Sunday 5 June 2011

Economics for Sickies 6

A few years ago, a multi-millionaire friend of my husband gave us a great lecture on leveraging. We had set up a business, but had no appetite to borrow further to expand, happy to grow slowly and sustainably.

He however, had been buying property in London and the South East as though it were going out of fashion (turns out it was...) and his debt vastly outweighed his assets.

He maintained that "debt equals wealth" and we butted horns for quite some time over what I saw as ridiculous double-think. I, the leftie, argued that no, debt equals interest payments, insecurity and...well...debt. He, the Thatcher-loving rightie (he has a picture of them together on his piano) argued that debt was hunky dory and could only lead to growth.

He and his buddies in the city borrowed and leveraged and borrowed some more until the whole house of cards teetered and fell.

We sold our house, paid off our debt, battened down the hatches and hoped to ride out the enormous storm we could see looming on the horizon.

Why would I tell you this little tale? Because it is a microcosm of society today.

The wealthy, the city, the banks and the entrepreneurs borrowed and leveraged, twisted and obscured, creating clever logarithms and computer programmes to convince themselves - and us - that it could, and would go on forever.

In a desperate bid to keep up, ordinary people borrowed too. They wanted a slice of this economic revolution, so they re-mortgaged and took out loans and maxed-up credit cards.

But even before the crash, "ordinary" people started to see that it couldn't last. They stopped spending, they stopped borrowing, they started to save and pay off debt. OK, maybe just a few at first, but once the credit crunch struck, it became a flood. And that is recession in a nutshell.

That is why governments must step in to prop things up in tough times. Because families, rightly, won't and can't.

But this is a straw man argument now. Things have gone too far. Osborne knows it, the banks know it, the city knows it and the global economy knows it. Osborne insists that eye-watering austerity and paying down debt will help, Labour argue that stimulus and growth will help, but actually, will any of it help at all now?

For decades we neglected our economy, we stacked it high and sold it cheap, we sacrificed quality to chase every financial bubble that appeared and we borrowed and borrowed and leveraged and obscured until no-one knew what anything was worth at all and there's a very good chance that in fact, it was worth nothing.

So, the naturally debt averse lefties are now the one's getting the blame for spending and leveraging, whilst the corporate righties have the astonishing cheek to claim we all need to be frugal. That the debt they courted was unsustainable, that the leveraging they adored had nothing to do with getting us into this mess. That the "light touch regulation" they called for less of was the real fault.

But under every right winger is a deeply held belief that it can go on forever, that capitalism will provide all the answers. There is an absolute confidence in the private sector to have the answers to the very problems they caused. There is total certainty that free markets and less regulation will get us out of this.

Isn't it all just amazingly incoherent? If you give it even a moment's thought, it seems fairly clear that they literally have no idea what to do. None of them. They are so totally thrown by the collapse of their house of cards, they can only use arguments they always used, only come up with suggestions they always thought would work.

Growth??? We'll be lucky to avoid a further crash that makes 2008 look like a street party. This is a global problem - everyone was at it. There is no money and there is no top hat from which we can magically pull a growth-rabbit. What will happen to personal debt when interest rates rise? Which businesses exactly are going to find export markets strong enough to pull us forward, feeding the capitalist growth monster in sufficient platters to fill him? How exactly are we going to "re-balance" our economy if those in charge have no appetite - comprehension even - of what that will actually take?

And who are the geniuses who will pull us out of this mess? Who are the new thinkers, the innovators, the dazzling brains who can see of all this and have answers? Osborne? Berlusconi? Sarkozy? Geithner? Lagarde? A few ex-bankers and gigolos so married to the current system that they can't see an inch beyond it?

Well, I have a horrible feeling, that like the last days of Rome, they are venal, corrupt, lazy, ignorant, selfish and incapable.

