Four Ways To Pull An Economy Out Of Recession

[jcpricewatcher]

An article with some sense...

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aYQ8dRWi2aGU

Four Ways to Pull an Economy Out of Recession: Matthew Lynn

Commentary by Matthew Lynn

Oct. 27 (Bloomberg) -- Germany has clawed its way out of recession. France is growing again. The U.S. is starting to expand. Even Ireland, one of the countries worst hit by the credit crunch, isn’t contracting anymore.

And yet the U.K. economy keeps on getting smaller. Last week, the government said gross domestic product dropped 0.4 percent in the third quarter. Expectations that Britain would join most of the rest of the world in staging a modest recovery turned out to be misplaced.

At this rate, even Iceland will pull out of recession before the U.K. does.

Prime Minister Gordon Brown keeps boasting he has the right policies to guide the country out of the woods. The truth is that they aren’t working and they won’t anytime soon.

Before it can recover, the U.K. needs a 180-degree change in direction. It must curb the budget deficit, support the pound, stop printing money, and cut taxes.

This is now the longest recession since records began in 1955. While the rest of the world recovers, the U.K. hasn’t. There is no sign of life in manufacturing, nor much in retail or services. The pound edges closer to parity with the euro every week: When it does, expect it to go into freefall.

Household Debt

It isn’t hard to figure out why. The U.K. economy was puffed up on a wave of borrowing and speculation. According to Dublin-based Goodbody Stockbrokers, U.K. households have debts worth 183 percent of disposable income. That is the highest of any major economy. Even the U.S. is only on 134 percent, while in comparable European countries, the ratios are far lower: In France, it is just 100 percent, and in Germany 99 percent.

The U.K. used to have a private debt problem. Now it has a private and a public debt problem. A collapse in tax revenue coupled with rising welfare bills to pay for the increase in unemployment has led to a widening gap between what the government receives and what it pays every month.

In September, it ran a 14.8 billion-pound ($24.6 billion) deficit, the biggest ever recorded for that month. The half-year shortfall was the largest since records began in 1946, when the country still had the small matter of World War II to pay for.

The U.K. is disappearing under a tidal wave of borrowing.

So far, the response from the government and the Bank of England has been straight out of the economics textbooks.

Ballooning Deficit

Interest rates have been cut, the government has maintained spending and allowed the deficit to balloon, the pound has depreciated against the euro, with the tacit support of the Bank of England and the government, and a program of “quantitative easing” has pumped cash into the system.

The economy has been stimulated, stimulated and stimulated again. It has failed to respond.

So what’s the answer? Yet more stimulus? More debt? Printing more money? Devaluing the pound by another 30 percent? There are plenty of people who would argue for all those.

And yet, as any doctor will tell you, when the patient doesn’t respond to the treatment, it’s time to change the medicine. In reality, the U.K. needs a total change of direction. It needs to do four things right away to get it back on the road to recovery.

First, stop printing money. There is no evidence to suggest the program of quantitative easing has done anything other than re-ignite another bubble. Stocks are soaring, the banks are minting money, and the property market, which never had a chance to correct, is starting to fizz again. But the U.K. didn’t need more debt-financed froth. It needed to start building new industries, and printing money isn’t helping that.

Unsustainable Debt

Two, get the budget deficit under control. At more than 12.5 percent of GDP, the U.K. is running up debts at an unsustainable rate. Everyone knows that taxes must rise to pay for it, and services are going to be cut as well. All it does is undermine confidence, and stop people spending now, because they know they will have to pay higher taxes further down the road.

Three, support the pound. A modern, advanced nation can’t devalue its way out of trouble. The idea that the U.K. is going to suddenly build lots of factories that compete with Eastern Europe and China on price is ridiculous. Britain can export plenty of things, but they are high-end, design and technology- intensive goods and services. Those products depend less on prices. There is no sign of exports picking up as a result of the pound’s collapse. All it does is destroy confidence.

Investment Destination

Four, cut taxes for business. The U.K. used to be the low- cost destination in Europe. It has squandered that position, ceding ground to Ireland, Switzerland and just about everywhere else. That is crazy. It will take massive investment to build the new industries and companies to replace those that have been hit by the credit crunch. Right now, the U.K. is raising taxes. How is that going to help? Slashing corporate-tax rates to match the 12.5 percent charged in Ireland would send a clear signal that Britain was a place to invest again.

The U.K. went into this recession in terrible structural shape. It was too reliant on banking and financial services, its competitiveness had slipped, the state was expanding in size, and it was building up too much debt. Getting out was always going to be a long, painful slog. Instead, it has been going for the quick fix of an artificial stimulus.

