Category Archives: United Kingdom

Fools Gold or the Economic Follies of Phillip Hammond and like minded Conservative Politicians.

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Our current Chancellor is nicknamed spreadsheet Phil, a name intended to reflect his prowess in managing the country’s finances. His proud claim was to have achieved what most Chancellors had failed to achieve, that is a balancing of the books. He announced that the government daily revenues exceeded its spending. To use economic jargonese current revenue exceeded spending, that is tax revenues exceeded spending on hospitals etc. This was for him a cause for celebration and he was feted in the financial columns in the print media. However much like iron pyrites* all that blisters is not gold.

Chancellors of a Conservative mind have always sought to achieve the holy grail of sound money. A non existent myth much like that of the holy grail. As students we were given the example of Winston Churchill who as Chancellor who returned the pound sterling to the gold standard in 1925. He choose a rate that valued the pound at $4.84, its pre war value. He said that he wanted to look the dollar in the eye. A political move as the ravages of the First World War had diminished the relative value of the U.K. economy and its currency and had confirmed the USA as the world’s leading economy. Consequently the dollar was now the world’s strongest currency. Churchill wanted to put the pound on a par with the dollar. It was economic folly, as the expensive pound priced U.K. exports out of foreign markets. In consequence the U.K. had a trade deficit, which could only be kept within reasonable bounds by depressing the level of income activity. This cut the level of overall demand in the economy and so reduced the import bill. Much of the misery experienced by the people of the 1920s was a consequence of this policy.

Phillip Hammond just as did his predecessor, does not understand that a weak or unsound economy makes any sound money policy fallacious. Simply because such a weak economy is likely to experience sudden and unexpected downturns, which in the eyes of the financial community can render the sound pound and chancellors reputation unsound over night.

Our current Chancellor has continued with the austerity policies of his predecessor and has fulfilled his predecessors aim of ensuing that government revenues exceed its spending. What they both want is the respect of the financial community. If the financial community believe that the government is pursuing a policy of sound money, they both believe many benefits accrue. One is that this community will allow them to borrow at low rates of interest. However this is of little practical benefit when the government chooses not to invest. Currently investment in infra structure projects is the same as in Greece one of the most impoverished of all EU member states.

However the plaudits of the financial community soon become worthless in a financial crisis, as then that community is forced to confront stark economic realities, that they would prefer to ignore. At present the current benign economic climate allows the financial community to overlook the very obvious weakness in the economy. When forced to confront them they will turn on the government. Greece provides the obvious example of what happens in these circumstances.

Phillip Hammond is astute enough to realise that the U.K. is subject to regular periodic economic crisis.* When that occurs he might need to find the funds to tide the U.K. economy over that crisis. He believes that if he builds up a war chest of money by continually spending less than he receives, that money can be used to avert any run in the pound as occurred on Black Wednesday. What the Chancellor fails to understand is that this cash reserve will rapidly diminish in value as the pound falls in value during a crisis so in consequence making that reserve of cash too small to be of any real value. One of the characters says in a Stendhal novel, that what takes ten years to build can be destroyed in ten minutes of warfare. The same applies to Chancellor reputations. In any major financial crisis the government and the Chancellor rapidly lose all credibility, so all the years spent creating a reputation for soundness are rendered meaningless.

What should be the aim of any Chancellor is a sound economy not a sound money policy. While there are many fundamental weaknesses in the U.K., two stand out. The first is the persistent trade deficits. At 6% of GDP it is the highest of any developed country. This debt is financed in part from money invested in the U.K. by foreigners. As a country we are paying Germany, the USA and our many other creditors by recycling the money that there nationals invest in this country. A situation that cannot continue indefinitely. One day the financial community will decide that the emperor has no clothes.

Secondly as a nation the U.K. borrows short and lends long. The U.K. is one of the world’s leading financial centres and as a consequence many foreign nationals invest there savings in London. These moneys are usually invested in accounts with a short term notice of withdrawal and pay a relatively modest interest rate. British banks to finance these accounts lend long for which they receive a relatively high rate of interest. This arrangement works fine when the investors have confidence in the country concerned. In the event of a crisis these investors want their money back. If the amount invested is relatively small compared to the size of the country’s wealth (GDP), that country will have no problem in averting a temporary ‘country run’. When those sums are relatively large when compared to a nations GDP as in the case of the U.K., the county’s reserves of foreign currency will be too small to avert a ‘country run’. As Black Wednesday demonstrated when the country was bankrupted in one afternoon due to the activities of foreign currency speculators. Unfortunately spreadsheet Phil appears to be ignorant of this fact.

Britain’s chancellors should have been working to remedy all the flaws the financial crisis of 1992 and 2008/9 revealed. Instead there has been a papering over the cracks, with the so called sound money policy. This is not a folly practiced not by just Conservative Chancellors of the Exchequer. When Gordon Brown was Chancellor in a Labour government he also pursued a sound money policy, instead of implementing the necessary structural reforms necessary for strengthening a weak economy. Although the crisis of 2008/9 was a financial one caused by the foolish speculative activity of financial speculators, the fact that he and none of his successors failed to make any attempt to create a sound economy, meant that the economy has failed to make the expected recovery from the last crisis. The majority of the population have experienced either falling, stable or small increases in income since 2009, a mark of a failing economy.

It is a perverse rule of thumb that when the financial columnists particularly of the right wing media laud a Chancellor for the soundness of his economic policy making, usually that Chancellor is making a hash of things.

* Iron pyrites or fools gold were the staple of many stories in the cowboy magazines of the 1950s.

* He is aware that just such a crisis might occur when the negative consequences of Brexit become obvious to all.

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Why our economy constantly makes fools of our politicians

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When the great financial crash happened in 2008/9 politicians, economists and political commentators were claiming that it was a once in a life time event and as such it could not have been predicted. Therefore absolving of any of the blame for the catastrophe. However all the warning signs of an impending financial crash were there for all to see. The banks for example were increasingly disregarding sound financial practices to keep the speculative property bubble growing. A bubble that dubious financial practice could not prevent from bursting. The politicians and central bank governors, who could have averted the crisis turned a blind eye to this widespread financial malpractice and so were the bankers willing accomplices in making this catastrophe happen.

Unexpected downturns should not be a surprise as the economy is constantly changing, and there is no reason why the economy should not be characterised by periods of recession and decline, as by those of growth. When economists say that the economy is dynamic, they don’t mean that it is always growing, just that it is always changing. Change can be in either direction.

