#98: While time allows – part two

CAN THE UK ESCAPE A ‘BRITMUDA TRIANGLE’?

If you’ve read the preceding article, you’ll understand how institutionalized thinking – a product of rigid orthodoxy within a closed environment – seems completely to have blinded Britain’s political elite to the very possibility that voters might “defect” en masse to the collectivist alternative offered by Jeremy Corbyn.

This raises at least two important issues. The first is the extent to which the same sort of “institutionalized folly” – the inability to “think the unthinkable” – has been operative elsewhere.

Obvious examples here include the authorities’ blindness to the escalation of risk ahead of 2008 – a blindness which, at least arguably, still persists – the near-unanimity with which the “experts” wrote off Donald Trump as a “joke candidate” with zero chance of success.

The second (and more pressing) question is where Britain goes from here – and the answer to this question must depend, in large part, on whether or not the governing elite is going to remain in the myopia of institutionalized group-think.

Put simply, is this election result going to shock the establishment (in politics, business and finance) into reality? Or will denial go on?

The dangers of denial

When an incumbent regime suffers a shock setback, some of the reactions are predictable, and are far from helpful. There is an almost automatic tendency to try to shift the blame.

So, quite predictably, we’ve been told that the election defeat was wholly the fault of Mrs May and her immediate circle, so is not a reflection of broader failure.

Equally predictably, we’ve heard that the opposition (in this instance, Jeremy Corbyn) didn’t play fair, the implication being that the voters were fooled (which is pretty close to saying that the voters are fools). We saw the same pattern after last June’s referendum on “Brexit”, with defeated Remain supporters arguing that the Leave campaigners cheated, and that those who were duped into voting for “Brexit” were old, poor, poorly-educated and losers (or, in a word, idiots).

This really won’t wash. The failure of an elite to see something coming doesn’t make their opponents dishonest, or the voters foolish. Where expectations and outcomes differ, it’s usually a fair bet that it’s the expectations that were wrong, not the outcome.

We needn’t revisit the causes of popular discontent with the incumbent government. People disliked falling real wages, disliked austerity in the public services, and were angered by a perception that a minority were prospering at the expense of everyone else. They saw no evidence that the Conservatives were going to do anything to address these grievances.

This makes the surge in Labour support wholly rational. Of course, the Conservatives can respond by persisting with the illusion that the voters, duped by unscrupulous opponents, got it wrong.

Doing this would have two consequences. First, it would prevent Conservatives from changing their policies in response to voter demands. Second, and consequently, it would condemn them to protracted irrelevance. Evidence from the past suggests that parties do indeed tend to condemn themselves to marginality in exactly this way.

A ‘Britmuda triangle’?

The practical realities, now, are three in number. First, and despite any deal that Mrs May might put together with the Democratic Unionists (DUP), Britain is condemned for the immediate future to a caretaker administration subject to almost total policy paralysis. No government can undertake any bold policy when a tiny number of its MPs can pull the rug from under it.

Such stasis is bad news at the best of times – and could be desperately bad news now, in what looks a lot more like the worst of times.

Second, and pretty obviously, it is hard to see how a paralysed government, demoralized and frightened of its own shadow, can hope to be an effective negotiator over the post-“Brexit” relationship with the EU.

Third, and despite any claims to the contrary, the British economy is in very big trouble, and now seems virtually certain to deteriorate further.

Last year’s sharp fall in the value of Sterling has now fed through into reported inflation of 2.9%, meaning further declines in real wages. The response of the forex markets since the election result has been comparatively muted, but this does not by any means eliminate the risk of a currency crisis. Indeed, it seems that the comparative stability of recent days may reflect a widening expectation that the Bank of England will have to raise interest rates, primarily to counter inflation, but also to shore-up the pound.

Higher inflation and higher interest rates, plus a waning of confidence and a flight of capital, are the consequences of a currency crisis, but they can also happen without one.

Consumer spending, which has been the engine of the British economy in recent times, is flagging palpably, and can only get worse if confidence wanes, interest rates rise, and property prices fall. The political situation almost guarantees that the fiscal deficit will be larger, for longer.

Even before the election, reported GDP growth had fallen to all-but-zero, and some of us believe that such figures tend to put an over-optimistic gloss on underlying trends anyway. Business confidence at home is said to have crashed since the election result, and there seems no reason why foreign investors shouldn’t take a similar view.

A perfect storm in prospect

In short, the UK now faces a “perfect storm” of stagflation, rising interest rates, weakening confidence and political paralysis – plus, of course, imminent “Brexit” negotiations, and rancorous division within the public.

There are old sayings to the effect that “you bought it, you name it”, and “you broke it, you pay for it”. In this spirit, it is incumbent, both on the Conservatives and on the supporters of the current economic system, to come up with solutions.

Of course, if you believe that the Corbynite programme would rescue the situation, you can afford to be more relaxed about this than if you don’t. If the patched-together minority government falls quite soon, and if the Conservatives persist with denial, then a second election, and a victory for Labour, start to look pretty likely.