The trouble is, it’s not a fix and it’s not working. The only way the U.K. can save itself is with radical changes.

(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)

Click on “Send Comment” in the sidebar display to send a letter to the editor.

To contact the writer of this column: Matthew Lynn in London at matthewlynn@bloomberg.net.

Last Updated: October 26, 2009 20:00 EDT

[Harbour Lad]

That man speaks a lot of sense! I can't see the powers that be changing their tactics anytime soon though.

[DiggerUK]

The Bloomberg piece seems to have been cobbled together by a cub reporter.

It's nonsense, on inconsistency, on fantasy.

In paragraph 5 the UK needs to cut taxes, yet by the time we get to the section on "Unsustainable Debt" we need to raise taxes.

Then in the following section on "Household Debt" the debt in US, "is only 134%", whilst the household debt in France is 100% and Germany is 99%. And this is supposed to stop Obama, Merkel and Sarkozy losing sleep because the UK figure is 183%.

I think in reality I had lost it by the time I was near the end of the opening section, when this comment came off the screen and tangoed me.

"Whilst the rest of the world recovers" Yea, right.

[scepticus]

Yes, the medicine required will not win any elections. I mean, anyone who truthfully says we're f**ked and will raise interest rates etc, will definitely not win the next election!

How can raising interest rates possibly help?

[jcpricewatcher]

That man speaks a lot of sense! I can't see the powers that be changing their tactics anytime soon though.

Yes, the medicine required will not win any elections. I mean, anyone who truthfully says we're f**ked and will raise interest rates etc, will definitely not win the next election!

I think our best bet is to let the policitians peddle their lies, and then maybe, just maybe they can apply the required remedies when they sit safe knowing they have 4 years to try and fix it in

Any drastic measures will not happen until next June/July at the earliest!

[jcpricewatcher]

How can raising interest rates possibly help?

You're right, it won't right now.

Though it may have to happen in the future if we want to retain the value of the pound, especially if other major economies do the same. At that time, I guess we're really going to be in trouble if the uk economy isn't sorted by then...

[scepticus]

Though it may have to happen in the future if we want to retain the value of the pound,

The value of the pound is damaged by both low rates and contracting GDP. If raising rates when the econoym can't sustain it results in a large drop in output the pound will suffer anyway, perhaps by much more than via lower rates.

Here's the thing, if rates are raised to say 5%, who is going to be paying that interest when there is no growth in the economy?

[spivT]

The Bloomberg piece seems to have been cobbled together by a cub reporter.

It's nonsense, on inconsistency, on fantasy.

In paragraph 5 the UK needs to cut taxes, yet by the time we get to the section on "Unsustainable Debt" we need to raise taxes.

Then in the following section on "Household Debt" the debt in US, "is only 134%", whilst the household debt in France is 100% and Germany is 99%. And this is supposed to stop Obama, Merkel and Sarkozy losing sleep because the UK figure is 183%.

I think in reality I had lost it by the time I was near the end of the opening section, when this comment came off the screen and tangoed me.

"Whilst the rest of the world recovers" Yea, right.

exactly.

the only points which made any sense is the point about the reliance on QE. plus the bit about exports. The UK is never going to become a net exporter, so the devaluing currency bit i'm not sure the reasoning behind. Is it to make those companies who do export more competitive ? Or is it part of the reflate 'asset prices' policy.

the deficit is an automatic stabiliser, the govt. has had little choice in that running into double figures. i think the problem has been the actions of the central bank, which is effectively an extension of the treasury, and therefore is a govt. induced mess. The problem with the tories is they worship at the alter of monetary policy [while not understanding it] while not being sympathetic to fiscal policy.

The govt. have basically followed the world consensus in not worsening the situation via fiscal austerity, but they too worship at the alter of monetary policy. End result is they have no concept of moral hazard, anyone with any skin in the game gets a bailout. worse still they worship at the ideology of flooding the world with cheap money.

while doing a pi$$p00r job of regulating...infact they actually seem to be afraid of regulating properly, that's the kind of weak ground they are standing on.

which sounds like a recipe for disaster to me.

And U-turning on every promise that this was a new chapter. The man who promised no boom bust will always choose boom. and govt. intervention will take care of bust. then what happens.....each subsequent bubble gets bigger and requires more exceptional measures.

[Bloo Loo]

The first sentence:

Oct. 27 (Bloomberg) -- Germany has clawed its way out of recession. France is growing again. The U.S. is starting to expand. Even Ireland, one of the countries worst hit by the credit crunch, isn't contracting anymore.

Everywhere is growing...times are good everywhere...why not here.....well, here, we have honest government...and our stimulus just hasnt been as big as everywhere else.