What an economy in its essentials is nothing more than the aggregate of the millions of economic transactions that take place everyday. These transactions need not be the same today as those made yesterday, so the economy is constantly changing or dynamic. Therefore it should be no surprise that the economy is subject to sudden and unexpected changes. What should be surprising is that the economy appears stable or unchanging for such long periods of time. Why then are today’s interactions so often the similar to those made yesterday? If people are behaving the same today as yesterday, their expectations about the economy must have remained unchanged. Why these behaviours remain unchanged is a question economists have never been able to answer.

One explanation of why the economy changes must be found in the expectations and beliefs about the future held by those millions of individuals that participate in the economy. I would suggest that if today seems very much like yesterday, they will make the same decisions as yesterday. If their expectations change so will there behaviours. Uncertainty about the future will cause there expectations and behaviour to change.

Britain at present provides a demonstration of the effects of widespread uncertainty on economic behaviours. Our government is committed to Brexit, that is leaving the European Union (EU). However there is confusion about how the exit will be managed and what will be the future relationship between Britain and the European Union. Whenever government ministers are asked questions on these issues, all they get in reply is a series of meaningless generalities. Individuals correctly assume that this government does not have any answers to these questions. As the date for Brexit nears it is obvious that the necessary policy decisions have been made, so generating uncertainty.

If Britain leaves the EU, it will be leaving the customs union and inevitably there will be tariffs imposed on goods moving between Britain and the EU, as Britain will no longer be within the European free trade area. Yet when the government is asked about future tariffs on goods exported and imported between Britain and the EU, all it’s says is that it is committed to frictionless trade between Britain and the EU. Frictionless or no trade barriers will only be possible if Britain remains within the customs union. Yet the government has said it will take Britain out of the free trade area that is the customs union. Either the government is lying or it has no idea what will happen the day after Brexit. I think the latter is more likely to be the case.

If business and consumer confidence declines this will have a negative impact on the economy. If people feel unsure about the future they will save more and spend less. This evidenced on the high street, where nearly all retailers are reporting a decrease in sales. Many of the large retail chains are planning to close there less profitable shops, as they can see no likelihood of trade picking up. * This will lead to thousands being made redundant. Those newly employed will spend less, so reinforcing the downward trend in the economy.

Business owners will postpone investment or not make it all, if they are uncertain about the future. Only recently shipowners and port operators asked the government what would be the post Brexit arrangements for handling the import and export of goods between Britain and Europe, all they received was the standard non reply. This has very serious consequences, as the port of Dover which handles a large part of EU trade is in urgent need of modernisation. Given the uncertainty about the future, the port operators will not undertake the necessary modernisation works, so risking future failures in its cargo handling capacities and delays in the transport of goods. Transport company owners will not invest in new lorries or ships. Instead they will manage with their existing fleet of ageing lorries and ships. It will be a policy of ‘make do and mend’ for them. All these negative decisions made by consumers and business owners will reduce the level of economic activity, so slowing economic growth and possibly pushing it into recession. The great danger is that this feeling of gloom becomes all pervasive and as a consequence the economy could tip into a recession as severe as that of 2008/9, if not worse.

What our political leaders fail to realise is the negative effects of their indecision. They are the principal cause of the feeling uncertainty that afflicts the people of this country. In consequence the people are making not the same decisions they made yesterday, it was this repetitive behaviour that gave the economy its sense of stability. They are making different decisions and are creating a new dynamic, which is pushing the economy in the direction of recession.

What I am trying to demonstrate is that events such as the financial crash of 2008/9, just don’t come out of no where, they are the consequence of foolish decisions made by people with power. Such events should not be unexpected as politicians, bankers etc. are always going to make foolish decisions. Fortunately such people are also capable of making wise and enlightened decisions, otherwise there would be no human progress.

N.B. I try realise I have over simplified the workings of the economy, but I do believe that what I have written is correct in its essentials.

* However this decline is in part due to an increase in online shopping. In consequence high street retailers are facing a perfect storms, falling sales due to falling consumer confidence and increased competition from the online retailers.

Memories of a childhood spent in the countryside of post war Britain

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When I recount stories of my childhood spent in the countryside of the late 1940s and early 1950s, people always tell me that I had an idyllic childhood. While to some extent I did, I had many wonderful childhood experiences. One of my earliest memories is being placed between the shafts on the hay cart seated directly behind the cart horse. The man that placed me there told me to take the cart back to the farm. Being a small child in charge of a cartload of hay and huge shire horse gave me a tremendous sense of excitement. I was dwarfed by both the loaded hay cart and the horse. Obviously I was not really in charge, the horse knew the way back and went on its way oblivious of the small passenger shouting commands to it. While I can paint an idyllic picture of a post war country childhood, I was even as a child aware of the darker side of country life.

One of my other early memories is of my father, a gamekeeper,  nailing a grey squirrel skin to a board. Once it dried out it was sent to the ministry for a bounty. The bounty was one shilling (5p) per squirrel skin, which in the hard times of the post war era was a substantial sum. Particularly if the gamekeeper sent in several skins at once. When I explain that my father’s wage was £3 10s (£3.50), it is obvious that the squirrel bonus was a useful addition to the family income.

There were other ways in which my father supplemented the family income. On such a low income meat was something of a luxury and all to often our meat was rabbit. What I should explain was then that rabbits existed in large numbers in the countryside. Farmers regarded then as a pest, as they consumed large numbers of their young plants growing in the open fields. Although my father’s  primary role was to breed and nurture pheasants for the winter shoots, his secondary role was as a pest controller. Quite simply this meant controlling the number of rabbits on the farm.

Now as an adult I can see how inefficient were the methods he used, which were trapping and snaring the rabbits. He studied the hedgerows and when he found a rabbit run he would put either a gin trap or a snare there. Then the following day he would go back to collect the rabbits caught in the trap or snare. Surprisingly the rabbits could often set off the gin trap and not be caught. When he did come across a trapped rabbit it would often be still alive and he had to put it out of its misery.

It was not only us who benefitted from this rabbit bounty, but also our neighbours. I can remember my father giving our elderly neighbours the Hugget’s nice plump young rabbits to make into a pie. Other workers on the farm similarly benefitted from this practice.

This brings me to the most disreputable of characters,  the ministry pest controller. This was a man who could be called in by farmers to remove the rabbits from their land. He was disreputable, because of the way he went about his trade. Once on the farm he would identify the areas most popular with the rabbits. Then he would lay traps in this area, but he was very selective in his trapping, as he never bothered with those areas where there were few rabbits. In this way he could always demonstrate to the farmer that he had killed a large number of rabbits and had largely solved the rabbit problem. However he always left enough rabbits to ensure that by the following year there were enough them to cause a nuisance, so he would need to be called back again. Countrymen such as my father despised him because he would make all the easy kills, leaving to the gamekeeper and others  to kill the more difficult to get at rabbits.

