![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
Departing Chairman of the Bank of England Mervyn King did something profoundly irritating yesterday. He got something right.
Of course, that’s by no means the most irritating thing he’s ever done. I’d say that presiding over the creation of the biggest consumer debt bubble ever seen whilst lying about inflation and then acting all surprised when it didn’t work out very well takes that particular prize, but this was almost as annoying.
People who talk to me in person or read my facebook will know that for the last few weeks or so I’ve been changing my tone on the economy from one of entirely doom to stuff more like this, and on Sunday I sat down to start knocking together a post about why I think that. I was going to end it by saying something like “There you have it, growth is coming. You heard it here first”.
And then Mervyn went on record with it yesterday and completely messed up my plan to boast a bit by saying just the same. Tsk. If I’d posted on Monday I’d’ve been a guru, and now I’m just the sub-Mervyn.
Anyway, what I’d been writing and planning went something like this:
It’s been the best part of a year since I last went off on one about economics. Yeah, I’ve mentioned the subject from time to time but the last real, sustained rant about the subject was in April of last year. You might recall the last time round I was rather negative. I usually am, it strikes me, but I ran through what I perceived the state of the economy, both British and global and, well, it wasn’t pretty.
It still isn’t.
Anyway, what’s new? You might remember a few months ago an article was published by the Huffington Post, allegedly by a former Conservative supporter banging on about why the current economic policies by the Coalition were based on lies. If you’ve not seen it, it’s this one here. Anyway, subsequent to its publication several people have asked me for my opinion of it; knowing my abiding love of the sort of economics which involves people being paid in gold and telling Wesley Mouch to get out of my way. And off the back of that request I did give serious consideration to fisking the article good and proper but, you know what? It’d be a waste of my time and yours because the sort of people who read that article and nodded wisely and approvingly aren’t going to believe me whatever I say and how much I point out the glaring factual inaccuracies in what he says, so I’ll content myself with the observation that it’s a load of old pony from start to finish and can be safely ignored.
You might have noticed how a year or two ago the evening news carried a lot of stuff about the bond markets and how Greek bonds were so much weaker today and how Spanish bonds looked bad and so on, and that news seems to have just vanished. Well, don’t get complacent. What’s happened is that there simply isn’t a bond market any more; central banks have stepped in to buy their own bonds meaning that the great economic fear of the a few years ago – ‘Bond vigilantes’ seeing weaknesses in national finances and attacking the markets, bankrupting countries by attacking the value of their debt – has gone. What we might see instead is currency vigilanteism; as national currencies are now being used to buy debt it is they who are feeling the weight of supporting economies, and speculative attacks on currencies are possible. However, the printing and purchasing is being coordinated by central banks precisely to try to prevent that sort of thing happening – all the major currencies are declining at roughly the same rate meaning that weaknesses in one are quickly offset by weaknesses in another.
And that’s interesting – it’s global. Everyone who matters is now printing, in one form or another. Most central banks are pretending they aren’t by calling it innocuous-sounding terms like “Quantitive easing” and “LTRO” and so on, but they’re printing. A tidal wave of money has hit the markets in recent years, propping up asset and stock values and deflating away the debt overhang which resulted from Gordon Brown’s masterstroke of de-regulating City of London back in ’97.
I sometimes wonder why foreigners hate the city so much, and then I remember that and go “Oh”. As the Icelandic president said only the other day “Gordon Brown will be remembered in Iceland long after he’s been forgotten in Britain”, and he’s right. Brown has fallen right out of the political debate in this country, and the very people who four years ago were saying that Brown wasn’t responsible for the crash are now saying that George Osborne *is* responsible for a 0.5% decline in GDP, which is about as entertaining a volte face based on political ideology as I’ve ever seen. Presumably someone will be blaming Osborne for the German GDP figures released yesterday as well.
Anyone?
Anyway, in the light of all this negativity, the ‘austerity isn’t working’ argument is coming through louder and louder as more people start saying that what the government needs is a ‘plan for growth’. I’ve even seen that opinion expressed in the bastion of sound monetary policy, the Daily Telegraph, and when they jump on the bandwagon for this sort of thing you can be sure that things are getting serious. There is now a general market consensus that a ‘plan for growth’ is needed by the treasury, and that’s interesting.
