End this austerity now


            Voters are fed up with austerity. The government is worried about the lack of growth.

            The government’s original plan was to cut public spending whilst expanding the private sector. The acceleration of growth would produce a large increase in tax revenues, which in turn would limit the need to cut public spending to bring the deficit down.

            As readers of this site will know, the fine words of the government ‘s strategy were never reflected in the subsequent  figures. Over the last two years the government has had to scale down its estimates of private sector growth. It has also revealed that it has increased, not cut overall public spending. Despite or because of this, the economy has slipped back into a  second mild recession.

             So what does the goverment need to do to trigger the private sector led growth they promised? Why isn’t the private sector in general, and manufacturing in particular, accelerating as planned?

             The private sector has been hit by three main forces. The first is an absence of bank credit for worthwhile projects and businesses. The second is the high rate of inflation the Bank has presided over, squeezing real incomes and so cutting consumption or demand. The third is a series of tax rises which have harmed enterprise and actually cut rather than increased revenues.

             So what should be done to change this? 

              First, the bank regulators should be told they have done quite enough to give the banks stronger balance sheets. The regulatory controls on cash and capital, which were far too lax in 2004-7, are now far too tight. They should be temporarily relaxed to allow more lending.

              Second, the Bank of England should announce no more quantitative easing, and should start to move interest rates up to closer to the private sector rates already working in the marketplace to normalise monetary policy. The Bank should make clear it will in future be more hawkish about inflation.

              Third, the government should revise tax rates to set optimum rates for raising revenue. Several rates are now above the level to maximise income to the state and need to be cut.

             It would also be helpful if the government did more to cut the costs of regulation on business. They could also stimulate much more private sector infrastructure investment through their licensing and planning decisions on energy, transport and housing.


  1. Ian
    June 9, 2012

    Just like Ted Heath’s useless administration, which was followed by the equally useless Wilson-Callaghan one…..and then a real Tory took office and cut about her like a savage.

    1. forthurst
      June 9, 2012

      Thatcher had boldness, self-assurance and her ‘Willy’; Cameron has risk-aversion, self-regard and his ‘Mainframe computer’.

      Her enemy within were the syntax-mangling admirers of the mass-murdering Lenin and Trotsky; his enemy within are law-abiding hardworking Englishmen who object to the trashing of their country by the multiculturalist, internationist admirers of Trotsky, Marx and Freud.

    2. zorro
      June 9, 2012

      This, incredibly, is even worse than Heath’s government……I agree with John on point 1, point 2 yes but we need to lessen taxes and spending first and cut out unnecessary regulations. Interest rate rises now will precipitate a property crash, good in some ways, but will constrict demand and worry customers even further.

      Sorting out the banks, getting rid of the ridiculous capital requirements and relying on moral hazard/risk to govern activity will be more effective than tick box/rear view mirror regulation.


      1. Bob
        June 9, 2012

        The way to get the country moving again is to do the reverse of what we are doing.

        Lower tax
        Lower public spending
        Less foreign aid
        Stop giving money to insolvent banks and currency zones
        Reduce welfare handouts
        A U-Turn on environmental facism

        Every member of the government should be required to read James Delingpole’s book “Watermelons” to help them understand the meaning of the phrase “evidence based science”.

        Cameron has been rumbled, and everyone knows it except apparently, the Tories.

        1. waramess
          June 10, 2012

          Very well said

        2. uanime5
          June 10, 2012

          Wouldn’t it be better to read studies by real scientists than a book written by ( someone with questionable-ed) scientific understanding?

          1. Bob
            June 11, 2012


            What? like the scientists that came up with the hockey stick graph?

            like scientists that use tricks to hide temperature declines?

            Try reading the book. This non scientist presents facts that stand up by themselves, and are irrefutable, as opposed to projections based on fake data and politics.

  2. lifelogic
    June 9, 2012

    Indeed you cover the main points and many have but still no action.

    On regulation at least get Cameron to reverse his no retirement and absurd gender insurance rules and the energy performance drivel.

    You say “Third, the government should revise tax rates to set optimum rates for raising revenue. Several rates are now above the level to maximise income to the state and need to be cut.”

    Actually they should be set at the maximum good for maximum number of people which is well below this perhaps 20% of GDP.

    1. lifelogic
      June 9, 2012

      The maximum revenue rates, perhaps 40% of GDP, are far too high. Why on earth should the monopoly state be allowed to take and waste this extra 20% when it is not needed to provide defence law and order and the basic services that the state can provide best. And the private sector can do it more efficiently.

      Going to maximum revenue rates means you are at the balance point, when taking any more starts killing the private sector milk cow. In other works you are always nearly killing it. How can that be good for most people?

      1. Tad Davison
        June 9, 2012

        Spot on yet again!

        Healey found that out in the 1970s. He was going to ‘tax the rich until the pips squeak’ then found that the tax take actually fell as a consequence. We just can’t go on like this! (Now where have we heard that one before?)


        1. lifelogic
          June 10, 2012

          83% plus 15% investment surcharge, I think – what a plonker. No wonder revenue fell and he went trotting off the the IMF. He has still learned nothing despite his brain and double first.

          There are people with firsts and no sense and people with them who have sense. They very often do not go together perhaps the obsession with academia distorts their views.

          Not seeing the wood for the trees is so often a trait of such people.

    2. zorro
      June 9, 2012

      There is no chance on earth that he will reverse this nonsense. Why would anyone bring it in in the first place. They want to send ‘poorer’ children with less ability to university. How will this help?…..Prizes for everyone……


      1. lifelogic
        June 9, 2012

        There is much to be said for a few bright builders, plumbers, mechanics and the like. Far too many lawyers, and senior civil servants already doing nothing useful or worse.

  3. barnacle bill
    June 9, 2012

    Whilst we still have bankrupt banks in this country none of the above will be possible John.

    1. Single Acts
      June 9, 2012

      I agree that the weak banks should be left to bankruptcy and starting a new bank should be much less burdensome, but JR has a point that negative real interest rates don’t allow the banking system to work as it previously has.

    2. zorro
      June 9, 2012

      Whilst we are still stupidly bailing them out it won’t….


  4. norman
    June 9, 2012

    In short undo some of the damage they have done and implement policies that should been ready to go on day one. Instead we’ve had one u-turn after another from the schoolboys at the top and confidence in them is so damaged it will take a miracle to persuade people they know what they’re doing.

    Or a new Chancellor as a minimum if Cameron really does have what it takes to win an election. Which up to now he has shown no signs of except when his hand was forced at the veto.

    1. zorro
      June 9, 2012

      He won’t sack Gideon or Clegg……but he should do.


  5. colliemum
    June 9, 2012

    “Second, the Bank of England should announce no more quantitative easing, and should start to move interest rates up … … The Bank should make clear it will in future be more hawkish about inflation.”

    These proposals would be of great help. But interest rates won’t rise because of the huge mortgage market, due to the particularly British housing market.

    Also, you are suggesting that the BoE ought to be more like the pre-€ Bundesbank. That would be good, but I doubt this will ever happen. Sadly.

    Reply: Mortgage rates and other private sector rates are already well above the official rate and are not kept down by it.

    1. zorro
      June 9, 2012

      They are if your mortgage is tied to the BoE base……..ahem


    2. lifelogic
      June 9, 2012

      If you can borrow anything at much less than base plus 4% you are doing well many are paying 10-30%. Best solution is to lend to individuals or business taking security and at retail rates – rather than to an insolvent-ish bank for 0.5%.

    3. Andy
      June 10, 2012

      Reply to John: Many people have tracker mortgages, which are kept down by the low official rate.

      1. lifelogic
        June 12, 2012

        Indeed they are the only ones still benefiting from the low rate but many of these deals have ended.

  6. Mick Anderson
    June 9, 2012

    There are a few other things that will be required, probably before any of JRs list. Mr Osborne needs to be replaced with someone who has a grasp of economics, business, and human nature. In order to depose the PMs friend, Mr Cameron needs to be replaced by someone with a common touch. The problem is not about the Cameron family wealth, but that like Mr Brown, his aim was to become PM in spite of having neither talent or vision for the job.

    I disagree that taxes need to be set to the level of optimum yield and would suggest that they need to be at a level well below this point to act as a stimulus. Keep them low and see how much more confident people and businesses will become. Government needs to learn to do only that which is necessary for the administration of the Country, which needs much a smaller Public Sector and corresponding spending.

    1. lifelogic
      June 9, 2012

      Indeed just having a government that people believed wanted to lower taxes when they could would be a big confidence boost – no one believes they even want to.

    2. Tad Davison
      June 9, 2012

      ‘Cameron needs to be replaced by someone with a common touch’

      Who do you suggest Mick?

      I know one who struck a real chord with the people, as he didn’t come from a privileged public school background. The people have gone right off the latter type, they’re now seen as an impediment. Out of touch and too poncey for the tastes of mainstream man. Ask Nadine!


      1. Mick Anderson
        June 9, 2012

        For the common touch, there’s an argument for Boris. He would also act as a useful distraction if things continued to unravel. It’s not the public school thing I have a problem with (I prefer those running the country to have a superior education), just the lack of ability in the current leadership

        Perhaps if they had had to actually run a business out here in the real world they might have some idea of the aggravation that they cause those who they apply their random rules to.

        It seems that Ms Dorries can recognise the lack of a common touch, but I’m not sure she has it herself. I’m not sure that I could name anyone in Parliament that I’d want as PM. (JR for Chancellor, obviously!)

        1. lifelogic
          June 10, 2012

          What is a superior education? It so often seems to be Latin, Greek, History, PPE, Law and having good contacts – these are the people who have largely made the mess we are in.

          Give me people with an understanding of maths, engineering, energy, business systems, of power, negotiation and risk reward. Also knowing that encouraging and paying able people to do nothing is not moral, nor good for them nor good for society. Nor is it moral to rob savers by currency devaluation.

          Also that passing endless laws, regulations and over taxing everyone is only good only for parasites in the end.

        2. Little White Squibba
          June 10, 2012

          David Davis.

  7. Mike Stallard
    June 9, 2012

    To get growth going, you could not be more right. You read the comments as you moderate them and to your great credit you take in what experts are saying. A lot (not all) of us actually know at first hand what they are talking about.

    You realise, perhaps more clearly than most of us, that the EU is the instigator of the regulations.

    At very bottom of the whole thing, however, is this intractable problem: in a democracy you have to suck up to the electorate to get elected. This means overlooking tax swindles, treating bludgers like genuine cases, providing ridiculously expensive and unnecessary building projects, laying on games and circuses, keeping people in employment when they ought to be sacked and making great speeches which are, at base, lies.
    At the end of this line lies inevitable bankruptcy.

