Blogging from the Highlands of Scotland
'From fanaticism to barbarism is only one step' - Diderot

Sunday, 1 February 2009

The 'headless chicken' has a mind-dump in Davos

Our Prime Minister, Gordon Brown, has revealed just how directionless, and ineffective his government's recent measures have been during his premiership; the lengthy interview in the linked article with the excellent Christiane Amanpour I'm afraid also reveals how little he understands what has happened, and why - and consequently what to do about getting ourselves out of the mess we are in.

All the political flim-flam on both sides of the Atlantic seeks to mask from electorates a simple fact; living standards are going to have to drop significantly in a number of countries, specifically those countries which have been running significant balance of payments deficits for very many years - two prime examples of this are the US and the UK, both of which at a national and individual level have been living on borrowed money for many years; both have very low levels of individual saving. All this has led to a too-rapid growth in the economies of countries such as China which, because of their traditional low labour costs and large and generally well-educated populations were able to supply the goods the consuming nations wanted; obviously the producer nations (China, India etc) were anxious to raise their own populations' standards of living and in the process these countries have built up massive savings, both nationally and individually - which they have for many years loaned to the consuming nations to fuel their purchasing binge. All based on 'confidence' that the currencies of the consuming nations would retain their values in the light of all this national borrowing to fuel consumption. Of course this could not go on for ever - eventually people began to see that the whole structure was built on nothing more than a confidence based on historic assessments, rather than realistic current valuations.

The current mantra is that markets have failed and that the 'State' must step in to put things right. This is crazily wrong! The markets have been circumvented for so long by government by over-regulation that eventually the power of the market can no longer be resisted. Brown wants to keep public spending (and taxes) high and to fuel a continuing decifit with yet more borrowing, whereas the lenders are becoming increasingly reluctant to go on funding us (the consuming countries) - just look at bond spreads to see what is happening in the underbelly of the market and how it assesses the relative strengths of various economies. The civil unrest that started a few months ago in places such as Greece and in eastern Europe has now spread to France and the UK - not to mention the tensions that are building up in places such as China where many factories have had to close because we are no longer buying.

Brown wants to keep interest rates low to 'kick-start' the economy so individuals and companies can 'afford' to borrow to keep their consumption levels up. As I've written here before this is analagous to offering a drug addict more drugs to stave off the pain of withdrawal symptoms. Short-term relief, but a lot more pain to come in the future. This is all, so we are told, to prevent deflation. How is it going to work, though, if people fear they are going to lose their jobs (and increasingly ARE losing their jobs)? Beats me! How are savers going to be encouraged to continue to save (to do their small part in propping up the financial system)? They answer is they are not.

Unless we reduce our national outgoings significantly, currently funded by high taxes and government borrowing, this problem is only going to get worse. What's going to happen to our political and social stability in a few years time when the bills for this continuing fiscal folly start to come due? Well, I think the answer will be found in the euphemistically-named 'quantitative easing', or running the printing presses for paper money much faster to increase the money supply massively - and the burden of debt will be 'magicked' away by a massive increase in inflation which in the low interest climate the government wishes to maintain will be absolutely disastrous for those who have loaned the money to fuel the party, whether domestic savers or international lenders. Expect further falls in the value of the pound in coming years, too. Social unrest? We ain't seen nuthin' yet!


  1. But surely - to extend your drug addiction analogy - the point is to withdraw slowly rather than let the economy go cold turkey, which could cause greater unrest, for example?

  2. Bill, I just so much hope you are wrong but you give a pretty good description of how it seems to be going.

  3. Oh, I totally agree with that and indeed it's what I think myself. I may be an unreconstructed libertarian, but I recognise that moderation in all things is wise.

    However, we seem to be pressing the accelerator to the floor with additional borrowing at present - all to keep the level of public spending high and growing, simply because it might win Labour the next election with the 'cold turkey' of even higher taxes after it accompanied most likely by raging inflation, whichever Party wins, but specially the current one; their clients and voters are thought by them to be too childlike to be faced with a bit of reality for once.

  4. Yes, Graisg, I would be very pleased to be denounced as a complete idiot and scaremongerer by someone using arguments that are believable.

  5. Stuart, the unrest is happening. Not about to happen in the near future or distant future but now. Sadly, but thankfully in some ways, people are beginning to see what's happening.

    Now here's the right wing side of my brain:

    Reduce benefits and make all these people who claim them without due reason, go out to work. Not for a pittance but for a way which will support them.

    Stuart, you'll be shocked by my comments I know. Bill doesn't know me but then perhaps he's wise :)

  6. Bill

    But perhaps the long-term consequences of doing little or nothing would be worse than a bit of a fiscal stimulus, particularly since the monetary stimulus perhaps hasn't worked as it normally should?

    Most obviously, if the recession took hold and resulted in years of Japanese-style deflation then public borrowing could be in an even worse position in ten years as it would be if the economy is kick-started again?

    And, Subrosa, to that extent the social unrest evident at the moment could be just the thin end of the wedge if the Govt isn't proactive in trying to reinflate?

    As for your benefits point, I agree that something has to be done about welfare dependency, but with the labour market in its current state and worsening then now doesn't seem the best time to do it.

  7. Well Stuart, whatever we do is going to have unpleasant consequences; we are in a mess.

    However, I would rather that steps were begun to correct the basic problem (western populations grown accustomed to an unsustainable standard of living, beyond our capacity to generate the national revenue to support it) rather than to go along with sticking-plaster policies which will do nothing to solve the problem, merely act as a temporary palliative - and the only reason this is being done is to try and get the government through the next election.

    The biggest danger now is that protectionism begins to take hold; this is already starting here with the 'jobs for British workers' slogans, in contradiction to EU free movement of labour principles - indeed it started a few years ago in the US when a newly Democratic Congress over-ruled the President in one of his few sensible economic initiatives by banning the take-over of the P&O-owned ports by a Dubai investment consortium; I thought at the time that this was a worrying sign, couple as it was with various other things going on in the US economy at the time.

    My basic premise is that people will respond to harsh truth, and the potential conseqences for them and their families, if the government had the courage and the imagination to present people with the facts rather than wishful thinking which the average citizen can be forgiven for having little confidence in. Margaret Thatcher may be disliked intensely in Scotland and in mining areas throughout the whole country, but what she did in her first 8 years as PM was to turn this ocuntry around, by a combination of carrot and stick policies; she was deeply unpopular in the early 1980s as a result and owuld undoubtedly have lost an election in 83 or 84 if it had not been for the Falklands. However, few economists now doubt that the changes that took place when she was PM (until 1987 at any rate) were beneficial; there's a difference between having worthwhile policy and simply courting opinion polls and focus groups and telling people what they want to hear. Politicians should not be under the delusion they need to be 'loved' to be successful; that has been the ultimate downfall of NuLabour policies and I'm sorry to say the present Conservative party might well fall into the same trap although there are encouraging signs they know what needs to be done, even if they have not yet quite got the courage to say it openly.


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