I have a feeling we need to show them a different way. the days of mind-numbing faith that these ridiculous political clowns have a clue what they're doing may be limited. We need to create excellence, pay down our debt, strengthen our families and communities and build businesses that actually make things we all need. We need to innovate for the future, create new technologies and sustainable energy sources. We need to square up to powerful lobbies that have made all of this impossible for generations. I have this horrible feeling they're not going to have the vision to actually make any of these things easier and I'm more and more convinced that people need to wake up to the long, hard slog ahead.

Working our way through this together, might be the only way forward and the more we listen to those in charge, the worse things might be about to get.


  1. What a great piece that perfectly articulates what I used to say in A Level economics (which I failed) "None of this makes any sense - it is all fake."

  2. Good article.

    Conservatism isn't a politcal ideology, it is in actual fact a cult. It has all the hallmarks of a cult. It's adherents are completely impervious to reality, facts and reason. Whenever they are proved wrong by reality, they just engage in magical thinking and blame anyone and anything for the failure of their ideology.

    Conservatives always claim personal responsibility as one of their traits, but they never ever take personal responsibility when things go wrong for anything. Iain Demon Smith even tried to blame so-called "benefit scroungers"(the sick and disabled) for the economic crash!

    Some good documentaries:

  3. Sue, you are depressingly right. The failure is not one of any particular political party, though the current administration is particularly unwholesome. The failure is one of capitalism itself - and the enormity of that is just about impossible for any politician of any of today's political parties to accept. We have been brought up - even the lefties among us - to believe an idyllic Candidian "tout est au mieux" philosophy and we've all bought into it in one way or another until it is virtually impossible to get out of. One can almost hear Marx trying to shift his headstone, crawl out and scream: "I bloody well told you so!"

  4. Good (but depressing) article Sue. I don't know what the answer is, I only know what the answer isn't and that is the suicidal course of capitalism on speed that Osborne has set us all on.

    I have listened and written down (because I'm weird) Gordon Brown's speech at Bretton Woods and he mentions these problems, he has a plan, he has the vision, he is I am increasingly coming to to believe 100% the only man (literally) in this world who can help our economies rebalance into the new economical world order. Yet the 2-2 in History Osborne and the ever disappearing holidaying man Dave have effectively blocked this country and the rest of the world from installing a man that could actually help us *all*. How is that for a bit of insane right wing politicking? Never mind that Brown is right (imho)for the job and that our country (and the rest of the world) can be helped through this period of extremely volatile financial readjustment (because this is what it really is), never mind that it doesn't matter just as long as the Tories win the next election.

    Who has Cameron and Osborne backed for the job? A visionary? An economist? Oh no, they have backed Christine Largarde and ex synchronised swimmer who speaks perfect English (like that is essential) and who is another right winger like themselves.

    If the whole world is in debt to each other, is it too simplistic (and female-ish) to ask, could not the whole world, our markets companies, every single this have a debt amnesty? Just write it off, have a cleans sheet and start again, help being given to those smaller poor countries that need it?

  5. Gracie - Trouble is, it's not the whole world is it? China owns America's ass, India is booming and the BRICs seem to be managing growth AND socialism at once.

    It's just us arrogant, white, Western capitalists-on-speed (I like that) who screwed up and don't want to face that the party is horrifically over.

  6. "But even before the crash, "ordinary" people started to see that it couldn't last. They stopped spending, they stopped borrowing, they started to save and pay off debt. OK, maybe just a few at first, but once the credit crunch struck, it became a flood."

    Exactly. I think I've said this before, but politicians have actually said "no-one saw the recession coming" and I've always thought "that's funny, because I and every single one of my friends said it was, all we weren't sure of was when". A hell of a lot of people know this stuff is crap, they just happen not to be the ones in power. I'm amazed by this "spending caused the recession" thing; if the state had had fewer outgoings, what, the whole process could have lasted a couple more years before crashing? Because it was always going to, spending or no spending.



  7. So which system will help me to put money on my pre-payment electricity card, because we have zero money and are about to run out? I can't really care about "future forecasts", growth or whatever - I have to live in the right now, and it's a panicky, stressful place. I'm fairly sure that for all the problems the banks are having, poor dears, the top dogs aren't having to worry about their pre-payment cards.