    Greece, Spain, Ireland, Germany are all democracies which have fallen into this trap already: putting votes before leadership. And we have too. So has the USA (14 trillion reasons for saying so).

    Until this underlying problem is addressed, the “democracies” will slip further and further into debt and fall further and further behind countries which simply neglect their peoples’ welfare.
    In a way, we are back in the 1930s facing up to the growth of dictatorship.

    Canada, New Zealand, Singapore, Australia even South Africa might be a good place to look for a good example.

  8. D K McGregor
    June 9, 2012

    Do you really believe that Dave and Co will even give this a thought , dream on. We’ve got a Spanish banks crisis to sort this weekend so no time to adress British problems,again.

    1. zorro
      June 9, 2012

      Unfortunately, they are out of their depth in many departments.


  9. me
    June 9, 2012

    “They could also stimulate much more private sector infrastructure investment through their licensing and planning decisions on energy, transport and housing.”

    Hope you’re not implying government makes it easier to get wind farms through planning. Tories seem to speak out of both sides of their mouth on that one.

    Reply: I want subsidies cut. I am talking about privately financed infrastructure, not heavily subsidised.

    1. lifelogic
      June 9, 2012

      I want wind and PV subsidies abolished now then no planning applications will be made.

  10. A.Sedgwick
    June 9, 2012

    “If Britain had a Chancellor of stature — and it does not — he would already be making the structural changes to our economy, such as serious tax reforms and real cuts in public spending to fund fiscal stimulus, to help us weather the storm.”

    Read more: http://www.dailymail.co.uk/debate/article-2156583/Enough-weasel-words-Dave-The-British-people-given-vote-Europe.html#ixzz1xHLRk8dX

  11. Steven Granger
    June 9, 2012

    When you say the govt should be doing “more” to cut the cost of regulation you imply it is currently doing something. It isn’t. It is actually busily adding more cost and regulation or, more accurately, it is busily implementing EU directives that add more cost and regulation. Why do you persist in calling for things that you know cannot happen? Areas such as employment law are now under the control of the EU and the govt couldn’t make changes even if it wanted to. Much more regulation is planned in this and other areas that will further shackle the private sector.

    You call for the govt to do more to stimulate private sector investment. The recent ridiculous spectacle of droughts in one of the wettest countries on earth demonstrates the need for urgent investment in our water infrastructure. Why then is Caroline Spelman refusing planning applications to add more reservoir capacity, something which would create jobs as well as boosting capacity? Could this possibly have something to do with the EU policy of deliberately creating shortages to force up the price of water and reduce its usage, all in the name of cutting carbon emissions? Will not this policy add further to the inflation that you complain about and further reduce living standards and consumption thus further reducing growth?

    Is it not true that we have an excellent opportunity to improve our energy supply and security by investing in shale gas, something that has already led to big reductions in natural gas prices in the USA? Is this not an area that could create a huge number of jobs, whilst potentially bringing drastic reductions in energy prices (and therefore inflation)? Oh sorry, I forgot about the Climate Change Act (or, more accurately, the Economic Suicide Act). I can’t even blame the EU for this one, as it was the loonies in our own parliament that passed this by 464 votes to 3, going beyond even what the EU required. Where you one of the 3 John or did you not even bother to turn up for such an important vote? (the voting record suggests the latter).

    Reply: Of course I was present at the passage of the Climate Change Act. I disagreed with it and refused to vote for it. I explained to the Shadow Ministers and whips why I thought it was ill conceived. As 464 MPs wanted it I did not vote against, realising the cause was well lost.

    1. The Prangwizard
      June 9, 2012

      But you could have voted against it, couldn’t you, if you really had had the courage of your convictions? How do we make a stand against things we don’t like if we drop out like this? What kind of an example is it?

      Reply Yes I could have voted against it. I vote against three line whips from time to time, but on this occasion saw no point as the odds were overwhelming. Instead I expressed my strong objections and refused to vote for.

    2. uanime5
      June 9, 2012

      Could this possibly have something to do with the EU policy of deliberately creating shortages to force up the price of water and reduce its usage, all in the name of cutting carbon emissions?

      No such policy exists. While the EU recommends building more reservoirs as a last resort it doesn’t forbid this.

      Is it not true that we have an excellent opportunity to improve our energy supply and security by investing in shale gas, something that has already led to big reductions in natural gas prices in the USA?

      Given that the UK has more taxes on gas than the US and extracting our shale gas will require deeper wells the UK will not experience a reduction in the cost of gas on a scale similar to the US. Also the problems associated with shale gas, such as water contamination, make it one of the less attractive options.

      1. Little White Squibba
        June 10, 2012
    3. APL
      June 9, 2012

      JR: “I disagreed with it and refused to vote for it.”


      JR: “As 464 MPs wanted it I did not vote against, realising the cause was well lost. ”

      Comfortable on the fence?

      Reply: I am not on the fence – I am against it, and said so at the time.

  12. Paul Danon
    June 9, 2012

    What, please, does being “more hawkish about inflation” mean?

    1. Denis Cooper
      June 9, 2012

      I suppose it could mean the Chancellor not just setting an inflation target for the MPC but seriously expecting it to be met, and therefore publicly rebuking the Governor rather than writing another “Dear Mervyn, I see you’ve missed my inflation target again, never mind, carry on” letter like this from February:


    2. Single Acts
      June 9, 2012

      Without wishing to speak for mein host, I imagine he means that if you have missed your inflation target years on end and had seen your MPC preside over a 53% increase in RPI since it was created, then yes it is time to be a bit more hawkish about the crypto-tax that is inflation.

      1. Denis Cooper
        June 9, 2012

        Well, taking it as a period of 15 years, and keeping to Brown’s original central target of RPI-X rising by 2.5% a year, I find that compounded up RPI-X would have risen by 45% even if the MPC had performed its task to perfection throughout that period.

  13. Pete the Bike
    June 9, 2012

    You suggestions are excellent and we have to ask why an alleged Conservative led coalition has failed to lower spending, taxes and regulation. Surely conservatism has a realistic view of business and the economy? Yet Cameron and co have failed utterly to bring any policies that differentiate them from the Lib Dems or Labour. They have raised taxes and spending and increased regulation. Is it any surprise that a recovery, any recovery at all, is a distant dream?

    1. Tad Davison
      June 9, 2012

      You have a point Pete.

      It could be said, this is a case of the tail wagging the dog, and in this case, it’s a shame tail-docking isn’t still carried out.

      The woolies are far too influential in this coalition partnership. If the poorly-led senior partner were a staid St Bernard, or an agile Border Collie, instead of a yapping bitch of a miniature Poodle, we might get somewhere!


    2. zorro
      June 9, 2012

      Apparently, the minority partner effectively vetoes policy and Clegg threatens Cameron with armageddon so Cameron gives way……


  14. alan jutson
    June 9, 2012


    The problem stems from the period before the last General Election, when no main stream political party was honest with the electorate about the true state of our economy, and the size of our deficit and debt.

    Yes, I understand that if anyone told the real truth and what was really required, they may have thought they would not get elected, but that is why we now have policies based on lies from all of the mainstream Party’s.

    Its not “Austerity” it is called “living within your means”.

    If you live within your means, as millions of us out here do, simply because we have to, then debt is not a problem, if you spend more than you earn, then future debt is a problem.

    The only way to get back to normal, having lived beyond your means, is to either live below your means until the debt is paid, or seek to earn more to cover the repayments on the debt.

    Given that the Government have found out it cannot earn more (with Higher taxes) then the only REAL solution is to cut its spending .

    The fake solution is to pretend to cut spending, and print more money, it perhaps works for a short period until you are found out, but then the action needed to correct it, is more painful than if you had been honest in the first place.

    Thus we are where we are, in total denial.

    No government should be allowed to spend more than its income of the past year, and because of the size of our borrowings no government should spend more than 80% of the previous years income, other than for a short period, perhaps in its defence of the realm.

    Why do Politicians insist on working out their spending on guesstimates on future years income, which is just pie in the sky.

    1. alan jutson
      June 9, 2012

      With regard to Bank lending.

      Yes the double talk of wanting Banks to lend, and at the same time asking them (forcing by regulation) to increase Capital reserves, has to stop.

      When in business myself, I expanded my business out of cash flow and profit, I never ever went to the Bank for anything, not even an overdraft.

      Yes you grow more slowly, but you are not beholden unto anyone, (other than yourself) especially the Bank who may at any stage demand clearance of overdrafts with IMMEDIATE EFFECT (its in the small print if you choose to read it).

      Loans, why go to the Bank, they are usually only interested in small businesses if you are prepared to put your house on the line first and foremost.

      If governments want to encourage growth, then they need to encourage self employment, not try and discourage it, as all past governments have IR3, Advance tax registration and Certification, Compulsary Registration, tax held from gross payments, monthly returns under fear of fines, tax calculated in advance on last years earnings etc etc..

      Why, because self employment is usually the seedcorn of people who then grow a business out of their own personal success.

      For those who are unfortunate to be unemployed, make the system simple enough, so that you can take up temporary work without it mucking up your benefits for 13 weeks by having to sign off and then on again during periods when there is no temporary work available.
      The present system actually discourages temporary work, because of all of the delays, complexity and time lag within the system.

      1. alan jutson
        June 9, 2012

        oops. IR3 should IR35

        1. alan jutson
          June 9, 2012

          Or is it IR45, so long ago, so many changes, so many controls, so much confusion.

          Just about sums it all up really.

          Pleased I am now retired and do not even have to bother to comply with it all any more.

          Although still have to fill in a lengthy tax return each year, or rather my accountant does, as I fear even a slight, honest mistake could lead to a fine.

          Thats what Government has now done to its taxpayers, its all about fear, not about encouragment.

      2. The Prangwizard
        June 9, 2012

        How about no income tax on earnings or savings income under £25,000pa. No need to notify anyone until limit reached, severe penalties for cheating. Hire and fire no reason, no statutary notice period. Abolish minimum wage. End housing benefit, child benefit. End inheritance tax, stamp duty. Reform mortgage market, US style mortgage freedom, make it simple, no fees. I know, I know, but as thousands say, we can’t go on like we are doing. Something has to change, and it has to be big change. Government is gigantic, it is strangling us, draining our life spirit, it must be made small. There’s more of this, make provision for your own pensions, pay for your own medical treatment. Provision by the state only for those who are unable to work or care for themselves. Give me a minute or two so I can get into my bomb shelter!