Those who doubt the merits of nationalization, an expanded state, higher taxation, higher public spending and bigger fiscal deficits, on the other hand, should be very worried indeed. The economic outlook is more than risky enough to prompt a further swing to the Left by voters in search of solutions.

Can Conservatives respond?

An effective response from the Conservatives needn’t mean an abandonment of the market, because what has passed for pro-market economics in recent years has been far closer to corporatism than capitalism anyway.

Government has done precious little to break-up sectors where over-concentration reduces competition to the detriment of consumers. It has presided over the idiocy of a developed economy trying to compete on the basis of cost rather than on the basis of quality, which is the only viable competitive option for such a country. If anything, the Conservatives need to re-learn the principles of markets that are competitive, free and fair. Policy has exacerbated, rather than tackled, a lamentable bias towards speculation over innovation.

At the same time, Conservatives need to recognize that, in economics, extremes are seldom, if ever, a good idea. There is abundant logical and historical evidence supporting the concept of a “mixed economy”, which blends the best of the private and public sectors, rather than leaning too far in either direction.

There are, then, three things that Conservatives need to do.

First, they need to re-learn the difference between capitalism (in its competitive market sense) and corporatism (which is more “law of the jungle” than Smith).

Second, they also need to re-learn the importance of the mixed economy.

Third, they need to recognize the legitimacy of redistribution, which at the moment is required more in terms of wealth than of income.

 

 

61 thoughts on “#98: While time allows – part two

  1. As someone trying to form an opinion on how best to run a country this is great. It confirms some of my thoughts and adds new ones.

    Thanks Tim.

  2. At the same time, there is little to no discussion about peak oil and falling EROI across the board. The conservative leadership might well get some of the concepts above but how do they judge EROI? Really Britain will have to abandon democracy for a technocracy of engineers who will have to manage societies descent path. We need a total rethink on how the world works because frankly it’s becoming unglued. In some places faster than others.

    Where will the U.K. get its next North Sea from? It won’t. As it’s all been burnt up. It’s been a riotous time since the 1950’s, mostly boom and rarely any bust. People have forgotten what hardship our ancestors had to live through.

    • Indeed so. My main interest is in the energy basis of the economy, but I’ve avoided complicating this article by going into it.

      On energy-based metrics, the UK economic situation looks even worse than when assessed (as here) on “conventional” economic grounds.

      When it comes to the energy equation, Britain’s leaders simply “don’t get it”.

    • VK,
      vast oil and gas reserves are reported to be off the West coast of Scotland.
      These fields are reportedly not being developed as it would play into the political hands of the SNP, and also interfere with submarine traffic in and out of the Clyde naval base. However, maybe one day the governments hand will be forced.

  3. Getting macroeconomic principles right would effectively be a “great leap forward”. Labouring under academic mainstream models, which have a failure rate of 100%, is a surefire recipe for continued policy mistakes.

    Are you on board,Tim? You’ve made noises about problems with MMT but never spelled them out.
    As Prof Bill Mitchell writes, “We live in an MMT world”. It’s called a theory but it’s not an hypothesis. It simply describes the creation of the currency and the government’s capacity to utilise it without the political distortions of Neo-liberalism, corporatism and other laws of the jungle.

    Corbyn cannot offer a solution any more than can the Tories as Labour is a co-believer in neo-liberal policies, in fact it started the rot and betrayed its base back in the 1960’s. It’s no wonder the party has nothing to add now and being Tory lite is not what the supporters expect. That has no future and the left everywhere is only resurging because the right is stumbling. Without a circuit breaker like MMT the situation will just drift on into eventual catastrophe.

    • I’m neither pro- nor anti- on MMT.

      Here’s why.

      As I’m sure you know, I believe that, primarily, the economy is an energy system, not a financial one. So I distinguish between the “real economy” of goods and services and the “financial economy” of money and credit. The latter is secondary to the former. Finance can help, or it can sabotage, management of the real economy. Money has no intrinsic worth, but has value only as a “claim” on the real economy.

      This makes money – and ANY theory of money – a second-order issue compared with the energy cost of energy.

      Incidentally, Labour as “Tory-lite” describes Blair (etc), but does not describe Corbyn. He is a socialist, and the Blairite wing has fought a bitter rear-guard action to thwart him at every turn.

    • Here is a talk on MMT which DOES factor in the productive capacity of the economy, a determining factor in fact. Professor Philip Lawn in Adelaide gave this talk in 2015; MMT does talk a lot about trying to get the economy on a sound footing, but it doesn’t neglect the productive capacity which depends on the energy use. In fact Phil actually mentions it stopped improving by the late 70’s. and shows a graph where our 1 earth reached its limit by 1985. We are at 1.5 Earths now, and rising.

      It’s the chief reason why we are so in debt today. Debt has masked the resources decline, in affordability terms. This has to stop and is ordained, and unavoidable.

