#70. Britain’s disappearing economy


There are times when the very sanity of those running the British economy has to be called into question.

If you think this verdict extreme, please consider the following.

1. Dependent on foreign creditors. The British economy is run “on tick”, in that the current level of consumption requires huge (and growing) subsidies from overseas creditors. In the latest quarter, these creditor subsidies reached a staggering 7% of GDP, and averaged 5.2% in 2015 as a whole.

2. A downwards spiral. This dependency on foreign creditors – which has totalled an enormous £350bn over just five years, and almost £200bn in 2014 and 2015 alone – has been funded by overseas borrowing and the sale of assets, each of which automatically creates streams of future financial outflows (in the form either of interest or of profits).

3. Economic illiteracy. Those who manage the British economy are quite incapable of distinguishing between the creation of value and the recycling of value. Thus, it doesn’t – in their opinion – matter one jot if a value-creating manufacturing job is lost, provided that it is replaced by a value-recycling job (such as a waiter, an estate agent or a “manager”).

4. The abdication of economic sovereignty. Dependency on foreign creditors imposes a straitjacket on policy – for example, and despite what is happening at Port Talbot, a British government that habitually grovels to China is reported to have opposed EU plans to impose anti-dumping tariffs on Chinese steel.

5. Delusions of grandeur. With both the government, and the economy as a whole, running huge deficits, Whitehall spends its time dreaming up extravagant projects – such as HS2, and the replacement of Trident – which the country simply could not afford, even supposing that either investment made sense.

6. Gross neglect. An impending energy squeeze is all but ignored, with the solitary exception of steadfast support for the folly that is Hinckley C.

Finally, the people responsible for this near-disastrous state of affairs actually seem to believe that this situation is indefinitely sustainable, so long as Britain keeps on borrowing from abroad, flogging off its asset base and currying favour with wealthy foreigners.

This has been a week in which chickens have started coming home to roost. In addition to intense anger about the threatened closure of the Port Talbot steelworks, official statistics have reiterated the extent to which the British economy lives ‘on tick’. Whilst President Obama’s criticism of Mr Cameron over Libya was unfair, the broader charge – of British freeloading on the American taxpayer over defence – is undoubtedly valid.

More broadly, though, the British economy as a whole is freeloading, on foreign lenders and overseas buyers of British assets. Not only is this unsustainable, but it creates an ever-larger stream of future financial outflows which shows every likelihood of turning into a lethal spiral.

Let’s start with the current account, which is a prime indicator for the state of the economy. This is illustrated in the following chart.

Bop 2000-15

Source of data: Office for National Statistics

Essentially, the current account measures the financial relationship between the British economy and the rest of the world. Back in 2005, this was a small deficit (£17bn). In 2015, however, this deficit stood at £96bn, equivalent to 5.2% of GDP (though in the final quarter it reached a horrific 7%).

This means that more than 5% of Britain’s consumption – which is one definition of GDP – now comes courtesy of foreign creditors.

Of course, these overseas creditors do not subsidise British consumption out of the goodness of their hearts – the difference has to be matched by inflows in the financial account. What this in turn means is that, last year, Britain subsidised its consumption through a combination of overseas borrowing and the sale of assets, to the tune of £97bn.

Over just five years, the total extent to which Britain has inflated its standard of living, through borrowing and selling off assets to fund a current account shortfall, is £350bn.

This, put simply, is the extent to which Britain is living beyond its means.

(If you do think this is in any way sustainable, by the way, there are lots of nice men who would like to play poker with you).

There is, of course, an even nastier sting in the tail of this kind of recklessness. To understand this, take another look at the chart. As you will see, the chart divides the current account into two components – the balance of trade, and a category labelled “income”. The latter, termed by the statisticians “primary and secondary income”, is dominated by the total of interest and profits paid to the foreign owners of British assets and debt, net of equivalent income from abroad.

As the chart shows, the trade deficit, though persistent, has been relatively static – in fact, it was £36bn both in 2005 and in 2015.

The big difference between those years has been a massive deterioration in the “income” component. Back in 2005, Britain earned a net £19.8bn from overseas investments, offsetting a £36.4bn trade deficit to leave the current account a modest £16.6bn in the red.

Between 2005 and 2015, however, the balance of income swung massively, from a surplus of £19.8bn to a deficit of £59.6bn, which means that we are now adding a financial outflow of almost £60bn to a trade deficit of £36bn, resulting in a total current account deficit of £96bn.

If you have any grasp of financial flows, this should worry you – and the reason for it should worry you even more.

Essentially, when you sell an asset or borrow money, you create a future outward flow of profits and interest.

What this in turn means is that, each time Britain fills a current account gap by borrowing or by flogging off assets, it commits to future outflows such that the future current account deficit widens automatically. Thus, the £80bn swing in in the income account – from a surplus of £20bn in 2005 to a deficit of £60bn last year – is a direct consequence of the process of selling assets and borrowing from overseas.

Of course, if you work in Westminster or Whitehall, you don’t let this worry you. You certainly don’t tell the public how dangerous and unsustainable this is. Above all, you don’t admit that Britain is living drastically beyond its means. Instead, you come up with excuses (“the weakness of the Eurozone economy”), and you curry favour with wealthy foreigners, typified most recently by the grovel-fest laid on for Chinese leaders last autumn. The rest of the time, you dream about how to spend even more money that the country doesn’t have on, for example, HS2 and the replacement of Trident.

Even if Britain had the money for either – which, clearly, it doesn’t – both of these schemes come close to a definition of madness. As well as being unaffordable, HS2 is the wrong priority, when Britain needs better rail links across the North (for instance, connecting Manchester and Liverpool with Leeds, Sheffield and Newcastle), and also needs to tackle a huge backlog in the upkeep and repair of its roads.