    2. Brian Tomkinson
      June 9, 2012

      I agree, not one party was honest about the true state of the public finances and they still aren’t. How often do you hear cabinet ministers saying that they are paying down the debt when they are planning to virtually have doubled it by 2015?

    3. Payguy
      June 9, 2012

      Don’t fall for the idea that tax revenue are required to pay-off government debt. In fact, it is a myth that taxes “pay” for any government spending.

      When an economy is at ‘full capacity’, (i.e. very low unemployment and all resources in the economy being used productively), a government may wish to spend say £20Bn on something everyone agrees is needed – it could be repaying govt debt, defending the country, building hospitals, whatever. When it spends this money it inevitably causes inflation – this is because you have more spending chasing the same amount of goods and services. The amount of goods and services does not change because the economy is already at full capacity.

      To enable the government to spend without causing an inflationary spiral, the government taxes by an equal amount to prevent the private sector spending by the same amount -so overall the spending (public and private) remains roughly constant, so no inflationary spiral.

      So the extra tax is to prevent an inflationary spiral when the economy is at full capacity – it is not required to “finance” govt spending. This is why govt economics is nothing like household economics.

      However, when an economy is the position ours is in with excess capacity, spending by government is permissible without taxation as it doesn’t cause inflation.

      Given that our economy has not been at full capacity for over 30 years (hence the high unemployment), the government does not need to increase taxes or cut spending elsewhere to “pay” the interest on govt debt or to “pay” for anything.

      The big question is why does the government issue bonds at all and pay interest to private investors? Why doesn’t the govt just create the money at the mint or Bank of England – this won’t be inflationary as there is spare capacity.

      An answer often given is that when governments issue bonds someone has to surrender money to the government. If it wasn’t for the bond that money would probably have gone into the banking system instead. This is called a ‘reserve drain’ and was clearly necessary when we had the Gold Standard/Bretton Woods or some other type of Fixed Exchange Mechanism.

      The argument given now is that debt is a better way to stimulate the economy. Supposedly there is a problem with a liquidity trap in the banking system. By issuing bonds the government can take money away from the banking system and make sure that it is being spent.

      However, it’s pretty obvious that for countries with their own floating currency, deleveraging banks and with economies working at way, way below spare capacity that you can use QE to clear government debt at will without any inflationary effects.
      This is obviously in the UK since there is £325 billion sitting in the Asset Purchase Facility. This money was bought using reserve crediting in 2010/11 and the result of the purchases was deflationary – M4 last year after £200 billion of QE had hit stall speed with growth at only 2% (more than 5% growth is needed to prevent the economy contracting).

      So the Tories are moaning about the huge and “unaffordable” government credit card bill. At the same time over a third of the debt they are moaning about is stuck in the government owned Bank of England with no hope of it ever being anything other than cancelled and retired. To add to the hilarity the Treasury, through a wholly government owned agency called the Debt Management Office pays interest on the £325 billion in the APF to the wholly government owned APF. This money is just building up and will eventually (as all profits for the Bank are) be returned to the taxpayer. You couldn’t make this up.

      So clearly in economic circumstances such as now you can print money directly, buy outstanding government debt and retire it with no inflationary consequences. Nevertheless Governments are continuing to use an explanation built up at a time of Bretton Woods with full employment, fixed exchange rates and no deleveraging to explain why they don’t use the QE to clear down debts

      1. alan jutson
        June 9, 2012


        So if our taxes do not pay for government spending, why are we taxed?

        If your saying the Government is borrowing long, and circulating funny type money with Quantitative easing and the like to pay for it, as well as screwing savers with below inflation bank interest rates and at the same time reducing the effect of its own debts by manufactured inflation, then I agree.

        To me its all smoke and mirror type accounting, which would never be allowed by Companies house with a true Company Audit.

        Why can we not have a full independent Audit every year of the Nations accounts, published every year, whith the Prime Minister having to explain them away by going through them with a fine tooth comb in a National State of the Nation broadcast.

        Let the Government live or die by the way it looks after our Nations Accounts.

        1. Payguy
          June 9, 2012

          That is the point. Government accounts do not work at all in the same way as household accounts. Governments withbtheirbown central banks tfatbissue debts in their own currency are not resource constrained and cannot go bankrupt.

          Certainly take no lessons from the current Government who are badly misleading the public about the economy in a way that is certainly immoral and evil and verges on treasonous.

          Take a look at the following graphs –


          The private sector is deleveraging. Households, private sector companies and banks are all reducing economic activity and hoarding cash (£650 billion of it). In this circumstance the state has no choice but to make good the difference. It is not a choice. It is an accounting law.  See the graph showing a perfect relationship between private sector surplus and public sector deficit (including trade deficits).

          Until Osborne puts in place policies that make the economy grow the deficit will continue. His fiscal policies of course will continue to cause depression and higher unemployment and lower living standards.

          Public sector debt is private sector income (by definition) and it matters not a jot.  As MMT proves – higher public sector debt DECREASES gilt interest rates. 

          The current governments policies will fail by definition – look at the graphs – public sector debt = private sector surplus + balance of payments ALWAYS. 

          The sectorial balance graphs are also a great way to compare labour and conservative records on public sector spending.  Look carefully and prior to 2008 you can clearly see labours record is better. 2008 was a world wide crash which effected every nation in the world. 

          The Tories were pushing for further deregulation of banks in 2007!!-


          The current government is dramatically reducing spending on useful activities such as education, health, transport. These are the deepest cuts since the 1930s and we are only an eighth into the planned program. 

          But what we can clearly see is exactly what Modern Monetary Theory would predict.  The deficit reduction program is and will fail. It has to by definition (see the graphs again showing public sector deficit equal private sector surplus ALWAYS). 

          Osbornes spending cuts  will always be replaced with higher spending on housing benefit, unemployment benefit and lower tax revenue.  All at the cost of lower growth and higher unemployment.

          And how’s the Tory plan working out for people in practice? The government has tried to reduce itself in size. The economy has tanked. Living standards have fallen. Government debt has increased as every pound no longer spent on employing a teacher, nurse or mending a road is more than compensated for by the extra costs of unemployment benefit, housing benefit etc. government tax revenues are down despite higher vat and income tax due to the stagnating economy.

          We are in a liquidity trap. I can’t say this often enough to austerians. Without QE the money supply has been contracting for three years. 


          Banks are deleveraging and lending less money into the economy. Households are poorer so are spending less money in the economy. Now the government is trying to spend less money in the economy. Government fiscal tightening in a liquidity trap leads to a depression and a slump.

          The only thing saving us from falling into a free fall abyss is QE and automatic stabilisers such as unemployment benefit and housing benefit.

          If we did as the Telegraph and Cameron want and further reduce the size of the state, companies  won’t have any customers for their goods as households will be poorer and more of them will be unemployed. There will be no aggregate demand for their products. Households are getting poorer due to the austerity, more people are unemployed.

          Pretty soon we enter the world of asset price deflation. This is the tipping point when an insane right wing government has sucked out so much demand from an economy that prices drop. Then the real fun begins as people hoard cash and goods as cash is worth more (prices are now dropping) if not spent and goods are more valuable than cash. This throws the economy into a vertical nose dive with hyperinflation as in Weimar germany and rapidly rising unemployment. Firms lay people off to try and reduce costs. This reduces demand further. And repeat.

          some people just never learn do they?

          Read and learn and see how badly you are being mislead-


          Reply: The Independent piece cited here repeats the Labour lie that I “wished to deregulate the banks” at the wrong point in the cycle. As the Economic Policy Review I co-authoroed made clear, I wanted tighter control of cash and capital and pointed out Labour had allowed an overextenstion of risk on balance sheets!

          1. Caterpillar
            June 11, 2012


            As you know there are many arguments with respect to MMT, in more than two ways. I am sure you would argue against each of below, but I shall list them anyway:

            Economics (general point not just MMT) is not the only social science that can inform policy.

            Nominal accounting identities are just that; there are different ways they can be satisfied, and they are nominal.

            ‘Savings minus investment’ is not ‘savings’, it is ‘savings minus investment’.

            Money is not a resource (when one reasons that money can and cannot remove a constraint depends on your underlying theory and hopefully empirics)

            Fiat money will not necessarily be trusted in perpetuity, neither internationally nor domestically.

      2. Denis Cooper
        June 9, 2012

        I don’t think this is entirely correct.

        As I understand the government has a number of accounts with the Bank of England, the main one being the Consolidated Fund.


        “The Consolidated Fund is the Government’s general bank account at the Bank of England. Payments from this account must be authorised in advance by the House of Commons. The Government presents its ‘requests’ to use this money in the form of Consolidated Fund Bills.”

        Whatever the state of the economy, whether conditions were inflationary or deflationary, if the government kept spending money out of its account without any inward payments then eventually it would be overdrawn.

        As each pound issued represents a claim against the Bank, there would be the risk that if the Bank allowed the government an open-ended overdraft to spend as much as it wanted and Parliament authorised then ultimately that would start to affect the position of the Bank.

        Once again, that would be nothing to do with whether the effects of government overspending were to cause excessive inflation or to ward off impending deflation, it would simply be that the Bank would be accumulating debts on its balance sheet in the form of claims against money issued, without any counterbalancing assets.

        If on the other hand the government directly or indirectly provides the Bank with bonds in exchange for the money, then the Bank has those bonds as assets on its balance sheet.

        Under “quantitative easing” as so far practised in the UK, almost all the £325 billion of new money created by the Bank has been indirectly exchanged for government bonds, gilts, which are held in the APF.

        (As an aside, not only would it have been too transparent and comprehensible if the Bank had bought gilts directly from the Treasury, it would also have been in breach of Article 123 TFEU in the EU treaties.

        And I suspect that would also have been the case if the Bank had taken the even simpler route of allowing the government to have a £325 billion overdraft; however I’m entirely sure because the UK’s euro “opt-out” protocol allowed an exemption from Article 123 TFEU for the government’s “ways and means” facility with the Bank, and although apparently that overdraft was frozen in 1997 and has since been largely paid off I don’t know whether the facility still exists and could have been reactivated to the required extent.)

        About three years ago I did moot that in the end all the gilts held by the Bank might be transferred back to their issuer, the Debt Management Office, free of charge, and they could then be cancelled.


        “If I was a devious and unscrupulous politician in government, I would quietly arrange for the bonds to be cancelled.