In the immediate post war years meat was rationed and then when it ceased to be rationed it remained an expensive purchase. Therefore families where looking for alternative sources of fresh meat. This man had a very profitable trade selling these rabbits to market stall holders or local butchers.

In January when the pheasant shooting season ceased  it was the rabbit drive season.  The pheasants now had been shot and could no longer be scared away by the noise of shooting. Also the vegetation had died down depriving the rabbits of cover, making them easier to shoot. This was a very popular event as it was the one time of the year that the lower social orders could gather on the land and shoot the rabbits. At other times of the year they would be regarded as poachers for and would be prosecuted. Local magistrates who were usually the local landowners dealt with poachers harshly.

These January shoots were an expression of the class divide, as only the lower orders shot rabbit. The gentry only shot game birds, shooting at rabbits was something they regarded as an affront to their dignity.

Sometimes the landowner or farmer would demand a larger cull of rabbits than usual. The only way to do this was to gas them in their burrows with cyanide gas. There was danger in this method, as the pump which pumped the gas into the burrow usually had one or two small leaks. Unfortunate gamekeepers could be killed by cyanide leaks. I can remember my father remarking on the gamekeepers whose obituaries appeared ‘The Gamekeepers Gazette’; men who had been killed by a gas leakage from the cyanide pump.

Gamekeepers regarded this as an unnecessarily cruel means of killing rabbits. I think memories of the First World War accounted for this feeling. Gamekeeper were invariably in times of war turned into infantry men. Certainly the older of my fathers work colleagues could remember the horrors of gas warfare. Also it represented a waste, all those rabbits were left in the burrows to decay; if other methods had been used they could have been used to feed a family.

While as an economist I can note is that this form of rabbit control was a labour intensive and relatively ineffective. As regardless of how many rabbits my father killed there were also a large number happily consuming the farmers crops the next year. Yet these same rabbits provided a source of food for the low paid workers of the countryside. Rabbit pie was for us a cheap meal which he had once or twice a week. Although rabbits consumed a large quantities of the farmers crops the crop yield in those days was still large. The methods used by my father and others to control rabbit numbers was sufficiently effective to prevent the rabbit problem getting out of hand. Farmers never seemed to be put out of business by the rabbit. In fact the farming industry produced a similar proportion of the nations food to that produced today by the same industry.

Farming in the 1940s and 50s was relatively low tech and as a consequence employed large numbers of workers. Such labour intensive industries are less productive per worker than capital intensive industries, so the wages of such workers were low. However such a labour intensive industry demanded a large labour force. When mechanisation became more common jobs began to disappear. As a teenager in the 1960s I can remember seeing abandoned country cottages being left to decay, as they were no longer needed to house workers.

Often when I talk to people about my childhood they say it must have been idyllic. The same belief prevailed amongst my mothers relatives who visited us from town. What they never understood was  that country life could be a hard demanding life. In summer my father would rise at dawn and work through to dusk, that is a day starting at 4.30 and ending at 9.30.They wanted the romance of the country, which they got as in there visits they never engaged with the realities of country life. Somehow they managed to be obvious to the brutal killing of wildlife, even when they were enjoying the rabbit pie for dinner.

In this essay I have chosen to emphasise the harsh realities of country life. Living what could be a hard and demanding life meant country people aged in a way that people do not do today. Ageing was noticeable once people passed the age of 40. However despite what I have written country people believed that they had a better lifestyle than those living in the urban centres. They were not oblivious to the beauty of the surroundings in which they worked. Also the nature of their work meant that they were unsupervised. They worked free from the constant intrusion of a supervisor. They were judged by the end product of their labour, the ploughed field or in my father’s case the number of pheasants seen on a shooting day. Although they might be paid as an agricultural labourer, they knew that they were highly skilled in the tasks that they undertook. They with a few exceptions took pride in their work and it was this pride that ensured that the unsupervised work they undertook was always completed.

What I believe is that the working environment on the land in this period created a group of men who were satisfied with their lives. The nature of their work made them tough resilient individuals. One writer in the 19th lamented the decline of agriculture as  means of employment, because it meant that there less of such men in the country. To this writer these agricultural workers were the backbone of the ‘thin red line’ that secured so many British military victories.

While I have no illusions about the nature of country life, I do believe the low tech lives lived by such as my father were in many ways superior to the lives lived by many today. It seems to me that the choice is living a more fulfilling life in a low tech economy or in living in a high tech economy with a higher income but with uninteresting working life.

Why economists lie

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I should start with a disclaimer, I am an economist who likes to think that I am generally honest. What I am protesting against is the tendency of many practitioners of my profession to lie. They lie when faced with problems to which they have no solution, by claiming that to have policy solutions that in practice are unrealistic or untrue. 

Rousseau in his writings used the term amour-propre, words which have many synonyms in English and they include pride, self respect and vain glory. It is the last which is a fault that afflicts so many economists. They are the self acknowledged experts on the economy and are never willing admit that they are stuck for an answer. When a problem occurs they will look for an answer from their memory bank and choose one which seems to be offer the best solution. It is not an original solution, but one borrowed from the collective memory bank of all economists. What matters to the economist is that their answer will be judged as correct by their fellow economists not that it is the correct solution to the problem posed by the economy.  Given the complexity of the economy, they can always blame the failure of their policy recommendations on unexpected events.  The familiar its somebody else’s fault excuse is always available as a defence for a failed  policy. In this case its either the fault of the economy when they claim that the fault lies with  unexpected changes in internal or international economy, or its the politicians who fail to understand the policy prescriptions and implement them wrongly. When the great reforms of the 1980s were imposed on the British economy which led to a decimation of the British manufacturing sector; economists introduced another lie, which was that the pain being endured now would lead to a better future in which a revitalised economy which would work to the benefit of all. A future which never materialised.

What I am leading is a campaign for economists to say I don’t know. A willingness to look  at each situation afresh and use the skills of economic analysis to come up with original and new solutions to economic problems. Unfortunately the majority of economists believe that the economic toolset was largely completed in the time Alfred Marshall, whose most influential book the ‘Principles of Economics’ was published in 1890. All that is now required is a tinkering with the toolset left by Marshall to develop the economic policies needed for today. (Marshall systemised the study of market economics, developing a series of tools of economic analysis which are widely used today.)

The great change in the practice of economic policy making in the 1980s was the introduction of monetary economics associated with the American economist Milton Friedman. What was not realised was that he was merely adapting the quantity theory of money which was explained in a  book published  by Irving Fisher in 1911 to the world of the 1980s? Plagiarism in economics is not frowned on but worshipped, so long as the correct work in plagiarised.