As for Trident, the current system theoretically enables Britain to obliterate Murmansk or St Petersburg, with the inevitable implication that Manchester, London or Birmingham will be turned into a pile of radioactive rubble by an opponent with vastly larger numbers of warheads. Since I simply don’t believe that any British leader in his right mind would do this, I favour a more affordable, more flexible nuclear capability, such as nuclear-armed cruise missiles fired from submarines or warships. And, rather than spending money that Britain doesn’t have on a system it could never use, I would much rather see greatly increased spending on conventional armed forces.

The publication of the truly horrific current account numbers for the final quarter of 2015 has coincided with the grim news from Port Talbot, where the steelworks clearly stands in grave danger of closure.

The immediate reason for the threat is the dumping of steel by the Chinese, which is something that Britain seems highly unlikely to counter. According to the government, providing state assistance is not possible because of restrictions imposed by the European Union – an ironic comment, coming as it does from ministers who, in the main, believe that Britain should vote to remain in the EU.

One might speculate that British grovelling to China for investment effectively rules out taking a tough line with the Chinese over dumping. It has been reported that Britain has opposed EU-wide action on the issue. If this report is true, then ministers have (a) been telling the public that they cannot act against Chinese dumping because of the EU, whilst (b) trying to dissuade the EU from taking precisely that action.

The Port Talbot works also suffers from two other, “made in Britain” handicaps. The first is a malign form of taxation – Business Rates, a ludicrous tax levied irrespective of profitability or even sales. The second is energy costs which, for industrial users, are far higher than those paid by European competitors.

At this point, a rational government would be doing four main things.

It would be adjusting energy charges to reduce or eliminate the extent to which industrial consumers subsidise household users.

It would be reforming – or preferably scrapping altogether – the absurd system of Business Rates, replacing it with a higher level of Corporation Tax.

It would be taking action over Chinese dumping of steel.

And it would be providing Tata – an excellent company, by the way – with financial support sufficient to keep Port Talbot viable whilst these essential measures are implemented.

In reality, none of these things is likely to be done. At root, the problem is a familiar Whitehall ignorance which believes that manufacturing doesn’t really matter very much.

Whitehall, you see, all too easily believes that a job lost in manufacturing doesn’t matter if, instead, we employ an additional estate agent, “manager” or pizza-delivery driver. This misapprehension – perhaps fostered by the way in which all jobs are aggregated together in statistical publications – reveals gross ignorance, not just of supply-chain considerations but also of the process by which value is added in the economy.

In short, government does not understand the difference between creating value and simply recycling it.

What has been happening has been a hollowing out of the British economy, with asset ownership being traded for short-term consumption, whilst high value-added jobs have been replaced by more peripheral, casual and lower-paid employment.

Of course, I might be accused of venting pointless frustration, because, in practical terms, it may already be too late – not just for Port Talbot, but also for a British economy managed on the assumption that a country can live ‘on tick’ indefinitely.

The point is drawing ever nearer when some very nasty events occur. I will leave you to ponder what these nasty consequences might be, suggesting that you consider the possibility of a sharp fall in Sterling, a sharp rise in Britain’s cost of borrowing, and a simple inability to go on selling assets or borrowing from abroad.

Conceivably, there may be someone reading this who believes that this will never happen, and that the UK can continue indefinitely to live far beyond its means. If so, that person has all the qualities of vision and understanding to qualify for a top job in government.

For everyone else in Britain, the outlook is grim. Living beyond one’s means is not a sustainable policy.

For far too long, Britain has been governed by people whose approach to economics makes the Charge of the Light Brigade look like a sensible military operation.



60 thoughts on “#70. Britain’s disappearing economy

  1. I have just finished reading Robert Gordon’s ‘The Rise and Fall of American Growth’. Any chance of a book review from you on that one? Something to cheer us up with…

    • Gordon argues that we saw a great wave of innovations 1870-1970 and the transformation in living standards they caused cannot be repeated, hence the new normal is low productivity growth (and value recycling rather than value creating?). The book is 760 pages (but very readable) or there is a five-pager by Robert Gordon from the American Economic Review 105(5) 2015, ‘The Economics of Secular Stagnation’, freely available on the net, with the focus more on the past decade than the past 145 years the book covers. Gordon appears to inhabit the conventional economists’ bubble, so lots on GDP, Solow Residual etc but not a lot of time for potential impacts of climate change or end of cheap oil, nor for the idea that much of the Solow Residual was cheap energy (although, page 563, Gordon states “there was a substantial increase during 1929-50 in horsepower per unit of constant-cost capital equipment, as well as a vast increase in the amount of electricity consumed per unit of capital.”).

    • Sounds interesting, and I will look into it.

      The technology point is interesting. We certainly live in an age of exciting technology, but little of it seems to have commercial impact. For me, high tech means – as examples – pharma and electronics. Yet a lot of what we think of as “high tech” companies actually earn all their incomes from advertising, which is about as “old economy” an activity as you can get!

  2. Nice article. Very sensible analysis. Unfortunately I doubt anybody in the Tory government will take a blind bit of notice.
    You mention upping corporation tax. I think your first problem there would be to get the big corporations to pay any tax eg Google, Vodaphone, Starbucks etc. Complex company structures and moving monies around Europe in various tax havens means paying corporation tax in the UK seems to be almost voluntary.
    Maybe a levy based on turnover paid directly to the local government might be an alternative. I accept turnover is suppressed for a number of reasons but it is a bit more difficult for bigger audited companies.
    HS2 I think has more to do with Osborne’s political ambitions and should be kicked into touch straight away. We would be better off maintaining what we have now rather than so called improvements.
    Couldn’t agree more with your ideas for nuclear deterrent.
    I don’t think any politician should be allowed to quote figures without clearance from the OBR or some agreed respectable independent body.
    There you go. My two pence for what its worth.
    Keep up the good work.

