Category: Blog

Today life has got dearer again. Postage has soared, with the cost of a second class letter rising from 27p to 30p. I make that an 11% increase. It follows hard on the heels of the typical Council who want an extra 5%, and the railways who pushed their fares up by 6% (regulated) and more if unregulated.

These three important services have something in common. They are all government owned, in whole or part, and their prices are controlled by government! The government benefits from the extra revenue they collect, whilst losing from the inefficiency they often display in how they run themselves. Because they are largely monopolies they can spend what they like and charge it to the user, if the government is weak enough to allow them to do so.

We are told by some sages that the government’s worry is deflation. Deflation means falling prices. I see no deflation, with the CPI going up 3.2%. That understates the inflation many are feeling. Meanwhile the government is pushing up petrol and diesel tax so we all have to pay more at the pumps, and so deliveries become dearer.

It’s not just the monopoly public sector which is pushing up prices. The competitive private sector is having to pass on some of the 25% devaluation of the pound where it is importing manufactured goods, as I have pointed out before.

There is only one word to sum up what we are experiencing – slumpflation. The government sector is the main inspiration of the inflation we are now facing, just as its broken monetary and financial regulatory policies were the origin of the slump.

I see today Ireland has decided it does have to cut its deficit by a combination of spending cuts and tax rises. How much longer before Mr Darling bows to the inevitable?

To all those who say cutting public spending means tough choices and services “decimated” I say just two words: “MPs expenses” – and four more words “public sector fat cats” – and two more words “RBS losses”.

The government should require all MPs to cut their total expenses by 10% in 2009-10. It would not be that difficult, especially for those of my colleagues spending over the average. Indeed, why not ask the big spenders to cut by more? Then, armed with the modest moral authority that would bring, the government should demand a 10% cut in all the other administrative overheads of the public sector.

It should also tell RBS there will be no bonuses, and no salaries above a Cabinet Minister’s, until they are making profits.

Today we are being softened up for the Budget. Treasury briefing has been allowed out of the dark back room, to tell us the blindingly obvious – the nation’s finances are in a much bigger mess than they have been letting on. We read that the deficit might rise as high as £150 billion next year. Hold on a minute – hasn’t the Treasury noticed they have already borrowed more than £150 billion this year, so that would be a small reduction!

The media keep on falling for the spin. How on earth could a tax rise to 20% VAT fill the “black hole”? How could just £500 each fill it when the debt burden is already so huge, and when we have six greedy banks to maintain in the lifestyle to which they have become accustomed? £500 extra from each taxpayer is only around 10% of the anual deficit. We are not going to get out of this massive overspend with a few “tough” tax increases. We need a root and branch reform of how much we spend and what we spend it on, beginning with a huge dose of reality for our nationalised banks which are literally too large for the state to subsidise on the current scale.

Nu Labour has changed the language to try to disguise or support the spending. They call spending “investment”. Investment now includes the spin doctors salaries to tell you school results are great, and the adverts to warn you to pay your taxes. In Labour’s newspeak a £157 billion borrowing programme in 2008-9 is a £78 billion deficit. An “Independent” Central Bank is one which is required to change the inflation target to keep interest rates down, and one which is asked to print money like there’s no tomorrow. “Child poverty” is another newspeak concept, meaning parent poverty.

Labour introduced the idea of child poverty because calling the problem “parent poverty” would have led to more questions about what the correct response to it should be. Instead of tackling welfare reform so people were equipped and incentivised to work, the government preferred creating a complex system of benefits which did not succeed in reducing parent poverty by the promotion of more and better jobs in the way intended.

To get out of the current financial mess we will have to dismantle parts of the rambling and expensive government administration, beginning by the removal of most unelected regional government. We will need to tackle welfare reform, so more people are equipped to work and incentivised to get a job. We need to cut back on the ferocious spin machine. What is the point of all those Treasury briefers, if they fail to tell us the truth about the financial mess, and fail to warn early enough that we are running out of money to pay the bills?

