economic situation is dire

[peterms]

The golden question is how do you give confidence back to markets, businesses and the like?

Start by asking why there is so little confidence at present. Businesses lack confidence because they see households choosing to pay off debt rather than spend, in so far as they have the choice; cutting their outgoings, putting money aside, buying cheaper versions of similar goods and buying less of them. So because the demand for their goods has fallen, many businesses are choosing not to invest even though they have cash and they could borrow at low rates of interest (though many smaller businesses struggle to find loans at acceptable terms, despite all the promises given that Project Merlin and QE would result in a lot of new lending).

Households aren't spending because they fear for their jobs. With unemployment driving relentlessly higher and Osborne promising years of austerity, they are quite right to be worried and to cut back their spending. But what makes sense for each of them individually makes no sense at all for the economy as a whole.

The answer is therefore to spend money on worthwhile things in order to employ people, get them off benefits and paying taxes, reassure those in work that they will continue to be in work, and thereby increase effective demand. In general, only when demand increases will businesses invest their own money. Because the private sector is not increasing spending, the government must, or else demand will remain flat.

Of course this runs directly counter to the policy which Mr Osborne is following. He is reducing demand in the economy, because he is following a discredited and disreputable ideology called "expansionary fiscal contraction", which says that state spending crowds out private spending, so if you cut the role of the state then the private sector will step in. It's crap on a theoretical level, and as almost everyone can see, it's crap on a practical level as well.

[kidlewis]

so Peter, is the situation not to reduce deficit and try to balance our books a little so that when this "worst to come hits" they are more in a position to borrow a bit more and hopefully stem the flow?

Would it be dangerous or a good idea for the government for example to

Invest monumentally in housing projects for EVERYONE, so that the market is flooded with new property to reduce the cost of rents and house prices?

after all would that not also help keep inflation low?

this would enable the biggest single expenditure in households to fall (rent/mortgate for the many not on beefy tracker rates) to have more money to spend.

also on infastructure projects which they have already announced.

housing has been a massive failure for years, never kept up with demand which has seen rents even in what was thought a 'saturated market' of BTL rise to very high levels.

Also legislation needs to be brought in to help people who rent a lot more. If you have a mortgage you get support, if you rent you don't get anywhere near the support.

also food prices, there should be something done to help keep those low other than buying from big corporations. Even small projects like tax breaks on items to grow your own food. no VAT on seeds, garden products etc should be something they look at. Seems silly but I think it would help.

I think lots of little projects and tax breaks like that would be more beneficial to the many. Especially for industries where there aren't many big players.

[peterms]

so Peter, is the situation not to reduce deficit and try to balance our books a little so that when this "worst to come hits" they are more in a position to borrow a bit more and hopefully stem the flow?

That's what we hear, but it's not sensible. It's based on the idea that governments are just like households, they have a certain amount of money and can either save it or spend it and if you spend too much today there's none tomorrow.

In fact governments create their own money, or can do. The Maastricht Treaty reduces our power to do this (by saying we can't fund a deficit without borrowing, ie handing wealth and power to the money markets), and those in the EMU can't do it at all.

Would it be dangerous or a good idea for the government for example to

Invest monumentally in housing projects for EVERYONE, so that the market is flooded with new property to reduce the cost of rents and house prices?...

Also legislation needs to be brought in to help people who rent a lot more. If you have a mortgage you get support, if you rent you don't get anywhere near the support.

Agree there are several problems with housing. One is supply - there are too many properties in some areas, massive shortage in others. Need to address this by regional economic development, not moving everyone to the south-east.

Second is stock condition. Too many properties in need of repair, esp older council stock and a lot of the private rented sector. Linked with that is poor insulation, so people are paying too much for fuel and we are wasting energy. Investment is the inescapable remedy for both parts of this problem.

Third is quality more generally. A lot of what the private sector has built over decades is frankly crap. Tiny rooms, poor sound insulation, too dense. Aimed at being able to shift it at first point of sale by having a fancy kitchen and bathroom (or the ubiquitous "en-suite" at the expense of decent room sizes - how stupid is that?).

