Thursday, Nov 27, 2008
Times -
Times: A week of stupid politics but good economics
Claims that Britain is on the brink of bankruptcy are a misunderstanding. Every pound of savings is a pound borrowed.Shock. Horror. VAT could go up after the next election. Or it could go down - or stay the same. The same can be said of income tax and council tax and road tax. It can also be said about public spending, government deficits, the FTSE index, the oil price and the price of fish. So what? Britain's political debate has descended into farce. The fault for this lies largely with Gordon Brown and Alistair Darling - not because of the contents of the Pre-Budget Report, which was sensible from an economic standpoint, but because of their political failure to explain why it made economic sense.
Posted by jack c @ 10:17 AM (838 views) Add Comment
22 Comments
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1. jack c said...
oop's something went wrong with the title
Anatole Kaletsky - "Claims that Britain is on the brink of bankruptcy are a misunderstanding. Every pound of savings is a pound borrowed"
2. gardeniadotnet said...
I guessed the author before clicking on the link. Kaletsky - what a joke.
3. jack c said...
The readers comments at the bottom of the article are well worth viewing
4. Wage Slave said...
I thought every pound saved could be lent out 8 times over. So every pound of savings is 8 pounds borrowed.
5. wage slave said...
I thought that every pound saved could be lent out 8 times over.
6. stillthinking said...
Well, he makes a good point which is pretty much always ignored i.e. not everybody is in debt, somebody does have the money. Also as the one of the comments states, we can't all save at the same time without busting the economy !
Personally I don't mind if the government replaces, say me, and borrows in my place. The relevance to house prices though is that for their eventual recovery to take place (!), private lending would need to go back to 2007 levels, which would of course be impossible if the government had already borrowed the cash on our behalf. This is a kind of flaw in the plan for existing homeowners because while my borrowing would be directed at the housing market, their assets, government borrowing will be directed at nonsense public works projects or keeping some Labour voter at a desk somewhere.
The Japanese people have not thus far, wanted to start borrowing again, so we can't see the natural outcome, which is that they can't anyway without causing massive inflation, as their government has already borrowed for them. Government borrowing = long term depressed house prices.
7. andrew said...
I think the comments below the article were the only polite ones that were sent in, Kaletsky always gets things purposely back to front in an attempt to drag a reader's opinion into the unbelievable zone in the hope that some of what he is spouting will rub off, pure propaganda and therefore not worth reading or trying to understand past the rediculous headline.
8. mountain goat said...
Stillthinking not sure if I understand you right but I have been thinking something similar. If savings are all going into gilts because they are safe (governments can't default because no one would trust them again) then there is no money left to fund business or mortgage lending. The bailouts will be paid for by issuing more gilts so the gov are siphoning all the cash savings out of the system and preventing any recovery.
9. The Baldman said...
Mountain.. government borrowing competes with private borrowing so it can actually take money form the potentially efficient to the incompetent.
10. The Baldman said...
By the way Kaletsky is probably the most unbelievwable of all the economists.
11. bellwether said...
Someone seems to think the UK's recent steps are good news as Sterling has been rising against other currencies for a few days straight now. Not that I'd put much store in the forex market. Isn't valuing currency ultimately based on the prospects of a country at a range so far out that it all resolves to best guess.
Stillthinking always good to hear from you as you tend to take a different perspective. I tend to think on this site we overplay the plight of the UK because we often think of it in islotation. We are an absolute mess with deficit due to rise towards 9% but its not as if things are signifcantly better elsewhere. Spain? Italy? US? China? Australia? Germany? I do worry about the level of personal indebtness though It at 165pc of personal income (far higher than US, in fact I think only our cousins in Australia are worse) and the correction in house prices (far less progressed than the US). But then we speak English, which is possibly the singe biggest contributor to GDP, and we can play the US and Europer like no-one else.
Its too early but maybe the montiezation of debt which is looking like a global phenomenon will work this time.
12. stillthinking said...
@mountain goat
I think so and this seems widely accepted as well with the name "crowding out". http://en.wikipedia.org/wiki/Crowding_out_(economics).
