Monday, May 30, 2011

Where has all the growth gone?

No Way Out

I may have come across this strategy note via an HPC post, so apologies if you have already seen it. Real estate, finance, health, education, construction and public administration account for 58% of UK output. But none of those sectors is going to be showing any growth for the foreseeable future. George Osborne is hoping that sustained 3% growth, not spending cuts, to balance the books in 2016. But looking at it from a sectoral point of view it is impossible to see where the growth is going to come from. Much is relevant to HPC: "With real disposable incomes now falling, interest rates poised to rise and the spreads on mortgage lending far higher now than they were before the crisis, a bet on property price recovery would require courage bordering on foolhardiness."

Posted by monty032 @ 09:49 AM (2360 views)
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21 thoughts on “Where has all the growth gone?

  • Very insightful comments. Good Post, Monty!

    As confirmation, BCC has just revised “growth” downwards for UK.

    Expect more “financial repression” in the shape of low IRs.

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  • Yes this is an excellent peice. Great summary of the relationship between debt and growth from the late ’90s to the present, all supported by some killer graphs. I look forward to the Armageddon Project’s final report “Thinking the Unthinkable” which is due next month.

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  • general congreve says:

    It’s gone into my precious metals portfolio, that’s where 😉

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  • Although it contains some informative stats, personally I find it a curiously blinkered and a-historical view. The economy has been debt dependent for far longer than the last 10 years. The bank of England’s M4L series shows money owed to banks every quarter since 1963. This is the private sector debt stock, in so far as we have figures for it. What it shows is exponential growth reaching practically a vertical line by 2009. Debt grows throughout the business cycles, just the rate of growth is peturbed. In our system money IS debt, so this should hardly be surprising. What has changes is that we don’t have real economic growth (as opposed to Ponzi speculation) to back it up with. The deficit (to be distinguished from the debt stock) shot up when it did because the banks’ Ponzi scheme started to collapse, a fact curiously neglected by this financial sector publication.
    Nick

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  • Isn’t the absents of growth part of the austerity plan. If it isn’t it should be.

    Stagflation, where you go under, watching others go over.

    If you really think about it. Growth in this current senario is impossible, it would make you a HPC hypocrite to believe otherwise.

    Le Crunch.

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  • 3. general congreve

    There seems to be steady growth in two camps. The growing losers and the growing winners.

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  • stillthinking says:

    GC. Maybe I’m reading it differently but I don’t see how holding gold in a country full of people faced with impossible debts is going to be of benefit. The whole article seems to recommend a flight to cash, and gold being cash arguments aside, the deleveraging monster looks ever closer.

    Something the government should be doing is to alter the tax structure skewed towards property investment, it seems to me that nobody is going to invest in a risky taxed business when they can just sit out a property crash. I think the economy is going to shrink until this is addressed. I know this is a point that has been made endlessly, but when the malinvestements crash out, we will certainly see headline level business closures along with unemployment, which will lead to increasingly desperate policies to foster SMEs necessarily at the expense of currently over-priced assets.

    The main point made is that neither left or right policies as currently stated are going to succeed i.e. the Osbourne plan is over-optimistic in that it assumes there is enough rump left to take up the slack which means that ultimately the government will be forced to introduce dramatic policy changes or simply the UK will go bust. Jim Rogers made this point a few months ago, the UK looks bust.

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  • Perhaps the article is right in identifying this as the key difference between pre 1998 debt and post 1998 debt:

    “Government has been guilty of over-consumption, and very little has been invested in self-liquidating projects such the improvement of the country’s road, rail, power or telecommunications infrastructure.”

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  • @Greenmind
    But the broader context was that much of this national infrastructure had been privatised, to the cheers of the financial sector, plus we had run down manufacturing by then believing in something called the service economy. Is it not this financialisation of the economy that is the deeper story, alongside the evasion of tax by the rich and corporations, not governments simply ‘living beyond their means’? We need to understand why we’re being told that standards of public services we had in the 60s to the 80s are not affordable, despite continued GDP increases (doubling every 25 years or so).
    N

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  • “Between them, real estate, finance, health, education, construction and public administration are six
    of Britain’s eight largest industries, and account for more than 58% of output”

    Surely that in itself is a fatally flawed concept?

