Millennium’s Credit Crunch Diary… April: Fools and Swines

In 1909, Mr Lloyd George went to the Cabinet fourteen times in order to hammer out approval for the People’s Budget before he took it to the House of Commons. That is an extraordinary level of co-operation; that is the way the system is supposed to work.

When I and my fellow Lib Dem bloggers went to talk to Mr Chris Huhney-Monster, on the day before the 2009 Budget, he mentioned this because, in more than thirty years of looking at Budgets in one form or another, he cannot think of a single case of the Cabinet being informed more than two days in advance.

It’s a SIGN of just how BROKEN our top-down, centralized, secretive, power-crazed system has become.

This year, however, the Cabinet no doubt learned most of the SALIENT details at the same time as the rest of us: by reading the weekend newspapers.

As we shall see, it has been a month when the MEEJA has been getting BORED of the continuing story of MONEYGEDDON (©Mr Charlie Brooker) and gone looking for new stories to distract us, whether it was the April Fool Riots, or Downing Street’s “In the Loop” antics, or Flying Piggies.

Anyway, before SWINE FLU goes all “Terry Nation’s Survivors” on us, which would REALLY put the kybosh on Global Recovery, hopefully there is time for me to tell you all about what ACTUALLY happened in April. Though, so if you’re feeling a bit SNUFFLY you might want to get your TAMIFLU in before starting to read…

There were, of course, THREE important economic developments this month: first, there was the G20 summit, then there was Chancellor Sooty’s Budget, and most important of all, I read Mr Vince’s BOOK, so now I understand what is going on!

This last point is actually worth dwelling on, and if you haven’t read “The Storm” yet (and assuming you DO want to understand what is going on and not look a PILCHARD like Mr Gideon Oboe does) then you should do so as quick as you can!

You would THINK, from the television news, that the recession is JUST caused by something to do with the BANKS and SUB-PRIME mortgages. This is only PART true, and by IGNORING the OTHER causes, some avoidable, some not, then we are going to apply the WRONG REMEDIES.

Now, I have been saying for some time that Mr Frown’s economic miracle was, like all plastic toys, MADE IN CHINA.

What Mr Vince explains is this:

The entry – or rather RE-entry – of China and India (and to a lesser extent Brazil and Russia and other outside-the-G7 economies) onto the Global Economic dance floor has not been handled very well.

The expansion of the Chinese (etc.) economy has kept Western inflation DOWN by increasing IMPORTS. Normally, this would cause the exchange rate to shift but, in order to protect their low prices, the Chinese have used their profits to buy up US dollars and US government debt, keeping the exchange rate stable. This led to a HUGE increase in CREDIT.

Cheap credit meant that it was easy to borrow money to buy assets – that means property i.e. houses if you are people, but if you are a bank it means stocks and bonds and most of all the exciting new mortgaged-backed securities.

That’s SPECULATION – buying assets because you think the price will go up so you can sell them for more than it cost you to borrow the money to buy them. And when speculation becomes an apparently self-fulfilling prophecy – at least until someone points out that the Emperor has no visible means of support – then you get a BUBBLE: the housing bubble and the much, much bigger bubble in stock-market securities.

At the same time, the developing economies having more money coming in were able to buy up more in raw materials, in particular: OIL and FOOD. There have always been CYCLES in sale of basic stuff like this – in THEORY supply rises to meet demand, but in PRACTICE supply rises SPASMODICALLY. It’s easier to squeeze a bit more out of what you’re already supplying (pump oil faster, cut back your fallow years and grow more) than it is to develop new sources of supply. So what happens is that your margin of error (that bit of “extra” room you have between the total you can supply and total demand) gets narrower and narrower until suddenly it’s critical and one little thing (a bad winter, a drought, a small Middle Eastern War that threatens supply) causes people to panic-buy and prices go shooting up and up.

(In the LONG RUN, those prices shooting up will be the incentive for people to open up new areas of supply – because the potential rewards are there to make it worthwhile investing capital in e.g. new wind farms, or e.g. Canadian oil shale deposits or e.g. African irrigation projects or e.g. development of genetically modified crops and so on. But in the SHORT RUN…)

Increasing prices of food and fuel, and American interest rates being allowed to go back up, revealed that those sub-prime mortgages couldn’t be repaid, and so those assets were not worth what people thought they were. But that was not, in the scheme of things, a large amount of money. The problem was that it revealed that ALL those securities were made out of promises and air.

And when the Americans allowed Lehman Brothers to go bust, it revealed that the promises were worthless. This imploded the entire market in international banking. And that WAS a large amount of money. In fact it was pretty much ALL the money.

End of story.