For starters, it’s wrong. Asking a government for a plan for growth is like asking a ships’ anchor for a plan for acceleration. Anchors are useful things; they provide regulation of speed and in high seas they provide stability. However what they can’t do is act as a motor. If you want to go faster, you have to pull the anchor up, not use it to pull you along. It’s not just me saying that; it’s the entirety of recorded human history demonstrating that centralized planning of the economy is a really sucky way for anyone except the inner party to get richer.
However the increasing unanimity of assumption that the economy is in the mire forever unless the government acts now is interesting, for two reasons, these being:
1) Left wing folks demanding the chancellor raise tax revenue. It’s worth noting here that no British government, since records began, has ever got tax revenue above 40% of GDP. Not even Gordon Brown with his clawlike digits clenched to the national scrotum for a decade managed to squeeze out more than that. The demand that the Conservatives get revenues above that level is a de facto acknowledgement by lefties that they reckon the evil tories are better at running the economy than they are, which I simply find entertaining.
2) More important than my own entertainment at the discomfiture of others is the observation that there is now an almost entirely complete market consensus about what needs to be done, and if there’s one thing I’m pretty confident about it’s that when there’s a market consensus it’s time to start selling.
This is one of the most useful graphs I’ve ever found:
You can map it onto a many bubbles; the recent spectacular rise and collapse of Apple shares, the NASDAQ market in the late 1990s, even the tulip bubble of the 1630s. You might remember it from the 'new paradigm' of a few years ago, when Brown hilariously quipped in his 2007 budget statement that there would be "no return to boom and bust." How we laughed, eh? (It’s also mapping neatly onto the gold chart at the moment, which means at least one of my purchases might have been mis-timed.) The graph is also applicable to ideas, and I’d say we’re in the mania phase of the ‘plan for growth’ idea. In fact, pretty much the worst thing ol’ George could do is try to get in on the act now.
Still, there’s some numbers which I keep coming back to and which I think are very interesting.
1) That the deficit has fallen by 25% since its peak. Assuming that total real inflation has been about 25% since 2008, then the deficit has fallen by 50% in real terms in the last 5 years. Inflating the debt away might be harsh on individuals and savers, but it does appear to be working.
2) That consumer debt in the UK is now less than 50% what it was at the time of the crash, and that’s before you take inflation into account. People are paying down debt at an unprecedented rate. I’ll come back to this one.
3) That 69% of people think the economy is getting worse, but only about 40% of people think their own economic or employment prospects are getting worse. In other words, a majority of people think the economy is getting worse, but only for other people. You know what I was saying earlier about market consensus?
4) British companies, in saving for potential economic trouble in future, are now sitting on a cash pot in excess of £750bn – that’s a sum of unspent cash approaching 75% of GDP. If there’s one thing you can be sure of, they aren’t going to sit on it forever.
5) Median incomes in the UK have risen by 40% since 2000. Unfortunately, real inflation has been approaching 50% in that time, meaning people are poorer in real terms than they were ten years ago. Well done, Gordon.
The crisis was caused by a massive amount of debt, and the thing that’s pretty obvious is that at a personal/consumer level that debt is heading to manageable levels. This shouldn’t surprise you; all debt is is a promise to do some productive work (or get someone else to do it) later, and people haven’t stopped working, or inventing, or having ideas and creating new things. Of course, the thing which makes productive labour easier is cheap energy, and that brings me to some more interesting numbers:
1) That taking real inflation into account, petrol in the UK is now cheaper than it was in 2000, and electricity per unit is cheaper than it was in 2007.
2) According to the Times, the British Geological Survey will release figures next month suggesting that the initial estimates for the British shale-gas reserves published in the wake of the discovery near Blackpool were wrong. Very wrong.
Estimates are now 200 times higher than originally predicted, giving an estimated reserve of between 1,300 and 1,700 trillion cubic feet.
This has led me to one conclusion which I can’t help but keep coming back to. Economic recovery is coming. Not today, not tomorrow, but it’s on the way.
