I watched some of Evan Davis' programme on BBC2 last night and yelled almost constantly at the crass stupidity of his understanding of economics.
His hypothesis is that because we as a nation don't save enough we don't have the manufacturing we need.
It's hard to describe how staggeringly wrong this is. It is as if none of the economic understanding of the last 75 years had happened.
Davis lives in a terribly simple world. He seems to genuinely believe that if people do not put money in banks than banks cannot lend. It seems he's never heard of fractional reserve banking or the fact that banks can literally make money out of thin air.
And worse, he thinks all the money we put into pensions then goes on to create productive capacity in the economy. That's so naive it's just ridiculous. But for the record:
a) A significant slug of all pension contributions is raked off by the City. How do you think they get so fat when pensions have shown no real return for a decade or more?
b) About 60% of all pension fund cash is still in equities (although the number moves a bit over time. Since almost no new equities are issued this simply means that this money is used to buy second hand bits of paper - called shares already in issue. That's why the stock market is valued as it is now - quite irrationally. We face Euro meltdown and the markets at 5,700 or more - because day in day out clueless pension fund managers buy shares hat are kept in short supply because no new ones are issued - and so it will go on until the next big crash when they'll lose vast amounts - and then start putting money back in the market all over again.
c) They also buy second hand land and buildings.
d) They buy some bonds - and yes I agree - this tiny propertion of their actrivity might result in job creation.
But nothign else pensions do creates jobs - or manufacturing or anything else. Credit does that - and Davis shows himself to be economically ignorant (sorry to be so blunt - but it seems like a statement of truth to me) to argue otherwsie.
No wonder we have no manufacturing then - we're clueless about how to fund it, and repeat that cluelessness on television to ensure that people remain in ignorance.
The BBC should hang its head in shame at broadcasting such nonsense.
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Well said, Richard. A surprising number of people still believe in the deposit multiplier (which has been mythological for a LONG time). An even more surprising number of people genuinely believe that shares and bonds traded on the secondary market contribute to the wealth of the UK. They don’t. Glad you’ve pointed this out – again. I fear you may get sick of repeating it, though.
I rather like this explanation of FRB:
“Fractional reserve banking occurs when banks lend out any fraction of the funds received from demand deposits. Despite being a form of embezzlement and fraud this practice is universal in modern banking”
From:http://www.greatcreditcontraction.com/fractional-reserve-banking/
Followed by its end:
“This misinformation leads investors to misallocate capital. They borrow and invest either too much or too little in long-term projects. The result is periodic recessions. Then, as it always happens, there are necessary “corrections” following periods of fiat credit expansion and the unprofitable investments stimulated by fiat credit creation are liquidated which frees capital for new sustainable investment.
It is during these inevitable credit contractions that the fictitious capital created during the credit expansion evaporate. The central banks of the world are engaged in global quantitative easing in a vain attempt to stop the credit contraction”
Think of him as the Bugs Bunny of political reporting. Fun to watch but rather removed from reality.
Amen to that.
I saw this programme too. In one breath, he bemoaned our massive trade deficit and in the next, he extoled the virtues to business off-shoring manufacturing jobs to China! He also omitted to mention that the recent boom in manufacturing has been down to low interest rates and the effective devaluing of the pound, This boom is now losing impetus. What does Mr Davis (no relation :)) think is going to happen to manufacturing if the government, as they have continually threatened to do, put up interest rates to combat inflation?
Also, Mr Davis states that manufacturing would have to grow massively to rebalance the trade deficit, I don’t know where he thinks this investment will come from as this government is cutting, not investing. Private capital probably has no interest in investing long term in manufacturing, it is far too interested in the short-term gains of casino capitalism or outsourcing to other countries where labour and wages are cheaper.
It annoyed me when he described this country’s decline in manufacturing as if it was an unforseen natural event rather like the extinction of the dinosaurs. Although poor investment in this sector was occurring well before Thatcher’s reign, it was she who cut back massively on public spending, causing much of our manufacturing base to simply collapse. In the years since, we have become one big warehouse and shopping centre, relying far too much on imports and the financial and service sectors.
