There was a rather surprising article in the Telegraph this morning that supports my hypothesis that the economic narrative is changing. It was by Jeremy Warner, who has been hard into cuts and the austerity programme and firmly pro-Conservative to date as far as I can recall from what I've read by him. Because quoting is necessary for my argument I am going to do so at liberty.
The the tune has changed is obvious from this, stressing that I am not always showing the cuts I have made:
UK government bond yields have fallen to historic lows the depths of which even six months ago would scarcely have been believable — less than 2.5pc on ten year gilts. Those of us who have been calling the top of the bull market in bonds for the best part of the last two years are left with egg on our faces. I'm hardly alone. Step forward Bill Gross, John Paulson, Jim Rogers and a litany of other self styled market “experts”.
And those who got it right? Well I hate to pay him the complement, but among others Paul Krugman, whose religiously preached Keynsian analysis of the crisis has, in this regard at least, been spot on.
You read that right: a "we've got to live in fear of the markets" man admits he's been wrong all along. He continues:
So why is this happening? Why is it that despite ever more mountainous government debt, investors want to keep buying into the non-eurozone version of it? ... [T]he single most important factor that underlies all this is that when householders, businesses and the financial sector aren't spending and investing, a savings surplus accumulates which has to go somewhere. In the search for safe havens, it goes first and foremost into government debt, where it is used to provide the demand which the private sector has decided to remove. When governments attempt to reduce their demand for debt, as is beginning to happen at the moment with fiscal austerity programmes, you get a self feeding pressure of excess demand on limited supply, and yields fall even further.
Note that: first there is a demand for bonds - and no one is going to run away from them. Second, governments should stimulate demand (Keynes all over) and when they don't, by choice yields fall - which is happening now. Why? Let the man go on:
What these yields are pointing to then, is a depression. In such an environment, corporate profits will suffer and insolvencies will rise. Equity markets suffer accordingly.
Yes, that's what he's saying: he's saying the government is choosing to put us into recession, even though as he noptes the governemtn is paying record lows for his money. And note his cynicism here:.
George Osborne, the Chancellor, likes to see this phenomenon as a vote of confidence in his deficit reduction strategy. Unfortunately, that's only part of the story. As I say, they've had similar yields in Japan for years now, with no sign of a credible deficit reduction strategy in sight and public debt spiralling up towards 250pc of GDP.
Unfortunately, low gilt yields are more indicative of impaired private sector demand than they are of Government resolve. What the economy appears to need, and I really do hesitate to say this, is a good old fashioned bout of inflation, but then we've already got that in the UK, and to perpetuate might seem only to replace one problem with another. Yet there are few more effective ways of eroding the doomsday machine of excessive debt.
Oh boy, the man also buys my argument for inflation.
Believe me - on a day which is deeply depressing for the left, after a week I've found quite hard, this is sure sign that the right are losing the conomic argument hands down and that we on the elft are winning it.
They're conceding defeat on the right. And if that happens then two things happen. Either Osborne does the most massive U turn - which will secure Tories power for time to come (heaven forbid, and actually unlikely - U turn governments are rarely forgiven on the economy) or he'll refuse and be swept from office for good.
But things are changing, I'm sure.
Hat tip: Nick Shaxson
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Unfortunately it does seem that the Right will win on the ‘law and order’ front. I lived through the 80s and 90s in the West Midlands and the aftermath of the riots in Liverpool and Birmingham and copycat riots in Wolverhampton (where I lived at the time) and it was another 16 years before the Conservatives became unelectable. Meanwhile the loss of well paid working class employment continued and the seeds of social breakdown and economic decline were sown.
There is an interesting article in today’s Guardian from an economist at the New Economics Foundation about the problem with just focussing on GDP. He cites Japan where growth has stagnated and yet ‘yet living standards are among the highest in the world’. He concludes that ‘Japan is not the economic basket case it is often presented as’. I suspect that the distribution of wealth plays a significant factor in this.
Unlike here, Japan ignores its deficit and just gets on with rebuilding its economy. After the big Asian crisis in the early nineties, despite spending trillions of yen, Japan’s deflation was so severe that even vast amounts of spending made no differece.
It has only recently broken free of this cycle of deflation. The worry about national debts is largely tosh, anyway. As long as the money is pointed towards productivity, this spending largely pays for itself. Also, national debts in just about every economy are never actually paid off, just rolled over.
