Britain’s Greatest Depression

This is just a disaster — and more prolonged than the depression of the 1930s:

GDP to January 2013

And even more of a disaster when we consider the impact this has had on youth unemployment, which has climbed far above the EU and OECD averages (although nothing like as badly as Spain or Portugal):

o-UK-YOUTH-UNEMPLOYMENT-570

This is not just a failure of government austerity, although that in itself has totally failed to ignite any kind of growth or recovery. The fiscal trajectory is important (not least for business expectations) — and trying to cut public spending and raise taxes during a severe depression in private activity has been shown repeatedly to just exacerbate the private slump — but it’s just one aspect of a greater problem — the failure to create a favourable business environment that can attract capital and growth to the UK.

Lending to UK business remains severely depressed:

LendingtoUKbusiness

Given that the British government owns the bailed-out commercial banks, it’s a shock that they haven’t leveraged this power to reignite lending to business, and particularly to business startups. So long as businesses are allowed to either succeed or fail on their own merits, it would not be a malinvestment of time, energy or capital to use publicly-owned bailed-out banks to break through the lending freeze.

It is something of a chicken-or-egg problem to say exactly how much of the problem is austerity, and how much of it is a weak business environment. But either way, we are on the wrong track. Business confidence levels are still deeply depressed — lower than they were when Cameron and Osborne came to power:

uk-pmi-services-buisness-confidence-feb-2013

We’re now half of the way to a Japanese-style lost decade. If we carry on on the same track, we may end up with exactly that.

If British businesses don’t have confidence in Cameron and Osborne’s policies, if their policies don’t lower unemployment, don’t create growth, don’t boost imports and exports, don’t result in recovery, and don’t even result in less borrowing  (their stated aim), why do they continue to pursue them?

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We’re All Doomers Now

How bad are things getting in the Eurozone?

Paul Krugman is getting apocalyptic:

The big story: German bonds are now being priced as a risky asset — what the FT calls the “apocalypse trade“. The interest rate on bunds, at 2.21% as I write this, is still very low by historical standards. But it’s above the rate on UK bonds (2.17%) and way above the rate on US bonds (1.88%).

The way to see this is that the market is in effect pricing in a real possibility of eurozone collapse.

In particular, market expectations seem to assume that the ECB will remain utterly indifferent to its responsibilities. The German breakeven rate, an implicit forecast of inflation over the next 5 years, is just 1 percent. That’s a disaster level, implying severe deflation in the debtor nations — or, more likely, a euro breakup.

There is a cruel and almost Shakespearean irony to all of this: the Teutonic monetarists at the ECB, with their sole mandate of price stability, and deep hostility to inflation have had the horrors of the hyperinflation of the 1920s imprinted on their memories. Really, they should have been worried about the credit contraction and austerity of the Brüning years in the early 1930s. Unemplyment shot up, industrial production slouched, hunger was rife, and Germans were willing to vote for a charismatic Austrian anti-semite bent on consolidating Europe into one.

While I do not agree with much from Keynes, he did understand that monetary contractions in a system of fractional banking can totally destroy the productive economy. His response to that was that the answer was government-driven stabilisation. My response to that is interventionism and preservation eventually turns to zombification, and that the true answer to the problem of credit contractions is noticing that fractional banking is a fundamentally unstable and dangerous system, and abolishing or significantly reforming it. But that’s an argument for another day.

From Zero Hedge:

The only quote worth noting from the just delivered speech by ECB executive board member José Manuel González-Páramo is the following: “We cannot completely delegate governance to financial markets. The euro area is the world’s second largest monetary area. It cannot depend solely on the opinions of ratings agencies and markets. It needs economic governance arrangements that are preventive and linear. This underscores my central point that a much more comprehensive approach to economic governance is now the priority for the euro area. And this means more economic and financial integration for the euro area, with a significant transfer of sovereignty to the EMU level over fiscal, structural and financial policies.”

So the ECB has lost faith in markets and now believes that a form of central planning is a better economic model.

It’s a shame they haven’t lost faith in austerity — because it is those disastrous, divisive, technocratic and wrong-headed policies that will drive Europe to the stage of bank runs and systemic collapse far quicker than anything else.

Anyway, despite the technocratic coups d’état in Italy and Greece, a federalised Europe still seems politically and socially impossible. Bureaucrats will be punished for this folly. History always sees to that.