If Ewan Davis wants something to blame for our manufacturing demise, blame the political kow-towing to international capital and globalisation. This, more than anything, has usurped democratic control over a nations economy and left them ever more vunerable to the vagaries of casino capitalism.
” Although poor investment in this sector was occurring well before Thatcher’s reign, it was she who cut back massively on public spending, causing much of our manufacturing base to simply collapse.”
Nonsense. Manufacturings share of GDP fell from about 25% of GDP to 23% under Thatcher. We lost shipbuilding and some steel but we gained Japanese car manufacturing and chip fabrication plants. We also had substantial growth in investment by companies like Rolls-Royce and Pilkington who became world leaders in their industries (aero engines/turbines and glass). Investment in industry dropped off in the 1990’s but manufacturing was still over 20% of GDP at the end of the Major government, but fell to 11% by the end of the last government.
Between 1979-01, Britain lost 25% of its manufacturing production capacity. Rolls Royce – foreign owned apart from the aerospace arm.
Our car industry – almost completely foriegn owned
Steel production – virtually gone
Shipbuilding – virtually gone
Textiles – gone
Of course, Thatcher did much the same as new Labour, that is, simply made it very easy for consumers to obtain credit to buy all those foreign goods we didn’t make any more. Easy credit gave people more spending power and conned us into believing our economy was booming. In fact, consumers caused the boom, not Thatcher, and in the process, consumer debt ballooned to unprecedented levels
Re manufacturing would Germany be daft enough to get rid of all its car marques such as BMW and Mercedes? Would they be silly enough to sell off such valuable assets? Hell no! Yes, the likes of Nissan is supplying taxes and wages to our economy, but the bulk of the profits leave this country.
We have 12% manufacturing capacity. Service industries account for around 75%. We have turned ourselves into a gigantic warehouse and shopping centre, off-shoring qiute a bit of manufacturing to other countries, low wage low tax countries, that is, and selling cheap products back to us, then wonder why we have such a massive trade deficit!
Until we start making things again, it will be impossible to close that yawning trade gap. That is going to take massive investment. It can’t be done any other way, whatever the government likes to pretend.
That is a typo – I meant 1979 – 1981
Sorry!
“Our car industry — almost completely foriegn owned
Steel production — virtually gone
Shipbuilding — virtually gone
Textiles — gone”
These industries would still exist in the UK if they were competitive. They crashed because their costs were too high relative to our competitors, and the quality was embarrassing. Let’s face, it British cars were crap in the 1970s – as was just about anything else we produced back then.
The notion that manufacturing is somehow a panacea that would cure all Britain’s ills is romantic and outdated.
“These industries would still exist in the UK if they were competitive.”
But if you’re subsidies are cut while other countries keep their’s, and we are not protected against countries with dar lower wages and taxes, we are fughting with both hands behind our backs. So it wasn’t exactly a fair fight was it?
“They crashed because their costs were too high”
See above!
“Let’s face, it British cars were crap in the 1970s”
Erm……Rolls Royce, Bentley, Rover, the world-beating mini, the humble Morris Minor and the Lotus? All of them? Nah, don’t think so. Various British Leyland cars were notorious for being poorly built, that’s true, but if the government weren’t prepared to spend money on modernisation of the factories (both Labour and Tory) like the German’s, French and Italians were, and by sticking with equipment out of the ark, it was hardly any wonder, was it?
“The notion that manufacturing is somehow a panacea that would cure all Britain’s ills is romantic and outdated.”
Could you explain how we are going to close the massive trade deficit and with it the outflow of billions of pounds of lost revenue, then? Well, we could build yet another supermarket or shopping centre, couldn’t we? If we actually started to make things again, we may actually be able to hold on to some of that money and actually create proper well-paid jobs for ourselves, rather than farming manufacturing out to developing countries or working for minimum wage at a call centre, warehouse or shopping centre.