    Never mind that they account for 58% of output, at the end of the day what really counts is simply how much more, in value, a country exports than it imports.

    I can see that finance and construction can bring money in and possibly health and education to a small extent but how do you export real estate and public administration?

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  • mr g,

    That’s only if you’re worried about the trade deficit. The western economies’ most pressing problem is budget deficits, i.e. government spending more than it raises in tax. It’s important to keep people working, no matter what the work is, as long as they pay tax. If I wash my own car then I don’t pay tax; if I go to a car wash then there’s VAT on the service, income taxes on the employees, and business rates on the premises.

    Obviously that logic doesn’t apply to government workers – there’s no point paying a council twittocrat £35,000 a year just to save £15,000 in tax revenue (including their spending on VAT, the dole money they’d otherwise claim, and so on.) That’s like spending money on your credit card just to earn the air miles. There is however a case to be made for a slow transition. If we slash government spending tomorrow we would have millions of people on the dole chasing the same few jobs.

    Unemployment is the real danger. People who are out of work for a long time become unemployable. Young people who can’t find jobs start protests (like in Spain) and riots. A generation of unemployables is of no benefit to the economy at all.

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  • general congreve says:

    @5 – Think you’ve pretty much answered the question for yourself. Either the govt. make the cuts necessary to address their deficit and the debt, or the UK is bust. However, making the cuts necessary just to erase the deficit, let alone start making meaningful inroads into the national debt is all but impossible, especially with a voting public ready to vote in ‘money bags Labour’ at the first hint of their job being lost as a result of said cuts.

    In order to make the necessary cuts, the govt. would be looking at slashing at least £200Bn a year from public expenditure, that’s the same as the entire welfare budget! It can’t be done, the economy would collapse and they’d be national outrage. Therefore the path of least resistance is to print money and follow a negative real interest rate policy to amortise the debt. The end result is the same, economic collapse, but the path chosen is more insidious and keeps politicians in their jobs longer thanks to an ignorant public.

    Anyway, how does gold fit into this? If they stop money printing, put up interest rates into positive territory and make the draconian cuts necessary, then initially the pound would strengthen, but as the economy starts collapsing (because it is nothing more than a mirage built on debt) the pound would collapse with it (weak economy = weak currency, see third world for details). In the scenario all hard assets, including gold automatically rise in terms of pounds taken to buy them, because the pound is weaker. Not only that but there will be a massive investment rush into safehavens, like gold, as people seek to save their wealth from the ravages of sterling devaluation, hence pushing the price of gold higher because of the supply/demand dynamic.

    On the other hand, if they continue with the current policies (which is the most likely outcome) then the value of the pound will be eroded by inflation. This will have the same effect on the price of gold, as it takes more pounds to buy an ounce of gold as inflation eats the purchasing power of the pound and also in the form of increased demand as people seek safety from the depreciating pound in gold.

    Couple these facts with the fact that even traditional ‘safehaven’ fiat currencies, like the Swiss Franc, have their problems (mainly because of unsustainable debt levels in the public and private sectors) and the fact the world reserve currency, the US dollar, whose ‘value’ backs all other fiat currencies through Central bank reserves, is also in major trouble, then there are precious few safe places to keep you wealth without it’s value being eroded. Hence the ultra-bullish case for gold/silver.

    Obviously, commodities are also good, but a piece of paper saying you own some oil, versus actually having that asset in your hand/the nearest safety deposit box (or in your vault if you are a major financial entity) is a major factor as to why gold/silver will probably be the leading assets to come out of this crisis.

    Fact is, it’s not a case of I believe it is going to happen. It has been happening for 10 years now, it has made me a return on my gold/silver investment of 40% in two years (I haven’t accounted for the ravages of inflation in that figure – but I am still well ahead of the inflation curve) and that percentage is only going to accelerate.

    Remember this is not a typical bull market, it is actually the death of the global fiat monetary experiment and the re-monetisation of gold/silver (whether the authorities like it or not – you can’t fight reality). The main reason for gold and silver and going up is fiat currencies going down (this is the wealth protection component of these metals). Of course, the icing on the cake will be the massive speculative boom on the back of this that takes place, this is where fortunes will be made while all those in paper will be losing theirs.

