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.


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.

Another Empty Obama Promise

The extent of Obama’s duplicity continues to grow apace. And yes — it’s duplicity. If you can’t or won’t fulfil a promise, don’t make it.

From Bloomberg:

Two years after President Barack Obama vowed to eliminate the danger of financial institutions becoming “too big to fail,” the nation’s largest banks are bigger than they were before the credit crisis.

Five banks — JPMorgan Chase & Co. (JPM), Bank of America Corp., Citigroup Inc., Wells Fargo & Co., and Goldman Sachs Group Inc. — held $8.5 trillion in assets at the end of 2011, equal to 56 percent of the U.S. economy, according to the Federal Reserve.

Five years earlier, before the financial crisis, the largest banks’ assets amounted to 43 percent of U.S. output. The Big Five today are about twice as large as they were a decade ago relative to the economy, sparking concern that trouble at a major bank would rock the financial system and force the government to step in as it did during the 2008 crunch.

“Market participants believe that nothing has changed, that too-big-to-fail is fully intact,” said Gary Stern, former president of the Federal Reserve Bank of Minneapolis.

And the hilarious (or perhaps soul-destroying) thing?

The size of the banks isn’t even the major issue. AIG didn’t have to be bailed out because of its size; AIG was bailed out because of its interconnectivity. If AIG went down, it would have taken down assets on balance sheets of a great deal more firms, thus perhaps triggering even more failures. So the issue is not size, but systemic interconnectivity.

And yes — that too is rising, measured in terms of gross OTC derivatives exposure, as well as the size of the shadow banking system (i.e. pseudo-money created not by lending but by securitisation) — which sits, slumbering, a $35 trillion wall of inflationary liquidity ready to crash down on the global dollar economy.

On the other hand, Keynesians — and Obama (in spite of his supporters’ best protestations) is certainly one — are insistent that the easiest and best way to reduce systemic indebtedness is by unleashing additional inflation, and thus reducing the real value of debt.

From Paul Krugman:

To be sure, more aggressive Fed policies to fight unemployment might lead to inflation above that 2 percent target. But remember that dual mandate: If the Fed refuses to take even the slightest risk on the inflation front, despite a disastrous performance on the employment front, it’s violating its own charter. And, beyond that, would a rise in inflation to 3 percent or even 4 percent be a terrible thing? On the contrary, it would almost surely help the economy.

Such simplistic reasoning. Given the sizeable deflationary impact we know that deleveraging in the shadow banking system can have — even in spite of a tripling of the monetary base — we should surely understand by now that the global financial system no longer works by the old rules. We are living in the fat tail of history. 

As I wrote in January:

Simply, the Fed’s huge expansion of the monetary base has still failed to prevent the contraction of this strange and exotic part of the “money” supply. It has failed to prevent the sector from deflating and sucking down the wider economy.

In the years preceding 2008 the definition of “money” became extremely loose. When securities made up of sub-prime mortgages which are in arrears comes to pass for “money” — and came to stand on balance sheets as debt — it should have been painfully obvious that modern finance had mutated into an uncontrollable monster, and that no amount of quantitative easing could prevent prevent the inevitable credit contraction from blown-up asset prices tanking.

The shadow banking sector was never “too big to fail”; it was too monstrous to succeed.

Working toward a “mild” inflationary uptick would certainly debase the real value of debt, but there is a clusterflock of black swans circling above that road, not least the impact on U.S. relations with creditor nations who also happen to produce a huge portion of the goods we consume. What would we do if the Chinese central planners decided to slash exports to America (e.g. by imposing heavy tariffs) and instead recycle their $3 trillion dollar hoard on domestic consumption (after all, they hardly need any more of our dollars)? America would be faced with a painful transition.

Today it struck me that Franklin D. Roosevelt’s famous aphorism that “all we have to fear is fear itself” — at least applied to the present situation — is possibly one of the most dangerous and foolish ideas in history. We have plenty of things to fear; real and present dangers to our civilisation.

Living with a fundamentally broken, fundamentally monstrous economic and financial paradigm is a recipe for future disasters. Here is something for Obama and Bernanke to think about:

One should never stand in a place of danger and say that a miracle will be wrought for them, lest it is not. And if a miracle is wrought for them, it is deducted from their merits.

Shabbat 32a