Perhaps self censorship might be a more accurate term to describe the practice to which I am objecting. However every economist when studying the subject at university will either be taught about the flaws in the dominant model of economic analysis or would have come across them in one of the texts that they have studied. Yet once they leave university to practice their profession, they suppress their knowledge of the weaknesses or flaws of the favoured method of economic analysis. The act of forgetting probably becomes second nature to the practising economist. Deliberately ignoring the evidence that might suggest that their suggested policy remedies are flawed is an act of dishonesty. Lord Oakshott the former Liberal Democrat Treasury Minister once said that the British Treasury is populated by free market fundamentalists. What he was saying was that  Treasury economists were excluding from their economic policy making any evidence or thinking that was contrary to the free market model of economic analysis. This suggests that economic policy making by the government will be constantly subject to error, because of the wilful deception practised by Treasury economists.

Warning signs

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Sometimes as an economist you notice things that others don’t. Today I visited the centre of the city in which I live and for the second time this week, I noticed that the cafes and shops were relatively empty. One reason is the belt tightening that invariably happens after the Christmas shopping spree. The other reason is more ominous and that is that the uncertainty generated by fears about Brexit which are causing people to be more careful with there spending. In times of uncertainty it is sensible to be cautious about spending, it makes sense to increase one’s savings to protect against future uncertainties. All the extra spending on credit cards that was recorded last year will come to a halt once people start to fea the future. They won’t want to saddle themselves with extra debts.

While the evidence I present is only anecdotal this is how economic downturns start. Consumers become more and more cautious with their spending  because they fear for the future. This action becomes something of a self fulfilling prophecy as failing consumer spending means that firms cut back on there spending on staff and purchases of stock. Gradually at first but then more rapidly people become poorer, because of falling spending by businesses and the down turn in economic activity can  within a short time develop into a recession.

These downturns occur because of flaws in the economic system,  as happened with the financial crisis of 2008/9 or because of misguided economic policy making. The second is happening now. There should be a golden rule in politics, that governments never take action that might be detrimental to economic welfare except in the most extreme circumstances. The problem about such actions is that there is no way of foretelling whether the action taken by the government will lead to an uncontrollable downturn in economic activity or whether it will result in a more modest adjustment.

There is a terrible warning that all politicians regularly fail to heed. When the Prime Minister Jim Callaghan returned to the country in 1976 from an overseas trip, there was a crisis developing in the financial markets. He made a foolish remark in response to a journalists question about the crisis, he said ‘what crisis?’ This gave the impression that the government was not in control and the financial crisis rapidly got out of hand.

Yesterday the Prime Minister Theresa May had her Jim Callaghan moment. She stated that Britain will be leaving the single market, giving the impression to informed observers that she had little grasp of economics. The EU is the largest market for British exports and announcing that she intends to make it more difficult for British firms to access that market, is an act of supreme folly. Today two banks announced in response to her speech that they are moving some banking operations to Europe. There will be many more such announcements in the following weeks and months. This will generate fear and uncertainty amongst British consumers, leading to large cuts in there spending, as they save more and more for the expected rainy day. The consequence is that it likely that later this year  that the economy will tip into recession.

Unfortunately the folly of her decision is compounded by the school boy howlers  made by her ministers. Today the Foreign Secretary compared the attitude of the French President to Brexit to that of a Second World War prison camp guard. Such remarks will merely serve to convince the financial markets that this government has little understanding of the economic reality and has but a very weak grasp  of the essentials of policy making.

As I said in the second paragraph my evidence is anecdotal but the incompetence of this government makes me fear for the future.

A REPLY FROM AN ECONOMIST TO THE ANTI-INTELLECTUALISM OF DONALD TRUMP AND MICHAEL GOVE

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(There were many errors in my first draft, it was written in anger and published without  a thorough checking for error.)

Contention

Economists don’t always have the right answers, they can be wrong at times, but their answers to problems are better than those of ill-informed politicians and journalists. There are plenty of never-never land politicians selling an unreal picture of the world to the electorate. There are many fewer such economists because there work would have undergone informed scrutiny by their peers and much that is dubious would have been discarded. The overwhelming majority of economists believe that Brexit will inflict significant economic damage on the economy, while a significant number of politicians and most journalist believe the reverse (who are lacking any evidence apart from their misguided optimism in the rightness of their beliefs).

Confession of interest

I am one of those experts that Michael Gove spoke abouto he said people are fed up with and who they should be ignored by the people  when making decisions about the future, such as how to vote in the EU referendum. I am one of those people who following Aristotle’s advice  have dedicated the best part of their life to study. What Michael Gove is trashing is the value of learning, I cannot accept that my years of study have been wasted. How can such small minded person go against centuries of a tradition that values learning? He is a graduate of an elite university but he seems to dismiss the value of what he learnt there. I can say to Michael Gove that when teaching in a tough secondary school I never demeaned myself to pretending that I lacked learning. What young people can identify is the phoney, the teacher that pretends to be like them. Michael Gove’s attempt to pretend to be one of the people is as phoney as my colleagues who adopted a fake working class accents and mimicked the words and manners the young in an attempt to win their favour. Behaviour as phoney as that of the Dad who to tries to impress by claiming a knowledge of and love for garage music and rap.

The dangers of contempt for learning

If Michael Gove’s lead is followed as experts such as myself as regarded as just another self interested individual with an agenda to promote, a lot is lost. Economists such as myself are in possession of or can access a body of knowledge about the economy not available to others. Acquiring and understanding the store of economic knowledge takes years and to be honest a life time of study, because the subject is always changing and developing. What Michael Gove is saying is that my learning is of no consequence. I cannot accept that the anti intellectualism of todays politicians will stand future scrutiny. Without wishing to be too unkind Michael is an insignificant figure compared to Adam Smith, Ricardo, Keynes, Hayek, Polanyi and Robinson. With time his anti intellectual populism will be a but a minor blip in the progress of humankind. In studying economics I developed a critical faculty which makes it possible to make reasoned judgements about government policy, rather than relying up prejudice and common sense on which to found my judgements. Paraphrasing a much greater thinker than myself who used this phrase in the context of religious belief, those who don’t believe in God are likely to believe in anything; similarly those who don’t believe the truths of  economics are likely to believe any nonsense about the economy.

One such nonsense is the current belief that there is a real knowledge of the world, which is only possessed by men of business, who deal every day with the complexities of the real world, as opposed to the unreal world of academia. One such person held to possess this knowledge is Donald Trump, the next President of the United States. I would question the breadth of his knowledge, he is a real estate developer. Yet one who has failed in several business ventures and has only been saved from bankruptcy by the protection afforded by US law to such people. If you wished to buy and develop a property you would go to a real estate agent or property developer, but one with a better track record than Donald Trump. Apart from his deal making in which he has a very mixed record I cannot see how Donald Trump has a better understanding of the world than me. As a teacher I would be criticised for living and working in an unreal world, which is a silly phrase as the school is as real as the boardroom. One other silly untruth is that teachers lack the toughness to cope with the real world, all I can say is that these people who say that have little understanding of the difficulties of teaching a group of adolescents. One of the most telling examples of the falsity of this stance is a video on Youtube, where Michael Gove is addressing a group of teenagers. They show complete disdain for his lecture and indulge in all the behaviours of disaffection typical of teenagers. What I am saying is that my experience as  teacher of economics is as valid as Donald Trumps as a property developer, although if I’m honest I think mine is the superior knowledge of the world.

