Rebalancing the economy


             Yesterday I explained why you need increased consumption to sustain growth and to  generate the need for investment. I pointed out that exports are not morally potent or special as a type of output. They just add to output and jobs as does supplying the domestic market. You need to export enough only in order to pay for the things you  import that you think are better made abroad. If you are unable to export enough to cover your bills in the longer term, then you need to make more of what you want at home.  Rebalancing in favour of more exports and more investment may be a good idea, but it can only happen if there is enough consumption demand at home and abroad. Nor can it happen if people are unable to borrow sensible sums of money to buy homes, cars, and other large ticket items.

            Today I want to look at why the state, just like individuals and companies, has to accept there are limits to how much it can borrow. My critics here have tried to argue I want there to be another consumer boom and property bubble based on excess borrowing by the private sector. No I do not. I do, however, want there to be sensible amounts of credit so people wanting to buy homes can borrow on mortgage, and companies wishing to expand can add prudently  to their loan capital. My critics should also understand that household wealth is now standing at over £7 trillion. The value of our homes net of our mortgages is £3 trillion, and the value of our pensions, insurance savings and the rest is £4 trillion. It may be perfectly prudent to borrow a bit against this big asset base.

           The issue is how easily in future will the state – or an individual or company – be able to pay the interest on the debt and meet the repayment schedules?  At extremes I would hope those who favour never ending debt fuelled state expansion will see the same rules apply to a government as to a company or person. If the state borrows too much, interest charges take up too large a proportion of the tax revenue of the country, and the state is no longer able to provide the services it wishes to offer.

                Once lenders to the state start to doubt its ability to pay the interest, so they force the  state to pay higher rates to borrow more. The state can lose its ability to borrow seemingly limitless sums to meet its desires and needs. This has been very obvious in the case of the crippled sovereigns of Euroland, where Greece, Ireland, Portugal and Cyprus have all found it impossible to borrow on the markets to sustain their spending and meet their obligations. They have been forced into special loans by the international community requiring deep cuts in spending. The same has happened in living memory with some latin American countries, led by Argentina, where they reach the point that they cannot sustain their debts and have far worse austerity forced on them than would have kept them out of trouble in the first place. Indeed, the 1970s Labour government got to the point where it had to pay more than 15% to borrow money from the bond market, around the time it was forced into spending cuts by the IMF. A state cannot carry on borrowing when the interest bill spirals out of control.

             It is true the combined powers to tax and to print which sovereign governments enjoy and individuals do not, give a state more leeway before the crisis hits. It does not, however, prevent a crisis in the case of states which borrow excessively for long periods. The UK has been borrowing far too much. The total build up of state debts and liabilities, often catalogued here, had gone too far by 2010 and did need correcting. Correction is taking  time, but the deficit is now falling  and in due course state debt as a proportion of output will start to fall. That is a necessary adjustment that has to be the fundamental concern in rebalancing the economy. If we do not do that we do just fuel an unsustainable debt burden for future taxpayers.  Borrowing is not free money. It is deferred tax.



  1. arschloch
    December 21, 2013

    One of your colleagues pointed out the other day that it will not be too long before HMG is spending more on servicing its debts than it will spend on defence and education combined. That is with the benefit of the almost Zimbabwean situation, where one part of the state, the Bank of England, simply creates money out of thin air to “lend” to HMG and unlike any other normal lender/borrower relationship, the BoE then gives back the interest it has received to HMG. No politician I am aware of has a sound rational plan for getting us out of this mess, all they are interested in is in being in power for powers sake and they hope that something will eventually turn up. It will not not surprise me when then the whole economy collapses rather than continue to “rebalance” itself.

    1. Denis Cooper
      December 21, 2013

      “… where one part of the state, the Bank of England, simply creates money out of thin air to “lend” to HMG and unlike any other normal lender/borrower relationship, the BoE then gives back the interest it has received to HMG.”

      It’s now nearly five years since Brown and Darling introduced this device to ensure that the Labour government wouldn’t run out of money without having to make drastic cuts to its public spending during the year before the election, proceeding stepwise from first getting the Bank to set up the Asset Purchase Facility to buy up private sector assets using money lent by the Treasury to having it buy up gilts previously issued by the Treasury using new money created by the Bank.

      And yet I doubt that one voter in ten really understands it even now, and I’m not sure which is the biggest disgrace to our democracy – the politicians of all parties who chose not to explain the truth of what was being done, or the mass media who compliantly assisted the politicians in misleading the public.

      I am quite sure that the Tories allowed themselves to be totally wrong-footed by it, having spent so many years reassuring themselves and gloomily warning anyone who would listen that eventually every Labour government runs out of money, but then not knowing quite what to say when that was about to happen but the Labour government cleverly solved the problem by getting the Bank to print more money for it to spend, £198 billion in total, more than enough to cover its needs.

      There was the abject surrender over the Lisbon Treaty, and there were many other things that knocked back Tory support, but in my view the biggest single factor was Osborne’s failure to properly explain to the electorate the dangerous state of the government’s finances and expose the truth about the “quantitative easing” device Labour had adopted to tide itself over to the general election.