    • @ejhr I’m not entirely sure that you are able to understand Dr Tim’s reply about how MMT seeks to describe the financial economy rather than the actual, physical, real world economy which depends on an energy surplus to function.

      You and I have discussed this exhaustively before and both agree that while a monetary sovereign nation can not go bankrupt in its own currency – it cannot ‘print’ its way to an energy surplus.

      I don’t know why you keep on trying to grind your MMT axe in this forum.

      Your time might be better spent addressing the real and insurmountable issues of how to cope with our resource crisis.

      You are not an entirely stupid man – and probably have some useful ideas – and I’m sure that we would all appreciate your input… if only you could apply yourself to the actual issues that this blog seeks to address!

    • Yes we have clashed a bit. You however misunderstand MMT. That is quite clear.
      Answer me this, please. Have you looked at the blog I sent through recently, by Professor Philip Lawn?
      It says enough to be 100% on topic, regarding the connection to resources, which include energy.
      You miss the opportunities MMT make to correct the mistaken economic narrative touted by the mainstream. it is unspeakably damaging to our society. I get that you are unwilling to entertain that understanding. It is just as relevant as any discussion on just energy.

      I can say equally to you that I believe you too are not entirely stupid. but you are running it close with your unwise assertions regarding the inputs people you don’t agree with make.
      You need to get out from under the cloud that narrows your learning and apply yourself to the actual issues this blog seeks to address. [sound familiar?] It’s much wider than you think.

  4. An excellent analysis and well thought out. Wish we could have more of this instead of the tosh that is churned out in the Murdock-ised press. The problem with our electoral system does seem to be the “missing middle” – as the economist put it a couple of weeks ago – and with it the ability to push policies such as the mixed economy and reform of business ethics and the like. It’s never succeeded in the uk and I’m not entirely sure why – is it just our first past the post system? As think you have pointed out we seem to be playing out an eerie repeat of the 1970s which I experienced as an impoverished student. Attempts to reform politics then – the Gang of Four come to mind – but all fell down under Mrs T’s government. Will be interesting to see what happens next but like you I fear for our prospects under a weak leadership that few actually voted for.

    • Thanks, David.

      There is a lot to be said for avoiding extremes, and the case for a “mixed economy” – blending the best of private and public provision – seems, to me, compelling. This makes me suspicious of anyone who thinks that everything should be privatized, or everything nationalized.

      Somebody once said this:

      “Anyone under twenty-one who isn’t a socialist has no heart;
      Anyone over twenty-one who is a socialist has no head”

      So my personal view is that we’re better served by pragmatism and balance, than by ideological purity, irrespective of the ideology in question.

  5. Headlines today – George Osborne: Don’t change course on austerity – as this will lead to a loss of economic credibility’ Not great if you’re a struggling family or waiting for an operation.

    How would you respond to this statement (given that we’ve been living outside our means)

    • Well, he’s certainly right that a country cannot live beyond its means indefinitely – but austerity can be counter-productive, when it squeezes demand.

      Looking at the stats, I don’t think the public’s demands (re health etc) are unreasonable. But the UK is a poorly-performing economy, and has a high-employment/low-wage bias – and both tendencies reduce tax revenue. So it’s really a case of improving economic management to finance public services. I don’t think Tory – or Labour – policies will achieve that – they both seem too ideological for me.

      Near-term, that’s no solution. In fact, the economy “will get worse before it gets better”.

      So, in the present, both sides of the equation need to be addressed. I think the wealthiest – by which I don’t mean the highest earners – could reasonably pay more tax. Asset values have been inflated by policy, such as low rates and QE. So, if you’re sitting on big gains in investments or property, you have national (monetary) policy to thank for those gains – so you can hardly complain if the country wants something back, in higher capital gains tax, and/or a wealth tax.

      Then there’s public spending. Taking the NHS, I’ve never believed that “internal markets”, or the fragmentation into Trusts (with the inevitable management overhead), or PFI, or creeping privatization and out-sourcing, have ever made much sense. The NHS is a public service, so cannot be managed as though it’s a business. So I’d be looking at reinstating a command model, on a regional basis. In short, I think the founders of the NHS got it right. I also wonder how long public sector workers will go on accepting declining real incomes – with wage rises capped below inflation – before they start to feel that they’re subsidising public services.

      That’s the long answer.

      The short answer might be a wealth tax.

  6. Thanks for reply. I doubt a politician in the Conservatives would dare announce a wealth tax so sadly we have to count that out.

    However Jeremy might get in but could also grab savings.

    The next few years are going to be bumpy – I see the fasten seat belt signs have already come on.

