George Osborne Still Doesn’t Get It

In downgrading British debt from AAA to AA1, Moody’s was explicit enough to mention weak growth as the main problem. Now, I couldn’t in itself care less about what Moody’s thinks, because credit ratings agencies are themselves bastions of utter incompetence who continued to rate subprime junk mortgage-backed securities as AAA long after it became clear that they were dangerous default-ridden products. But Osborne himself made clear that Britain’s credit rating was the metric on which we should judge his performance. Yet although Moody’s mentioned weak growth as the problem, Osborne continues to talk about how reducing Britain’s debt-load is his main priority, something that he has completely failed to do:

That ultimately is the choice for Britain — either we can abandon our efforts to deal with our debt problems and make a difficult situation very much worse or we can redouble our efforts to overcome our debts and make sure this country can earn its way in the world.

Osborne is tackling this from the wrong end of the problem. Strong, sustainable economic growth is the way to tackle the debt problem in the long run. But Osborne’s fiscal austerity is not the way to strong sustainable economic growth, which means he is failing by on his own terms and by his own definition. In terms of growth, since 2007 Britain has done worse than comparable countries.

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People like to talk of Japan’s problems with depressed growth, but since 2007 Britain has done worse than Japan.

And this lack of growth is the real reason why Britain’s debt load becomes ever more unsustainable, no matter how much austerity Osborne tries to implement.

So what’s Osborne’s plan to generate growth? Reduce regulation and taxes on small businesses and new businesses? Make it easier for construction companies to build new homes? Invest in infrastructure (ultra-fast broadband, improved roads and rail) and energy (solar, wind, hydroelectric, oil, natural gas)? Invest in science and basic research? Guarantee loans to unemployed people so they can become self-employed? Offer incentives to foreigners to invest in the UK?

Cutting spending (and yes — in real terms George Osborne is cutting spending) and raising taxes isn’t cutting it. It’s constricting growth. And at the next election if this depression continues, people will vote in droves for anyone but Cameron and Osborne.

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73 thoughts on “George Osborne Still Doesn’t Get It

  1. It seems that the UK economy is having the same problem as the US. Widening income inequality led to debt financed growth for much of the last few decades. But now that households are deleveraging, consumption is dependent on low middle class incomes.

    I don’t see GDP reaching potential in either country until middle class incomes improve or borrowing resumes. I’m not sure what government program can solve the problem – although austerity sure makes things worse in the mean time.

      • Countries with their own currencies do not have to ever fully pay off their debts, just stabilise them as a percentage of GDP. It is possible although difficult for countries like the USA to stabilise their debt paths through economic growth. Falling energy costs via solar energy becoming cheaper than fossil fuels (likely within the next 10-20 years) would probably make this much, much easier. Until then, it is probably the Japanese route.

        • Aziz,

          “Falling energy costs via solar energy becoming cheaper than fossil fuels (likely within the next 10-20 years)” – yes, but keep in mind that oil is liquid fuel, and productions/distrobution of solar panels is still dependent on fossil fuels. Today wind electricity is cheaper than solar electricity. Also keep in mind that ENERGY consumption is 5-times higher compared to electricity consumption,

          cheers,

          Alexander

  2. I disagree. The UK has a massive entitlement system for all its inhabitants, when its real export earner is financial services. Without financial services the UK would be a pariah state. By imposing austerity, the burden of taxation will fall less on the last industry where the UK has comparative advantage.

    It has nearly no natural resources left, and it will be in the same situation as Japan soon, minus quality manufacturing.

    Austerity is necessary. The only Government spending I would call for is infrastructure spending that allows the UK to have long term comparative advantage. Perhaps dedicated financial services universities, where students get practical experience in the GOVERNMENT OWNED BANKS. Think of the education and foreign student housing opportunities.

    Maybe they could fund a TV series that focus on the Royals and groom billions of fans around the world, then parade the Royals. Tourism dollars keep the UK afloat!

    • It has nearly no natural resources left

      This is not true. UK still has massive energy resources, not least alternatives like tides, solar and wind but also conventional such as natural gas and oil.

      Without financial services the UK would be a pariah state. By imposing austerity, the burden of taxation will fall less on the last industry where the UK has comparative advantage.

