#75. Britain – old, new, borrowed, blue


After the weighty material we’ve dealt with in recent discussions, the subject-matter here is the (relatively) lighter matter of Life After Growth. By this I refer both to the book, which has reached a paperback edition, and to the practice of coping with an ex-growth economy.

The latter, whether she knows it or not, is the primary task facing new British premier Theresa May. Though I wish her luck – and she will need it – Mrs May would not have been my first preference. For a start, she opposed Britain’s decision to leave the European Union (EU), which has been supported by modest but decisive majority of voters, and, pretty clearly, by a larger majority within her own party. Second, and more seriously, she is another “moderniser”, seemingly every bit as committed to that cause as outgoing Prime Minister David Cameron.

Back to the future

For those with better things to do than follow British politics, a brief explanation of “modernisers” is in order. With the kind of irony with which politics abounds, “modernisers” are really stuck in a time warp, existing in a 1990s Britain when Tony Blair was popular, and his policies seemed progressive.

Back then, Mr Blair changed his party fundamentally, even renaming it “New” Labour to underline the transformation. Left-wing economic ambitions were ditched in favour of what amounted to an accommodation with neoliberalism, but this was combined with a commitment to social policies traditionally associated with the Left. Government was both centralised and casualised, the latter typified by the term “sofa government”. PR, or “spin”, was elevated to new heights of prominence.

Though the economic policies of “New” Labour were comfortable for the opposition Conservatives, Blair’s social agenda was more challenging. Party opinion divided between those who supported “traditional” Tory values, and a faction, known as “modernisers”, who advocated adopting the Blairite social agenda as well. Theresa May was one of the most prominent “modernisers”, and indeed described her party to its face as “the nasty party”.

The enthronement of David Cameron marked the triumph of this faction, and the accession of Mrs May reinforces the modernisers’ control of the Tory machine. If one single attitude defines the “modernisers”, it is a crusading belief in “equality”, though a cynic might argue that it is an “equality” cleverly defined to exclude equality of wealth and income.

Mrs May has promised to tackle this, and it will be a major achievement if she does.

Essentially, the Conservative “modernisers” decided that, if they couldn’t beat Blairism, they would copy it.

“The future isn’t what it used to be”

Unfortunately, the problem with this combination of economic neoliberalism and social crusading is that it doesn’t work. Of course, the social dimension is a matter of personal opinion, though the rising tide of coercion (including restrictions on free expression) does sit oddly with a so-called “liberal” philosophy.

The economic agenda seemed successful under Blair, but only because his government was presiding over an economic “boom” which amounted to nothing more than the spending of borrowed money. The hollowness of the economy was laid bare in 2008, with massive fiscal deficits, the near-collapse of a bloated banking sector, and a 25% slump in the value of Sterling, to an index weighting of 74.4 at the end of 2008, from 98.3 at the start of the year.

David Cameron, in coalition with the Liberal Democrats, steadied the ship, but didn’t – or rather, couldn’t – fix the holes below the water-line.

For a start, Britain remains massively indebted. “Real economy” debt, at £4.65 trillion or 250% of GDP, may not sound too onerous, but this excludes the financial sector, which adds a further 183% to this ratio, establishing the United Kingdom very firmly in the category of “debt-ravaged economies”. Nor is this all – the British government has massive off-balance-sheet “quasi-debts”, with its commitment to government employee pensions alone standing at about 55% of GDP.

More seriously, the British economy remains addicted to debt, with little or no growth remaining once incremental borrowing is stripped out. Nowhere is this more stark than in the current account, where an enormous deficit – a completely unsustainable 6% of GDP – is bridged by a combination of selling assets and borrowing from overseas, currently at a combined annual rate of £100bn, and rising. Though trade remains in deficit, the big change since 2008 has been in the income part of the equation, where outflows of profits and interest now massively exceed the equivalent sums coming in.

A frightening spiral

This, of course, is a circular equation – the more a country borrows, and sells assets, to meet short-term funding shortfalls, the bigger will the net financial outflow become in the future. The British establishment seems not to have noticed this, but what they lack in economic understanding is compensated by a preternatural determination not to upset public opinion – they are not, then, about to tell the voters to start living within their means.

A debt-addicted economy tends to use housing finance (as well as consumer credit) as a conduit for pouring more debt into the economy. This has resulted in bloated property values, which are socially distorting as well as detrimental in the sense that the property sector is a nil-return “capital sink”.

Worse still, speculation has increasingly trumped innovation as the route to individual prosperity. If there is a single measure that government needs to implement without delay, it is to rebalance the equation by taxing all short- and medium-term property gains, and using the proceeds to remove the burden of Business Rates from small enterprises. Needless to say, this is completely outside the realm of practical politics.