When politicians deny the truths of learning they became prey to the teaching of messianic and charismatic charlatans such  as the  novelist – Ayn Rand author of ‘Atlas Shrugged,’ whose followers include Sajid Javid and all politicians of the Neo-Liberal persuasion. Her book paean to billionaires who she believes are the heroic figures that make our civilisation great. The central figure of the book John Galt a man of independent means who is puzzled as to why billionaires keep disappearing from society. He is taken to a mysterious canyon remote from Washington, where the billionaires are hiding, seeking sanctuary from a rapacious Washington. These  billionaires are fed up with being oppressed by a government that so taxes and regulates them, that they are denied their role as the creative driving force of society, a rapacious government has reduced them to impotence. It does not realise that without their enterprise, society would fall into stasis and decline. When these billionaires go on strike society collapses and thousands of the useless poor die as a poor and weak government is forced to withdraw the income on which they depend for their survival. Eventually a discredited government is forced to welcome back the billionaires on their terms and these billionaires put society back on its feet and society develops and prospers. Many politicians of the new right are followers of Ayn Rand and her influence can be seen on government welfare policy. The Ayn Rands in government believe in a policy of brutalising the poor to the extent that they are forced to work at any price for anybody. It’s a cure for the wasteful culture of dependence, to such as ‘Sajid Javid’ homeless and misery is a just punishment for the useless poor. When governments ignore the truth tellers they are prey to the charlatans and other paddlers of fantasies and falsehoods.

Economists do possess a knowledge of the economy which is invaluable  for the effective running of government. One such economist is Anne Pettifor who is constantly ignored by governments because she tells them truths they don’t want to hear. Economists such as her can be compared to the Old Testament prophets who were constantly ignored by the rulers of Israel.

Anne Pettifor -is the author of ‘The First World Debt Crisis’. While most politicians are aware that economic growth is driven by consumer spending and debt, such as the popular car leasing system, they have little awareness of the dangers of this policy. The growth of consumer debt is so large that it has created a credit or debt mountain of unsustainable proportions – UK bank debt in 2009 – 586% of GDP it falling to around 400% of GDP in 2009 (Dominic Raab), but has since risen. Even Germany has similar problems the collective debts of its banks are over 300% of GDP (much of the money lent to Greece was recycled back to the German banks who had made too many ill-judged loans to the Greeks, so as to prevent them experiencing a liquidity crisis).The UK vies continually with Japan for the title of most indebted country of the industrial developed world.

David Cameron was right that Britain was maxed out on its credit card, he was just wrong about which credit card.

Rather than tackle the problem the government spends billions on quantitative easing to provide the cash to keep the banks afloat. At the height of the financial crisis in 2008/9 Gordon Brown was willing to spend a sum equivalent to the almost the total national income to keep the banks afloat. The official policy is to kick the problem can down the road leaving it to a future government to tackle the problem.

Why do governments fail to tackle this problem? They fear the electorate reaction, if they brought the credit boom to an end. Loans of various kinds account for a significant proportion of people’s spending and to reduce lending would in effect to reduce people’s incomes in that they would be unable to spend as much as previously on various consumer goods. What they are most scared of is cutting spending in the housing market which would lead to a fall in house prices. The belief amongst politicians is that falling house prices equal lost election.

The best informed of politicians know that the risk is that the whole financial house of cards will come tumbling down in a crash as bad as that of 1929, yet they prefer the risk of a future catastrophic crash to taking action now.

The right and wrong of economics

Although I can as an economist make more accurate predictions about the future than any politician there are limitations to the usefulness of my predictions. I cannot say exactly when a predicted event will occur or how great will be its impact on the economy. The economy is a dynamic social institution that is constantly changing and changes can maximise or minimise the impact of the predicted event.

Last year The Observer published one of my letters in I which predicted an economic downturn in 2017. I made my prediction on the basis that all free and largely unregulated markets are liable to exuberant booms that always end in a crash. Past history shows that such crashes occur every nine years, that is 1990, 1999 and 2008/9.

This contention is supported by the economist Hayek. What he stated was that there is a period when the benefits of innovation are exhausted and economic growth falls and the economy falls into recession. This has happened to the UK as the benefits from the mass production of consumer goods begin to tail off. Since the mid 1980s there has been too many car manufacturers in Europe, making cars that were needed. The consequence was retrenchment in the car industry and in Britain the disappearance of the native car industry. When industry fails to deliver alternative sources of income need to be found. In the UK, USA and Western Europe that has been the development of the speculative industry, increases in income no longer come from employment but from the increase in the value of assets, such as houses. A speculative economy is particular prone to booms and busts, as there become periods when it is generally believed that prices have peaked and they can only go down. These downs are quite spectacular and cause widespread distress.

However although I can predict with confidence that a downturn will occur, there are a number of proviso’s that I must make about prediction:

There is no iron law that states a downturn will occur every nine years, but evidence from the past shows that this is likely, it is events that may change the date of the crash.

Brexit – if Teresa May calls an early  election the uncertainty generated by that can bring the date of the crash forward to whatever she makes that announcement.

Events may occur that halt the downward trend – if the government panics at the thought of there being held responsible for the negative effects of Brexit and states that it will do whatever deal is is necessary to ensure that Britain remains in the single market, this could result in a boost to business confidence with businesses now rushing to make the investments that they had postponed due to the uncertainties of Brexit. This rush to investment will lead to a temporary boost to the economy that will delay the economic downturn. However it will only postpone the crash.

Conclusion – Economists are not infallible but they are closer to infallibility that most politicians. What economists possess that politicians do not is an understanding of the workings of the economy.

Xenophobic and racist behaviours as understood by an economist

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Neo-Liberalism or the practice of free market economics is claimed to be responsible for the decline in living standards, but it is not usually blamed for the decline in public behaviours. In the UK ever since the vote to leave the EU there has been an increase in racism and xenophobic behaviours. (A policy decision desired by NeoLiberal and Libertarian politicians.) What I want to suggest is that the adoption by Western European governments of Neoliberalism and in particular by Britain, has been one of the main contributory factors in the increase in racism and xenophobic behaviours.