Now, I don’t want you to think I’m complacent – far from it. For starters I don't think the bottom is in yet, which means that there may well still be corrections to come, possibly nasty ones. There’s all kinds of trouble brewing which could scupper things, such as
1) Seeing as how the EU has decided that saving the Euro is more important than the lives of its people, it’s possible the populations of Spain and Greece could form a ‘Southern European Spring’ and force the issue of their right to self-determination over Germany’s right to have functioning pension funds.
2) China and Japan are sabre-rattling, and it’s an unavoidable fact that the traditional way out of a debt crisis is a jolly good old war. Japan is the most indebted nation in the world and China has stopped even trying to make its economic figures credible.
3) Governments worldwide are still spending mad money which they don’t have. However, it’s worth pointing out that the British are the only meaningful economy who are making any efforts to tackle their debt problem before reality intrudes and forces the issue and i reckon we'll be glad of that before we're done. Given that some Keynesians out there are still singing the ‘max out the credit card for growth’ song, it’s enough to get me doing a little jig of delight that Ed Balls isn’t in the treasury doing to the economy roughly what Jimmy Savile did to Jim’ll Fix It entrants in his dressing room.
Actually, an economics show called “Ed’ll Fix It” is a great idea. Why not, Labour fans? It can’t make him any less credible.
4) Currencies. As the bond market has stopped working and there's a continuing debasement of national currenies from all parties, it's possible that there'll be currency crises within the next few years. Watch Japan with interest - they've just started targeting nominal GDP growth through trying to ensure inflation of 3%. The problem is that if inflation hits 3% they won't be able to afford their current debt interest repayments on current revenues. If it works out for them, watch for others to follow suit. If it doesn't, buy popcorn and watch the show.
All that said, however, I’m an optimist. I think people are usually pretty great. They like building better lives for themselves, and they’re doing that day in, day out, by working at it and creating new wealth and paying off debt – and provided governments worldwide let them get on with it, they’ll succeed. Not just that, but Elliot Wave theory, which has a far better predictive record than I do, is calling the bottom for 2015*.
So there you go; economic recovery. It’s not here yet, but it’s coming.
You heard it here, er, second.
*It's also saying gold will hit US$32,000 an ounce, which I'm taking with a massive punch of salt.
Of course, that’s by no means the most irritating thing he’s ever done. I’d say that presiding over the creation of the biggest consumer debt bubble ever seen whilst lying about inflation and then acting all surprised when it didn’t work out very well takes that particular prize, but this was almost as annoying.
People who talk to me in person or read my facebook will know that for the last few weeks or so I’ve been changing my tone on the economy from one of entirely doom to stuff more like this, and on Sunday I sat down to start knocking together a post about why I think that. I was going to end it by saying something like “There you have it, growth is coming. You heard it here first”.
And then Mervyn went on record with it yesterday and completely messed up my plan to boast a bit by saying just the same. Tsk. If I’d posted on Monday I’d’ve been a guru, and now I’m just the sub-Mervyn.
Anyway, what I’d been writing and planning went something like this:
It’s been the best part of a year since I last went off on one about economics. Yeah, I’ve mentioned the subject from time to time but the last real, sustained rant about the subject was in April of last year. You might recall the last time round I was rather negative. I usually am, it strikes me, but I ran through what I perceived the state of the economy, both British and global and, well, it wasn’t pretty.
It still isn’t.
Anyway, what’s new? You might remember a few months ago an article was published by the Huffington Post, allegedly by a former Conservative supporter banging on about why the current economic policies by the Coalition were based on lies. If you’ve not seen it, it’s this one here. Anyway, subsequent to its publication several people have asked me for my opinion of it; knowing my abiding love of the sort of economics which involves people being paid in gold and telling Wesley Mouch to get out of my way. And off the back of that request I did give serious consideration to fisking the article good and proper but, you know what? It’d be a waste of my time and yours because the sort of people who read that article and nodded wisely and approvingly aren’t going to believe me whatever I say and how much I point out the glaring factual inaccuracies in what he says, so I’ll content myself with the observation that it’s a load of old pony from start to finish and can be safely ignored.