UK PLC is pleased to announce the successful outcome of its recent international negotiations with other country PLCs. Some of them began the discussions sceptical about the wisdom of our strategy of seeking to maximise both borrowings and losses. Despite this, I am delighted to report that all agreed that international bodies should support any national PLC following such a policy with additional lending to them when the money runs out at home. This is a most important development, designed to reduce any external constraint on our policy. It was also good to see the CEO of the very powerful US PLC following a similar approach to our own and offering us warm words of encouragement. Their level of borrowing far exceeeds our own, but if you adjust for the relative sizes I would point out that we are still well ahead in building debt.

Meanwhile we continue to make progress with the core strategy. Recently we added the toxic assets and more risky investments of Dunfermline to our portfolio, taking us to controlling the risky assets of six banks. All but one of these, the original LLoyds, have plenty of scope to add to the total losses, and should need extra support in the future. We continue to add staff to increase our wage bill, and the unfunded pension liabilities are increasing at a satisfying rate. The pensions bill will continue to soar from the increases in numbers of people on the payroll, and from the public sector pay rises we are putting through. Do not worry about the recent rally in share markets which might apparently start to cut the deficit in the funded schemes. By keeping gilt yields down through our policy of quantitative easing we can ensure pension funds need even more capital to balance their books, keeping the deficits up.

I am sure you will agree the MP s who help us implement this strategy deserve a pay rise for what has been the most successful period ever in our history at boosting public borrowing and spending in this unique way. I do hope you will also agree with the Chairman of our crucial RBS subsidiary that criticism of that company has been overdone. I find it especially disappointing that their inspired decision to boost their pension deficit and our borrowing in order to pay a decent pension to their former CEO has attracted so much adverse comment. You should expect more such moves, as they show just how serious we are to implement our core stragey whatever the noises off.

I will be reporting soon on the growing success of our strategy in the social housing area. We have established a bridge bank to handle the loans of Dunfermline in this overextended sector, and look for more news to come on the build up of debt here.

We have decided to allow some of our employees in the public sector led by the MPs more time off over Easter in gratitude for their efforts.

This was the week when UK spin was exported to the Leaders of the world.

All were made to sing from the same soothing hymn sheet. “This is a global problem (Well that’s all right then, I wasn’t to blame, nor was my country).

We need global solutions (Phew, that saves me having to do something and take the blame).

We need more global regulation ( memo – let’s make sure they can’t boss us around – no need to disagree yet. There’s no actual rules or rule makers set out in this document).

The world needs a $1 trillion package (sounds like a lot of money, shows how important we all are, good job it’s borrowed as I couldn’t justify this spending back home) .

We will resist protectionism( We always say that but we never shop each other doing the opposite)

We don’t like hedge funds, bankers, tax havens, spam sandwiches…(fill in anything else you don’t like so we have an agreement) (That means I can go home and claim a negotiating triumph because I promised to root out the spam sandwich)

We can all go off to the IMF and borrow some more (Sounds like a great idea – I have an election coming up. I do hope I can spend those SDRs on making myself a bit less unpopular)

The people get it, the government is in denial.

People in Britain and their government are diverging on how to deal with overborrowing. The people know you need to save to sort out a credit crunch. The government thinks you need to borrow more!

Many families are cutting out the luxuries and the inessentials from their budgets, to cut their borrowing. They are dining out less, cancelling the exotic holiday, taking fewer trips to the pub and reducing the purchases of designer clothes.

The government meanwhile is increasing its spending on administrative staff, on adverts and spin doctors, on Identity Cards and much else that we don’t need.

Many families are repaying credit card borrowings and stopping use of their old flexible friend. They know it all has to be repaid and the interest rates on them are still high.

The government meanwhile presses on with more PFI and PPP contracts, its equivalent of very expensive credit card borrowing, and flexes its plastic whenever it can. It has a weakness for ruinously expensive bad banks and can’t walk down the High Street without buying another.