Borrow masively in the bad times, stimulate the economy and pay off your debts during the boom times. Its provavly a good idea to keep your capital as national as possible as well.
There are some surprising facts about JM Keynes. For one, he was actually a commited capitalist, not a socialist, For another, his economic strategy was designed to support the economy fully – in other words, anything that was needed should be paid for regardless of cost.
Unfortunately, despite creating the Welfare State and the NHS and eventually providing free university education for all but the very rich, after losing the US funding that has been spent into much of Europe, the post war governments of the 1950s appeared to lose their nerve. Prescription charges were introduced for the first time, prompting Nye Bevan’s resignation and the national debt was slashed from 250% of GDP to 105% of GDP in the very early 60s, eventually coming down to 59% by 1972 and less than 40% by the early 2000s.
As a result of these cuts, and by the early ’70s, outside influences such as the oil crisis, the economy began to gradually stagnate and inflation became rampant. It is not widely known that wage restraint was actually been practised in the 1970s and it was not the because of the oft-repeated claim that unrestrained union pay demands that caused inflation to rocket.
If both Labour and Conservative governments (mostly Labour) had kept their nerve and kept the spending up, particularly in the event of natural gas and oil resources, our economy would probably be flourishing today, not stuck in long periods of stagnation and austerity as has happened for the past 30 years.
We stupidly listened to the monetarists and the neoliberals and paid the price for it. Maybe as you suggest, this article may suggest a ground shift of opinion in regards to our economic direction.
I hope so, but I somehow doubt it.
The government is not implementing fiscal austerity – there are very few real cuts happening – just look at the numbers! It is still spending way more than it raises in taxes (growing slowly) and is therefore creating the “demand” that you talk about albeit a proportion is leaking out through imports. Question is can the UK maintain the stimulus for the foreseeable future in isolation? What you recommend would be a disaster. Any sign of weakness in resolve by the govt will shunt the demand for gilts elsewhere as it has in the Eurozone. If you think that it is worth gambling on growth on the back of potentail yields of 5-6% then good luck to you. You seem to have this simplistic view of the British economy as an isolated system where any surplus funds go into gilts. We are one of the most internationally exposed economies in the world and capital can flow in and out at will – not ideal but a fact. It is these international flows you need to focus on. The comments in the Telegraph to me indicate that few saw the inherent weakness in the Eurozone. As for Krugman – me makes so many predictions he has to get at least some right by chance as does any economist.
So you’re one of the nutters are you?
I guessed one had to turn up soon
Bound to be another along in a minute in that case
Very politely: no one believes you or your fantasies. They’re about as credible as the average pornographer’s story – and worthy of the same contempt
“We are one of the most internationally exposed economies in the world and capital can flow in and out at will — not ideal but a fact. It is these international flows you need to focus on.”
Ever heard of capital controls? Those things countries used to have before Nixon in 1971 closed the “gold window”. Up to that point, any country that had holdings of US dollars, pound sterling or German Marks could have then been exchanged for the equivalent in gold. This kept a large proportion of your capital in the country.
Of course, largely due to the expense of the Vietnam war, the US became more and more reluctant to cover the expense of its lendings of US dollars to foreign governments. Eventually, the US had to admit it didn’t have nearly enough gold to cover its debts and in 1971, it cancelled the right of countries to claim gold in exchange for holdings of US dollars. Other countries immediately followed suit. From then on, there was no real limits to stem the outflow of capital from countries and so started the process of globalisation and the de-industrialisation of both the US and the UK. Capital was sucked out of nations by banks and finance houses seeking quick profits to the detriment of industries that actually made things.
It also insured in time that the interests of finance would come first and the interests of democracies would became secondary. Corporations and finance demanded countries open up their markets and allow more and more “free” enterprise, to the detriment of their own interests.
We have had 30+ years of neoliberalism and, apart from the elites who have done very nicely out of it, thank you very much, it has been nothing but an unmitigated failure! Its high time we used tried and tested economics that has time and time again been proven to work, not the tired old theories that seldom work outside the pages of textbooks.
Time to prime the pumps again!
“The government is not implementing fiscal austerity — there are very few real cuts happening — just look at the numbers!”
The numbers are cuts to public spending by 2016 of £81 billion. The idea is that the public sector is “crowding out” investment to the private sector and that the private sector is going to rush in and fill the gap. Except that is unlikely to happen to any large degree because, despite corporations being awash with cash, there is no demand, that is, not enough people buying stuff due to debt, to make it worth their while investing.