This GROWTH...its just not there....its STIMULUS...nothing more....

Edited October 27, 2009 by Bloo Loo

[Sour Mash]

The first sentence:

Oct. 27 (Bloomberg) -- Germany has clawed its way out of recession. France is growing again. The U.S. is starting to expand. Even Ireland, one of the countries worst hit by the credit crunch, isn't contracting anymore.

Everywhere is growing...times are good everywhere...why not here.....well, here, we have honest government...and our stimulus just hasnt been as big as everywhere else.

This GROWTH...its just not there....its STIMULUS...nothing more....

Indeed - all the guff about other countries 'recovering' is a bit disingenuous but it does say a lot about the UK when even with massive stimulus and world-leading levels of money printing/debt monetisation the British economy still doesn't manage to grow.

At least other economies seem to have shown some signs of life when hit with the financial equivalent of defibrillation.

[bogbrush]

Interest rates have been cut, the government has maintained spending and allowed the deficit to balloon, the pound has depreciated against the euro, with the tacit support of the Bank of England and the government, and a program of “quantitative easing” has pumped cash into the system.

The economy has been stimulated, stimulated and stimulated again. It has failed to respond.

So what’s the answer? Yet more stimulus? More debt? Printing more money? Devaluing the pound by another 30 percent? There are plenty of people who would argue for all those.

And yet, as any doctor will tell you, when the patient doesn’t respond to the treatment, it’s time to change the medicine. In reality, the U.K. needs a total change of direction. It needs to do four things right away to get it back on the road to recovery.

Spot on. All Brown is doing, and what septic wants to see more of, is jamming adreniline into a corpse.

[scepticus]

Spot on. All Brown is doing, and what septic wants to see more of, is jamming adreniline into a corpse.

No , I want the corpse to continue to get life support until we have a sensible way forward in place. Given the general lack of understanding of what the real problems are, I expect the coma and associated life support to continue for some while. Only once the real issues are appreciated can we solve them. I see no evidence that labour or the tories or the libdems do understand. If they understand, they must feel they can't say what the problems are openly.

Though it pains me to say it, I think the BNP have a better undertstanding of the economic and social issues we face than all three of the main parties, it's just a shame that violent racism is part of the package.

[seriousz]

I want the corpse to continue to get life support

Good one.

[TwoWolves]

The OP's a rant not a plan.

[TwoWolves]

Though it pains me to say it, I think the BNP have a better undertstanding of the economic and social issues we face than all three of the main parties, it's just a shame that violent racism is part of the package.

Interesting that you would say this. I may quote you in future.

However, please can you point out the violence proposed as I don't recall seeing this anywhere?

[huw]

exactly.

the only points which made any sense is the point about the reliance on QE. plus the bit about exports. The UK is never going to become a net exporter, so the devaluing currency bit i'm not sure the reasoning behind. Is it to make those companies who do export more competitive ? Or is it part of the reflate 'asset prices' policy.

It's also to rebalance the UK's trade position -- which is not just about boosting exports, it's about cutting imports too. Allowing the pound to strengthen, and cutting taxes (assuming such could be funded) would simply suck in more imports, since the domestic economy can't satisfy its own demand for goods.

The pound will inevitably weaken (over the long term) as long as we continue funding the trade gap with borrowing. For some reason the article didn't even address this aspect of our problem. We won't sustain outselves by re-jigging internal pricing and resource-allocation within UK plc -- UK plc itself has to work toward turning a profit

Edit to add: on the "reflate asset prices" policy you can also look at it as allowing real asset-price falls without the pain of actual nominal deflation, with the effect that would have on banks' and others' balance sheets. Bad news for sterling savers of course ... but when you're looking for someone to pay the bill, it's generally best to find someone with money

Edited October 27, 2009 by huw

[scepticus]

Interesting that you would say this. I may quote you in future.

Feel free. The BNP recognises that unemployment is probably the key problem facing the british people. The solutions they propose would certainly damage the pound but I don't think thats at the top of the list for them is it?

However, please can you point out the violence proposed as I don't recall seeing this anywhere?

One doesn't have to see it proposed to know it's part of the package.

[scepticus]

It's also to rebalance the UK's trade position -- which is not just about boosting exports, it's about cutting imports too. Allowing the pound to strengthen, and cutting taxes (assuming such could be funded) would simply suck in more imports, since the domestic economy can't satisfy its own demand for goods.

