Ed Balls Promises to Wreck the UK Economy by 2020

http://www.bbc.co.uk/news/uk-politics-25885606

The headline actually says “balance the books” but it might as  might just as well read Ed Balls pledges Britain will export more than it imports by 2020. Or Ed Ball pledges to stop the private sector saving by 2020. Or Ed Balls pledges to send the private sector into deficit by 2020. He’ll probably achieve none of these things but he’d be likely to crash the economy trying. He might want to look up the mess the Australian Labor Party got themselves into by promising an-impossible-to-achieve-surplus in the 2010 Australian election.

George Osborne is promising exactly the same of course.

An aircraft pilot wouldn’t be allowed at the controls if he had no idea of how to fly a plane yet finance ministers the world over have no idea how to ‘fly’ their economies. If they did they wouldn’t be producing sonic booms at one instant and stalling the engines the next. Passengers do expect ‘soft landings’ at airports. I seem to remember that analogy being used around 2007/2008 when it was obvious there was going to be a big crash.

Is there any chance of getting Ed and George to practice on an economic simulator before they cock it up for real?

PS Does anyone know if such simulators exist? I’d say they are desperately needed.

Tesco announces plans to open 40 new skips across country

Worth a reblog!

Pride's Purge

(satire?)

Tesco has announced plans to open 40 new skips across the UK in a bid to break Iceland’s lead in the relatively new starving customers market.

The supermarket retailer announced Wednesday it will be adding another 40 new skips across the country, with most of the locations in deprived areas such as the north of England, Scotland and Wales.

The launch due in the first half of 2014 will see Britain’s biggest supermarket go head-to-head with other high street retailing giants as competition in the desperately malnourished sector widens.

The ambitious new expansion project also includes plans for the retailer to expand its own brands of out-of-date food staples as well as develop a wider range of rotting and putrid fresh grocery products to be thrown away.

Several new skips will open in Liverpool, Glasgow, Cardiff, Birmingham and Manchester with expansion of existing skips at sites in other deprived…

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Why Governments Can’t Choose to Run Balanced Budgets.

It is very difficult for many people to get their heads around the idea that the Government don’t have to run balanced budgets. It is even harder for those same people to accept that it’s usually not even possible anyway. It’s so counter intuitive, with regard to their own experience, that they’ll often just flatly refuse to accept a reasoned explanation. “If the Government only spent what it first took in taxes then the budget would be balanced.” would be a typical comment. End of discussion.

Many also don’t like the idea that the money supply needs to increase with time . In their minds, once a country has been issued  with its ration of money then that’s it. It should manage on that for ever. The question of who issued the money in the first place is one which is much too difficult to think about.

The UK and US money supplies have increased almost linearly with time for the last several decades regardless of the party of government of the day. So it’s a clearly observable fact that is what happens in real economies. The private banks play the major part in increasing the money supply, but Government needs to play its part too. But it should be noted that it is only a part. Most money in the economy is the creation of the private banking sector.

A government deficit is  necessary to allow individuals and companies to save. For every borrower there has to be a lender and vice versa. Savers are lenders. That means that someone has to borrow it from them. If the non-government sector are net saving then the government sector has to be a net borrower. ie it recycles the savings via the sale of bonds which it then spends back into the economy.

The non-government sector also represents overseas sellers of goods and services. Both Britain and the US generally are happy to run their trade at a deficit to the rest of the world. That deficit is effectively the rest of the world saving £ sterling or US$ treasury securities. Money  drains out of the US and UK economies as those net imports are paid for. The money has to be replenished by the UK and US Governments selling securities into the market and spending that money back into their economies. In other words: by running  budget deficits.

So no Government can, in a free society, just choose to run a balanced budget. A balanced budget is only possible if the private sector, in aggregate, chooses  not to net save, and also chooses  not to purchase more from abroad in imports than it sells abroad as exports. Or, if like Germany, the savings of the private sector are offset by a large export surplus , currently about 7% of GDP, then it is possible, as they do, to run a balanced budget. For Germany the numbers add up and they can do this without any real problem. If the UK or USA tried to do the same thing without addressing the trade question they would very quickly crash their economies – exactly as has happened in Greece and Spain.