You might have noticed how a year or two ago the evening news carried a lot of stuff about the bond markets and how Greek bonds were so much weaker today and how Spanish bonds looked bad and so on, and that news seems to have just vanished. Well, don’t get complacent. What’s happened is that there simply isn’t a bond market any more; central banks have stepped in to buy their own bonds meaning that the great economic fear of the a few years ago – ‘Bond vigilantes’ seeing weaknesses in national finances and attacking the markets, bankrupting countries by attacking the value of their debt – has gone. What we might see instead is currency vigilanteism; as national currencies are now being used to buy debt it is they who are feeling the weight of supporting economies, and speculative attacks on currencies are possible. However, the printing and purchasing is being coordinated by central banks precisely to try to prevent that sort of thing happening – all the major currencies are declining at roughly the same rate meaning that weaknesses in one are quickly offset by weaknesses in another.
And that’s interesting – it’s global. Everyone who matters is now printing, in one form or another. Most central banks are pretending they aren’t by calling it innocuous-sounding terms like “Quantitive easing” and “LTRO” and so on, but they’re printing. A tidal wave of money has hit the markets in recent years, propping up asset and stock values and deflating away the debt overhang which resulted from Gordon Brown’s masterstroke of de-regulating City of London back in ’97.
I sometimes wonder why foreigners hate the city so much, and then I remember that and go “Oh”. As the Icelandic president said only the other day “Gordon Brown will be remembered in Iceland long after he’s been forgotten in Britain”, and he’s right. Brown has fallen right out of the political debate in this country, and the very people who four years ago were saying that Brown wasn’t responsible for the crash are now saying that George Osborne *is* responsible for a 0.5% decline in GDP, which is about as entertaining a volte face based on political ideology as I’ve ever seen. Presumably someone will be blaming Osborne for the German GDP figures released yesterday as well.
Anyone?
Anyway, in the light of all this negativity, the ‘austerity isn’t working’ argument is coming through louder and louder as more people start saying that what the government needs is a ‘plan for growth’. I’ve even seen that opinion expressed in the bastion of sound monetary policy, the Daily Telegraph, and when they jump on the bandwagon for this sort of thing you can be sure that things are getting serious. There is now a general market consensus that a ‘plan for growth’ is needed by the treasury, and that’s interesting.
For starters, it’s wrong. Asking a government for a plan for growth is like asking a ships’ anchor for a plan for acceleration. Anchors are useful things; they provide regulation of speed and in high seas they provide stability. However what they can’t do is act as a motor. If you want to go faster, you have to pull the anchor up, not use it to pull you along. It’s not just me saying that; it’s the entirety of recorded human history demonstrating that centralized planning of the economy is a really sucky way for anyone except the inner party to get richer.
However the increasing unanimity of assumption that the economy is in the mire forever unless the government acts now is interesting, for two reasons, these being:
1) Left wing folks demanding the chancellor raise tax revenue. It’s worth noting here that no British government, since records began, has ever got tax revenue above 40% of GDP. Not even Gordon Brown with his clawlike digits clenched to the national scrotum for a decade managed to squeeze out more than that. The demand that the Conservatives get revenues above that level is a de facto acknowledgement by lefties that they reckon the evil tories are better at running the economy than they are, which I simply find entertaining.
2) More important than my own entertainment at the discomfiture of others is the observation that there is now an almost entirely complete market consensus about what needs to be done, and if there’s one thing I’m pretty confident about it’s that when there’s a market consensus it’s time to start selling.
This is one of the most useful graphs I’ve ever found:
You can map it onto a many bubbles; the recent spectacular rise and collapse of Apple shares, the NASDAQ market in the late 1990s, even the tulip bubble of the 1630s. You might remember it from the 'new paradigm' of a few years ago, when Brown hilariously quipped in his 2007 budget statement that there would be "no return to boom and bust." How we laughed, eh? (It’s also mapping neatly onto the gold chart at the moment, which means at least one of my purchases might have been mis-timed.) The graph is also applicable to ideas, and I’d say we’re in the mania phase of the ‘plan for growth’ idea. In fact, pretty much the worst thing ol’ George could do is try to get in on the act now.
Still, there’s some numbers which I keep coming back to and which I think are very interesting.
