Fron Martin Wolf in the FT this morning:
Is a global economic recession likely? If so, what might trigger it? Willem Buiter, Citi's chief economist and the Financial Times' erstwhile Maverecon blogger, answers these questions: “Yes” and “China”. His case is plausible. This does not mean we must expect a recession. But people should see such a scenario as plausible.
I err towards likely. Or if you wish, at the probable end of plausibility.
And what I am quite sure of is that in that case the assumptions that George Osborne was forced to make to forecast a government surplus by 2020 look increasingly inappropriate.
He assumed a significant improvement in the UK balance of trade. Even with declining commodity prices I do not think that likely.
He forecast massive increases in business borrowing to fund investment at levels unknown in recent economic history. With even a hint of recession on the horizon that is not going to happen.
And he believed that households are going on a massive consumer spending spree to max out their credit cards to a scale greater than that seen before 2008. Given the abolition of the social security safety net I foresee many fewer willing to take any such risk.
The reality for the UK is that we face a tough time.
The reality for George Osborne is that his plans already look like the most hopelessly wishful thinking. And this time the recession will be on his watch and will be made worse by his own failure to prepare.
People's Quantitative Easing is part of the preparation for times to come. George Osborne may come to regret not getting to it first.
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PQE is the only game in town: no-one else is investing in productive enterprises.
What we have instead is rent-seeking, and every penny of rent taken from a household or a business is a net contraction of the economy: none of that money is being recirculated in consumption; all of it goes into hoarding, speculation, and the purchase of additional rents.
In such circumstances, recession is inevitable: and it is happening already, because much of what we see and count as ‘economic activity’ is not consumption and production, it is the accelerating transfer of wealth from the many to the few.
And these few consume very little, produce nothing, bid up asset bubbles and purchase further rents.
(As always, I point to rents on services. privatised utilities, monopolies and monopsonies, as well as the familiar rents on land and buildings: ‘rent’ is the extraction of value created by others, by rent-seekers who have purchased or otherwise obtained a positional advantage without contributing to the processed creating economic value).
I think I’d modify your excellent line that:-
“‘rent’ is the extraction of value created by others”
to:-
“‘rent’ is the extraction of value created by others by those in a position to dominate”
This chimes with the failure of many to recognise that the flaw in the distorted Neoliberal version of Adam Smith’s Invisible Hand (otherwise known as the General Equilibrium Theory)is that fails to incorporate a necessary condition for the alleged beneficial outcome: the condition that human sociality and morals must set limits to the individual pursuit of self-interest.
“George Osborne may come to regret not getting to it first” – the Osborne’s of this world do not “do” regret – it is always somebody else’s fault & Osborne always has an answer – which what passes for the “popular” press in the Uk, then pumps out to UK subjects/serfs.
In terms of China, the Chinese communists are likely to do what it takes to retain “the mandate of heaven” – the alternative is back to the 1920s – (turbulence) which is not what the Chinese pop may want.
Will there be another recession in the future, well yes, of course. That is the business cycle. You can expect one every 10 years, which means we are due one soon. The fact that the gap between the 1990-2 and 2008-9 recessions were so long just made the eventual recession far worse.
Nothing to do with a certain financial crisis caused by the naked greed of banks then?
And it will undoubtedly be speculation and financial bubbles that will cause the next recession because nothing has changed. We should have followed the example of Iceland, nationalised the banks and arrested many of the perpetrators.
Because governments decided, rightly or wrongly, to prop up the banking sector with public cash without any consideration such as bank taxes and strong regulation, we are surely heading down the same road.
It is about time governments grew a spine!
“It is about time governments grew a spine!”
Difficult when much of that spine is paid for by “bankers” via campaign and party funding and individual politician sinecures!
I’m afraid people like Neil are pumping this stuff out because when a crisis strikes there are always a limited number of people who benefit big time and it’s that class (which includes Osborne) who don’t care if it happens because they see it as a change in a weather system which is beyond control and which they are adept at gaming – so bugger social consequences, environment, basic decency because there is the Greater God of the market which punishes those who don’t respect its rules. In short Neil is simply describing his religious beliefs, nothing more.
