Tag Archives: NHS

Is there a possibility that events such a Black Wednesday will occur more frequently in the future?

The short answer to my question is yes. There will always be that occasion when that combination of human folly and arrogance will lead to a repetition to the economic disasters of the past. As an economist I can reconcile myself with the knowledge that such crisis are but a once or twice life in a time occurrence. Unfortunately I believe that I will be unlucky enough to experience a third life time economic crisis, but one of such damaging dimensions that it has the potential to make the crisis of 1992 and 2008 seem relatively insignificant.

Recently I read an article in ‘The London Review of Books’ which expressed an opinion which I share and that is, that for the first time in recent history we have a group of leading politicians who want to do ill to a substantial number of their fellow citizens. These politicians are the ultras of the Conservative party. It is not just the turning back of the clock to disadvantage those groups that have profited from modernity, but desire to impoverish large numbers of their fellow citizens. Now some of them are beginning to openly admit that leaving the EU will not deliver any of the benefits they claimed in the referendum campaign. In fact they recognise that there will be a significant loss of national income as a result of Brexit.

There are those who believe that the economic downturn consequent on ending our free trade deal with the EU, will lead to a modest reduction in living standards.  They believe that the stoicism of the British will enable them to weather this temporary storm. Britons endured worse during the Blitz and so they believe they will the people demonstrate a similar stoicism in seeing out this downturn. Just as in 1940 they will see this deprivation as a price worth paying  to be free of this new tyrannical continental behemoth that is the European Union. They seem to want to replay the 1940s, but with a contemporary twist.

However what they do not seem to realise is that the various predictions of a 3% or 8% in future income growth are the cautious predictions made by economic statisticians. The  economy is not some mechanical creation such as a car that can be tinkered with to produce a slightly more modest performance, it’s a dynamic social organisation that is capable of volatile, unexpected and sudden changes in direction. An economic slowdown is quite capable of turning into something much worse.

The British economy as with many others includes within it many economic fault lines that if triggered would wreak tremendous damage to the economy. What these foolish politicians have forgotten is “Black Wednesday’ in 1992, a day in which speculators effectively bankrupted the country.  All the weakness in the economy that existed then, still remain today. One such is the massive private sector indebtedness, which includes that of the banks. Britain is one of the world’s bankers and as such it holds a large proportion of the world’s cash reserves. The banks assets are moving towards a position whereby they total nine times the county’s GDP, that is about £18 trillion. Just as in 1992 the British banks are borrowing short and lending long. In plain English customers deposit money on short term notice, money that they can withdraw on demand or with a few days notice. Banks lend this money long term, it is invested in property or some other asset, which either cannot be quickly changed back into cash if needed or if cashed in it will return a value much less than that for which it was purchased. British banks have reserves that they can use to fund cash withdrawals in normal circumstances, so this is never usually a problem. However it becomes a problem when the abnormal happens and investors lose faith in the banks and want their money back. The abnormal occurred in 1992 and 2008. On the first occasion the central Bank was almost bankrupted and in the second if was the entire banking system that suffered the same experience. Nobody that is not a fool or an arrogant politician with little understanding of economics would do anything to provoke a recurrence of these past crisis.

One of the triggers of a depression is falling business confidence, once that is lost the economy is in the doldrums. The maladroit government negotiations with Europe over Brexit is leading to a loss of business confidence, as businessmen are increasing uncertain of what the future holds for them.  Whenever politicians are informed on problems tor business that are developing because of Brexit, they are either ignored or dismissed. Such behaviour is further draining confidence out of the economy. In such febrile circumstances a run on the pound could easily be triggered. One such trigger point occur at the port of Dover. The government has made no preparations for the reintroduction of customs barriers at Dover, yet free trade with Europe will end in the near future forcing the government to reintroduce customs barriers. New staff are not being recruited and it no preparations have been made to introduce new  IT systems to processing the import and export trade tariffs, such checks are unnecessary while Britain remains in the single market. It seems to assume that they can introduce a seamless system of tariff collection, when they or nobody else in the world knows what such a system will look like or even if such a system is possible. After March 2019, when Britain leaves the EU and chaos prevails at Dover and other ports, it will be a demonstration of government incompetence. When the government is demonstrating such a degree of incompetence investors could take fright and take their money out of British banks. Our banks are quite incapable of funding such a large and sustained flight from sterling and the UK would have to turn to the IMF for help. The resultant crash would turn the British economy into an economic basket case resembling that which is contemporary Greece.