Fourth, biggest of all, is the massive debt we have acquired for buying houses. People are now buying later in life if they can afford to at all. They are paying more for the privilege. Households are more likely to work longer hours and have two people working than in the 50s. All this has resulted in a mountain of private debt which has enriched landowners and rentiers, has bid up the price of existing assets, and has driven down the quality of new housing in terms of space standards, quality of finish and sound insulation, though some limited advances have been made in eg thermal insulation. It's a poor deal by anyone's reckoning. But that's what you get when you let the market decide.

also food prices, there should be something done to help keep those low other than buying from big corporations. Even small projects like tax breaks on items to grow your own food. no VAT on seeds, garden products etc should be something they look at. Seems silly but I think it would help.

Not silly at all. Very good ideas. We face a future food crisis, and we need to think about this now. We need more locally produced food from sustainable sources, and things like helping people grow their own in gardens, allotments and anywhere they can find is just a good idea. If you then combine that with some locally controlled co-operative means of distribution and storage, teaching people the forgotten skills of making their own bread and many other things, you have both a more sustainable food source and better nutrition.

[tonyh29]

and things like helping people grow their own in gardens, allotments and anywhere they can find is just a good idea.

The Hungarian govt introduced this last year ... basically gave old people some seed and said this is instead of (some) of your pension , grow your own ..or starve ..quite shocking really but then life is cheap in Hungary the other year in the hot summer labourers were dropping dead as they were working in 100 degree heat and denied water breaks !! the idea possibly isn't a bad one ,but certainly not the implementation in Hungary's case

personally I think food costs are way way to high in this country and Tesco etc are exploiting people ...

[peterms]

and things like helping people grow their own in gardens, allotments and anywhere they can find is just a good idea.

The Hungarian govt introduced this last year ... basically gave old people some seed and said this is instead of (some) of your pension , grow your own ..or starve ..quite shocking really but then life is cheap in Hungary the other year in the hot summer labourers were dropping dead as they were working in 100 degree heat and denied water breaks !! the idea possibly isn't a bad one ,but certainly not the implementation in Hungary's case

personally I think food costs are way way to high in this country and Tesco etc are exploiting people ...

Sounds a crazy way to do it.

In Hungary's favour, it has a more recent connection than we do with a widespread popular knowledge of how to bake bread, and my impression is they are a little better placed than we are to be a bit more self-sufficient. Those are things to build on, but not in the way described, which just sounds stupid.

Agree food costs are too high. The whole strategy of Tesco etc is to crowd out competition then ratchet up prices. We need to find ways to safeguard the independent sector, support independent producers and distributors, invest in co-operative forms of ownership and control, or else we will be completely at their mercy. And to think that the main beneficiary of Tesco profits is a gerrymandering criminal who fled the UK to escape the legal sanctions for her illegal behaviour.

[peterms]

This is interesting.

4.21pm ...Michael Platt, founder of hedge fund BlueCrest Capital...argued that many European banks are effectively "insolvent", given the amount of sovereign debt from troubled countries on their books...

5.38pm ...Economist Andrew Lilico has written an interesting piece arguing that the French financial position is rather more precarious than Christian Noyer, its central bank governor, claimed...

9.22pm ...Eight of the world's biggest banks have just been downgraded by Fitch.

Bank of America, Barclays, Goldman Sachs, Deutche Bank, BNP Paribas, Credit Suisse, Morgan Stanley and Societe Generale all saw their "Viability Ratings" (a measure of credit worthiness) cut.

All eight of the global trading and universal (GTUB) banks are seen as "systemically important". In other words - too big to fail. Out of the group, only UBS had its ratings affirmed.

Fitch said that the downgrades "reflected challenges faced by the sector as a whole, rather than negative developments in idiosyncratic fundamental

creditworthiness."

It warned that the banks all face difficult economic conditions:

These challenges result from both economic developments as well as a myriad of regulatory changes.