      Reliance on financial services is dangerous, and not just because I don’t buy all that Ricardian stuff about comparative advantage being advantageous — not to mention that the British financial system is an overleveraged, corrupt mess. It’s very fragile. Austerity is totally pointless self-inflicted pain right now, because rates around the world are naturally extremely low. The UK has no borrowing crisis. Access to credit for the government (but pointedly not for small and new businesses) is extremely easy, and will remain so while the economy is still depressed and while UK debt remains denominated in a currency the bank of England can print. Public debt is not the problem. Overregulation of small business, lack of housebuilding, weak infrastructure, endemic unemployment and failed banking and lending systems are the problem.

      • Why should Australian resources (Coal and Iron ore) be diverted to the UK, instead of China?

        Because we are closer, to the human population and consumption centres this makes sense.

        Until the UK builds products, that are superior to the Chinese (This does not matter in the minds of price conscious consumers anymore), there will be no manufacturing, and no employment for low skilled workers (Immigrants and housing project youths)

        The only chance is to use the intellect of the “City Boys” to pay the taxes that fund the welfare class. This is getting harder to do!

        Time to migrate John. Time to migrate.

        • Why should Australian resources (Coal and Iron ore) be diverted to the UK, instead of China?

          I don’t think they should be. I think the UK should improve its own resource base to achieve energy independence.

          The only chance is to use the intellect of the “City Boys” to pay the taxes that fund the welfare class. This is getting harder to do!

          I question how much intellect there really is there. The City of London seems to finance nearly as much corruption and fraud as it does productive ventures.

          Time to migrate John. Time to migrate.

          Maybe…

      • Thanks. Found an interesting article I agree with http://www.moneynews.com/Elias/barry-elias-Modern-Economists/2010/11/29/id/378249

        High interest attracts savers and raises velocity of money . V =i/(1-u) . 1-u is a measure of indebtedness. When Volcker raised the fed funds sky high in 1979, household savings went over 12%. Reagan spoiled the effort with enormous budget deficits for military spending, so velocity started falling again.

        Money velocity could be doubled simply by doubling the interest rate. It is better to use savings than indebtedness for investing. Falling velocity creates a pessimistic business climate.

        In case you missed it, here is by explanation of velocity http://wp.me/P2kKxz-6g

        • Yes I think raising interest rates could have very beneficial effects…. if the debt-to-GDP ratio was much lower.

          Right now, raising interest rates would make the debt mountain totally unsustainable, and collapse it in a disorderly way. The Fed has run out of room to manoeuvre.

          As for velocity, it’s calculated as a residual not as an observed quantity. I’d be much more interesting to see velocity defined dynamically across M2 rather than as a single generalisation. Not every dollar in M2 (or M0, or however we’re going to define M) behaves similarly…

        • “Disorderly” is an odd term to describe a forced liquidation of the semi-fraudulent assets of the crooked profligates who are running this insane labor camp. It would certainly be more orderly than a revolution with mass executions.

        • Okay I’ll be more specific: I think hiking rates right now would take down not only a whole load of badly-run fraudulent junk, but also a whole load of good companies. There are subtler ways to deal with this. Look at Iceland. They’ve managed to return to strong growth.

        • When Volcker jumped the Fed Funds to 20%, household savings went up to 12% . Velocity jumped up to 3.5
          Then Reagan ruined everything with military spending deficits .

          The point is that things can be turned around fairly quickly. You can’t deprive the households of the entire world the ability to save.

        • In a low interest rate environment, it is still possible to save…. just not in a typical way. Look at all the people buying gold and silver. Goldbuggery is a new form of saving.

          On the other hand, I hate the contemporary zero-bound reality, and hope that interest rates rise in the near future. The best way to do this is for those with access to low-rate credit to eat it up, put it to productive use, and grow the economy….

        • An interesting point about goldbuggery: Silver @ $29/oz is equal to the 1792 legal definition of a dollar price $1.2929 x CPI . My guess is that if the money system converts to hard currency, it will be silver.

          Gold on the other hand is overvalued. Legal definition of a gold dollar is 24.5 grains which, factoring in CPI means current price would be $460/oz vs market price of $1700/oz

          Hoarding is defensive. The hoarder cannot accumulate via interest. I wonder if hoarders will issue loans payable in gold/silver.

        • I agree. When savers get 1% for their deposits, yet banks earn 12% providing business loans, the business still gets hit with the cost, but savers lose on the deal. To fund their model, they raise bonds on international markets. This disconnect causes bubbles.

