Central Planning pitted against free markets once more in rap format.
Showing posts with label Keynes. Show all posts
Showing posts with label Keynes. Show all posts
Friday, 29 April 2011
Saturday, 3 July 2010
Cuts, its never that easy
Margaret Thatcher, Conservative party Conference, 1980
The subsequent 5 years resulted in unemployment doubling in the UK after this speech. After years of kicking the can a politician eventually got a grip making Britain competitive in the global market place once more. It wasn't easy. It wasn't pretty. It wasn't sadistic. In fact it was political suicide but Maggie held her nerve.
Talks about public sector cuts with Prime Minister Cameron claiming that not only will the private sector take up the slack within his term - but actually there will be more jobs is ludicrous. Just as I expected, within a month of power I can see David Cameron is no Maggie. The Tories talk the talk, declare swaggering budget cuts but its all soundbites. Clegg, his coalition buddy, meanwhile states that "this won't be like Thatcher, we will do it differently", contradicting the recent budget given by George Osbourne which is much worse than anything Geoffrey Howe had to administer.
There is no chance the Conservatives will be able to do what they state - they don't even have a majority government which is based on a shaky coalition. Even if they did it will take longer than a term. Back when Thatcher was in office, at the 1983 election unemployment was still rising (setting post war records), the pound was dropping like a rock and the economy was still in taters. It took well into her second term to see the effects of her earlier policies.
The idea that the private sector will take up the slack is just political wordplay. Its takes years for these things to change, a change in peoples will, a change in peoples expectations. People expect the UK bubble to carry on. So until reality kicks in, people will want the politicians to maintain the mirage which will mean its the market that has to force the people into the correct line of thinking, just like it did with Thatcher. We are a way off this so Mr Cameron will play kick the can down the road until this moment.
What factors are different this time? For one Cameron has to contend with a stronger opposition, and competent at that. People didn't necessarily like Thatcher back in the early eighties, but they couldn't stand Michael Foot and Labour who had increasingly moved so far left they were within touching distance of Joe Stalin and Mao. It was the oppositions weakness that helped Thatcher pursue what she did. Labour was so broken, the party splintered creating the SDP which ripped its support base in two. Thatcher could have campaigned with Adolf Hitler as her minister for for Justice - she still would have won a landslide back in '83.
Thatcher also had a majority from 1979 unlike the current government. You try and reduce public spending you have another recession. We've only just emerged from the worst depression since the all-mighty one back in the 1930's. People won't warm to this. Then the budget deficit gets bigger. It did with Thatcher - it will do the same for Cameron if this is the path he takes. This would bring into question with the public the competence of the Tories with the economic policies they are pursuing. I know and you probably know that its the right path to take but many who are told the Keynesian way of thinking will not see it that way.
The Unions are coming, North Sea Oil and Gas is running drier by the day and higher interest rates are inevitable over the next decade. We haven't liquidated anything - just like the Japanese during their lost decade we have propped up the banks and ensured zombie loans are kept afloat. Like a junkie we tell everyone we are good for it - we just need more time. But time is our worst enemy.
The problem with the current coalition is how long will it last with cuts on the agenda? The Tories may be historically comfortable in this setting but how many grass root Lib Dem supporters are going to swallow the medicine? Defection of many to Labour is inevitable. And remember - "things were going 'well' under Brown". This could cast the Tories in the wilderness for a decade if they practice what they preach. There's only so long you came blame the previous government for the mess. Give it a year and people won't be seeing Labour mess but will instead switch their view to Tory mess. Just like Thatcher. People forgot the Labour mess in the 70's, they just remember the early eighties.
The G8 or now the more relevant force the G20, have been putting austerity on the agenda. I think a basic illustration of economics is required to contrast spend and stimulus versus austerity, using the classic economic Crusoe example (there has been many takes on this over the years). Peter Schiff gives an excellent example in his latest book which I will list below.