    • Thanks, much appreciated.

      I’m sure you’re right that no MP – Tory or otherwise, for that matter – will take any notice. I see the establishment, or most of it anyway, as a collective – I still shudder when I remember Tory MPs applauding Blair on his last appearance in the Commons.

      Upping CT was simply one way of relating the tax to profits, or at least sales – in a previous article I described buiness rates as “the economic equivalent of strychnine”. In fairness to Geore O, he does seem to be cracking down on corporate non-payment of tax. Incidentally, I think you’ll find that Business Rates don’t go to local authorities, but to the Treasury.

      HS2 is indeed a nonsense – it won’t reach Birmingham for decades, let alone its final destination (Wigan) for decades after that. As far as my reading of the UK situation goes, anything that’s more than a decade away is likely to be irrelevant.

      As you may know, the OBR’s recent report, just a few months after the previous version, shows A LOT less optimism over the current account – they still expect the deficit to shrink, but no longer by very much……

  3. Tim, you state that “for far too long, Britain has been governed by people whose approach to economics makes the Charge of the Light Brigade look like a sensible military operation.”

    Fraser Nelson makes the point in The Spectator today that, “successive politicians and policymakers have taken a superficial approach to poverty and reform, passing bills that they do not understand.”

    The point is that politicians today are dangerous mongrels: a cross between charlatan and fly-by-night. I had encounters this week with local politicians in Moray on the back of my Moraymint Chatter blog essays on the EU Referendum. Both politicians exhibited breathtaking ignorance about the history and workings of the European Union. What’s worse is that they seemed both proud of, and dogmatic about their unfounded and unarguable positions.

    I have little more than contempt these days for The Political Class. I lump all of them into a single, indistinguishable cohort. More and more I come back to Aleksandr Solzhenitsyn’s take on politicians: “Don’t believe them, don’t fear them, don’t ask anything of them.”

    The decline and fall in the quality of politicians in this country of ours is depressing to observe but, moreover, is dangerous for our society as a whole – as your latest post makes clear.

    • Thanks. To me, the political elite is the tip of an establishment iceberg. These people seem characterised by self-interest and a total lack of scruples. Of course, there are a few exceptions, but not enough to make any difference. How the current shower will cope with a real crisis – the economic equivalent of 1940, so to speak – is a gloomy thought…..

  4. Tim

    Me again!

    You say, “conceivably, there may be someone reading this who believes that this will never happen, and that the UK can continue indefinitely to live far beyond its means. If so, that person has all the qualities of vision and understanding to qualify for a top job in government.”

    I’d be very interested to get your take on Harry Lambert’s piece in The New Statesman yesterday in which he states, “our debt wasn’t and still isn’t particularly great. It’s now about average, and if anything still below it.” He goes on, “there is no relationship between the rate at which the UK has cut its debts each year and the rate at which it has grown. On a mathematical scale from 1 to 100, the relationship rates as a 16, or as nothing at all.” And, “nothing in Britain’s history supports Osborne’s thesis. The UK’s debt wasn’t unusual, excessive or imperilling in 2010, and it isn’t now.” You WHAT?

    My gut feel is that Lambert could be analysing the situation through the lens of the economics of the Industrial Revolution – fossil-fuelled economics rather than Surplus Energy Economics, but you’re best placed to comment on that.

    Here’s Lambert’s article which I really do think merits a riposte from you: http://tinyurl.com/zawp4co

    All the best …

    • Thanks for this.

      I’ve perused this article – I need to do a more forensic job on it – but he seems to be talking only about government debt, not the national total. This is because his theme is that Osborne’s austerity policy is/was mistaken.

      My point is a very different one – it is that, for the country as a whole, (1) annual borrowing and asset sales have, collectively, become a means of supporting artificially-inflated consumption. and (2) that each such exercise creates new future outflows.

      On purely government debt, his historical point is valid, but of limited relevance. Yes, government debt was enormous in 1815, but that was the price of defeating Napoleon – and came down quickly, thanks to the Industrial Revolution. Again, government debt was very high in 1945 – but that was a result of defeating Nazi Germany and Imperial Japan. And the alternative was……?

      Osborne’s point in 2010 was that the debt ratio had shot up, and we were adding to government debt at a terrifying rate (£150bn in a single year), which we couldn’t go on doing.

      The argument that cutting government debt impairs growth isn’t surprising either – it is “negative stimulus”, after all.

      But my point is that you can’t go on indefinitely boosting consumption by trashing the national balance sheet – which, incidentally, was exactly what the banks were doing pre-2008, when they were generating ‘profits’ – and hence bonuses! – at the price of over-stretching their balance sheets (and we all know how that ended……)

    • “On purely government debt, his historical point is valid, but of limited relevance.”

      Thanks for that.

      As an economic layman, I’m often baffled by the relaxed attitude to debt of some economists. To me, the historic perspective is a bit like the alcoholic saying that because he’s only drinking one bottle a day compared to his previous three, he’s now OK.

      Like the alcoholic, our past situation – making things for the home market and for export – was in better shape to withstand the ‘three bottles’, whereas now, we’re not in so fortunate a spot.

      Given our struggle to eliminate the deficit, where’s the money to come from to pay off our national debt – even at rock bottom interest rates?

    • Eddy

      You are right about this – indeed, I’ve been running a series here on how the global economy has been turned into a giant Ponzi scheme.

      Well before 2008, we had created debts of such magnitude that they could never conceivably be repaid.

      2008 created a new, more immediate challenge – “can we even keep up with interest payments on this mountain of debt?” As things stood, the answer was obviously “no”.