  8. Indeed. And who will get that last week's shopping when I run out of the cash I don't have? Mr Mastercard?

  9. Regretfully Gracie the debts cant be written off. In case you missed it here is the link to TV Andrew Marr's Megacities from the bbc1 series

    china is the new super power in which it makes money as for quality thow there still a long way off

  10. Mr Barclays was a help for a while by telling me to pay the minimum if I couldn't afford more, but now Mr Barclays is sending letters with over-limit charges.
    One person's "economic reality" is not another's and "economic reality" is a quagmire that increasing penalises the poor and rewards the rich.
    Or maybe I'm just cynical due to circumstance...

  11. You're precisely right about the economy, the 'Growth' of the last decade has been a sham, and now the reality is being revealed and 'Growth' can no longer be based on ever-increasing debt we're having none.

    What I find odd is that you miss that the rather large elephant in the room that the last decade was Labour's decade. Despite the anecdotal 'right-wing banker'.

    That Labour presided over the massive growth of debt and called it prosperity, that Labour funded its vast increases in public spending on tax revenues from an enormous bubble that could never last, that it was Labour who based their entire economic reputation on the claim the good times would go on forever "ending boom and bust", Labour that borrowed £150 billion during a boom, pushing the economy's ridiculous indebtedness up even further, that Labour's celebrated independent bank of England kept interest rates too low and made credit too cheap, thus encouraging debt even more, Labour that cut the amount of capital that Banks needed to hold, that under Labour total UK public and private debt went from 250% of GDP to 550%, Labour that presided over a tax system that actively incentivised companies to swap capital for debt for tax reasons. And Labour who now claims the only solution to this is even more debt and even more borrowing.

    It was Tony Blair and Gordon Brown who were in charge and had the responsibility when the UK economy turned into a debt built house of cards. Not George Osbourne or David Cameron or Nick Clegg.

    Now you may argue they don't have the answers either, or would have done the same things. But still it's Blair and Brown who were in charge and responsible, who should have done something. At least worth mentioning in a fair description of how we got into our present troubles I may have thought.

  12. Sorry to be a doomsayer, but there's no point in kidding ourselves. The horrible truth is it isn't going to get better, there isn't going to be a brighter day, in short we're fucked. We're on a runaway train heading for the edge of a cliff and the driver is at the front holding down the accelerator.

    The free market neoliberal fanatasists that run the economy are sociopathic addicts. They are completely addicted to the accumulation of wealth they don't need, and they'll kill you and bury your kids alive before they let anyone interfere with feeding their habit. They are completely out of control.

    "There's a certain chemical that gets released in your stomach when you make ten times your money. And it's addictive. - William Browder a U.S money manager.

    That it's going to destroy the whole planet that they and we depend on for life doesn't bother them in the slightest. They own the media, which means they can fool most of the people most of the time, and they own and control the main political parties too.

    "Energy is the lifeblood of any economy. But when an economy is based on an exponential debt-based money system that is itself based on exponentially increasing energy supplies, the supply of that energy deserves our very highest attention.

    Key Fact #1 is that world oil discoveries peaked in 1964. US discoveries peaked in 1930, and 40 years later production peaked. We are now 44 years after the global discovery peak.

    Key Fact #2 is that world production of conventional crude has been flat for the past four years, even as prices have increased by 140%.

    3.Financial assets are only valuable if they can be used to secure a sufficient quantity of oil to keep the economy running. They represent the ability to get work done, and since in an industrialised society the work is done by industrial machinery that runs on oil, less oil means less work. Financial assets that that are backed with industrial capacity require that industrial capacity to be maintained in working order. Once the maintenance requirements of the industrial infrastructure can no longer be met, it quickly decays and becomes worthless.

    It will have to get to the point of mass penury before the people revolt, and even if there is a revolution it will probably be hijacked by fascists and we will probably end up with a fascist dictatorship.