Fitch incorporated the significant progress it sees the banks have made in building up capital and liquidity buffers to resist market challenges, which has kept the VR downgrades to one or two notches. Nonetheless, Fitch continues to be of the opinion that, however well-managed, the structural aspects of their funding, earnings, and leverage, predispose GTUBs to vulnerability to market sentiment and confidence, particularly during periods of exogenous financial stress.

Furthermore, the complexity of their business models and exposure to fat tail risk make it more difficult to assess the size of loss that could emerge rapidly from unexpected events.Over time market conditions are likely to ease, but Fitch expects market volatility to remain above historical averages and economic growth in developed markets to remain subdued for a prolonged period. This makes many business lines in securities operations more difficult, due to lower activity and higher funding costs...

[CI]

Bleak

Uk reminds me of Japan 10 years ago and they still haven't recovered

[peterms]

Bleak

Uk reminds me of Japan 10 years ago and they still haven't recovered

That's what Richard Koo keeps telling us. He's right, as are you.

We need to draw a line under this.

The banks are insolvent, the debts won't be paid. Close down the banks, write off the debt. Set up some new banks or build on eg the Co-op to develop a sensible banking sector.

Actually there's a second demand, made at times like this throughout history. The first demand is write off the debt; the second is take back the land.

Take back the land stolen in the enclosures and in other ways, which has generated rentier profits ever since. It's still happening - I've heard two different stories just today about US theft of third world land. Foreclosures are another example.

Take back this land. Those who have it stole it, and employed bent lawyers to create legal title. Take it back.

[JulieB]

kidlewis wrote:

The golden question is how do you give confidence back to markets, businesses and the like?

Only by instilling confidence so that people begin to Trust the economic policies of governments around the world and the financial instutions that fuel them.

Bad Markets work by FEAR & GREED. If you reduce one, you reduce the other.

Speaking to colleagues in the City this week - the mood is definitely changing - people are beginning to be sickened by the excesses of some bankers and corporate leaches. Pay back for some maybe on the horizon, as regulators and legislators have been forced to finally wake up to what has been going on behind the scenes during boom time.

When it gets to the stage where the rumour is that a head of the US Treasury alledgedly tipped off a few of his select mates on Wall Street that Fanny Mae & Freddy Mac were in trouble early in 2008. Enacting a massive take up of short stocks on both stricken institutions, which triggered & hastened a chain reaction which.............. whilst earning a few investment bankers billions of $$$$ ....caused the entire US National Debt to literally double over night when the inevitable US taxpayer injection of trillions to keep the patients on life support took place...... .

What's the old Proverb? "Bread gained by falsehood is pleasurable to a man, but afterward his mouth will be filled with gravel"

I really hope that proves true....would be only right that the rotten immoral practices of these megastar bloodsuckers are finally exposed for all to see.

[CI]

French BASTARDS

Let's just invade, take them out

[VILLAFC2000]

The golden question is how do you give confidence back to markets, businesses and the like?

Start by asking why there is so little confidence at present. Businesses lack confidence because they see households choosing to pay off debt rather than spend, in so far as they have the choice; cutting their outgoings, putting money aside, buying cheaper versions of similar goods and buying less of them. So because the demand for their goods has fallen, many businesses are choosing not to invest even though they have cash and they could borrow at low rates of interest (though many smaller businesses struggle to find loans at acceptable terms, despite all the promises given that Project Merlin and QE would result in a lot of new lending).

Households aren't spending because they fear for their jobs. With unemployment driving relentlessly higher and Osborne promising years of austerity, they are quite right to be worried and to cut back their spending. But what makes sense for each of them individually makes no sense at all for the economy as a whole.

The answer is therefore to spend money on worthwhile things in order to employ people, get them off benefits and paying taxes, reassure those in work that they will continue to be in work, and thereby increase effective demand. In general, only when demand increases will businesses invest their own money. Because the private sector is not increasing spending, the government must, or else demand will remain flat.

