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London-loser

Economics - Debt Financed "growth"

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I hesitate to post this since it is rather "macro" and only indirectly linked to house prices.

However, I hope it will be interesting to some people.

I received a quarterly update from an independent fund management group I respect highly and in it the manager notes:

Since 2001, the USA and UK have moved from a 3% annual budget surplus to a 3% annual deficit (even before Hurricane Katrina in the US), injecting an annual 1.5% of GDP into the economy as new money. This, given a typical two-times multiplier, SHOULD have produced an extra 3% of annual GDP growth; but TOTAL GDP growth has been only 3% annually over that period in the UK and US, so there has been no REAL GDP growth at all.

Essentially, he is saying ALL of the apparent economic growth in the UK (and the US) of the last four years has been driven purely by government spending (paid for through debt and taxes). It has been borrowed from the future (with the need at some point to pay it back) rather than genuinely created... and when the chickens come home to roost (or at least when the government stops borrowing and spending ever more money and starts to re-balance its budget) things will get very messy.

Gloomy I know, but like I said I thnk these guys are VERY sharp.

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I received a quarterly update from an independent fund management group I respect highly and in it the manager notes:

Essentially, he is saying ALL of the apparent economic growth in the UK (and the US) of the last four years has been driven purely by government spending (paid for through debt and taxes). It has been borrowed from the future (with the need at some point to pay it back) rather than genuinely created... and when the chickens come home to roost (or at least when the government stops borrowing and spending ever more money and starts to re-balance its budget) things will get very messy.

Gloomy I know, but like I said I thnk these guys are VERY sharp.

It's directly linked to inflation in the public sector which can over x2 or x3 general inflation, the uncomfortable truth is that public sector productivity has actually fallen over recent years, and productivity gains in the private sector have been swallowed up by extra taxation.

Remember productivity not debt is the only thing that leads to real growth, the skewed CPI figures help overstate GDP by understating inflation, if we measured things property we'd discover that we haven't actually grown at all, we're just paying each other more money for everything that was occuring before without any real new output in the mix. If we took out the deficit spending then things would look really ugly!

Edited by BuyingBear

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Debt Financed "growth",

Debt has tripled since 1995. House prices have tripled since 1995. Coincidence? :rolleyes:

Edited by IPOD

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I hesitate to post this since it is rather "macro" and only indirectly linked to house prices.

However, I hope it will be interesting to some people.

I received a quarterly update from an independent fund management group I respect highly and in it the manager notes:

Essentially, he is saying ALL of the apparent economic growth in the UK (and the US) of the last four years has been driven purely by government spending (paid for through debt and taxes). It has been borrowed from the future (with the need at some point to pay it back) rather than genuinely created... and when the chickens come home to roost (or at least when the government stops borrowing and spending ever more money and starts to re-balance its budget) things will get very messy.

Gloomy I know, but like I said I thnk these guys are VERY sharp.

Thats my assumption too, just a question when reality kicks in, my guess is late 2006.

Labour will go down in history as the party that turned the UK into a 3rd world country.

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Thats my assumption too, just a question when reality kicks in, my guess is late 2006.

Labour will go down in history as the party that turned the UK into a 3rd world country.

Anyone remember The Road to Albania? Have I got that conflated with the Road to Surfdom? I seem to remember a paper from the 70's indicating that by the mid 90's the UK's economy would resemble that of Albania (Romania?) with little native industry.

All very 70's (those 'new' style of appearing jeans confirmed my suspicions)

Edited by BuyingBear

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Thats my assumption too, just a question when reality kicks in, my guess is late 2006.

Labour will go down in history as the party that turned the UK into a 3rd world country.

third world country ... again..

They do it every time..

I used to presume that their socialist ideals based on their best intentions.. were actually doomed to failure..

This time they make Maggie look like a red..

Turns out they are just morrons..

Economics are just in the details..

and if it looks to good to be true.. then chances are it is.

do we need a colloqulisim discussion...?

one where we all put in colloqulisims that fit the housing bubble.

if they all do.. would that convince us all..

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Yes, these people are right - growth is debt based - however what constitutes a bubble?

Perhaps the house price rises can be justified by increased population, and low interest rates and lastly rising rents and tax breaks - tax breaks which get greater as interest rates rise and landlords seek more rent.

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Brainclamp,

I guess we are destined to disagree forever.

However, I fail to understand how tax breaks in themselves can continuously justify higher house prices (the tax has to come from somewhere and if we ever reach the rentier society you predict then, er, the landlords are the only ones with the money to pay the very high taxes).

As for the immigration, low (nominal) interest rates and rents... we've been through this before.

