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KingBingo

The British Economy May Get Officially Downgraded - This Is No Time For Panic

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from: http://www.labourlist.org/uk-downgrade-duncan-weldon

Once again Labour Economist Duncan Weldon seeks to explain economics to an ungrateful public. Once again I don't believe Labour is in any position to lecture us.

S&P, the ratings agency, has placed the UK’s AAA bond rating on ‘negative outlook’. This means they are ‘considering’ downgrading it in the future. The full S&P statement is here.

In the context of the large expected rise in public sector debt, this is not surprising.

First off – let’s not panic.

They are talking about moving us, at some point in the future, to AA, the second highest rating. They are not saying we are heading for bankruptcy/the IMF whatever. Let’s keep some perspective.

Second, at 10.30am this morning (after the negative outlook), there was bond auction. We sold £4.5bn of 5 year gilts at an average interest rate of only 2.91%. Clearly the markets are not as paniced as the right is about to suggest they are. We received £13bn of bids, in other words there were plenty of people willing to lend to us.

Third, it’s worth reading the actual S&P release (my emphasis):

"We note that there is support across the political spectrum for additional fiscal tightening. However, the parties’ intentions will likely remain unclear until the next administration is formed after the general election, due by mid-2010. How quickly the government can stabilize and then reduce the government debt burden will also depend on the timing and shape of the economic recovery and whether the cost of government support of the banking system is higher than we currently assume, areas where we also see continued downside risks.

The rating could be lowered if we conclude that, following the election, the next government’s fiscal consolidation plans are unlikely to put the U.K. debt burden on a secure downward trajectory over the medium term,” Mr. Beers said. “Conversely, the outlook could be revised back to stable if comprehensive measures are implemented to place the public finances on a sustainable footing, or if fiscal outturns are more benign than we currently anticipate.”

This downgrade, if it happens, will not happen until after the election. At that point it will be imperative for the government to set out a credible plan to return the finances to balance, I favour doing it mainly through tax rises, the Tories through mainly spending cuts. Either way, the new Government will be forced to act very quickly in setting out plans.

I am not trying to ignore the significance of all this. But let’s keep some perspective.

In true totalitarian form the government is seeking to bring everything in the remit of the state. The ‘market’ is no different.

Originally QE was promised as a measure to restore liquidity, no more than 15% we were promised would be used to buy gilts. Yet the latest announcements show that they will buy £125,000,000,000 of government bonds, with just a few corporate bonds as part of the programme.

Government gilts are being supported by the government which is creating money to buy its own debt. Its devaluing all money by creating more of it to give to itself. Its classic redistribution of wealth from savers (who are probably just evil Tories) to government, so they can spend it on a bloated public sector (who are mainly godly Socialists).

What is worrying already about what will happen to prices once the stimulus is withdrawn. If the Bank started to sell the bonds it has bought in at the same time as the government is trying to sell more than £200,000,000,000 a year of debt, there could be a lot of disarray to put it mildly.

A tad alarmist, perhaps?

Although I agree QE exit strategies need to be given mroe thought, you need to explain why QE did not cause high inflation Japan?

Equally you cannot ignore that most major economies are now in, or every near to, deflation.

Duncan, I shall keep this as focused as possible. I shall not sidetrack onto Japan which bizarrely you seem to be holding up as a poster boy for QE despite the fact they are in a 20 year depression as a result of Keynesian economics . Although I will briefly point out that Japans saving ratio leaves our own much to be desired and they also actually export real goods.

However, what is crucial for you to understand is that inflation and deflation are symptoms of problems and not actually the problems themselves. Until you (like Gordon Brown) understand this your always be chasing the wrong solution. You have to start by asking why are prices inflating. The answer is that the total supply of money in the economy is too high, too much money has been created. This was done by banks that over lent and governments that held down interest rates. This extra money does not have anywhere to go so it bids up the factors of production, in our case land prices and public sector wages. The second factor going up because so much money was be channelled through government.

What then happens is that business and individuals mis-interrupt this extra money they see. They don’t appreciate that it just means money itself is devalued, because on the short term people just ask how much money they have, and not the value of that money itself. So they behave like they are richer but they are not, even misunderstanding that debt is negative wealth and decreasing their personal saving ratio to negative.