Of course this runs directly counter to the policy which Mr Osborne is following. He is reducing demand in the economy, because he is following a discredited and disreputable ideology called "expansionary fiscal contraction", which says that state spending crowds out private spending, so if you cut the role of the state then the private sector will step in. It's crap on a theoretical level, and as almost everyone can see, it's crap on a practical level as well.

BOOM...!

[VILLAFC2000]

French BASTARDS

Let's just invade, take them out

Another great point.

Nothing ever bad happened of this before. Its not as though Germany invaded Poland oh wait....!

Dulverton.

[CI]

The thing that struck me about japan when they were in this mess, was the likes of Sanyo, who leaders I spent some time with, were shaken to the core by the fact that they had to rely on Goldman sachs to step in, bail them out and ultimately take a huge slice of their business

[Ads]

French BASTARDS

Let's just invade, take them out

Another great point.

Nothing ever bad happened of this before. Its not as though Germany invaded Poland oh wait....!

Dulverton.

Its time they handed back Gascony and Normandy. Thieving bastards. I want my red!

[drat01]

More proof that the tory party really only look after their own in the south. Yorkshire post as said before are a pretty right wing paper and they are reporting that 84percent of spending for transport is in the south North on wrong side of tracks as South cashes in on funding

[tinker]

Investing so much in the south is killing this country and has done for years. A high profile Mayor for Birmingham would be a good step. Forget the High speed train network, let have an underground system built in Birmingham

Incidently the very fact that any rise in the sea levels would flood london is a point that is being overlooked

London flood

[CI]

A high profile Mayor for Birmingham would be a good step.

What about that Faulkner chap

[lapal_fan]

^

Birmingham was going to build an underground, but decided to use normal trains/trams instead. This wasn't such a problem but turned into a big one when some dickhead decided to destroy the trains to the majority of the satelite towns in the 70s..grrr.

Brimingham could have been one of Europes most beautiful cities if it wasnt for the absolute shite city planners.

[peterms]

An excellent piece here for those who are interested in the current recession and have time to read the whole thing. In particular, for those who are interested in why the current Osborne/Merkel policies are mad and self-defeating.

For those who only have time for the conclusion, it's quoted below.

It is laudable for policy makers to shun fiscal profligacy and aim for self-reliance on the part of the private sector. But every several decades, the private sector loses its self-control in a bubble and sustains heavy financial injuries when the bubble bursts. That forces the private sector to pay down debt in spite of zero interest rates, triggering a deflationary spiral. At such times and at such times only, the government must borrow and spend the private sector’s excess savings, not only because monetary policy is impotent at such times but also because the government cannot tell the private sector not to repair its balance sheet.

Although anyone can push for fiscal consolidation in the form of higher taxes and lower spending, whether such efforts actually succeed in reducing the budget deficit is another matter entirely. When the private sector is both willing and able to borrow money, fiscal consolidation efforts by the government will lead to a smaller deficit and higher growth as resources are released to the more efficient private sector. But when the financial health of the private sector is so impaired that it is forced to deleverage even with interest rates at zero, a premature withdrawal of fiscal stimulus will both increase the deficit and weaken the economy. Key differences between the textbook world and the world of balance sheet recessions are summarized in Exhibit 17.

With massive private sector deleveraging continuing in the U.S. and in many other countries in spite of historically low interest rates, this is no time to embark on fiscal consolidation. Such measures must wait until it is certain the private sector has finished deleveraging and is ready to borrow and spend the savings that would be left un-borrowed by the government under an austerity program.

There will be plenty of time to pay down the accumulated public debt because the next balance sheet recession of this magnitude is likely to be generations away, given that those who learned a bitter lesson in the present episode will not make the same mistake again. The next bubble and balance sheet recession of this magnitude will happen only after we are no longer here to remember them.

[blandy]

given that those who learned a bitter lesson in the present episode will not make the same mistake again

I wouldn't bet on it. They're not paying for their mistakes, why should they care?