James Hickling: UK Recovery Built on Sand.

Happy economic days are here again. At least, that’s the current mainstream press narrative: the UK economy is sailing back to health, with unemployment falling, house prices rising, services expanding and even manufacturing joining the party. What’s not to like?

Well, you don’t read crazy malcontent websites like Bogpaper for validation of such happy talk do you? So here’s the bucket of cold water: the government’s deficit is still among the highest in the world; the trade deficit is at its highest since the end of the Second World War (excepting a brief period in the late 1980s); savings are falling as a percentage of GDP; and business investment remains pathetic (as a share of national income, the UK ranks at 159 in the world on this measure).

To top it off, the Bank of England’s determination to keep rates pinned to the floor – well below the inflation rate – in combination with the government’s madcap, cynical scheme to subsidise home buying (CammiMae and OssyMac?) is igniting another property bubble, as well as a surge in consumer debt.

It became popular in the immediate aftermath of the financial crisis to say that the UK needed to consume less and save, invest and export more. Yet consumption as a percentage of GDP has increased since 2008 – with government consumption up 6% since the first quarter of 2008 – while total public and private investment is down by over 20%. And while there was a brief bounce in household savings post-2008, this has fallen as a percentage of GDP from 7.3% in 2010 to 6.2% this year.

Ultra-loose monetary policy is all that’s supporting the illusion of prosperity, and has given politicians leeway to dodge the kind of tough, structural economic reforms that would be a part of a genuine recovery. At this point it’s worth quoting at length from a comment piece that appeared in The Times the other day from Graeme Leach, Chief Economist at the Institute of Directors:

“The optimistic forecasts may come to pass, but many of the people making such forecasts didn’t predict the recovery in late 2012. They missed it because they didn’t pay sufficient attention to how the total amount of money in the economy – the M4x measure – began to grow about a year ago. Further acceleration of M4x in the first half of 2013, by around 5 per cent, happened only because of the the lagged effects of the Bank of England’s quantitative easing policy. Without that QE the economy would have continued to bump along the bottom; now it has ended, it’s beneficial effects might end too. Sorry to be technical, but the one thing that stands out in the current economic debate is the lack of recognition of the role of money in the recovery.”

The narrower six-month M1 measure is now surging at double-digit rates. Those well-disposed towards Austrian economics will be unsurprised that these dramatic gains in money supply are boosting economic data, consumer borrowing and house prices. But as City A.M.‘s reliably-sound Allister Heath has pointed out, by and large this is the wrong type of growth.

Sure, the central bank can liquor up the economy on cheap money and hope that somehow animal spirits make things OK. But in the context of an economy with low-to-non-existant savings, that continually borrows from abroad to consume – the UK hasn’t run a current account surplus for over 30 years – is no longer profiting on foreign investments (net income from such assets turned negative last year), where government spending accounts for half of all economic activity, and which remains horribly exposed to still-overleveraged, fragile global banks, it seems a heroic assumption to think that this situation can continue for much longer without a serious crisis. One that will make 2008 look like a warmup act.

My bet for how things unfold at some point in the rest of this decade would be on a loss of confidence in sterling on the part of foreign investors, followed by runaway inflation a la the 1970s. Then we really will regret that hardly any of the gold in the Old Lady’s vault is ours.

22 comments on “James Hickling: UK Recovery Built on Sand.

  1. Anthem
    November 12, 2013 at 11:16 pm #

    They’re trying to inflate away the debt. Thirty quid for a loaf of bread, anyone?

  2. Rocco
    November 12, 2013 at 11:31 pm #

    Title’s too short.

    • dr
      November 15, 2013 at 6:29 pm #

      Read this:
      http://www.stevebaker.info/2013/11/book-review-huemer/
      Its got nothing to do with this article, but you may be interested.

      • Rocco
        November 15, 2013 at 11:06 pm #

        Are you replying to me, dude? I forgot to tick that little box for email updates!

        If so: thanks for the link, man. I think that I heard the title of that book and just assumed it was one of them “politicians have a moral duty to tell you what to do because you are an idiot” treatises that are in fashion these days.

