Reality check on economy numbers

Discussion in 'The Intelligence Cell' started by BoomShackerLacker, Nov 8, 2010.

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  1. Professor Saville Kushner from the University of the West of England, together with Barry Kushner and Oliver Penrose. The presentation makes the case that there is no urgent need to reduce the budget deficit and that the budget deficit was higher post World War II when the welfare state was being constructed. It also asks the very relevant question of why is there one single narrative about the financial state of the country.

    The Coalition Government is embarking on an unprecedented round of spending cuts. “It is as tough a package of retrenchment as the IMF imposed on Greece, a country on the brink of bankruptcy and twice as tough as the famously harsh measures Canada took between 1994 and 1997. It is three times tougher than Sweden's measures between 1993 and 1995. In British terms, it is immeasurably tougher than what we did after the IMF crisis in 1976 or after the ERM crisis in 1992….No country has volunteered such austerity.” Will Hutton, The Guardian 19.06.10
    Are the cuts justified and do the assumptions behind it stand up to scrutiny?

    In the Maastricht Treaty, negotiated during Margaret Thatcher’s period as PM, the EU set a ceiling of 60% debt as a percentage of GDP. At the time, this was considered harsh. We’re not that far off of it.

    But look at the history of national debt. The debt to GDP ratio has almost always been more than 60% since records began. When we were building the welfare state the UK debt rose to 261% and stayed over 100% well into the 1960s. And this was also the time when we were rebuilding cities destroyed by bombing.

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  2. But look at the history of national debt. The debt to GDP ratio has almost always been more than 60% since records began. When we were building the welfare state the UK debt rose to 261% and stayed over 100% well into the 1960s. And this was also the time when we were rebuilding cities destroyed by bombing.

    Here’s another way of seeing it – as a graph. You can see that our current debt is pretty low. So why do we believe the story that it’s high? The UK has had much larger debts than today, but it has managed to service repayments without any need for severe austerity cuts to the public sector – in fact, while growing the public sector. Experts say that countries are at great financial risk if repayments of this debt are 12% or more of GDP. Our repayments are nowhere near this at around 4%. Anyway – more of that later.

    We could afford that level of debt after the war because we had cheap American money. But we have cheap money now – and the government owns two banks! Also, our debt is nothing like the debt that Greece has or Spain. Our debt is long-term – 13 years or more. Anyway, debts are never paid off. Think about it. You may pay off your mortgage, but the next owners of your house bring a mortgage, and the next. Your house probably always has a large debt attached to it. It’s still standing.

    Now look at other countries’ debts. Pretty random-looking, isn’t it. But look closer. Canada is the model for our public sector cuts – they went through this between 1994 and 1997. But they now have a debt ratio even larger than ours! So even if there was a debt crisis – which there isn’t – savage cuts don’t do anything to help. But look at some countries with debt levels our government is aiming at – Uruguay, Algeria, Ecuador, Yemen, Turkey, Namibia.

    So there’s no debt crisis at all. But then the government says there’s a ‘fiscal deficit crisis’ – this is not debt to GDP, but our capacity to balance our outgoings with our income – on an annual basis. So basically, the deficit is the difference between what we pay out – much of it to the public sector; and what we earn – much of it through taxation. The government says that we pay too much to the public sector – but, equally, we could say that we collect too little in taxes, especially from people who can afford to pay more. Anyway, what we pay to the public sector may have gone up every year in recent years – but a lot of it goes straight out again to the private sector. Remember – when we cut school building programmes the construction industry immediately took a massive blow. Think of privatised prisons, health services outsourcing to private medicine, school services outsourced, some police functions being privatised – all of that is money draining out of the public sector.

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  3. But we should go back to GDP as well and look at what that is. Actually, it’s a pretty flexible idea and is heavily influenced by the volume and circulation of money in the economy. It is also based on a survey of information on sales collected from:
    6,000 companies in manufacturing
    25,000 service sector firms
    5,000 retailers
    10,000 companies in the construction sector.
    Data is also collected from official sources in agriculture, energy, health and education. Still - in 2008 there were 2.1m businesses registered for VAT and PAYE, which means the GDP survey represents 2% of businesses, and this does not include small businesses with a turnover of less than £60,000. How reliable is this as a measure of economic activity? But the scary bit is this. GDP is all of this multiplied by what is called the ‘velocity of money’ – e.g. how many times a pound is spent in the economy. This is ‘V’.