The pound will inevitably weaken (over the long term) as long as we continue funding the trade gap with borrowing. For some reason the article didn't even address this aspect of our problem. We won't sustain outselves by re-jigging internal pricing and resource-allocation within UK plc -- UK plc itself has to work toward turning a profit

Edit to add: on the "reflate asset prices" policy you can also look at it as allowing real asset-price falls without the pain of actual nominal deflation, with the effect that would have on banks' and others' balance sheets. Bad news for sterling savers of course ... but when you're looking for someone to pay the bill, it's generally best to find someone with money

Thank you huw for the most intelligent post I have seen on HPC for quite some while.

[Injin]

Feel free. The BNP recognises that unemployment is probably the key problem facing the british people. The solutions they propose would certainly damage the pound but I don't think thats at the top of the list for them is it?

The key problem facing the british people is the rise of the state in all areas of life. Unemployment has followed the massive tax and inflate rentier payment seeking binge by the state backed banking sector.

One doesn't have to see it proposed to know it's part of the package.

Obviiously.

As the BNP are just another bunch of fantastist statists they'll have to use violence to get people to comply. All statists have to or they can't get what they want.

[wonderpup]

Though it pains me to say it, I think the BNP have a better undertstanding of the economic and social issues we face than all three of the main parties, it's just a shame that violent racism is part of the package.

Listening to one of them interviewed on the radio a few months back, I was struck by the fact that they seem able to articulate the core issues facing a lot of people far more directly than the main parties- perhaps because they are not encumbered by the decades of ideological baggage that seem to paralyse their opponents?

It gives them an insidious plausability, an aura of, dare I say it, integrity? The mainstream need to take seriously the fact that for many people singing the praises of globalisation or even racial tolorence are not hacking it- it's all too abstract and remote from the things they are impacted by in the real world.

If I am in danger of losing my job, or on a ten year waiting list for a council house, the last thing I need to see is Mandy on tv bleating about the virtues of a globalised economy and the virtues of immigration- even if it's true.

[bogbrush]

It's also to rebalance the UK's trade position -- which is not just about boosting exports, it's about cutting imports too. Allowing the pound to strengthen, and cutting taxes (assuming such could be funded) would simply suck in more imports, since the domestic economy can't satisfy its own demand for goods.

The pound will inevitably weaken (over the long term) as long as we continue funding the trade gap with borrowing. For some reason the article didn't even address this aspect of our problem. We won't sustain outselves by re-jigging internal pricing and resource-allocation within UK plc -- UK plc itself has to work toward turning a profit

Edit to add: on the "reflate asset prices" policy you can also look at it as allowing real asset-price falls without the pain of actual nominal deflation, with the effect that would have on banks' and others' balance sheets. Bad news for sterling savers of course ... but when you're looking for someone to pay the bill, it's generally best to find someone with money

I agree, and have been saying for ages that there is no hope of success until we can trade effectively. Sadly a weak currency is just a short term palliative and until we learn how to do this from a position of a strong currency - which we'll get once we trade effectively anyway - there's no hope.

The answer lies in low taxes and expert free enterprise businesses run by intelligent people. That is turn requires lots of people motivated to do better for themselves.

[right_freds_dead]

Four Ways To Pull An Economy Out Of Recession

1. rob savers.

2. increase taxation

3. increase workload for same pay rates

4. introduce new laws.

[porca misèria]

The Bloomberg piece seems to have been cobbled together by a cub reporter.

It's nonsense, on inconsistency, on fantasy.

In paragraph 5 the UK needs to cut taxes, yet by the time we get to the section on "Unsustainable Debt" we need to raise taxes.

You evidently didn't read the rest of it. The writer goes on to talk of specific taxes that need to be cut: namely, those that drive off investment in the productive economy (and are the flip side of the tax breaks that drew all the money - plus the leverage that bust the banks - into inflating houses).

[Game_Over]

How can raising interest rates possibly help?

Interest rates are already going up and BOE base rate is now irrelevant because the bank of England has lost control.

If you want to know what needs to be done and what is going to happen if the Conservatives get elected, this article sums it up nicely.

A country cannot get itself out of a debt crisis by running up even more debt.

And no country in history has ever succeeded in printing its way to prosperity.

[Game_Over]

The Bloomberg piece seems to have been cobbled together by a cub reporter.

It's nonsense, on inconsistency, on fantasy.

In paragraph 5 the UK needs to cut taxes, yet by the time we get to the section on "Unsustainable Debt" we need to raise taxes.

Then in the following section on "Household Debt" the debt in US, "is only 134%", whilst the household debt in France is 100% and Germany is 99%. And this is supposed to stop Obama, Merkel and Sarkozy losing sleep because the UK figure is 183%.

I think in reality I had lost it by the time I was near the end of the opening section, when this comment came off the screen and tangoed me.

"Whilst the rest of the world recovers" Yea, right.

Income tax will have to go up, but business rates will have to be cut drastically.

These two statements are not mutually incompatible.