Vince Cable predicts second economic storm

Remember back in 2003, when Vince Cable was saying that at some point the economy would collapse because of the amount of consumer credit?

Well, he was right then and he’s now saying that we could be up for another Brexit fuelled crash.

The former Business Secretary, who hopes to win back his former seat of Twickenham, says that a combination of declining consumer confidence, job losses and inflation has the potential to outstrip the economic storm of the previous decade. That, if you remember, was the direst economic crash since the Depression in the 30s.

Vince said:

For Britain, the economic weather is arguably worse than it was before the credit crunch. The pound has plummeted, which is driving up prices and trapping consumers in a vicious Brexit squeeze.

Consumer confidence was all that kept the storm clouds away. But with job losses at everywhere from Deutsche Bank to Nestlé, that confidence is going to drain away further.

The Chancellor clearly has no confidence in the economic strategy of the government, because he knows that leaving the single market and customs union has the potential to devastate the UK economy.

If Britain enters a second economic storm, it will be Theresa May’s economic storm. You can’t have a hard Brexit and a strong economy.

That is why it is vital that the general election produces a large increase in MPs who understand why it is essential to remain in the single market and customs union. That is why we need a large increase in the number of Liberal Democrat MPs to hold Theresa May’s disastrous hard Brexit government to account.

Someone with Vince’s track record on these matters needs to be taken seriously.

If you are after some more Vince wisdom, have a look at our report of his lecture to the Scottish Liberal Club earlier this month.

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29 Comments

  • Lorenzo Cherin 28th Apr '17 - 12:48am

    Having been delighted that our local party in Nottingham recently welcomed Sir Vince as speaker for our annual dinner, I am now very glad , seeing him in such good form, he is standing.

    Life in the old dog yet ! We need his special brand of doom and gloom that always has a solution too!

  • “It’s being so cheerful that keeps me going”?

    Mona Lott in Tommy Handley’s ITMA. (It’s That Man Again’ ) The BBC Light programme 1939-49.

    Memories of childhood

  • Whilst I tend to agree with everything he says here, sadly it will be dismissed as yet mor project fear. I think some politicians (not Vince) have cried wolf so many times over other issues that it will fall on deaf ears…

  • Peter Martin 28th Apr '17 - 9:41am

    Lib Dems will be pleased to know that Vince Cable is very probably right and that there will be an economic crisis caused by the build up of of excessive levels of consumer credit in the none too distant future. Theresa May is likely of the same opinion. That’s why she has called an election now while the economy doesn’t look too bad.

    Remainers will be even more pleased to know that it will be quite easy to blame any future problems on Brexit. That’s what it will look like. We vote for Brexit in 2016 and a couple of years or so later the economy is on the skids and we have another crisis.

    The truth of the matter, though, is that the excessive build up of private credit which led to the 2008 crash has also continued afterwards. It is this which will cause the next set of problems and is really nothing to do with Brexit.

    Last time we blamed the banks. But next time we should aim our criticism at the politicians and economists who advise them. There has been far to much reliance on interest rates to regulate the economy. Every time it needs a stimulus, and it does need a stimulus to make up for too much private debt in the economy, interest rates are lowered which encourages even more private debt. You don’t have to be a professional economist to see the problem. So what happens now that interest rates are so low that they can’t be reduced any further?

    And why does the economy need so much debt to make it function anyway? The answer is that the UK runs a large trade deficit and someone in the UK has to borrow to finance it. Government doesn’t want to do the borrowing so it has shifted the burden, as far as possible, to the private sector. The only long term solution is for the UK to have balanced trade. The fall in the value of the pound is, therefore, a good thing and may have delayed the crisis for a year or two. Countries with floating currencies tend to recover better from economic shocks than those who use someone else’s currency like the euro.

    Vince Cable, the economics lecturer, will be well aware of the beneficial effects of a lower pound which will help our exporters and help create jobs. But Vince Cable, the politician, can’t acknowledge it.

  • Sadly, he’s right and it’s already starting to happen. Today’s slowdown in GDP is caused by people being unable to spend as much rather than them being unwilling to spend as much. Import price inflation is now hitting people’s pockets and living standards are falling as a result of the Brexit vote. Not because of sentiment, but because of fundamentals. The vast majority of the population are completely unaware of the negative economic impact of Brexit.