        If you’re interested, Lysander Spooner was saying all this about 140 years ago in “No Treason”.

      • dr
        November 16, 2013 at 10:50 am #

        I should have started that last post with “Rocco, read this:”
        to be more clear.
        I just read the book review, and when I got to the point where it states, that the author reaches the conclusion that the entire government should be privatized, I thought, this is obviously the kind of material that Rocco has in his porn collection. So I posted a reply to one of your comments, so that maybe you would see it.
        Note to self: I must add “make comments editable” to the list of proposed Bogpaper improvements.

      • Rocco
        November 16, 2013 at 11:03 am #

        Not at all, dr, it was entirely my error.

  3. Simon Roberts
    November 13, 2013 at 8:43 am #

    The consequences of a de facto one party state.

    The economy is being destroyed but the two main parties are both fully signed up to the idea of “managing” it.

    Government intervention always ends in failure and until the electorate choose someone who believes in the proper role of the state this will just get worse and worse.

  4. Roderick
    November 13, 2013 at 10:36 am #

    Those occupying the top levels of any organisation have a vested interet in keeping things the way they are. Politicians are a case in point. Where is the drive for a change to a smaller state going to come from?

  5. Michael
    November 13, 2013 at 3:01 pm #

    I’ve been putting a bit of thought into this whole “recovery” soap opera that the Government and its sycophant media is telling us is underway. I can only conclude that the whole “recovery” meme is to make us believe that the Politicians were getting us back on track before an “event which nobody could have foreseen” causes an even bigger crash.

    The truth is the monetary system of debt as money has reached its end game. The whole premise of supporting ever increasing debt loads has only been supported by massive increases in productivity and the constant downward trend of interest rates to zero-bound since the early 80’s making it possible to carry larger and larger amounts of debt. “Help to buy” and the dramatic increase in tuition fees are simply desperate measures to try and add the last scraps of harvestable debt to the Ponzi scheme to stop the plates coming crashing down.

    I’m going to go out on a limb and say that the plates start crashing on UK plc BEFORE the next GE. A massive deflation, followed by hyperinflation as they try to print their way out followed by a “solution” of joining the Euro in 2017 which conveniently have massive reserves of gold to back their currency.

    I hope that I’m wrong, but I think the only thing I’ll have incorrect are the dates.

  6. AndyL
    November 13, 2013 at 5:17 pm #

    Very good post. I don’t like your medicine; can I just stay ‘sick’ instead?

    One thing I don’t get is the hyperinflation. Are you saying that as the £ devalues, imports become more expensive? For that to happen, wouldn’t the Euro have to collapse? OK, Chinese imports may become more expensive, but overall, more than half of our imports come from Europe and most of Europe is tied to the Euro with Germany (and the UK) benefitting.

    If the £ did devalue, our workforce would become cheaper and our exports would increase, in theory. Not such a bad thing considering the current trade gap. Would this necessarily lead to hyperinflation?

    On another note, although it has already been touched upon, no current Political Party will want to commit suicide by not continuing to fuel our addiction to debt*. So, despite the Tories trying to intefere less at the start of their term, now we have ever more schemes to further fuel this debt along with ever more unelected Quangos, eg, Heseltines LEPs. Labour would be worse of course.

    Currently government debt interest payments are about 3% of GDP which is manageable (I’d rather not pay £45bn of interest at all, of course). The real pain will come once bond yield rates start to rise and for the rest of us once interest rates start to rise.

    Andy

    * I have a mortgage and no other other debt.

    • dr
      November 14, 2013 at 11:23 am #

      AndyL wrote:
      “The real pain will come once bond yield rates start to rise and for the rest of us once interest rates start to rise.”
      I doubt that the government will allow bond yields to rise. I think that with the levels of government debt that we have today, that we face a “new economic paradigm”, where interest rates stay low indefinitely.
      The problems will come when inflation starts to build in the world economy as a whole, and we can’t export it anymore.