Of course, it is perfectly possible for a country to “earn” its way out of such problems, especially when its exchange rate weakens. But Britain has precious little scope for increasing exports, because globally-marketable output (GMO) has fallen steadily, combining shrinkage of manufacturing with the relentless decline in energy production. Energy has been another area of cluelessness on the part of the governing elite, which has done little or nothing to invest effectively in replacement sources of supply. Britain relies on French and Chinese investors to fund its next generation of nuclear power stations, preferring to ear-mark its own resources for schemes like the HS2 rail link, and buying a new nuclear deterrent.

Meanwhile, the use of asset sales and overseas borrowing to bridge a current account deficit requires both that a country is seen as a reliable borrower and that its assets are desirable.

This in turn depends on global confidence in its currency…..

No way out?

Anyway, so much for this intrusion into private grief. With the opposition Labour party divided between Blairites and a resurgent Left, the Conservatives pretty much have the field to themselves. Another pro-EU “moderniser” was exactly what the doctor didn’t order, but Mrs May has the job, and the best that can be done is to wish her luck.

To end on a more – well, relatively more – cheerful note, my publishers have given me a publication date for the paperback version of Life After Growth, which will go on sale on 3rd October. However, they actually expect to have some copies well before that, possibly even before the end of July, which can be pre-ordered here. Though the text itself is unchanged, the paperback includes a new introduction and after-word, reflecting on what has happened since first publication in 2013.

Of course, I hope you will read Life After Growth, if you haven’t already. It might be a good idea for Mrs May and her colleagues to read it, too – but there’s not much chance of that……………

LAG2-3D cropped

21 thoughts on “#75. Britain – old, new, borrowed, blue

  1. Tim, for various reasons, no doubt misinformation included, I would like to understand the categories of debts. We hear of “Government debt”, but it’s not debt as far as the private sector is concerned. It’s just debt from the government’s side, but they never spend it and can pay it back simply by reversing the transaction that set it up.
    Private debts, like mortgages, etc. They have to be paid back. But what do you intend “with real economy debt”? Surely there is no such thing as “off balance sheet quasi debts”?
    There cannot be any debts for future expenses, future pensions, as the government can acquire debt at any and every time. Just as now we aren’t dipping into any savings to pay for today’s pensions, the government just writes the money for pension payments in private bank accounts.
    In the future as long as banks survive to do the transactions.
    What is the debt called that a country borrows? In effect the federal government is never in need to borrow and go into debt being monetary sovereign. So why do we hear of governments borrowing? I assume it’s meant to be that after all they can buy foreign currency ad hoc. without any “borrowing” using their own currency.

    • Obviously, MMT has a profound bearing on how we think about debt.

      In this article, I use the convention “real economy debt” to mean the total excluding the inter-bank or “financial” sector. This real economy debt is sourced from the BIS, except that I use the (lower) nominal amount of government debt, instead of the market value of that debt. Total debt includes the financial sector.

      Quasi-debts mean commitments for the future which are not strictly debt, but would be difficult or impossible to renege on. The biggest of these is public employee pensions, and is the NPV (net present value) of future payments, net of employee contributions. In the British case this totals about £1000bn. These are pensions to which people have a legal and contractual right, and to which they have contributed, so they cannot simply be cancelled, or scaled down. In the past, pensions paid have roughly matched current contributions, but now there is a big and widening gap, which is paid out of general taxation.

      Ahead of privatisation of Royal Mail, the government added to this by taking over postal workers’ pension funds. These had assets of £28bn (treated now as a government asset) and liabilities of £38bn (treated as “contingent liabilities”, though there is nothing remotely “contingent” about them). This was a “funded, but insufficiently” scheme, whereas most government pension schemes are “unfunded” or “hand to mouth” schemes. An official report by the IMF (I think) quantified these for a number of economies, and they are huge in the UK and the US, and not immaterial in Australia, if memory serves.

    • Thanks, Tim. Re your employee pensions etc. They are simple to pay . When the time comes the government simply “writes a cheque” in whatever amounts needed, no debiting any other account is necessary. The BoE never needs to save or borrow. Any contributions made to date are like taxes, just written up in the Consolidated Fund [it also has other names for the same thing] it is just an accounting ledger, not a cheque account. All tax and public contributions end up there. It’s not a problem as new money will pay out whenever needed. The government can never run out of its currency. To complain, as we see often with the uninformed, as a problem of affordability, a burden on our future, is just false.

  2. Good article Tim, thank you. I’ve not yet read your book, but I shall do.

    It seems to me that awareness of these issues needs to be increased drastically – given the billionaire-owned press in the UK, I’m not sure how that can be achieved, as it is not in their interest for reality to be unveiled!

    I have circulated several of your articles. The best summary I think has been your “4 of a Trilogy”.

    I know I’ve asked this before, but I’m still unclear what the individual can do to protect themselves from the havoc which will unfold when the reality finally hits home.