          At 12%, banks would be earning tighter margins as business could not survive with higher rates. As the margins are tighter, they make more losses if they don’t invest properly.

          Savers would be rightly compensated for their capital. Capital misallocation by the banks would not occur.

          What are your thoughts on this Warren? If capital raised internationally was restricted, banks would have to fund their book, locally. This would compensate savers.

          I worked in banking in the early days before securitisation raised its ugly head. All that hot money has raised land prices. The early borrowers have amassed great fortune with that printed low interest international money. Now the locals can’t buy a home. MEDIAN home prices in Melbourne are now $500,000 plus. When MEDIAN wage is no more than $50,000 after tax. Assuming the wife/partner works too, that 5 times Median earnings. 100K take home earnings is LUCKY. Protected industry, or Government worker. Throw unemployment or a more traditional stay at home mother household (No socialising with uncouth children at pre-schools group and Kids learn to read and write as a bonus).

          Higher interest rates would compensate young savers, help retirees maintain their living standards and reduce the speculation in house (HOME) prices.

        • I’m not well acquainted with credit unions or S&Ls, but it would seem fill the gap with lower rates for small business and higher rates for depositors. No one seems to know what the inflation rate is. Problem is, if inflation is 4% or better then a 6% loan gives a 2% return and 0% for the depositor, so the nominal rates would have to be 10% to the borrower and 4% to the depositor, who might just break even with inflation.

  3. If the gov was to increase house building…prices would fall and if unemployed people were guranteed loans they would build failed businesses. The british high street is being hollowed out…empty shops galore…whoever own these shops have a tight grip on shop incomes. It comes down to land monopolies “the physiocrats” said the same thing. Finance creates paper millionaires who then buy up real assets creating cartels monopolies and a priviliged class…all others are unable to enter the market they are locked our.

    Vacant shop lanlords are offering cheaper rents now but you get clobered by the municiple rates and other bills.

    • If the gov was to increase house building…prices would fall

      Yes, that’s the idea, housing is historically overpriced and restrictions on housebuilding are keeping it so:

      if unemployed people were guranteed loans they would build failed businesses.

      This is a pretty big assumption. Most new businesses fail, but that’s what you get in a capitalist economy — creative destruction. The few successful new businesses would go onto provide jobs, incomes, growth for years to come. Those are currently being killed by the depressive lending conditions.

      Finance creates paper millionaires who then buy up real assets creating cartels monopolies and a priviliged class…all others are unable to enter the market they are locked our.

      Well, that’s certainly the case under present conditions because of the lending freeze which was created by a bailing out the banks, and then just stuffing them full of QE cash and hoping for the best. If you break the lending freeze there would be new competition, and a real opportunity to break some monopolies.

      Vacant shop lanlords are offering cheaper rents now but you get clobered by the municiple rates and other bills.

      Right, those are other things that could be repealed to help new businesses.

      • If house prices fell through an increase in supply, current house owners would be stuck in negative equity and they would not want that, so politicians are unlikely to choose that route.

        Unemployed people getting guranteed loans to start new businesses sounds like a good idea, especially if the loans had some sort of profit sharing componant built in instead of the usual interest bearing loan.

    • “High St” retail in outer Melbourne’s “boutique shopping precinct” is decimated. People are just not spending frivolously. Google Bridge Rd Richmond Australia.

      example: http://www.propertyobserver.com.au/retail/melbourne-shopping-strip-bridge-road-richmond-has-highest-vacancy-rate-in-five-years/2012091656593

      If this is a problem in a AAA country with the most desirable capital in the world, with unemployment below 6% and a major boom in commodities I could only imagine the carnage in the UK.

      The situation in Australia is the same, landlords won’t budge in price, instead they prey on hopeful retailers. These retailers ultimately go bust and are replaced by others.

      • Traditional shopping is a dying industry. Everything is moving online. Lower margins, meaning that they can offer customers lower prices. Only specialist areas where pre-viewing items is absolutely necessary (e.g. luxury sector, clothing) will continue to need retail space. Electronics, books, music, even food will be 80%+ online in a couple of decades.