The economy responds to this extra spending with false supply. Which is why a year ago my high street had 8 estate agents, 4 coffee shops, 5 mobile phone shops and 3 nail bars. It was fax demand that was supported only through bubble level spending.

Eventually of course reality kicks in, and this time reality first kicked in the America sub-prime market. So when GB says that our problems started in America he is correct, so long as the problem is reality. People start to realize they have not actually become wealthier, but simply more indebted, they are now actually poorer. So this fax supply is unsustainable, and we can’t support so many mobile phone accessory purchases or new cars.

So now given people are adjusting to how wealthy they really are, as opposed to how wealthy they used to think they are they adjust spending to match. Supply which never should have existed, suppliers have no choice but to cut their price to match reality. When I say suppliers I mean of everything, workers must on aggregate cut their wages (or numbers), home builders must cut prices etc.

You would say that this is deflation and is the cause of the recession. Quite wrong as you can see, deflation is the symptom of the real problem, excess money supply, which lead to at first inflation then deflation.

I urge you to stop and consider this, better still order a copy of Crash Proof: http://www.amazon.co.uk/Crash-proof-Profit...3146&sr=8-1

It explains better than I ever could the inflation/deflation issue. It predicts (before it happened) the economic turmoil and credit crunch. As I have mentioned to you before, those of use following the Austrian economics school of thought saw this crash coming and why it would happen. I find it odd those other individuals such as yourself and GB who did not see any of this coming now attempt to tell us you have the solutions to a problem you never saw coming and nor would I argue understand even now.

Edited by KingBingo

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from: http://www.labourlist.org/uk-downgrade-duncan-weldon

Once again Labour Economist Duncan Weldon seeks to explain economics to an ungrateful public. Once again I don't believe Labour is in any position to lecture us.

Yes the tories will fix it by further lowing the fractional reserve requirement as they did throughout their last reign - causing untold disaster on the banking system. But it is already zero - Doh!

Having the tories in is just proping up the stinking rich more than they are already.

Labour are scum - tories are worse

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Yes the tories will fix it by further lowing the fractional reserve requirement as they did throughout their last reign -

To 12% which is three times what it is today, GB lower it to 4%. A high fractional reserve requirement might not itself be the golden bullet you think. Banks would simply bypass the requirement with close money substitutes and shadow banking practises. I cannot promise you there would be no recession under the Tories, but had interest rates been much higher, and public spending much lower the pain would be considerably less.

causing untold disaster on the banking system. But it is already zero - Doh!

The events you refer to happened after 10 years of Browns new regulatory framework, no sane individual could cite recent bank failures as a Tory failure.

Having the tories in is just proping up the stinking rich more than they are already.

It will help the rich true, but the poor proportionally more. I remind you that the Institue for fiscal studies has reported the poor are worse off today than in 1997. A kid starting school in 1997 finishing school now faces a far worse jobs market.

Labour are scum - tories are worse

The electorate will be the judge of that.

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First off – let’s not panic.

This is what Peston said. Is this the latest government message?

Getting on with the job

Doing the right thing

Hard working families

It was within the rules

Don't Panic!

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Yes the tories will fix it by further lowing the fractional reserve requirement as they did throughout their last reign - causing untold disaster on the banking system. But it is already zero - Doh!

Having the tories in is just proping up the stinking rich more than they are already.

Labour are scum - tories are worse

And you are a completely clueless bell-end!

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This is what Peston said. Is this the latest government message?

Getting on with the job

Doing the right thing

Hard working families

It was within the rules

Don't Panic!

Duncan actually used that, he told us that Peston agreed so its all right.

Just because another government sycophant agrees means nothing.

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QUOTE (Labourlist)

A tad alarmist, perhaps?

Although I agree QE exit strategies need to be given mroe thought, you need to explain why QE did not cause high inflation Japan?

Equally you cannot ignore that most major economies are now in, or every near to, deflation.

japan exported their inflation

aint gonna happen this time

the country is run by idiots - maybe because the country is full of idiots who dont understand what the government and bankers are doing

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If taxes are raised to make up for the shortfall in revenues any recovery will just be strangled at birth

Labour are public spending junkies

They rely on public spending to BUY VOTES

The only chance we have of avoiding disaster is spending cuts followed by tax cuts.