      So official, “policy” rates were slashed to almost zero. But that was never going to be enough, because the interest rates that matter are set by the market, in the form of bond yields.

      So then we created huge amounts of new money – “QE” – and bought bonds with it. This pushed bond prices up, so yields down. This is the so-called “ZIRP” – zero interest rate policy.

      Unfortunately, this simply made borrowing dirt cheap – so we have borrowed even more since 2007 than we did during 2000-07. ZIRP has failed, so some are suggesting “NIRP” – negative rates. That can’t really work, though, unless you ban the owning of cash. Hopefully, it won’t get to that, because early evidence from Japan playing with NIRP are dire.

      Where does this all end? Well, how do all Ponzi schemes end?

  5. Hello Dr Tim. You mention the need for higher corporation tax in place of business rates, but it is well that some (or many) international companies treat UK corporation tax as voluntary. What are your thoughts on the following suggestion?

    In addition to normal accounts, HMRC should ask the likes of Azamon and Barsucks to present accounts that show the effect of not including any business conducted in the UK. The idea is that the two sets of accounts would cut through the financial miasma and reveal the profit from doing business in the UK.

    And the company could be asked to pay UK corporation tax according.

    • Good idea, though it would require international co-operation. In fairness to George O, he is at last acting against tax avoidance by big corporates.

      My main point is that Business Rates are insane, being unrelated to sales or profits. Even quite small businesses pay £50,000 a year – £1,000 per week – irrespective of business performance. Assuming a gross margin of 20%, they have to generate sales of £250,000 just to pay business rates, before we even consider salaries, NI contributions, heat and light, stock and so on…….

  6. Thanks Dr Morgan for such a clear and interesting analysis – truly shocking that so much of the bad news is being ‘buried under the carpet’ in this age of industrial scale political lying.

    George Osborne was telling us recently that ‘Britain deserves a pay rise’..well quite evidently we do not and need to get a grip on reality.

    In January 2016, the last month for official figures, the UK imported £202m of steel from the rest of the EU and only £80m from the Rest of the world. The way EU energy, regulatory and procurement policies are enforced in the UK versus the continent allow much more steel to be produced in the rest of the EU than here. This should be one of the prime issues.

    I suspect the impact of ‘Chinese dumping’ has been exaggerated to deflect attention away from how much Steel is imported from Europe. Mr Cameron it seems is terrified of anything that might derail his beloved Eu project.

    Would Mr Cameron really be so wicked as to attempt to bounce us into staying in the Eu to help his friends in big business…I think yes.

    • Thanks. Politics really has reached new lows. As for the EU, it might interest you that, when 36 FTSE bosses wrote to The Times opposing Brexit, their 36 companies spend EUR 21m lobbying the EU, and get EUR 120m in EU grants….

      Be a bit careful on those steel volumes – steel can move from producer via stockholder to end-user, and in any case, in an over-supplied market, the cheapest seller can be the price-setter, even at modest volumes.

      Personally, I favour leaving the EU. But neither “out” nor “in” is a panacea – an economy needs to stand on its own two feet, creating value (rather than simply recycling it), making things the world (including domestic consumers) want to buy, and living within its means.

  7. Thanks Tim for some thought provoking ideas…….following what you said could a Brexit be the something nasty precipitating a sterling crisis?

    • In short, yes it could.

      Let me add that this needn’t be a negative response to Brexit. Rather, it would be the trigger for something that the market wants to do anyway.

      In my experience, markets are often itching to do something, but don’t do it until there’s a “story” to relate it to.

    • Just to add, Sterling (given huge UK banking exposure) is always suspect if you expect any kind of banking trouble. Thus, Sterling slumped in ’08. There are plenty of reasons for similar banking worries now.

  8. Which means that the referendum in June is going to be really difficult choice – with awful timing.

    • David:

      Let me give you my view of Brexit.

      First, “no change” isn’t on the ballot paper. If Britain says no to exit, then the past habit of sulking, being awkward and demanding special terms is over. The UK will have to accept EU decisions. National vetoes will gradually disappear.

      Second, “Brexit” will not solve all Britain’s problems – neither will staying in. Then again, neither decision will be a disaster in itself.

      The UK needs to stand on its own feet. Not live on asset sales and credit. Not grovel to wealthy foreign countries. Not let down our friends when it suits us (we have let down the US very badly, twice, in recent years). Change our ethics, both in politics and in business. Find a way to change politics, to somehow escape from arrogance, self-serving, incompetence and dishonesty.

      These, for me, are the real issues. The Brexit question, as I see it, is “which option makes reform likelier?” I think the answer is Brexit – but it’s not a panacea. I hope this makes some sense?

    • I would like to think that Brexit would force a rethink but my guess is that the “ruling classes/elite” would simply see it as being freed from the overview of European courts and legislation and carry on as before. Europe has many problems but it has benefited this country in terms of workers rights, human rights legislation, conservation etc. None of which are perfect and they have spawned some odd events but at least the cartel that runs the government and the courts can be subjected to some sort of outside scrutiny. For those reasons I am for remaining. I do accept that it is very much the choice between a rock and a hard place!!

    • Yes, that’s the danger, and the EU certainly has done some good. The British approach has often seemed to me to be “what can we get out of it?” instead of “what can we contribute?” I share your fears in one respect in particular – human rights.

      Either way, I don’t see the current course of things as sustainable, and neither leaving nor remaining will, in itself, change that.

    • I fail to see how the EU protects human rights when it is imposing corpus juris, a legal system based on the Napoleonic code in which hard won British rights like habeas corpus are on the way out.

    • Lindsay – I agree, but I am very far from complacent about the UK on this. On human rights – by which, in this context, we really mean civil rights – I don’t trust the UK establishment.