If we imagine a desert island with three people. These people all catch fish in order to survive and feed themselves. The problem is they have to use their hands, which is very time consuming so they spend all their time catching fish to live. However one day, one person decides to build a net. He spends a day constructing this, therefore foregoing current consumption and going with no food for that day. He is the entrepreneur within this small community and doesn't know if his endeavour will succeed. For the sake of argument his net is a success and he is now able to catch more fish in less time. So much so that he now has more leisure time and can eat more, thus consuming more.
If we imagine a desert island with three people. These people all catch fish in order to survive and feed themselves. The problem is they have to use their hands, which is very time consuming so they spend all their time catching fish to live. However one day, one person decides to build a net. He spends a day constructing this, therefore foregoing current consumption and going with no food for that day. He is the entrepreneur within this small community and doesn't know if his endeavour will succeed. For the sake of argument his net is a success and he is now able to catch more fish in less time. So much so that he now has more leisure time and can eat more, thus consuming more.
A simple example but it perfectly illustrates elementary economics. The current Keynesian thinking is that postponement of consumption is a bad thing but yet as we saw above this was in fact good. It is how society accumulates capital goods, tools, that enable us to enhance our productivity. Savings - the foregoing consumption should be embraced not deterred. The entrepreneurs risk taking has also benefited everyone. We should reward those who figure our how to do things more productively or cost effective, we all benefit over the long term.
You see our recent solution was for the government to spend more, to destroy capital, to expropriate wealth from individuals. Raising taxes, printing money, raising deficits will never solve the economic question. Just like state planning never did. All it does is take away the net from the individual, remove incentives for innovations such as the net and encourage us to consume more rather than increase our productive capabilities. If the net breaks we can leave it and continue consuming our way out of trouble. That's why no amount of Paul Krugman stimulus will ever be enough because its the wrong thinking in the first place. He is saying we need to run faster just to stay still. I say we need to be leaner and think smarter to run just as fast only this time at a stroll.
The video of Thatcher at the start was right. However the left always like to use slogans of themselves such as compassionate, open, fairness, yet when an individual states they support the Conservatives they are ironically labelled Tory scum - and for what? Thatcher put us back in the global marketplace. She embraced Asia's awakening which enables us to buy many consumer goods for practically nothing. We moved out of mines with many of us into flexible workplaces, hours that suit us, working from home in relative luxury compared to how our ancestors had to work. The fact is the left still can't swallow the reality that Thatcher destroyed their ideological way of thinking in this country. John McDonnell's unwise words regarding wishing to assassinate her was not for her policies but rather that people like himself have no place in politics where 30 years ago they were everywhere in parliament. Was it nice that people had no jobs back during the early eighties? No, but this is the problem with statist elites. They cause the problems, blame markets, then ironically when things get that bad look to markets once more to solve the mess they made in the first instance. We still seem to be looking for state solutions. We have recently had hard talk, yes. But talk is cheap, when action is taken then the backtracking towards Keynes once more will commence.
Wednesday, 19 May 2010
Inflation - The Governments Free Lunch
"While our case has been aggravated by the illegal sanctions imposed by the Western powers, rising food prices are a world phenomenon because of the use of biofuel"
Zimbabwe's Finance Minister, Samuel Mumbengegwi
Recent figures for inflation have been released for the UK yesterday and it doesn't make pretty reading for the Government. CPI up to an annualised rate of 3.7% with RPI standing at 5.3%. Again Mervyn King blames the increase on VAT, the fall in the pound or the rise in oil prices. Hate to break it to him but these are just symptoms not causes. The causes can be laid directly at the Governments monetary policy, that is printing money, record peacetime deficits and artificially low interest rates. Thats what he should have told the new Chancellor George Osbourne. Scepticism amongst the city seemed to be the other part of the story, that is they are not buying the above reasons anymore. How long will it be before the general public cottons on that inflation is going to be a real problem going forward. The only way inflation is going to come down, as the Governer would have us believe, is if the government stops printing money, hikes interest rates and gets their books in order. But none of this will occur.
Continued debates regarding which algorithm to use have resurfaced. RPI-X, RPI, RPI-Y? What about using a tool we all know works, the free market. Supply and Demand. Prices. But that would be all too easy. The Keynesian witch doctors couldn't promote their economic religion of the 20th Century.
