I've said before, and I'll say it again (no doubt), that George Osborne's forecast that the UK is entering a period of stable growth is just nonsense. That's not just because of his own wild assumptions regarding massive increases in personal and corporate debt that are required to make his modelling work; it's also because his plan for a balanced budget was dependent upon the resumption of modest inflation, rising interest rates and the world at large buying many more goods from the UK.
And then along comes China. It has now devalued for the the third day in a row. Superficially that looks good for the UK: our imports from China will be cheaper. The reality is threefold.
First, this indicates massive problems in the Chinese economy, which has been fuelling world growth.
Second, it implies a willingness on China's part to externalise its problems: it is going to dump them on the world.
Third, in that case it is setting out to undercut wealth creation in the UK and the whole of the west. That's not driven by a dogmatic desire; it's just got itself in a mess and this is the way that it sees itself getting out of it.
But the consequences are enormous. First, our fragile recovery, dependent as it is on increased consumer borrowing (which will not happen so fast as prices fall) and, even more importantly, on a £60 billion a year forecast level of private sector business investment that will not happen if China is in meltdown and grabbing market share at the same time, is not going to happen.
Second, China is effectively exporting deflation on a massive scale. Far from rising interest rates and a return to inflation we are at risk of seeing deflation and flat interest rates for a long time to come (unless we try negative ones).
Third, the UK housing bubble may well burst soon. All that money being committed to pay for London property that currently only exists on plan way well not be available by the time completion day arrives: the Chinese influx of money may well dry up soon. And that will have massive impact on UK personal borrowing as a knock on effect.
In other words, all George Osborne's key economic assumptions may have just flown out of the window. And he has no plan B.
People's QE, anyone?
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Does he need a`Plan B’?
Don’t measure his success or failure by objective measures of economic benefit: his agenda is to accelerate the concentration of wealth.
So the rational approach is to consider who will profit – or who will be bailed out, profitably – in any transfers of wealth that will occur in your scenarios.
Not sure about that.
Kipling’s ‘God’s of the Copybook Headings’ springs to mind inasmuch as that no matter how fancy the equation both sides have to balance. Wealth depends on money which, as we have seen, can be destroyed as well as created.
The Western Anglo Saxon economic model depends on recycling the trade surpluses of economies like China ( who do not have the domestic demand for its own productive outputs) back into Wall Street, via The City, in dollars to maintain the financing of the USA’s twin deficits. For this reason the Americans and their fellow travellers have been putting pressure on its bankers (the Chinese)to revalue the Chinese currency.
The recent small devaluations this week have already got some of the more excitable sections of the US oxygen breathers reaching for their brown trousers because they know a)the impact it will have on their own domestic economy in particular and the Western economies in general and b) Given the bubble that has formed in the Chinese economy that more drastic evaluations should not bubble rued out – giving rise to and negative feedback loop.
The UK economy will bubble en particularly badly hit a) because unlike the dollar the pound is not the world’s reserve currency; b) the UK economy is wildly unbalanced in favour of finance, we do not produce enough and rely instead on making money from recycling money through the City to Wall Street fro trade surpluses denoted in dollar terms; and c) as a result of this our own bubble ( the third in 15 years) will be bursting sometime in the next two years.
Osborne and the current Tory Government may well not last until 2020 and even if they do they will be a busted flush, even worse then after the ELM debacle in 1992. Which is why it is important that an alternative that does not involve the B team of Blairite’s will need to be up and running to take advantage of the opportunity presented. We cannot afford a rerun of 2008 this time around.
You say “not sure about that”, but your comment is more or less compatible with Richard Murphy’s post.
You could not have a more ideal time for a People’s QE.
The £ is strong, deflation already here and looking locked in and interest rates at practically zero.
In the event that QE lead to inflation edging up and the £ weakening then surely both those are good things? If not why have an inflation target of 2% and proclaim you can an export led recovery?
This is an opportunity to basically get free money to build social housing, renewable energy infrastructure built and owned by all of us.
And I have to laugh when I read people like Robert Peston reading from the same tired script that public spending is inherently wasteful and only banks can allocate capital sensibly. Did 2008 actually happen as I remember it? I recall banks allocating un-payable capital recklessly then repackaging it and spreading it around the world until it blew the system up. Nothing to do with inefficient public spending at all.
Well said Tim K. By the way,the Reserve Bank of Australia, has an inflation target of 2-3% and has had for a very long time. It is very rarely a source of argument and when it is the complaint comes from those who would like to see the range set higher.
3% is fine. I’m not sure why the UK commentariat on both sides regard the 2% target with such grave respect.
It may be that the (produce nothing)people in the banking and finance sector have to much influence. They don’t like inflation, even modest inflation, because it reduces the real value of loan assets, a.k.a. debt.
Agreed: 3% makes much more sense right now
The coming private debt bubble needs to be the rope by which Osbornomics is hanged.
I might just take the opportunity to rib you, in the friendliest possible way of course, about mixed metaphors and bubbles being able to support ropes etc but I know what you mean!
I’d say we are pretty close to the next crash, or market correction as some may call it. Next year maybe? We’ll see.
Couldn’t agree more, boom…………………followed by bust. Sooner rather than later. (within 2 years Steve Keen)
Richard,
You have to hang on to the basics. Exports are a net real cost. Imports are a net real gain to the economy. Any economy. If China has devalued that’s good for everyone else. If they want to ship more goods and services to the rest of the world than the rest of the world ships to them, why not just let them?
That means of course we need to be smart enough to understand how our own economy works. We needs to understand the relationship between the government deficit and the trade, or current account deficit. If imports are greater than exports to the tune of 6% of GDP then the budget deficit has to be 6% of GDP too just to keep things all square in the economy.
Are the present govt smart enough? They are smart enough to understand when the alternative is to lose an election. The problem is that the next election is 5 years away. They tend to be very stupid unless the reality of looming elections forces them to focus on the way the economy really works rather than how their ideology might indicate it should work.
I accept all that re sectoral balances
But people do very obviously not understand them
And they also pretend they can manipulate them when on occassion they have no hope of doing so
The result is economic crisis
And that may be the response to China
That and bubble bursting
Yes, I agree that there is a general misunderstanding of the sectoral balances but it should be one of the less contentious and easy to understand aspects of MMT. Not that its exclusively MMT of course.
I often see an argument made by supposed Keynesians that Govts should run surpluses in the good times to offset the deficits run in the bad times. They then go on to suggest that the Brown government were at fault in not running a surplus in the run up to 2008.
This can only, possibly, be true for a country which has overall net balanced trade and even so the govts balance would depend on the savings patterns in the economy.
It would be good if we could nail this fallacy. It does a lot of political damage to the Labour Party.
Logged as an exercise to undertake….
R
Peter Martin sounds like the ghost of Nicholas Kaldor. Nothing wrong with that of course.
Indeed not
Cambridge has none of his like – barring Ha Joon Chang – these days