      The government has made no secret of its plan to scrap the Human Rights Act (which as you’ll know is not related to the EU) and replace it with a UK version. I simply don’t trust them on that. Freedom of speech has already been restricted (by far too much, in my opinion), and the abolition of “double jeopardy” worries me as well. Britain is almost alone in Europe – the only other exception I can think of is Sweden – that has not been either occupied, or ruled by a dictatorship or a politburo, within living memory. That seems to have caused complacency.

      For me, the system is already too biased towards the elite. Centuries ago, when a Law Lord was told that British justice is “open to all”, he replied “yes – like the Ritz Hotel”.

    • Well much of what you rightly complain about comes from the EU – the PC restrictions on freedom of speech; abolishing double jeopardy is part of corpus juris. Furthermore if you want a nightmare look at the judges on the ECJ and the ECHR and their histories.

  9. Tim,

    So should I be getting some more chickens then & dusting off those old John Seymour books (Self Sufficency)

    It seems to me though that we have a massive failure in both the managerial & political classes in the UK. Why for example do we have a large export led motor industry none of which is owned here?

    Any suggestions for a way forward

    • Not sure I know what to do about it – wish I did. The biggest single problem might be getting rid of First Past The Post, which entrenches the incumbency. Short of this, the only way the incumbency goes might be in the event of abject failure.

      As for foreign ownership – for example in the car industry – I’ve commented on this before. Britain has huge strengths in innovation, but management is a weakness – by contrast, the Indian-owned JLR has beeen a managerial success, and much the same can be said of German and Japanese-owned car manufacturing.

      As small British firms grow, something goes wrong when the bean-counters and the bureaucrats take over from the innovators and the entrepreneurs.

  10. Tim,

    Some very helpful comments on Brexit – thanks. The level of debate here is lamentably awful. The politics of fear with little sensible argument even in the so-called quality press. Spain might be a sensible place from which to watch the drama!

    • Well, if you avoid the ex-pat areas – which I have – then it is. This said, many Spaniards intensely dislike the Euro.

      The debate is indeed lamentable, not least because so much of the media concentrates on the trivial.

  11. Hi Dr Morgan

    I’m also reading Robert Gordon’s book and it seems to me that to the non repeatable technology factors enumerated by Gordon you can add demographics and globalisation as additional challenges. Whether automation/AI can confute Gordon’s thesis remains to be seen.

    If you add to this the depredations of the banking system and the fact that we have morphed from a productive to an extractive economy and you have what, to my mind, is a perfect storm of systemic factors.

    As others have said the current crop of politicians are self serving pygmies who not only have no solutions to these issues but don’t even see that there is a problem and to say that one cannot be optimistic about the future is somewhat of an understatement.

    My view, and it is a depressing one, is that the system will crash at some point and one must hope that some halfway sensible policies will emerge from the rubble that go at least some way to tackling these fundamental challenges. I also agree with you about Brexit; I shall vote to leave and hope this may be a catalyst for change.

    • Have you any survival tips Dr Morgan in the event of a major financial ‘event’.

      Perhaps it would be sensible to keep stocks of tinned food a little higher and convert a quantity of sterling into US dollars kept in a secure location ?. I have heard sterling could go as low as 60p to the dollar….

      Or is that too alarmist………..

  12. HI Tim
    I read this and couldn’t help thinking that given the combined world economy is cashing cheques it cannot bank, isn’t looking at (just) the specifics of the UK situation a somewhat irrelevant exercise. ie all debt/economies are completely interlinked now and a “localised” solution does not change the ponzi of the whole scheme. In effect, you’re arguing about trying to tidy one room on the titanic. So, as a politician, where are the incentives to not let the people spend well beyond their means … the whole things going down.

    • Very good point – as you may know, I’ve been running a series about “the global economic Ponzi”, and indeed the UK is just one part of that. I’m planning the next piece in the “Ponzi” series right now.

  13. Tim, certainly a timely article, but as I know you are not wholly conversant with Modern Monetary Theory, let me make a few points about the economy
    1] Overseas imports of ‘wealth’ in the form of investments into Britain are a benefit. However they have to be ONLY in Sterling. Using another currency like the Euro or US dollar would be catastrophic [see Argentina] I assume we are talking about private debt, not government debt.
    2] see above 1]
    3] economic illiteracy. The whole world is infected with this virus. The sore point is that the resultant misgovernment is quite unnecessary. MMT points the way because it describes what can really happen. As Bill Mitchell says “We live in an MMT world” It just needs to be understood.
    4] The Lisbon Treaty seems to have done that, insisting the UK stop creating new money or matching any with Gilts. A good reason to revisit the EU obligations. Sheer ignorance.
    5] Deficits are not the problem. Deficits are what stops the country falling into recession.
    It sounds here that the problem is choosing appropriate projects to spend money on.
    6] Neglect. That’s because we do not actually know what to do. That goes for all of us, all over the planet. Our western nations are now “mature” economies, really only requiring maintenance to keep going. WE dee decadent spending , all financed with credit on fluff, The Olympics was one, but lots of Museums [the new churches] galleries, shopping malls, booms in holidays and travel.
    University courses of no empirical value. We neglect essential maintenance, 100% literacy, the environment, and so on.

    We are all doing it. The USA is self destructing, Energy needed to get things going again, doing useful work are neglected. The UK is just typical of the sordid situation we are in. The most influential people just want to drive us forward over a cliff into ruin. Maybe they don’t see they are shitting in their own nest. They make it impossible for the poor to participate into the economy, then lament no one is buying stuff. So Helicopter money gets an airing. There is a valid solution but see point 3]

    • Cant agree. Take point 5 – deficits aren’t the problem. Because you then state why they are the problem.. ie that there is nothing productive to put the deficit spending towards … which then logically makes the deficit a problem. This is because clearly the worlds resources are finite, unlike the magic infinite resources of MMT.