There are a lot of common myths surrounding inflation in most instances, the symptoms are portrayed as the causes. Symptoms such as unions, 'overheating', OPEC, speculators - the list goes on. In a nutshell inflation is actually created by making more money, its that simple. Zimbabwe hasn't got inflation because of their stock market or the Unions or OPEC, its got price problems because Robert Mugabe ran out of money and turned to a printing press instead of balancing the books. Of course he lists the same reasons as all governments do. Zimbabwe shut down their stock market recently by stating it was helping to cause runaway inflation. The best stock market in the world is there, along with the best housing market, gains we could only dream of. However there is a catch. The Zimbabwe dollar, in which these assets are valued, is worthless. Same policy as our current Governments are pursuing only with more moderation.
Excess Capacity? Now theres something Zimababwe knows about. But yet the well versed lines we are told is that we can't get inflation because of this excess capacity. People can't demand pay rises, again a symptom, because of this fact. When in history did a country sucumb to high rates on inflation when their economy was strong? Excess Capacity exacerbates inflation, it doesn't dampen it. So while the deflationist scream 'excess capacity', I say 'look at history' (Remember Stagflation?). Incorrect lessons are learnt, fallacies are drawn from history. By the same logic, Zimbabwe should have solved their inflation problem. I have been tracking events there from around 2006 when their inflation stood at a 'mere' 1,000-2,000%, and continuously there has been more and more slack in the economy but yet inflation has gone through the roof, it can't even be measured anymore. People stopped turning up to work because the price of the bus fare was more than they got paid at work. People get confused that the unemployment caused during Thatchers Policies in the early eighties helped dampen inflation when in fact all she stopped doing is spending money the Government didn't have and buying her way out of trouble like previous Governments had. She let market forces take over which lowed consumer prices, and let inefficient state entities fail. It wasn't excess capacity, it was a combination of market forces and the relative restraint of money creation.
Oil keeps going up and up. It does in Zimbabwe. So much so that they put price controls in place. Mugabe blamed oil speculators or OPEC, again the symptoms. It was caused in exactly the same manner as we have now, excessive monetary expansion. Supply and demand issues will occur at some point in the future as we hit peak, but not now. Global demand is weak and people are struggling to buy as much of it. So that price of £1.22 a litre in the UK, we can thank our MPC and our government. Not the oil companies as the Government would have you believe.
Unions or the lack of them. We won't get inflation because we don't have unions due to the wage price spiral they cause, again its a symptom. As more money gets created the publics demand for money becomes greater as it takes more money to buy the same goods and services. However pay demands can equally occur in the free market, for example people move jobs similar to India where they have greater inflation expectations as their Government is weak thus creates too much money. People can just as easily drive up their own wages. We will see more unions and strikes in the future, but don't confuse this with a cause of inflation. I disagree with the concept of unions but there is one point I agree with them, they don't cause inflation, they just play catch up to rising prices caused by weak incompetent Governments. Suggestions of public sector pay freezes does not bode well for future industrial relations, when inflation is on the rise.
In 1997 when Labour granted 'independence' to the BoE for controlling interest rates this was hailed in the city and by many economists, but I disagree. Their targets are still set by the Government. It's laughable that the BoE is independent with it's main remit to target inflation however this figure is now nearly twice as high as what they target, it's not even within their bounds. The 'recovery' or 'it will subside' are reasons given to not take action, but the bank doesn't have a remit on these issues. Its aim is to take steps once inflation goes outside its bounds of 1-3% that the Government dictates. So while Mervyn King and Co. sit on their hands it won't be long before the creditability of the central bank is called into question. A year ago the bank predicted that inflation would now be 0.7%. A 3% margin or error is quite large if you ask me. The record reads quite clearly - it didn't take until 2011 for inflation to rise above 1.2%.