Neil won’t have any objection to the next collapse because it won’t touch him, if it does, he’ll be screaming “where’s the Government?”
Ann Pettifor has pointed out (in “Just Money”) that these crises are now being seen as acts of God or nature, so they are given quasi-metaphysical status by finance Capitalism – great in ‘it?
@Stevo, I don’t follow why you think there’s no consideration of bank taxes. Has the bank levy, restrictions on banks using past losses and the 8% banking tax surcharge escaped your attention plus a whole swathe of new regulation including but not limited to FATCA and Common Reporting Standards?
No VAT?
No FTT?
Thank you Richard. I was just responding to the ‘no’ consideration point made by Stevo as that’s just factually wrong. Although you may say it’s not been enough.
On your VAT point, wouldn’t Banks be better off with VAT and their customers be worse off? At the moment, banks cannot recover the vast majority of VAT they incur on their expenses as they are mostly exempt. If VAT was charged they could recover millions in VAT in the same way other VATable businesses do and so their profits would be higher (on the assumption that people and businesses still want the same level of finance). On the otherhand, if the imposition of VAT reduces demand for finance won’t that negatively impact UK economic growth?
VAT not charged underprices financial services so over-expands them
That is the macro point
And I do not think we need growth from more finance
So I would welcome a rebalancing
The notion of a recession caused by speculation is an austrian concept called malinvestment. For a number of reasons this is a less than satisfactory explanation, not the least which is lack of a mechanism by which bad investments result in an economic slump.
Far more likely is Keynes’ concept of irreducible uncertainty. Consumers and investors suffer from a surfeit of fear given a future that cannot be known. This creates a strong incentive to spend and invest less than our aggregate income pushing economic activity into unstable orbit around a sub-optimal level of performance. The more fear, the worse this becomes. With no objective means of judging the risks everyone looks to their fellows for ideas about what to do and the downward trend becomes self-reinforcing.China is an excellent candidate for ground zero of a true global panic.
A wisely led government would adopt the role of uncertainty reducer (which is, I think, the most accurate description of what PQE as proposed will dod) for both consumers and investors, but with the current group I see no way out but down.
So you agree it’s not the banks themselves that are under taxed because of VAT but the end users?
I am talking of the consequences
Banks are also under taxed
fTT needed for that
“@Stevo, I don’t follow why you think there’s no consideration of bank taxes. Has the bank levy, restrictions on banks using past losses and the 8% banking tax surcharge escaped your attention plus a whole swathe of new regulation including but not limited to FATCA and Common Reporting Standards?”
Oh – I do beg your pardon! I meant they are not taxed enough to n extent worth mentioning. The taxes are obviously ineffective as the banks are carrying on much as before.
As Richard pointed out, there is no Financial Transaction Tax which I regard as a priority that it should be impose on banks. Do banks not have the use of tax havens or tax planning then? I am more concerned about the lack of regulation. Something like the Glass-Steagal act needs to be re-imposed on the banks. I would go further and say derivatives should be taxed in order to discourage irresponsible speculation and the juicing up of stock market into bubbles.
Let’s stop pretending that anything of significance has been done to curb the banks, eh?
There hasn’t.
@Stevo. On the regulation front – which you are most concerned about – are you aware of the bank ring fencing proposals that are due to come into effect on 1 January 2019? It’s a modern form of the Glass-Steagall act. I’m not saying that all is well with the world just that some of the things you are asking for are being considered or implemented.
It is a token gesture about 8 years too late
Unfortunately this ten year cycle is but a sub system of larger cycles. The approximate fifty year cycles which were first observed by the executed Soviet economist Kondratiev should by now be on an upswing of innovation necessary to drive the next wave of economic growth and progress.
The observable fact and reality that this is not occurring has a great deal to with the drop in wage levels and the weak bargaining power of labour to secure the necessary level of value required to kick start this wave of innovation and progress investment. Instead the lazy idle option of rent seeking has taken over. Far easier to sit on your arse and collect easy money from rents on everything from land, property, commodities and even money itself. After all, in this mindset which has now become the whole basis of all economic activity throughout the whole of the economy, why get your hands dirty funding long term investment in the next wave of innovative technologies necessary to the health and very continuation of capitalist industrialism when you can coin it in using the ponzi debt ridden casino short termist option?