      • AndyL
        November 14, 2013 at 12:18 pm #

        Completely agree. Although once we run out of Countries to make T-shirts for 10p etc, we will produce more ourselves again as our workforce will be more competitive. But at a cost which is inflation (as you state)

  7. silverminer
    November 13, 2013 at 10:52 pm #

    I’ve asked this question before but it seemed that nobody could help me out :D! Why does the Government have to borrow its own money back from private banks at a cost £45billion a year in interest? The money says “Bank of England” on it, right? Which is owned by the Government, right? Fact is we don’t need to have a national debt. It’s just a Bankster fraud to keep us all in debt slavery.

    What we need (if we’re to persist with a fiat currency) is full reserve banking with all new currency issued by the Bank of England and spent into circulation by the Government. Then there is no debt attached to it and we can start purging the debt from the system. There is no way you can get out of debt when you have a monetary system where 97% of all new money is issued as debt! It just can’t frickin’ work! The wheels have come off the cart, it’s over.

    • dr
      November 14, 2013 at 11:21 am #

      You are right that we could print money and just give it to the government to cover the deficit. This would increase the rate of money supply, and in theory raise inflation. The Spanish tried this with silver a few hundred years ago, the government just mined the silver and spent it, and it ended rather badly.
      It is feasible that if government debt becomes much worse, that the government will start to monetize some of its debt. Its just that this action is seen as being associated with a banana republic, so the government doesn’t want its image tarnished.
      It is worth noting, that the government doesn’t pay interest on its gilts that are owned by the Bank of England. This is a form of monetization of debt. This reduces the £45bn per year interest bill that the government faces.

      • AndyL
        November 14, 2013 at 12:16 pm #

        My understanding was that the UK Government borrows by selling bonds and gilts. So, when UK plc overspends, they sell the debt to mainly British institutions although a lot is also owned by overseas investors.

        Borrow too much, and your currency falls leading to hyperinflation as seen by the Weimar Republic and people had to wheelbarrow around their money to buy bread as a result. Maybe Michael is right and it could happen again. But unlike the Weimar Republic, which borrowed to fund WWI whereas other Countries used Income tax, we are all in the shit together now. Except Germany, ironically.

        When the PIGs threatened to default on their debt payments (and probably will do again), it was because no one would buy their bonds or rather wanted a very high rate of return. So they ran out of money for a while. Of course, their currency can’t devalue either as they are tied to the Euro.

        Get rid of the Euro? Be careful what you wish for 🙂

      • silverminer
        November 17, 2013 at 8:49 pm #

        The Government is monetising the debt now. That’s what QE is. The Treasury issues bonds, the banks buy them, then sell them back to the Bank of England, taking a cut. It’s just a big money-go-round. All it does is line the pockets of the primary dealers (as they call them in the US) and keep the people confused about the real nature of the ponzi scheme. This is the so called “Mandrake Mechanism”.

        It would be more honest to get rid of the middle man, i.e. the central bank (which is part of the government anyway), and issue new money directly out of the Treasury as credit, i.e. with no debt attached (Bradbury or Greenback). Whether you back this with something, like gold, to retrain the ability of the State to print currency, is a separate issue.

        Then you have the question of where most, 97%, of the new money in the economy comes from? Unbelievable as this may be to most people, this money is created as debt by private banks out of thin air and lent out at interest. They are lending money created by a key stroke in their computer systems and lending it out at interest. They are not just lending their depositors savings out, which is what most people think. All you need to get in on this scam is a banking license, which is why they are almost impossible to come by.

        This is morally wrong because it is a deliberate fraud and a deception against the people who are clueless about what is being done. When private banks create money, private actors get the benefit (the interest) but the general public suffers the inflation. When the State creates new money, at least the same people roughly speaking benefit (through lower taxes) as suffer from the inflation if they create too much.

        I favour moving to Treasury issued money, full reserve banking (i.e. private banks can only lend out their own capital or money invested with them specifically to be lent out) and free gold (i.e. gold and silver trading freely without tax or restriction) as alternative stores of value if the State abuses the money creation power. Under this system, all new money would be issued as credit with no debt attached so we could finally start reducing the debt in the system. This is simply not possible under the current debt based ponzi scheme, i.e. it constantly expands or it must inevitably collapse.

    • Michael
      November 14, 2013 at 4:49 pm #

      Exactly – If we the people give money its value through our sweat and toil, why should we borrow it at interest from Banks who create it out of thin air?