    And here’s the evidence. Look how the supply of money fell in recent years. Again, the same question: is it the public sector ‘debt’ that’s too high? Or the money to pay for it too low? Why do we have only to believe in the first of those two options?

    But even so – what we gave the banks is investment – we can get it back. So why count it as debt? But that’s not the point, either. If banks are going bust means we have to give them billions of pounds, why don’t we give just a few millions to stop universities going bust – as they are about to do? Because our economy depends on banks – you might say. But doesn’t our economy depend on universities, too? Don’t you think there’s another reason?

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  4. Why scary? Because the banks virtually control both the volume and the Velocity of money. They can turn it on and off like a tap. When they wanted to increase their property assets they gave us cheap and fast money to buy second and third homes. After the crisis they want to raise the price of money (which is, after all, what banks sell) so they restrict it and cut down its Velocity. They lend less and charge massive prices for it – some mortgages are priced at 4%, 5% - even 8% above the base rate; some small businesses are offered loans and overdrafts at 15%. Vince Cable is helpless as was Peter Mandelson. This is what it means when Michael Moore say that the banks have hijacked the economy. It’s happened here.

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  5. It started to happen when Margaret Thatcher chose to ‘rebalance’ the economy – shifting it from manufacturing to financial services. So we closed productive steelworks, factories, farms and small producers - and then deregulated and cut taxes to encourage insurance, hedge funds, investment banking, loan companies and the like. We ‘demutualised’ (equivalent to privatised) building societies and allowed the private sector to buy vast tracts of state property – utilities, railways and eventually schools, hospitals and prisons. All this to create business in money. Has it paid off? What growth rates has the new financially-based economy generated.

    But how significant is public debt? The level of private sector debt on individuals and businesses, is 4-5 times larger than the national debt. But that’s thought to be sustainable. One law for the public and another for the private?
    But the issue is not how big the debt is, the issue is the capacity to pay it. Will Hutton pointed out that “uniquely, the term structure of our debt is very long – around 14 years.” and “the level of interest on the national debt in five years time as a share of national output is more than manageable .” That begs the question, why is the government wanting to pay off the national debt in 5 years?

    But why? Well – maybe because the banks who corporately control wealth – have as their number one goal the personal and corporate accumulation of wealth. Take money from the public sector, give it to banks. Isn’t that what we’ve been doing? But look at the effects - look at the Gini Coefficient. The Gini Coefficient measures household incomes. The lower the Coefficient, the lower is the gap between rich and poor; the higher it is, the more inequality there is. See it rising?

    Incidentally, doesn’t this suggest that there is capacity in the economy to raise more money through tax, as wealth and income have concentrated amongst a smaller group?

    So we either tax wealth more than we do – or we cut the public sector.

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  6. Surprise, surprise! Growth under a finance and bank led economy has flatlined around 1%, whereas manufacturing in the 20 years before that supported the UK to grow at 2-5%, albeit more erratic. As a result of this shift our economy and the size of our GDP are vulnerable to the banks supply of money in the system. But, again, there’s a scary side to this. Look at the ‘tiger economies’ – Indonesia, China, India, Malaysia, Brasil, Chile – their growth rates are between 6% and 10%. We compete for world wealth with them. This means that we are steadily getting poorer as they steadily get richer.

    The CG talks about a ‘bloated’ public sector – but it is not what it used to be. Over 20% of the sector is outsourced to private companies, representing around £124bn, and this is set to increase. If 5% of that is private sector profit, £5-6bn per year is flowing out of the state coffers. The relationship between the public and private sector is complex and we should talk about the difference between the public sector and public services.