      1. alan jutson
        December 21, 2013


        Absolutely agree with your last paragraph, and probably the single most important reason why Cameron did not win outright.

        1. Hope
          December 22, 2013

          In 2010 Osborne derided Brown for a property boom and bust, today he is creating one, Old Labour or New Labour there is not any difference. Dennis is right, but let us be clear the civil servants at the Treasury are steering Osborne and telling him what to do not the other way around. For them a different cheek of the same a..e, but carry on as before. He is only part-time in the Treasury and preferred to go on a jolly in the president’s plane than sort out the economy.

          He has failed as a political strategist because the Tory numbers have halved, he has failed on all the economic measures he asked us to judge him by.

          A few years ago we were told that Liam Fox had said there were no plans for an EU army. It is now clear there were/are plans and it appears a fake veto will be made if there is. This does not add up. Why did Cameron sign up with the French if he wanted the UK to maintain its independent national security? We have NATO. Why ask the French for planes and sell off jump jets to the US for a fraction of the cost? I believe the EU army is being created by stealth despite fake denials by Cameron. We heard his fake warnings before over the Lisbon Treaty.

          The EU project will continue despite destitution, loss of business, loss of nation states, vast sums of money wasted. These fanatics have stolen from Cypriot citizens, government coups in Italy and Greece and the UK continues to support and finance this unelected body of people, and yet not a murmur from Cameron. The slightest opportunity for regime change (thousands killed and maimed) and a war is created in the middle east which is none of this country’s business. Germany wants to rule Europe by its finance through the EU and it will do so.

      2. oldtimer
        December 21, 2013

        I think this is correct, but I suspect were “wrong footed” as you put it by dire warnings of a complete banking collapse. It happened as I recall over the weekend before the Conservative party conference.

        Our national problems are compounded by an utterly stupid energy policy which will set this country back by a decade or more.

      3. Arschloch
        December 21, 2013

        There was no oversight by Osborne he has nothing different to offer than Balls and Co. In fact looking at the recent strength of the pound he is going to have print a whole lot more. What you have to remember is that politicians thrive with a base of “low information” voters and that is why the ordinary working man so often gets taken for a ride.

        As an aside it’s interesting to see in the “Guardian”this morning that the NHS is spending the taxpayers money prudently. There is an advert for a job with something called the National Joint Regulatory Steering Committee. However before you all rush to apply (and it’s unpaid by the way) the recruitment criteria is that you must be a CEO or a board level director in a NHS trust. Well if that is the case why was it not advertised in house instead of paying the “Guardian” a load of dosh instead?

      4. zorro
        December 21, 2013

        As I am sure that you are aware, it was no mistake. It was clear that this government when in power would continue this policy. They had said that they would match Labour spending in previous years (proceeds of growth etc etc). It will be interesting to see if any more QE is considered necessary before 2015….


        1. miami.mode
          December 21, 2013


          It will be more interesting when they come to “unwind” QE.

          If the US “monetise” i.e. turn Monopoly money into real money, their QE then doubtless the UK will follow.

      5. Tad Davison
        December 21, 2013

        Another good post Denis.

        I despair of both politicians AND ill-informed voters. I’d bet my shirt that most of the latter (and maybe even some of the former!) couldn’t even tell us who Osborne is let alone say how the economy works. Some are even telling me that all our problems are now over, and that domestic debt and that in the Eurozone is no longer a problem, so everyone is once again free to borrow and spend. I just put my head in my hands. Who the hell feeds them this guff?

        I am forever trawling lots of news channels to try to get the inside story, and build up a mosaic of information in order to see the bigger picture, but the worst culprits for a lack of proper news, has to be the cheap-jack tabloids and the good old BBC. One of which I would never buy, and the other I am forced to buy, despite not wanting to.

        The information highway has too many blockages for our collective good. We won’t make progress and have a fully-informed public who cannot be duped, until the conduit is totally unrestricted. Our national broadcaster must do better, but frankly, it’s pathetic and failing us badly.


        1. Hoped
          December 23, 2013

          Well said Tad. You cannot rely on the MSM or an insight to what is actually going on. A careful read of a variety of opinion gives a better balance. However, the Tories will want people to think things are better for their elections chances to improve. People have made their minds up that Cameron does not keep his word, whether that be through UTurns, broken promises or false excuses.

    2. Ralph Musgrave
      December 21, 2013

      The idea that our interest bill is anywhere near the combined total of defence and education spending is complete nonsense: the REAL or INFLATION ADJUSTED rate of interest on our debt is zero (or maybe even negative).

      1. Mark
        December 22, 2013

        By implication our spending on education and defence is imaginary.

        We don’t really know what the real interest rate on our debt is until it is sold, rather than held as a shelf issue by the BoE.

  2. lifelogic
    December 21, 2013

    Government borrowing is indeed deferred tax as you quite rightly say and the Coalition are expected to borrow about £120Billion PA (or £2000 per person). This to add to all the 299+ tax increases Cameron has already given us so far.