    • Sorry, Ross. You are not correct. “Deficits are not the problem” is correct, [always within reason]. The only way currency can grow is by deficit spending, compared to taxation.
      Re MMT you commit a howler. MMT is what the economy we have ACTUALLY IS, so we already live with “unlimited” resources, so to speak.[your description]. MMT just says it’s what we have. MMT is not hypothetical, It is reality. That word “theory” can be misleading. Personally I prefer to substitute “Mechanics”, to bypass the trap you have fallen into.
      Right now we still have scope for productive investment spending, even if a lot of it is maintenance.
      But in the sense the western economies are Mature, then productive spending is definitely on a downward trajectory. As Tim so ably puts it we are now recycling more than creating wealth.

    • MMT does describe the current system, but that doesn’t make it in any way sustainable or ultimately plausible in a closed system. Yes, the present system requires continual growth of the money supply but this doesn’t translate to unlimited REAL resources – its not plausible to confuse the two. Its also not about the balance sheet of unlimted “money collateral”, its ultimately incomes/ wages where inflation isn’t now able to outpace the rise in true costs. Demand destruction is kicking in so that the “poor” can no longer participate in the economy.

    • In a way sustainable/ non sustainable future is slightly off topic and needs its own topic.
      The sheer fact that MMT does illustrate how our economies really function is drowned out by neo-liberal noise and its impossible to get politicians to listen to MMT.
      It’s not going to solve our problems way off into the future because the moment the electricity grid goes down so will all our files, our banking, our economy, our food.
      So lets in the interim get the system right. It should give us some breathing space and not subject us to instant chaos.
      If you can follow on from this lecture, you will have some idea just how we have screwed up;

    • I’m staying out of the MMT debate, but not because I don’t understand it. Some time back I wrote an article here about money – what it is, how it is created and so on.

      My problem is a broader one. There is a whole sub-discipline of economics known as “monetary economics”. This has ruled the roost since 2008, when governments effectively abdicated from economic policy and dumped it in the lap of central bankers – whose only field of action is monetary policy. I don’t think this focus on the monetary can work – and here’s why:

      As I see it, there are two parallel economies – the “real economy” of goods, serevices, labour and resources, and the “financial economy” of money and credit. The financial economy consists entirely of the aggregate of claims on the real one. This makes it a tokenisation of real economic activity, and therefore subsidiary to the real economy. So I don’t think that monetary policy can fix the “real” economy. I suggest that evidence since 2008 bears this out!

    • I agree there are two parallel economies. Finance is about 45% of the total, I saw. However as Michael Hudson explains finance is the liability side of the economy – the cost of doing business.
      Howard Kunstler says the “Economy is a two headed monster. One head is the trade in real goods and services. The other head is financialized traffic in swindles and frauds that surrounds banking”.
      Is some tipping point going to be reached if the 2nd head is more than half of the total economy?
      Any thoughts there?

    • I think there’s a distinction here. What you are citing is the division between two different parts of the same economy in terms of activity – financial activity, such as banking; and other activity, such as manufacturing, and services other than finance. There are those who would argue that finance doesn’t create value at all, but merely reallocates it. Some have even said that finance is a negative element in GDP, merely a cost imposed on the rest of the “productive” economy. If finance doesn’t create value, tying up too much of our capacity (labour, skills etc) in it weakens the overall total.

      My view is a different one. It is that there are two, quite distinct or “parallel” economies. One consists of “real” activities, goods, services and so on. But, without money, this would have to operate on a basis of barter – very inefficient. So we created a parallel, “financial” economy, a sort-of mirror-image of the “real”, physical economy.

      So far so good – this actually helps enormously.

      But by creating a financial economy, we also create scope for divergence. Money has no intrinsic value – its only value is as a “claim” on real physical goods, services or assets. These should be roughly in balance – the aggregate of “claims” (money plus debt) should be roughly the same size as the “real” economy. We can let it be slightly bigger, because this allows some growth.

      But when the financial economy – the aggregate of all claims – gets much bigger than the real one, there is an “excess” of claims, which cannot be met. Claims which cannot be met must, by definition, be destroyed. This can happen in several ways, but the principle ones are (a) default, or (b) devaluation (the erosion of claims, through inflation).

      Having created huge “excess claims”, we have been trying to avoid a default by manipulation. But I don’t believe this can work – leaving us with default of some sort as an inevitability.

      Thus far, since 2008, events have followed my theory. Indeed, today, the IMF has warned of economic “derailment”.

      Now clearly, this does not mean that factories or shops vanish, or that workers or machinery somehow goes up in smoke. It means, pretty obviously, financial derailment.

      To give just one example, there exists an aggregate $7 trillion “bet” on (a) the USD and US rates remaining low, and (b) the emerging economies continuing to outperform. This bet is going wrong, so $7 trillion is racing for the exit doors. That is going to damage the “real economy”, through disruption – but its root cause lies in finance – not in anything wrong with the “real” or “physical” economy.

      Hope this makes sense?

    • Sorry Tim, not quite certain of your thesis. It sounds new. As you saw I can quote Kunstler and Hudson, and others who talk about a the economy of two sides, but you are describing something different, more separate.
      I’m not sure how that can be.. the two sides are so intertwined, as should be the case because money represents the claim in every transaction. Fiat money cannot exist as barter and it needs an intermediary, a bank. So all transactions are three sided, banker,buyer,seller. – as said by Steve Keen et al. All money is debt as well, no debt, no money. So I don’t know how there can be your ‘excess claims’ except on real goods and services, and inflation resolves that.

