#32. Deep in the hole, part 2


In my previous article, I explained that, whilst Britain’s current account deficit has been lurching into dangerous territory (see chart), no one in authority seems even to have noticed, let alone done anything about it.

UK BoP annual2

Please be in no doubt that the collapse in our financial relationship with the rest of the world is ultra-serious. Current account gaps can be filled only by selling assets or by borrowing from abroad. We don’t, quite frankly, have all that much left to sell, and who in his right mind is going to lend to a country which, already massively indebted, cannot live within its means?

There are three main ways in which markets can communicate their lack of faith. First, they can shift capital out of the country, and this seems to be happening. Second, they can sell off sovereign debt, in our case gilts, which raises the effective cost of borrowing. Third, they can dump Sterling, and under certain circumstances this can force us to raise interest rates.

Capital flight can turn into panic. A weaker pound can hike up the cost of buying essentials such as food and energy. Higher interest rates would be a disaster for a country in debt to the tune of about 500% of GDP. If a big jump in rates was reflected in mortgage costs, the result would be catastrophic.

All of this being so, why does it seem that no-one is watching what’s happening to our current account balance?

Can anyone in a position of authority be quite that stupid?

Well, if the last-ditch effort to bribe the Scots into a “no” vote is anything to go by, they certainly can be.

The flying of the saltire over Downing Street – or should that be Clowning Street? – was ridiculously patronising.

The leaders of all three parties have signed a “vow” promising more powers and money to Scotland, seemingly without even pausing to consider how this might go down in the rest of Britain. (UKIP must be rubbing their hands with glee).

In any case, this (ungrammatical) pledge has little or no substance. On top of this, Cameron, Milliband and Clegg seem to have handed over the “spear point” of their last-ditch panic campaign to Gordon Brown, a man whose premiership was brought to a decisive end by the electorate and who presided, as chancellor, over the biggest borrowing binge in British history.

Can these people be serious? Actually, I think it’s the system at fault, not individual leaders. To be sure, David Cameron has attracted a lot of the blame, but his only real mistake was a refusal to offer some form of “devo max” as a third option on the ballot paper. Ed Milliband clearly fears the loss of a potentially decisive bloc of Labour seats should Scotland leave, whilst Nick Clegg wants to pretend to be the leader of a major party before the Liberal Democrats’ seemingly-inevitable meltdown at the next election.

But it would be naïve in the extreme to blame the whole mess on the three party leaders. Rather, what we have is systemic incompetence. We see this all the way across the public administration, ranging from the tragic (Stafford Hospital) to the appalling (Rotherham) via the simply incompetent (passports, border control, failed IT projects, the rail bidding fiasco – and now, of course, the Scottish referendum).

The system, it seems to me, is not just incompetent but complacent. In few if any of the instances of gross incompetence which have happened in recent years has anyone lost his or her job, let alone their gold-plated pension. In the absence of penalties for failure, incompetence thrives.

If you looked at Britain as an investor would look at a business, you would be struck not just by excessive debt and a severe cash flow shortage but also by managerial ineptitude.

This needs to be sorted out – and soon.

17 thoughts on “#32. Deep in the hole, part 2

  1. It’s all very sad, Tim. Coming of age in the 1970s, I was distraught at the state of my country. In 1976 we were forced to apply to the IMF, and in that same year Chancellor Schmidt of Germany kindly said that Britain was turning into a Third World country. Back in 1975, David Bowie had declared that Britain needed a period of fascist dictatorship, and in 1976 Eric Clapton urged people to vote for the National Front. When the usual politicians are discredited, people turn to some dangerous options. These rock stars were my heroes, and I’d already been looking at the extreme right in my youthful naivety and despair, so I felt vindicated by this. Fortunately, Maggie came along to save us in 1979 with some harsh medicine. Since then, local democracy has suffered, and the multi-nationals now have the whip-hand over the state. Under Gordon Brown’s aegis, the banks were allowed to get away with reckless behaviour.