  4. Growth, if only we had a magic wand. Since post war (’45) we had a constant boost to growth through credit creation. That’s now at the Minsky moment. Whilst everyone can simultaneously create credit to boom the economy it seems that we cannot simultaneously all pay it down (at least not without someone else, sadly absent, to create the credit instead). Aziz thinks there is a way to thread a path through this. I disagree. Without the destruction of debt through repudiation there is no short cut. No govt loan scheme can create demand. Yes govt can create demand itself through spend; but only at the cost of the real economy as it configures itself to serve govt alone. Stalin would look upon these daft GDP boosting arguments, and smile.

    • Without the destruction of debt through repudiation there is no short cut.

      Yes, we’re in a secular private deleveraging cycle. There are two ways to reduce the debt-to-GDP ratio to a sustainable level. Pay down private debt — which is happening anyway, quite dramatically — and increase GDP.

      There can be no doubt that government austerity is hurting the level of GDP, thus keeping the private debt-to-GDP ratio high, and slowing the deleveraging cycle. That is true whether we believe that government should be bigger or whether we believe (like I do) that it should be much smaller.

      Yes govt can create demand itself through spend; but only at the cost of the real economy as it configures itself to serve govt alone.

      This is a silly, thoughtless argument. The economy is already configured around government. The question is not whether we should have a society that is configured around government. We already have that! Trying to reconfigure society through government austerity during a depressionary deleveraging phase will backfire, and is backfiring. It will not lead to a smaller state in the long run. If the so-called “free-market” solution of austerity backfires and leads to huge unemployment, no growth and socio-economic breakdown, where will voters look? They’ll look toward statists, socialists, Rooseveltians, etc.

      Stalin would look upon these daft GDP boosting arguments, and smile.

      The issue is not boosting GDP.

      Government needs to help the private sector deleverage while simultaneously repealing laws that constrict business activity and business growth, and providing necessary infrastructure for future growth. My view has always been that the government should not get involved in the market, but should instead provide a firm infrastructural and political base for market activity, same as Adam Smith. So I am not arguing for demand creation, or demand management. I am arguing for government to get rid of impediments to growth and market activity that are either infrastructural or regulatory. Many (or most) of these impediments were in fact created by government (e.g. restrictive house-building laws, broken financial system propped-up by bailouts). I am arguing for a free-market solution.

      The champions of austerity are the real central planners who believe that they know better than the market.

      • Silly argument? Come now. At a marginal spend level every extra additional £ spent by govt skews the economy towards its service. If it were free competition that is bad enough but we both know the money goes to govt friends & family. You seem to think that Trickledown from them is preferable. I disagree. If the economy needs support why not give every family £10k to spend? At least that would be market driven!

        • You seem to think that Trickledown from them is preferable. I disagree. If the economy needs support why not give every family £10k to spend? At least that would be market driven!

          Yes, that is in many ways preferable to direct government spending. On the other hand, Britain is not really configured for private infrastructure creation. For some things like roads and improving the energy grid, government spending is just the way things are done. Of course you are correct when you say: “If it were free competition that is bad enough but we both know the money goes to govt friends & family.” But for infrastructure unfortunately I think government involvement is a necessary evil right now (although not necessarily further into the future).

          But most of what I am arguing for is not actually government spending. Most of it is getting the government out of the way, for example in terms of over-regulating small and new businesses, and greenlighting new housebuilding. There are lots and lots of things that can be done to improve business conditions and help the economy without a single extra penny of government spending, and it’s really disappointing that the government hasn’t pulled the trigger, and has instead focused on austerity.

        • Aziz is in dreamland if he thinks that by having the government borrow money to fund infrastructure improvements is an answer. Other than repairing a bridge, repaving a street or putting up new signage, the type and scope of investment if done wisely takes years of planning and environmental review, two things government does not do well. We have been waiting 4 years for Obama infrastructure projects to start. The problem is politicians find ways to redirect those funds to pet projects and social programs… Buy the time a project is planned and permitted the money is gone and they ask for more….. .

        • Aziz is in dreamland if he thinks that by having the government borrow money to fund infrastructure improvements is an answer.

          No, I don’t think it’s an “answer”. But I think actively cutting spending on infrastructure — especially if it’s infrastructure that people want and need — during a secular deleveraging cycle is counterproductive. And if an infrastructure or research investment leads to things like falling long-term energy costs then that would actually be an “answer”.

        • “If the economy needs support why not give every family £10k to spend? At least that would be market driven!”