  7. Meanwhile the global oil and gas industry is facing an inverted collapse. Purchasing power is rapidly collapsing, so oil companies have tapped into the debt spigot to keep themselves going. As prices further collapse as the net energy of a barrel keeps declining, the lower the amount of positive energy utility to society from that barrel of oil, hence prices keep falling further. Eventually the oil companies will go bust, oil extracting nations will go bankrupt, banks will fail and all the QE in the world will lead to nowhere.

    https://srsroccoreport.com/warning-the-global-oil-gas-industry-is-cannibalizing-itself-to-stay-alive/

    In the last 3 years, oil companies have had their three worst consecutive years on record for oil discoveries, CAPEX has been drastically slashed. Debt service levels for the largest 68 publically traded oil companies are at a record 75% of their cash flow now according to the EIA.

    US sub investment grade oil companies need to pay back $220 Bn worth of debt by 2020 alone! Assuming they produce 5 Mn bpd or half of US oil production, that means embedded in the cost of each barrel extracted by them is $120 of debt per barrel extracted. That’s nearly 3x today’s price!! So will a barrel of oil soar to $200 in 2020? Or will the system fall apart?

    My bets on a technocratic Marxist society or a neo-feudal state with a barbarian led aristocracy.

    • Hi I’ve looked at the link – and it is alarming – but there perhaps is one way out. It would mean taking a leaf out of the creative accounting that the guys at ENRON did – namely creating profits from power stations that hadn’t even been built (watch the film if you haven’t already)

      In this instance – the debt becomes very long term and becomes repayable against profits made by electricity generated at low cost by fusion reactors. Of course we may never get fusion reactors to work economically – but if we did – it could be one way out of our current mess.

  8. Brilliant, brilliant, brilliant. Hard to contribute to this high quality discussion.

    UK’s democracy is messy, chaotic and slow but we get there in the end; or I like to think so, at least.

    The elephant in the room is energy depletion and population. No one wants to discuss these issues. Absolutely nobody. Brexit, for me, was a population question as well as sovereignty question. My view is that we need to control our population size as we go into our net energy descent. A very simple concept if one accepts that we have future where net energy declines, as I do. It was lamentable how the narrative that put out by the Cornucopian media was one of race, racism and anti-immigration. (I use the term Cornucopian on purpose because Right and Left politics is getting increasingly meaningless for me).

    I think the general public do get it thought, in a sub-conscience way. For example, the most uneducated person understands that if there isn’t enough money for new houses, NHS, and capacity problems regarding schools, roads, airports etc; that the answer may not lay in building more houses, schools, roads etc but simply to have less people. To label this person racist was not helpful, not least to the Remain camp who were blind-sided.

    This a clear case of the electorate being ahead of the politicians who now have to react.

    • On behalf of all here, thank you. I’ve always believed that if we discuss things rationally, objectively and courteously, we can advance our understanding.

    • Thanks Ed. In my opinion most governments, including the UK’s, know that fundamental growth is over. The problem is our current massive worldwide financial system. As soon as one country implements ‘degrowth’ policies, or just gives the slightest hint at such measures, that country will be abandoned by that same massive worldwide financial system. With imminent collapse as the result.

      All western governments and central banks are in the know, and no one wants to blink first. And they are afraid as hell for the unavoidable domino effect.

      As we speak the west undermines non western countries, especially in the middle east, to slow down or even destroy domestic oil consumption in those countries. We’re talking big geopolitical business here, not mainstream politics. We ain’t seen nothing yet. And indeed, people are waking up.

  9. Hi Tim

    Many thanks for yet another perceptive view of the situation we face.

    I’m not sure I agree entirely with your: “perfect storm” of stagflation, rising interest rates, weakening confidence and political paralysis.”. Stagflation yes and weakening confidence certainly but not rising interest rates. I don’t think we will get rising interest rates unless we get a collapse in sterling or there are substantial secondary effects of inflation on wages, of which there are no signs at the moment. Rising interest rates would bring on the pains almost immediately and I think the BOE/Govt will do almost anything to prevent this (RPI went to over 5% in 2011 and IRs were not increased). So I don’t think that one of the main triggers will come into play.

    The second is a more subtle point and that is, notwithstanding the clear signs of anger and frustration expressed recently in the referendum and the election, I think there is a long history of suppressing conflict in this country and that no effort will be spared to play all these adverse matters down.

    • I agree that rates won’t be raised voluntarily. It’s unaffordable, even to fight inflation (even though the alternative is further falls in real wages).

      But higher rates are what’s likely to happen if the pound comes under the cosh. I can’t see why overseas investors would want to buy Sterling. Investing in business doesn’t make much sense when real wages (i.e. customer spending capability) is falling and business confidence is so low. There is a vacuum at the top, and UK economic policy has been inept for a long time. Any new setback – “Brexit” negotiations? – could crash Sterling.

      The British, traditionally, are not easily roused to anger, but this may be changing, I suspect.

    • Apparently, 3 members of the Monetary Policy Committee voted for a rate increase, the other 5 voted against. GBP has risen on this.

  10. The economics of safety and maintenance.

    Following the tragic fire in London I think in some ways it’s indicative of the mess we’re in. I’d mentioned in an earlier post that we should be using our remaining energy reserves to build goods that are robust and that will last a long time rather than waste energy on churning out goods that breakdown or fall apart within a few years.

