...a blog by Richard Flowers

Monday, October 11, 2010

Day 3569: A Change of Tack – Chris Huhne has it right on the Economy


I've said this before and I'll say it again: the British economy skates across the thin ice between TWO great dangers.

On the one fluffy foot: DEflationary recession caused by insufficient demand (i.e. the economy losing oomph because there's not enough money being spent).

On the other fluffy foot: collapse in market confidence leading to spiralling interest rates leading to INflationary recession (i.e. the economy losing oomph because the money is spent on higher costs and interest instead of growth).

ONE solution needs MORE Government SPENDING funded by borrowing; the OTHER needs LESS Government BORROWING achieved by less spending.

Obviously, I mean really OBVIOUSLY, these are the OPPOSITE of each other so you can't do BOTH.

But if you are SERIOUS about doing the best for the economy, as I hope most politicians are, then you DON'T just pick ONE and stick to it regardless. You make a judgement call about which risk seems to you to be greater and you watch the outcome LIKE A HAWK, so that if the risks change YOU CAN SWITCH to the other policy.

THIS is what we mean when we say we are being PRAGMATIC.

THIS is what Mr Huhney-Monster is saying in his interview in the Tell-lie-o-graph.

As of the start of May, when the world markets turned on Greece and looked like they might turn on other European countries soon after, we have made the judgement that the risk of market panic was the greater.

That is why we supported Master Gideon's budget saying he was going to borrow less, even though that meant harsher spending cuts.

And it appears to be working. The markets have calmed a little, the IMF has given its approval and we have retained our Triple-A credit rating.

That does NOT mean we go "tick, V.G. Economy sorted". It means we CONTINUE to watch the OUTCOMES and try to adjust our plans accordingly.

The signs are that our economy is RECOVERING but that growth remains FRAGILE, with Great Britain, Europe and Americaland all looking at expected growth figures of around 1.7% for the year. But while that is BETTER news than Europe was expecting, it is WORSE than Americaland thought they were doing, and with American unemployment remaining high and their dollar continuing to weaken there is the underlying WORRY that Americaland is falling back into another recession. And if America goes down, the rest of us could well be carried with her.

All summer long, Mr Bully Balls was rather over-fond of quoting famous economist Mr Milton Keynes.

"If the circumstances change, I change my mind."

Well that's pretty much EXACTLY MR Huhney-Monster's line.

If anything, people ought to be MASSIVELY REASSURED that the Government aren't just flinging themselves at cuts, but are taking an informed decision AND that they are OPEN to CHANGING THEIR MINDS.

But no.

Hard Labour's Angela Eagle aka Angela Engels, newly appointed to Shadow Mr Danny Alexander, described this as "letting the cat-monster out of the bag", claiming the risk lay in coalition policy (which shows she's either politicking or she's startlingly lacking in economic understanding – maybe she could borrow Mr Johnson and Johnson's "Economics For Dummies" once he's finished reading it).

Meanwhile, her new boss, Mr Potato Ed, was on the tellybox simultaneously condemning the rise in VAT while promising no increases in personal taxation. Well, HELLO Mr Ed, but WHERE IS THE MONEY COMING FROM? Or is he saying the deficit should be brought down with 100% spending cuts? No, because he was then on to defending benefit payments to millionaires. And he has the temerity to call Coalition policy "shambolic"!


If we stick to Coalition policy we're being "ideological"; if we say we're open to the evidence, we're "letting the cat-monster out of the bag". I'm sorry but it's VERY difficult to have a rational discussion for the benefit of the nation with people who reply to anything you say with: "heads we win, tails you smell".

Personally, I'm just GLAD that there's SOMEONE on the Coalition side standing up and SAYING this is EVIDENCE-BASED policy. Three cheers for Mr Huhney-Monster.


Anonymous said...

The Millennium Elephant's musings help me to understand much about the economy and that.

One thing I would be interested in is what his thoughts are on what would happen if *whispers* Greece defaults on its payments (or whatever its supposed to pay back). Presumably similar to what would happen if Americaland goes pear-shaped, but happy to be enlightened.

Hoping you will reply.

Millennium Dome said...

Dear Ms Rachel,

"What would happen if Greece defaults on its debts?"

Ooh, you don't half ask hard ones. Well, I'll give it a go.

Sovereign debt default is the next big bogey monster that haunts the world's money markets after the banking collapse a couple of years ago.

As a reminder, back in the early Nineteen Eighties a combination of soaring oil prices and contracting world trade meant that the countries of Latin America found they were no longer able to service the enormous debts that they had run up over the last decade and basically said "can't pay, won't pay".

The consequences of this were a ten percent drop in incomes throughout the region and a decade of stagnation; unable to get foreign currency in order to buy imports, most importantly ENERGY, they had to go cap in hand to the IMF which meant handing over control of their economies to Americaland. It is thought that a number of governments fell as a direct result of the default. But it also did huge damage to a number of Western banks, for example, if I'm remembering this right, it was one of the things that led to the Midland Bank going from being the largest bank in the world to a subsidiary of HSBC in under a decade. And this in turn prolonged and intensified the Early Eighties recession – you may remember how higher banking costs and lending charges were passed on to British customers to try to claw back some of the losses incurred speculating with Arab Oil wealth in Latin American debt.

The other comparison is what happened in 2008 when Lehman Brothers went down with net debts of about $130 billion.

That money was effectively vaporised. That represented an immediate loss to the people whose money was deposited there, but worse than that were the knock on effects which were simply catastrophic. Banks expecting to receive payment from Lehman Brothers were themselves no longer able to meet their obligations. In the following few days, the Stock Markets around the world lost about 12% of their value and the planet fell into the worst recession since the 1930s. Only massive government intervention, buying banks before they could fall, prevented the actual end of the entire global economic system. It is not too much hyperbole to say that we were, almost literally, just days away from going back to a barter economy.

Greece currently has debts of about $370 billion.

So the consequences of a Greek default could have been: for Greece, a contraction to make their current riot-inducing austerity plans look like a picnic; and for the rest of the World, a recession to make the one we've just been through feel like a walk in the park.

HOWEVER… However, it's important to remember that the International Monetary Fund and the European Union have ALREADY intervened.

They've put in a package of loans worth about a hundred and ten billion euros (about $150 billion), so instead of having to borrow that money from the MARKETS (at escalating interest rates as their credit rating gets downgraded from Triple-A to double-B to junk) instead they have a fixed loan from Europe for something like half their debt, and can concentrate on covering the rest of their short term debt which is now much more manageable.

More importantly it's given the markets the breathing room to hedge themselves against a Greek default. If you are EXPECTING a possible default, you don't make receipts from Greek bonds such an essential component of the money you yourself will have to repay. And you can take out insurance against not getting it too. So there is less likely to be a catastrophic "domino effect" now that traders and bankers have had six months grace.

The quid pro quo for all this is, of course, that Greece is now a wholly-owned subsidiary of Germany, which is why the Germans can order the Greek government to impose the massive austerity programme to bring their deficit under control.

Hope this helps.

For that matter, hope this is RIGHT!

MM xx

Anonymous said...

Thank you Mr Elephant, its much appreciated by someone who hasn't yet picked up the 'Economics for Dummies' yet, Mr Johnson has borrowed it!