    On top of this we have a current account deficit of 5.1% of GDP, the biggest since 1989. Cameron needs to start to cut the endless government waste, un-rat on his £1M IHT promise, cancel HS2 and all the green crap and halve the size of the (largely parasitic and incompetent) state sector now. Until he does his absurd claims to be a tax cutter at heart are just as laughable as his two faced stand on the EU.

    The state sector is spending nearly 50% of GDP but delivering fairly appalling so called “public services” in general, a dis-functional, rationed NHS (which even treats cancer patients in the wrong order just to fiddle the figures), 17 agencies including the police that can do nothing about the repeated rape of minors, government department like HMRC that cannot even answer the phone and usually have not a clue when they do.

    Also often delivering things that are purely negative in their actual effects, such as wind farms, PV, biofuels, absurdly complex and daft regulations and tax rules and the absurd HS2 and payments to augment the feckless and keep them in that state.

    Rather than borrowing against our personal pension assets (of £4trillion) we should be legally permitted to access them directly far more easily – for certain uses such as business investment or even personal borrowing so as to cut out the middle men the high margin rip off bankers. £4 Trillion is only £60,000 per person or a pension of perhaps £2,400 PA before tax. Property values of £3 Trillion represents only about £150k per house, so these assets will not go very far.

    Will someone finally give Cameron a working Compass and a kick in the right direction?

    1. lifelogic
      December 21, 2013

      Sorry correction – property values of £3 Trillion represents less just £120k per household. It is also very heavily concentrated in the hands of rather few people, the Duke of Westminster and landlords, mainly ones owning property (or properties) not too far from Harrods.

      You say:- “I pointed out that exports are not morally potent or special as a type of output. They just add to output and jobs as does supplying the domestic market.”

      True, but we do need to import energy and very many other products/materials that we no longer make/extract, and now with a huge current account deficit of 5.1% of GDP we do have rather a problem to address.

  3. Anonymous
    December 21, 2013

    “The value of our homes net of our mortgages is £3 trillion.”

    This is taken from the prices of the small amount of houses being sold and by projecting that value across the entire housing stock. The same mistake as last time. What would happen if we tried to realise £3 trillion from the housing market to pay down debts today ?

    We have, effectively, caused a rise in house prices in London (and an influx of foreign money) by opening up our housing stock to global trading. This has rendered many of our young homeless, or to becoming renter serfs.

    Energy, water, transport, homes. What do we sell off next then ?

    We do not have enough funding for pensions regardless of what amount is in those funds – this is the main reason for mass immigration, we are told. Ought we to be borrowing against those too ?

    Sorry to be negative.

    We really need manufacturing but there is a looming energy crisis and our government proposes to pay factory owners to turn their lights off.

    The smoke and mirrors will be pointless. They can’t be seen in the dark.

    1. lifelogic
      December 21, 2013

      There is little difference between a renter surf and a mortgage surf. One borrows money, the other borrows a property. The renter has more flexibility, need less outlay and does not have to pay for repairs and takes less risk, gets better state benefits for rent help and does not have to pay perhaps 25K in stamp duty, land registry fees, valuations and legal costs.

      1. Max Dunbar
        December 21, 2013

        Even if you are no longer a renter or a mortgage serf and you own the property outright you are still a sitting duck at the mercy of government legislation and market forces which are outwith your control. Changes to rules and politically motivated restrictions can ruin the value of your home or investment . It takes a long time and an expensive and lengthy process to sell a property and realise the asset value. Added to that is the volatile nature of the market and the fact that property worth has, in the recent past, proved to be illusory.

  4. Brian Tomkinson
    December 21, 2013

    You say you don’t “want there to be another consumer boom and property bubble based on excess borrowing by the private sector.” How, then, do you answer S&P who are quoted in the Telegraph thus: “We see risks to the sustainability of any UK recovery based on net lending growth and property inflation, given that UK household debt and house-price-to-income ratios remain higher than in many advanced economy peers” ? Interest rates have been held down for years and those with loans have had the benefit of those low rates. Savers have correspondingly seen their income and value of savings reduce year on year. You now want more consumption based on even more borrowing: ” It may be perfectly prudent to borrow a bit against this big asset base.” That may be true in certain cases but cannot be regarded as universal. One reason why interest rates are still held down is the fear of default by borrowers. Just how encouraging even more debt solves that problem is a mystery to me. Perhaps you think your government, like the last, has put an end to boom and bust.
    As for government debt your Chancellor is still borrowing to overspend by £2bn a week. Interest charges are around £50bn per annum and heading for £60bn. As much as you would like us to believe that Osborne has done a good job many of us think differently. You may regard comparisons to Gordon Brown as silly but I regard them as frighteningly apposite.

  5. alan jutson
    December 21, 2013

    “Borrowing is not free money, it is deferred tax”

    Never a truer word.

    So why do so many MP’s vote for such policies. ?

    Why do so many Chancellors always reduce our disposable income, the very thing that would drive growth through individual demand.

    1. lifelogic
      December 21, 2013

      So why do so many MP’s vote for such policies. ? Same reason they vote for 299+ new tax increases under Cameron. They just like wasting other people’s money.