Frustrated savers sit and wait, questioning the policies officials take. Of course its one great moral hazard and the Central Banks are masters at setting up future disasters. The reason savings rates are so low is because commercial banks can lend from central banks for virtually nothing. Unlike genuine savings (capital) this is just pure inflation, so why pay retail savers with real capital more than the central banks rate? The commercial banks can then take this money and lend it for the long term, a common trade is to borrow short term at 0.5% and take this money to buy long dated bonds, say 10 year gilts, which have a higher return (inflating the bond bubble). The difference becomes the profit, money for nothing. Of course the problem occurs when Central Banks have to raise rates. How will the banks deal with this sudden shock to funding? Bailout Mark II? Private Banks then lend to the public and the Government at higher rates because of inflation and default risks in the future. So unless the Government and Central Banks step into the place of private banks then they will never ultimately set market interest rates.
Media types will have you believe that this is not a plan, that is to inflate away the debts, and its Central Banks believing that inflation will subside. Don't believe everything you read in the news, like I mentioned above there is a remit on the bank which they are quite clearly ignoring. Much damage will be done by trying to inflate, its not just a case that the prudent among society are punished to bailout the irresponsible. The prudent peoples savings erode, incentives are lost to save and capital begins to flee, into foreign assets or Precious Metals. Keynesian's would have you believe we have a liquidity problem, when it fact its a capital deficiency issue. If you have a printing press liquidity is never an issue, so by inflating all officials are doing is adding gasoline to the fire. It compounds the problem. I think people are aware something is not quite right with the monetary system, printing money, giving away free money, people are asking "isn't this what Banana Republics do?".
I warned that we can't devalue our way out of trouble, making the point that prices always catch up with you. The UK is now beginning to find this out. Companies and individuals get lazy but when prices come back to bite, suddenly that purchasing power has gone. Capital gets eroded, saving rates come under pressure as people's demand for money rises to buy the same goods for more - two building blocks for prosperity. Peoples inflation expectations grow. Capital becomes harder to form as prices rise and people struggle to forgo consumption. Company profit margins come under pressure. A vicious cycle can occur without action from a strong Government. Could we have a fall in inflation? In the short term I don't dispute this, when cuts are enacted we could have some slowdown but we won't go the distance and take our full dose. If we couldn't take the pain in 2008 why do you think our leaders will take it going forward with the economy in worse shape.
There is only one trend and that is expect more inflation, but not the relative calm inflation we have seen over the previous decade. Over the new decade inflation will get out of control, the policy makers will go to far. With the same deflationary market forces relatively subdued it's going to get messy. Inflation, its historically the Government great free lunch.
"Inflationism, however, is not an isolated phenomenon. It is only one piece in the total framework of politico-economic and socio-philosophical ideas of our time. Just as the sound money policy of gold standard advocates went hand in hand with liberalism, free trade, capitalism and peace, so is inflationism part and parcel of imperialism, militarism, protectionism, statism and socialism."
Ludwig Von Mises
Friday, 5 February 2010
Keynes and Hayek (Accompanied by General Ramblings)
“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”
John Maynard Keynes
The General Theory of Employment, Interest and Money
“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”
F A Hayek
The Fatal Conceit
Both quotes above are taken from the recent econstories rap video that has been showing up all around the Internet which can be viewed here. A very lucid video crammed with factual information, so don't be put off by it's format as a rap song. As we start a new decade, more people will see the ill's of our economic system and formats such as this will help inform people on all levels, as I realise many people find history and economics a very dry and boring subject.
The video contains many subtle messages. The receptionist not recognising Hayek, Keynes book in place of the bible in the hotel room, a party at the FED - the old alcoholic analogy along with "Tim" and "Ben" as the bar tenders. It compares our current solutions to nothing more than the 'hair of the dog', painting a clear picture of what needs to be done. The video is not biased either, with a fair representation of Keynesian economics.
