Rumour has it that David Cameron has a first in PPE from Oxford. The E stands for economics. However, the only way that's possible is if he did what all creeps do: read the set texts and never ask a question. Why do I say that? Because there is no sign at all that he actually learned anything from the process.
What's the evidence? Because this morning he's saying that the only cure to our financial crisis is that everyone, government, business and individuals must put all our efforts into paying off our debts.
Now it so happens that I do think debt is, particularly if personal debt used to fuel excess consumption, a 'bad thing' and I dedicate a lot of space to this issue and how to address it in The Courageous State. I also think bank gearing to fund speculation and business borrowing to finance mergers and acquisitions are also seriously bad news for the economy, being wholly unproductive uses of cash that drain resources from the real productive economy that meets human need. This activity is where the so-called practice of 'squeezing out' that neoliberals attribute to borrowing really occurs. But all that being said to have everyone throughout the economy at the same time seeking to reduce ther debt is an economic prescription straight from the mad house (or maybe Oxford; you choose).
Why is this so crazy? There are three main reasons. First, and most importantly, if everyone saves at the same time we very obviously get a recession. If people don't spend what they earn, which is necessary if they are to save, then demand crashes. If demand crashes then very clearly employment crashes with it, businesses fail and recession follows. So that is what Cameron is calling for.
Secondly, if we have everyone repaying debt then the money supply also crashes - because debt is the basis for all money creation in the UK. Now we could get round that with QE, for example, but the government has given away responsibility for such issues and as such Cameron is calling for a cut in the money supply and a consequent liquidity crisis at the same time as he's calling for recession. Smart move Dave.
Third, Dave really has not got his head around the fact some debt is really, really useful. Government debt is the most useful of all. We need vast amounts of it because the annuities that underpin almost all old age pensioners private pension income are based on the ownership of gilts - that is, government debt. Perhaps he doesn't realise this, but if the government were to repay all its debt, which seems to be his fantasy, he'd destroy the entire logic of the private pension sector. It's an interesting idea that this seems to be what he is setting out to do.
So universal debt reduction is a massively bad idea.
Cameron also ignores the fact that it is also basically not possible: it's pretty much an accounting impossibility that we can all reduce debt together. Debt is owed to people. Unless those to whom money is owed agree to sit on massive piles of cash they will not spend or even save with a view to earning interest when debt is repaid to them then everyone repaying debt simply can't occur. I agree the issue is a little more complex than this, but that's the essence of it.
That does not mean reducing pernicious debt of the sort I note above is not possible. I note lots of ways to do this in The Courageous State so now is only time for an overview.
Firstly, you cut business debt by removing tax relief on it.
Second, you cut pernicious personal debt by regulating the personal finance markets.
Third, you take action to stop the advertising whose main aim is to drive people into debt. In particular you remove tax relief on it.
Fourth, you provide sufficient social housing to ensure people aren't forced into excessive mortgages.
Fifth, you regulate takeovers and mergers.
Sixth, you introduce capital controls.
Not all of these will go down well with the Tories. But they're preconditions of reform.
And finally you have to make sure that people have incomes that make sure they can generate the cash needed to repay the debt. This is so glaringly obviously a part of the equation that it is staggering that Cameron does not mention it. If people are repaying debt there is a shortage of demand for consumption which is fine if, and only if, the economy is rebalanced by excess demand for investment in the creation of new productive assets at the same time. And since business glaringly obviously won't be picking up this issue, since it will be suffering a downturn in demand, then the only agency that can ensure that the equation is rebalanced during a time when most debt is being repaid is the government.
In fact for the government this is a no-brainer. Unless it spends in this way mass debt reduction will mean that the automatic stabilisers - benefits payments - will sky rocket as demand crashes and recession sets in - as Cameron is demanding. The alternative is to spend that money productively - on investment that creates employment.
But Cameron has not mentioned this. He wants everyone to cut debt - which is impossible. His failure to understand this logic is frightening. And it also guarantees recession.
And he's in charge. Very scary indeed. You have every reason to be very, very worried. I am.
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There is also another, very fundamental, reason why we can’t possibly pay off our debt. As Robert H. Hemphill, Credit Manager of the Federal Reserve Bank of Atlanta, put it in 1935:
“If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.”
Even Milton Friedman, along with the Chicago group, advocated 100% reserve, that is, that governments, rather than private banks, issue the money supply.