However there are a minority of Tory Ultras who would welcome such a collapse. The consequence shortfall in government finances would mean that many of the institutions of modernity, such as the welfare state and the NHS could cease to exist through lack of funding. They like the medieval doctors who let blood to purge the body of noxious vapours, believe that an economic crash which destroyed the welfare state would lead to a similar purging of the British character.  Such a purging would be the purging of the welfare dependency virus, no longer would the British people be able to look to the same for welfare or health care. This purging of the British character would lead to a rejuvenation of the British, they would become like their independent 18th and 19th century forebears who created the largest empire the world has seen. Some ultras are even speaking of the Empire 2.0.

However they show little awareness of history, the Greek political parties that dominated the Greek political scene prior to the crash of 2008 that is New Democracy and Pasok have disappeared from the political scene, as the people blamed them for the decimation of their incomes and economy. Although these Tory ultras are careful to remain in the background pulling the strings to ensure that the government commits to their desired hard Brexit, they would not be unable to avoid ‘ownership’ of the post Brexit economic crisis. They were members of the party of government that caused the economic crash and in any election many would be voted out by an angry electorate.

Greek tragedy provides a metaphor which can demonstrate the reality of the crisis facing Britain. In Greek tragedy the God’s raise the hero up, only to later destroy him. It is as if the God’s of the economy have raised the Brexiteers and Conservative Party Ultras to power only to destroy them. The Gods seem to have chosen the least capable and those least fitted for the role to lead the Brexit negotiation, knowing that their incompetence will be the cause of their downfall. It is tempting to refer to Winston Churchill wartime speeches in this context, because they see themselves in the Churchillian role of standing up to the continental tyrant. He said the Nazi’s would reap what they had sown, the same applies to the Brexiteers who will reap the consequences on what they have sown. Not the whirlwind of mass destruction but the whirlwind of economic destruction. Quite possibly the Conservative party, as with the conservative Greek New Democracy party will disappear from history.

Any prediction made by an economist is never more than a probability or a possibility. When the Bank of England predicted economic meltdown if Brexit occurred, it was widely assumed that they had made a terrible mistake, when this never happened. However this scenario was avoided through the prompt action of the governor of the Bank of England, who fearing a downturn in the economy, pumped billions of pounds of extra money into the economy to prevent that downturn happening. Similarly it is possible that the realists in the Conservative party regain control and instead of going for a decisive break from the EU with all it’s damaging consequences, they will negotiate a ‘soft Brexit’ which will minimise the damage to the British economy which will result from leaving the EU.


The Economics of the Titanic or a comment on Larry Elliot’s article on Brexit economics

When reading today’s Guardian I was struck by an article written by Larry Elliot. It was mocking all the doomsayers who predicted dire economic consequences if Britain left the EU. He quite rightly wrote that since the vote to leave the EU, the economy has  been doing quite well. Unemployment is down, economic growth is higher than expected and sales in the retail sector are as buoyant as ever. There seems to be no evidence of the economic disasters that would occur if Britain left the EU, as claimed by the Remain campaigners. However, he does in his thoughtful article explain that there are still unresolved problems that threaten future prospects of the UK economy, such as the appalling low productivity levels of British workers and the large trade deficit. He does suggest that these problems do have solutions and that the shock of exit will force the government into tackling these problems in the economy that have been ignored by politicians for decades, as they wish to minimise the negative effects of EU exit.