          I agree. See my posts on earlier topics. Basically it is a refund of taxes paid in the past, and used to stimulate MARKET driven investment Efficient allocation based on individual preferences. Not political pork barreling.

    • “That’s now at the Minsky moment”

      Agreed.

      Debt repudiation would only cause anger, among those that paid their debts back.

      No, it is time for people to pay off their debts and have lower growth, whilst they work it off.

      I did not buy a flash car, kept my older car going, while neighbours bought new cars. They can keep the new car and pay back the loan.

      • Truly the more honorable approach; Japan’s been trying it for years! Most of the growth before was “credit” driven so without it growth will be negative/flat for years. Aziz advocates govt stepping in to fill the breach and spend; yes that will “goose” GDP for a couple of years more. Then what? Aziz – is GDP really a useful measure when it is so easily gamed? Actually what with all the hedonics/inflators/deflators it’s all bogus anyway. If you had a proper figure then GDP ex credit would be more helpful. BUt if you re-calc’d that you’d likely find we had negative grown for 20 years…

        • Japan’s been trying it for years!

          And look where Japan’s debt-to-GDP ratio is! They’ve been trying to deleverage, and it hasn’t worked! I don’t know how long it will take for Japan for the real problems to emerge there, but when it does it will be extremely ugly, and people will call Kyle Bass a genius. We do NOT want to end up like Japan.

          Aziz advocates govt stepping in to fill the breach and spend; yes that will “goose” GDP for a couple of years more.

          There is a serious deficit of understanding here. I’m not calling for government to step in and “fill the breach” (although actively opening a breach with totally unnecessary austerity measures is stupid and counterproductive). I’m calling for government to get out of the way and let the private sector grow. If you want to talk to someone who sees “filling the breach” as a solution (it is not in itself a solution) go talk to Paul Krugman.

          Then what? Aziz – is GDP really a useful measure when it is so easily gamed? Actually what with all the hedonics/inflators/deflators it’s all bogus anyway.

          GDP has issues, but don’t throw the baby out with the bathwater. In terms of whether an economy is growing both inflation-adjusted GDP and inflation-adjusted GDP per capita are relatively truthful measures to compare different countries. And in terms of other measures that I use — all the various measures of unemployment, debt-to-GDP, inflation, industrial production, trade balance, etc, the UK is doing badly. Even by George Osborne’s (bad) metric of public debt, his policies are failing. Don’t think that I haven’t looked at this from every possible angle.

          If you had a proper figure then GDP ex credit would be more helpful. But if you re-calc’d that you’d likely find we had negative grown for 20 years…

          Do you mean just counting cash transactions? Because everything else in the economy is credit-based. I’ve been looking at GDP-ex-government-spending. In the UK, it is severely depressed. In the USA, it actually looks reasonably good (USA has been practicing austerity too, just not as severely as the UK).

          Do not confuse the austerian rhetoric with reality. They preach “living within our means”, but what they actually mean is voluntarily and unnecessarily strangling the economy while the economy is weak, leaving us with massive unemployment issues, weak growth, etc. If we really wanted to live within our means we’d repeal all the bad regulations and austerity measures that are constricting growth, constricting construction, construction energy generation and the deployment of natural resources.

        • Aziz – I believe we have no choice BUT to become Japan unless you take the “pain trade” and let the castles-in-the-air asset values deflate. However, Govt’s around the world have demonstrated that they would rather print a quadrillion of currency rather than have nominal values fall.

          I am struggling to understand what you are arguing – you say that Govt should “get out of the way” but then criticise them for “austerity”. What do you mean by that? They should spend more money? But isn’t that “filling the breach”? So it’s not that then. Oh, it’s loans to support new business then? But lacklustre economic performance is being driven by lack of demand. So new business has to create the demand? If you are arguing against “red tape” I totally agree but I don’t see a “red tape = austerity” relationship so how is that an anti-austerity position.

          Fundamentally the problem is simple; solution not so clear. People, on the expectations of rising incomes brought forward their spending financed by credit; for 30 years. Now, with incomes stagnant/declining there is no-one bringing forward their spending. Those who had done that before are of course paying down the debt (as they would have done anyway) – if I borrow £1M today and spend it, GDP goes up today by that credit injection but then suffers as every year after I underspend to pay it off.

        • If you are arguing against “red tape” I totally agree but I don’t see a “red tape = austerity” relationship so how is that an anti-austerity position.