See also: https://petermartin2001.wordpress.com/2014/03/11/an-economic-quiz/

The Earth is not flat!

And Sovereign Governments:
Issue fiat money which  is not backed by gold or anything else.
Aren’t like a household or your family. They don’t have to balance their budgets.
Don’t tax first then spend later.
Don’t have to rely on raising taxes to cover their spending.
Don’t save their tax revenue. They destroy it.
Don’t spend money like we do. They create new money as they need it.
Aren’t users of their own currency. They are issuers.
Can’t ever run out of their own money .
Can’t borrow their own money (their own IOUs).
Can’t save up their own money for a rainy day.
Can’t have their own money or not have their own money.
Don’t sell bonds to fund deficits. (John Armour)
Debt does not burden future generations.
Do not have direct control over their budget  deficits
Deficits aren’t dependent on the willingness of the Chinese to fund them.
Deficits do not raise interest rates or reduce private savings.
(they increase them!)
Don’t ever have to worry about not being able to sell their bonds.
(or having to offer more interest than they choose to)
Aren’t living beyond their means.
(if there is any significant level of unemployment in their economies)

Commercial Banks:
Don’t lend out their reserves (Government issued Money) to borrowers.
Don’t take in money from savers (depositors) and hand it over, or lend it out,  to    their borrowers. *see also comment from John Armour below
Don’t ‘hold your money’ on deposit. They swap whatever you give them for their own IOUs.
Don’t grow money on trees but they can create it from nothing when they lend.

Central Banks (like the US Fed, or Bank of England) are not independent from government.

Furthermore:
Quantitative Easing is not inflationary and does not add to Government spending. It is an asset swap.
The National debt is not like a mortgage or a car loan which has to be repaid.
Private Savings do not create investment. They can cause Government deficits!
Base interest rates are not decided by the laws of supply and demand.
Cutting spending in the public sector does not create jobs in the private sector.
The private sector and the public sector cannot both ‘tighten their belts’ at the  same time.

And: the Sun doesn’t go around the earth!

The Government isn’t living beyond its means!

All Governments which, together with their supposedly, but aren’t, independent central banks  issue their own currency have to do just that. ie issue currency. Currency consists of the IOUs of the government, and without which modern society could not function. Governments have to issue more than they receive back in taxes. It is a logical, or arithmetical, impossibility for them to do otherwise.

It can be argued that taxes are too high, or inflation is too high, or the resources of society should not be ‘wasted’ on the poor and unemployed but that is not the same as government, or society, living beyond its means. It is a readily observable fact that society, in most western countries, is living at less than its means. Industry is working at well below full capacity and many workers are kept in a state of enforced idleness who could, otherwise, be adding to the general means.

Bill Mitchell and Randall Wray

You probably won’t see Profs Mitchell and Wray on the Mainstream Media anytime soon.  Even the BBC with its reputation for being on the liberal/left hasn’t shown any real interest in explaining how the Economy really works. Instead the BBC’s ‘expert’ economists trot out the usual line without explaining what really goes on.

The BBC have Professors like Brian Cox who jump around the world with amazing speed talking about distant Galaxies and Quasars etc but if you’re interested in Economics and are  looking for an explanation of, say, why the 2008 crash occurred you can forget it. All you’ll get is that there was a big party beforehand and when it finished everyone had a hangover and had to clear up the mess. Is that the best they can do?

So the question is if Profs Mitchell and Wray are talking nonsense, or the kind of sense that gives the game away. You can decide. There’s a series of 3-4minute talks on youtube of which these are the first 5.

UK (and Australian and NZ) Debt is a Myth!

Mike Norman explains why in terms of the US debt but the same goes for the UK too; and, the same for Australia, Japan, Turkey, India, etc. It is the same for any country which has control over, and issues, its own currency.

Note that this doesn’t include the Eurozone countries. They are not in control. They are users of the Euro not issuers of the Euro.  Countries which lose control of their currencies lose much or most of their independence. Most Eurozone countries do have debt problems and so would the UK if it had adopted the Euro. Not to mention much higher levels of unemployment.

