I have explained the concept of sectoral balancing before. At the risk of repeating myself, what it suggests is that if the government is to run a surplus within the economy then somebody else has to borrow. That's basic double entry book-keeping at play at a national level. It's a fact that cannot be ignored or denied. What that also means is that if the government is to clear a big deficit somebody else has to borrow a lot more. I explored this issue in July when the OBR forecast that the sectoral balances would look like this until 2010/21, with useful back data shown:
The government deficit was to be cleared then by a massive boost in business borrowing and an equally improbable improvement in foreign trade. Households were going to flatline with no net borrowing.
Now let's move to the November and look at the equivalent chart:
There is, near enough the same red line (although a wobble or two is added) but look at the rest. The changes are staggering.
First, business is no longer going to borrow to invest until sometime in 2018. The boom forecast for 2015 on has vapourised. I happen to think it will in 2018 as well: there is no sign whatsoever that business is going to give up saving either now or in the future: PLC directors seemingly want a comfort blanket of cash to protect themselves from the real world.
It is still forecast, by the way, that there will be massive business investment at unprecedented levels just to get to this level of business borrowing:
I see no chance of that, but, in recognition of the reality that whatever happens this investment will not be funded by borrowing the OBR has had to make other changes and two things have been reforecast as a result.
First, the already absurd assumptions made about our balance of trade continue, with a little enhancement. If this reflects less money pouring into the London savings market that may be reasonable, but I still see no prospect of trade balances moving as forecast.
But, second, and much more significant is the belief that the UK public will be going on a borrowing binge. In fact, the plan is that we should stedily increase our borrowing to levels last seen around 2008 when consumer excess borrowing helped bring the economy down.
And why is this necessary? Because household incomes are not going to rise by anything like the amount forecast in July:
In fact, they're going to grow much more slowly than forecast. And so we're going to have to borrow, a lot. The savings ratio will, in fact, have to dip into record low territory:
So George Osborne's balanced budget is predicated on a long term credit boom because people are worse off. That's a real selling point for it. And a massive risk for the UK economy as a whole as it enters risk territory with regard to personal debt, and so the risk of default, that is has not really known before.
That's either a scary prospect or a wholly unrealistic forecast.
Worryingly, if trade does not behave as forecast, it could be both.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Good analysis.
These charts are the way to shine a light on Osborne’s charade.
The problem is not enough of the electorate will see or understand any of this, and will therefore continue to vote against their interests.
I can only hope more people that aren’t on the firing line (yet) start to feel that something isn’t quite right with Osborne’s politcal games. The MSM and commentariat are way too interested in gossip, sycophancy and tit-for-tat to explain anything to the public.
Another good reason to reform the monetary system and take the credit creation process away from all commercial entities.
Osborne constantly belittles People’s QE as government printing money (as if this is a bad thing). And yet this is exactly what all forms of private credit creation are, it is just at the moment we foolishly allow banks and financial institutions to do this and earn vast amounts of interest for the privilege of doing so.
The interest is supposedly to pay for default risk and administration costs, but when government is underwriting the risk and technology has minimised the administration costs – why on earth do we allow the private credit creators to run off with excess profits?
As the UK political establishment is so inbred with the financial establishment it is unlikely to change the monetary system without a huge fight!
If everybody else has to borrow more to give the government a surplus, who do they borrow it from? There is only themselves left surely?
Why do you have difficulty with the idea that every borrower has a lender?
I’m trying to work out who the lender is. If we split the world into government and everyone else, then from whom does everyone else net borrow to give the government a surplus?
The government
kiplingsociety.co.uk/poems_copybook.htm
It was once the case that double entry book keeping was taught in local Adult Learning Classes.
Until the philistines led by Frauline Roberts of Grantham entered the china shop.
There’s just no helping some folk.
@jamesg,
It doesn’t have to be the govt. There is a lot of holders of £ looking for somewhere to park them.
Say you lend me some ££. Presumably you’d do that because you have no pressing need to spend it yourself. So lenders tend not be spenders. Borrowers, on the other hand do tend to be spenders. Otherwise ther’s no point in borrowing it.
So borrowing does tend to increase spending temporarily in the economy and give it a stimulus.
The explantion I have heard for increased borrowing by households says it’s alright because it will be borrowing on housing. So if there’s not a property bubble and there is lots of housing being built which is affordable for those whose wages are likely to be static, I suppose that’s just possible. But given the rapidity of the borrowing increase, those houses are going to have to get built in double quick time!