Now, a lot of people want to put the BLAME for all this on the CHINESE of all people.

But really, WE were the ones living beyond our means: the Western Economies in general, but Great Britain and America in particular. It meant that we, some of the RICHEST people in the world, were essentially borrowing from some of the POOREST people in the world.

We need to set our own houses (not to mention houses’ prices) in order.

Now with a bit of luck you can see how Mr Vince’s explanation ties in to Mr Frown’s two TITANIC FAILURES of the month: first there was the World Summit, where the World all said they ENTIRELY agreed with Mr Frown, and then followed French President Monsieur Sarcastic’s plan to IGNORE him; and second there was the Budget, where the World all said “hahahahahahahahaha… what, you’re SERIOUS about that growth figure???”

The Summit was an enormous MISSED OPPORTUNITY. Mr Frown and President Barry O wanted a co-ordinated move to more borrowing and spending; Monsieur Sarcastic and Germany’s Frau Angular Meercat wanted to control borrowing and protect their own markets. Of course they were ALL wrong – first on the agenda should have been re-opening the World Trade negotiations that died with the Dohar round last year. Cutting protectionist trade barriers, particularly farm subsidies, saves Government money, reduces prices through greater competition, creates opportunities for investment and stimulates the World Economy to START MOVING AGAIN.

Despite the headline figure of… one… trillion… dollars [/Dr Evil] most of this is to go into the IMF – that’s International Monetary Fund, not Impossible Mission Force… though come to think of it… – to be used to shore up counties whose economies look like falling over. Countries like Iceland and, if we’re not careful, US!

Far from being a “new Bretton Woods”, this deal is merely sticky-plastering the last remnants of the OLD Bretton Woods.

An extra one hundred billion in International Development funds for the poorest countries is to be welcomed (if it ever arrives – stares hard at Millennium Commitments) but honestly, TRADE is better and more dignified and frankly more SUCCESSFUL than any amount of charity.

But the actual achievement, limited as it was, at the G20 has been somewhat blotted out by the subsequent news stories about the police going mental and the death of an innocent passer-by, bringing into horrible focus all those jokes about people falling down in police custody.

And then any credit [hoho pun] Mr Frown MIGHT have gained by being seen to be working towards SOME KIND of SOLUTION, however misguided, was then drowned out by the Conservatories wailing ON and ON and ON about some smears that NEVER ACTUALLY HAPPENED. In fact, if anyone smeared the Conservatories it was THEMSELVES and their not-remotely-housetrained semi-detached associate in the blogosphere. Oh you know who I mean. Irritatingly, it was Mr Frown who was left with the STAINES.

The underlying significance of this story is that the Conservatories, Mr Balloon, Mr Oboe and all the little Etonians you can’t remember, had nothing, literally NOTHING, to say about the most significant economic crisis of the decade, in fact NOTHING to say about ANYTHING except:

“wah wah wah, Gordon won’t say sorry for the nasty things that his friends didn’t say about us. Boo hoo hoo we’re really upset.”

Even by Mr Oboe’s unforgivably low standards this was a pathetic display, but such is the FEBRILE atmosphere of the Westminster Village, the MEEJA lapped it up.

Then the Budget was an enormous MISSED OPPORTUNITY. Instead of facing up to the economy’s problems, the Chancellor laid out plans to bring the Government’s spending under control by, er, borrowing more money than any government in history. Or, actually, borrowing more money than EVERY government in history!

So how has Chancellor Sooty managed (MIS-managed) that?

Well, in really simple language, Sooty foresees getting LESS money coming in, but plans on lots MORE money going out.

With the numbers: the Government estimates that UK GDP will be a shade under one point four trillion pounds; that is, fourteen hundred billion pounds. They intend to TAKE about a THIRD of that (four hundred and ninety-six billion pounds) in taxes and duties and other fiddly little charges; and they want to SPEND about HALF that amount (six hundred and seventy-one billion pounds) on services and salaries but mainly on cake.

As Mr Charles Dickens’s character Mr Micawber of Bleak Expectations would have put it:

“Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure six hundred and seventy-one billion pounds AAAAAAAAAAAAAAAAAAAAAAAAGHHHHHHHHHHHHHHHHHHHHHHHHHHHHH!”

Even the fairyland figures of the Hard Labour Government expect tax receipts to go DOWN this year – broadly ten billion pounds less in Income Tax, ten billion pounds less in Corporation Tax and fifteen billion pounds less in VAT (i.e. sales tax).

At the same time Sooty is spending more by FIFTY billion pounds.