        That’s for gilts, bonds which were issued by one branch of government – the Treasury – and which are now owned by another branch of government – the Bank of England – and which therefore represent an internal debt.

        Not for corporate bonds, obviously, because they’d have to be bought back and cancelled by the company which issued them.

        Cancelling all the gilts acquired by the Bank would slice a chunk of the national debt, at a stroke.

        It might need a few lines inserted into a Finance Bill, but I could rely on my lobby fodder Commons majority to let it through.”

        But wouldn’t that leave a massive hole in the Bank’s balance sheet?

        Reply: No, cancellation of the gilts would b e matched by cancellation of the loan that financed them. The whole exercise comes from the Treasury, who indemnify the Bank.

        1. Denis Cooper
          June 10, 2012

          In principle a creditor can unilaterally decide to forgive a debtor and simply cancel his debt, but if a debtor unilaterally decides to cancel his debt then that is called “default” and it doesn’t usually go down very well.

          In effect the Bank and the Treasury have swapped IOUs: the Bank has got IOUs issued by the Treasury, gilts, to the tune of £325 billion, while the Treasury got IOUs issued by the Bank, money, and has spent it.

          So thinking in old-fashioned paper terms, the Bank could bundle up all the gilts cerficates and send them across to Treasury with a nice covering note saying “We forgive you these debts, here are all your IOUs which you can destroy as you see fit”.

          But those holding banknotes, the IOUs issued by the Bank, would not be volunteering to hand them in and freely relinquish all their claims against the Bank.

          So unless the Treasury collected up enough banknotes, mainly through taxation obviously, to exchange back for the gilts rather than receiving them back free of any charge, then the Bank would be left with a ca £325 billion hole in its balance sheet.

          You mention that the Treasury has indemnified the Bank against any losses arising from the APF, but that comes to the same thing – somehow in the end the Bank must get back its ca £325 billion worth of money, its IOU’s, to balance the loss of the gilts, the Treasury IOUs.

          It seems obvious to me that if it became habitual for the government to fund its spending by getting the Bank to create new money then ultimately there would be a collapse of confidence in the currency as a store of value, even if it still worked as a means of exchange, and the best way to prevent a descent into Zimbabwe or Weimar is to insist that the Bank must keep proper accounts and it will never be allowed to become insolvent.

    4. Mark
      June 9, 2012

      The Wisconsin recall election sets an interesting precedent. Voters were not fooled by the “you can have your cake and eat it” brigade.

    5. zorro
      June 9, 2012

      Government is the biggest culprit, and also our stupid banks for lending incompetently and then needing taxpayer bailouts to cover their foolishness….


  15. James
    June 9, 2012

    I don’t see any cuts in taxes or spending on the public sector ever happening voluntarily. They are still employing more and more people on Fat Cat salaries and there is no will to curb the excesses of the public sector at any level. Perhaps the best thing that could happen is that they run out of money and can no longer afford the sort of drunken sailor spending which is as bad, if not worse than under Labour. If the jobsworths and bureaucrats didn’t get paid then perhaps they would clear off and leave the rest of us to carry on without their interference in everything we try to do.

    Plus imagine how pleasant life would be without all those public sector know-alls coming on the airwaves to lecture us about smoking, drinking, what we eat, how racist we are, what environmental criminals we are etc etc. That was what was supposed to happen but under Cameron the nannying and bullying has got worse than it was under Labour.

    1. Tad Davison
      June 9, 2012

      James, for what it’s worth, I have a lot of sympathy with that view. I’m still waiting for the promised changes. All I see is a continuation of what we had before.


  16. Martyn
    June 9, 2012

    A fair and good assessment, John. However, insofar as this government is concerned I am inexorably reminded of the old saw about “Nero fiddling whilst Rome burned”….

  17. Lindsay McDougall
    June 9, 2012

    An excellent post; agreed on all three counts. Number four; we need to cut public expenditure. It is too high, particularly current expenditure. There should be no taboos, no sacred cows. Do it the Canadian way.

  18. Brian Tomkinson
    June 9, 2012

    I have asked before but it’s worth repeating – what happened to Osborne’s pledge to reduce the deficit by 80% cuts in spending and 20% tax increases? Was this just another promise that sounded good for the election but was never meant to be implemented? You must know by now that he will not follow your advice, for example we know he is planning even more tax increases on petrol in August. Sadly for us, he is yet another politician more interested in playing politics and scheming about how to become the next leader than doing the job for which we pay him.

  19. Electro-Kevin
    June 9, 2012

    Why no growth ?

    In addition to those problems you list:

    – energy costs are higher, especially with green taxes
    – the industrial base is smaller than it once was, many major brands having been sold off so the recovery is going to have to wait for new start-ups to get through the vital first two years – they will never achieve the output of lost industries.

    We relied far too much on the City and the Credit Crunch has hit us particularly hard.

    Off topic if I may. On the issue of rail transport:

    I mentioned in an earlier post the following to improve the national rail network (and de-congest the roads) with minimal investment:

    – More passing loops to enable more traffic and a mix of local and intercity services
    – Longer trains to cope with shortage of capacity on peak trains

    There are other suggestions from the ‘spotters’ I work with:

    – More park and ride shuttle services around major towns and cities
    – re-open some old branch lines and stations where major new-town development has taken place
    – re-link dead-ended branch lines (post Beeching) with similarly developed – and now highly populated – towns

    This would seem to be more popular among the ‘spotters’ than HS2 which is generally thought to be a waste of funding and too London-centric.

    As our people are going to get poorer they are going to need more public transport.

    1. Tad Davison
      June 9, 2012

      Kevin, I’m a rail enthusiast. ( I have no fewer than three passenger-hauling locomotives in build at the present time.). You should see the abomination we were lumbered with in Cambridgeshire, in the form of the infamous guided bus! To reinstate a rail service along the route, it would have cost £360,000. They opted for a guided bus instead, and that, according to some estimates, has cost £126,000,000 (before litigation) to essentially do the same thing. And worse still, the guideway is beginning to break up.

      My point is this. Again, we have stupid people making stupid decisions, the rest of us have to pay for, with absolutely no recourse. Cameron is right that things have to change, and that includes anyone who cannot deligate tasks to the right people – including Cameron himself if he can’t cut it.


      1. Electro-Kevin
        June 9, 2012


        I really don’t know anything about the figures involved. When I mentioned ‘Park and Ride’ I wasn’t being specific as to whether or not that would involve a rail service.

        I feel that there needs to be integration rather than competition sometimes. And that fragmentation often leads to ‘professionals’ screwing the system for all it’s worth.

        Quite clearly the middle classes are as adept as the unions for taking us all for a ride.

        Having said that my family background includes ship builders and coal miners – none of them were rich or well paid but I do know that some of them died young through industrial diseases.

  20. a-tracy
    June 9, 2012

    “Why isn’t the private sector in general, and manufacturing in particular, accelerating as planned?”

    Whose plans?

    Reply: The government’s

    1. Brian Tomkinson
      June 9, 2012

      Reply to John’s reply
      John, I think you mean the government’s pipe-dreams rather than plans.

  21. waramess
    June 9, 2012

    Without cutting the size of government even the UK government will run out of money. No matter it has the ability to create pounds digitally they will find eventually there is no alternative to austerity.

    What can they do now? Start cutting and reduce taxes.

    More credit is not the answer although less regulation must be beneficial. Allow interest rates to find their own level without the need for the Bank of England’s input and facilitate the liquidation of some of our zombie banks by witholding further support.

    Of course none of this will be on the agenda because it is perceived as being too painful so, no doubt we will end up with more of the same, which has so far brought us five long years of disaster

  22. Javelin
    June 9, 2012

    Last night after US FX closing time Spain announced yes it did need a bail out but no it wasn’t happening because of German conditions. So it looks like trouble.

    However the Eu 100 bn they have asked for is unsurprisingly just what the Eu can afford. Thus the Eu is obliged to pay until the next re-estimate and the next squeeze on Germany will result in the next Eu 100 bn bailout. All the way to Eu 400 bn. Without the FED printing a dollar. The internal dynamics are such that this bailout will further depress the Eu and the borrowing will simply shift counterparty risk to Germany but not help growth.

    The real terror point – as I have been predicting for 4 years – will be an Italian bank who will announce a massive shortfall out of the blue on a bunch of loans, CDOs and swaps. The Italians haven’t marked their books to market for years and they have not started to realise their losses on a serious scale. As I have predicted an accountant or clerk will phone up the CFO late one evening and tell them the swaps are due and the bank is bust.

    I’ve been right on every prediction so far. So let’s see how well I do on this one.

    1. Brian Tomkinson
      June 9, 2012

      Thanks for cheering us all up!

    2. sjb
      June 11, 2012

      Javelin, here of just two of your past gems:

      […] a week either side Nov 11th [2011] will be the final straw for the Euro.

      I’m expecting a fall of the order of 20-25% on the equity markets over a week in that period.
      Posted September 30, 2011 at 4:33 pm

      Rumor from the Bundesbank treasury traders is they are preparing for an overnight exit.

      When the President starts saying the ECB bond buying is illegal and only tolerable in the short term, then it’s going to be in their interests to bail out before they have to pay for Italian and Spainish debt.

      Posted August 25, 2011 at 8:48 am

  23. Bazman
    June 9, 2012

    Many of the companies are to blame with the obsession with their share price which determines the bonuses paid to their executives, so they sit on large piles of cash and do nothing.

    1. oap
      June 9, 2012

      If you were responsible for running a business in today`s financial climate you would be saving every penny you could for the rainy days to come – if indeed they have not already arrived. A business with a substantial cash reserve is a well-managed business; as someone (with actual business experience) said earlier, overdrafts can be called in with immediate effect. If you rely on an overdraft to survive then you face instant insolvency unless you have access to near cash alternative assets. Insolvency will also beckon any business that suffers a sharp loss of sales – very possible in today`s world – look at Greece and Spain.

      1. alan jutson
        June 9, 2012


        Agreed, if you run a profiable business, they why do you need to borrow huge sums, at a huge cost (in many cases at a rate higher than your percentage of net profit), surely better to expand slowly with no borrowing, rather than to massivly expand without the resources in place to manage or cope.

        Half the problem with business today is that they want to expand with someone elses money, that someone else often makes more out of lending them the money, than they would make by using and borrowing it !!!

        Then again, perhaps I am just old fashioned in not wanting to be in debt at all.
        I blame my parents who taught me such !

      2. Bazman
        June 9, 2012

        Also applied when times where good. The executives thinking about themselves and not the company.

