#26. Moving the deck-chairs

UNLESS SUCH THINGS HOLD A FASCINATION FOR YOU, the details of David Cameron’s cabinet reshuffle will be of little or no interest. What matters much more is the logic (if such it can be called) behind what is almost certainly the last big shake-up before next May’s general election.

There are two big ideas behind this move – and both typify the kind of thinking that, over decades, has moved Britain ever closer to an economic disaster. One of these mistakes is a preference for campaigning over governing. The other is the apparent desire to have more women in the cabinet.

Taking the latter point first, I find it astonishing that senior appointments continue to be made seemingly on the basis of gender rather than ability.

The only criterion for appointment to high office should be suitability for the task. If David Cameron is more concerned with what his cabinet looks like than how good it is at its job, he must be every bit as addicted as his inept predecessors to putting spin before substance.

Moving Michael Gove from education (where he seems to have done an excellent job) has been done, apparently, to give him a more prominent role in campaigning.

That’s it, then – the government moves an excellent minister because the Tory party’s immediate electoral prospects are more important than sorting out education.

 
THIS MOVING OF THE DECK-CHAIRS REINFORCES BRITAIN’S SIMILARITY TO TITANIC, though, even there, Ismay and Smith did not reassign officers’ responsibilities whilst water was pouring into the hold (or, in point of fact, actually move any furniture). The economic outlook is such that Britain simply cannot afford to select its leaders on the basis of anything other than ability. As for putting party politics before considerations of substance, any comment from me would surely be superfluous.

Let me spell out what the real issues are.

First, Britain depends on borrowing to create “growth”, and the increment to GDP this year seems sure to be, as usual, a lot smaller than the additional debt taken on to finance it.

An economic policy which involves borrowing money, channelling it into consumer spending and then describing the outcome as “growth” is an imbecility that has been with us for far too long. It has made us by far the most indebted major economy, with formal debt at close to 500% of GDP even without the inclusion of vast informal quasi-debts, such as public sector pension commitments, PFI and the off-balance-sheet debts of state-owned enterprises.

 
Britain’s current account deficit, meanwhile, reveals that we are rapidly running out of time. Though we’ve been in the red on trade for three decades, the big change revealed by this broader number is that our previous big surplus on net investment income has gone up in smoke. Profits and interest remitted out of Britain now exceed the amounts coming in, a situation that can only get worse as more assets are sold to foreign buyers, and more overseas debt is taken on.

A recent analysis suggested that, even on the most optimistic assessment of our net asset position, we can only support a current account imbalance of 4% of GDP for a maximum of five years. Given that the deficit is actually well over 5%, we may have less than four years in which to sort this out.

 
The energy outlook should reinforce a sense of urgency, since North Sea output continues its sharp decline whilst we are years away from commissioning replacements for our ageing nuclear capacity. I’ve long believed that the lights could go out in the winter of 2014-15, and it won’t be long before we find out if I’m right.

 
ULTIMATELY, THE NEED FOR REFORM goes far beyond the need to shore up our energy supplies, reduce our imports and, more generally, find a growth model that does not depend on borrowing-to-spend.

Britain needs new ways of doing business, and time is short. Shuffling ministers who, for the most part, are unknown to the voters can play no part in this process unless it concentrates abilities where they are needed most.

 
Titanic, of course, had too few lifeboats. Britain, as things stand, has none at all.

16 thoughts on “#26. Moving the deck-chairs

  1. Good to here from you again. I did mean to post a comment on your blog when the following 3 articles appeared on the same day in the Telegraph last week:

    http://www.telegraph.co.uk/finance/economics/10959241/North-Sea-oil-revenues-will-decline-more-sharply-says-OBR.html
    http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/10957292/Fossil-industry-is-the-subprime-danger-of-this-cycle.html
    http://www.telegraph.co.uk/finance/economics/10959816/UK-trade-deficit-widens-in-May.html

    Looks like some of your ideas are slowly seeping into the mainstram media, though actually connecting the dots seems to be a long way off!

    By the way, I have read in various places (including a previous article you wrote), that Solar could be the “White Kinight”, it would be interesting to here what the EROEI of solar is, and what a society would look like that used solar as its main fuel (I think in your previous article you touch more on the impact for Utilities).

    Keep up the good work!

    • Thanks. It would be good to think that some of these issues are being picked up by the media. The AEP article, however, seems way off-beam – the idea that renewables might “strand” the energy companies’ huge investment in fossil fuels is nonsensical, in fact I’m composing a blog about that right now.