Many families are repaying some of the mortgage, aware that their property is falling in value and all too conscious that the debt on their home is too high. Government in contrast is taking out record levels of borrowing, increasing the nation’s mortgage like there’s no tomorrow.

They can’t both be right.

The truth is the public understand that together we borrowed too much, imported too much, saved too little and produced too little. They are desperately trying to correct all this, by reining in and repaying debt. As predicted here, the savings rate is shooting up, mainly through debt repayment.

People are therefore angry and frustrated that just as they are getting their own finances into shape, the government is debauching the national finances. We all know we are responsible for the debts the government builds up. Long after these reckless Ministers have gone we will be working harder to repay the bills they incurred. No wonder the public mood is so bad.

The scale of it all is so worrying. If you take the more accurate government balance sheet I have set out each man woman and child is now in debt to the tune of £50,000 including the banks and £75,000 if you include the public sector pensions deficits. That’s the magnitude of the risks and borrowing this government has taken out. It was around £5000 each plus say £5000 for pensions in 1997.

It means the government is increasing the borrowing of every one of us quicker than we can repay our personal debt. That’s why so many of us are hopping mad.

I agree with those who say Labour think they can get through the next year without a formal trip to the IMF for a big loan. My point is they are getting into a position where they could borrow from the IMF if Plan A, domestic borrowing and printing, starts to go wrong. They are afraid the past will come back to haunt them and are lining up as many credit cards as possible, just in case. It will be a disaster indeed if the domestic borrowing and printing runs out in under a year of maximum overspend.

Last night on Newsnight Mr Mandelson told us they wanted to take the stigma out of going to the IMF to borrow more.

That could be a very significant remark. It took place on the day that they announced the creation of $250 billion of Special Drawing Rights, available for IMF members.

It sounds to me as if the UK government has buttressed its wish to borrow and borrow not just by a policy of printing money at home, by also by a policy of gaining simple access to new liquidity abroad through the SDRs.

Labour remembers the dreadful pictures and publicity of its last visit to the IMF to bail out the UK after it had spent too much. This time round they intend to make it easier and to take the shame out of it. What a clever ruse. It still means more borrowing we have to pay back. Clearly there is no limit to how much they want to borrow. It’s always handy to have another credit card to flex.

The BBC said there was no Conservative available to put a point of view on the G20 on Newsnight. I was available and would have happily done so, but I guess they did want my kind of critique of it.

It was classic Brown and vintage Mandelson. The TV pictures were great, the endorsements of other leaders fulsome, but there is little chance the UK government will do what it says.

It was the biggest cover story for ailing public finances in our history. The one certainty is we are a bit more in debt , all of us, as a result, thanks to the large bill for the summit. Every penny cost of what they ate and of the police overtime is borrowed. And now we have to stump up more borrowed money for the IMF.

Let’s just look at the promises and the likely results:

1. “We will put in place credible exit stategies for long term fiscal sustainability and price stability”. When? I presume that does not apply to the UK, which is going in for a borrowing binge and more inflation. They can’t even tell me if there is any prudential limit to their borrowing!

2. “We will build a stronger more globally consistent supervisory and regulatory structure”. When? How will that work? Is a global regulator about to tell the UK government it is borrowing too much and must stop? I doubt it. Is a global regulator about to force RBS to get into sensible financial shape? Don’t hold your breath, of course not.

3. They plan a “Financial Stability Board to warn of macroeconomic and financial risks”. They need one today to tell the UK government it is is risking too much by buying so many bad banks and putting them onto the taxpayer. I don’t expect it to happen soon.

4. They will take account of “macro prudential risks”. The biggest currently is the artificial government bond bubble being created by both the US and UK authorities. Why is no one in authority warning of this? Why is a government bond asset bubble a good thing, whereas a private sector property asset bubble has to be punctured by monetary action? (Rhetorical question!)