I don’t think that it is entirely fair to say that:
“PLC directors seemingly want a comfort blanket of cash to protect themselves from the real world”
It is more likely that they are cautious on account of low demand levels “because people are worse off” as you say. Perhaps that’s what you meant. I’m not sure. As for household debt, credit booms tend to be speculative. Consumer credit has always taken a distant back seat, Given that interest rates couldn’t be much lower than they are now, I can’t see any incentive for people to increase their borrowing.
The risk may not be in the prospect of a credit bubble so much, but in the likelihood that it won’t happen. Why should it?
On the first issue: we are close
On the second, I can’t see it happening. Why should it? People won’t take the risk
Nobody ever borrows any existing money. When a so-called loan is given by a private bank, at that point money is CREATED, The Bank of England concede this to be the case in 2014. Many noted economists and economic commentators have also referred to it. You don’t need existing money to get a so-called loan. The moment you realise that banking is just a giant Ponzi scheme, you realise what the problem is. It’s bound to crash every now and then, and with increasing frequency, before being helped back up by the government, or in other words, us.
This is technically true but the implications are often misunderstood. Any bank can create its own IOUs ie bank money, but unless that bank money is used to pay another account holder, at the same bank, it generally won’t be acceptable in the way BoE money is generally acceptable.
Any issuers of money have to be able to back up their own issued money with ‘real money’ ie BoE money. So, in that sense, ‘Barclay’s Pounds’ , ‘Lloyds’ Pounds’ are just the digital equivalent of those local currencies like Bristol Pounds. They are liabilites to the issuer and assets to the holder which cancel out in the general economy.
Lending does have an effect in the economy because it transfers money from those who don’t want to spend it to those who do. It really doesn’t matter if the loan is in BoE pounds, Barclay’s Pounds, or Bristol Pounds. Providing no one defaults on their obligation it all has exactly the same effect on the wider economy.
PS On second thoughts I’m not sure that it’s even technically true! If I lend you £1000 cash them you are borrowing “existing money”!
I think this is interesting
But nit what Positive Money might want to hear
“If I lend you £1000 cash them you are borrowing “existing money”!”
Cash is always “existing money” as a central bank has created or approved it (unless it is counterfeit)
Credit could be existing money in theory (e.g. under full reserve banking it must be redistribution of existing money between savers and lenders) but under current situation (i.e. fractional reserve banking) it is most likely to be “new money” as a commercial bank is highly unlikely to use its precious reserves to extend a loan.
That’s how I understand it anyway (am I wrong?)
Neil Wilson gives this explanation to the “sovereign money myth”.
“http://www.3spoken.co.uk/2014/11/the-sovereign-money-illusion.html
The way I understand it is to think that Bank created money is the digital equivalent of casino chips or local currencies (as mentioned)
On the question of bank’s not wanting to lend out their reserves we could consider the following scenario. Say, I borrow £10k to buy a car. The bank could give me £10k credit into my account. Would it make the slightest difference to the bank if I then converted that credit to cash (essentially the bank’s reserves) and paid for the car that way or I paid for the car via internet banking or an old fashioned cheque? It wouldn’t make the slightest difference.IMO.
The bank’s ability to lend isn’t constrained by its reserves though. I think that is the correct way to look at it. Encouraging a bank to swap its gilt holdings for cash holdings doesn’t really make any difference to its ability to lend. That was one of the erroneous arguments heard to justify QE.
I’m afraid to say that the technical arguments are (as always) a bit beyond my comprehension! I have a feeling that there are some missing pieces in the analysis (e.g. CDS/CDO/debt derivatives) which allowed the conventional wisdom of money creation to miss out on the reality of explosive debt bubbles.
I’m sure the pros and cons of sovereign money and other alternatives to the current financial system can and will be argued back and forth for a very long time. The fact the debates are taking places is what is most important in my view.
What makes particularly interesting thinking to me are the personal/community/state level questions behind money and finance, such as personal motivation and incentives, corporate risk and reward, private wealth and poverty, social responsibility and accountability – to name but a few.
It is currently the governments and populations of small countries with relatively large financial sectors that have put them at severe risk since 2008, which are having to think these issues through very carefully.
Iceland and Switzerland are the two countries most visibly debating the nature of their monetary systems at the moment so it will be interesting to see where their democratic processes take them. I’m not sure that their banking systems will remain as they were for much longer, but you can be sure they will fight hard to maintain the status quo.
More regulation may be the answer, but I think history shows that financial regulations are an invitation for some professionals to continue to find legal/commercial workarounds while they attempt to have them reversed through the political process.