One of the great economists but who is rarely read today gives an insight into the processes by which the practice of Neo-Liberalism gives rise to anti social behaviours. This economist is Micheal Polanyi and any reader of his book ‘The Great Transformation’ on reading the first chapter would think that he is describing today’s society, whereas in fact he is describing that of the 1930s. The great insight that he reveals in this book is that the unregulated free market is destructive of social order. He demonstrates that this was a fact known to rulers in the past who insisted on regulating the market to minimise its most destructive effects. Although he does not quote this particular example, the biblical story of Joseph shows that the Pharaohs of Ancient Egypt were all to well aware of the destructive effects of an unregulated market. Joseph interprets Pharaoh’s dream to as a warning that there will be seven years of plenty followed by seven years of famine. Then Joseph and the Pharaoh store grain during the good seven years to distribute to the people in the years of need. The Pharaoh’s understood the importance of controlling the market, they knew that food shortages and their exploitation by the merchants who took the exploit the situation to raise prices for the scarce  supplies of food could lead to food riots and possible threats to the rule. A careful reading of folk tales shows that good rulers regularly opened the warehouses of the greedy merchants to the hungry people.

Evidence seems to suggest that the great Greek dynasties of the era of the Trojan wars and Agamenon, were overthrown by internal revolt. One possible cause is the shortage of food caused by adverse climatic changes, a problem worsened a self indulgent aristocratic elite failing alleviate the hunger of the poor and preferring to spend the wealth of their society on conspicuous consumption by creating ever grander palaces.

When reading Polanyi’s book I noted uncanny resemblances between the England of today and that of the 18th century. He writes about the plight of the workers in the cottage based textile industry, as they lost work and income to the large cotton manufacturers who employed the latest technology in weaving and spinning. These people were reduced to a life of misery, having to rely upon handouts from the parish  to feed their families. Their contemporary counterparts are those workers in the so called ‘gig economy’. The development of the mobile phone has made it possible employers no longer to have workers on site or in situ, as its possible to call them in for work when they are needed. No longer does business have to keep a large staff team on site to deal with those busy periods, instead they can be called in when needed.

These workers are also disadvantaged by the lack of employment protection legislation, as ever since the Neo-Liberal revolution of the 1980s, successive governments whether of the centre right or left have seen as it as their task to remove as many as possible of the labour protection measures. These measures it was believed hampered the efficient operation of the labour market. What this legislation did was to leave the worker increasing defenceless against the actions of the exploitative employer. The gig economy is made possible by two things, the mobile phone and the lack of legislation to protect the rights of the worker.

Not surprisingly this was paralleled in the 18th century when legislation removed workers access to common land. Prior to the 18th century workers in the countryside had access to the common land on which they could keep cattle and raise crops. This meant that in time of hardship they could rely upon this as a source of income and food for their family. These people were often the workers in the cottage based textile industry, who when trade was bad could rely on the produce from the common land to keep the family fed. A series of enclosure acts deprived rural residents of their rights to common land. When the collapse of the home based textile industry happened these people were deprived of two sources of income and reduced to abject misery. (These hungry and desperate people were the workforce of the new textile mills willing to endure the most dreadful of working conditions as the alternative was going without.).

When society falls to deliver people look to alternatives. In the 18th century  it was to France where the  revolution had otherthrown the old exploitative landlord class and promised a fairer society. In England many revolutionary societies were formed and the aristocratic government was in constant fear of revolution. They were only able to suppress the revolutionary instincts of the poor through repression and through a system of regional handouts (the Speenhamland system) which prevented workers being reduced to that state of despair that would make them resort to dangerous measures. The Speenlandham system was not unlike our current tax credits system.

The depressed poor not only turned to thoughts of revolution, but also to xenophobia. There is the story of the monkey that was cast ashore from a shipwreck in Yorkshire. This unfortunate monkey was then hung as a French spy. Whatever the truth of this story xenophobia thrives when people are in need and society appears to be failing them. They look for scapegoats to blame for their misery, then it was the French, now its immigrants. When resources such as housing are scarce, its easy to see it as being caused by the foreigner who has taken the house that by rights should have gone to a native born citizen. Politicians have used this xenophobia as a means of winning popular support. They have constantly used the EU as a convenient scapegoat to blame for the nations economic and social ills, ills which were often of there making and so it was no surprise that when people were given a choice they would opt to leave the EU.

Now there is a situation in which a government refuses to acknowledge its culpability for the increasingly dire economic circumstances, and instead relies on scapegoating the other (the foreigner) to distract from its failures of governance. It has boxed itself into a corner and now the only policy measure that it can offer to alleviate the misery of the people is the limiting of  immigration.They promise that no longer will the European immigrant take the council house or job that should have gone to the native born Englishman or woman. What they fail to realise or the brightest and most cynical politicians fail acknowledge, is that their anti immigrant policies will make the situation much worse for the so called ‘just managing class’. Even when the negative effects of abandoning the EU become apparent the politicians will be unable to acknowledge there policies are failing. What instead they will do is to to adopt more and more extremist language to disguise their policy failings. Economic decline will be blamed on those opponents of Brexit who have talked down the economy. Already one Conservative party councillor has suggested that the people and politicians that oppose Brexit should be charged with treason. The only hope for a xenophobic government is to turn up the volume of abuse directed at their opponents in the expectation of silencing them. This of course is the policy pursued by the current government, when any reasoned criticism of Brexit is answered with abuse. The opponents are the ‘Bremoaners’ or whatever catchy phrase of abuse that they can conjure up.

When the government’s sole claim to legitimacy is that it embodies the xenophobic instincts of the people, it language will be that which both implicitly and explicitly gives sanction to racist and xenophobic behaviours. The government will not act effectively to discourage such behaviours or to  condemn them without fear of alienating its most xenophobic supporters. Next year when the negotiations start in earnest and the impact of the uncertainty accompanying those negotiations will cause increasing unemployment, increasing inflation and falling house prices, what can be expected is an increase in the abuse directed at those who dare to suggest that these are a consequence of Brexit. Incidences of racism will increase as the government’s abusive language towards its opponents will seem to give a green light to their extreme behaviours. A government that suggests the actions of its opponents is bordering on the treason will be seen to sanction violent racist actions, as they can be described helping the government cleanse the nation of that element that is responsible for the ills that beset society.

Why economists are so miserable and why you should never trust a happy economist

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I can explain the title through referring to a story from the Westminster political scene, as it demonstrates how politicians fail to understand the role of the economist. Although Mark Carney as  governor of ‘The Bank England’ and is not strictly speaking an economist, only a person thoroughly grounded in economic theory and practice could fulfil this role. He was called to a meeting of the Select Committee on the Treasury to explain why he gave such a negative account of the impact of  Brexit. Why the assembled politicians wanted to know did he give such a negative account of its impact on the economy, as all knew that in fact the economy was as buoyant after the vote to leave the EU as before it. He answered that he remained serene about his prediction of a dire economic future if Brexit occurred.