      1. bigneil
        December 21, 2013

        you forgot to add – – -while filling in claims for moats – -and electricity for stables

        Personally I think “MPs ” and “connected to reality” – should never be in the same sentence. – – after 45 years of work – retired early due to injury – -I qualify for nothing – -yet the likes of a certain hate preacher and loads of foreigners (words left out ed) who are about to land – -can all get benefits – -FOR CONTRIBUTING NOTHING

        AND MR DUNCAN SMITH SAYS HIS SYSTEM IS FAIR – -BUT DIDNT EVEN BOTHER TO REPLY – -I will assume freeloaders and fanatics are more equal than an Englishman who has contributed for 45 years.

        1. alan jutson
          December 23, 2013


          Your thoughts are shared by many.

          A self employed work collegue a few years ago hit hard times due to a Company he did work for going bust, leaving him thousands in debt, he went to the Council for the first time in his life, to ask them for help in paying his rent for a while whilst he tried to get back on his feet.
          He was refused any help (he had no dependent children) and eventually lost his home, became homeless, they still said they could not/would not help.

          Had worked all of his life, paid all of his taxes, and even served in the Royal Air force for 7 years.

          Really does make you wonder, is it all really worth it, when others seem to walk in and get help immediately.

  6. JoeSoap
    December 21, 2013

    The problem with your analysis is that private borrowing is already far too tilted in favour of consumption in the form of tat from the Far East and houses in the South East, instead of investment in business and infrastructure. We end up as before with excessive private and government debt, instead of a Sovereign Wealth Fund and decent personal pensions, on the back of returns from business investment. You just seem to encourage the racket to continue, viz. government issuing banks with 0.5% money, passed on at double digit % s to “consumers”, with repayments feeding banks, China and asset bubbles.

    Why not encourage the UK to stand on its own 2 feet, by allowing pensions to invest in infrastructure bonds at a real rate of interest, and encouraging business by releasing it from the tax and regulation shackles, leading to more business investment?
    Why do we always have to be in hock to the banks?
    Reply Not what the figures show – our collective investments in business and financial assets well exceed our housing, mainly via pension funds.

    1. A different Simon
      December 21, 2013

      Joesoap ,

      Rather than assume the risk of capex overruns for the new nuclear power station in Bristol , the current Govt assumed the risk of electricity prices coming down in the medium term by guaranteeing the operators high prices decades into the future .

      Seems to me that the taxpayer is going to pay for any capex overruns several times over yet is precluded from i) any potential upside ii) reductions in prices of electricity in the future .

      Think we need a funded state pension for this and provision of social housing . With proper trustees and out of reach of the Govt of the day .

      1. backofanenvelope
        December 21, 2013

        Nothing is out of reach of the government!

    2. lifelogic
      December 21, 2013

      To reply “our collective investments in business and financial assets well exceed our housing, mainly via pension funds.”

      Hopefully (for the investors) this is mainly invested overseas where they often have far more business friendly regimes and lower tax rates than the hugely over taxed/over regulated UK. We could not get far more of it invested in the UK with a sensible change of government direction.

    3. Mark
      December 22, 2013

      I checked out the latest ONS National Balance Sheet here:

      Table B shows the changes over the course of 2012, and reveals the dominance of rising house prices and assumed pension assets (“insurance technical reserves”) in increasing apparent national net worth. Meanwhile, assets in the productive economy were static.

  7. Denis Cooper
    December 21, 2013

    “It is true the combined powers to tax and to print which sovereign governments enjoy and individuals do not, give a state more leeway before the crisis hits.”

    This is attributed to Gladstone, speaking in the Commons in 1891:

    “The finance of the country is ultimately associated with the liberties of the country. It is a powerful leverage by which the English liberty has been gradually acquired. If the House of Commons by any possibility loses the power of control of the grants of public money, depend upon it, your very liberty will be worth very little in comparison.”

    It is clear enough that MPs still have most of the power of control over public spending that they had in 1891, and they still have most of the power of control over taxation that they had in 1891 – one can no longer say complete control in either case, when the EU budget is determined by qualified majority voting and VAT is under the control of the EU – but where is MPs’ power of control over the government inducing the Bank of England to print more money for it to spend?

    The Chancellor sends a letter to authorise the Governor to create more money and use it to buy up gilts, bonds issued by the Treasury, like this last one sent by Osborne on July 5th 2012:

    “I am therefore writing to authorise an increase in the ceiling on asset purchases financed by the issuance of central bank reserves from £325 billion to up to £375 billion.”

    And once again I suggest that MPs should wake up to their responsibilities and insist that before any Chancellor does that he must lay a draft of his letter before the House for their approval through a formal vote after a proper debate.

    Reply We have that power. As I have explained before, only a handful of MPs disagreed with the money printing so there was no vote. Had the Opposition wished to divide the House on this there would have been means to do so.

    1. Denis Cooper
      December 21, 2013

      Well, MPs have collectively allowed two Chancellors of two different parties to set the precedent that the Chancellor can authorise the creation of large sums of new money without first asking for their approval, even if it was through a motion that passed without the need for a division. So what will happen if/when a Chancellor feels the need for another tranche, given that MPs have not raised any objection to that way of proceeding? Obviously the Chancellor will once again send his letter of authorisation and tell MPs afterwards, the now established procedure.

