Avoiding a Lehman 2 and a Second Great Depression.
I’m afraid a second Great Depression is a possibility.
The only doctor that can cure the problem is the G20.
The debt situation is far bigger than 1929 when many US citizens jumped on the stock bubble with credit. But many would be less than 10% unlike the many that jumped on the worldwide property bubble.
We cannot unilaterally change our interest rate without consequences affecting FOREX, capital movements and balance of trade. The US can.
The US is like the sun and the rest of us are like planets. If the US gets hot or cold the rest of us get hot or cold.
We have just witnessed a bubble busting, the tech bubble of 2001. We couldn’t possibly walk right into another, but we did.
The tech bubble burst thanks to tiny calculations showing that the emperor had no clothes and 90% of the new Internet companies disappeared overnight. It cost the US 2m jobs and Alan Greenspan took advantage of the US’s reserve currency status to reduce interest rates every 6 weeks 11 times in a row.
I’m not looking at any references. This is all from memory. I follow these things like a hawk.
Easy money put on 7m new US jobs.
When the US reduces interest rates we, and others, can follow and we did. We went down to 3.5% and it occurred to me that that was ¼ of the base rate when I bought here. Therefore, another person could get 4 times his mortgage for the same cost as his 1991 mortgage and that is what happened here and across the world.
The UK house price rose to 9.3 times average income when the norm is 3. US house prices went to 6.
We first heard the term sub-prime mortgagee in 2007. But the fact is that since Carter the NINJAs basically had to be given a mortgage and if he didn’t get one he could get legal assistance from Barack Obama, the solicitor, to get his right to a mortgage. The banks found a way of selling on sub-prime mortgages as securitized bonds (mortgages are securitized loans as the lender has his name on the title and can reposess the asset and sell it if the mortgagee fails to pay). The rip-roaring Northern Rock was giving 125% loans but it was selling them on and was outstanding in the building society market with a great business model for many years.
Securitized bonds paid as much as 18% and there was massive appetite for them. The more sub-prime the better the bond paid and house prices just went up and up and up (as bubbles do). US banks were actively seeking NINJAs and Northern Rock was reaping them in with its 125% deals. In the US you got a three-year easy start to draw you in. These bonds were triple A and when you think that interest rates in Japan were 0% for seven years you can see where the appetite came from. Foreigners held 80% of US treasuries. They were AAA and paid 4% when your bank paid 0%. Buyers of Mortgaged Backed Securities (MBS) looked no further than the 18% and the word “securitized”.
So my point is that the US, with its reserve currency status, had a licence to reduce interest rates and it paid them well, putting on 7m extra jobs and expanding GDP. The cost of Medicare and Medicaid increased 10 fold in twenty years and Bush signed the cheques. The cost of Iraq was small fry by comparison. The US debt ceiling was increased with a nod some twenty times and no one was bothered.
That is what was happening to the world economy. The sun was getting hot and we all benefited from the low interest rates.
But back home we were wanting in parliamentary debate and scrutiny. This is what parliament does. The massive Labour majority of 1997 led to a situation where it was not necessary for Labour MPs to attend debate but only to attend for the vote. Typically few or no Labour backbenchers attended a Finance Bill debate. Try keeping Ken Clarke, John Redwood or Peter Lilley away when money was on the table. But Labour MPs, who actually thought that Gordon Brown was a super economist (when he only studied modern history), never received or contributed to debate and scrutiny.
Labour (when we talk about labour we are only talking about the handful of middle class privately educated politics, philosophy and economics graduates, PPEs, who traditionally take all the top jobs) (prior to 1965 every member of a conservative cabinet had a PPE from Oxford, you need a PPE to govern) jumped on the easy money decade. They borrowed £30-£40bn every year since 2003, grabbed £15bn pa from pension funds (forcing employers to scrap their defined benefit schemes or fund the missing £15bn from profits which in turn takes £15bn from investment in UK wealth creation), drove people into property as the FTSE suffered the loss of £15bn pa, ran up an off-balance sheet debt of £300bn in PFI, allowed mortgage debt to sky-rocket to £1.2tr, allowed £400bn of home equity release and allowed banks to multiply their lending reserve by as much as 30 times deposits.
The result is that today we have personal debt of 1.06 x GDP, corporate debt of 1.26 x GDP and sovereign debt of 89% of GDP. All affordable when interest rates are low but all having to be paid back.
Debt is where you go when you cannot make ends meet. It is bringing forward future earnings. It is like earning £100 per week and taking a one-week sub and telling everyone you are on £200 per week.
GDP is measured in three ways that all give the same answer. It is basically the summation of all transactions. It peaked at £1.5tr in 2007, as did personal debt (£1.2tr of which was mortgages).