    To think that the UK finally paid off it debts for the Second World War in 2006, and only two years we were back in even worse debt. I well remember Vince Cable telling the House of Commons in November 2007 that Gordon Brown had been transformed from Stalin into Mr Bean, creating chaos out of order:

    In the Henley by-election of June 2008, when that albino Turk Boris Johnson stood down as MP, Labour came fifth – behind the Lib Dems, the Greens and the BNP. Never in my born days had I seen such a pathetic result from one of the two main parties. This was directly down to the Gordon Brown and his lack of leadership. Never have I seen a prime minister so unable to project leadership, authority and a sense of coherent policy. He is one of the main reasons that Labour lost credibility in Scotland, and hence one of the reasons for the rise of the SNP. It beggars belief to see him taking the lead in the “Better Together” campaign and making policy on the hoof, and to see the coalition leaders allowing him to do so. It’s a sign of the times, and we are certainly in a dire mess.

    • Adam – I share your views. The 70s were a disaster, but Mrs T (and the public) seemed to have hauled us out of it. Now we’re back in a mess that’s the same, or worse.

      Don’t think that I’m an uncritical admirer of Mrs Thatcher – she got some things wrong, but she took over a country that was virtually bankrupt. The establishment almost unanimously opposed her determination to contest the Falklands. And she privatised industries – car-making, airlines and so on – not public services.

      Her immediate successors (Major et al) were a bit of a shambles, and even worse was to come with Teflon Tony followed by Gordon.

      I’ve noticed three central features to this. First, the erosion of responsibility – more than a decade on, we STILL await the full facts about Iraq. Second, increasing arrogance at the top – no heads roll even when incompetence reaches astonishing levels. Third, the move away from democratic capitalism to oppressive corporatism, the corporates being as much in the public as in the private sector.

      Given all of this, incompetence is wholly to be expected. But I’m quite sure that time is now running out, and that we can’t live on debt indefinitely.

  2. I wonder if all this has happened by design or incompetence. My personal view is that the industrial scale poor managment that Dr Morgan describes cannot be explained by incompetence alone.
    For the unreformed communists and cultural marxists that have infliltrated nearly every corner of public life, their plan is working perfectly meeting very little opposition or commentary.

    England, in the words of Gordon Brown, needed to be ‘taken down a peg or two’, a view that has widespread unspoken support amongst many of his colleagues. Behind the scenes Whitehall officials depressingly just see their jobs as ‘managing decline asthough this is an inevitability. In order to display their moral superiority, English culture had to be derided and sneered upon..and with it it’s values of independence from the state , thrift,good manners, fair play and hard work.

    We know that the politically correct elite have little time for the views of the majority of people in England that hold conservative opinions and wish to sideline this silent majority.
    As Powell said we as a nation have been ‘busily building up our own funeral pyre’ for the last 50 or more years. It didn’t have to be this way.

    • Thanks for your perceptive comments. It’s clear to me that change has to come, in politics and in economics.

      You know my views on the economy, where the problems are:

      – a mountain of debt
      – an economy seemingly incapable of growth without borrowing
      – a state that spends more than the country can afford
      – a disastrous financial relationship with the rest of the world
      – the lack of answers to the ongoing plunge in energy supplies

      Politically, the promises made to Scotland must of course be honoured, but can this be sold to English, Welsh and Northern Irish voters? Our system is too centralised and lacks accountability, and is perceived as being in hock to big corporate interests.

      I’m thinking of writing a report which sets this out as succinctly as possible. If I do, it will of course be available here for download.

    • – a mountain of debt (is the result when you borrow/roll over principal + interest for 570+ years … )
      – an economy seemingly incapable of growth without borrowing ( … that industry cannot meet its own costs is self-evident, debt is foundational to every industrial enterprise and to the industrial economy as a whole.)
      – a state that spends more than the country can afford (is why the world is bankrupt: every state is an industrial enterprise.)
      – a disastrous financial relationship with the rest of the world (unfortunately, the rest of the world is in as bad- or worse shape.)
      – the lack of answers to the ongoing plunge in energy supplies (depletion is permanent, there are no answers other than to conserve what remains.)

      The solution to the ‘problem’ (after acknowledging first that there is a problem) is to jettison the myth of ‘industrial productivity’ and ‘growth’ (which is simply an accounting of borrowing and waste) and move on to something else that requires fewer people, cows, machines and near-zero finance. The alternative is ‘Conservation by other means’ ™ a high hard one up the you-know-whattie!

    • Looking forward to reading that report Dr Morgan. In a sense you remind me of the great motoring writer David Vizard. Similar entertaining yet accessible style of writing clearly explaining key principles with great insight and never afraid to go against the doctrine of ‘conventional thinking’.