  3. I was trying to think how to help with solutions but I’m sure Schrodinger’s cat got involved somewhere. We’re both in the EU and out at the same time, Labour has and hasn’t got a leader, we’re wealthy bankrupts and so on. The only sane way to approach the problem is to make a decision about what will happen, how that will affect you and then make your preparations accordingly. I’m not going to list my solutions again but I will share one thing, I now value everything I have.

  4. A very good article, Tim, thanks.

    In my view you highlight a very important issue – innovation. Many people might agree that we don’t spend enough on investment and don’t tax speculation enough but investment is a financial decision. What really drives progress, and indeed growth, is innovation and this is a much more elusive commodity.

    I happen to believe that the only way out is to try and develop an economy based on innovation and that means spending much more on education and R & D. I know this is only adding to the national debt and it is “interference” which is not the “flavour du jour” these days but it is difficult to see any other way out in the long term. I also know that pursuing such things as robotisation and AI will cause major challenges to society, again I think we have to take these head on.

    I also think that the Euro could well bring down the EU in the next few years and if people think we are facing economic uncertainty due to Brexit then all I can say it “they ain’t seen nothing yet”!

    It is very unfortunate that we now have a political class that is, to my mind, not up to any of the challenges we face and this simply means that the hill is that much harder to climb.

    • Good points. Innovation is critical, and globally it is lacking. Often we see impressive new technologies which are “old economy” in their effects. For instance, there is nothing beneficial in new technology which does nothing more than deliver advertising differently. We need new products and services, not new ways of doing the same thing.

      Historically, innovation comes from small and medium enterprises. Large corporations are inherently conservative, but they are also reluctant to back innovations which are unlikely to have a material percentage impact for a long time, if ever.

      This is one reason why the UK should free small firms from business rates. I can think of no better ways to finance this than taxing speculative gains, but there is also a case for higher capital gains tax rates.

      The EU is dysfunctional – it drives a wedge between monetary and fiscal policy by combining a single currency with a multiplicity of budgets. At the moment, banking weakness – most obviously in Italy – is the biggest threat.

      The British establishment is incorrigible, and the failure to give the public, or even Tory members, a choice over the new PM is par for the course.

    • in italy this is the number 3 in a row PM without give the public a choice (thanks to populist five star mouvement also). and we have a parliament elected with a uncostitutional law that approve another uncostitutional electoral law that in fact . grant that five star anti establishment win with 55% of MP next time. a clear exemple in the last local election, where every time in the second round there is center left or center right against m5s, is m5s that win.

  5. Tim, in my understanding all signs are pointing to a period of helicopter money – large scale, coordinated deficit spending by advanced economies on infrastructure and jobs creation utilizing zero coupon perpetual bonds. This issuance will be directly monetized by the central banks thereby maintaining low effective interest rates and yields. The academic opinion exemplified by Bernanke’s recent visit to Japan as well as recent bank analyst reports are unified in touting helicopter money as a solution. Stock markets are rising strongly on the speculation based on a recognition that there is no alternative.
    The difference this time relative to prior QE efforts is the direct impact on working class incomes and resulting consumer spending through this marriage of fiscal and monetary policy. Are we finally going to see a jump in inflation to work down real debt levels that all the CB’s appear to be praying for?

    • Yes, I agree about the seeming inevitability. The perpetual bonds route makes helicopter money look less blatant, and might be a way of circumventing legal restrictions. Even Yellen’s language has become subtly different. Japan is already monetising government debt, and doing so without – yet, anyway – spooking the forex markets. There have always been only two ways out of excessive debt – hard or soft default, the latter through inflation – with soft default almost always preferred. So yes, the probability is rising.

      There are obvious risks – triggering hyperinflation, and destroying faith in money. This next stage in monetary manipulation would/will increase these risks, I think these risks are being understated, and are very real.

      I’m not so sure about the impact on working class incomes. QE was a hand-out to the wealthy (i,e. those already asset-rich) – and these gains were not even recouped through adjusting taxes. To that extent, adding a fiscal dimension make helicopter money less damaging than QE to working class people. But prices may rise faster than median incomes, and savers will be hard-hit. The context here is growing public discontent with incumbent elites.

      But I’m far from convinced that helicopter money will improve the underlying, “real” economy of goods and services. Monetary innovation has failed to do so thus far. And incentives may continue to favour speculation over investment and innovation.

    • I’m not sure how much helicopter money will really boost demand. The US gave rebates to families in 2001 and 2008, and the Australian government tried it with “bonuses” (an interesting bit of marketing) in 2008 and 2009. Households in Australia mostly saved the money or used it to pay down debts, versus spending it on goods and services (about 40% of the money was spent). Numbers were lower in the US, I expect consumer confidence in the economy has a lot to do with how they will then decide to do with the extra money.