        1. alan jutson
          June 10, 2012


          You should always keep money in reserve, good times or bad, because sometimes the unexpected happens, even in good times. (A customer can go bust, depriving you of expected funds/income)

          But clearly you keep more in reserve in times of turmoil, as the risk of problems is greater.

          1. Bazman
            June 10, 2012

            Not at the detriment of the companies expansion, shareholders dividends and to boost your wages. Or compensation/remuneration as they laughably call it.

  24. Atlas
    June 9, 2012

    I suppose the problem really is that we elect politicians and not economists. So the thing that gets George Osborne out of bed in the morning is working out what political deal he can do today to assist his rise up the greasy pole. We are told he attends two such ‘tactical’ meetings every day.

    Clearly his actions show that the state of the UK economy is of secondary interest to him, his real interests are keeping in power and eventually getting the No. 10 job.

    Cameron must think that Osborne is doing the job better than others could otherwise I suspect he would sack Osborne – this the “for the Cabinet, a limited gene-pool to select from” – effect perhaps?

    I’m not sure who to assign our present problems to – To Cameron for being Cameron or to Osborne for being Osborne? or to those who elected Cameron Leader? But there again, hindsight is a wonderful thing!

  25. David John Wilson
    June 9, 2012

    Taxes need to be revised so that they maximise the economic advantage for the country by increasing exports, reducing imports, increasing employment etc. A few examples of the many would be:

    Removing VED on commercial vehicles particularly heavy lorries would give an advantage to them over foreign vehicles. If the revenue lost has to be found through fuel tax, so be it.

    Removing or reducing employers’ NI, particularly for the under 25s could increase employment and help to improve the advantage of exports over imports. This may need to be paid for by an increase in corporation tax. Even so it would help to improve cash flow which is particularly needed by small companies.

    Following the Scottish proposal for progressive stamp duty on housing could stimulate new house building.

    Removing VAT from fuel, if necessary retrieving any loss of revenue from fuel tax, would damp down the effects of international oil prices particularly on remote areas.

    Revue the large number of licences that small companies in particular retailers need to purchase. The overhead of obtaining and renewing these is excessive for small companies. Many of these only have a historic value that has been made totally redundant by the advent of supermarkets.

  26. oap
    June 9, 2012

    The figures do not match the declared strategy because the deeds were misguided. You have described the remedies. I would add to selective tax reductions the elimination of subsidies for demonstrably inefficient renewable energy schemes. There is talk of this, but where is the action?

    According to a recent article in Der Spiegel, German taxpayers now face a future tax liability in excess of 100 million euros to pay for solar energy subsidies the state has committed itself to. They did not say how much would be required for wind farm subsidies. The UK is well on the way to getting itself into a similar fix. High cost energy is a significant barrier to international competitiveness – and it adds to inflation and depresses economic activity. Unless and until this issue is dealt with, your hopes for a recovery should be deferred.

    1. oap
      June 9, 2012


      I have just rechecked the Der Spiegel article mentioned above. The reported subsidy for photovoltaics over the next twenty years exceeds 100 BILLION euros – not 100 million I wrote above

      1. lifelogic
        June 12, 2012

        Insanity they should refuse to pay as the pv installers were clearly in on this scam/fraud against tax payers. Every one knows they make no sense.

  27. Gary
    June 9, 2012

    Cut the banks loose. You will never get growth while you carry this albatross. Stop sucking taxpayers and the productive sector dry for the banks.

    Co-ops, mutuals, post offices, and private security companies would soon fill the gap.

    The govt is wedded to the city. The parties are funded by the city. That is the unwritten rule. That is killing the economy.

    In the EU, the UK, the USA and Japan it is all the same. Bank debt is drowning the economies. Stop blaming the EU for the cancer of taxpayer underwritten fractional reserve banking, the true culprit in this mess. Then we may get somewhere.

  28. Neil Craig
    June 9, 2012

    I would put your final point – cutting regulation – first. Particularly uf you include the energy industries as part of what is over regulated. The rules preventing thje production of inexpensive nuclear electricity and mandating expennsive and unreliable wind are, alone, keeping us in recession while the outside world is growing at 6%.

    When a recent report can sat yhat by 2016 the average electricity bill will bge £2,000 a year and that 55% of people will find this so unaffordable that they will have to keep their heating off even in winter it is obvious that the recession is, quite deliberately, being manipulated into something far worse. http://www.energychoices.co.uk/news/household-energy-bills-will-be-unaffordable-by-2015-300512.html We are going to see massive deliberate deaths.

    The current government is making it worse by stifling the developmeny of shale gas – a technological breakthrough to rescue our society that our political classes have done nothing to deserve and are clearly keen to suppress.

    1. uanime5
      June 9, 2012

      The main reasons there aren’t more nuclear plants is that they’re very expensive and take a long time to build. Wind turbines are much cheaper and quicker to build.

      1. APL
        June 10, 2012

        uanime5: “The main reasons there aren’t more nuclear plants is that .. ”

        No and no.

        The main reason there aren’t more nuclear plant is because we only need a certain number to provide the fraction of total energy when you include the other sources, gas, hydro, coal.

        A Coal power station is very expensive, but it gives you a known return in both energy and return on investment.

        Wind power is very expensive and thus requires huge subsidies, but only gives you energy when the wind blows – not today when the wind isn’t blowing. Or when the wind isn’t blowing too hard when the turbines have to be disengaged or shut down because they will be operating outside their design parameters.

        1. uanime5
          June 10, 2012

          I was pointing out that Neil Craig was wrong when he claimed that nuclear power plants were inexpensive.

          Also all methods of generating energy require huge subsidies.

      2. Neil Craig
        June 10, 2012

        Uni has made this claim repeatedly on previous Redwood threads. In each case je was disproven and in each case ultimately declined to produce evidence for his contention & merely moved on to the next thread to tepeat it.

        Clearly fact free assertion repeated volubly is the only form of debate the Luddites are capable of. How fortunate for them that the state broascaster gives them endless opportunity to lie and censors any honest debate from the airwaves.

  29. Denis Cooper
    June 9, 2012

    I don’t see how we can end “austerity” when we haven’t actually got any worthy of the name.

    Greece has something that can reasonably be called “austerity”, and the main task of our government must be to make sure that we don’t get it.

    Which may well involve allowing the Treasury to borrow more from the Bank of England through “quantitative easing” so that the government doesn’t run out of money, even though that will tend to push up inflation.

    When the staff at your local hospital haven’t been paid for months, and so they can’t pay their bills and are losing their homes, and the hospital can no longer buy drugs because the suppliers are demanding cash up front, and because the government had to raid the hospital budget to satisfy the demands of the troika the hospital has no cash but instead a pile of bills that it can’t pay, and when mental patients are going hungry because the institution can no longer even buy enough food for them, then those will be some of the signs of “austerity” setting in.

    1. zorro
      June 9, 2012

      Austerity is not being able to print your own money…..


      1. zorro
        June 9, 2012

        So simple but so true…..

      2. Denis Cooper
        June 9, 2012

        Rather, austerity can be greatly mitigated by being able to print your own money, for as long as you can get away with doing it. Which in the case of the Labour government only needed to mean for the year leading up to the general election.

  30. Matthew
    June 9, 2012

    Agree that the banks should be induced to lend again to worthy businesses

    I liked your plan of dividing up RBS into its component banks and the new banks going to the city for capital, it was a radical plan. We need radical action.
    UK business is being hit by banks unwillingness of banks to lend.

    Manufacturing is being held back because too much of the medium sized UK manufacturing is second rate (the middle ground is too few and not good enough) and the goods being made available are not wanted by foreign markets.
    The best and the brightest head for the city, or if they do go into manufacture, they head for BAe, or Rolls Royce – the middle ground gets the guys with 3rds and they aren’t good enough to compete with German competition.
    It’s easy really if the products were good enough we’d be exporting them. Very often we haven’t even got the products.

    Years ago Brian Walden’s Weekend World made a study of this comparing top grade engineering students from UK and German universities, where they went for employment. (you can guess the results) – and the programme predicted that UK manufacturing would keep falling behind.

    Lowering overall tax rates, in particular employers NI would help with employment and investment in the UK

    Much of UK inflation occurred because of the devaluation in the £, and VAT rise – not too sure if increasing the bank rate would help much. A lot of problems in the UK economy are down to a lack of demand. Many people have mortgages linked to the bank rate and these people would be adversely affected. The gap between interest rates and inflation will probably stay while the government deals with the deficit – default by inflation.

    It would help if the government really tackled the benefit culture and non EU immigration. In addition the public sector should be squeezed to make the savings and efficiencies that the private sector is long used to delivering.

    1. zorro
      June 9, 2012

      We need to spend to stop immigration costs, it will pay for itself several times over in less social costs…..The Coalition is of course doing the exact opposite. It should also stop wasting money on things which could be done privately or mutually.


    2. oap
      June 9, 2012

      Many mid sized businesses were wiped out, or decided to fold, years ago in the 70s and 80s. I was around at the time and witnessed it first hand.

      It will be very difficult to rebuild the equivalent industrial capacity if at all. I read the other day that Bosch was unwilling to return to the UK and build a plant to support JLR`s new engine factory in Wolverhampton; they prefer to continue to supply from Germany. Who can blame them? Right now the UK looks very unattractive for new investors in industrial capacity.

    3. uanime5
      June 9, 2012

      Unless the Government is willing to create 2.7 million jobs there’s nothing they can do to tackle the benefit culture.

      1. APL
        June 10, 2012

        uanime5: “Unless the Government is willing to create 2.7 million jobs .. ”

        What would the people doing these government jobs be doing?

        1. uanime5
          June 10, 2012

          It doesn’t matter. The point is that as long as there are more people in the UK than jobs available there will be a benefits culture and no amount of Government bullying will change this.

      2. Lindsay McDougall
        June 12, 2012

        All over Asia there are more people than there are quality jobs. They don’t have a benefits culture and people take what work is available in order not to starve.

        What you really mean is that you are determined to retain the whole of the EU/UK benefits culture and would not even be content to see the bloated total cut by 5%. Does is never occur to you that these ‘automatic stabilisers’ are one of the things stopping us from getting our fiscal deficit under control as rapidly as we should.

  31. Martin
    June 9, 2012

    Growth ? No chance as it would make a third Heathrow runway even more needed.

  32. Payguy
    June 9, 2012

    John Redwood is entirely right about the austerity crippling the economy. Cameron and Osborne owe all of us an apology and should resign. Mr Redwood is mostly wrong about tax 


    Fortunately, There is an easy fix to the economic woes caused by the Global Financial Crash. 