There are two answers to the question posed by the angry politicians.The first is that he by being aware of the possible bad effects of Brexit, had reacted immediately after the vote to offset the negative impact through cutting interest rates and pumping more money into the economy by the process of quantitive easing. These measures restored business confidence and enabled the economy to recover from the immediate post Brexit blues. However this was a short term measure, which had a short term effect. The truth or otherwise of his predictions will be known in 2017 when negotiations to leave the EU begin in earnest. The uncertainty engendered by the negotiations to leave the EU will have a negative impact on business confidence and investment. Businesses will postpone investment decisions or as with the major car manufacturers look to develop their new models in those parts of Europe that are unlikely to be subject to the import tariffs that British exporters will have to pay. There seems to be a consensus among economists that incomes will fall in the long term by 4% or more as a consequence of Brexit, which if these angry politicians had listened to Mark Carney’s speech would have realised that this is what he was saying.

However what these politicians fail to demonstrate is a fundamental misunderstanding of the role of economists. Economics is with some justification known as the miserable or the gloomy science. The role of economists is to look for the worst in possible outcomes that could develop as a consequence of current policy decisions or current changes in the economy and to warn against them. Foreknowledge of the bad to come enables politicians to take action to prevent the worst of all possible futures from happening. Happy economists fail in this task as they never foresee future economic storms and squalls. The Governor of ‘The Bank of England’ at present with his advisors is considering what possible future measures he will need to enact in 2017 to prevent the worst effects of a loss of the uncertainty generated by the Brexit negotiations. If like the many politicians advocating Brexit he took an optimistic view of the future, he would lie woefully unprepared for the expected downturn in the economy in 2017. What politicians fail to understand is that economists and Bank of England governors are doing the job for which they are paid when they a being economic miserablists or Jeremiahs.

When economists are happy they are not fulfilling their role. Before the crash of 2008 the vast majority of economists were upbeat about the economy. They believed that the world economy had entered a new paradigm in which the old caveats about credit bubbles and an overheated economy no longer applied. The over whelming majority of economists believed that the world economy had entered a new phase in which it would continue on an ever upward trajectory, in which the minor mishaps that occurred could be remedied by a few simple changes in monetary policy, such as varying the interest rate. Those few economists that warned that the world economy was heading for a financial disaster were ignored. After all who is interested in the pessimistic views of a miserable neighbour. Politicians just like the rest of the population are not interested in unpalatable truths, they just wanted the party to continue.

When the Queen asked the economists why they had failed to predict the crash of 2008, she was asking the wrong question. What she should have asked is why they had abandoned their role of that of social Jeremiah for that of cheer leader. Politicians could deny their responsibility for their irresponsible policies that led to the crash of 2008, by claiming that economists also believed that that they were pursuing the right policy. The financial crash could be claimed to be a once in a life time unforeseeable event, such as the Tsunami and therefore politicians should share no blame for the crisis which in reality was a large part of their making.

Economists can be compared to the Old Testament prophets who warned the Israelites of the dire consequences of ignoring God’s will. Similarly economists should be warning of the dire consequences that will follow from ignoring economic realities. Although revering their prophets the Israelites could react badly when their were told things that they would rather not know. Isaiah is reputed  to have been sawn in two while hiding in a tree, after having angered King Manasseh. The Israelites had time for regret after the disasters following on from the invasions by the Assyrians. Economists will always be tempted to follow the party line or say what pleases those in power and the consequence is a disaster such as that of 2008, when economists should as one have been urging the government to take action to end the dangerous explosion of credit, they were encouraging the government to continue to inflate the asset bubble. A good economist is one that is willing to court unpopularity, as did the Old Testament prophets who sought no one’s favour when speaking God’s truth.

I as am economist am very wary of speaking the truth about future events to my friends, as to do so is one way of losing ones friends.

Ignorance is the New Black (or the stupid things journalists say about the economy)

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While listening this morning to an early morning radio programme I was struck by one of the comments made by the broadcaster. This comment was made during a discussion of the economic consequences of Brexit. She said  will it matter if the UK falls from being the seventh largest  to the eight largest economy in the world? This is an example of the typical remarks made by a member of the economically illiterate media.

Nobody with any understanding of economics wants a modest downturn in economic activity, because that modest downturn can easily turn into a catastrophic downturn. What journalists and politicians never seem to understand is that the economy is inherently unstable and decisions should never made that threaten the stability of the economic order. There are times when the economy resembles a house of cards and the slightest puff of the economic wind can send it tumbling down. Yet there are other times when the economy seems to be as a house built out of granite and is impervious to any economic storm. The problem is that it is difficult to tell before an event whether the current economy is structured like a house of cards or a house of granite. Only a fool would start an economic downturn, as history all too often shows that minor downturns become major ones. Unfortunately for the British people the political and media classes seem to filled with these economically illiterate people. Typified in the figure of the politician Michael Gove who during the Brexit debate said people where fed up of experts (economists) and did not need to heed their advice.

Politicians and journalists have forgotten that the collapse of the 2008 started when a minor bank Northern Rock collapsed. This collapse exposed the fault lines in the financial markets which led to the catastrophic collapse of the banking sector. It would have been more accurate to use an example from the USA but my knowledge of which minor bank there presaged the collapse of the banking system there is lacking. However what I wrote about the UK economy is true of the USA. The collapse of these minor banks would have had minimal impact on an economy that was sound, but as the economy was of a rotten construction it brought the house down.

The first fact to establish is that the British economy is far from being strong, it is in a fragile and perilous state. The Bank of England has recently reduced interest rates to a new low of 0.25% to offset fears generated by Brexit which threatened to  destabilise the economy. Prior to that the Bank of England has had to keep rates at 0.5% for several years. In a healthy economy interest rates of 5% or more would not destabilise the economy, whereas in a weak one a rise from the previous low of 0.5% to 1% would threaten to tip the economy into depression. The merest hint of a rate rise in America caused a minor financial panic.

The decision to leave the European Union (EU) is one such destabilising factor. After the initial vote there was some panic in the financial market and the pound fell to record low levels against the dollar and the Euro. If one major Japanese car manufacturer now located in Britain were to announce the cancellation of a major investment project, this would negatively impact on business confidence and could lead to copycat cutbacks in investment projects which would could lead to a recession. Nobody really knows which lever will be pressed which would start a major economic downturn in the UK, what can be said is the uncertainty generated by Brexit has revealed many potential vulnerabilities  in the UK economy each of which could lead to a major downturn.

