Category: Blog

 

            The pictures from Tripoli are bitter sweet. For every picture of someone happy that the dictator has been pulled down and his cruelty limited, there is a picture of lawlessness. We see  more deaths and injuries, and  apparently indiscriminate firing of a wide range of weapons.

             The sooner the transitional government establishes some kind of control the better. The sooner the people can be disarmed and well trained forces of order can be in charge, the better. It is not going to be an easy task. It is one best carried out by those directly involved, not by UK  or US forces. If the new state is to have a chance of winning hearts and minds, and enjoying the full loyalty of most of the people most of the time, it must not be a puppet regime of Nato. There needs to be support for a new system and form of government and constitution across the spectrum, including  from most of those who backed the previous regime.

             Nato’s task was to prevent civilian casualties where it could do so by precision intervention from the air. Nato must avoid mission creep. The heavy exchanges of fire street to street that we now witness cannot be stopped by the kind of interventions NATO is good at.

             The sooner order is established by some group of forces in Tripoli, the sooner the new government  can get on with re-establishing power supplies, water, and the other basics. Living in Tripoli in recent days must have been fraught with danger and difficulty. We all, I am sure,  wish the Lilbyan people well in re-establishing a governing authority. We hope they will choose one which is kinder to them, but it will also need to be one which exerts enough power to curb the various armed groups and individuals who are currently trying to establish their own positions in a very fluid situation.

 

              Amidst all the talk of billions and trillions the truth is often a casualty. Few in the public debate seem to grasp the overall numbers, or see how the adjustment to lower borrowing will in due course be made by forecast higher tax revenue. It might be helpful to set out the Uk figures expressed as  so much per head. I have based all these numbers on a UK population of 62 million. The numbers beneath are the averages for every man, woman and child in the country.

            The UK this year is estimated to earn or produce £22,984 of  income per person, before public borrowing and associated spending  is added on.

            The public sector will account for half of this , or £11,451 spent per head.

            We will pay £9065 of  tax on average.

             £1968 of public spending  will be paid for by borrowing. The balance is paid for from other receipts.

           The current debts, unfunded public sector pension liabilities, and bank liabilities owned by the government amount to more than £50,000 each.

             The additional debt of £1968 each adds another 8.5% to total Uk spending, and an additional 17.2% to public spending. In  other words, if the government manages to get borrowing down to the target level this year  it will be borrowing one pound out of every six it spends.

              This will be an improvement on 2010-11, when the government borrowed one pound in every five it spent.

              Tax rises from  £7,900 in 2009-10, the last Labour year, to a forecast £10,677 in 2014-15. That’s an increase of  35%.

 

 

              Amidst all the talk of billions and trillions the truth is often a casualty. Few in the public debate seem to grasp the overall numbers, or see how the adjustment to lower borrowing will in due course be made by forecast higher tax revenue. It might be helpful to set out the Uk figures expressed as  so much per head. I have based all these numbers on a UK population of 62 million. The numbers beneath are the averages for every man, woman and child in the country.

            The UK this year is estimated to earn or produce £22,984 of  income per person, before public borrowing and associated spending  is added on.

            The public sector will account for half of this , or £11,451 spent per head.

            We will pay £9065 of  tax on average.

             £1968 of public spending  will be paid for by borrowing. The balance is paid for from other receipts.

           The current debts, unfunded public sector pension liabilities, and bank liabilities owned by the government amount to more than £50,000 each.

             The additional debt of £1968 each adds another 8.5% to total Uk spending, and an additional 17.2% to public spending. In  other words, if the government manages to get borrowing down to the target level this year  it will be borrowing one pound out of every six it spends.

              This will be an improvement on 2010-11, when the government borrowed one pound in every five it spent.

              Tax rises from  £7,900 in 2009-10, the last Labour year, to a forecast £10,677 in 2014-15. That’s an increase of  35%.