    But even if we somehow made it through that humanity has pumped so much CO2 into the atmosphere and done so many other destructive things that the climate will collapse, it's probably already started to and even if we stopped now it probably wouldn't make any difference.

    The only thing we can do now is survive as best as we can, try and get as much pleasure out of life as possible and spend time with our loved ones and cherish every moment.

  13. Erm, Stephen, the problem didn't start on May 6th 1997. There was this woman called Margaret before that. Labour bought into the idea that it could be sustained for sure - I don't think my article denies that.

    Have a look at some growth charts and compare them with debt charts.

    Right across the "developed" world, leaders bought into the same myth. Now they simply don't have a clue what to do.

    It's cheap and silly to suggest that this was a Labour phenomenon.

    When the FSA went in to audit RBS, they came away deciding it was all fine. The books were so convoluted, so dishonest, so screwed, that even government didn't know exactly what was going on.

    This goes way beyond politics. The Tories were calling for LESS regulation and more debt right up until the crash. We can keep on playing "he said, she said" or we can try to find some solutions.

  14. I totally agree that this goes beyond politics. It's due to our inherent desire to look on the bright side. I have lived a good life and luckily got onto the debt spiral early! It took me nine years to pay off all my debts, working two jobs and living very frugally. I was lucky, I was healthy and fell into a young industry that was beginning - IT. I did well and because of my earlier debt experience we did not live above our means and managed to save. those savings were invested in ISAs, as advised by the govt needless to say are worth much less than they would have been had I had them in savings accounts. After paying tax at 33% when struggling and working two jobs and later at 40%, having taken little back out as we have no children and both had private medical insurance through work, we are now in a position where my husband has had a breakdown and may be diagnosed as bi polar and I am earning much less money than before having taken early retirement. Now I have been diagnosed as having a progressive lung disease. I have no fears about dying, and given my hard work and contribution should be able to rely on "the state" to give me something back. I, with many middle earners, am worried about living - the middle class that was has now become the maltreated proletariat of Marx and Engels! Time we all recognised it and fought for change before the forced return to an agrarian society when the oil runs out!

  15. Ok. First of all let me just say that I'm Greek and that, even though I read the paper and watch the news and am not in denial about the possible scenarios of what awaits us, reading your post made me shudder.

    You said: "I have a feeling we need to show them a different way. the days of mind-numbing faith that these ridiculous political clowns have a clue what they're doing may be limited"

    And: "Working our way through this together, might be the only way forward".

    I won't comment about the economy generally, because I really don't think I know that much about the situation to be able to analyse what's going on. What I do want to talk about is my country. Whatever anyone may think of Greece and whatever views and opinions anyone may have about why we (along with Spain and Portugal et cetera et cetera) are in such dire economic straits at the moment (and I do understand there are some strong opinions about this issue), one thing, I think, is pretty clear. The more cuts the government introduces, the more difficult everyday life gets, the more the economy staggers, the harder it gets to pay back the debts, the more loans we need and the more demoralised people get.

    I was raised in Athens. Both my parents are Greek. I went to a British school and after graduation to a UK university. I go to Athens for a few days every year, but haven't lived in Greece for a long time. My most recent trip back was 15 days ago and what struck me wasn't that there were fewer cars than ever on the streets because of rising petrol prices, or that people were talking about the austerity measures non-stop. No. What struck me was that everyone's head was kind of bowed, a permanent frown on their faces and they spoke like a people humiliated, helpless, ridiculed.

    After the first demonstrations in Madrid, something changed. People started gathering in the centre of Athens and just sitting outside parliament. We watched from afar and to be honest, expected the demonstrations to dwindle as time went on.

    Amid all other measures, this past Friday the Greek state announced it would no longer cover medical equipment (pumps, artificial limbs, wheelchairs, insulin needles and syringes etc etc etc) for anyone in Greece. Today there were three hundred thousand (!!!) people outside Parliament. They didn't shout, they didn't hurt anyone; they didn't go to cause any trouble. They sang, held up Greek flags in silence, cooked, shared food with everyone there and just stood all together. They are, for the first time in a very long time and for as many days as this lasts, a community.