That’s a widening gap between money in and money out of eighty-five billion pounds – thirty-five plus fifty – almost DOUBLE last year’s already-dreadful shortfall of ninety billion making the grand total that Sooty needs to find of ONE-HUNDRED AND SEVENTY-FIVE BILLION POUNDS (of which you may have heard).

So what’s he SPENDING it all on?

Well, social security and tax credits make up about 30% (and with an increase of seventeen billion, they are the largest part of the increase in spending too).

The next three biggest big-ticket items are health, education and defence and between them they add up to another 30% (half of that being health). These too are getting whopping increases: eight billion more on the health service, five billion more for schools. Universities and defence have to settle for a paltry billion each.

Devolved spending – Scotland, Wales, Northern Ireland, local government – gets about 15% of the total. They are NOT getting large increases, only about a billion each.

Then there are a couple of dozen spending departments – from Culture, Media and Sport to Work and Pensions – that make up another 20% of Government spending. The rest of the increase in spending is scattered among them, a billion here a billion there, some deserving, some not so much.

For example, it’s difficult to argue with another billion for International Development, say, or a ten percent increase (that’s only a tenth of a billion in cash) in the budget for Energy and Climate Change – you just wish they were spending it on windmills or sea-snakes, not atomic power stations. On the other fluffy foot, an extra three-tenths of a billion (i.e. three hundred million) for the Cabinet Office, which is a fifteen percent rise, seems a tiny touch excessive in a time of allegedly zero inflation.

And the last 5% (for those who are adding up) is what the Government has to spend just servicing the interest on this massive debt that it’s running up. Almost ironically, the fact that interest rates have been flat-lined to try and Save The World (©Gordo) means that this is actually getting CHEAPER!

Even in the short term, we are spending WAY too much money, a legacy of Mr Frown breaking his own Golden Rule and borrowing to spend in the wrong part of the economic cycle. This Budget will only make things WORSE. It’s the old adage: when you’re in a hole… stop DETONATING HIGH-EXPLOSIVES!

There is much talk of “Keynesian economic solutions”, but there are two things to remember: firstly, Mr Keynes wouldn’t have started from here. Well, actually he WOULD have started from here, but he wouldn’t have STARTED borrowing UNTIL we got to the situation we are in now – he certainly wouldn’t have started years ago and now be looking at a Mastercard that is now so overcharged it is glowing in the dark!

And second, Mr Keynes was talking about borrowing to fund CAPITAL investments, like the ones that President Barry O is planning, not just spending on current expenditure which is a LOT of what Sooty and Mr Frown are about. These are things that will return a benefit after economic conditions get better again.

There are “good-to-go” projects – the sort the American’s call “shovel ready” – up and down the country. Mr Huhney-Monster told us about several in his own constituency:

“I’ve got a sixth form college and a college of further education, both of which were encouraged to draw up plans for replacement of old buildings, they’re both ready to roll, could begin like that [snaps fingers]. There are flats that are simply half-built and they’ve stopped building them. We’ve got unemployed people who could be given work to finish that off; we’ve got four thousand people in the constituency on the waiting list who are actually waiting for housing; all we need to do is make sure that the finance is there.”

This is the sort of fiscal stimulus that a Liberal Democrat Budget would have brought forward. Direct spending, quickly targeted to the very things that will help us survive and recover: homes and education.

Instead of tinkering with tax rates on earnings over £150,000, designed merely to give newspapers something to chatter about rather than to raise any REAL taxation, the Liberal Democrats would have made sweeping reforms: a SIMPLER tax system and a FAIRER tax system, a huge raise in allowances to give everyone on lower and middle incomes a tax CUT, paid for by abolishing the loopholes and curlicues that let top earners pay less.

Here’s the real deal: right now, we can’t cut spending dramatically. We could spend a little less, and we could spend a little more smart, but the idea that we go into an already worsening recession slashing public services, as the Conservatories suggest (and they sure aren’t making any OTHER suggestions), has no sound basis in any known theory of economics, whether Keynesian or Monetarist or based on finding Leprechaun Gold (that’s Mr Frown’s theory).

After the General Election next year, AND after the recovery, which may well not be until the year after that – Chancellor Sooty’s forecasts being not only unbelievable but proved obsolete within 48 hours – then we will have to begin repaying some of this enormous debt.

Some of it can be repaid when the banking sector has sorted itself out and we can sell off all those banks that we have recently bought, maybe in five or six years time.