There are just one or two caveats that I would wish to make. He as did I would have read J.K.Galbraith’s “The Great Crash”* when a student studying economics. He would have read that one of the prime factors in causing the great crash was an unsustainable boom in asset prices. One these prices moved downward all the flaws in a weak financial sector were exposed and a panic would set in forcing a crash sale in assets such as shares with the consequent bankruptcy of many business enterprises. There is plenty of evidence of there being a speculative and unsustainable boom in asset prices within the UK economy at present. Despite a few blips property prices have reached new highs. While it is not clear when the downward in the property market will occur it is likely to be sooner than later. Given the natural turn of events financial downturns occur every nine years, 1990, 1999 and 2008, which means that if this cycle continues there will be a crash in 2017. Leaving the EU has created an aura of uncertainty which not only undermines market confidence making a financial downturn more likely but means when it does occur it will be worse that otherwise would be expected.

If I could use a metaphor to describe the foolish actions of our political leaders, I would see it in the actions of the captain of the Titanic. The captain of this ship overestimated the soundness of the construction of this liner. He believed that if the ship collided with an iceberg, the nature  of its construction would mean that any collision will result in minimal damage to the ship. As a consequence he sailed too far north, to close to the area of the Atlantic in which the icebergs where situated and the resultant collision with an iceberg sunk the unsinkable ship. The attitude of the politicians who campaigned for Brexit mirrors that of the Titanic captain. They vastly overestimated the soundness of the UK economy and its ability to withstand economic shocks. Instead of there being a small hole below the economic waterline, caused by exiting the EU which can soon be fixed, there is a much larger one that is capable of sinking the UK economy.

One of the flaws never mentioned by Larry Elliot and the Brexiters is the massive over indebtedness of the British economy. Consumer indebtedness is moving rapidly towards a total of 200% of GDP and the debts of our banks are far in excess of 400% of GDP. Much of this debt, particularly that of the banks is owed to overseas investors. Even in normal times this represents a problem for the UK economy, but in a time of uncertainty it becomes a far more serious one. The value of the pound sterling has fallen since Brexit, this has meant that the holdings of British currency in British banks by overseas investors has decreased in value. At the moment the fall in the price of sterling has stabilised and there has been no rush by overseas investors to withdraw their money. They judge that the advantages of investing money in Britain outweigh the disadvantages. However in a time of uncertainty there is a possibility that the value of sterling will fall further, which will probably occur when the exit negotiations hit some difficulties. Then these foreigner depositors will not be willing to see their cash deposits shrink further in value and so will begin to withdraw their funds from the UK. This can easily develop into a panic and the consequence will be a run on sterling. The UK government would have to apply to the International Monetary Fund for emergency funding to tide it over the crisis. Quite possibly the European Central Bank would be involved as many large European banks are located in London. In this event the price for these loans would be the imposition of a Greece like austerity programme. Such a programme of austerity would devastate the British economy as massive cuts in public spending would be required. One casualty would be the National Health Service as one of the first casualties, as the Greek experience shows that any national system of healthcare is regarded as a luxury that an indebted nation cannot afford.

If Larry Elliot’s memory had served him better he would have remember that Galbraith wrote that there was a relatively long lead in to the crash in 1929. The signs of the impending disaster were visible  long before the crash occurred. Then it was the evidence of the foolish speculative spending made by investors, they would invest in anything in the hope of making a profit. One story sticks in my mind and that is the one property developer marketed Florida swamp land as a desirable housing investment. This obvious fraudulent nature of this development mattered little to investors as they believed what they bought for $1 in the morning they could sell for $2 at the end of the day to some sap. Obviously this could not continue and it would end in heartbreak for many.  A minority of investors got out early recognising that there would  be a stock market crash, investors such as Joseph Kennedy. The soon to be multi millionaire father of JFK. Similarly in Britain there are signs of problems ahead. There has been a marked fall in business investment as manufacturers are unwilling to commit to a future which is so uncertain. A collapse in business investment is as any economist knows is the mechanism which starts a downturn in economic activity and possibly a recession. There was also the short panic that occurred just after the Brexit vote when a number of property investment funds had to temporarily stop withdrawals as they had not the funds available to met the demands for cash withdrawals made by panicky investors. The omens for the future are not good, despite current appearances to the contrary.