      So I’m not sure the short term boost will be worthwhile. It also starts to feel like money is simply being shuffled around. The government taxes its citizens, then gives back some of that money in one-off rebates, then (through VAT) taxes some of that money back.

      The one positive, then, over just simply reducing taxes is that the money supply is increased. But if it’s a one-off stimulus, will it really have much impact? And if it isn’t, and we enter a cycle of helicoptering money (as has happened with QE), how is this a good thing structurally for the economy? And how will we know when the cycle has turned and who will turn the spigot off so as to prevent out of control inflation?

      Although I don’t dislike the idea in the abstract, the fact that so many governments are edging towards helicopter money as the next big monetary stimulus is worrying.

    • Your comments highlight an issue that the powers that be simply do not understand, but that we mustn’t fall for. Their “plan A” (in so far as they have one) is that monetary policy will somehow stimulate growth, if only they can stumble upon the right monetary initiative.

      This is mistaken. Keynes showed us how fiscal policy can stimulate demand, and there are some reads-across to monetary policy. But Keynesian stimulus only works with the “normal” kind of recession, which is a “de-stocking” event. Producer expectations (“sentiment”) turns cautious, and producers decide to cut production and live on inventories (hence “de-stocking”) as a precaution. This in turn reduces hours and wages, impairing demand, so that the negative expectation becomes self-fulfilling, resulting in recession. This can be countered by fiscal stimulus, and sometimes monetary stimulus.

      Unfortunately – and most policymakers simply do not understand this – what we have now is not a “de-stocking” downturn. It is a “de-leveraging” downturn. Consumers (and producers too) run shy of excessive debt. This, too, depresses demand. But it can not be countered by stimulus. Any liquidity injected into the system does not find its way into demand. Instead, the private sector uses it to reduce debt – it does not get “spent”. Done fiscally, this simply transfers debt from the private to the public balance sheet. The monetary equivalent cannot work either, whilst the inflation risk is material.

      Fairly soon I’m going to put forward, for readers to discuss, a possible set of solutions. But these will distinguish between the “real” and “financial” (monetary) economies. Helicopter money is likely to have a role to play – but it will not solve the “real economy” problem.

    • Tim

      Quite apart from the point you make about deleveraging it seems to me that these attempts to generate demand simply bring forward consumption even when the money is spent. But If people spend today they won’t spend tomorrow so eventually you reach a point where there is no stimulus effect at all.

      With demographics really beginning to assert themselves do TPTB realize that most of the developed economies at least are heading into a much lower growth environment?

      It seems to me that Japan is a special case being in the forefront of demographic change; being culturally exclusive and with a low birth rate as well could result in their situation being interpreted as the beginning of a society on its way to extinction and not merely secular economic difficulties.

    • Reports from Japan today seem to confirm that the BoJ is going to take Milton Friedman quite literally. One of their helicopter money plans is to gift coupons that cannot be deposited at a bank to low-income earners. I’ll be interested to see how this works. How will shopkeepers etc., be able to then turn these coupons into cash? Will this provide a loophole for those who want to use the one-off gift to pay down debts (I assume a lot of these will be going to students)? If not, where will the spending be directed? It must be fun being a central banker these days, devising ever more complex systems to get the population to spend, spend, spend.

  6. Hi Tim
    Have you looked into high altitude wind power?
    One of the systems he talks about is called Kite-Gen. It is expected to have a very high EROEI (more than 300) It gets the very high EROEI because it is very light weight, (high strength air foil and cables attached to a generator on the ground) and the wind is much stronger and more consistent at ~1000 meters. The higher altitude also means that this type of wind power would work in most areas of the world.

    In my opinion, this renewable energy technology has the best potential by far. Development, testing and validation of this technology should be one of our top priorities. And it shouldn’t be that expensive either, far less than you are spending on that nuclear power plant.

  7. What I enjoy about your articles Tim, is that they’re accessible. So much that is written about the subject just simply isn’t. That got me thinking: two psychologists, Freud and Adler, although contemporaries had very different approaches, one overly complex and the other, not. While I was tossing this around in my mind it dawned on me that the fundamental component of economics should be the individual which rather places economics in the realms of psychology. Taking it away from physics and entropy etc. and allowing it to exist in psychology releases the logic and allows for the ludicrous situation that we find ourselves in. It also suggests a solution. If the individual no longer thinks of money in terms of great value – a debasement caused by easy cheap credit – then a way out of this is to make money much more valuable. It would hurt like hell of course but, maybe a reverse gear is called for – interest rates to 10-20%, a crackdown on easy credit. Just a thought…..

  8. Hi Tim, you might have seen this already, but a very good presentation from Richard C. Koo:

    • I’ve recommended his lecture a few times myself. It well illustrates why we still have low growth, even deflation, yet there is plenty of money in the system.


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