 

 

                   The world awaits the word of Ben. Will it be helicopter Ben Bernanke, commanding another drop of dollar bills on a slow growth country? Or will it be inflation fighting Ben, newly steeled for the fight by tea party poopers and the growing demand for public austerity?

                I suspect this year’s Jackson Hole speech will be carefully crafted, leaving it open to interpretation from both growth hawks and inflation eagles. I will be suprised if the word from Wyoming is to print much more money  immediately. Republican candidates are out and about condemning the Fed for daring just that. The Fed itself will be worried, with core inflation rising, lest they do more to stoke it. Some critics think it was Fed action with QEII which helped the spurt in commodity prices. If your money printing pushes prices up too much, it can negate the favourable impact on demand and confidence that you want from the extra cash. Nor do I expect him to dash all hopes of more bond buying round the corner. The expectation might help markets as he sees it. The administration might get quite demanding early next year if growth has stayed low or stalled.

                The truth is the authorities are running out of options to keep the show on the road without sorting out the underlying problems. Some day the US does have to rein its public sector deficit – both US parties now agree in principle. The Federal deficit last year was a lively $1.3 trillion. More than one dollar in 3 spent by the national government was borrowed. The politicians are still arguing over whether to cut spending more or raise taxes more, but they know they need to do something. That’s not easy in an election year.

               Some day the US – like much of the rest of the west – has to make more things for itself, or find some other way to pay for the imports from China.

               These fundamental imbalances – large deficits to you and me – will not simply go away. They need fixing.  Mr Bernanke can agonise over how much to print, but in the end the bigger calls will be made by the President and the Congress on how to get the US out of the red. The last lot of printing boosted markets for a bit, then they collapsed again when they saw it had not provided a permanent solution.

 

       There is an email in circulation that sums up in scatalogical language the current tensions of UK politics. In polite summary, it says the people who work hard and earn the money are against having to pay more taxes. The people who rely on the state think these people are all rich and should pay more to sustain higher public spending. The government then wades in on the side of the public sector, and decides the self reliant and hard working should pay more. Those who pay the bills are attacked for being “rich”.

        This is a crude characterisation in every sense. It does however strike a chord with a large number of people who do not think of themselves as rich but who do think they are already paying too much in tax and resent the idea that they should have to pay more.

              Some of these tensions bubbled over in the words exchanged on the back of the riots. The law abiding taxpayers by and large were appalled that they would have to pay more taxes to repair the damage and make good. They wanted strong justice and tough punishments.  Some in the public sector wanted to claim it showed we needed to spend more on social problems. I even saw a rioter or two “explain” his conduct by saying that the state took too much of his income away so he intended to grab something back by looting. People on this site have argued that because some in the public sector have taken too much by way of pay and perks, it set a bad example to others who then broke the law to take goods they did not themselves own. This is the false doctrine of two wrongs somehow make social justice.

        The politics of austerity are never easy. Even when the Uk has been growing quite rapidly, there have  been agruments over how to spend “the proceeds of growth”. It is easier for politicians to contain the tensions, as they can offer something more to most groups as they carve up the national pie. When an economy has lost 6% of output, and still is borrowing more than 10% of the total each year to keep itself going, much more difficult decisions have to be made about who is to take the hit of getting the deficit down.

            The model in many people’s minds that the rich can be made to pay to solve the whole problem  is both appealing and false. The size and scale of the debt, and the continuing large gap between state revenue and state costs, are far too big for the top one or two percent to solve the problem, even if they could be persuaded to stay here to pay the higher rates some have in mind.  The debt and deficit is the the burden of all of us, whether we voted for it or no. It falls to the lot of many taxpayers to pay more tax to tackle it, just as it falls to most of the public sector to have to rein in costs and cut out less desirable spending to make its contribution. Modern politics is the argument about the balance between those two parts of the solution.  Somehow there needs to be a growth strategy to offer hope and ease the pain, at the same time.