The motto being indulgence today, investment tomorrow if at all. The observable historicle facts clearly demonstrate that the ability of labour to maintain and increase its value through wages forced investment in new technologies to drive the capitalist economy in previous identifiable waves. This has now broken down and we are currently in unchartered territory on the cusp of bursting our third bubble in 15 years.
The current drop in many prices of commodities like oil, food items,minerals, metals etc is merely evidence of the receeding tide before the tsunami hits. When it does recession will be a totally inadequate concept by which to describe what is about to occur.
Trying to pass this off as some naturally occurring and predictible ten year business cycle is, to put it bluntly, somewhat complacent and not congruent with what is happening in the real world..
“1 January 2019? It’s a modern form of the Glass-Steagall act. I’m not saying that all is well with the world just that some of the things you are asking for are being considered or implemented.”
If it is anything like as strong as the regulation of the old Glass-Steagall act, then good. If it ever sees the light of day of course.
@Neil Robertson
But why do recessions occur every 10 years? What’s the mechanism?
It’s called the business cycle. It’s a fairly well known phenomenon. Have a look at the Wikipedia article on it.
Sorry Neil, that is not answering the question. At best it is merely stating a faith based position.
It really is time economists,students of economy and business junkies were forced to join the real world and submit to the scientific method.
@ Dave,
Agreed.
@ Neil,
I was inviting you to think about why recessions occur every ten years or so. Once we better understand the mechanism we can do something to rid ourselves of them.
In days gone by it was usual to consider that people just got sick every so often and there wasn’t much that could be done. Everyone had to accept the inevitable.
But were the 1929 and 2008 crashes, and also numerous other lesser crises, really inevitable? I would argue that in all cases they were caused by allowing too much private debt to accumulate in the economy. We have the boom when the lending is occurring and accelerating. We have the bust when the lending slows down or even virtually stops.
But if you have an alternative theory, let’s hear about it!
What does a political/power informed complexity science/ complexity economics lens add to understanding these phenomena?
“I would argue that in all cases they were caused by allowing too much private debt to accumulate in the economy. We have the boom when the lending is occurring and accelerating. We have the bust when the lending slows down or even virtually stops. But if you have an alternative theory, let’s hear about it!”
I have no alternative theory, because I agree with you completely!
“The reality for the UK is that we face a tough time.
Yes I think so too. There’s been far too much build up of private debt in the economy – much of which has fuelled an increase in asset prices rather than been used as an investment in the productive process.
So, in the next few years I would expect a fall, some would call it a correction, in house prices and equity prices. That’s going to have serious consequences for old and young alike. Private pension providers will be increasingly unable to meet their obligations. Many younger people with high mortgages will face the choice of default or being unable to move due to their properties having negative equity.
It’s possible that a government with a different economic outlook would be able to create greater liquidity by increased deficit spending. There could be some extra inflation as a consequence but it’s hard to see how many younger people can be freed from their debt traps unless there is that inflation.
As it is the government is committed to just the opposite: A reduction in deficit spending. Hopefully, future opinion polls will lead them to understand the folly of their ways. If there’s one thing a Tory politician likes less than a budget deficit it a deficit in votes to the Labour Party! So there may just be some hope yet!
In addition to PQE, should a future Labour Government openly pursue a policy of ‘window guidance’ in which the Bank of England strictly enforces credit allocation quotas on the commercial banking system? Would such a policy drive out speculation and solve the problem of credit misallocation that has caused huge increases in asset prices, particularly housing?
Despite their public pronouncements that quantitative credit policies were ineffective, according with conventional economic theory, the Bank of Japan secretly and successfully put into practice ‘window guidance’ for several decades after WWII. It is one of the reasons why the Japanese economy rose to become the second biggest economy in the World in just a few decades (it was later abused in a political fight with Japan’s Ministry of Finance and hence Japan’s financial crises of the last few decades).
Your thoughts?
I gave them
And pressing deadlines
Sorry!
Ah…never mind…I’ve found your post of March 13, 2014…I agree wholeheartedly!
Although Werner did not explain it in his book the young Japanese economic students went to get their degrees in the US. Thus US capitalism arrived in Japan.