Nevermind Gordon Brown’s claim of 53 quarters of growth and the best chancellor ever. Just looking at a simple model; personal debt rising from 0 to equal to GDP between 1997 and 2007, and assuming it is linear, it takes real GDP from +3% to –7%. We were spending money and providing jobs that derived from home equity release, PFI, mortgages and personal, corporate and sovereign loans.
30,000 extra doctors, 90,000 extra nurses, 80,000 teaching assistants and 118 brand new schools in 2007. It all sounded great. A doubling in the spend on pupils pa and a tripling of NHS spend but all based on borrowing and not what we can afford but passed off as the latter.
The illusion was first broken when the Daily Mail ran the story that 90% of all the new jobs that Labour boasted about went to migrants who came here from 2004 onwards to get paid 6 times what they could get back home for the same work. The £ fell and the Zloty rose and many went home but we still have 1.35m doing work that Brits will not do because they are much better off on benefits. Then it transpires that many of the 5.2m Brits on benefits are basically unemployable and industry will always choose a migrant over a Brit because the Brit is less educated, less presentable and has a lower work ethic.
I broke the story that to halve the deficit in four years also meant to increase the national debt in five years. I put it on lots of financial sites prior to the election. Obama first used the phrase and I thought it was good news until I realised that he would be halving the deficit and not the debt. Labour picked up on it and even made it law and I knew it was a persuasive mantra.
You only had to add a few numbers together to understand that halving the deficit in four years meant doubling the debt in five. Debt was £700bn. Add £178bn, £130bn, £110bn, £89bn and a further year and you doubled the debt. I posted it on Jeff Randall’s Telegraph column and the following day was budget day. He never mentioned the budget on his Sky news show when every other channel was budget, budget, and budget. He just repeated that debt was different to deficit and the debt would double in five years. The Treasury Secretary, Steven Timms, was a guest and Jeff asked him what would happen to debt and Steve didn’t know. Jeff pointed out that it would double and that it was in the budget document that Steven had just written.
We are paying £43bn pa in debt service charges and this will grow to £63bn at the end of the coalition term. But we will miss this target, as it is so difficult to get the structural deficit down to 0 in a five year term.
Please ask yourself what you think about halving the deficit in four years? It does mean paying £120b pa in debt servicing in four years time, equal to the cost of the NHS.
The NHS costs £120b pa out of a total government spend of £700b pa of which £400b goes on benefits and pensions. Does any one really think that paying the cost of the NHS in debt service charges is a good idea?
The numbers are the key to understanding the problem and understanding a problem is the key to solving it.
Management is what we need.
Spending money on the most vulnerable in society was hard to control and ended up multiplying the poor and diverting money from the most vulnerable in society.
We introduced IB (incapacity benefit) for a target audience of 175,000 but soon there were 20 times that number claiming that they couldn’t work a day in their lives due to incapacity. Including 200,000 teenagers.
We went easy on single mums and their numbers grew by three fold in the last twenty years. Often due to LAT’s (live apparts). Those who choose to recover the lost income of the female when a child occurs by claiming to live apart and get everything funded by the state (or as I put it, by their neighbour).
We have to swallow some facts about Labour’s Britain that are not well aired by the media.
-The BBC delighted in telling us that the kids would go back to 118 brand new schools in September 2007 but omitted to tell us that even the primary school children would have to pay the PFI (generally 17% pa over 20 years) as it would load their council tax in years to come.
-600,000 LAT’s all getting all their home bills paid by the taxpayer.
-a career choice for 3.5m, less 175,000, was to graduate from JSA (job seeker’s allowance) to IB for the extra money and to save Labour the embarrassment of high unemployment figures. The most common illness being depression.
-1.35m guest workers doing the work we refuse to do.
-14,000 children excluded from school who will never learn to read and write.
-the average cost of a truant was £2m some 15 years ago. Yet we have more truancy today than ever
-15% leave school with no qualifications despite a doubling of the spend on schooling.
-public sector workers get 43% greater remuneration than private sector workers doing the same work when their 7% extra wages, lower hours, longer holidays, earlier retirement and better pensions are accounted for. The reason being that for 13 years the union (Labour) has sat in the employer’s chair.
-only 64% of working age men work, one in four children live in a home without a father (2m children), 5.2 m of working age do not work, one in four households of working age has no worker.
This list is endless.
I have not mentioned all the assaults on employers. We are beginning to realise that we quite like employers as they provide employment. That is what it says on the can. If you kill an employer you lose the tax they provide and the rest of us have to pick up the tab for benefits necessary to fund the workers that he funded before you hit him with CGL (climate change levy), NMW (national minimum wage) and increased employer NI and UBR (uniform business rates).
None of the Labour stimulus went to employers.
Going forward.
Before going forward let us please get the problem properly identified. There is no point in trying to solve the wrong problem.
Do we all agree that the above is the correct characterisation of the problem?
objectiveknowledge 