          This is counterintuitive, but it’s actually critical to grasp. I’m not advocating the government stepping in, because we already have a mixed economy. We hit a Minsky moment, and went into a private deleveraging cycle as a mixed economy, around 50% government activity and 50% private. Now the private sector is weak due to the deleveraging trend, as well as weak credit conditions brought about by government intervention (bank bailouts — providing massive liquidity, so banks don’t need to lend).

          In a mixed economy, austerity is another intervention. The more austerity, the weaker demand. Rather than just rolling with the cycle and continuing on a similar spending path to support private activity and provide a decent backbone of infrastructure for growth (which can then be reduced once the private sector gets back on its feet) the government has decided (in all its wisdom) that it is worried about borrowing costs, and so spending needs to be cut. But of course in the real world, borrowing costs are very, very low and (this part is crucial) will remain so until the private sector either recovers or becomes much, much, much worse (e.g. a war breaks out), which still hasn’t happened in Japan for 20+ years.

          Now, with spending being cut, the private sector is contracting even more than it otherwise would, leading to severe stagnation and severe employment issues. The private sector, of course, continues to offer the government very low interest money to continue on the previous spending trajectory (which is actually an idea that has broad support in the country, see Tory electoral support collapsing while Labour support is soaring), but no the government believes it knows best and believes public austerity is the answer and won’t listen to evidence that public austerity is actually exacerbating the private deleveraging cycle.

          If the Tories wanted a strategy that would really lead to smaller government (rather than an economic depression) they would invest like crazy at these low interest rates, until we get a strong recovery and interest rates start rising due to increased demand for capital in the private sector. Then they would gradually decrease spending in various areas. My (back of an envelope) calculations suggest that we could get government deb-to-GDP back down to 50% within 5-10 years by slashing red tape on small businesses and new businesses and energy and construction, spending (especially spending on tax cuts and low-interest loans for new and small businesses) at the low interest rates the private sector is offering, and building new energy, transport and communications infrastructure (fiber broadband to all homes, solar panels for all homes that want them, etc).

        • Yep, the risk in your argument is that the govt spend ends up just being that, spend and doesn’t lead to the magical growth. I am trying to think of a real life example where your theory has been successfully applied. Anyone? Anywhere? For sure, that fast rail link to Manchester will kick ass the GDP numbers!

        • Yep, the risk in your argument is that the govt spend ends up just being that, spend and doesn’t lead to the magical growth.

          And the risk in austerity is that we will have a depression with very high unemployment, depressed growth, and huge numbers of people sitting on the scrap heap rotting. Oh wait, that’s what we already have! Austerity wins, right?

          Spending money on stuff people actually want and need but aren’t able to finance because of the broken financial system — a situation that was created by government intervention — is not “magical”. It’s just undoing the ills of propping up the broken financial system. But, again, most of the things I’m advocating wouldn’t add an extra penny to the deficit, so this is really a redundant argument. If Osborne really wants to avoid direct borrowing and spending (i.e. Keynesianism) he could probably still reverse many of the effects of this depression by cutting away red tape, and redirecting idle resources we already have (e.g. RBS, Lloyds). The fact he can’t even do that just underlines how useless he is!

        • Aziz – goosed GDP or austerity. What is the difference? I’ve found this dialogue interesting. We likely have the same core beliefs but vary at implementation; you have faith that somehow govt can do “something” where I have no such faith. Maybe you are right and something could be done; I know of no politician (any spectrum) that is so altruistic and draw my conclusions as I see them. Were it not so. Daily, I wager my wealth in this game and where-ever we disagree theoretically money plays out. My job is not to lose. Feel free to take the moral high ground; there is plenty of room there!

        • We likely have the same core beliefs but vary at implementation; you have faith that somehow govt can do “something” where I have no such faith. Maybe you are right and something could be done; I know of no politician (any spectrum) that is so altruistic and draw my conclusions as I see them.

          I see most of this as a matter of government getting out of the way and letting the private sector grow. That’s the “something” I’d like to see the government do.

        • Aziz – we are of one accord then. Govt clears the way fwd for new growth;no magic wands; simply product meets need.

      • “I did not buy a flash car, kept my older car going, while neighbours bought new cars. They can keep the new car and pay back the loan.”