              The problem with the politics of envy, peddling the idea that taxing the rich can solve the problem, is its easy popularity. Very few people think of themselves as rich. Most people know others in their immediate circle who are better off than them. All see stories of people who are fabulously wealthy in the papers, as their lives  form the modern definition of news. The problem with the resulting policies that some wish to follow is many people would discover that the rich are not just the footballer in the paper or the millionaire down the street, but it includes them as well. Then they usually become less enthusiastic about the idea of taxing the rich. The few who say they do think they themselves should pay more tax have an easy answer. I am sure the Treasury would receive any donations that are on offer, and if they won’t there are many charities doing good work who will.

 

                  The battle for Tripoli will produce more deaths. In a civil war with many protagonists not in uniform brother finds it difficult  even to rely on brother and to distinguish enemy from friend. The tribal society of Libya was held together by the authority and brutality of the Gaddafi regime. The Transitional Council will have no easy task gaining full control. It will need fine judgement and great control over its supporters to call a timely halt to revenge and continued infighting. It is difficult  to move from where Libya is today to a successful open society capable of peaceful change of government.

                  The west said it was only involved to prevent massacres of civilians. Now the west has to urge its new found friends in the rebel groups to show clemency, restraint and judgement where they have succeeded in gaining control over civilian populations. I am glad the UK government has said it does not plan to put our troops on the ground.

 

          I saw the last performance of Anne Boleyn at the Globe on Sunday. It was a great performance of a brilliant new play. It captured the power games of the court of King Henry, and shed an interesting light on the mind of  James I and VI, who looks back on Elizabeth and Anne.

           The author, Howard Brenton, portrays Anne as a powerful politician in the Protestant cause. She sells the Protestant religion to a King advised by a Cardinal by appealing to Henry’s  own sense of importance, self interest and need to settle his own divorce, as well as using her feminine charms over him. She comes across as an early Eurosceptic, wishing England to settle its own affairs at home without recourse to Rome. She dislikes the intervention of Roman authority between a person and their God, and  seeks the issue of the Bible in English to all. She sees the advantage of the dissolution of the monasteries.

             The play includes an important scene where Thomas Cromwell, by now the King’s trusted adviser, is busily drafting the famous and seminal Statute of Appeals. ( 24 Henry viii c 12  ” An Act that the appeals in such cases as have been used to be pursued to the see of Rome shall  not be from henceforth had nor used but within this realm”).

 They cited  historical precedent for claiming imperial power to the government of England.

                “Where by divers sundry old authentic histories and chronicles it is manifestly declared and expressed that this realm of England is an empire, and hath been so accepted in  the world, governed by one supreme head and king…..”

They claim that the power of self government within these islands is complete

           “he (the king) being also institute and furnished …with plenary, whole and entire power, preeminence,authority, prerogative and jurisdiction to yield justice and final determination to all manner of folk…in all causes, matters, debates and contentious happening to occur…”

The power to appeal to Rome had to be  removed owing to

“great inquietation,vexation, trouble,costs and charges of the King’s Highness and many of his subjects….but also to the great delay and let to the true and speedy determination of the said causes…” and for the difficulty in cross examining witnesses in so far away a place. They asserted that remote justice was delayed justice, wrong justice or no justice at all.

           This revolutionary piece of legislation is presented as  a restatement of old law and is partially founded on Richard II’s  praemunire provisions. (legal butresses against foreign jurisdictions). The Crown approached the break with Rome in a crab like way, aware of the dangers of retaliation from the continent by the Catholic powers as well as by the Pope.  Nonetheless, it was radical to state that in future the Crown was the fount of all justice and legal settlement. The Church in England was the King’s to shape and control.

              The Crown used its influence in Parliament to give full Parliamentary backing to this constitutional revolution. It proved useful in later years when Parliament wished to transfer powers from the Crown to itself. It is only in the last thirty years that England – now with the rest of  the UK – has ceased to be a sovereign empire governed by itself, as it has surrendered more and more of its power to the Brussels government.