    My view is that It is perfectly safe to monetize the £325 billion of outstanding government debt in the Asset Purchase Facility.  There is zero/nil/none/no earthly possibility of the Bank attempting to unwind the QE until at least 2017. We know this as the government OBR forecast is of deficit spending until at least then. It will of course be impossible to cover both unwinding QE and government deficit spending. 

    Without QE the money supply is shrinking very very quickly. M4ex, M3 and narrow money are all contracting at a rate that assures economic contraction and deflation. 

    Even with £324 billion of QE and about the same level of deficit spending the money supply is still not growing at the level needed to sustain economic growth-


    Again there isn’t any possibility whatsoever of core inflation building up. Look at unemployment, wage levels, bank lending, the money supply figures. Our economy is dying – not overheating. 

    So the earliest QE can be unwound is over 8 years after the initial reserve crediting for much of the QE. Many of the gilts in the APF will have matured and be canceled automatically by then.

    Private banks not the Bank of England determine the rate of growth in the money supply. The money supply is demand rather than supply constrained.  

    If the economy has improved in 5 years time (that’s still a big if) the banks will widen the supply as much as they want or are allowed to (by contingent capital requirements). The degree to which banks widen the money supply in 5 years time will have nothing whatsoever to do with a few hundred billion pounds of reserve crediting five years in the past.

    QE will not be reversed and this will have no effect on inflation in the future. If monetizing debt was going to be inflationary it would happen now when the reserves are credited. Ie the banks would immediately lend the reserve credits out into the real economy now. They are not doing this.

    Also to note even if 5 years time policy interest rates are still at 0.5%. If we want to constrain the growth of the money supply then and choke off a recovery we can still do that by raising policy rates.

    In 2019 Basel 3 kicks in too. The tightening of liquidity requirements will also act to put a break on banks lending. As will the separation of retail and casino due to Vickers. Both halves will need to hold there own reserves.

    What is mostly happening is that governments, the media and other actors are very very badly misleading people about how the money supply works. It should be obvious to absolutely everybody by now that the government is not resource constrained and it can spend as much as it likes. Inflation concerns should constrain spending in normal times but that after a Financial crash such as 2008 when we are in a liquidity trap that there is no risk whatsoever of inflation. Even if there were the risk is only in at least 5 years time and there are many many ways to constrain the money supply that we will need to use anyway to make banks safe. 

    Somebody needs to fix this system very very badly but nobody cares about us the citizens. 

    1. zorro
      June 9, 2012

      I suspect that QE will be around £500bn by 2015.


      1. Payguy
        June 9, 2012

        I agree. It may even have to go higher until eventually all oustanding government debt has been bought up. The Bank of England really has no choice if banks, households and then private sector continue to deleverage and Osborne – the most useless Chencellor we have ever had – perpetuates a slump with his austerity.

        The Uk Money supply (see for example M4ex) is contracting rapidly as banks are not creating credit. The QE is fairly ineffective as banks trouser the credits and use it to gamble with rather than lending into the real economy. But unfortunately Osborne is insisting on a tight fiscal – loose Mobetary policy. It is utterly wrong headed and ineffective but the Vank has no control over this.

        As John Redwood indicates a tight Monetary – loose fiscal policy stance would ge much much more appropriate in the liquidity trap we are in.

        1. zorro
          June 10, 2012

          The way QE is currently being implemented is the issue. Its effective use now is to cover government deficit spending, when it could be used to improve infrastructure and other projects which will improve our economic competitiveness. It woul be nice if banks could actually get around to doing this, but capital requirements are preventing this amongst other things.


    2. David Price
      June 10, 2012

      “the government is not resource constrained and it can spend as much as it likes”

      How exactly does that work when we import the majority of our goods and resources?

  33. Local Tory
    June 9, 2012

    John, I do not blame bankers for our current problems, anymore than one might blame the politicians, the regulators or the millions of ordinary people and companies who bought things they could never afford. However, the lack of respect for debt by our entire society has provided for a credit cycle bust not just a business cycle bottoming out. This is what has been called the Return of Depression Economics and is a far more fragile state of affairs than other more recent business cycle recessions.

    In my view, the current monetary policy priority is macro-economic stability not inflation. The regulatory arguments are also potentially finely balanced e.g. if a capital lite banking balance sheet expansion was to be combined with a future eurozone economic crisis then the result could be a new banking crisis. In addition, I am not convinced that some of the structural problems in the financial system around specialisation and the separation of risk and reward – that gave rise in places to a short term outlook and the undertaking of debt practices that were in long term risky – do not still persist in places and could re-emerge if deregulated.

    Although, I do agree that the key issue is the contraction of the money supply to the real economy. I am therefore coming round to the idea that we now need a national government backed bank. In particular, for UK SME loan provision.

    I agree with Mr Krugman’s Keynesian and debt deflation analysis. However, the practical reality is that the UK at this point in time does not have the fiscal headroom to implement a fiscal stimulus on the scale required. If his advice was implemented my fear is that the UK government would be at the doors of the IMF in very short order.

    Therefore I agree with you – that the private sector will have to dig us out of this. So along with a national government backed bank for business loans, it is I agree a good idea to have some focused tax cuts to boost demand, and some incentives for the private sector e.g. subsidies to supply business and especially manufacturing with energy and perhaps water at cost, reduced business rates and some generous tax incentives for start ups.

  34. Tad Davison
    June 9, 2012

    Ok, I’ll buy that, but if it’s so obvious, why can’t those in government see the strength of that argument too?

    And equally, doesn’t that apply to all those who fly in the face of reason and common sense, and drag us ever more closely to the EU?

    Even now, with all the disaster and social deprivation, they STILL want more of it. It doesn’t make sense, but they’re going to do it anyway. Absolute madness!

    Tad Davison


  35. sm
    June 9, 2012

    What about dealing with the bad-debts and insolvent banks? Lets stop pretending (asset and speculative asset lending) , tbtf banks and fractional reserve interest bearing debt based money system is not the problem.

    Send in the bomb disposal teams, to defuse and safely explode the bad debts banks.
    Ensure private bets stay private.

    Split the banks and consider QE direct to individuals with the proviso of paying down debt first, then imposing statutory limits on debt to income ratios.

    Lets work to mange the money supply directly and control any consequential price changes above the change in money supply and productivity.

    Lets have some capitalism & competition at the top and deserved loss taking for the 1%.

    1. zorro
      June 9, 2012

      That’s a fair start.


  36. Leslie Singleton
    June 9, 2012

    I have no time for the term “austerity”. Austerity relative to what? If compare to conditions of say 10 or even 5 years ago or to present comditions in most other places in the world the concept of austerity here is laughable. Bit like the Americans saying, The Indians are coming as they do. We need much more to do what is right not what people think, admittedly difficult to do with an electorate. This government makes me cry and I am all for UKIP.

  37. lojolondon
    June 9, 2012

    John, the reason why ‘austerity’ hasn’t worked is because we haven’t been austere – the ‘bonfire of the quangos’ was a damp squib, with all but a handful escaping the knife. Public sector salaries continue ramping up at inflation-beating rates, and we are spending like there is no tomorrow – including billions lent to the IMF, world bank and Argentina amongst others.
    If action is not taken very soon, mark my words – the next election will see UKIP deny Tories several key seats, there will be a hung parliament and the LibDems will be delighted to form a coalition with Labour.
    You have been warned.

    Reply: There’s no point in threatening me – I vote for less EU and for a referendum.

    1. Tad Davison
      June 9, 2012

      My observation: The Lib Dems will be seen as solidly Europhile (If I have anything to do with it, they will) and decimated. They won’t be in coalition with anybody!

      And after this debacle, anyone who remotely resembles one, will suffer a similar fate.


    2. APL
      June 10, 2012

      lojolondon: “.. with all but a handful escaping the knife.”

      A good many of those that did get squashed were simply merged into another Quango.

      In Quangoes as with everything else about this government, there were no cuts in Quangoes.

      1. David John Wilson
        June 10, 2012

        I worked for a large Quango for ten years. During that period we had on three occasions reorganisations aimed at reducing spend and staff. For every department that was removed two new ones popped up employing the “redundant” staff plus a few more.

        Quangos are hydras that spend most of their time on self preservation and multiplication. The government hasn’ t the guts or ability to make general cuts in a civil service that has years of experience of self preservation.

      2. uanime5
        June 10, 2012

        Not only have quangos not been reduced but they’ve been increases by 384 at a cost of £48 billion to the taxpayer.

  38. forthurst
    June 9, 2012

    But who then will buy government debt and how will it pay the coupon?

    The Labour Party trashed our country in order to rub our noses in Aegean manure and bequeathed an unaffordable, uncontrollable state. Hundreds of thousands of highly qualified English people are leaving this country every year to escape the smoking embers. What is the solution? Gay marriage.

    1. forthurst
      June 9, 2012


    2. zorro
      June 9, 2012

      Cameron’s solution to the population problem? Perhaps DC thinks that it might become fashionable!


  39. Ashley Mooney
    June 9, 2012

    John – Why do you not mention energy costs. The “climagte change levy” is a serious drain on private sector spending power and business profitbility. Surely we should all agree that one immediate supply side reform would be to take off this ridiculous Kyoto hairshirt.

    Reply: I usuaully do mention enrgry costs and agree with your point.

  40. Alte Fritz
    June 9, 2012

    Regulatory issues apart, how do you compel or encourage a bank to lend on terms which borrowers can live with?

    Recent experience shows that requirements for security are too stringent for comfort, and certainly well above what is reasonable. Government cannot tell banks what security is right. Only realistic competition between lenders can do that, and, for various reasons, that will not happen.

  41. Johnny Norfolk
    June 9, 2012

    In the end they will have to accept that the only way is the Thatcher way. She would have us on the way to recovery by now or it would never have happened on her watch. The state is just far too big.

    1. Tad Davison
      June 9, 2012

      Whilst I share your sentiments, Mrs. T. was shackled by some very dubious cabinet members. Heseltine, Hurd, Howe, Clarke, etc.

      What a shame it has taken thirty years to truly appreciate their pro-EU treachery.

      The present crop is possibly worse still!

      We need John back in there, and one or two other hard-hitters to counter their influence.