        I feel your pain! And govt wants them to repay too, but in cheaper currency. Every govt sees this as the way out – devalue and inflate, reducing the “value” of the debt. The flaw is that nominal salaries aren’t climbing, pretty much due to off-shoring and the competition it induces. We are constantly told in the UK that there are “skills shortages” but it is BS. If there were, ceterus paribus, salaries in that shortage area would rise. Apart from govt/union set salaries, name one industry where they are rising.

        The consequence of that is the govt planned way out won’t work as cheaper currency will not raise salaries but reduce the amount left over each month to pay down debt.

        • Agreed.

          Globalisation, and mass migration has reduced the wealth in the 3rd world and raised it in the 3rd.

          We are becoming equal, but some are less equal than others. They are loaded.

          My solution is the forfeiture of the 0-1%’s wealth, which then would erase all Government debt, and allow the economy to circulate capital again. If you examine the issue with transfer pricing in taxation law, much of the profit and real wealth has been locked up.

          I think that an injection of this wealth as a monthly transfer payment to boost GDP through actual market prices. In effect it is just a repayment of tax which was unfairly paid over time, due to the non payment of taxes by the uber wealthy.

          We have the technology to electronic toll tag for motor way use, let the private sector build new bridges and roads and toll the drivers with increased disposable wealth. That will boost investment, and get inefficient and potentially corrupt government out of the way.

    • Scandinavia has had a pretty good run too, and that run continues… GB is in many ways a Scandinavian country that grew into a global empire, and we’re still dealing with the residual fallout of that empire ending… Plenty of energy resources here.

      • I agree, energy is not the issue. England just needs to re-invent itself by living within its means, while actually producing some wealth [instead of stealing it from everybody else].

        The second half of this century should see your country beginning to get its act together. Perhaps people in 2075 will find that they can not live without double-decker buses, or really bland food, or maybe there will be a great need to hire consultants in order too return to monarchy-style governments, or people will get tired of the sun and want to retire to a place where it is gloomy at the time, or… [sorry about that, John, but you Brits can be a tiny bit arrogant at times :].

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  6. Well Chaps you can wait for Uncle Ben to tighten up at the Fed, As for Ronald Reagan… and 12% returns on savings in 1980. A 30 year home mortgage was 16% and spurred the popularity in short term interest only market (what a disaster) Remember the Jimmy Carter Misery Index? It took a lot of $ to free Russia and Eastern Europe, Defend England and Germany not to mention putting up with the French and Italians.
    Reagan cut those numbers by more than half and restored confidence and respect all the while ending the USSR use of slave labor to become a world power.

    Reagan/Thatcher Obama/Osborne you choose..

    Rather than wait for sound economic policy, your best chance is to recolonize Canada…..you can give the French Quebec and half of Montreal…

    The rest of Canada has a motivated work force a booming high tech industry on the west coast, reasonable environmental regs. strong tradition of home rule and plenty of natural resources… Canada might be the New England all over again..
    God Bless Milton F.

      • On the serious side, you should be working on a plan to pick-up the pieces, 50 years ago there was a branch of capitalism that believed used a term that is seldom used today. It was called “Free Enterprise”…Capitalism is a dirty word. The mass media has restrictions on using it in a positive light. You should re-brand whenever you can. .

        • I like economic freedom but it sounds like a god given right. Free enterprise is more heroic and implies that action is needed to obtain and succeed… Free is used as a verb. I agree that research into alternative/solar energy is a good investment like Hydrogen conversion for use when the sun doesn’t shine. A breakthrough in energy production particularly along the cold fusion line might provide a century or more of worldwide prosperity. The goal should be “cheap energy” not just replacing $150.00 a barrel oil. We need a goal to replace $50.00 a barrel oil in todays dollars.. Over the past ten years the US spent several hundred million dollars on solar and battery technology. most of the gains were in reducing manufacturing costs and were not proprietary.. The Germans also made investments. Both countries saw the manufacturing technology licensed to China. …
          .. .

  7. Since the British love their horse and carriage parades perhaps they can create an industry for a return to horse and cart, complete with iPad connectivity, blutooth, air conditioning, air supspension, solar power etc etc. You have the carriage makers?

    That will also save the horse meat going into burgers.

    Problem solved!