      And is it even a strictly legal way of proceeding?

      Given that the creation of new money is quintessentially a matter of monetary policy, and Section 10 of the Bank of England Act 1998 expressly removed the power of the Treasury to give the Bank directions in relation to monetary policy unless Parliament has agreed to the activation of reserve powers under Section 19, which has never happened?

      Reply Sometimes you should allow me to explain how Parliament works. On this matter which is not governed by EU law the opposition at any time can table a motion to condemn, censure or reverse the QE process. It is more difficult for a group of MPs who are not the official opposition, but they too might be able to do it if they can show the Speaker there is enough support in the House for such a proposal.

      1. Denis Cooper
        December 22, 2013

        I would say that in this instance it is not how Parliament works but how it is not working; we elect 650 MPs supposedly to exercise democratic control over the government, but very few if any of them question the right of the Chancellor to arrange for the creation of vast sums of new money simply by executive decree without their express approval, and nor does there seem to be any concern among MPs about the questionable legality of this way of proceeding under Parliament’s own Bank of England Act 1998.

  8. A different Simon
    December 21, 2013

    “Once lenders to the state start to doubt its ability to pay the interest, so they force the state to pay higher rates to borrow more. ”

    In other words , predatory lending .

    Isn’t that the whole point of the IMF , the BIS and central banks …. to keep the population of the world in debt peonage ?

    Here in the UK we never thought it would happen to us .

    We are not going to find the answer looking in the rear view mirror .

    We need leaders who are prepared to contemplate new ideas like they did in Iceland .

    Fix the system so that events can’t repeat themselves and then soft default on the debt by printing .

  9. Edward.
    December 21, 2013

    “Borrowing is not free money. It is deferred tax.”

    Well said.

    So why aren’t you really affecting to cut borrowing?

    Supply side reforms boost the economy and would indubitably aid the rebalancing of the economy.

    SME’s snowed under with Red tape and myriad layered bureaucracy; equality and diversity regulation, business rates, energy, fuel taxes all add costs – is there any chance of doing something about these – nope thought not.

    Vince Cable needs to go.

    And while we’re at it:

    How about getting rid of a few quangos, hundreds of thousands more civil servants and bring down the enormous public sector pensions liabilty – there’s never any mention of that John – it’s always ‘off the books’.

    Welfare – it’s too much.

    Build a few more houses but shut the gates.

    Reply I have often recommended cuts to overall spending, including to public sector pension accruals.

    1. Bazman
      December 21, 2013

      Whos fault is the need for all this welfare? The recipients or the state? How can a person live on next to nothing here and why should they in one of the richest countries in the world? Because they are undeserving poor by default?

      1. bigneil
        December 21, 2013

        totally totally agree – -there should be no poor – yet £53m a day given away to the EU – millions more given in “aid” to countries with space programs- – -yet we here nothing but cutbacks – and all the people coming here – -what happens when they get to state pension age – -do the govt import another countryload of people to our once beautiful island??

        -I fear instead of – -“will the last person switch off the lights” – – -more – -“when the last blade of grass disappears under the concrete”

        glad I am nearer the end of my life – feel sorry for the young – -unless they can get out of this MP created hell hole.

      2. A different Simon
        December 21, 2013

        Baz ,

        I’m in 100% agreement with you .

        From what I can see LibLabCon amounts to more of the same and UKIP has become a shambols but still looks like the best real alternative around .

        Who do you suggest I vote for ?

  10. Atlas
    December 21, 2013

    We could start by keeping the lights on and the factories in electrical power. If this fundamental is not achieved then everything else is futile.

  11. Neil Craig
    December 21, 2013

    I’m afraid all this debt financing and other financial stuff, useful as it is in its place, is no substitute for productivity. If you want a consumer boom based on imports you have, in the medium term, to be able to produce more exports (including services) or the £ collapses.

    To increase production we need cheap energy and market freedom. No party but UKIP is not actively opposed to cheap energy and all are a bit dodgy on market freedom too, though I grant the Tories are less dodgy on that.

  12. Tad Davison
    December 21, 2013

    I’ll keep my comments short today and merely refer everyone to last night’s Newsnight on BBC 2. They carried an equally short piece on the economy that is worth seeing (note that I am not giving my own view one way or another). A number of economists and political commentators gave their take on the present financial situation, and could have a bearing on today’s debate.


  13. Richard1
    December 21, 2013

    I agree we should welcome the growth and that its good news the defecit is falling. Hopefully we will eventually reach the point where debt can be reduced. The concern some have is the extent to which artificial borrowing costs are distorting the market, leading to spending and investment decisions which wouldn’t be made if market interest rates prevailed.

  14. behindthefrogs
    December 21, 2013

    We need to realize that money spent within the country is just circulating and will later be spent on some other service or product. It is money spent on imports or taken out of the country by foreign owners that is the real problem. Unless this is balanced by exports or money earnt abroad the country and everyone in it eventually loses out and becomes poorer.