    The complete failure of seven years of Tory ‘austerity’ (ideological reduction of the size of the state) has left a government that has failed completely to eliminate the public account deficit and now, seemingly, no longer cares about fiscal stability in the pursuit of a greater parliamentary majority on the back of an upsurge in nationalistic, anti-foreign sentiment. Compared with 2008, we now have much higher levels of public debt and interest rates that cannot be slashed any further. We have used everything up to achieve anaemic growth since the great recession, whilst our governments have pandered to the worst forms of anti-public sector rhetoric that has left us with underfunded schools and hospitals that are no longer able to cope in the pursuit of lower taxes. I despair for the future my children are inheriting.

  • Richard Dean 28th Apr '17 - 11:22am

    Peter Martin – it does however help to be an economist sometimes. Businesses run on credit. Always have done. Lowering interest rates makes some new business projects viable, and therefore increases business activity, creating jobs and wealth.

  • Christopher Haigh 28th Apr '17 - 12:16pm

    @PeterMartin, given Vince’s analysis and your own , what will be the future developments of the UK economy after brexit in your opinion ? How will we recover from this self imposed recession ?

  • Sue Sutherland 28th Apr '17 - 1:46pm

    Peter, I agree with your analysis of the role of private sector borrowing in our economy but disagree with your conclusion because it’s too simplistic. Manufacturers rely on imports which become more expensive and our exports will be subject to tariffs post Brexit which will have the same effect.

  • Peter Martin 28th Apr '17 - 3:41pm

    @Richard

    You’re right. In a way it is good that interest rates have fallen. And yes businesses do run on credit. So no-one is arguing that credit per se is a bad thing. But we need to be a bit more like Germany and make sure that credit is being used for productive purposes rather than creating bubbles in the property and stock markets.

    @ Christopher,

    It all depends on what Government does if, or when, the private sector starts to deleverage their own positions. In other words they stop borrowing and start saving. The last time they did that after the GFC, the Government’s deficit rose to 11% of GDP in 2010. The arithmetic is ultra simple. If the trade deficit is 6% of GDP and the domestic sector is saving 5% of GDP then the Government’s deficit has to be 6+5 =11% of GDP.

    If Government panics and starts to raise taxes, like they did last time, and cuts spending, like they did last time, then we’ll have another deep recession. Like we did last time.

    @Sue

    It’s really not that difficult. So there is no need to over-complicate it. If the pound is (too) high then we can afford more cheap imports. Overseas holidays are cheaper than UK holidays etc. It becomes less attractive for producers to export their produce overseas. We run a trade deficit. On the other hand if the pound is (too) low we can’t afford so many imports. It becomes less attractive to sell stuff in the UK and more attractive to export it. We run a trade surplus.

    Somewhere, in the middle, is a level for the pound where trade does balance.

    Tariffs can distort the picture but the nation imposing the tariffs on its own imports can be just as much, or sometimes even more, harmed than those pursuing a policy of free trade. Historically the Liberal philosophy was to try to avoid tariffs even when the temptation was to impose them as a tit-for-tat measure. If the EU is as enlightened about free trade as some Lib Dems believe, there won’t be a tariff war after Brexit.

  • Peter Watson 28th Apr '17 - 6:19pm

    @AngrySteve “The complete failure of seven years of Tory ‘austerity’ (ideological reduction of the size of the state)…”
    Sadly, it was (is?) Tory and Lib Dem austerity. The TV face of the Coalition’s economic policies was the hapless Danny Alexander, even if George Osborne was pulling the strings.

  • But how can we reduce trade deficit? I would argue for adopting mercantilist export-led strategy for a while until trade balance improves, and also with plans to develop regional supply chains. It is a fact that only 40% of car components in the UK are domestically produced. Besides I prefer a combination of this and an investment-led strategy, an engine of growth driven by export and investment rather than consumption.

    None of other parties proposed export-led growth model. Libdem can do by not presenting them carefully so that they do not look like blatant mercantilist policies. Investment-led strategy can be done by pushing investment in fixed capital excluding new housing to over 20% of GDP.

    Also, macroeconomic management not must put private debt/GDP at the central, besides GDP and deficits.

  • Also, what about imposing some hard limits to discourage property lending in favour of lending to productive investments?

  • Richard Dean 28th Apr '17 - 9:17pm

    @Peter Martin. You have forgotten the capital account in your “ultra simple” arithmetic. It’s not so ultra simple when it’s included.

  • Christopher Haigh 28th Apr '17 - 10:01pm

    @richarddean, whilst in the EU the UK must have been able to run a surplus on its capital/financial account through inward foreign investment etc otherwise with our trade deficit the pound would have fallen in value. Just hope brexit does not put this surplus at risk as it must have balanced up our international dealings as you indicate.