  42. Mark
    June 9, 2012

    You draw attention to the apparently much stronger balance sheets of banks, bolstered by requirements to add to their capital and reduce their gearing. However, it is highly questionable whether their assets are carried at fair value. Impending losses on lending to PIIGS, and substantial risks on their mortgage books are the most obvious cases where valuations are optimistic. Recognising these positions would once again leave their balance sheets looking weak, and unable to lend.

    The idea that higher interest rates might be beneficial is more promising. Whilst there are clear potential problems with hot money flows from PIIGS that will need to be neutralised and not banked on as real long term deposits, higher rates would attract money and perhaps reverse some of the flow of wealth into commodities as better preservers of asset values than pounds with negative real rates of interest and eroding value due to inflation. Getting money out of commodities would reduce inflation, as would attracting funds from abroad via the consequent improved exchange rate in a virtuous circle. Moreover, it would reduce dependence on the wholesale interbank market. Of course, a corollary is that the subsidies presently given on mortgage rates would have to be cut back, which might start to force the issue on sorting out mortgage lending – and lead to lower house prices, making housing more affordable for almost everyone except those who invested fresh money at bubble prices.

    Since banks plainly have some way to go before they resolve their problems, it makes more sense to consider tilting the taxation economics away from favouring debt finance in preference to equity finance. Heavy reliance on debt finance distorts incentives. Banks seek to (over)-collateralise to improve their balance sheets, and then to trigger covenant breaches to consolidate that position, especially when other parts of their balance sheets are stressed. This is why businesses are reluctant to borrow from banks – and will remain reluctant until the banks become sounder, reliable counterparties. The largest businesses bypass the banks, issuing their own debt. Such options are not open to smaller businesses.

  43. S Matthews
    June 9, 2012


    You should have mentioned removing the subsidies for so-called ‘green energy’, as the effect of expensive energy is to damage competitiveness and reduce investment.

    Tim Worstalls piece is worth reading;


    1. Tad Davison
      June 9, 2012

      Yes, true, but what about the woolies?

      They’re all for green energy, and the local MP for Cambridge, the Lib Dem Julian Huppert said he’d like energy prices to be higher!

      How the hell can we ever hope to be competitive, with people and like that sitting on the government benches?


  44. James Reade
    June 9, 2012

    I guess you must have never really agreed with Central Bank Independence back in 1997, John? The main reason for that was to avoid monetary policy being politically driven, and hence the Bank should no longer pay attention to politicians telling it what to do – and quite rightly so.

    A case can just as easily made for much more QE actually, in order to help provide that cash you point out is lacking for all of those worthy projects out there currently that aren’t being funded. QE would be an alternative way to affect balance sheets of banks, rather than telling them what to do – which it seems is what you favour. That is a rather un-conservative position, it strikes me…

    Reply: I thought you read the articles I write on this site. I have made clear on several occasions that 1. Mr Brown did not make the Bank independent 2. You cannot have an independent Central bank in a democracy 3> The Bank’s so called independnece in monetary policy was compromised in several important ways.
    I am not arguing that we tell banks what to do, as you should be able to understand from my piece. I am saying that the Banking regulators should regulate in a way appropriate to the state of the cycle, something you usually wish to stress.

    1. zorro
      June 9, 2012

      I also think that QE should have been used more imaginatively to try and stimulate the economy in the absence of sensible banking policies and ridiculous capital requirements which effectively make them non lending banks and at worst banks which are demanding cash back from businesses or introducing less advantageous terms to good customers.

      This does not mean that I support QE in principle but that we live in very strange times….


    2. Mark
      June 9, 2012

      When the BoE owns 100% of the gilts, what are pension funds supposed to do? Is anyone supposed to believe that deficit spending – or indeed any spending by government – would be credible? Would the pound remain credible as a currency for international trade or even as a medium of exchange domestically?

    3. Lindsay McDougall
      June 12, 2012

      QE doesn’t create real GDP growth but just monetary demand and inflation. If you don’t accept the theory, why don’t you look at the empirical evidence? We have had interest rates at 0.5% and several doses of QE for at least 3 years. Where’s the GDP growth? It hasn’t happened. The rudder is broken.

      I’ve challenged you to name me ONE developed country that has achieved significant economic growth over a period of several years by creating inflation. The silence is deafening.

  45. Roger Farmer
    June 9, 2012

    Well John you have asked the question and provided the answers. I would only add the cloying hand of regulation emanating from Brussels in a continuous stream and the absolute failure to decimate public spending.
    With very few exceptions we have a Cabinet of sound bites never fulfilled, led by a PM who has failed to lead, followed by his vociferous deputy acting as devil’s advocate to please his imagined following. When will we get leadership.

  46. Andrew
    June 9, 2012

    Austerity can begin to be ended by, of course, sustainable economic growth.

    However where does this growth come from ?

    Where is the “New Economy” ?

    Politicians cannot second guess business in any detail at all, –and should not (otherwise they should go into business), –but at least during the years of Mrs Thatcher and your time in the Cabinet there was some general idea and agreement about where growth would come from,—IT , high tech businesses (as in the M4 Corridor) , financial services, etc .

    These days there are no predictions as to what a sustainable new direction for the economy could be.

  47. Arunas
    June 9, 2012

    I agree with the most of the analysis. However, two points I’d like corrected:
    1. The proclaimed “austerity” has turned into austerity for business, profligacy for State. How can the Chancellor talk about private sector-led recovery when is not only milking it, but cutting the meat off the bones while they’re still alive. Don’t end the austerity, turn it into austerity of the public sector for the benefit of the private sector – that’s what I voted for, that is what I am cheated out of.
    2. I am disappointed to see the reduction of regulation as an afterthought. This should be rather high on the agenda. Want higher employment? Cut minimum wage, simplify dismissal procedures, minimise liabilities of the employers.
    In addition, large proportion of workforce is not fit for any purpose. Offer them subsidised vocational courses, make jobseeker’s allowance conditional on studying a profession and successfully passing the examinations.

    1. uanime5
      June 9, 2012

      Cutting minimum wage won’t work because people will need higher levels of benefits to make up for the loss of income, thus welfare costs will go up. If you don’t provide additional benefits then spending will go down because people will have less money, this will result more businesses going bankrupt due to lack of demand. A better solution would be to increase minimum wage so people have more money to spend and need less welfare.

      Given how little money the unemployed have if you don’t offer free training expect people to join the cheapest course they can find no matter how useless it is. Also if there aren’t enough jobs available then passing vocational qualifications is pointless.

      1. Mark
        June 10, 2012

        Wrong. People who are paid minimum wage are worth that to employ. Cutting the minimum makes it possible to employ other people whose output is worth less, and thus would make a contribution to their current benefits payments, and allow the economy to expand.

  48. Tad Davison
    June 9, 2012

    I posted this elsewhere for a slightly different set of readers, but it might be…….


    Cameron says we need to reduce Britain’s structural debt, the massive amount Labour’s Gordon Brown left us through his mismanagement of the economy. No problem there, but now, we’re actually borrowing more than even Labour would have done had they won the last election.

    That can only lead to catastrophy, just as it has across the EU.

    So might that not be what Cameron and all the other pro-EU people actually want?

    We would then have to seek a bailout, and to get one approved, we’d have to join the Euro, submit to the EU’s terms and conditions, and have a stooge as our leader instead of a conniving Tory drip.

    To some, that might sound far-fetched, but at the time we joined the free-trade area know as the Common Market, so did any thought of a European federalist super-state!

    So too might the thought of armed insurrection to get our country back, but in years to come, that could be our only option.

    Tad Davison


  49. uanime5
    June 9, 2012

    Given the current problems in the Eurozone it would be unwise for the banks to relax their balance sheets now in case they suffer major losses later. Especially since Spain is asking for a bailout and Greece may crash out of the euro. Also as companies have hoarded about £70 billion and are planning to hoard more money there’s no need for the banks to lend more at this time.

    How exactly are you going to calculate the optimum rate of tax? I trust you won’t be using this as an excuse to lower all tax rates because of the Laffer Curve.

  50. BobE
    June 9, 2012

    Scrap HS2
    Scrap Trident
    Scrap the increase in Fuel Tax.
    Scrap silly windmills.
    Use UK builders to build Nuk power stations.
    Start fracking up ASAP
    Build a motorway from Dover Due West past Portsmouth join it to the A34 which should be motorwayed and run due north.
    Change the rules so that MPs must have worked in the private sector for at least 10 years before being eligable for selection.
    2 years 10 months to go boys.

    Reply: I agree with several of these points and have written about the need for cheaper energy, for gas extraction, and for lower growth rates in public spending.

  51. BobE
    June 9, 2012

    I forgot…
    Cap public sector pay to max at £100k.
    Cap public sector pensions to be £75k per annum max.
    Cap Council pay and pensions as above.

    1. zorro
      June 10, 2012

      Public sector pensions should be capped at £30k pa or G6 level. Above that, they can pay extra contributions to get extra money. Pensioners can easily get by on that.


  52. BobE
    June 9, 2012

    John, instead of ignoring my points could you please explain to me why I am wrong? Because to my simple self it seems self evident.

  53. simon
    June 9, 2012

    Forgive me if I’m wrong, and please excuse the noddy level of this comment, but the interest rate set by the Bank of England is it’s overnight lending rate to commercial banks yes?

    If it increases the cost of shortfall cover borrowing to commercial banks, does that not mean that banks will either want to do less of it, and/or increase the income due from activities that make use of it?

    Doing less shortfall borrowing means encouraging savers (by increasing saver interest rates, which is lovely, but beside the point). Encouraging savers means getting people to postpone purchases, which simply reduces demand.

    The activity that makes shortfall borrowing necessary is lending money to people and businesses. Increasing income from that means increasing the interest rates for borrowers, which makes borrowing less attractive to both supply and demand sides of the economy.

    I’m not sure what “normalise monetary policy” means, but as far as I can see, increasing the bank rate would simply reduce growth even further. And at a time when CPI is plummeting, not increasing.

    It really doesn’t seem like a good idea until we have growth, and growth led inflation, to constrain.