      A re-incarnation of the debt free Bradbury Pound without Golden Handcuffs whilst not solving distortions of government induced inflation, would at least stop countries running up huge debts.

      Post below is an excerpt from Financiers and the Nation on the origin and ending of the Bradbury Pound created at the start of the Great War – while British soldiers were sacrificing their lives in killing fields of Flanders in their Patriotic Duty, the Banksters were safe in London enslaving the nation in enormous debts.

      http://archive.org/stream/financiersandthe033017mbp/financiersandthe033017mbp_djvu.txt

      On the Bradbury Pound
      “This new currency had been issued by the State, was backed by the credit of the State, and was issued to the banks to prevent the banks from utter collapse. The public cheerfully accepted the new notes; and nobody talked about inflation.

      To return, however, to the early war period, no sooner had Mr. Lloyd George got the bankers out of their difficulties in the autumn of 1914 by the issue of the Treasury money, than they were round again at the Treasury door explaining forcibly that the State must, upon no account, issue any more money on this interest free basis; if the war was to be run, it must be run with borrowed money, money upon which interest must be paid, and they were the gentlemen who would see to the proper financing of a good, juicy War Loan at 31/2 per cent, interest, and to that last proposition the Treasury yielded. The War was not to be fought with interest-free money, and/or/with conscription of wealth; though it was to be fought with conscription of life. Many small businesses were to be closed and their proprietors sent overseas as redundant, and without any compensation for their losses, while Finance, as we shall see, was to be heavily and progressively remunerated”

  8. dr
    November 14, 2013 at 1:11 pm #

    AndyL wrote:
    “My understanding was that the UK Government borrows by selling bonds and gilts. So, when UK plc overspends, they sell the debt to mainly British institutions although a lot is also owned by overseas investors.”
    Sort of. The government borrows by selling gilts, correct. They sell them to anyone that is stupid enough to lend them money, not just British institutions. For example, the UK govt, is contemplating issuing an Islamic bond, so that wealthy “Middle Eastern Investors” can lend money to the government.
    The Bank of England QE programme, consists of the BoE printing money and buying gilts in the open market. This is to depress prices and to allow the government to borrow more cheaply. Hence the BoE now owns some government gilts. It is on these gilts that the BoE waives the interest charge, reducing the cost of borrowing for the government further.

  9. Tim
    November 14, 2013 at 5:09 pm #

    Beware of being perma-bears. No money in it!

  10. kevinsmith2013
    November 15, 2013 at 6:12 pm #

    Just this week they have admitted retails sales were down in October, when you would expect the Christmas sales to kick in, Barratts the builders have gone into administration, BAE are closing their shipbuilding in Portsmouth and cutting jobs in Glasgow (about 1,700 jobs), Barclays have announced 1,700 job cuts, Blockbusters have gone back into administration and are closing 72 stores, house prices actually dropped in October, German company RWE (owner on Npower) are cutting 6,750 jobs across Europe (to help deal with low wholesale prices for energy and an increase in renewable capacity – and renewables was meant to create jobs!!! ).

    The whole world is now on 100% (almost, excluding coins which have some intrinsic value) based on fiat currencies, the last two countries to hold out were Libya (gold dinar) and Iraq and look what happened to them. It is just one enormous Ponzi scheme. However, the BRIC countries are busily buying up gold, so something may be in the offing. Failing that we face an unavoidable global finacial (fiat currency) collapse (probably intentional) and the “answer” from the central banking elites will be a single global currency, almost certainly the IMF Special Drawing Rights (SDR).

  11. duffieldjohn
    November 16, 2013 at 3:17 pm #

    I think that’s Barratt’s the shoe company kevin, but yes, the job losses we’re seeing do not match what we’re hearing about the economy.

  12. kevinsmith2013
    November 16, 2013 at 6:19 pm #

    Bugger, someone told me it was the builders, but as you say the facts don’t seem to match the rhetoric.

    The US stock markets continue to climb to ever new record highs, but if the Federal Reserve even suggest slowing down the $85 billion a month QE3, it goes tumbling downwards, so thats safe then!

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