  • Peter Martin 29th Apr '17 - 9:42am

    @ Richard Dean,

    No I haven’t forgotten that. It’s true that the capital and current accounts have to balance but it doesn’t change anything. Say Country A runs a trade deficit with country B. Country B will buy bonds from the Govt of country A which will then deficit spend the proceeds back into their economy. Those bond sales will appear in the Capital account.

    It doesn’t mean that Country A doesn’t have a debt to service though!

    Another way of looking at it is to say that the Govt Deficit = Everyone Else’s Surplus.
    Divide up everyone else into where they live, and change the wording a little) and we have
    Government Deficit = Domestic Savings + Overseas Savings
    Overseas Savings = UK’s external deficit.

  • Peter Martin 29th Apr '17 - 10:01am

    @Thomas,

    You ask “But how can we reduce trade deficit? ”

    There’s really only one way and that is to do what every other country which runs an export surplus does, and that is to manipulate your own currency downwards. Germany does it now by using the weakness of the Euro. Denmark and Switzerland peg their currencies at unrealistically low values against the Euro. China does the same with the dollar.

    That’s very difficult for any UK party to do. There’s not many votes to be gained by promising to devalue the pound and keep it low!

    So the alternative approach could be to keep the pound high and have a more relaxed approach to Govt debt. Unlike the extent of private sector debt that’s not the big problem that it’s made out to be.

    But that’s not likely to go down well with the electorate either!

  • Richard Dean 29th Apr '17 - 1:37pm

    @Peter Martin. I see your calculation, which I agree is cute, but now I am asking whether growth has been accounted for? The global money supply isn’t fixed, it increases as a result of economic growth.

  • Peter Martin – And the only another approach is increasing efficiency. But one of the constraints on British businesses, especially SMEs, is the access the funding for investment. It is extremely hard for them to get conventional bank loans, and the UK did not have a powerful and dynamic VC sector like the US. According to what I have read, Corbyn National Investment Bank is based on the KfW model. Libdem introduced British Business Bank in the last coalition, but it is just too small (just around £1 bn of capital), if we compare it with German KfW Bank. I believe by promising to substanstially expand the scope, scale and capital of the Business Bank, Libdem can win over support from SMEs and startups. Also, as British firms are generally unwilling to invest in R&D, the government must make up the gap either through increasing funding for direct public research or to subsidize business R&D via an enlarged British Business Bank. By any means Britain must raise its investment rate to over 20% of GDP.

    Well, a weak pound, while boosting exports, would also make it easier to pay back government pound debts.

  • Peter Martin 29th Apr '17 - 10:23pm

    @Robert,

    I prefer to think in terms of what is spent in the economy rather than in terms of “money supply”. If I have money sitting in a safe or a piggy bank, it might as well not exist as far as the rest of the economy is concerned. But when I get it out and spend it – well then it does have an effect.

    The economy of the UK is about £2.2 trillion p.a. It needs £2.2 trillion of spending every year to keep it going. About £0.8 trillion is by government and £1.4 trillion by everyone else which includes overseas buyers buying stuff from the UK. Governments like to aim for some growth and also some small level of inflation (say its 2% of each). That means that next year spending in the economy has to be nearly £2.3 trillion.

    The problem for every government is that it doesn’t know, in advance, how much everyone else will spend. Maybe they’ll spend too much and create too much inflation. That can happen when everyone is over-borrowing. Inflation jumped back up to double figures in the late 80’s when the Lawson boom got out of control. Margaret Thatchers government had previously kept it under much better control. They didn’t seem to realise that excessive private sector spending was just as inflationary as excessive govt spending. Or maybe everyone else will not spend enough and we’ll end up in recession.This happened in 2010 when everyone else stopped borrowing and started saving.

    So Government has to spend, not according to the taxation revenue it receives, but according to what levels of inflation and growth it wants to see in the economy. That can be a tricky balance to get right. Where money is spent is also important. Money spent in the depressed regions is more likely to create growth. Money spent in regions where the economy is already at full stretch is more likely to cause inflation.

  • Peter Martin 29th Apr '17 - 10:24pm

    @ Thomas,

    Agree with you on the importance of having an government directed investment bank. We do need private and public credit to fund businesses and productive enterprises. We don’t want to see a flood of credit just used to push up stock prices. Or just used to inflate the value of the property market. House prices so high in many parts of the country that young people can’t afford them. If house prices stay high the younger generation will miss out. If house prices fall then a lot or recent buyers will end up being bankrupt.

    Maybe that’s why we need a bit more inflation to restore that balance and reduce levels of private debt. Government doesn’t care either way for itself. It should care for everyone else though. Money is just an IOU of government. Government has to assume a debt so everyone else can have assets in the government’s created currency. Government holds the negative numbers so we can all (or nearly all!) have positive numbers ourselves. Everything does have to sum to zero.