    Just for the record, the average amount of global wealth held in gold throughout the 20th century until the 1980’s was about 25%, the rest being in cash, stocks, bonds etc. Today that figure is just 1.8%. Ask yourself what happens if even just 1.8% of global wealth seeks safety in gold from a collapsing fiat system and collapsing global bond market? It’s not hard to see where this is going.

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  • @Drewster

    Whilst I have to agree entirely with your comments, I genuinely believe that the UK economy’s reliance on these sectors is basically flawed, regardless of whether it’s the trade or budget deficit you’re concerned about.

    But then again, I’m biased because of my manufacturing background!

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  • @drewster
    I’ll hazard a guess that there is no credible evidence, from anywhere, that reducing government spending is an effective strategy for positive economic development.
    @mrG
    Reliance on finance is indeed misguided (compared to manufacturing) because much of its activities are geared towards trading already existing assets in, essentially, speculative asset price bubbles. This does nothing for economic wellbeing, it merely transfers wealth from one holder to another.
    N

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  • nickb,
    Canada’s spending cuts in the 1990s are generally considered to have ushered in positive growth. In general though there’s little peer-reviewed research on the topic.

    Not all government spending is positive. If you scroll down to the bottom of page 6 in the original post (“the nature of addictive borrowing”), it explains the distinction between borrowing to invest and just borrowing to spend. Building new roads or schools generates long-term growth; merely hiring more bean-counters does not.

    At the extreme, firing missiles into Libya at £1m per shot clearly doesn’t generate economic growth. Spending billions more in Afghanistan or Iraq definitely isn’t positive. The myth that war causes growth – that WWII ended the great depression – is just that, a myth. There has been a fair amount of research on that topic and all signs indicate that the global economy was growing robustly until 1939, and that in fact the war caused growth to be much lower than it otherwise would have been.

    Taking the analogy to its limit, at the end of WWII the government laid off millions of soldiers. Government spending – which had been abnormally high due to the war – was slashed. Yet the economy grew rapidly.

    I invoke Godwin’s law and hereby call this debate to a close.

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  • @Drewster

    Too early to invoke Godwin’s Law!

    Those individuals who spend their days posting on HPC whilst purporting to work and sundry other opinionated individuals, have been on holiday and will join the debate on Tuesday!

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  • You also have to take into account 12% of the economy is retail – the report forgot this according to CityAM – which means 70% of the economy will not grow. Only exports and clever design and engineering may grow – but only if it is helped by weak exhange rates and lower salaries.

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  • general congreve says:

    @10 – Goddamn you stillthinking, I spend 20 minutes of my bank holiday Monday furnishing you with a detailed reply and for what?! A response man, a response!

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  • @Drewster
    I’m some way off from invoking comparisons with Nazi Germany; at least three posts in fact.
    An unreferenced anecdote about Canada is not really convincing, I’m afraid. In Naomi Klein’s ‘shock doctrine’ a ratings agency insider is quoted as saying there was no problem with Canada’s fiscal situation; the austerity measures were ushered in by VI hyping. One can give several reasons for subsequent Canadian growth, including exploitation of the ecologically disastrous tar sands. In Europe we had the Marshall plan, and government debts that were in most European countries over 200% of GDP. Britain was alone in trying to slash its debt levels and had the lower growth rate, (putting in brackets that growth actually has ill effects). Also, note that after the storm, things have to get better, by definition.
    N

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  • mark wadsworth says:

    GC at comment 10: “In order to make the necessary cuts, the govt. would be looking at slashing at least £200Bn a year from public expenditure, that’s the same as the entire welfare budget! It can’t be done…”

    I agree, slashing the entire welfare and pensions budget of approx. £200 billion is not a serious option, but how about we reduce the amount the government ‘spends’ on private sector procurement every year by two thirds?

    It was £281 billion in 2009-10 (40% of total government spending) and I can see the point of sub contracting refuse collection (£3 billlion a year) or getting in private companies to build roads (£5 billion a year) and so on, I think £80 billion a year should more than cover it. The rest is outright theft.

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