Hubris? What hubris?

12 August, 2011

Post updated: 17.03 12 August, 2011. Maybe its because I was born and grew up in an ex-colony, but yesterday’s speech by the Chancellor, delivered as part of the emergency debate on the riots did strike me as reeking of empire. The tone was censorious – both of Britain’s feckless, heavily indebted citizens but also of all world’s economies.  (I am tempted to ask once again: who set the framework for the creation of ‘easy money’? Feckless citizens or Parliament? Who was responsible for Competition and Credit Control, (CCC)  and then the City’s ‘Big Bang’ and the massive growth of credit/debt that followed? Conservative governments, not feckless citizens – because  CCC was implemented without parliamentary scrutiny. My recollection is that until the 80s it was very hard to get a credit card, or credit. By the noughties bankers were spraying credit card promotion bumf into every post-box in the land – on a daily basis. Where were our politicians then? Cheering them on.)

But the speech was not just censorious, lecturing our OECD partners when really the UK does not have much of an economic leg to stand on.

It was also frightening.

Mr Osborne warned implicitly that the government was going to stand to one side, as the nation de-leverages i.e. pays down its debt. See the FT: “Osborne admits long, hard recovery.”   He seemed to regard this process which will “take longer and be harder” as inevitable – almost the result of ‘natural forces’ beyond his control – and declared

“an absolutely unwavering commitment to fiscal responsibility and deficit reduction…(and) making the difficult structural reforms needed to restore competitiveness and improve the underlying performance of our economies”

in much the same way as medical practitioners once welcomed blood-letting and blood-baths; enemas and purges. These treatments were enthusiastically applied by ignorant doctors, but were medically painful and deadly. Debt de-leveraging is economically painful and deadly. And for the Chancellor to suggest that the government is simply going to allow the process to take place without any form of economic amelioration is deeply threatening to the economic, political and social stability of this country. His statement was a challenge, almost an incitement to rioters, at a time when Britain was reeling from the shock of four nights of unprecedented chaos, looting and pillaging.

I urge his advisers to read Irving Fisher’s “Debt Deflation Theory of Great Depressions” – and to urgently explain its contents and implications to the Chancellor.

I was not alone in my concern at the Chancellor’s careless dismissal of the policies and approaches of other OECD economies; or of his eagerness to offer hostages to fortune. David Blanchflower, writing for the New Statesman, believes that Britain is “far from being a safe haven from the storm”.    Britain’s banks are as exposed as are the banks of Greece, Portugal, Italy and France to the crisis in the Eurozone.  According to the Bank of England’s analysis, reported by the BBC,

“if every single one of those countries went bust and wrote off 50% of their sovereign debt, banking debt and non-bank private-sector debt, that would wipe out around half the capital in the UK banking system – which is another way of saying that, in theory, the majority of our banks would limp on.”

I am not as optimistic as the BBC; banks are looking much more fragile than that – which is why they are laying off so many of their staff. (Reuters: 30 June 2011: “Wave of job cuts sweeps banks”). So, as I tweeted yesterday (@annpettifor) it’s time to board up the Bank of England, and ready the IMF fire-brigade, because, Mr Osborne the speculators will soon be coming for British banks. In the event that they cannot defend themselves, it will be up to the Old Lady of Threadneedle St to come to their defence – wielding taxpayer-backed resources.

Mr Osborne made clear yesterday that the government and the Bank of England

“have in place well developed and well rehearsed contingency plans”

– which he later insisted to the Shadow Chancellor Ed Balls, had to be kept secret. Why? Because if there were to be a sovereign default, leading to a loss of confidence, and therefore a “mass withdrawal of liquidity from private sector banks” –  what the Bank of England governor has called ‘the unimaginable and the unmentionable’ (FT 12 Aug 2011) – then the nationalised Bank of England would have to step in and deploy taxpayer-backed resources.  If speculators (or speculooters as one tagged them) were to accurately size-up the value of ‘contingency’ – the size of the contents of ‘the house’ – they would start betting against it, and would push the Bank to its limit – as they did on 16 September, 1992, when George Soros became famous for ‘breaking the Bank of England”.