 

Booms and Busts

The British Prime minister Gordon Brown was very foolish to proclaim, in 1997, that he’d “abolished boom and bust”. Even if he hadn’t put a foot wrong in his time as Chancellor of the Exchequer and Prime Minister, that wasn’t at all possible. A single country, especially a trading nation like the UK, cannot  isolate itself from the world economy.

There was a recession at the start of the millenium and if you look at at the sectoral graphs supplied by http://www.3spoken.co.uk/ you can see why. The UK government went strongly into surplus in the year 2000. In the USA the same thing happened under the last years of the Clinton government. The snag with government surpluses is that they also mean, arithmetically, that the private sector have go into deficit unless the trade balance is very strong , as in the case of Germany. The private sector deficit reached 6.21% in 2000 . See the orange curve on the graph.

It was the same story for the US too as you’ll have seen if you watched the video in the previous posting. See the graph shown by Stephanie Kelton at about the 10 minute mark. That recession was ‘fixed’ by drastically lowering interest rates, but that created a credit boom, especially in housing. The UK government looks to have handled things better than the Americans, in 2007 -2008, because the UK private sector wasn’t in deficit then but it was in America.

This was unsustainable and triggered off the GFC on a worldwide scale. There is a good case for saying that the GFC actually started in the late 1990’s with the much heralded surplus created by President Clinton.

Following the GFC there was an inevitable process of automatic stabilisation. Tax revenues fell, government spending rose everywhere. It had to as workers lost their jobs, stopped paying income tax and started to receive state benefits. Instead of going with the flow, politicians decided they didn’t like the idea of large budget deficits and tried to cut them . There is no virtue in doing that,  driving the economy towards recession, which forces the central bank to lower rates, and then saying – look our fiscal policy is really good because it results in lower interest rates.  This is the moronic position we hear all the time from those  who should know better.

They all fail to understand that even trying to achieve a budget surplus, or even a reduced deficit, at a time when the economy is struggling is a self-defeating goal. The reality is always that the automatic stabilisers , that is, the plunging tax revenues,  will likely see the budget in increasing deficit anyway and so there will be nothing at all positive to show for austerity measures. Contractionary fiscal policy at a time when private spending is weak overall is  irresponsible fiscal management.  Neo-liberal politicians – Conservative and Labour, Republican and Democrat alike don’t get it at all.

All the usual myths  are trotted out– the importance  of a AAA, or AA+, or whatever, credit ratings even though Government don’t intend borrowing anymore!  The need to take pressure of interest rates. Even though interest rates are whatever Governments, sorry the independent central banks,  choose them to be and are at an all time low.

The important thing is to learn from past mistakes and not repeat them. However it looks like both the UK and US governments are intent on doing just that. To prevent the next credit bubble which could generate a short term boom, and therefore the next bust, monetary policy needs to be tighter, ie interest rates need to be higher,  and fiscal policy needs to be much looser, ie lower taxes and/or higher levels of government spending,  to compensate.

How come that nearly everyone, gets it all wrong on money and the economy?

Biologists have done a pretty good job educating the public on the origins and workings of life. Physicists too on the workings of the universe. So how come that nearly everyone, gets it all wrong on money and the economy? The Economics profession has some explaining to do!

Even in America, would President Obama get a standing ovation for proclaiming that the Earth was only a few thousand years old ? Or that the creation of the Earth was literally as described in the book of Genesis? I don’t think so. But the same people who laugh at that kind of nonsense nod knowingly when he says that “the USA is  spending wildly and driving up the National debt on a platinum card from the Bank of China,  in the name of our children which they’ll have to someday pay back”.

It is the same, and maybe even worse, in the UK, Europe, and Australia! How can this have happened?

Not all economists are guilty though. There is an intrepid band in this video doing their best to put things right. Please re-tweet or repost this link (http://tinyurl.com/mjxvuoe) if you think the conventional wisdom on deficit reduction needs to be more widely challenged. You and your family’s livelihoods may depend on it!