Keynesian policies only work if governments save during boom times in order to spend in recessions

If governments continue to expand and spend during boom times then they cannot afford to spend in the following recession because this just results crippling levels of public debt followed by crippling tax rises.

Seems self evident to me.

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the wally sacked from the Apprentice wants to be an investment banker.....if they snap him up, it will prove that there really is no hope.

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Can you kindly take your political views elsewhere. Jesus.

There isn't anyone posting here called Jesus.

Who the Hell are you on about?

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To 12% which is three times what it is today, GB lower it to 4%. A high fractional reserve requirement might not itself be the golden bullet you think. Banks would simply bypass the requirement with close money substitutes and shadow banking practises. I cannot promise you there would be no recession under the Tories, but had interest rates been much higher, and public spending much lower the pain would be considerably less.

The events you refer to happened after 10 years of Browns new regulatory framework, no sane individual could cite recent bank failures as a Tory failure.

It will help the rich true, but the poor proportionally more. I remind you that the Institue for fiscal studies has reported the poor are worse off today than in 1997. A kid starting school in 1997 finishing school now faces a far worse jobs market.

The electorate will be the judge of that.

fractional reserves were about 16% when the tories came into power - around 3% when they left. that is a lot of private money creation and inflation paid for by the working and middle classes. So when labour got in the banks were already in serious trouble - labour just carried on the charade for 10 more years - suprising it carried on that long.

I expect the tory plan for the economy:

"thine plebs shall be forced to dig moats for thy local Lord of the Manor. this will keep the plebs busy and in their proper place."

Labour are scum - the tories are worse.

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fractional reserves were about 16% when the tories came into power - around 3% when they left. that is a lot of private money creation and inflation paid for by the working and middle classes. So when labour got in the banks were already in serious trouble - labour just carried on the charade for 10 more years - suprising it carried on that long.

I expect the tory plan for the economy:

"thine plebs shall be forced to dig moats for thy local Lord of the Manor. this will keep the plebs busy and in their proper place."

Labour are scum - the tories are worse.

Your facts are wrong. Your assertions facile and your strategy obvious.

Your clearly a socialist of some breed, probably disaffected Labour voter gone BNP/Green. Your well aware its impossible to redeem the main branch of socialist so your tactic is to make the Tories seem worse in the hope support will leak either back to Labour by default or to BNP or some other 3rd party.

Blaming Tories and not Labour for banking collapse is absurd. Labour have been in power for 12 years, the ENTIRE regulatory framework was remade in their image. Gordon Brown even tells us he foresaw the bust coming ten years while he was telling us no more boom and bust. The banks did not collapse because of the governance of the Tories 12 years ago, but because of Browns policies. You would have to be totally detached from reality to attempt to argue otherwise.

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Your facts are wrong. Your assertions facile and your strategy obvious.

Your clearly a socialist of some breed, probably disaffected Labour voter gone BNP/Green. Your well aware its impossible to redeem the main branch of socialist so your tactic is to make the Tories seem worse in the hope support will leak either back to Labour by default or to BNP or some other 3rd party.

Blaming Tories and not Labour for banking collapse is absurd. Labour have been in power for 12 years, the ENTIRE regulatory framework was remade in their image. Gordon Brown even tells us he foresaw the bust coming ten years while he was telling us no more boom and bust. The banks did not collapse because of the governance of the Tories 12 years ago, but because of Browns policies. You would have to be totally detached from reality to attempt to argue otherwise.

Name me a well modern politican who is not motivated by personal gain rather than public service? Looking at what is happening I can see no party is better than another...vote for apathy...

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Blaming Tories and not Labour for banking collapse is absurd. Labour have been in power for 12 years, the ENTIRE regulatory framework was remade in their image. Gordon Brown even tells us he foresaw the bust coming ten years while he was telling us no more boom and bust.

You have so many false assumptions, blowing smoke in all directions, it’s hard to know where to start.

They are both to blame because they both have the same economically destructive / abusive tax policies that cause the problem and they both have absolutely no intention of changing these policies. The banking regulatory framework is almost completely irrelevant and this is why they are going to try to address this disaster by (once again) changing the banking regulatory framework.

Edited by Stars

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