    It is thus essential that we reduce the number of companies being purchased by foreign owners and increase the UK ownership of foreign companies. We also need to reduce imports and increase exports. Firstly this should be done by positive action to encourage import replacement. Secondly we need to make our exports more competitive. Decreasing employers’ NI contributions would be one major step for both of these as well as encouraging fuller employment. Similarly identifying food imports that could be produced at home and ensuring grants are directed towards increasing competitive production will help.

  15. PayDirt
    December 21, 2013

    Dennis Cooper rightly doubts that one in ten voters understands basic economics. Our politicians and the media continue to ignore what socialist Governments around the world are doing with their citizen’s property and our means of creating real value. You say household wealth stands at £7 trillion. Come again, how is that real value? It’s just the devaluation of pounds. The insidious fact is that printing money is a form of confiscation by the state. It’s only possible merit is that it helps avoid a monetary collapse at a time of crisis and so avoid chaos. But the chaos is surely coming when the little people realise their declining wealth and increasing poverty.

    1. Leslie Singleton
      December 21, 2013

      Paydirt–I am one of the one in ten for I rarely understand and even more rarely agree with a lot that is labelled “Economics”. In particular today (I have written before on this with John replying that it didn’t matter if useless endeavour is included in GDP), how is any account taken of investments that are just bad, eg a mine that turns out barren? Is such a mine, as would appear to be the case, to be included in GDP anyway? And on a different tack, this £7 trillion, how is that valued? I too am very sure the whole lot could not be sold (to whom, for a start?) for that amount for there is no market in £7 trillion chunks of real estate. Why doesn’t cost or realisable value, so important elsewhere, get a look in?

      Reply The work that discovers a dud mine is all GDP activity, but it does not produce future GDP as the mine closes. The £7tn valuation is at market prices – shares, bonds, homes all have fairly easily defined market prices, though of course they cannot all be sold at the same time at the market price.

    2. Denis Cooper
      December 21, 2013

      Specifically, I doubt that one in ten voters understands QE.

      1. Leslie Singleton
        December 22, 2013

        Denis–Even a less than one-in-tenner like me can understand QE, viz Buy back bonds for cash, which can be spent, whereas the bonds could not. Dead easy, whereas including useless and worse activity in GDP (what about burglary?), as per John above (I of course do not blame him personally), I can never begin to grasp. Is it something to do with Keynes and his views about digging holes?? As I have said before, it would not be so bad except for the sucking of teeth and decisions made on truly minuscule movements in GDP when GDP itself is a dreamland or Utopian concept impossible to measure with that accuracy, apart from any definitional angst.

  16. zorro
    December 21, 2013

    ‘My critics here have tried to argue I want there to be another consumer boom and property bubble based on excess borrowing by the private sector.’….

    I certainly don’t count myself as a ‘critic’ of your views, although I don’t always agree with what you say. I don’t think people are saying that you want this to happen. They are observing that it is happening or is a very likely consequence of these policies. The banks have generally performed poorly over the last few years in that they have denied finance in a rather haphazard fashion. I also think that QE could have been used more imaginatively as a motor for growth/employment rather than propping up some very wasteful public spending. Again, I hasten to add that I do not support QE per se, but think that if it was being considered, it could have been employed in a more productive way.


  17. Bazman
    December 21, 2013

    Would the greater Switzerland fantasy of many on this site include a Swiss style TV licence system know as the Billag? Requiring the owners of radio and TV equipment, including car radios and clock radios to pay a licence fee of more than £307 a year on the pain of a fine of more than £3415? Even if you do have one of these items and you never use it, you still have to pay and as efficient Swiss they keep a good track of where you live and the inspectors will listen at your door and then charge you for use. Nothing to say? Ram it.

    1. Leslie Singleton
      December 21, 2013

      Bazman–One sees that your delicacy of concluding expression not to mention your intellectual rigour have not left you, but, even so, since you invite comment (I write as someone who has never watched a TV in Switzerland) I shall tell you that if your latest effort is the biggest criticism of her, Switzerland must be splendid indeed. It sounds too good to be true but I wonder if the sky-scraping fee you mention means that advertisements are banned. Let’s face it, the only reason we pay the BBC these days is that there are none of the wretched things on it.

      1. Bazman
        December 22, 2013

        The point is that many want Switzerland but only the bits they like which will not work. Switzerland is a middle class society and all the busybodying this involves and with many rules and regulations and a complex tax system. All this would be seen as lefty nonsense and can be created by the free markets and no regulations or welfare. It cannot. However if any of these fantasist found themselves in Switzerland would praise the system to the hilt. As they do with France and Spain as ex pats. Switzerland is conservative country. British conservatives are defenders of big business and privilege looking for crumbs from their betters whilst looking down on everyone else. La de ramit.

    2. Max Dunbar
      December 21, 2013

      Similar set-up in Germany. You write a letter to them and they leave you alone.
      Just bin all those TVs and radios – the stuff they pump out is garbage anyway and a distraction at best. Just pick up a good book, put a CD on the Hi-Fi…… and ram the license.

      1. Bazman
        December 22, 2013

        Will you also be binning your phone with the ability to watch TV or listen to radio too? You would have to in Switzerland. At least in law.