      Of all the renewables, solar has long looked the best to me – and I particularly like CSP (concentrated solar power). But there are drawbacks, of course, and solar doesn’t provide the concentration (power to weight) of liquid fuels, so is more suited to fixed applications than transport uses.

      As for the trade deficit, the media (with the honourable exception of Robert Peston) do tend to miss the point. We’ve had a trade deficit since 1983, despite North Sea exports for part of that time.

      Hitherto, however, we’ve got away with it, because money coming in from overseas investments has far exceeded money going out from foreign investments here. As recently as two years ago, we earned a net inflow of £26bn from this.

      Now, though, this has turned negative, so we have a trade deficit AND an investment income deficit. This is why the broader current account number is so much more important than the narrower number for trade. The current account number is horrendous (5.5% of GDP), indeed is not sustainable. The only way to keep it going is to borrow from abroad, and sell assets, both of which we are doing. But both mean bigger outflows in the future, as we pay out more interest, and as income remittances to foreign investors increase.

      So, as Robert has explained, this is time-limited by our Net International Investment Position (NIIP)…………..

  2. Tim,

    You have a very good track record on what I would call ‘proper use of public funds’ I live in Frome, we have a slight surplus of school places. Now however we have a Steiner Free School that looks very much like the a now shut independent Steiner School; a few miles down the road.

    In addition to this there are some very significant issues over the nature of the education children will get there and their decidedly iffy racial beliefs.

    Now we have the stories coming out from Academies in Birmingham.

    Given the current situation it doesn’t look like Mr Gove spent public money very well – what do you think?

    • Education is a mess, and no-one could sort this out in just four years, least of all when opposed at every turn by the “educational establishment”, a.k.a. “the blob”. This said, I felt that Mr Gove had made a very good start – and the level of opposition tended to confirm that he was really shaking things up…….

    • Thanks John, brilliant article.

      My standard line on this is: “robots are good at making cars – but no robot has ever been known to buy one”. If low wages were the route to national economic success, Germany and Switzerland would be poor. So what we need is a highly-skilled, well-paid economy giving us competitive output and prosperous consumers.

      I despair, though, about this ever being understood in Westminister, given the obsession with a “flexible” (a.k.a. under paid and under skilled) workforce.

      Instead of highly skilled, well paid workers, we have gaping skills shortages and low pay. Because prices (and especially the cost of essentials) have risen much more than wages, debt has escalated.

      I’m never going to be PM either but, if I was, I’d be concentrating on skills and on ethics, both of which build success in business. High streets full of pawnbrokers, bookies and charity shops tell their own story, I fear.

      As for the pitchforks, I’m sure he’s right. If he is, and if the powers that be realise that he’s right, we’d logically expect heightened levels of surveillance – aah…

      As Marie Antoinette might have said, “let them eat burgers….”

    • Tim,

      Surely the reason say Germany has better paid workers is because of the types of industries they have and the types of high quality jobs they create to produce export goods, as opposed to low skilled service sector jobs in the UK? Surely this is the reason? I think that saying we need better paid jobs to boost the economy is like trying to put the cart before the horse myself.

      Cheers, Joe

    • As the % of tenants increase, then these issues will rise more and more.
      If BoE/Government keep subsidising higher asset prices then they will create a society of landlords and tenants which will not be wise at all.

  3. Joe

    Not so sure about that. I don’t have the figures to hand, but skill levels in the UK workforce are remarkably low, certainly compared to Germany, but wages are lower here. If you wanted to invest in a high-quality business producing premium products, you would be attracted to Germany because of its skills base, and the quality of your products would make you less concerned about labour rates. If, on the other hand, you needed low-skilled but cheap labour, you would prefer Britain over Germany.

    In other words, Germany markets itself to the business community as a high-skilled economy, not cheap, but with solid product demand due to well-paid labour. Britain markets itself as a cheap labour economy. These appeal to different types of businesses, I think?

    • Ok so how do you up-skill your workforce to be attractive to investors? I think if you simply started paying workers more we’d be expensive and unskilled which is even worse. I believe that these sorts of skills and jobs will only be created once the conditions are right for the investments to take place. My logic is that currently investing in stuff like the housing market or stocks or education loans where you are backstopped by the government is probably better and lower risk than investing in new productive assets like a factory.

      I think that interest rates should be allowed to rise as market dictates and after the various bubbles have collapsed it might then make sense to an investor looking for yield to invest in productive assets and then your up-skilling would kick off. Taking the example of Germany, they aint really got a housing bubble have they? Although I am amazed about this as they have had super low interest rates for a while now.