Whatever happens in the coming years all that can be said it that they will be years of difficulty for the British people. Years of difficulty brought about by the foolish actions of our political leaders who demonstrate a flawed understanding of the UK economy.

* J.K.Galbraith ‘The Great Crash’ an account of  the Great Depression which started in 1929

Osborne-oenomics explained

Nietzsche’s dictum is that philosophers are in error because while they write about man they never study real man, only their idealised construction of him. They construct ethical systems but never look at the source of those ethical systems, man. He demonstrates how the concepts free will and moral responsibility are of little use in explaining human behaviour. His psychology demonstrates that much of human behaviour is pre-determined, it is their physiological makeup that determines people’s actions not rational thought. Criminal behaviour is more likely to derive from an individual’s biological drives which they cannot control than from conscious decision making. Commentators would do well when commenting on George Osborne’s economic policy to observe Nietzsche’s dictum. Most would see his policy being derived from his reading of the Neo-Liberal commentators of whom they assume he is familiar with. This ignores two key facts, one is that he studied history and probably had but a nodding acquaintance with Hayek etc. and that he is a son of a baronet and it is this latter fact which provides a key to understanding George Osborne.

The baronet is at the lowest level in the aristocratic pecking order and being aware of their nearness to the masses, they have always been the most zealous in defending their privileges of social rank. They are all too aware of what a fall from social grace means. It is these people who have provided the backbone of the Conservative party. The defence of their position often led them to developing the most reactionary of principles. Any improvement in the lot of the servile classes is a threat. A guest at the dining tables of the baronetcy would be aware of the servant problem. The insolence of the lower orders making them such poor servants and the difficulty of recruiting servants as most of the lower orders rejected a life of servitude.

The greatest threat was progressive taxation, particularly taxes on capital. The latter threatened their holdings of wealth and they saw around them the break up and disappearance of many large estates. The social order of which they were part seemed to be disappearing. Since social democracy is dependent on progressive taxation to fund its activities; they hated social democracy as it was that progressive tax system that threatened their existence. They also hated the public services which made such taxation necessary. One service that attracted their ire was the National Health Service. Why should they make such a large and disproportionate contribution to a service that they use but only occasionally. As they would resort to private health care so as to avoid contact with the masses. Is it at wonder that coming from such a background the guiding principle of all George Osborne’s policy is the destruction of what remains of the social democracy of former years? The privatisation and destruction the NHS being the iconic government policy that by which it will be known in history.

Self interest lies behind the desire for a small state, rather than the desire to free enterprise from the the burdens and regulations of the nanny state. A small state does not require large tax revenues to fund its activities. Any policy which shrinks the tax burden on the better off will meet the approval of a baronet’s son. Is not likely a man from his cultural back ground would want to cut taxes? It is no coincidence that one of the first acts of this government was to let Vodaphone of it’s £6 billion tax bill and it is now letting the self same company avoid tax on the multi billion profit from the sale of its shares in Verizon. Tax avoidance is no longer an activity to be discouraged by government but one to be encouraged by the Chancellor. He has decided that multi-nationals that have off shore subsidiaries can channel any profits they make in the UK through these subsidiaries to avoid tax.

One cannot underestimate the impact of the culture of the baronetcy on George Osborne’s thinking. Some members of this social grouping in the heyday of the Social Democracy feared their extinction through a loss of their wealth and position because of what they saw as a penal tax system. Growing up in the sixties on a country estate with family friends in service; I could not but be aware of how this group saw the state as the author of their misfortunes. Any society will suffer periodic crises and the UK society suffered from an economic crisis in the 1970’s culminating in the extraordinary high annual inflation rate of 1974 which topped 27% . It was the OPEC inspired rise in petrol prices which largely caused this spike in commodity prices which caused the high level of inflation. Taking advantage of the weakness of the state in this crisis, the political right forced/persuaded the government to adopt Neo-Liberal policies that would ultimately lead to the demise of the social democratic state.

It is probably no coincidence that the doyen of Neo-Liberals Joseph Schumpeter was an aristocrat. Neo-Liberalism as espoused by George Osborne is the guise through which the baronetcy and others wreaked their vengeance on social democratic state.