    So although the fire is now entering its early stage of investigation – it’s a possibility that money may have been saved on cladding that only passed basic building requirements but was not fire retardant. Expensive sprinklers were not a requirement nor it appears safe emergency exit stairs.

    Throughout the UK I have no doubt that there a substandard buildings which are potentially hazardous – but the truth is we may not have the resources to bring them up to a good standard of safety.

    In fact bringing all the UK’s assets – the roads – railways – total housing stock – Schools – up to a high standard is financially beyond us. It has to been estimated that the US needs to spend $4trn on its infrastructure.

    Over the next 20 years we could face unsafe roads due to a poor state of repair – homeowners that cannot afford to replace condensation filled leaky double glazing – no resources for better insulation to stop vital expensive heat escaping – heavy speed limits on many mainline tracks that cannot be repaired or replaced.

    We could also become like the Cubans – somehow keeping our cars running without many of the spares we need.

    I hope none of this happens

    • I’ve been watching the news from London in absolute horror. We have to be careful here. We don’t have the facts, and certainly can’t know what caused this, or what might have prevented it. The point about cladding is no more than media speculation at this time. There’s a lot of anger, and understandably so, but a shortage of facts. For instance, installing sprinkers in existing buildings might weaken the structure – we just don’t know.

      But I think your general point is well made. The role of infrastructure is recognised in surplus energy economics. If we recognize that economic capability is a function of surplus energy, some of that needs to be reinvested in replacing ageing infrastructure. This is is one of the “non-discretionaries”, alongside food, education and medical care. It should thus rank above “discretionaries” (or our “wants but not needs”) in our budget processes. You or I need food; we might want (but not need) a new gadget.

      Our decisions sometimes look less than rational – for example, should we build a new sports stadium when the priority might instead be housing, roads or bridges? This question caused heated discussion before and during the World Cup in Brazil – should money spent on football grounds have been spent in the favellas instead?

      So this takes us to how decisions are made. Some favour a collective basis of decision-making, whilst others favour a private basis. My view is that government has a legitimate and non-optional duty to protect the public. This includes all aspects of public safety, in building standards just as in the provision of police, fire-fighting and ambulances. So the focus really needs to be on regulation, and its application even-handedly to public and private sectors alike.

  11. Thanks for reply Tim – you are of course quite right about the cladding and I’m sure there will be a thorough investigation. The findings will be a wake up call if it is found that all required building and fire regulations were met with their construction and fitting.

    By the way I found the above posts by Ed and Vk both interesting and a bit frightening – I had felt that Brexit was a way of lowering our portcullis. Regarding the link to the oil production and debt analysis – even my cat – currently peeking over my shoulder – has found it alarming – or perhaps she just needs feeding.

    • You don’t need to be too frightened, ewaf88. Our energy descent will play out over many decades. For example, year on year more pot holes will appear on our roads, private transportation will become gradually more unaffordable, there will be more financial pressure on our NHS and education services, and care of the elderly and childcare will increasingly fall more on the family. The economy will also become more local as global supply chains become unaffordable.

      The model is Cuba. They live on a small fraction of our energy consumption but still manage to come very high in the World tables for healthcare and education. Is the average Cuban unhappier than us? I suspect not. Happiness is relative, and equal societies tend to be happier.

      I agree with Tim, better to have a mixed economy where the government ensures everyone bares the costs of our energy descent, equally. This coupled with a fair market where true cost/benefits calculations can best dictate how resources are allocated. However, and this is central, we also need to get our population down to near our long term carrying capacity in a controlled way by a combination of education and tax and other incentives to encourage smaller families and to control our borders from too much net inward migration.

  12. Hi Ed – yes Cuba is a role model if you like. I often ask myself if I’m happier now with all the trapping that my employment bought me – or when I was living in a bedsit with no fridge or private phone (we all shared just one on a landline – pre mobile phone days).

    We will all have to slowly make do with less and make things that last longer. However – as I mentioned to VK – there is an ace in the hole – Nuclear fusion. If we can get it working all sorts of things become economically possible.

    If we can’t there’s still decent prospects of large improvements in battery energy density resulting in the far more economic storage of electricity.

    As far as this country is concerned we do need to manage the size of population more effectively and try to become less dependent on imported food.

    Perhaps in 20 years time we’ll be using our North sea oil reserves for non transportation uses – plastics – fertilisers and farming – which means our remaining reserves would go a long way.

    I’ve a feeling that America is going to implode.

    • Debt is just an invention to accelerate a natural phenomenon; greed.

      Greed is territorial behaviour out of surplus energy.

    • Agreed, houtskool. As Catton would say, humans show the same behaviour as bacteria on a sugar coated petri dish. Can nurture overcome nature, or are we to suffer the same fate as the bacteria? Not looking good so far.

  13. “Third, and despite any claims to the contrary, the British economy is in very big trouble…”

    I suspect a large majority of the population don’t understand the implications of the deficit and national debt nor fully understand the need to get our finances in order. For that, I blame the Conservatives in their failure to get the message across IN BASIC LANGUAGE.