5. They will extend regulation to “systematically important hedge funds”. The only one which matters now is the enormous hedge fund the US authorities are setting up to buy toxic debt with massive gearing. They are unlikely to stop that.

6. “Tough new principles on pay and compensation”. How does that work? I don’t suppose it will get British taxpayers our money back from Fred’s pension. They will still go on paying six figure salaries and mega bonuses to employees of loss making nationalised banks. It’s all just words, playing to the gallery.

7. They will “prevent excessive leverage”. Has anyone told Mr Darling? I bet they don’t stop him leveraging the British taxpayer to new heights of indebtedness.

8. They have demanded much more transparency. Don’t expect an honest UK government balance sheet before an election, and don’t expect them to confess the full extent of their off balance sheet liabilities or of their pensions black holes.

Several people have reminded me that the government and Bank are going round in circles. They have sold £3.5 billion of 2015 stock, and bought back £3.5 billion of stock with maturities in the range 2014-18. They did the first to fully fund their spending. They did the second as part of their quantitative easing policy.

What’s the point? It makes work for the Debt management Office and the Bank. There is the chance that the people selling the gilts back will then go and spend the money and help create more activity, whilst there is also the chance that the people buying the new stock would not have spent the money anyway and might not have kept it here in the UK as a bank deposit. That might have been a pig flying past your window.

I think it shows there is still muddle around what they are trying to do. One simple way of easing money supply is to sell less debt than you need to borrow and print the rest. It is more difficult doing it by fully funding the deficit first, then negating some of that by buying back similar gilts to the ones you have just sold.

It would help the markets if we knew what they are trying to do. Is there a target interest rate for longer dated government borrowing they wish to hit? Is there a specified quantity of money they are trying to create? Do they have a target in mind for the increase in bank deposits? They are in danger of paralysing the gilt market because no-one really knows what the authorities are up to, but they do understand that for the time being the authorities can make the prices what they want them to be. If they do not maintain confidence in their actions they will lose this ability, and then things will get a lot tougher for them.

Yesterday I was asked to step in to speak to a lunch of Parliamentarians and business people in the House of Lords because the Governor of the Bank of England had cancelled. He was detained in the Bank, unable to get in and out easily owing to the protesters.

I decided to develop two of the Governor’s sensible remarks last week. I hope he privately approves of what I said. He himself is rather more constrained than I am by his need to work with the current administration.

I began by praising his comment that the UK cannot afford another “reflationary” package. I went on to agree with his comment that switching inflation targets in December 2003 made it much more difficult to conduct a sensible money policy during the build up of excess credit and lending.

We have three simultaneous crises that egg each other on.

There is the monetary crisis. We lurched from too much cash and credit in 2007, to too little in 2008. The authorities are now literally printing money to try to get cash and credit growing quickly again. If they succeed too well it will be inflationary.

There is a banking crisis. The banks lent and borrowed too much. The Regulators egged them on by approving their business plans, ticking their boxes and setting requirements that were too lax. Now we have a series of broken banks that need to get on with the job of managing their bad loans and worse investments.

There is a collapse in parts of the real economy, led by the property and housing crash and followed by the auto crunch. The real economy will not work well until money and banking are stabilised. The saving and exporting economies need to spend and borrow more. The importing and over borrowed countries need to save and export more. The G20 needs different solutions for different countries, not a new credit bubble based on government bonds.

The rest of what I said will be familiar to readers here. It can be summed up in four soundbites.

You cannot solve a crisis of over borrowing by borrowing more.
You do not make toxic debts friendly assets by nationalising them.
It does not help solve the crisis by undermining national credit worthiness. There must be prudent limits to how much a country can borrow.

The Governor might be pleased to be reminded I do want to see the Bank of England reunited with full Central Bank powers to handle government debt and regulate the banks. That way we might go back to avoiding monetary disasters and banking crises.