations to black tie dinners, big cars……

      1. Bazman
        August 7, 2011

        I am a middle aged man and am ‘jealous’ of nobody. My Knighthood is some way off yet, and of course I would not be boorish enough to refuse one from Her Majesty. Dave and his chums will not be getting their honours for providing employment and income for the majority of their fellow citizens, but an elite few. Count on it…

    2. alan jutson
      August 6, 2011

      Bazman

      Now remind me, who left a note saying they had spent all the money.

      Face facts, the 50 year experiment with Socialism has now run its course, its proved unworkable because they have run out of everyones elses money.

      We have now reached a point where if you raise taxes any more, the incentive to work harder or longer, or even work at all, is near to zero.

      The EU is packed with Socialist failures, who have been having the time of their lives on the EU gravy train, living in a fantasy land where debt was never a problem, and where spending only ever increased.

      I am no fan of this governments present performance, but do remember it was not the present lot that got us into the Brown Stuff. 13 years of total financial incompetence did that.

  25. Denis Cooper
    August 6, 2011

    “We do not know when the latest fund to prop the Euro will be fully established and ratified.”

    That’s because it’s being done through international agreements between the governments of 17 sovereign states, each of which has to get the agreement approved back home, and that it is a cumbersome and time-consuming process.

    A single government could respond to a rapidly developing situation by drawing up the details of some financial scheme, and if it realised that its original proposal was unlikely to get whatever parliamentary approval was necessary then it could quickly modify some of the details accordingly.

    But with 17 governments and parliaments the chances are correspondingly higher that one or more will have problems with getting national approval, and in that case any modification of the scheme would require the agreement of all of the governments.

    The original EFSF Framework Agreement:

    http://www.efsf.europa.eu/attachments/efsf_framework_agreement_en.pdf

    did not require final ratifications from all of the (then) 16 eurozone countries before it could come into force, just for those which had ratified – if necessary, a government which experienced difficulty in getting the necessary domestic approval could have dropped out – but a later Agreement to modify the Framework Agreement:

    http://www.efsf.europa.eu/attachments/efsf_framework_agreement_amendment_agreement.pdf

    cannot come into force until all 17 goverments have confirmed that they have national approval.

  26. austin
    August 6, 2011

    U.S. Democrats believe that if they [the federal government] could only have more control of the nation’s capital and slash defense, they will be able to sing and dance their way around this debt problem and welfare can continue to expand. If conservatives take control of the presidency and the Senate next year as looks likely, look for a “clash of civilizations” as the Tea Party movement closes in to assault the welfare state. There will be a backlash from those who have checks and food stamps taken away and they may well be violent.

  27. Mark Whitenstall
    August 6, 2011

    ‘ Cutting the borrowings is not an easy task. It is task that cannot now be avoided. Too many western countries have got used to borrowing 10% of their National Income each year through some combination of private and public sector borrowing. Increasingly the borrowing is public sector, as the private sector takes the painful steps to rebuild its overstretched balance sheet. The markets are merely stating the obvious when they say governments cannot carry on like that.’

    The rest of the post is excellent, but your understanding of the deleveraging process is flawed. When the private sector contracts, the public sector must expand or risk demand-side recession. That means more debt, but a recession would be worse When the private sector stops cutting, the public sector starts, to avoid crowding out. We can easily afford to do it, and it won’t damage growth (Reinhart-Rogoff limits only apply when crowding out could be involved and confidence would decrease if governments borrowed more, neither of which apply here) – indeed, it’ll probably mean we can cut the cyclical deficit through growth in net exports (with a few targeted tax cuts), speed up deleveraging (by cutting VAT as well as income tax) and get onto increasing productive capacity so as to make reducing the structural deficit even easier.

  28. Bazman
    August 6, 2011

    Fat middle class social security system apologising for the system. Idiots. China and Russia is not that far away.

  29. DBC Reed
    August 7, 2011

    If Britain is the “safe haven” that the Coalition spokespeople (still in the country )say it is, why are we being so badly affected economically by the latest Panic? (Or perhaps all this Austerity for the less well-off is thought to be hindering growth.)

  30. John Galt
    August 7, 2011

    Alan

    I agree, unfortunately it will never happen under the present system. Maybe after they have finished this experiment building the brave new world and the next (if indeed there ever is one) civilisation comes along it would be nice to think those that build get to be those that decide.

    It cannot be right that persons with nothing to add, nothing to give to the advancement or even the maintenance of a society should have any part in its running.

    Testing times indeed.

    I was struck last week by the fact that the horsemen of the Apocalypse have most definitely left the starting post.

    As we face the impending meltdown of the financial systems and final corruption and destruction of the Anglo-Saxon christian world, western civilisation collapses, it has nothing, no means and certainly no will to counter the coming carnage in the Middle East as the global caliphate once more prepares to unify probably under its old ruler Turkey and (pursue unpleasant policies-ed).

    Lets see famine, disease, pestilence …. oh but the story has been well rehearsed.

    Here is another just for the thinking, and here I’m not going to be accurate and someone with the time and the knowledge is welcome to put dates and times on it, but I think it was 16C one of our illustrious kings held census and commissioned work to find out what the population level was that the country could support. I believe that it showed that pre-industrial revolution the figure was around the 4 million mark. I also seem to remember that the work was repeated on a regular basis and did not change until the advent of the industrial revolution
    Now in parts of the world its quite possible to survive a collapse in society as land mass allows the self sufficiency and support of an enterprising person/family/community. Its the old American run to the hills and prepare call.
    Well just a harrowing thought, but in a post industrial, post Christian country like the UK now is, with a population the heavy side of 64million how does anyone think that will really work out.
    Do we really think our present clowns, the might boy dave and co, will be able to maintain any semblance of order or propriety.
    I just hope that its the useful idiots that get all hungry and thirsty first, but that worries me too, as those are the types that all to easily resort to mob violence.

    Just thinking.

    Welcome to the brave new world

    1. John Galt
      August 8, 2011

      (ed)

      Apart from listening (for as long as possible without affecting my health) to Biased BBC radio 4 this morning, thats given me the best chuckle….. “pursue unpleasant policies”

      I could envisage a long distinguished and honorary career for you in the FO should you wish to change employment.

      Sometimes my blunt Yorkshire spade is a spade approach is seen as not subtle though ever so truthful.

  31. RDM
    August 8, 2011

    Now, JR, You can repeat all of that again, on Air, within the HoP, and any where you can!

    I just hope we get a new Banking system from all this turmoil! One that allows all peoples of this united kingdom to build their own lives, independent of Labours top-down dictate! Free from a Socialist Federal Europe!

    Let the Nations see the benefit of the Union!

    I hope Merkel & co understands the Free Trade concept? Ask DC to explain it to her!

  32. Ross J Warren
    August 8, 2011

    ” They say if the Tea party group had not made a big issue out of whether the US could afford to carry on borrowing, the markets would not have got into a spin. The debt was affordable, they say, until the Tea party said it was not.”

    I think you have left one important issue out of you analyses that being the reluctance of the Republicans to let the Bush tax cuts go. If there is a combination of tax rises and entitlement reductions the picture would be a bit better for the US. They need the equivalent of our “all in it together” and “fairness”.

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