    3. JoeSoap
      December 22, 2013

      I’d happily settle for £307 a year on a TV licence and 8.5% VAT.

      1. Bazman
        December 24, 2013

        On your energy bills?

  18. The PrangWizard
    December 21, 2013

    How do we maintain growth in manufacturing when the incompetents in government in charge of our energy policy are expecting industry to cut back to conserve power? How I wonder does this look to potential investors? How does this help our international image? Why is this lunacy allowed to continue? I’m not claiming to be a lion, but it does seem as if we are being led by donkeys.

  19. Ralph Musgrave
    December 21, 2013


    You are about the ten millionth person to suggest that if creditors don’t want to lend to a country there’s some sort of problem. There isn’t: at least there isn’t for a country that issues its own currency. Such a country can effect stimulus (as Keynes pointed out) simply by printing money.

    In response to which every economic illiterate will start hyperventilating and shouting “Mugabwe” and “Weimar”. Well the simple answer to the “M&W” point is that as long as the extra money does not result in excess demand, there won’t be excess inflation (as indeed David Hume pointed out 250 years ago). Indeed if exactly the right amount of money is printed, the result will be full employment without excess inflation.

    Be nice if economics had advanced in the last 250 years. Unfortunately it hasn’t.

    Reply One third of our economy is traded overseas, so one of the main constraints on how many pounds the Bank can print is the value foreigners will ascribe to it.

    1. petermartin2001
      December 22, 2013

      Reply to Reply,

      Foreigners will ascribe a value to the currency according to what they can buy with it, which in turn will depend on the strength of the UK economy. That has to be the over-riding consideration governing monetary policy.

      Like Goldilock’s porridge, it needs to be just right. Not too hot. That leads to high inflation which makes for an inefficient economy. Not too cold either. That leads to bankruptcies and high unemployment.

    2. Denis Cooper
      December 22, 2013

      But the printing of £375 billion of new money for the government to spend has already resulted in some excess inflation, albeit not a lot.

      The Bank of England estimated that the first £200 billion added between 0.75% and 1.5% to CPI inflation:

      Extrapolating that to £375 billion of QE would make it between 1.4% and 2.8% extra inflation, say as a best guess around 2%.

      The Chancellor chose to gloss over the repeated failure of the MPC to meet the retail price inflation target he had set, a target which is supposed to be legally binding, but nevertheless ordinary people are well aware that their purchasing power has been excessively eroded by what is in effect a stealth tax.

      Of course if a Chancellor openly proposed to simply confiscate 2% of all the wealth held by the population there would be an almighty row.

      1. petermartin2001
        December 22, 2013

        Yes I agree that the level of inflation in the UK might be too high for some who would regard 0% as ideal. The decision to accept 2% , or whatever, is somewhat arbitrary. I’d just make the point that if inflation reduction is the main priority then that should be clearly stated.
        You mention QE. Everyone gets their knickers about that because they consider it “printing money”. Yet, all money is printed – or created by keystroke in a computer – most of it by commercial banks when they extend loans to customers.
        Governments ‘print’ treasury bonds or gilts too. They are just another form of government money (IOUs) when you think about it. Swapping bonds for cash (QE) doesn’t do much. It’s the printing of the bonds in the first place which could be considered inflationary. The greater the budget deficit – the more bonds which need to be printed.

        1. petermartin2001
          December 22, 2013

          missed out “in a twist” 🙂 in the above!

        2. Denis Cooper
          December 23, 2013

          Firstly, my reference to “excess inflation” is to the excess over the 2% pa CPI target which has been set by the Chancellor and which is supposed to be legally binding. One can argue whether that target is correct and one can even argue that it should be zero – personally I would not support that idea, because I think that with a target of zero it would be too easy to tip into a deflationary spiral – but the fact is that the target set by the Chancellor is 2% pa and that has been greatly exceeded, and as acknowledged by the Bank of England that was in part due to its creation of £375 billion of new money, equivalent to about a quarter of GDP.

          Secondly, gilts are not “just another form of government money”, on the contrary they are not “money” at all, any more than National Savings certificates or indeed share certificates are “money”.

          Gilts are a form of IOU which are issued by the Treasury, but it is IOUs issued by the Bank of England which are “money”; as Leslie Singleton says above, as practised in the UK so far QE means the Treasury getting “… cash, which can be spent, whereas the bonds could not”.

          No doubt there are special cases where the government can settle a debt by giving the creditor bonds rather than money, but in the normal run of things those who are owed money by the government expect to be paid in money, not in gilts or any other form of financial instrument which they would then have to sell to get money so they could pay their own bills in the usual way.

          As I have said before, have you ever tried to pay for your groceries by offering gilts at the supermarket checkout? They want to be paid in money, legal tender, the Bank’s IOUs; they will accept an electronic transfer of money through a debit card, or the promise of a future money transfer guaranteed by a reliable credit card company, but they will not accept gilts, the Treasury’s IOUs.