    I realise it may be demeaning for the Conservatives to communicate such things to the Hoi Polloi but feel it’s imperative for people to know the significance of the debt time bomb ticking away.

    Whatever the solutions for an ailing economy, it helps if you have people ‘on side’.

    • Indeed so. There’s a history to this. Briefly, though, UK economic policy has been idiotic since the 1990s. What’s happening now reflects this.

      There is a need to explain these issues, but explaining economic performance is difficult when government itself doesn’t understand it.

    • This lack of understanding isn’t limited to the Tories. All the politicians have bought the mainstream nonsense, right around the world. They can’t even get right the origins of money, or currency, that it’s a creature of laws, which ought to be econ 1.01.
      We have to virtually browbeat them into getting understanding and then running with it.

    • Eddy,
      It is now quite impossible for any British government to admit to the truth regarding the economy.
      The British economy is a Ponzi scheme which runs on confidence, and that confidence cannot be broken.
      The British Government needs to maintain the illusion of solvency in order to attract investment. It needs $100 Billion/a.
      Being a Monetary Sovereign nation is not going to help the UK one iota, once the world realises that any money lent to the UK is money bet on a donkey in the Derby.
      It is clear that the UK is soon to suffer massive drops in average living standards. This is not the kind of truths that make a government popular, so this message is being buried as deep as possible in order to prevent it ever seeing the light of day. The last thing any British government will do now, is come clean on the Economy !
      Of course, the UK Ponzi scheme will not go on for ever, and little by little it will unravel. It will be at this point that the public will wake up to what is actually going on, but it will be too late to do anything about it. Those with wealth and those with skills are already leaving, the rest who cannot leave will suffer badly. Look forward to race wars, a breakdown in public order and finally Martial Law and ration cards.

    • You need debt in society because 95% of money in general circulation is created as debt. So it is not debt per se that is bad but too much debt for the underlying economy. Our current debt levels assume future growth in the economy much greater than what we are seeing. This is the problem. We either accept that GDP is peaking due to physical limits out of our control and take steps to reduce our National Debt accordingly (Conservative view) or we borrow more in the short term, in the hope, to kick start GDP growth (Labour view).

      The problem with the Conservative’s message, is that they are still promising growth while also trying to reduce the deficit. There is a mixed message there. Hence they need to start being honest about our future prospects for growth so people understand the need to reduce the deficit.

      The problem with Labour is that they will fail to kick start GDP growth and in the process make our National Debt more unsupportable than it already is.

      The problem with the Greens is that they also want to kick start GDP growth while simultaneously wanting to reduce our carbon footprint – go figure !!

    • Thanks Johan.

      Sadly, I fear that much of what you say is correct. It seems to be a case of pass the parcel and hope you’re not in government when it explodes.

      The reason I singled out the Conservatives for criticism is because they could and should have got people on side in 2010 by leaving no doubt in anyone’s mind what our predicament was following the financial crisis. It’s only a guess but I suspect the majority of people still don’t understand the difference between the deficit and the national debt.

      Although the new pound coin, being thinner than the old one, has reduced its height, a column of pound coins equal to the UK’s official national debt is still about 2,900,000 miles high (and rising).

    • Specifically what “debts” are you referring to?
      Government debt? [aka investor deposits]
      Private [non government] debt?
      Be handy to know as all debts are not the same.
      Thanks

    • Thanks Ed.

      There was an individual commenting on a web site the other week who had clearly confused the deficit with the debt.

      The fact that the individual is a maths teacher at a prestigious school tells me that the Conservatives, despite seven years in government, still haven’t got the basic economic message across.

      There seems to be an ‘it’ll be alright on the night’ attitude at the top table which, given our trade deficit, seems a bit optimistic.

    • In reply to Eddy. It is not the numerical value of the debt but its purchasing power that matters. Two very different things. The ultimate solution to unsustainable national debt relative to GDP is to inflate it away. A Stirling crisis on the foreign exchanges would do it, I think.. I’m a little vague on the exact mechanics and repercussions. Tim is the expert. Maybe he could fill us in.

  14. Tim, another excellent, thought-provoking article; and some sound and well-argued commentary from posters. If I may I’d like to offer two observations in relation to the recent UK general election campaign. First I was astounded by the paucity of discussion about the real position of the UK economy. Any discussion on the economy was trite and utterly detached from the facts. Secondly, I was dismayed, although not surprised, by the inadequate coverage of the economy and matters economic by the MSM. I fear that we are in one of those periods in history when both politicians and national journalism is failing the nation. The breadth and depth of our national detachment and delusion is now reaching epic proportions. We will, of course, ‘muddle through’, but I suspect that there is going to a lot of weeping, wailing and gnashing of teeth in the process.

    • Thank you, and I’m sure you’re right on both points.