  54. Iain Gill
    June 9, 2012

    I despair at the political class
    I despair at the current Conservative parliamentary party
    We have clowns running the country and I am now firmly of the opinion that the Conservative party will never ever be a majority in parliament again
    The Labour crowd are just as bad
    The whole powerful clique running this country is outclassed by their equivalents in many of our competitor nations
    I think the whole thing is wide open to a few decent folk setting up in competition to the shower running the country
    I don’t think there is any outlet for the hard working decent majority in this country in the political system. So much of the current system stinks from the open doors immigration system, the anti-motorist agenda at all layers of the public sector, the truly awful abuse of our children in the care system, the shockingly low standards of the schools available to vast numbers of our children, the widespread anti-meritocracy embedded at all layers of the British system.
    Talk about own goals, I firmly believe the police inspection regime should be led by folk who have pounded the beat, Yes the police need reform but they sure don’t need the useless armed services like officer class (which is a downright joke in many branches of the services these days, speaking as someone who has seen it up close and personal in action a lot recently). Pasty tax? What kind of idiot put that forward? Taking my family allowance away while I am expected to contribute via tax to the Indian middle classes and their space programmes?
    George Osborne complaining about the standard of facilities made available to his family at the jubilee celebrations? Come on do me a favour. He deserves kicking out of office for life for that if nothing else.
    I don’t know how this is going to blow up, but blow up it will. All of the main stream parties are treating the vast majority of the tax payers in this country as idiots, talking down to us and telling us how great immigration is. Being tame with the useless NHS that won’t even allow us to swap GP when even the NHS own website lists our GP as the worst in the county, and allowing these useless GP’s to continue to do very well in a career of failure.
    Shame as I am convinced the answers could easily be sketched on the back of a napkin and implemented in a few weeks.
    Power to the people, in a very real sense this is the only way forwards.
    Austerity? Clueless rhetoric like much else of the main parties policies.

  55. AJAX
    June 9, 2012

    This “LIGHTEN THE SHIP” call to throw over dead weight amidst the storm couldn’t have anything to do with the opinion polls by any chance could it??

    Even if it does, anything that stops Bernanke’s now failed & stale voodoo economic experiment of propping up failure by wrecking the value of currencies in a vain attempt to inflate debt away, abandoning the principles of sound money management & wrecking savings’ capital year after year with interest rates at 0%, regardless of the effect this is creating on investment regeneration that comes from this source, is welcome

  56. Richard Lewy
    June 9, 2012

    Dear John,
    QE, as practiced in the UK, has succeeded admirably. At its introduction the necessary liquidity was injected into the market. It mitigated stress in asset markets generally and helped pre-empt a likely dramatic shortfall in aggregate demand.
    By most accounts it worked well.
    It is not possible to quantify the effect with any precision because we cannot know for sure what might have been. But it is clear from lower gilt yields, a contraction of credit spreads and a fall in measures of asset market stress generally, that QE played a very positive role in reducing market stress and in preventing transmission of risk to the real economy.
    QE is, and remains, an effective tool to pre-empt the risk of deflation following asset market seizure.
    However, many politicians and the financial press all too frequently confuse this role. They appear to promote QE as a neo Keynesian growth strategy to combat the cycle.
    QE is not a particularly good anti-cyclical tool; there are much better fiscal tools. As the political debate of ‘growth’ versus ‘austerity’ has taken centre stage, however, the ‘old’ central banking view of QE is increasingly being replaced by the ‘new’ politicised view.
    Some have argued that the effectiveness of QE has diminished with successive waves. This perception often reflects the fact that QE is increasingly and improperly being judged against its ‘new’ politicised anti-cyclical role. Yet neither the Bank of England, nor the government, make the case that QE should be put back into the ‘old’ correct tool box.
    QE was originally conceived to pre-empt a potentially catastrophic and deflationary shortfall in demand. But in the UK today there is no immediate risk of catastrophic demand shortfall, at least as judged by most measures of asset market stress. Consumer spending is back nearly to where it was before the great recession. The problem is elsewhere. It is a problem of declining corporate investment. The expenditure shortfall is from corporate investment where companies are often failing to invest even enough to offset depreciation. This is why the employment figures remain so dire.
    QE has forced down the cost of sovereign debt and, indirectly, corporate debt, too. This should have been good news for companies that seek finance as funding should be getting cheaper. Yet the cost of capital for companies is not falling, it is increasing. You can see this from the equity risk premium which has risen to historic levels and also in the ‘cheapness’ of market PE multiples and the high price companies must consequently pay in forward earnings to maintain share prices. Some dismiss this as an anomaly resulting from distortions in gilt pricing by QE but, whatever the reason, why should companies invest in new projects when the incremental return no longer exceeds the cost of capital by a reasonable margin?
    Give or take, the cost of equity capital in the UK is around 10% as measured by the forward earnings/price multiple. This is far too high for a no growth economy. One might argue about the best way to measure the cost of corporate equity but whatever the method, the marginal return on capital for many new projects requiring capital investment in the UK today is very likely to be lower than the cost of capital particularly after tax.
    I am not suggesting that QE is the main cause here only that it is exacerbating the problem .QE has emptied many portfolios of risk free assets and forced the substitution of higher risk bonds thus increasing fixed income portfolio volatility and reducing portfolios’ risk tolerance for equities. PE multiples continue to compress, further raising the cost of equity.
    We must think about how to reduce the cost of capital for UK companies. Nothing else will stimulate investment and nothing else will alleviate unemployment and the growth shortfall. Getting to grips with the banks, the tax burden, red tape, employment rules, and the EU will all obviously help to reduce the cost of equity, as PE multiples respond, but we also need to think about the role of QE.
    In the US QE has worked particularly well in the mortgage market as well as the treasury market. There is no parallel extension in the UK. The Bank of England, understandably perhaps, does not wish to take credit risk with corporate securities and the result has been that QE has been conducted more or less exclusively with the banking sector. Money supply growth here has not responded to anything like the same extent as in the US where purchases from non bank institutions suffer few leakages. Banks here too often suffer high money expansion leakages when they sell gilts and place the proceeds on reserve at the Bank of England.
    The Bank of England and the government have not made the case that QE should be put back into its proper tool box. QE will therefore be increasingly seen in its new politicised anti cyclical role. It will no doubt be as difficult to prevent this as it was to prevent government spending growing on a trend basis after Keynes became mainstream. In any event market riots are likely to force the Bank’s hand.
    If QE is not put back into its proper box it will, perversely, be necessary to expand it even further. I would suggest that it will be necessary for the Bank to expand QE beyond the gilt market. It is becoming too difficult to prise the remaining gilts away from banks, and banks in any event are increasingly placing the proceeds as reserves with the Bank with little impact on money creation.
    The Bank of England needs to expand the program into other asset classes. It may not be politically correct at this juncture but in the UK equities are the natural choice. The purchase of equities will force down the cost of equity for UK companies and stimulate the corporate investment so desperately needed.
    As the program would be conducted primarily with non banks, far greater monetary stimulus will be generated through money expansion and asset substitution for each pound spent as proceeds will not be capable of being switched by non banks into central bank reserves.
    As the economy recovers through greater investment the stock of bonds and equities should be gradually sold back to the market.
    Reply: I agree with some of your analysis but not your conclusions. Surely the reason QE does not transmit into more investment is a mixture of the restraints on the banks who cannot increase lending, and the lack of demand from a very squeezed private sector. We need therefore to address those issues, rather than the price of shares.

    1. zorro
      June 10, 2012

      The restraint on banks is the key issue with regards to lending. But is this going to change? In which case, more QE innovation will be needed.


    2. Mark
      June 10, 2012

      It is the unfavourable tax treatment of equity that makes debt the preferred means of finance.

      You point up the TARP funding for mortgages in the US. A corollary is that house pries have been allowed to fall there. It really would be pointless if we failed to sort out our property bubble, because that undermines the trustworthiness of property as collateral.

    3. Richard Lewy
      June 11, 2012

      Certainly it is necessary to address the restraints on banks and the lack of demand in the squeezed private sector. The government is working on the first and inflation on the second. But I do not see how progress there might deal with the serious shortfall in investment while the cost of capital remains so high in relation to potential returns. It is here that we need to think carefully about the role of equities in QE.
      At the outset of QE, investment responded exactly as hoped. Execution through the gilts market succeeded in calming market stress and stabilising asset prices and so helped prevent the economy from falling off a ‘demand’ cliff. QE worked to pre-empt a potential crack in demand that might have thrown the economy into a violent downspin. Investment responded indirectly, but in the same positive way, by not following demand down the same cliff.
      But QE has moved on since then. We now think of QE more as a countercyclical policy tool. It is no longer mainly about insuring against a catastrophic event. It is now about maintaining consumer expenditure.
      This change is more important than it seems. QE objectives have moved on from insuring against a potential catastrophic crack in demand to one of stimulating actual demand.
      QE, as currently operated through the gilts market in the UK, focusses on stimulating demand mainly through consumption. It does not directly address the supply side i.e. investment. Failure to revive investment is likely to exacerbate dismal growth and in this environment conventional monetary policy is likely to continue to have difficulty gaining traction. Economic shocks will continue to carry real and serious deflationary risks.
      Whether we like it or not QE will continue to be the primary tool in the monetary tool box for so long as this uncomfortable economic environment persists because it is the best tool we have to deal with deflationary risks
      It is not difficult to imagine where new economic shocks might come from. As QE is brought more frequently into play as a countercyclical tool it will inevitably become progressively less effective as the private stock of gilts diminishes, as gilts become more difficult to prise away from banks and as monetary stimulus through banks leaks away into reserves at the Bank of England.
      With the passage of time markets are naturally become increasingly cynical about the effectiveness of QE for these reasons.
      Without any revival in private investment it is quite hard to see how the economy might break out of its no growth predicament. While these macro economic risks loom large, financial markets are likely to continue to be characterised by high equity risk premiums and high costs of equity capital. High investment hurdle rates are likely to inhibit investment expenditure and reinforce the negative feedback loop.
      A proposal to buy shares is no more unconventional than gilts in monetary policy terms . The potential power of unconventional monetary policy has already been demonstrated and I am not proposing a radical departure from the present QE orthodoxy, just a simple extension of the asset classes through which it operates.
      QE through the equities market wouldl renew the market’s enthusiasm for unconventional monetary policy, reduce leakages to central bank reserves and, stimulate investment by forcing down the cost of equity capital to normal levels .It will provide greater stimulus for each pound spent and significantly help rebalance stimulus towards investment and away from consumption.
      Perhaps more important,when we inevitably face the next macro economic shock, the toolbox would then contain one tool at least which hadn’t broken. QE, through the gilts market, may be reaching the point of marginal effectiveness as a countercyclical tool but this should not encourage us to throw away our insurance policies.

  57. Christopher Ekstrom
    June 9, 2012

    All the gentle requests JR suggests are ever so modest. Yet the “society” that has come to exist in the UK probably would construe the above mentioned as some sort of return to mid-Victorian hell.

    It makes radicals like me & the UKIP warsi-“racist” Brigade feel more Right in every sense of that word!!!

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