  • Peter Martin – I hope that there would be plan for British Business Bank expansion. Oh wait, we can use the state-owned RBS.

    But state redirection of the flows of funds in the economy might face opposition from the “economic liberals”.

  • Richard Dean 30th Apr '17 - 6:33am

    @Peter Martin

    Sorry to bang on about this, but are you using rather non-worldly definitions here? Let me explain with a simplified example …

    Consider an isolated country with a 1,000,001 citizens. A million end the year each having borrowed £1000 from the other one. In political-speak, the level of private debt has increased by a billion, but neither of the other two items in your equation have increased at all. So in political-speak, your equation is surely wrong?

    I can see that, if we take account of the money the last one is owed, the country as a whole has not changed its debt position. But that is a rather academic point, is it not? From a political point of view, what hurts is that a million have gone further into debt, and there is now even more inequality.

    Am I understanding this right? What relieves hurt is what get votes. Go to this country and tell the million that the increasing inequality is ok, and you surely won’t be voted in to government!

  • Peter Martin 30th Apr '17 - 5:19pm

    @Richard,
    If I borrow £1000 from you, then according to the principles of double entry bookkeeping, you have got the value of the loan to me on your balance sheet to offset the loss of the £1000 from your bank account.
    I have a liability to you for the £1000 to offset against the cash that appears in my acount.
    So immediately after the loan nothing has really changed.
    It starts to change as I spend the money. Why else would I borrow it?
    So it isn’t the borrowing in itself that initially stimulates the economy, it is the additional spending that results. You’d be unlikely to lend me money if you needed it for your own use.
    Of course once i’ve spent it I’m left with a debt.
    That then depresses my future spending ability.

    I’m not the currency issuer. I do have to repay debts.

  • Richard Dean 30th Apr '17 - 7:30pm

    @Peter Martin

    You’ve missed the point. Voters don’t care about double entry book-keeping. If one borrows £1000 from another, private debt has increased, in political speak. But government debt has not increased, nor has any foreign purchase been needed to do this.

    It is this way of counting debt, not the double entry method, that voters care about, and which politicians too should care about. It is just not good for a society to have huge numbers of people in huge debt to a few.

  • Peter Martin 1st May '17 - 12:11pm

    @Richard,

    You’re right that the voters don’t understand double entry bookkeeping. I didn’t myself until a couple of years ago but this seemingly dry and uninteresting aspect of accountancy is certainly an essential part of understanding how the economy works. My favourite economist Steve Keen acknowledges as such in the Podcast link below.

    So the point is, that if we both borrow £20,000 from each other then total private debt has not increased. Our assets and liabilities are exactly as they were. It hasn’t increased even if I just borrow it from you. Neither has it increased if I borrow it from the bank. The same arithmetic of liabilities and assets still applies. But when I spend the money, on say, a car, then it does. Some of that money is pocketed by the Government in VAT and other car taxes. So it is the extra spending, which is enabled by the borrowing (rather than the borrowing itself) that boosts taxation revenue and reduces the Govt deficit. The last two surpluses (~1990 and ~2000) were caused by this very effect. So a government surplus isn’t really such a good thing. It probably just means there is too much borrowing going on in the economy.

    It might be better to look me up on Facebook if you’d like to continue this conversation. Just add Carnforth to my name in the search.

    https://debunking.podbean.com/mobile/e/does-modern-monetary-theory-make-sense/

  • John Littler 1st May '17 - 5:52pm

    Recessions tend to happen about every 7-8 years and by that reckoning, we are due another. The previous one was deeper than most in some respects but it was a double hit, as there had not been one for 15 years.

    The combination of a hard brexit with a world recession would be sufficient to turn politics upside down and could close down the Tories as a party of government for a very long time.

  • Peter Martin 1st May '17 - 7:25pm

    @ John Littler,
    There’s no rule of either economics or nature that there has to be a recession every so often. There were no recessions from the late 30s to the early 70s and I don’t think many people would have noticed that one! Did unemployment break the 3% barrier then?

    Recessions and depressions are completely self imposed. Either because we don’t understand how our economy works or, the PTB, for some nefarious reason wants to impose them on the rest of us.

  • Peter Martin – the Keynesian era.

  • Richard Underhill 11th May '17 - 1:37pm

    Mr. Barnier is addressing both houses of the Irish parliament, a rare honour.
    Their PM Enda Kenny (FG) is there and will have bilateral talks later.
    http://www.telegraph.co.uk/news/2016/07/27/who-is-michelbarnier-the-frenchman-in-charge-of-the-eus-brexit-n/

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