              What Parliament can give away, it can reassert. It was a pleasure to be reminded of such a gutsy lady, who fought for a great cause as well as for her own advancement. She was indeed one of the architects of the Tudor revolution in government, the consolidation of English governing power here at home. She was also the mother of Elizabeth 1. It was Elizabeth who had to secure her father’s Protestant settlement against Spain, which she did by leading the  anti Armada campaign in 1588. The establishment of home rule took place through a simple Act of Parliament. It survived until a much later Parliament decided to give it away, once again allowing appeals to continental courts.

 England’s magnificent cricket means they won all four Test matches against the team that was Number One in the world when they arrived. They won them by resounding margins.

I have heard much comment on how disappointing the Indian team was. I think there should be more recognition of just how good the England team has been. The Indian team contained some of the world’s greatest batsmen. The English bowlers contained them, pressured them, and usually bowled them out cheaply.

 The Indian team contained some good bowlers, who were able to pressurise some of the English batsmen some of the time. Even Alastair Cook struggled at the beginning of the series.  Yet time after time  a few of the English batsmen showed huge skill, determination and ability. They got on top in the battle with the bowlers, and recorded large scores.

 

We are always willing to criticise when our team does badly. Let’s enjoy a smashing set of victories. It was not inevitable that they did that well. If they had played a little below the standard they achieved India would have looked an altogether stronger side. Getting Tendulkar or Dravid out for a low score is still one of the great achievements a test match bowler can put to his name.

This was truly a great performance by the team that is now the world’s best. Whatever happens next, that recent achievement cannot be taken away from them.

 

             I was asked to come a preliminary assessment of this question.  The Uk economy has lost around 6% of output. This will cost us £90 billion or  £1500 per person  every year for the forseeable future. Taxpayers so far have lost £40 billion on their RBS and Lloyds shares, or £670 per person. I suspect in the aftermath of the Credit Crunch growth will be around 1% per annum lower, which will cost us £15 billion or £250 per person per year.

                  We then need to guess at how much taxpayers will ultimately lose on all the bad and dodgy debts which the state took on or guaranteed. If the losses are a modest £50 billion then that is just £800 each,  but if they were £100 billion you can double that.

               At friday’s prices taxpayers have forgone gains of £15.4 billion on all the gold holdings Mr Brown sold. We would be £250 better off each person if he had kept his fingers off the gold. The rising gold price is part of the response to the continuing distress of the Credit Crunch. Some of our losses from inflation also stem from the Crunch, and from the money printing policies the US and Uk pursued to combat it.

                 It was never going to be easy moving from a position where the country was living more than 10% beyond its means every year, to a position where we lived within our means, or had brought our collective borrowing down to sensible and sustainable levels. Gordon Brown tried to defer the problem, by switching the borrowing from the private sector to the public sector. This decision made areas like private sector manufacturing take a large hit, with lots of lost jobs, factory closures and lower incomes, whilst continuing to boost incomes and employment in the public sector.He subsidised jobs and activity in several large banks, transferring them to the growing  public sector. This  delayed sorting out the over capacity and weak balance sheets in part of the banking industry.

The Coalition government so far has sought to cut the deficit by taxing the whole private sector more. They decided to do this whilst seeking a private sector led recovery to limit the pain of adjustment to lower borrowing. The politics of austerity are  about seeking a pace and impact of less borrowing which the public at large will accept and thinks is fair. If the government  can achieve a higher growth rate overall, it makes the adjustment much less painful.

Unfortunately, all this is now taking place against the background of a nasty and self inflicted crisis on the continent, courtesy of the Euro. The Euromantics, by refusing to implement either solution to their crisis, are delaying the recovery of their zone. Splitting up the zone would be the quickest and least painful solution. The richer countries helping pay the debts of the poorer would work economically, but seems to be fraught with political difficulty. Worse still they are underming banks in the zone, which in turn undermines confidence in banks elsewhere who do business with banks in their zone.