The key line is "Crowding out can, in principle, be avoided if the deficit is financed by simply printing money, but this carries concerns of accelerating inflation.", which is why I am so interested to know if the UK are allowed to print money a.k.a monetise debt under EU rules. At the moment the UK is not printing money, but there is that worry for anybody supplying the money to the government. This is also pointed out as a key difference with Japan, because the Japanese people have had a trade surplus they can fund their own government borrowing, but we can't, we need foreign funds i.e. the Japanese government can borrow in yen from the people, but the UK government has to borrow from abroad i.e. not pounds and so the suppliers of this cash are worried about the sterling exchange rate.
Probably things will come to a head when the government can't sell gilts because the demand is going down, and down, and down etc.
13. bellwether said...
sorry didn't mean to suggest that deficit on other countries was comparable to UK (although in some cases it is) just that there are structural problems inherent in all. This bust is global.
14. bellwether said...
Still thinking I think we are in a process than ends with pure monetization - maybe some kind of developed country agreement to devalue currencies. The guarantees propping up the system are in a sense promises to monetize if need be - because everyone knows there isn't the real wealth to support them.
15. stillthinking said...
Certainly its all global. But the effect of the media is so insiduous that it is impossible pretty much to make any conclusion that you can feel happy with.
I think the emphasis on debt and borrowing is wrong. The real problem is, and has been, the savers. And of course thinking about the UK is meaningless there because the savers are actually the Chinese, Japanese, Middle Eastern countries etc.
Think about this, I start up a bank doing mortgages. Tom buys a house from Harry. Accordingly I credit Harry with a 100K and put Tom a 100K down. Now if Harry was willing to buy stuff from Tom there would be no problem. Unfortunately Harry buys 20K of Chinese goods.
But how can I as a bank fund this purchase? I can't. I have to sell some of Tom's debt to the Chinese. The Chinese however, never want to buy anything from Tom, so Tom can't work his way out of debt.... and so on.
The way the media presented the bank crisis was with the emphasis on the people holding debt. In fact, the problem and insolvencies are from the savers, because the banks have to fund the savers who are all pretty much buying stuff from abroad.
16. goweresque said...
Never, ever, read anything by Anatole Kaletsky. The guy is a joke. Only 6 months ago he was telling us the crisis was over. Lehman, AIG, Fanny/Freddie, TARP, Citigroup etc etc - they were never going to happen in his world. In fact he is quite a good counter indicator. If he says the PBR is good economics, get ready for the mother of all economic sh1tstorms.
17. jack c said...
@goweresque - that was my thoughts as well - I'm 180degrees adrift of this guy
18. drewster said...
Kaletsky's track record has been very mixed. Sometimes he's right but more often not. Overall not worth reading because he doesn't do any real analysis, just spouts vague platitudes. I stopped reading after "Britain's public debt-to-GDP ratio, at around 40 per cent, is the lowest among the G7 advanced economies" - I'm sure we all know about Brown's off-balance sheet liabilities, the PFI accounting tricks, Northern Rock, etc.
19. jack c said...
@drewster - picking up on your last point - public sector pension liabilities are starting to surface.
20. stillthinking said...
I am not saying that I agree with his conclusions. Just that the article is thought provoking in a way.
21. notaneconomicsguru said...
12 . Nice explanation of why debt is being sold abroad, but I'm not sure that the media did portray the debtors as the problem in quite the simplistic way you suggest. I understood from the media that good debtors are OK because they keep up their repayments and that allows you the bank to keep selling the debt to whoever wants to own it. What I understood from the media to be the principal cause of the problem was a) the folks who are not good debtors and stop their repayments and b) a collapse in market price of the inflated assets against which the bad debts were raised.
Sure the role of the savers have been ignored in this and you are right to point that out because the requirement to satisfy the capital demands of your savers is part of the demand on your banks cash flow, but I don't think savers can be blamed for the problem.
The problem as I understand it is that the global savers now only want to buy debt from you that has a low risk of default and if its not 100% clear to them what the risk is then its simply too risky so they won't buy. To me that means the problem is and always has been the debt side - its just got way too big and way, way too stupid. I saw this ending in tears many years ago, just as I had predicted and then saw the 80s inflationary debt boom end in tears. This time though its global, its massive and its very much more alarming because of the sheer scale and rate at which events are happening.
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