      The example you give is a bet so if lost it would collapse and some involved would lose money.
      That financialized economy is just wagering on insurances etc between banks and their investors. Short selling included. These are what I think of as a separate economy, but are only of moment if they interact with real resources, which is peripheral mostly[?]

      Can you explain in more detail the point of division in your theory and where it lies?

  14. Hello Dr Tim. I see there are some comments on the economics of the EU and a call for the level of debate to be raised (?).

    Have you read Myth and Paradox of the Single Market – Michael Burrage?

    Burrage laments the failure of any British government over 40 plus years of membership to keep a running, or periodic, count of costs and benefits of membership of the EC or the EU.

    In Appendix I, Burrage shows that the single market has led to a decline in the proportion of goods exported by the UK to the EU, as a proportion of GDP. The proportion has declined from 18.7 per cent in 1973 to 16.5 per cent in 2013. So no benefit to be seen there.

    In the year 2013 the net cash transfer to the EU was about £11.5bn, including those sums that the EU calls its ‘own resources’. Lord Mandelson is quoted (speaking in 2004 as EU trade commissioner designate to the CBI) as saying that the cost of EU red tape is roughly double the economic benefits generated by the Single Market. In 2006 Günther Verheugen, European Commissioner for Industry & Enterprise, stated that the average cost for member states was 5.5 per cent of GDP (so €600bn across the EU then). In his cost estimate, Prof Tim Congdon concludes that, in 2013, EU membership cost the UK about £185bn or 11.5 per cent of its GDP.

    Is it any surprise that the politicians do not provide hard data on the economic benefits of EU membership? It is clear that the case wouldn’t stand up.


  15. I’m trying to get my head around ‘Costs and Compliance’

    If I run a business I (may) have to comply with EU standards (agreed)

    Now if there was no EU I would have to comply with domestic standards BUT if I wanted to export I would have to comply with possibly multiple foreign standards (more expensive)

    If I didn’t want to export (which in the context of the current situation isn’t a good thing) none the less I may be supplying business’s that do – so I would have to comply with whatever standards they adhere to. Again certifying compliance with a single standard would be much simpler than multiple.

    Finally of course assuming the EU never existed – or even now that it does, presumably some standards – say DIN or US Standards may well become/have become the markets preferred standard rather than the result of a decision by governments to set and adopt them. Of course that could then mean that the UK has no say in the standard adopted whatsoever. Is that a good thing?

    Or have I missed something?

    • Maybe it depends on what kind of say Britain has, and what we mean by “Britain” having this “say”.

      I mention this because big corporates – including British ones – lobby the EU,not for less regulation, but for MORE. They do this because it disadvantages smaller competitors.

  16. Hello John. I am not sure if your comment was a response to my post or not. Anyway.

    We may be digressing from consideration of the UK economy and the economics of EU membership towards UK sovereignty issues, but in some ways they are all inter-connected.

    Our lives are ruled by the Acquis Communautaire. The Acquis is the rulebook of the EU – the sum of its laws . This cumulative body of legislation must be adhered to by all states. In all, Brussels is now responsible for about 75 per cent of our laws, leaving us with 170,000 pages of EU diktats to obey. The rules apply to 100% of our GDP, not just to the 10% that is traded with the EU.

    The British MEP Daniel Hannan wrote: “Although it is reasonable to accept a degree of harmonisation of cross-border questions, Brussels is currently administering a number of policy areas of essentially domestic concern: farming, fishing, employment law, industrial relations, the status of local government, the interpretation of human rights, transport policy, immigration, defence, energy policy”.


    Anybody who thinks we are not ruled by the EU should try selling loose fruit or veg without metric measurements. The sale of loose fruit and veg etc must be by the kilo, and if retailers and traders sell exclusively in pounds they risk a risk a fine or six-month prison sentence and the confiscation of their equipment. Ironically, although the pint has been ‘saved’, a pint glass can no longer carry the crown symbol but must instead have a ‘CE’ marking, as if to say, ‘Enjoy your 568ml measure of beer but never forget who is really in charge here’.

    • Just to point something out here, “no change” is not on the ballot paper – if voters choose “remain”, the ongoing loss of sovereignty will continue. That’s just pointing something out, by the way, not taking a pro or anti view on Brexit.

  17. But as I have already suggested would we be much more sovereign had the EU never existed?

    The whole neo liberal project is to take power away from the people

    • I’ve no way of knowing about the sovereignty issue – but would reiterate that an “in” vote means a commitment to further pooling of sovereignty.

      The neoliberal project equates to my “corporatism” (vs individualism) and, yes, aims to concentrate power in very few hands.

      After this look at the UK economy, I’m going to be returning to the “global Ponzi” theme, where I have two things remaining to examine:

      First, “futurity” – how our mistaken expectations for the future have contributed to the global Ponzi.

      Second, government. Logically, the implosion of the Ponzi will cause extreme hardship. Systems of government have a poor record of surviving severe economic shocks.

  18. Earlier in the comments, some were asking how to prepare for the future and this prompted me to revisit my own preparations part of which include buying a large dollop of diesel. Large tanks and things were involved, some shovelling, a little swearing and then a close eye on crude before making my purchase. So, Doha came and went and oil should have gone down and it did very briefly before soaring in a very irritating, mildly expensive way. I searched the ‘net for explanations and then I remembered an article you wrote awhile back predicting a rise in the price of oil precisely now! If any are interested it’s No.. 61.

    So, tomorrow I shall go to the farmer’s co-op and buy my next four years worth of red diesel. I shall arrange to have the bullock slaughtered (there will be tears no doubt). I shall sort out the A.I for the house-cows and everything else I need to hunker down for the remainder of this decade.

    Thanks Tim for a timely kick up the proverbial….