What an interesting concept that would be, eh?
“They also buy second hand land” I don’t think there’s any other type:o)
You’ve only just noticed?
Richard, for every buyer of a security in the secondary market there must be a seller. That seller is likely to be someone who bought the securities some time ago and is now cashing them in to support him/herself in retirement. So far from being “useless” as you suggest, trading in secondary shares has an essential economic function: to allow savers to monetise their pension savings.
You are right on one thing though: fees paid to money managers in the UK, and the all-in costs charged by the industry, are exorbitant and bear no relation to the performance generated.
Evan is one of those special people who are picked to be part of
The British American Project for the Successor Generation.
He also wrote a book called ‘public spending’ (available at amazon for 0.01p, -perhaps a little overpriced yet) which had the singular acheivement of making into the serially useless derek draper’s top 10 political books before rocketing into the remainder bins.
Amazon says:
“This analysis argues that public services could be radically improved by hiring first-rate private service companies to supply them. It describes how increased productivity from new and more commercial styles of management would result in more efficient expenditure of our taxes.”
I wonder where he got that idea?
Well I complained straight away to the BBC. Did anyone else?
Its not accidental that he has the profile and position that he has with the views that he has though is it?
Today program had Leon Britten on this morning for economic comment!
But really Richard – you are no one to have a go at anyone else’s blinkeredness when it comes to jobs.
I don’t see you, or your greenienewdeal mates dealing with the figures that 87% of all jobs created have gone to migrant workers, any more than Evan Davis.
That’s because the government and its constituency want high unemployment. Immigration is very cost effective. Less training, less organised labour and a lightning rod for people’s anger..
If you think this was bad (which it was) you shoudl have seen his programme on illegal migration!
The ‘lightning rod for people’s anger, is Left group talk for ‘be silenced’. And where is that getting us?
No – its quite clear both that it has been and is govt policy to undermine workers here with cheap labour.
It’s there in free movement of workers and services in internal EU policy, which supposedly we can do nothing about (of course we can). Its there in the Intracorporate Transferee category in Tier 2 of the Points Based System, which has no numerical limits. And its there in the secret Mode4 commitments that the ConDem govt is leading us into via the Brussels front, also without numerical limits or any Economic Needs Test, which would mean only workers that were needed could be brought in. A further obscure category of the PBS, in Tier 5 – ‘international agreements’, is all ready for those Mode 4 trade commitments.
Many ICT workers brought in now, under the PBS, are VERY low paid, with ‘wages’ made up with tax free expenses. And no NI. For a transnational corporation – what’s not to like?
And guess whose job it is to make sure such ‘temporary’ workers leave? UKBA – which is even now failing miserably to deal with overstays.
Of course anyone could see that an employers’ bond would at least take care of that aspect Anyone except the Home Office that is.
So – its not about migrant workers being a ‘lightning rod for people’s anger – so be silenced’, while transnationals cream the profit from the massive labour migration earner.
Of course people recognise that its successive govt policies that are at fault. The trickiness is that all major parties have gone with this.
But let’s not pretend the people coming in are all closet socialists. The comparative advantage of being cheap is clear to all. Migrant work depends on it, as migrant workers are aware. And if and when ‘temporary’ migrant workers do go home, it is with £s that can buy a lot more at home.
But this is money leaving the economy here, as well as workers undermined and displaced here. It is increased welfare bills here and it is skills lost, because as has been pointed out, no training needed.
It would be useful if some people who have media channels, like some of the Green New Deal people – Larry Elliott, Caroline Lucas etc, got real about this.
If you want to infer that what I said was an instruction to silence, go ahead.
Even if it was, it does not seem it would have worked.
Left Group talk?
No, whatever that is, I just pointed out an aspect of the policy.
But let’s not pretend the people coming in are all closet socialists.
And who is doing that?
What difference would that make anyway?