I think I had a long argument with TTRTR about how rents are more determined by what tenants can pay than by what "landlords seek", which of course ties rents back to the nation's wealth (which is perhaps why when BTLs push up house prices yields collapse - because the rent they can "seek" is still tied to what the tenants earn even if they have paid over the top for the property).

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Anyone remember The Road to Albania? Have I got that conflated with the Road to Surfdom? I seem to remember a paper from the 70's indicating that by the mid 90's the UK's economy would resemble that of Albania (Romania?) with little native industry.

All very 70's (those 'new' style of appearing jeans confirmed my suspicions)

Hey I'd like to read that, my hypothesis was always that within 25years the UK economy will resemble that of Portugal, but perhaps Albania is a closer analogy.

I have argued this until I am blue in the face with family and friends that taking 25-30year punts on the UK economy via the housing market with no form of diversification is lunacy. IMO in 20years time UK house prices with, in real terms, be much much lower than they are today.

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In fairness to NuLab, it should be remembered that vastly overextended credit has been characteristic of many other countries in recent years, including the US, whose imminent reversal seems likely to trigger the incipient global deflation that many predict; would a non-Labour govt have avoided going the same route? I doubt it..

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In fairness to NuLab, it should be remembered that vastly overextended credit has been characteristic of many other countries in recent years, including the US, whose imminent reversal seems likely to trigger the incipient global deflation that many predict; would a non-Labour govt have avoided going the same route? I doubt it..

To a certain extent a fair point, although the profligate way that NL has employed an extra 1million Goverment workers and actually presided over a reduction in state sector efficiency is surely there fault. It is not their doing that private individuals are so willing to get into debt, and so greedy, but the falling competativeness of the UK ( 4th in 97, 13th now ) as a result of the tax rises to date and those to come surely are the fault largely of NL?

After all even as other countries in Europe are reforming and reducing the role of the state in the economy, NL is taking the UK rapidly in the opposite direction. If not for the borrowing, NL will be responsible for the economic ruin that follows.

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To a certain extent a fair point, although the profligate way that NL has employed an extra 1million Goverment workers and actually presided over a reduction in state sector efficiency is surely there fault. It is not their doing that private individuals are so willing to get into debt, and so greedy, but the falling competativeness of the UK ( 4th in 97, 13th now ) as a result of the tax rises to date and those to come surely are the fault largely of NL?

After all even as other countries in Europe are reforming and reducing the role of the state in the economy, NL is taking the UK rapidly in the opposite direction. If not for the borrowing, NL will be responsible for the economic ruin that follows.

The sh!t was gonna hit the fan anyway, all NL can do is monkey with the timing of it - so, yes, the splash will be bigger due to their choice to defer it, but my main point remains that the causes of crash lie out in the bigger world of capitalist forces - our collective greed has been successsfully pandered to by the govt we 'deserved'; the world WILL be re-balanced as the have-nots catch up & the haves lose a bit..

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Yes, these people are right - growth is debt based - however what constitutes a bubble?

Perhaps the house price rises can be justified by increased population, and low interest rates and lastly rising rents and tax breaks - tax breaks which get greater as interest rates rise and landlords seek more rent.

Given that most people who bought property within the last 2 years have actually acquired a loss making business, what's the relevance of 'tax breaks' ?

If the rental income doesn't cover the mortgage interest (which is already happening, and would happen more and more if interest rates rose and/or house prices continiued to rise), then there is no tax to pay in the first place.

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It's directly linked to inflation in the public sector which can over x2 or x3 general inflation, the uncomfortable truth is that public sector productivity has actually fallen over recent years, and productivity gains in the private sector have been swallowed up by extra taxation.

Remember productivity not debt is the only thing that leads to real growth, the skewed CPI figures help overstate GDP by understating inflation, if we measured things property we'd discover that we haven't actually grown at all, we're just paying each other more money for everything that was occuring before without any real new output in the mix. If we took out the deficit spending then things would look really ugly!

Very much so, inflation in the public sector is guaranteed to be higher because of the effect of the lack of competition and accountability.

When historians come to write the story of the UK's rise and fall from 1980 to 2010 this will be the main theme. It's a tragedy, we seem to be throwing genuine hard-won structural improvement away. Also uneccesary since the improved public services that the voters want could have been delivered in much more productive ways.

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Take a look at the share price performance of debt management companies, Debt Free Direct (DFD) and Accuma (ACG).

DFD up 100% in the last year and ACG up the same in the last 6 months.

Now that's what I call Debt Financed Growth ;)

By the way, ACG results 18th October.

Edited by Flash

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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