  19. Hi Dr Tim!
    I’ve followed your musings since discovering your Tullett Prebon Report ‘The Perfect Storm’

    I keep track of your blog as you seem to be, the only UK commentator I’ve found, prepared to acknowledge the herd of elephants in our collective room,

    In the comments above I see mentioned James Howard Kunstler, his book The Long Emergency left me as traumatised as your ‘Perfect Storm!’
    then Michael Hudson, his book ‘Killing the Host’ effectively stamped on my rose tinted spectacles,
    they are, I suppose, your American equivalents in some respects,
    I follow their commentary and also that of Dr Paul Craig Roberts, a man with an impressive resume and a scathing critique of the establishment’s follies,

    Even John Seymour’s book ‘Self Sufficiency’ gets a mention up in the comments, a fine piece of work, I have a copy!

    All I can discern is that nobody in the ruling elites seem the slightest bit prepared to change direction, “there is no alternative!”I guess to admit there is a problem would effectively acknowledge their incompetence and discredit them,

    The only scenario I can imagine where meaningful change is enacted is in the aftermath of a massive financial implosion that makes the so called Credit Crunch circa 2008 look like a hiccup,

    I look at the way Greece is being held hostage by the Troika and think of it as a example of how the Real Global Economy will be trapped in permanent debt bondage to the financial world if no large scale Debt Jubilee or asset value crash happens,

    Today I see Nationwide offering mortgages up to the age of 85, yesterday Barclays were reported offering 100% mortgages, last week there were articles promoting equity release schemes for the retired home owner, oh happy days, what could go wrong,

    Seeing as though catastrophe is the only likely outcome for the World of Ponzi I find myself wanting to know what contingency plans are being made?

    We had civil Defence Plans prepared for the possibility of a Cold War style Nuclear Armageddon, albeit that the plans were merely to write your NI number on a brown paper bag, put it on your head and sit in a corner away from the window, is any thought being given to apres financial collapse life?

    there was a chance post 2008 to split Real World Economy banking from the world of Casino type Investment and speculation banking in an attempt at stopping the possibility of the whole shebang going up in smoke at the same time,

    this seems to have been nudged off the table and deftly kicked into the long grass whilst we were distracted, nothing to see here, move along now,

    Before Yanis Varoufakis chucked the towel in with Greece he seems to have been trying to work out an alternative or complimentary internal currency to support and invigorate the Real Economy of Greece, something akin to The Miracle of Worgl in 1930’s Germany,

    I’m sure you are just as exasperated with the current situation as are we who look to your blog for some form of enlightenment,
    it is terribly depressing looking at the much vaunted light at the end of the tunnel knowing it is an oncoming locomotive,

    Instead of sitting disconsolately watching our elites re-arranging the deckchairs on the Titanic shouldn’t we be working on designing a raft out of the deckchairs that we can float off the deck as the ship slides under with the Captain stoically standing at the wheel?

    Would some thoughts and speculation on what could come after be a little more spiritually uplifting than just sitting here in the back of our collective car whilst they insist on driving it off a cliff?

    Sorry to sound a bit flippant but if I didn’t laugh about the future I’d probably cry instead,

    Best Wishes and all that,


    • Thank you.

      I’m sure this is some contingency planning, but how effective it is likely to be depends on whether the governing elite are knaves, fools or a bit of both.

      My guess would be that the US has good contingency planning, but in the UK and Europe it seems unlikely. We (UK and Europe) lack any sense of direction, it seems to me, and our thinking is very short-term. Europe depends on the US in defence terms, but is quite prepared to let down the US if there’s a possibility of short-term gain, i.e. by cosying up to China against US wishes.

      It is also evident, around the world, that so-called “liberal elites” are in retreat. You can see this in the US (Trump), the UK (Brexit), Austria (new right-wing government), Spain (Podemos), Greece (Syriza), France (Le Pen), Holland (thinking of restricting referenda as they no longer get the “right” result), Germany (AfD), Poland and Hungary.

      Japan looks virtually bust, as the only buyer for govt debt is now the central bank, using newly-created money. China has its own problems – the reported growth figures just don’t stack up, debt is soaring ($31trn today, vs $7trn in 2007), and the “historic bargain” with the government, which involves the people surrendering freedoms in exchange for prosperity, will come under stress if continuing prosperity cannot be delivered.

      This is not surprising, because all the historic ingredients for “regime change” are in place – economic weakness, fiscal weakness, at least one external threat, and perceptions of inequality and unfairness.

      The big question is whether existing elites (a) reform, or (b) dig their heels in. The latter course has usually ended badly.

    • interesting post as usual. thanks. i think that is moderate elite left and right that is on retreat and radical political party are keeping the prominence, with same reaction from the establishment in action: in france as you noted, and even more in Italy, where mr Renzi, center-left coalition, make a new electoral law and a costitutional reform that give to big businnes a even more power to influence parliament, and in fact give a very little change for the opposition to go in power. and radicalizion is even more evident between electors: very close to soccer supporter. i vote for b) : is to late for elite to reform and keep credibility. this can change with the next recession: usually is necessary two shock for regime change: as an example: 1929 first shock no change 1932 second shock: hitler, Spain civil war, New deal ecc (sorry for my english)

    • Thank you Paolo

      I agree – the instinct of regimes is to dig in, often because they live in a bubble and do not know what is happening in the real world around them.

      This was the case with Louis XVI in France. He was an intelligent man, but the Court did not inform him about how bad things really were.

      I also agree that second shocks are often critical. In the US they have a saying in politics about this – “dropping the second shoe”. A politician can survive one failure or scandal, but not two.

      Looking around the world it seems highly likely that a second economic shock is coming.

      For some years now, opinion has been divided between people who said that we had recovered from 2008, and others who said that the economy remained in trouble. But now there are very few who believe that things are looking good.

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