    What I mean is, all financial theories aside, people need a sense of dignity, a sense of worth, a sense of interconnectedness. You are absolutely right in that we need to work our way through this together. There is no other way. It won't be easy, in fact it might be almost impossible; but if we stand a chance, that chance is tangible only when we stand united, together.

    It is a perfect storm indeed. And we are in its eye. The second it moves, everything may come tumbling down. What's always left standing are people and our phenomenal capacity to endure and adapt.

    Thank you, for a truly thought provoking post.


  16. I largely agree with you in relation to the economy. To be honest I don't think the problem even really started in 1997. I think 2002 is more like it, when the UK went into permanent deficit and no action was taken to stop the spiralling levels of private debt, with the BoE deliberately holding interest rates low.

    I mention Labour only to provide a bit of counterweight to your just-so story of the greedy "right-wingers" and the naturally debt-adverse lefties. Sadly reality is not that simple.

  17. "I mention Labour only to provide a bit of counterweight to your just-so story of the greedy "right-wingers" and the naturally debt-adverse lefties. Sadly reality is not that simple."

    New Labour were economically right-wing.

    Margaret Thatcher herself declared that her greatest achievement was “Tony Blair and New Labour."

    Will the right-wing ever accept the failiure of their ideology? Never!

  18. The point was more of a general one. On the whole, lefties are not the ones rushing for a few million to leverage their souls, yet they are getting the blame for the credit crunch. On the whole right wingers tend to sign up to the whole corporate bubble nonsense yet the bankers and auditors and businesses are getting none of the heat for the mess they created.

    I love a bit of irony me.

  19. definatelycharlie12 June 2011 at 00:46

    Stephen,you are wrong about the growth of state debt.Far from being high before the crunch,it stood at 36.5% of GDP.
    That is low by historical standards.It went up to a peak of 61.9% of GDP,by mid 2009.That was still below average for the last 300years.It is a sly trick to add the private and the public debt figures together as if they are the same thing.The credit crunch is a private sector phenomena,aided by a failure of the state to regulate banking.
    But,the state stepped in and prevented a collapse of the banking system.It should have demanded something in return,but that's another story.
    It bothers me greatly that few seem to have noticed that debt fell substancially,from mid 2009,to 53% of GDP by April 2010.This was no fluke-it coincided with a period of growth.Since Osborne's budget last year,however,debt has risen again to 60.1% of GDP,a rise of £144.5bn.
    This ofcourse coincides with his squeeze and the big fall in growth.
    I'm extremely pessimistic about the economy,but mainly because of this unnecessary and damaging austerity program.

  20. definatelycharlie12 June 2011 at 09:58

    Stephen,I notice that you say that Labour were borrowing £150bn during the boom years.Presumably you mean the deficit,rather than total state debt-which would be a higher figure.
    The deficit prior to the credit crunch was 3.5% of GDP,or about 38bn(higher than the 4% they inherited),not 150bn-that figure is rubbish.
    It rose to about 150bn because of the recession and the bank rescue.Nationalising,or part nationalising the banks put it up by nearly 50bn.Most of the rest was due to a sharp decline in tax receipts coupled with the increase in welfare payouts to the newly unemployed.
    There were so many problems with the policies of the previous government.
    Continuing with the under-regulation of the financial services sector,failure to see the crunch coming,their belief that the market magically always has the answer to any given problem with the public services,etc..,
    One could go on all day.
    But it is incredible how their political opponents have got away with their ludicrous claim that the deficit,and debt,were high before the crunch,and that somehow they contributed to it's cause.
    And this is their excuse to attack what they say has created this debt,using policies that can only increase it!The austerity measures are greatly reducing demand in an economy where it is already lacking-with private sector debt of over 500% of GDP.The credit crunch is still with us.The present government are,like the last government,still failing to get loans to small and medium sized businesses.The state needs to step in and help directly.
    But that would go against every free-market principle.