And there’s real merit in that idea
Yes, I suspect that David Cameron’s scriptwriters were completely unaware of this vital operational point concerning private fractional reserve banking. The banks need a steady flow of credit card business which they can create as computer entries at no cost, then charge usurous rates between 18 to 37% pa then bundle them up as securities for sale to a third party and start the whole process again with further leveraging. Or does David Cameron want to stop this process?
Would it not be simple to not have artificially low interest rates? if rates were higher house prices would be much lower, Also why not bring back a UK version of Glass Steagall, and then you can let the banks do what ever they like, and since their own capital is at stake I bet they don’t make bad loans they did when they had government backing.
You criticize Tory government but what about the fact that UK gilts are among the safest in all of Europe, close to bunds, allowing for cheap mortgages and cheap government borrowing.
Without low interest rates we have serfdom
Aren’t low interest rates the core of Osborne’s economic strategy. A strategy that you invariably criticize.
And judged purely on achieving low base rates and low long term bond yields his policy has been wholly successful.
A strategy inherited from Labour and continued by the BoE
Nothing to do with him at all
Low interest rates set by the bank is what is only adding to inflation hitting the poor most of all. If your on 15k you will suffer more than if your on 150k.
Utterly bizzarre
Inflation is caused by a) VAT rise b) fuel and imported food rises – worldwide
Basing comments on facts helps
Richard the rate of interest and inflation are related. Don’t get me wrong this is not a pro or con arguement about anything. It is an economic concept that when interest rates remain low for too long they have an adverse effect on the rate of inflation.
The BoE has tried to stimulate growth through the use of low interest rates but this clearly isnt working. Time for them to scrap the plan.
So you think increasing mortgage rates will help families who cannot already make ends meet
And that charging more interest will help repay debt – including the national debt?
Or that raising interest will encourage investment and so create jobs?
The reality is we need inflation – including I stress wage inflation – right now. It is the only way to clear debt
You are spot on.
I have a 2.1 in PPE from Oxford.
I was not a star pupil, but I did leave understanding Keynes’s “paradox of thrift”.
Cameron is a maniac for going round the world preaching that countries rush to repay their debt — and then going round the country preaching that UK households do the same (though I gather from Twitter that his speech is being hastily rewritten to remove/alter this suggestion).
If everyone — governments everywhere, households — are not spending, who is going to buy the stuff we need if we’re to get economic growth?
Bizarre.
Perhaps you should be asking why we have the need for growth rather than how we are to achieve it.
BB
We have a need for investment for sustainability
Not growth
We need investment for sustainable growth
I’m deeply concerned about David Cameron – and by extension the future of the UK – now. His performance on yesterday’s BBC Radio 4 Today programme (http://bit.ly/pkKqxA) was absolutely woeful. As I said on my blog he’s either clueless or a liar (or perhaps even both).
Ian
I suspect both
Sadly
Richard
Not clueless at all! In fact, its all going to plan! Run down the public sector, roll back the welfare state, destroy the NHS as well as cutting pensions and wages.
Hobble or do away altogether with the public sector and you leave room for the rentier class to move in to pick up juicy contracts from the public sector. Prisons, hospitals, waste disposal, road, rail, infrastructure…..everything that is currently government owned will be fattened up like it was in Thatcher’s day and sold off to their mates in the city.
And who will end up having to pay most of the resultant debt in the form of higher charges and taxes?
Three guesses!
I’m afraid I had the opposite view of Cameron’s Radio4 interview. I thought he was extremely skillful. He didn’t say anything of substance but he put it over well under pressure. I fear that EdM is incapable of such a performance. His leader’s speech was so dull I couldn’t be bothered to raise my head from my sudoku (outside conference hall), the Q&A session he undertook the next day was fine but that was amongst friends. The leadership campaign was useless in revealing how the candidates could cope with hostile questioning, which to my mind was one of the most important considerations.
Good blog, Ian. I’ll look out for the follow up on RBS. Just to add, if you saw the lengthy piece in The Guardian on Saturday analysing who funds the Tories then none of us should have any doubt that at best this is Cameron being deliberately economical with the truth or, more likely, using his skills at communication to lie convincingly (as Carol suggests). Truly he is Blair’s successor.
…And the absurd office of budget responsibility predicts salvation will come through rising household debt.
But then, can you expect a ruthless aristocratic flunkey like cameron to do anything else but lie?