When an economy is on its knees, what should not be done if the economy is get back on its feet, is give it a metaphorical kick in the teeth.  This is exactly what the ‘vote leave’ politicians and their supporters in the media have done.

What this journalist had in mind was probably the modest falls in national income predicted by economists when accounting for the expected increase in inflation caused by the fall in the value of the pound. The expected fall in income will  be between 3% and 7% (Wyn Lewis ‘Mainly Macro” blog) for somebody on an income of £100,000 it’s a loss of £3000 a year. An unwanted cut but quite affordable. If it was an income of £60,000 it would be a loss of £1,800, again affordable but unwelcome. However for a person on the median income of £27,600 a cut of £828 will mean some bills go unpaid. Those on lowest income bracket who at present are just about able to pay their bills out of their limited income will find a cut of 3% catastrophic. Even with such a small cut in their incomes they would be unable to pay many of their bills. Any greater fall in income would push thousands if not millions into a life of despair and utter misery.

The previous paragraph makes the assumption that the fall in the incomes of all would be between 3% and 7%, but in an economy in which wealth and power are unequally distributed, the powerful (the upper middle classes) will be able to minimise their income loss and ensure that the less powerful take the greatest hit to their incomes. Broadcast journalists at least those who are national broadcasters on a BBC radio programme can bargain for increased incomes to offset any cut in their income due to rising inflation. The BBC would not want to lose a well known voice or face, as they know these well paid journalists could easily find employment elsewhere. This years pay cut (inflation imposed) of £3,000 can be next years pay rise of £3,000. 

The position for a person in the precariat, such as self employed delivery drivers or care workers on zero hour contracts will be dire. They are in weak bargaining position and will have to accept in full the cut 3% cut in their real wage. Demanding a pay rise to offset the fall in their real income caused will likely lead to the individual being unemployed, as the employer can find alternative workers willing work for the now reduced income. The government in response to falling tax revenues caused by the falling national income will cut in work welfare benefits such as working tax credits. Resulting in a further fall in income for these workers. The businesses who employ such workers will be experiencing falling sales and to maintain the income they derive from profits will make further cuts in wages. Whatever happens to this much larger group the sheer volume of their numbers mean that the cuts to their income will substantially reduce the national income, leaving scope for above average pay increases for the lucky few.

To conclude ignorance is the new black, when speaking about the economy as Michael Gove said you don’t need to be an expert. Whatever is the received opinion at the dinner parties in Notting Hill or whoever the well-off congregate for social events, is the truth about all matters economic. People can without any sense of shame boast that they are terrible at maths, people ignorant of economics don’t even feel that minimal shame. The billionaire who approached David Cameron at a social event who said that the solution to the UK’s unemployment problem was to abolish the minimum wage represents the sophistication of the level of thinking in this group.

The Faustian Bargain that is the British Housing Market

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When economic issues are discussed in parliament they are rarely those that matter. Issues that really matter are also almost absent from the media. There are economic issues that are not spoken of in polite society or parliament, One such problem that is continually swept under the carpet is the horrendous balance of payments deficit, the largest of any developed economy. This debt is subject to constant revision so it is hard to give accurate figures, but the for last quarter of this year it reached 7% of GDP. A figure a third of that caused a financial panic in 1967, whereas today far worse figures provoke no reaction.

Gordon Brown when questioned about this problem, said the world had changed and it was no longer a problem. What he meant was the government of the time could fund the enormous trade deficit from the large inflows of cash coming into the UK from abroad. To put it simply we were using the money invested in the UK to pay our debts to the rest of the world. This particular economist thinks that it is very poor policy to remain the perennial debtor nation that relying on the goodwill of others for the means to pay its debts.

The government has to take extraordinary measures to ensure that this money keeps flowing into the country. This is achieved by introducing policy measures to ensure that property prices keep on increasing so making commercial and more particularly residential property prices continue to rise. Falling property prices the week as a result of Brexit caused a panic in government. Action was taken immediately to slow or halt the fall in property prices. The government increased the amount of money banks would have available to lend to the property market. Simply by ensuring that there is plenty of cheap money around to buy property will tempt buyers into the market hoping to pick up bargains, which in turn keeps up property prices

However the government has made what is a Faustian deal with the property market. The deal is quite simple, the government will sacrifice the rights of the young, the low paid and those resident in London to accommodation in return for the massive inflow of cash from foreign investors into the property market. All these investors want is ever rising prices and the government is prepared to acquiesce even if it means denying the young, Londoners access to adequate housing. If large parts of London are subject to significant depopulation due to rising house costs that is acceptable to the government, as the alternative is much worse. The much worst alternative is admitting to the horrendous trade deficit and reducing the import bill through imposing strident cuts in the standard of living for the nation’s people, better to lie and fantasise about the strength of the economy than admit to some painful truths.

One of the most effective ways of pushing up house prices is to reduce the supply of housing relative to demand. This is perhaps the most objectionable part of the Faustian deal, that is deliberately pursuing a policy that will leave millions living in substandard accommodation. Governments no longer build social housing, the once thriving council house building programme has ceased. The consequence is house building has fallen to the low levels ever seen in modern Britain. House building is now left to private developers and the underfunded housing associations. The various right to buy schemes have resulted in the large scale transfer of local authority housing to private landlords. Consequently market power no resides with the private landlord they can constantly increase rents, often charging higher and higher rents for what is increasingly inadequate accommodation. This increasingly profitable private rental sector attracts foreign investors, the people whose money is needed to finance the balance of payments deficit.

Various denial of truth strategies are used by politicians to excuse their inaction in what is an increasingly worsening housing crisis. One of the worse is that if the government intervenes in the private sector it will worsen the crisis. They claim that if the government intervenes by increasing security of tenure or controlling rents, private landlords will leave the market in droves reducing the amount of accommodation available and making many more homeless. This is nonsense as too many landlords have invested too much money to withdraw from the market. Legislation could be introduced to ensure that existing landlords did not withdraw from the market, through the compulsory registration of landlords.

What our political classes are unaware is that Faustus had to pay a high price for the help of Mephistopheles, he had to surrender his soul. Similarly the new Mephistopheles in the guise of international finance requires a high price for its support, the surrender of the integrity of the political classes. To keep the cash following into our economy this new Mephistopheles demands that policy be structured meet to its needs. What it requires are two things the first is constantly rising property prices and the second that in the event of a price crash the government takes measures to stabilise prices, so ensuring that the investors do not suffer too big a hit. The governor of the Bank of England in fulfilling this promise, this week announced a whole series of policy measures to stabilise the property market. The fact that these measures would also protect the house owner  from the threat of increased mortgage costs and possible repossession was only of secondary importance. Even George Osborne (Chancellor) admitted that his new policy to support new house buyers was a measure whose primary importance was to keep up house prices.