1) That the deficit has fallen by 25% since its peak. Assuming that total real inflation has been about 25% since 2008, then the deficit has fallen by 50% in real terms in the last 5 years. Inflating the debt away might be harsh on individuals and savers, but it does appear to be working.
2) That consumer debt in the UK is now less than 50% what it was at the time of the crash, and that’s before you take inflation into account. People are paying down debt at an unprecedented rate. I’ll come back to this one.
3) That 69% of people think the economy is getting worse, but only about 40% of people think their own economic or employment prospects are getting worse. In other words, a majority of people think the economy is getting worse, but only for other people. You know what I was saying earlier about market consensus?
4) British companies, in saving for potential economic trouble in future, are now sitting on a cash pot in excess of £750bn – that’s a sum of unspent cash approaching 75% of GDP. If there’s one thing you can be sure of, they aren’t going to sit on it forever.
5) Median incomes in the UK have risen by 40% since 2000. Unfortunately, real inflation has been approaching 50% in that time, meaning people are poorer in real terms than they were ten years ago. Well done, Gordon.
The crisis was caused by a massive amount of debt, and the thing that’s pretty obvious is that at a personal/consumer level that debt is heading to manageable levels. This shouldn’t surprise you; all debt is is a promise to do some productive work (or get someone else to do it) later, and people haven’t stopped working, or inventing, or having ideas and creating new things. Of course, the thing which makes productive labour easier is cheap energy, and that brings me to some more interesting numbers:
1) That taking real inflation into account, petrol in the UK is now cheaper than it was in 2000, and electricity per unit is cheaper than it was in 2007.
2) According to the Times, the British Geological Survey will release figures next month suggesting that the initial estimates for the British shale-gas reserves published in the wake of the discovery near Blackpool were wrong. Very wrong.
Estimates are now 200 times higher than originally predicted, giving an estimated reserve of between 1,300 and 1,700 trillion cubic feet.
This has led me to one conclusion which I can’t help but keep coming back to. Economic recovery is coming. Not today, not tomorrow, but it’s on the way.
Now, I don’t want you to think I’m complacent – far from it. For starters I don't think the bottom is in yet, which means that there may well still be corrections to come, possibly nasty ones. There’s all kinds of trouble brewing which could scupper things, such as
1) Seeing as how the EU has decided that saving the Euro is more important than the lives of its people, it’s possible the populations of Spain and Greece could form a ‘Southern European Spring’ and force the issue of their right to self-determination over Germany’s right to have functioning pension funds.
2) China and Japan are sabre-rattling, and it’s an unavoidable fact that the traditional way out of a debt crisis is a jolly good old war. Japan is the most indebted nation in the world and China has stopped even trying to make its economic figures credible.
3) Governments worldwide are still spending mad money which they don’t have. However, it’s worth pointing out that the British are the only meaningful economy who are making any efforts to tackle their debt problem before reality intrudes and forces the issue and i reckon we'll be glad of that before we're done. Given that some Keynesians out there are still singing the ‘max out the credit card for growth’ song, it’s enough to get me doing a little jig of delight that Ed Balls isn’t in the treasury doing to the economy roughly what Jimmy Savile did to Jim’ll Fix It entrants in his dressing room.
Actually, an economics show called “Ed’ll Fix It” is a great idea. Why not, Labour fans? It can’t make him any less credible.
4) Currencies. As the bond market has stopped working and there's a continuing debasement of national currenies from all parties, it's possible that there'll be currency crises within the next few years. Watch Japan with interest - they've just started targeting nominal GDP growth through trying to ensure inflation of 3%. The problem is that if inflation hits 3% they won't be able to afford their current debt interest repayments on current revenues. If it works out for them, watch for others to follow suit. If it doesn't, buy popcorn and watch the show.
All that said, however, I’m an optimist. I think people are usually pretty great. They like building better lives for themselves, and they’re doing that day in, day out, by working at it and creating new wealth and paying off debt – and provided governments worldwide let them get on with it, they’ll succeed. Not just that, but Elliot Wave theory, which has a far better predictive record than I do, is calling the bottom for 2015*.
So there you go; economic recovery. It’s not here yet, but it’s coming.
You heard it here, er, second.
*It's also saying gold will hit US$32,000 an ounce, which I'm taking with a massive punch of salt.