          In early 2009 the Treasury faced the prospect of running out of money to pay its bills, as it was having to borrow about a quarter of all the money it was spending and gilts investors were growing increasingly wary about lending it any more money; if the Bank and the Treasury had not arranged to swap their respective IOUs, with the Bank getting the Treasury’s IOUs, gilts, and the Treasury getting the Bank’s IOUs, money, then the government would have been forced to either make drastic cuts in its spending or try to pay some of its debts in gilts; and those who expected to get money from the government, including as an obvious example old age pensioners, would not have been exactly happy with having their payments cut by 25% or with having that part of their pensions paid in gilts which would not be accepted when they needed to pay their bills.

          It had to be an indirect swap, with the Treasury issuing new gilts while in parallel the Bank created new money and used it to buy up previously issued gilts, because apart from anything else the EU treaties forbid national central banks buying bonds direct from their national governments, just as they forbid central banks extending overdrafts to their governments – both of which would have been much simpler and more transparent expedients.

    1. Bazman
      December 24, 2013

      Four out of five new jobs are in sectors paying less than £8 an hour – under £320 for a full week, barely £16,000 a year with millions or average earnings in the UK have risen by less than the rate of inflation for the fifth year running, according to the Office for National Statistics (ONS) in your Pravda newspaper which also forgets the million facing cost of living crisis as rent rises more than wages. Remuneration is growing and booming however.

  20. dave roderick
    December 21, 2013

    when will this lot and the previous lot stop telling lies
    more people are in jobs etc yes part time jobs or zero hour contracts ,our population has increased by millions but percentage wise we need thousands of proper jobs to make up for for the increased available labour market
    the banks press a button and create money from thin air this is called fraud any where else
    a simple solution would be to bring back the bradbury pound and let the banks sink it would be the cheapest way of sorting this mess out,but it also means the rich would lose out so their is no chance of that

    1. Denis Cooper
      December 22, 2013

      Ah, the Bradbury pound hare is still running …

      Given that since 1946 the Bank of England has been owned by the Treasury, and therefore all its profits belong to the Treasury, there would no longer be any point in the Treasury issuing its own new currency when it can simply induce the Bank to issue more of its normal currency.

  21. margaret brandreth-j
    December 22, 2013

    We used to refer to consumption as pulmonary TB. That’s not a bad analogy really, because as consumers the variety and things which can be bought escalates relative to progress, but wages do not match societies ability to pay for consumables,so they go into debt; a state of affairs in public and private life which consumes everybody.In my case the tax man comes along and tries to make me pay tax several times over, having already paid. The state grasps at straws , because they have been milked by the private sector.
    Of course all nations are buying and selling ,” this is the way the world goes” BUT
    “For every ill deed in the past we suffer the consequence.”

  22. petermartin2001
    December 22, 2013

    Mr Redwood,

    “the same rules apply to a government as to a company or person”

    But they don’t! Not governments like the UK , Australia, USA, Japan etc who are in control of their own currencies. Companies and people are users of a currency. We have to get money before we can spend it. Governments are issuers of a currency. They have to issue the currency before anyone can spend it. Where else can we get it from? Any government who issues its own currency has to be in debt. If it isn’t, it means it hasn’t issued anything.

    Governments like Greece are also users of a currency. Thay have exactly the problems you describe.

    Governments which issue their own currency have to get it right. They should issue not too much. This causes inflation. They need to issue not too little either. This causes deflation or depression. People lose their jobs.

    One mistake often made by sovereign currency governments is to try to peg their currencies to another currency- as with the examples you give (Argentina, 60’s and 70’s Labour governments) . They had to borrow at high interest rates to try, usually unsuccessfully to maintain that peg. They are losing a key advantage in having their own currency.

    Mrs Thatcher’s government was originally much smarter and allowed the pound to fall close to parity with the US$ in the early 80’s. Life went on pretty much as normal and hardly anyone remembers this now. They haven’t forgotten the events of Black Wednesday though! That was again caused by the UK government trying and failing to maintain a peg with the DM. Big mistake!

    The ‘unsustainable burden for future taxpayers’ argument is odd. Future taxpayers will consume the products of their future economy. They won’t be able to send anything back in time to us, and we won’t be able to leave them anything much to consume directly. If at some future time the Chinese decide to spend some of their accumulated money, that will be good. If they decide to order lots of Rolls Royce jet engines, for example, politicians will try to take credit for the order. It will be hailed as a good thing and of course it will be.

    What we can leave future taxpayers is a successful and well functioning economy.

  23. petermartin2001
    December 22, 2013

    ” Borrowing is not free money. It is deferred tax.”

    With interest rates lower than inflation it is probably better than free. Governments can set base interest rates at whatever it likes them to be. If it wants to reward savers and slow down the economy it will set them higher.

    If higher taxes are needed in future , and/or spending needs to be reduced, because of increased borrowing today, that will be because the economy is running too close to full capacity.

    That will be a good thing!

  24. David Williams
    December 26, 2013

    A little gold was shared and the golden QE goose was used sparingly. In return , the Germans took even more control. Jacques and the younger generation were generally comfortable with that, realising that it was no worse than the governance that they already had. For many, the advantages of European integration, such as being able to work and claim benefits in the UK, outweighed the negatives. A significant minority were not happy and there was a rise in nationalism and extreme politics. Everyone lived muddling through ever after.

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