  8. Pingback: George Osborne Still Doesn’t Get It | My Blog

  9. Aziz,

    According to my back of the envelope calculations, the REAL or “inflation adjusted” rate of interest on UK government debt is less than investors get in US, Japanese or German debt. If that’s true, that makes a nonsense of Moody’s downgrade. I.e. the MARKET is so keen on holding UK debt that is prepared to accept less interest on same than on the debt of the above other three countries. (Investors actually get a NEGATIVE real rate of interest on UK debt).

    However, my calculations are, to repeat, back of the envelope. Perhaps you’d like to do your own calculations.

  10. My reading of Austrian economics is that the boom caused the bust. Mal-investment etc. And the bust is a depression if the government can stick through the often scary re-adjusting process of rising unemployment and general economic malaise. Usually governments cannot stick with it and they start to re-inflate which cause the ‘depression’ to be classified as a recession. If the government stops with its austerity measures it will be re-inflating and causing greater pain in the long run.

    However if they open up business opportunities for the private sector and for individuals with tax cuts etc. this might be a better solution to government led booms.

    • If the government stops with its austerity measures it will be re-inflating and causing greater pain in the long run.

      I don’t see how stopping austerity is somehow reinflation. The opposite, in fact. Austerity prolongs the slump to an unnecessary degree, much longer than would be the case otherwise. If the government was running out of funding (i.e. if interest rates going higher — 10%, 20%, 30%), I can see why austerity may be unavoidable, but so long as rates are low, it seems obvious to me that now is not the time for a fiscal adjustment, or a fundamental adjustment in the size of government.

      • John, the State of Victoria in Australia, was deeply in debt, a new government did something new and controversial. It allowed a private toll operator to rebuild the freeway into the heart of the city, it used new electronic technology to toll the customer. It invested in the infrastructure, without Government support. Note it reverts back to government control in the far future.

        This would ensure that any roads, bridges, ports etc built have a commercial payback, and are needed by consumers. No pork barreling, and no waste. Of course all monopolies can make super profit, so a super profits tax should be implemented to prevent gouging. The result is business lead investment recovery, instead of Keynesian Government spending.

        For an example of this business lead investment Google Transurban Citilink.

  11. John writes:

    “If the Tories wanted a strategy that would really lead to smaller government (rather than an economic depression) they would invest like crazy at these low interest rates, until we get a strong recovery and interest rates start rising due to increased demand for capital in the private sector.”

    This is false. The government can not invest [efficiently] in anything but infrastructure [which is a good thing], but this only [modestly] decreases the cost of doing business, and little else. The private sector must be functioning efficiency to resurrect demand, something it can NOT do in its current predicament.

    The combination of over-regulation, over-taxation, financialization, globalization [not to mention more robust fraud, lying , cheating and outright stealing going on], have led to a business environment where only BIG business can be profitable [EXACTLY how they designed it].

    One must deconstruct this monstrosity in order to allow small business to thrive once again. This can be done several ways. I particularly like BR’s method of calling off the game, putting all the play money back into the Monopoly box, and starting over.

    • The government can not invest [efficiently] in anything but infrastructure [which is a good thing], but this only [modestly] decreases the cost of doing business, and little else.

      Well, in Britain there’s also a severe lending blockage where banks (including banks bailed-out and owned by the taxpayer) are sitting on huge piles of cash…

      And there’s the fact that the norm in basic research is now government funding… (And look how things like satellites and the internet developed with public funding have ignited massive private growth)…

      And there’s the fact that infrastructure and particularly energy infrastructure could lower costs of doing business significantly…

      So there’s plenty of stuff they could pivot off to ignite stronger business growth before any fiscal adjustment is made. But I think cutting away the red tape on small business and housebuilding is probably the best first step…

      • Lending to unemployed to start new businesses MUST have commercial scrutiny.

        For example, in the old days a Bank Manager, may have lent money to buy a truck, but these days, the contracts for trucking a stitched up by major players. Any loan to buy a truck would be a commercial disaster.

        The world is too complicated for most upstarts these days. All contracts are stitched up by major players, so it is very difficult for small business to compete. Project Managers or any Manager in general would choose the large players, as they provide risk mitigation strategies. e.g. truck breaks down, the reroute another one. If you relied on the small business owner, then that is a business risk. They just don’t take risks, even if it is a cheaper solution (No overheads) anymore.

  12. Pingback: Save Our Bonuses! | azizonomics

  13. Pingback: When All Else Fails, Housing Bubble | azizonomics

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