    So – no national debt crisis – and the fiscal crisis depends on how you see things. If you think we ought to cut back public services in order to channel more money to the banks and the wealthy classes and cut tax, then you will think there is a crisis in the fiscal deficit. You may, for example, believe in Thatcher’s famous ‘trickle-down’ policy – that the more money the wealthy have the more ‘trickles down’ to the poor. But if you think that is unfair or inefficient, you will be inclined to think that the crisis is that we don’t collect enough taxes, our growth rates are too small and wealth accumulations are too concentrated. You don’t, incidentally, have to be a socialist to think that – but you do have to put a higher value in public serves than in the banks.

    Now you might go and read Red Harvest by Dashiell Hammett – he invented the detective Sam Spade and wrote The Maltese Falcon. Hammett was always worried about how easy it is for gangsters to take over society and Red Harvest is a story about gangs getting together and doing just that – and corrupting society in the process. By gangsters he meant financial gangsters – the banks. It’s happening. Crisis? A goofy idea?

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  7. Sympathetic_Reaction

    Sympathetic_Reaction LE Book Reviewer

    Bloody hell....seriously it's monday morning.....
  8. And so in summary.
    We are financially fecked.Yes or No?
  9. Not according to the Tories...
  10. According to those articles, no.
    Do I buy it, no.
  11. Auld-Yin

    Auld-Yin LE Reviewer Book Reviewer Reviews Editor

    Jeez BSL, you are going to have to find a way of reducing the size of the images you post. I know my eyes are not good but feck me these can be seen from outer space!! :)

    Anyway, this goes along with a post I made in another thread prior to the cuts being announced.

    Are the cuts necessary or have the Tories just found a way to get ideological cuts through at a time when people are liable to accept them with little question?

    Secondly, how many of these cuts are just being put in place now in order for Dave the Lad to come up with packages of benefits/tax cuts etc just prior to the next election?

    I am not a Tory supporter - neither am I a Labour supporter, far from it. However, I am a deeply suspicious voter, wondering just how far Dave n Nick are taking us in.
  12. Looks to me like a load of slanted rowlocks. Analysis of historical debt figures conveniently ignore the fact that, historically, we had colossal government expenditure on the Boer War/WW1/WW2/Korea/the Fleet/the colonies/national infrastructure projects/state industrial support/etc. These days we have record levels of debt and tax with practically nothing to show for it. E.g. In the county where I live, every single road of every classification need rebuilding or resurfacing, and yet there is no money to do this. c.£350 bn (and rising) spent per year on health & welfare is absolutely bleeding the country to death.....
  13. Biped

    Biped LE Book Reviewer

    Basically, we are paying out well over £30,000,000,000 every year to money lenders. That £30,000,000,000+ per annum is paid for in taxes. All the financial organisations that lend money are telling the UK and various other countries to get their houses in order, or the interest rates on the huge sums we've borrowed will go up - this being from well of £30 billion per annum, to potentially well over £40 billion.

    We spend as much every year putting profits in the pockets of money lenders as we do on national defence, er, actually, no we don't, since the budget round, we spend more on money lenders.

    Forget the silly 'can we afford it or not as a country' questions, or even trying to compare it to times when we had to give up our empire and lose our place in the world because we lost all our money during and after a world war - jesus, what a ******* comparison to make, have a think about whether some university boffin is qualified to wipe his own arrse, let alone make a judgement on the UK's finances when he's trying to tell us that £37,000,000,000 of money the government takes out of our pockets in taxes are well spent on paying money lenders.

    Yes, we absolutely have to reduce the national debt, and to nothing at all. Yes, we absolutely must have our government account healthily in the black. It's not doing China any harm is it? After all, it's buying or already owns half of the world, including most of the US national debt, and much of Europes.
  14. Whatever did the Romans do for us?

    Welfare State, NATO membership, Universal Healthcare, Social Reforms, Educational Reforms, Employment Reform, Inequality Reforms (ala gender/pay differentials), Expanded Middle Class... I could go on... I will: 6th highest GDP, Rebuilt Economy Post-Empire, Expanded Home Ownership, Low Unemployment, Long-term Low Interests, Longest Period of Peace in Europe, Increased Standard of Living, Highest Level of Life Expectancy in Our History, 4th Highest PPP...

    Spiritually... well, another story... poverty, justice for the bottom rungs is woeful...
  15. And you can read it all in the Daily Mail.