“It is still spending way more than it raises in taxes”
And why is that, do you think? Despite cuts to public spending, the government has still had to borrow at record rates. This is largely because the economy is on the floor and the government has to borrow massively to make up the difference and pay its past debts otherwise the economy will collapse.
There is no demand. In fact, they seem to be doing their level best to kill off any demand. Witness the recent stupidity of sending those orders to Siemens of Germany rather than Bombardier of this country, despite the enormous job losses that it will create. Madness!
As to your other point, Japan has massive debt, yet they manage to run their economy OK without the threat of imagined “bond vigilantes”
Until this unmandated coalition government see sense and adopt a plan B for investment in jobs, particularly manufactuirng, the UK economy will continue to go down the tubes…..count on it!
Unlike Norway which has a considerable sovereign wealth fund (although I expect that its value has diminished in the present stock market turmoil), our government of the 80s and 90s preferred to spend money on unemployment and tax cuts rather than investing for a future productive economy.
Presently the Right has won the argument about ‘maxing out with the credit card’ because the majority of people are not really interested in economics and prefer the simplistic propaganda of the right wing press. Very depressing!!
Richard Murphy,if you want people to respect your website,and your views which clearly not everyone agrees with,you must not refer to Leon and his post as a ‘nutter’,’fantasies’ and so on.If you were right all the time,you might be as admired as Mr. Jobs whose company is now more valuable than Exxon,after less than 40 years.
I come on – I’m perfectly entitled to think someone who says that the bond vigilantes are out to get the UK when bond yields are at record lows since the second world war is a nutter. Because there’s really not much other description you can offer.
It’s just plain barking mad to put forward that argument – as more and more rational people now realise – as was the point of my blog
And if you don’t like it – tough – I was not seeking your support because I suspect I’ll never get it and would not want to comply with the conditions of doing so
Manners maketh man.
Bulls**t
That’s the language of an oppressor
“Manners maketh man”
…..and pomposity maketh a pratt!
Sheer poetry, Stevo!!
And the Daily Telegraph continues to print sense …
Visit:- http://blogs.telegraph.co.uk/news/peteroborne/100100708/the-moral-decay-of-our-society-is-as-bad-at-the-top-as-the-bottom/
Is it too much to hope that there will be a meeting of minds?
Also:
“Manners maketh man” . William of Wykeham (1324 -1404) was adopted as the motto of Winchester College and New College, Oxford; Signifying a code of behavior that delineates expectations for social behavior according to contemporary conventional norms within our society rather than the language of an “oppressor” or a “pompous pratt”.
A post submitted by Telegraph reader “Scottishman” ….
Bent politicians, bent police, bent newspapermen, and bankers so bent they resemble a corkscrew.
And yet, unemployed youths from dodgy council estates are supposed to be shining white paragons of moral rectitude.
Ain’t likely.
People quoting the Japanese example on here forget one thing, that Japan constantly runs a trade surplus, hence is a net exporter of capital and doesn’t have to worry about importing capital to cover its deficit. We don’t have that luxury and rely on the nations exporting to us to fund our deficit.
If we look at the market value of UK govt debt holdings since QE started, it has increased by £304bn, of which £194bn is from QE, £94bn from foreigners, leaving only £16bn coming from domestic sources, witht he banks having being big buyers recently (probably to build up their liquidity reserves). Without foreigners prepared to hold our debt, and the massive demand from QE, who knows where our interest rates would be now. With foreigners holding twice the value of UK govt debt than pre-crisis we can’t afford to do anything to scare them off, with the resultant hit to rates and the exchange rate. Our luck at benefitting from concerns over the Euro and dollar can’t hold forever.
Are you sure the data does not exclude QE holdings?
Stats from DMO quarterly bulletin
Q2 2009
Overseas £207bn
Domestic £479bn
Q1 2011
Overseas £302bn
Domestic £494bn
QE £195bn
Q4 2007 (so pre-crisis) overseas holdings £157bn versus £302bn now.
Whatever the effects of QE on the wider economy has been, and those are debateable, it has replaced £200bn of debt at approx 3.5% yield with debt at 0.5%, so saving the govt about £6bn. Not a bad deal foer the govt!
Isn’t most of our debt in domestic hands?