But for the rest, tax will have to rise and spending will have to come down. Since it’s now very likely to be Mr Balloon who wins that election, I would not be surprised to see VAT raised to 20% – that’s the typical Conservatory strategy – or even, really sticking it to the poor, extending VAT to food. I’d also expect huge Council Tax rises, especially in the North and in the Cities as the Conservatories reverse the Hard Labour bias in the distribution of the Central Government finance settlement. And they will probably do something UNSPEAKABLY EVIL about the 25% of spending that goes on social security and pensions, though this will be indistinguishable from the something UNSPEAKABLY EVIL that Hard Labour will do.

Unfortunately since both the Conservatories and Hard Labour want to win that election, they both have the same policy of NOT TELLING YOU any of this.

That’s why Mr Balloon’s reply, while it seems to have gone down TERRIBLY WELL with the PUNDITS, was entirely made up of NEGATIVE RHETORIC; it was all hot air, with not a whiff of a policy in it. Apart from slotting in the (leaked) figures from the (Sunday newspapers) Red Book, he could have written it months ago. And probably did.

And that’s why this Budget, Hard Labour’s last (or very-nearly-last) Budget was hardly a budget at all. Just an exercise in deckchair-rearranging.

As Liberal Democrat Leader, Mr Nick Clogg put it in his own reply to the man still laughably-described as Chancellor:

“He could have given a People’s Budget for the 21st century. Instead we got a politician’s Budget, desperately rushing around picking up half-baked ideas to save the skin of this failing government.”

It is almost CRIMINAL the way that a Government that KNOWS it has lost all moral authority is not only going to insist on struggling on through another increasingly embarrassing year of in-fighting and bad-news-days, but is going to charge us ONE-HUNDRED AND SEVENTY-FIVE BILLION POUNDS for the privilege.

And after that, just when you thought things could get any more SILLY… Mr Frown appeared on HootTube to put his foot in his mouth with a set of proposals on MPs’ EXPENSES dreamed up in the depths of the Downing Street BUNKER with no reference or consultation with anyone. He then proceeded to shoot himself in the OTHER foot by abandoning his plan two days before voting on it.

My recommendations for the month… well, I’m really STRUGGLING this time. Even sorting out our own personal spending and saving could be a special kind of DANGER called the “Paradox of Thrift”: if we ALL start saving and stop borrowing too much so that we can’t spend too much, then the economy grinds to a halt. This happened to JAPAN in the 1990s.

So, short of us all pooling our resources and buying a KIBBUTZ-cum-ELEPHANT-SANCTUARY in Sheffield, I cannot see a way out of this one. Although, on a smaller scale, apparently “Come Dine With Me” dinner parties (everyone takes a turn cooking themed dinner for the others; thousand-pound prize best deemed optional) are now becoming all the rage as a semi-cheap way for friends to enjoy an evening out in each other’s company/homes. Pizza’n’Politics and a Liberal Drinks, anyone?

Love from Millennium
(now read my diary!)

As it happened…

G20

2-Apr World Agreement, sort of

Smears

11-Apr Damian McPoison quits
16-Apr Frown apology

Budget

22-Apr Here’s Sooty!

22-Apr Mr Clogg responds

MPs’ expenses

21-Apr Frown on HootTube
28-Apr clock-in plan abandoned

30-Apr a vote for reform… sometime

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This entry was posted in Humour and Op-eds.
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8 Comments

  • “There is much talk of “Keynesian economic solutions”, but there are two things to remember: firstly, Mr Keynes wouldn’t have started from here.”

    Exactly. Keynesianism (if one insists on using this faulted model) can’t suddenly be invoked once the economy loses a wing mid-flight. Well they can, but it’s not Keynesianism then is it?

    It’s just a massive ramping of tax and spend.

    It’s a bit like classifying the preceding decade as “laissez faire”. Nothing could be further from the truth.
    http://libertycolumn.blogspot.com/2009/04/laissez-faire-fallacy.html

    Another interesting criticism (US based, but pertinent nonetheless) is here:
    http://www.europac.net/whitepapers/BewareOfObamanomics.pdf

    Great article Mr Elephant.

  • What a splendid piece.

    Elephantine in substance (sorry ….) Cableish in insight.

    AND it mentions David Ll G – he was my mother’s MP y’know? Have I mentioned that? Eh? Eh?

  • It’s pretty easy to argue against increasing international development funds really.

    To do the normal humanizing trick of putting it in terms of a personal budget.

    If you’re too broke to pay the rent and food bills for yourself and your dependents (uk poor).
    Would you sell your children (future tax payers & voters) into debt slavery to pay for the deadbeat homeless person on the corner? When you know that money will just as likely be spent on booze (corruption for arms and 3rd world politicos). As it will be to fund somewhere warm to live and healthy to eat.

    Excellent article though, but can someone edit all the I DON’T KNOW HOW TO BOLD TEXT into bolded or italicized text?

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