Can I make a confession, I used to believe that Gordon Brown was the supreme poker player. When he was Chancellor everybody credited him with the virtue of prudence,yet he was a reckless gambler. To give the illusion of prosperity he ruthlessly stoked up the housing price bubble, enabling people to cash in on their rising house prices by borrowing against this increase in the price of their houses. It was a gamblers boom built on the insubstantial shifting sands of cheap money. When the inevitable crash came, it was a surprise to me when it turned out that he was not a gambler but somebody who naively believed that he had achieved a new economic paradigm that is an ever growing economy without the inflationary tendencies of the past.
There is nothing to be gained anymore by going over the details of the 2009 crash, other than to say that the same economists who advised Gordon Brown on his reckless dash for growth are still there at the Treasury. Lord Oakshot the former Lib. Dem. economic spokesperson said the Treasury was staffed by free market fundamentalists. These same people seemed to have persuaded that arch Machiavellian George Osborne to adopt the same strategy as his predecessor. He is rumoured to have said that his help to buy policy will stoke up house prices. He is hoping to create the same illusionary feeling of well being as generated by Gordon Brown.
While there have been some voices of dissent, the same cheer leaders are there in the media, only too willing to cheer on the Chancellor.
However the situation is very different to the one that existed in 2008/9. Then government debt was at its lowest recorded level of just over 40% of GDP, whereas the now it is expected to rise to 97% of GDP. George Osborne will not be the beneficiary of the benign economic circumstances that existed prior to 2008. Rather than history repeating itself as farce, it will repeat itself as tragedy.
There are a number of icebergs that can easily wreck this recovery. Personal debt in the UK totals £1.4 trillion (The Guardian, 20th Nov. 2013), which in is about equal in size to the national economy. Britain has not recovered from its addiction to debt. This leaves the recovery likely to be derailed by any increase in interest rates. For such a debt addicted nation any increase in interest rates from its current low levels will be disastrous. There will be a crash in consumer spending and the economy will be forced back into recession.
Economists in the City and elsewhere believe an increase in interest rates from their current low levels is inevitable in the near future.
Britain’s trading account with the rest of the world is dangerously unbalanced. There has been no hoped for boom in the export trade to drive recovery. Instead for a fragile economy such as the UK it is the most dangerous type of recovery, a debt laden consumer boom which will only suck in more imports worsening our balance of trade. In a report made by the European Commission (The Daily Telegraph, 20th November, 2013) the U.K.’s current account deficit will rise to 4.4% by the end of 2014, the highest for any industrialised country. The only weapon in the government’s armoury to reduce the trade deficit, is to cut demand by raising interest rates. Obviously that won’t happen immediately, the Chancellor instead is closing his eyes to the problem and hoping for a miracle, which won’t happen. The only question outstanding is when the rates will rise and that is out of the hands of the Chancellor.
The IMF called Britain the world’s largest tax haven. Britain has always been the repository of the world’s hot money, that is footloose money deposited for short periods of time, wherever it can earn the best returns. London is at the centre of a web of tax havens located in former British colonies or dependencies. Part of these vast sums banked in London are recycled to pay our debts. While the world is willing to use London as its banker, the trade deficit is no problem. However it is an extremely unstable situation, as Britain borrows short and lends long, which is very profitable while it lasts, but is liable to upset if the foreign depositors develop doubts about the stability of the British economy. Such doubts might occur if interest rates rise or if Britain continues on its path to exit from the EU. With Britain borrowing short and lending long there will be difficulties in meeting the demands for repayment. Given all the billions that reside in the City of London it will require the biggest ever IMF loan to cover our debts. A loan that will only be given if Britain embarks on a Greek or Irish style austerity programme.
In the Middle Ages there was a popular topic for for painters ‘The Ship of Fools’, this ship was populated by the dignitaries of the time, bishops, popes and crowned heads of state. Today that ship would be populated by economists, treasury officials and government ministers.
CAUTION. Whenever an economist makes a prediction about future events , what they are predicting is either a possibility or a probability. I fear my predictions are a probability rather than a possibility. I hope that a fit of caution overtakes the British establishment and that they call a halt to this potentially dangerous property boom. Caution may take the form of George Carney the newly appointed Governor of the Bank of England, who has promised to take action to rein in any property boom. However he will be fighting against the ingrained instincts of the political establishment who prioritise wining an election over any other policy considerations.