      Good discussion.

      Cheers, Joe

    • Thanks Joe

      First off, I don’t think waiting for the quality of jobs (and the quality of the workforce) to improve will work. I don’t believe Britain is going in that direction but, if anything, is moving down the skills and quality incline, not up it. Second, if we paid people more they would have greater spending power, and that (even with downside) has to be a better option than the borrow-to-grow treadmill that we’re on now.

      I can’t emphasise too strongly that we’re running out of time. Recently my former colleague Robert Peston put it like this. Our net international investment position (NIIP) at book values is nil. An optimistic might hope it’s really +30% of GDP, but even that only gives us 5 years of creditworthiness with a current account deficit of 4% (it’s actually 5.5%, in fact).

      Pessimistic as I am on this, I don’t see our economy moving up the quality chain. More than ever before, our High Streets are dominated by pound-shops, charity shops, bookies and pawnbrokers, which isn’t First World stuff. More people, not fewer, are slipping into poverty, and wages have been below inflation now for six years, making people poorer and reducing spending capacity at the same time. From an investment point of view, we have serious integrity problems (miss-selling, rigging Libor, etc etc etc). I think that a turn-around is essential if we’re not to vindicate the Elliott/Atkinson definition of the UK as a “de-developing country”, and higher wages might – and I only say might – be one way to arrest the slide.

  4. Dr Morgan,

    A most interesting article. On your point about ‘buying growth’ with borrowed money I wonder if you have found a serious politician who is willing to debate this and admit what is going on is of the same ilk as a ponzi scheme.
    I have asked John Redwood to comment and so far he has declined. He simply said that the debts are modest in comparison to the assets of the Uk economy and that as a country we are not bankrupt.
    http://johnredwoodsdiary.com/

    I have tried to include links to your blog on his comments section to his diary but he always deletes them. Are the political elites afraid of the truth ?…and will they be in denial until the 11th hour before the next financial crash ?.

    Perhaps you could request that a link to your website be included with others included from both elected and non – elected opinion formers on Mr Redwood’s diary page ?

    • Thanks for this. John Redwood, who I’ve met, is one of the more open-minded of our politicians, but the general point is that the establishment is afraid of anything that threatens the status quo. The point about assets is pretty meaningless, by the way, unless one can sell them.

      As you and other readers will know, I’ve been warning about these UK economic issues for a long time. I think I’m probably wasting my time.

      So I’m thinking of doing one last, longer-than-usual article (or even a downloadable report) on the UK situation, then leaving it at that and sticking to the global issue of energy in the future.

    • I tend to agree with your decision.

      I do think having a “downloadable report” for general distribution to anyone will be useful for those of us who cannot begin to explain your views to others. I certainly need be able to offer a link to the report, to quote in the various blogs to which I can’t resist contributing.

      I don’t think there is much more you can add on UK economic issues, other than point to symptoms of the changes you anticipate.

      I will look forward to reading how your thinking develops on “the global issue of energy in the future”.

  5. Thanks again Dr Morgan, It seems that already the Uk’s prime assets and intelectual property have been sold of. Why in this respect the establishment have decided we are inferior as custodians to the Germans or French I do not know.
    Anything more would feel to me like cutting into the bone.
    I do hope you will keep up your good work on the Uk economy – I for one appreciate having a view from outside the establishment that can tell it ‘how it is’ rather than individuals at the mercy of party whips or newspaper editors. Atleast those of us that with enough foresight to see what is going to happen can rest easy knowing we did what we could – even if in my case it’s writing the occasional letter to my Mp or a newspaper editor.

    On a wider note I often wonder if the decline of the Uk is by design or incompetence?. Perhaps the establishment so loathed ‘old’ England (proud, patriotic, old fashioned, racist, backward looking in their eyes ) that they felt we needed taking down a ‘peg or two. I have no doubt this was Gordon Brown’s and Tony Blairs view as they sought to ‘rub the rights nose in diversity. Tony Blair himself declared ‘This (England) is a new country when elected in 1997.

    What better way to create the new, to change, unsettle,demoralise an old established country and shape it in a socialist mould than by creating the conditions for economic collapse and forcing through mass immigration?. New Labour and the modern Conservative party’s are not democratic organisations they are ‘projects’ with a radical agenda.The conservative membersship is wise to this and have left in droves – they are an irrelevance.
    My own view is that nobody could be as incompetent and stupid as our political leaders have been – in short they despise the conservative majority and what has happened is partly atleast, by design with a huge helping of short termist thinking and cowardice.

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