Friday, 11 September 2009
Two horrific postings to go to bed on! The Commission says Britain is set to crash (see “Dirty tricks or grim warning?” just sent) and here Jeff Randall pours scorn all those who continue to reject a ‘cold turkey’ solution to our ills.
The more we are addicted to subsidy the worse will be the withdrawal symptoms, culminating in the ultimate horror that all our savings disappear in a frenzy of inflation.
Christina
TELEGRAPH 11.9.09
Recovery talk is meaningless to the man with his P45 in the post
Unemployment is the only indicator that counts when it comes to confidence, says Jeff Randall.
"Though things may not look bright
They all turn out all right
If I keep painting the clouds with sunshine"
– Burke and Dubin, 1929
For those with a vested interest in talking up recovery – and there are plenty of them – this has been a good week. As if performing the hit song from Gold Diggers of Broadway, they have been painting the clouds with sunshine.
Profligate ministers, ineffective regulators and reckless bankers who conspired, albeit unwittingly, to create this humdinger of a financial crisis are delighted to identify salvation's early arrival: property prices are up, the jobs market is improving, and the stock market seems more like a playground than a graveyard.
Yippee! There is no need to adjust our sets, normal service has been resumed. The world has been saved; the recession is over. Load up the charabanc with fizzy pop, we're off to the races.
Nice theory, shame about the facts. What has really happened is that a seriously sick British economy has been pumped full of anaesthetic in the form of unprecedented monetary expansion and debt-funded government largesse.
Not surprisingly, with the narcotics of fantasy money and unaffordable public spending rushing through its veins, the patient suddenly looks a little perkier. But these are tranquillisers, not a panacea. They do not eliminate the illness, they merely mask it.
"The patient is still in need of major surgery, and will eventually have to be weaned off the painkillers," says Professor Andrew Clare of Cass Business School. "Debt burdens [private and public] will have to be addressed eventually."
Yes they will. As annual state borrowing approaches £200 billion, about 13 per cent of gross domestic product, the United Kingdom's credit card is all but maxed out.
So what kind of essential surgery does Professor Clare envisage? "Savage cuts in public spending, painful increases in taxation and increases in household saving rates." The side effect of the unavoidable operation, he says, "will be a very muted growth environment".
As any addict knows, what begins as a gentle dose of ibuprofen can turn into a dependency on ever bigger intakes. The British economy, I'm afraid, is beginning to resemble a raging junkie, craving regular fixes of quantitative easing and fiscal stimulus. No sooner do Mervyn King and Alistair Darling administer the drugs than the patient screams for more.
Just like painkillers, when policy medication is dished out too generously, it transmutes from pacifier to problem. At a recent high of $1,000 an ounce, the gold price is telling us what this problem might be – inflation. [For two years now in my periodic economic reviews I have quoted strong opinion that the end problem of this crisis is major inflation. It has, on the face of it, seemed a less and less likely scenario. But Whoa there! Here it comes again -cs]
Faced with three options for eliminating excessive debt – defaulting on it, repaying it through higher taxes or debauching the currency through inflation – governments, on the whole, prefer the latter. Gold buyers, especially the Chinese, fear that this is where Britain and America are heading.
Having spent tomorrow's income yesterday, we are now in the business of churning out money through the miracle of QE. So far, about £175 billion has been injected into the system. In the short run, this obviates the need for grown-up behaviour, but in the long run it devalues not just the currency but the credibility of the UK as a trading partner and location for investment.
Printing money, rather than earning it, is magic-circle economics. The Chinese, who are sitting on the world's biggest pile of foreign reserves, about $2 trillion, prefer not to be tricked, so are buying gold.
As far as Beijing's top brass are concerned, the dollar and sterling are in the same boat – one with a hole in the bottom.
Our political leaders are surely not so stupid that they fail to understand this. In private, most accept the need for a robust programme of budgetary discipline and debt reduction. But with an election less than a year away, few have the courage or integrity to tell us where and how deeply the knife will be applied – and that includes the Conservatives' front bench. At Westminster, straight-talking invariably comes a poor second to political imperative.
As a report this week from the French bank Société Générale concludes: "The pygmies that populate the political and monetary elites prefer to genuflect to the court of public opinion in a pathetic attempt to deflect blame from their own gross and unforgivable incompetence."
To his credit, the Chancellor has at least dragged Gordon Brown and his Cabinet toadies – Ed Balls, Yvette Cooper and Andy Burnham – away from the ludicrous juxtaposition of Labour "investment" and Conservative "cuts". By outlining the need for "hard choices" (without being specific), Mr Darling has highlighted the vacuity of his senior colleagues' propaganda.
Personal debt in the UK exceeds GDP. Yes, what we owe as individuals – about £1,450 billion – is greater than the nation's annual output. At some point, this has to be unwound; not entirely, but significantly. The same is true for government debt. With about 30 per cent of Mr Darling's £671 billion Budget expected to be financed by borrowing, no amount of Keynesian ballyhoo can circumvent this inconvenient truth.
As consumers feel the squeeze and begin meeting their financial obligations, instead of borrowing more to avoid them, the economy will stall. Governments can help put off this day, but they cannot abolish it. The journey from having-it-large to pay-as-you-go will be excruciating, but necessary. Real, lasting recovery – not the phoney kind that we are currently witnessing – will only occur after we have learnt to spend less and save more.
The pain levels are already rising, but are set to become much worse. There were 33,073 individual insolvencies in England and Wales during the second quarter of 2009, an increase of 27.4 per cent on the same period last year. Just about all the leading insolvency practitioners expect the numbers to increase over the next year, as unemployment heads inexorably towards three million.
And here's the rub. Talk of recovery is meaningless to the vast majority of voters, unless it involves more jobs and stable wages. Arcane economic data, remote stock market indices, even trumped-up statistics on house prices matter not a jot to the man who has just been told that his P45 is in the post.
Unemployment may be a "lagging indicator" but it's the only one that counts when workers are assessing the feelgood factor. Between 1998 and 2007, more than 600,000 jobs were added to the public-sector payroll, which helps explain why the illusion of Mr Brown's economic success felt so real for so long. All that is now over. The game is up.
By the time election day arrives next spring, the paint on the clouds will have peeled off. Voters will be left looking at the dark skies of harsh reality.
Posted by Britannia Radio at 09:33