                 Mrs Merkel is coming under more pressure to give up her opposition to Euro guranteed bonds. It is asking a lot of German taxpayers to take on responsibility for the debts and deficits of southern Europe. You can end up with long periods of underperformance and the need for large amounts of subsidy, where places join a single currency area that does not work well for them. Southern Italy and Eastern Germany are  cases  of this. If you do this where people do not feel they belong to the same country, where they do not accept the moral need to help, the politics could prove unworkable.

                  Some in the week-end press dismissed the Eurosceptic critique, because it said we have different views on how you could break up the Eurozone. I do not see it is our job to have a single unified view. It is only the views of those in the zone and controlling the zone that matter. They could withdraw Germany to set up its DM. They could create a northern and southern Euro. They could withdraw the weaker countries. It does not really matter which of these they do. All of them could work. All of them entail fast and decisive action to redenominate bank accounts, handle the issue of paper currency and regain the confidence of the markets. They all have similar risks to them, but all offer a faster way out of the inevitable pain of lost jobs and weak banks.

 

              The Guardian has diverted me from the big story. Just as feared on this site, the bungling Euromantics have shaken the financial world with their clumsy scheme.

               They have rejected the least bad answer – asking the most heavily indebted countries who broke their sensible rules on debts and deficits to leave the currency. They have rejected the answer of Germany leaving to re-establish the DM with a handful of smaller stronger countries. Just as they did with the ERM, so they are doing with the single currency. Inflict maximum pain on as many as possible, until the markets make the whole thing impossible. Watch unemployment rise, incomes fall, and say it is all worth it.

                Instead they imply they are going for the answer of creating a country called Europe to back up the single currency. They are implying they are moving to a world where the rich underwrite the poor and the strong support the weak across the Euro area. Yet when it comes to passing landmarks on this journey, Germany refuses. There are to be no common Euro area bonds, allowing the weaker states to borrow on a  common credit rating. There is to be no increase in the stabilisation funds. There is uncertainty about the size and commitment behind the ECB intervention programme. It is always too little , too late.

              As a result the markets are spooked. Investors fear for the state of some EU banks. These banks  have been encouraged or made to buy large quantities of sovereign bonds. These bonds are now in question, leading to worries about the strength of the banks that own them. Greek and Portuguese bonds have fallen massively in price. How far could Italian and Spanish bonds fall? What would that do to continental banks?  As the sovereigns are financially overstretched already, who will bail out any bank in trouble in the weak countries?

                    German and French growth has already come to a grinding halt. Growth is needed to generate the extra tax revenues to pay for the large public sectors these countries like.  The glacial progress to a transfer union, where the debts of all are guaranteed  by all, and to a subsidy union where the rich recognise their obligation to the poor across frontiers, leaves the whole system very vulnerable to market fears.

                       At the same time Mr Obama spooked the US markets by his refusal to rule out the  US reneging on debt in the crisis talks over the debt ceiling, and then again by his failure to reach agreement with his political enemies over how quickly and how  to cut spending to control the deficit in the US. A few bad figures recently on US economic growth finished the markets off.

                             On both sides of the Atlantic governments are running out  of time to have plausible ways of cutting their deficits and controlling the debts. The EU version is gravely compounded by the failure to offer strong leadership to maintain the single currency, and refusal to split it up. We are heading for a prolonged period of slow growth at best, with continuing alarms on the credit worthiness of individual states, and over the consequential weakness of various banks. There is still scope for disaster, if the authorities do not grip the problem more strongly.The slower growth is, the worse the deficits will be. It is easy for the overborrowed states to get into a vicious circle from here, slower growth, rising deficits, more tax rises, slower growth.

                There was one bit of good news this week. The latest UK borrowing figures show that thanks to the banks tax revenues rose well last month.  It was also the first month of the Coalition when the rate of increase in spending fell below 4%. They now need to keep that up, to get somewhere near the promised lower borrowing this year – a mere £122 billion.