      The British public have lived with, essentially, the same failed economic ideology for more than two decades – an ideology of deregulation, a form of “liberalism” that benefits a wealthy minority, and a worship not just of private profit but of consumerism and celebrity as well. This has made its mark.

      I noted the widespread outrage at Mrs May’s proposal that the proceeds from the sale of elderly people’s homes should be used to pay for their own care in old age – the assumption presumably being that someone else should pay for it. This suggests a detachment from reality.

      I’m not so sure about muddling through, however. As I measure it, average prosperity in the UK has been declining pretty rapidly, and there seems no reason why this shouldn’t continue. At some point, this deterioration – and perceptions of unfairness – are likely to trigger big changes. Support for the Conservatives, not just amongst the young but amongst the “young middle aged” too, has been collapsing.

      I don’t, myself, see how a government led by an accident-prone PM and depending on DUP votes – and with acute economic fragility, plus “Brexit” talks – can last more than a few months. If there’s another election, Conservative support could well slump. So then we could get to find out whether “socialist” policies are better than what Britain has now.

      Why, oh why, can’t someone put the case for a “mixed economy”?!

  15. Extract from the Economist :

    Brexit’s complexity is on a scale that Britain’s political class has wilfully ignored. Quite apart from failing to spell out how to negotiate history’s trickiest-ever divorce, no politician has seriously answered the question of how the economic pain of Brexit will be shared. Less trade, lower growth and fewer migrants will mean higher taxes and lower public spending. Voters seem resigned to the fact that they were duped by promises of a Brexit dividend of more cash for the National Health Service. No one has prepared them for the scale of the hardship they will endure in its name.

    Ps You could become a candidate Tim to get your message across.

    • Taxation has zero relevance to the NHS. The government can’t use tax to fund it. So there’s no argument that is relevant regarding tax cuts or increases to the NHS.

    • No one has prepared them for the hardship (hopefully that’s all it will be) caused
      by the end of growth ( Growth is dead- Tim Morgan) and the decline of the EROEI of fossil fuels (see SEEDS). Less trade, no growth (at best) and more migrants is the future.

      The only thing I can find to disagree with in Limits to Growth is Tim’s statement that “As ever, forewarned is forearmed.” In this case I think for most people “forewarned is forewarned” although I shall take steps to purchase a large amount of soft toilet paper in case things get really bad ( pathetic I know but I don’t think I can go back to Izal-which apparently is still available-why?).

      Unfortunately I don’t think most people are interested in hearing Tim’s message. “Blood, toil, tears and sweat” or the modern equivalent is not a winning message certainly at least in the more prosperous part of the country.

      As some one said in relation to something (can’t be more specific than that)
      ” Its much too soon and much too late”

    • No, the NHS isn’t funded from taxation and contributions. It might look as if it’s so but they disguise the facts with complex accounting. It’s been explained to me but is not recalled in enough detail to explain. The truth is that the BoE ONLY spends newly created money. It never spends “old” money.
      the economy would be ruined if that happened as the money supply would go right down and cause a depression. No it has to be new for the economy to grow and the government has to spend first so we punters can have the money to pay taxes. Etc. Etc.

    • Hi I understand – really all taxation is – is the hoovering up cash from the economy so the Government has more scope to print its own without creating too much inflation.

  16. However one looks at it, and whether one thinks it’s a good or a bad idea, “Brexit” is a fundamental change. How it turns out will depend on quality of leadership.

    It was once said (rather unfairly) of President Ford that he was too stupid to “chew gum and walk straight at the same time” (there were less polite versions, too). Mrs May is beginning to look like this, and is, at best, accident-prone. Her DUP-dependent administration is going to be feeble, for as long as it lasts. That may not be long, but “Brexit” negotiations start on Monday. It doesn’t matter too much if leaders are lightweight, but the lack of intellectual backing is very harmful. Margaret Thatcher drew huge strength from the intellectual rigour of Sir Keith Joseph. No subsequent leader has had an intellectual equivalent. That’s partly why policy has been a shambles.

    In recent days, Jeremy Corbyn has looked statesmanlike, in stark contrast to the Conservatives. Issues of unfairness between rich and poor have become even more charged, for obvious reasons. Demographic data is showing a collapse of Tory support, not just amongst “the young” but in age groups right up to 50 and beyond. Another election soon would probably put JC into Number 10. I’m not at all sure that would be better than what Britain has now, but I struggle to see how it could be worse.

    The irritating thing is that many of the answers are so obvious. Britain needs a mixed economy, combining the best of private and public provision. The dogmas of “privatize everything” and “nationalize everything” are both puerile. Private enterprise should generate wealth, but government has a vital role in how that wealth is used. The UK needs to compete with emerging countries (EMEs) on quality, not on price. Cheap labour just means poor quality, weak productivity and feeble demand.