Perhaps it’s Modern Greats that needs to be razed to the ground; but saying that, Vince Cable has a Phd in economics and still can’t define Keynesianism. The way I look at things is that this Coalition’s economic policies are a cut-and-shut of Andrew Mellon’s ‘purge the system, it’ll do everyone the power of good’, alongside Friedman-inspired monetarism (which the young Tories need to favour to keep in support of the economic policies of the early 1980s). So they find themselves saying that the government has ‘maxed out its credit card’ and that austerity is needed to stop government borrowing rates from rising, which is Mellon. And then they say QE should used if growth is tardy, which is Friedman(ish). Why the Liberals have joined in this disabling paradox I don’t know.
Richard you note :- “I also think bank gearing to fund speculation and business borrowing to finance mergers and acquisitions are also seriously bad news for the economy,”
The PSG has never doubted our affiliation to your philosophy/logic (but don’t claim that you necessarily reciprocate ours) and this statement is fundamental to our constitution.
Some interesting comments/information appearing here. The PSG is envious of those with a wide knowledge of Philosophy, Politics and Economics. Most of us could not even spell these words until after becoming acquainted with financial shenanigans on the Isle of Man, Jersey and Guernsey.
Good blog.
Take comfort.
We are not as badly-off as some !
http://www.zerohedge.com/news/us-starts-news-fiscal-year-14837-trillion-debt-142-billion-increase-two-days
Isn’t Cameron the man who took out a second mortgage that he didn’t need in order to claim expenses on the interest?
I am not making this up!
No, he didn’t take out a second mortgage – a second mortgage is a loan that takes as security any value of a property in excess of that due to a first mortgage.
It is true that Cameron took out a mortgage on his second home and (correctly) claimed the interest as an expense, but there is no evidence that he did not need it – to the contrary, the amount that he and Mrs Cameron could have saved out of their earnings to date would not allow them to pay cash for two houses in Oxfordshire and Notting Hill.
I think we have to look behind the salesman out front persuading us to buy his shoddy goods. Step forward into the harsh light of day, Oliver Letwin, the Keith Joseph of our day. Letwin’s parents were disciples of Ayn Rand and his background is in mergers and acquisitions (let’s hear it for the March of the Makers!). Letwin’s the real thinker (sic.) behind the Tory disaster capitalist putsch. Philip Blond was a useful idiot for a while but it’s back to the Victorian era of devil take the hindmost. When you read that people are to be forced even further out from their homes to seek work or have to spend hours every day in job searches or they will lose the steadily declining pittance that is not enough to live on then it begins to smell of fascism. An over-used word but hard times bring hard philosophies. Just remember though that kind of European nonsense can’t happen here. We’re far too sensible!
We’re far too sensible #at the moment#
But even a pacifist will eventually find the need to fight for life.
It has been noted, on other blogs, that local councils are relying on illegal charges to fund themselves, such as excessive charges for levying distress upon those unable to pay council tax.
ntp3:
Mellon is also alleged to have said that depressions deliver assets back to their rightful owners, which is exactly the mindset that I believe the current regime holds.
Anyone notice that Iceland has vanished from the news? They told the banker/gamblers to get lost and their economy is doing very well,
Cameron’s aborted call for paying off personal debt, was extremely curious. I do not believe that Cameron and his advisors were unaware of either the impact on the economy of people paying off their debts instead of consuming, or that Osborne’s economic forecasts for 2015 assume a near doubling of personal debt.
I can only think that this was an inept attempt to reframe the worsening state of households as being due to an innate lack of thriftiness.. similar to the unemployed being labelled benefit-cheating and lazy, or calling the disabled, fraudulent benefit-scroungers.
Either way, Cameron looks very bad. He is either unbelievably stupid or he was trying to pull another fast one .. yet again moving the blame away from the people who really created the current financial crisis.
Iceland is being ignored as it is something of an embarassment to neoliberals, however its government still seems to be in the grip of their propoganda, so they are not out of the woods yet
You need to pay it off debt- but it is a revolving door, debt continues for renewed investment but it is not the same debt. We seem to have a fascination with money supply. Let’s get back to basics. We need a manufacturing base and competitive industries and an educational system that supplies the needs of those industries. Where is our model?
No harm in copying the best. I say Germany but I am prepared to listen to alternatives.
Yes, regarding Cameron’s economics – what a turn around overnight. And this guy is Prime Minister???
A factor that is not noted is the effect on spending of job insecurity, which has been created wholesale, not just in the recent ‘cuts’ and economic downturn, but as the basis of the neoliberal project., with promotion of the counterintuitive ‘flexicurity’ ie the more insecure and flexible your job is, the more secure you are supposed to be????
And alongside this, the governmental structures that are ensuring that almost all jobs go to workers coming into the country – no tax and wages out of the country. Its time that this was centre stage.