  3. Tim,

    Have you ever read the book “Normal Accidents”? It’s a very illuminating read. The author looks at a number of industrial accidents, and argues that increasing complexity to prevent accidents (engineering standards, failsafe systems etc) actually fails in it’s task, because increasing the complexity of a system makes failure inevitable.

    I have a feeling that the various failures you highlight may represent ‘normal accidents’, which are in a way byproducts of the increasing complexity used to solve problems. Human beings are notoriosuly difficult things to control, after all!

    • Sam

      I’ve not read the book but I’m familiar with the thesis. My feeling is that what we have is systemic incompetence fostered by a lack of accountability, but I’ll certainly muse on “normal accidents”.

  4. Nice post.
    I am waiting to see how quickly and quietly all the promises will disappear.
    The status quo wont change of course and will do all they can to save the BTL/property speculators assets.

    But can the markets create such a panic anymore? Or will the search for yield make them not to care about this issue anymore?
    Specially when all CBs are coordinated (and not very independent) to continue with the ridiculous easing policies?

    And for anyone who understand this issue, the problem lies with the fact that no matter how well you try to prepare youself for the above again only the asset holders will prevail. Anyone young with no assets and only savings/stocks/etc/etc has no hope in surviving such a market run..

    • Thanks SK.

      I think the govt will struggle to break its word to Scots, but whether MPs from other parts of the UK will play ball is another question. There will have to be carrots offered to English regions (in particular), but the problem here is the extreme centralisation of our system – Whitehall guards power as assiduously as a miser hoards gold.

      Changes are inevitable. First, we have Clacton which, if held by Douglas Carswell, will drive a fissure into the Conservative party. Labour have their own problems, whilst the Lib Dems seem headed for oblivion.

      Then we have the election. Before then we could have power shortages this winter, and I regard the economy generally – and the current account in particular – as an accident waiting to happen. Meanwhile, the combined totals of UKIP supporters and Scots “yes” voters point to growing disenchantment with our political system, not to mention, of course, the millions who no longer even bother to vote.

      Politicians will, whether they like it or not, have to address reforms, and might well be doing so against a backdrop of economic and energy weakness.

      It was said, famously, of an army Captain that “his men would follow him anywhere, but only out of a sense of morbid curiosity”. I will be watching the travails of our politicians in much the same spirit.

  5. Insightful and concise writing as ever Tim – please can you spread this message to a wider audience? Get Robert Peston to interview you on Radio 4 at least!

    • Thank you. That’s certainly an idea – and Robert is a former colleague for whom I have the highest regard.

      More generally, there seems to be a woeful ignorance about the real state of affairs.

      What I’m thinking of doing – still just an idea at the moment – is writing up the UK situation in a report that is as comprehensive and yet as concise as possible, and then make this report freely available for download. I’ll send it to the media and see what response it gets.

    • That’s good to hear – I’m sure you would get on (mad) Max Keiser’s show on Russia Today or try Dominic Frisby (Frisby’s Bulls and Bears – who does internet interviews) and also writes for the ever-wise and sensible MoneyWeek (as their resident goldbug).

  6. Thanks Steve

    I have a feeling – I can’t put it more strongly than that as yet – that we’re heading for a big crunch. Britain and Japan are vulnerable, as you say, and capital markets have been inflated to keep the cost of capital down (see my earlier post on this).

    When this happens, of course, the powers that be will profess themselves surprised – “whoever would have thought that building a debt mountain and inflating capital markets would lead to trouble?”

    • Tim,

      I don’t know if you’re aware of Rune Likvern (guy from the oildrum days). He’s just put a new post up on his fractional flow blog: http://fractionalflow.com/2014/09/20/the-crude-oil-price-and-changes-to-total-global-private-creditdebt/

      I think the key point I take from his post is:

      “From what I have presented on this subject in this and previous posts it appears the global economy is approaching an inflection point where it becomes harder to support a high/growing demand for costlier oil.

      Rock is fast approaching the proverbial hard place and something will have to give.”

    • Many thanks. I’ve looked at this with interest. It fits neatly with my own view which, in brief, is this.

      With low energy costs (= high EROEI), an economy can afford current consumption + capital investment (including positive returns on invested capital).

      When energy costs rise beyond a certain point, however, we can only afford current consumption. Monetary policy becomes geared to supporting consumption and deterring investment, because we cannot in practice afford both.

      Therefore, the higher energy costs are, the lower interest rates have to be.

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