 If you have slightly more time this video explains in more detail:
http://tinyurl.com/kqaw758

Thoughts on the Euro

The Euro is an exceptional case, a dangerous experiment of a currency divorced from individual nations themselves. The Euro is a foreign currency to all its users -except, some may say, Germany which has insisted right from the start that the Euro should be, to all intents and purposes, a continuation of the DM.

All 18 governments that use the Euro are users not issuers of the currency. They have all scrapped their sovereign currencies. They now lack the powers that a sovereign issuer has. Japan, the United States, the U.K., Canada, Australia, are sovereign issuers. Governments that adopted the Euro must borrow the currency. They must pay whatever the bond vigilantes require. They can run out of money. And they lack the policy space of a sovereign issuer.

For a member of the Eurozone, such as Italy the relationship between the government and the currency is different from the UK’s relation to the pound. Italy does not issue the currency that it uses. A country giving up control of the currency effectively gives up its own independence. Italy has becomes a State like Georgia is the sense that Georgia is a State of the USA. Except that the Eurozone doesn’t have anything like the financial infrastructure, which exists in the USA, and which is needed to equalise the imbalances between the richer and poorer parts of the currency zone and make a common currency work.

The problem with the Euro is that it cannot be created as needed. The governments must go out and get Euros from someone else. The Eurozone countries have sacrificed their ability to conduct sensible economic policy, and the effects are clearer now than ever. Spain and Greece have unemployment rates of over 25%. Youth unemployment is over 50%. Unemployment is high everywhere. France has unemployment measured in double gigures. 1 in 4 of their young people are without work. The Eurozone as a whole is an economic disaster area.

But  the Europeans can’t say they weren’t warned. In 1997 Wynne Godley wrote:

“The danger then is that the budgetary restraint to which governments are individually committed will impart a dis-inflationary bias that locks Europe as a whole into a depression it is powerless to lift.”

The UK thankfully learned from its own experience the pitfalls of tying its own currency to another currency with its ill fated attempt to shadow the DM in the 90s. That ended in the debacle of Black Wednesday. But better a debacle than a disaster. At least the pound still existed, at the time, and could be freed. Greece and Spain don’t have their Drachma or Peseta any more. Just how they can free themselves from their predicament isn’t easy to see.

If you talk to most Germans , or read articles in the German media, you’ll notice a lot of finger pointing towards, particularly, the Greeks.  Their argument is basically one of ‘Look, we manage perfectly well with the Euro. If you sorted out your deficiencies then you could manage too’!

To decide if this is realistic we need to look  at the three sector balances for any country:

Public Sector Balance +Private Sector Balance + Rest of World Balance = 0

Germany runs a balance of trade surplus with the Rest of the World. Therefore the last term is negative.
The Private Sector save, in true German style, for their pensions etc. Therefore the second term is positive.
So the Government can comfortably run a closed to balanced budget without causing a deflationary effect on their economy.

It’s a lot different for Greece or Spain.
Their balance of trade is poor. Therefore the last term is positive.
There are still many who wish to save (people do when times are bad) so the second term is positive too.
The EU requires countries to minimise their deficit. So the periphery have to try to balance their budgets. The first term has to be close to zero.

So yes,  theoretically there is a lot that could be done to gather in more taxes from the rich in Greece. That could be done, of course. But fundamentally the German argument is nothing more than saying that if all countries had a balance of payments surplus then everyone could be like Germany!  The Germans are supposed to be smart and modern. Can’t they see the lack of logic?

The dictat of the EU is effectively one of trying to suspend the rules of basic arithmetic. The more Governments of the periphery countries try to achieve the impossible the more their economies spiral downwards in search of a ‘zero solution’ to the equation.

What can be done? Forcibly stop Greeks and Spaniards saving? Import controls within the Euro region? That would work but there are obvious problems! But, the first step is to at least recognise the reason for the problem. It’s pretty obvious but I don’t see any indications that the penny has dropped. German politicians, mainstream European economists, the IMF and many others are locked into a neo-liberal mindset.

They are like old fashioned doctors who prescribe the bleeding of a patient . When that doesn’t work they prescribe more bleeding. Then more and more until the patient dies! Afterwards they all agree that bleeding was the right course of action but they probably should have prescribed it earlier and in greater amounts! Is this supposed to be the 21st century?