    • ‘The UK needs to compete with emerging countries (EMEs) on quality, not on price. Cheap labour just means poor quality, weak productivity and feeble demand’

      Yes I agree 100%

    • I have mentioned before Dr. Morgan, that the standard of politician in Britain is exceedingly poor. Much of this comes, I believe, from the entrenched “Worship of Celebrity” in the UK. Competence is never viewed as a job requirement, and candidates are elected on the strength of being a woman, or a lesbian, or because their suit looks smart, or they have a charming smile.
      As such the UK is never going to be able to do anything other than muddle through. That is a tactic which is very much based on luck, but it is one which over the long term is doomed to failure.
      So if there is any kind of strategic thinking done in the UK at all, it is done behind closed doors by persons unknown and unelected, and more probably than not, out to line their own pockets, rather than those of the nation as a whole.
      We are seeing this unfold now before our very eyes. This conservative-dup deal is a deal which cannot work – it defies the very Laws of Physics! ( Ok , just a bit of hyperbole for effect. ) If there is anything at all positive in this, it is that the whole Northern Ireland issue is put front and centre stage, and this will expose the minutae of what is going on over there. Northern Ireland is a recipient of large EU grants for regional development and for Agriculture. Brexit makes absolutely no economic sense for these people. Of course, the rabidly anti-catholic dup would rather burn the house down, than concede anything to the republicans.
      Interestingly enough, back in 1976 when Scotland held its first independence referendum, it was stipulated that it had to be backed by 40% of the electorate. Yet here with Brexit, on an issue just as fundamentally critical to the UK, this stipulation was not made ( poor leadership ). As a result, all our lives are being thrown into upheaval based on a result backed by only 37% of the electorate. Brexit therefore, is not the will of the People in the UK. It is the will of a minority, backed by a rabidly anti-european Media.
      I am still of the opinion that Brexit will not happen.
      Yes, we will have our negotiations over the next two years, but it will become increasingly obvious to anybody with even half a brain, that the UK stands to lose far too much through it, and that after negotiations are over, a second referendum will be called on whether or not to proceed with the divorce. Whether we have a JC government by that time or not is not really important, the damage will have been done and the UK’s precarious economy will have been exposed for what it is. If the UK still needs to attract foreign investments, then it will need to pay very hefty interest rates to do so.
      .. and we all know what higher interest rates will do for the British housing market.
      I see this is the Beginning of the End for the UK.

    • Tim and Johan – my view on Brexit is that our current situation is so bad that it should be abandoned.

      Then politicians would have more time to think about and prepare us for what is to come. Why waste time and energy unraveling complex trade deals.

      We need leaders with vision to adapt our economies.

      Ps my power is back on.

  17. As I write this – on my mobile – my estate is enduring yet another power cut. A few weeks ago we had a major one which took 12 hours to fix. We then had a series of short ones followed by today’s. I’m not sure if it’s a capacity power generation problem or poorly maintained infrastructure.

    And of course I’d just got back from the shops with some ice cream.

    At least I’d been able to watch the Lions match.

  18. Statistically there is high probability that the next serious recession will occur in the next 5 years. I should think the Tories are desperate for Labour to be in power at the moment because whoever is in power during the next downturn will ‘own’ it.

    The standard run of the Limits to Growth will play itself out and the Cornucopians will find someone to blame for why Growth is dead, no doubt. Candidates are, in no special order, the 1%, the elites, Brexit, the Fiat monetary system, Capitalism, Socialism etc. etc. If all else fails just blame Russia.

    ps. If you don’t know what the standard run of the Limits to Growth is, then you should do, google it.

    • In the future perhaps growth will be measure in other ways. How our intellects develope – how well we care for others – our capacity for empathy – and how we innovate to overcome shortages of energy and materials.

      I’m sure we would find our lives more satisfying than simply waiting for the next throw away gadget.

    • I have just read the report by the All-Party Parliamentary Group (APPG) on Limits to Growth. (see link before). A central tenant of the 1972 LtG modelling is totally ignored by the All-Party Group; namely the need to bring population growth to an end to have any chance to avoid eventual collapse before the end of the Century. I’m not surprised. A bridge too far for even these enlightened politicians.

  19. Tim, I agree about the need to prioritise taxation of wealth over taxation of income. For the very wealthy in particular, inheritance tax and capital gains tax are essentially voluntary taxes.

    However, I would add two comments. There is an urgent need to curb the excesses of executive pay where disparities have become extreme; and vast rewards are often paid for serious underperformance. The public are already aware of this and May seemed keen to do something about it last year….but was then presumably nobbled by Tory donors. This issue feeds straight into the unfairness theme: stick for the shop floor and carrots or caviar for the CEO.

    The public are probably much less aware of how many high-earning professionals (often expats) are living in London (often within walking distance of Grenfell) and paying very low effective tax rates on huge incomes. There is a very discreet industry of advisers devoted to setting up and running private partnership structures to achieve this outcome. It boils down to the technicalities of UK tax law but the net result is that for the favoured minority, Central London has become a tax haven. Many inhabitants of Grenfell will have been paying higher effective income tax than their wealthy neighbours.

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