It is only a matter of time. Mr Osborne’s over-confident speech may soon come back to haunt him.

A friend, assiduous about checking the assertions of politicians, but anxious to remain anonymous, has analysed the Chancellor’s speech for its very bold claim that the UK is doing better than the US.  Below is her analysis. It reveals that Mr Osborne and his Treasury advisers were playing fast and loose with numbers, yesterday.

“The most illuminating part of George Osborne’s speech to the Commons today on the economy was his provocative question – why has the American economy grown more slowly than the UK economy this year?

 The aim was to demonstrate that the government’s fast-track public spending reductions are the only option, by demonstrating the vastly superior performance of the UK economy and its government over all others in these difficult times, thus justifying him in lecturing everyone else on what they must do, from a position of supreme authority.

 The professor was especially tough on those incompetents in the European Union who must (he was in imperative mode) put in place “hard-wired” fiscal responsibility mechanisms (thereby ensuring they would be beyond any democratic control), as well as those unnamed laggards suffering from “paralysed political systems”, i.e. the Americans (farewell all niceties of the special relationship). Oh yes, and the Chinese and their debtors must forthwith deal with their imbalances. Only the UK stands as a beacon, nay the safest of havens, from the turbulent storms of sovereign debt and global disorder. And Britain will once again show that it is the global leader.

 In short, the Chancellor made it clear that Britain will, in its global leadership role, at all times do all it takes to do to satisfy Standard and Poor’s.

 In contrasting Britain with the US, Mr Osborne’s aim was to show that all attempts at economic stimulus are doomed to failure, and that the government’s spending-cum-deficit-cutting strategy is the only way to go. So let us examine the claimed superiority of the UK over the US economy. In so doing, we will need to ignore the minor fact that UK GDP is still well below its 2007 Q4 figure, whilst the US has just returned to that level.

 The recent US Quarter 2 figures show an annualised increase of 1.3% over the same quarter in 2010. Not great, for sure.

 The official UK GDP figures are presented differently, with the change being shown from Quarter to Quarter. The figures are Q1 +0.5%, and Q2 +0.2%, let us say 0.7% for the first 6 months. Most informed estimates for the whole of 2011 have been cut back to 1.4% or less. The Office for Budget Responsibility reduced its 2011 growth estimate in March from 2.1% to 1.7% , a figure which its head, Robert Chote, now accepts is very difficult to achieve. The IMF, in its recent UK report, forecast UK GDP growth of 1.5%. On the other hand, its recent US report, also of July, forecasts American GDP growth of 2.5%.

 But the sheer chutzpah of Osborne’s claim of superior economic performance for his “model” comes when we recall the relative state of the American and UK economies in 2010. Neither could or can be said to be in great shape… but the UK saw GDP growth of 1.4% for 2010, and this included the fabulous -0.5% “negative growth” (decline) in the 4th Quarter, which was the first quarter for which the new government could decently claim some policy-based responsibility. In 2010, the USA, on the other hand, grew by 2.9%, or more than double the UK’s growth, and the US Q4 result was higher than most had predicted (annualised increase 3.1%). So if the Chancellor had compared the performance of the two economies since last October, even he would have had to accept that the UK was the laggard. To remind Mr O. once again, the last 3 Quarters GDP have shown -0.5%, +0.5%, and +0.2% = roughly…. 0.2%!

 So let the world listen. The UK knows it is on the right path. Look at our record. We have achieved a staggering growth (literally) since September 2010 of one fifth of one per cent, an annualised rate of no less than 0.27%!

 Let us beat the drum loudly. Other countries, if only they would follow our lead and our leadership, can achieve the same (standard or poor?) level of results as the UK under the present government. All they need to do is join us in our haven (haven?…Chancellor, I suggest you change the metaphor, this is a bit too reminiscent of the Cayman Isles). In our land of the have(n)s and the have(n)-nots.

 So all together now. Stand and Deleverage!”

This was a very worrying statement by the Chancellor of the Exchequer. And I fear that its scarcely coded messages were missed by most of today’s media reportage of the speech, the Financial Times excepted, and will therefore not be fully understood by the wider public.

end.