Back in the real world Greece finds itself on the ropes once more, the bond vigilante's are turning up the heat sending rates upwards meaning rollover default is becoming a real danger. As quick as the pansy states will be able to cut their budgets, the rates on their bonds will rise over the long term negating all of the spending cuts. Portugal was thrown in the same gladiatorial arena, as the med club cousin found it couldn't find buyers for some of its bonds. Who's next - Spain, Italy, Japan, the UK, the landscapes getting ugly as distress in the bond bubble is on display for all to see. The Euro fell, but the Germans seem to be having no Southern Shenanigans. Staunchly opposed to any bailouts instead demanding nations begin to get their house in order as their Bunds still look as solid as any other government debt instrument out there. Could the Chinese bail the Greeks out? Yu Yongding doesn't believe so declaring the assets as unsafe.
What seems to have surprised many is the speed of events and how the Greek economy has fallen into the abyss. Well this is what happens when a government runs out of bullets, the market always catches up with you. It took near 80 years for it to catch up with Communist Russia but when it did, it fell in spectacular fashion. The decades of decay are still there for all to see.
Pimcos Bill Gross has given a big no, no on UK Government Gilts as he sees not only real rates of return as an issue but the devaluation dilemma. When the UK politicians still have access to devalue, investors wisen up and realise its not just the interest rate you need to worry about, its a question of will the currency still be worth the same 10 years down the line? Italians used to perform this form of default when the basket case lira was around, nonetheless international money gets smart and knew not to trust an Italian Government. Similar to their driving, reckless.
In Britain it goes from bad to quite simply awful. Over in America Obama has felt the peoples backlash of late, with all the Wall Street bailouts and excessive government intervention coming back to bite him. Meanwhile the 'Great' British public reward Gordon Brown, increasing his bounce in the polls, even though the current Labour government are doing all they can to make the fundamentals worse. That's the British for you, we believe in the free lunch and that Government can solve the issues of the day. We like illusions, inflation, governments and think there's not enough spending on public services despite our gigantic deficit. Americans talk of dollar death, they should think about coming over to Europe and see how to really mess things up! Sorry Peter Schiff, its not just America that's the 'Caboose', its pretty much the whole of the West.
Japan has been in the news a fair amount lately, with many commentators declaring default could occur there first. While Japan is a basket case, their savings rate is not what it was and they are all getting a lot older, they still have a lot of currency reserves, second only to China. They will sell these first to pay for the latest Government who are following Keynes advice just like the previous Government did for the past 20 years. They will also stop buying US Treasuries at some point, which they still seem to have an appetite for, instead buying their domestic bonds. Of course they will go pop at some point. You don't build up 200% of government debt and not pay for it. Any slight move in rates would be fatal, therefore expect the above actions to be taken first.
Switching gears, Shells profits collapsed forcing the sale of its assets and job losses for the oil giant due to oils lower price. You always hear about price rises in the media, but never hear about the falls. When oil was around $148 a barrel, it was the 'evil' oil companies that was causing the price to rise, profiteering at the expense of the public. When it collapsed, the same reasoning didn't add up as the same companies were scrambling to mend their books. 'Why didn't the price of oil fall at the pump substantially when its price fell from $148 to $40' - simple its hedged. The free market insulates consumers from the volatility in the commodities markets by using futures contracts to hedge against price spikes and dips. Hence the price at the pump stays fairly stable in comparison. The only reason the price rises over the long term is from Government Monetary mismanagement. Of course the government likes to blame speculators, oil companies, Arabs and the public generally buys the lies. Against gold of course oils price doesn't really move anywhere over the long term, but enough on minor details such as these.
Reports again come out detailing inequality is larger than it was thirty years ago. As Milton Friedman once said "We all start the race from the same point, but each one of us has a different finishing line". Markets enable us all to prosper and follow our own goals, using our available talents. Governments are the ones who ensure further inequality. The monopoly on money ensures the currency is inflated, enriching the asset rich at the expense of the asset poor. Lower incomes are also crushed further as a larger chunk of money is used to buy everyday goods, food, energy and so forth. The Government welfare state has meant the 'why work?' culture further expands creating an increased disillusioned underclass stuck in a vicious circle. Charity starts at home and the only way to help people is to allow them to help themselves. Who says the free market can't run a social welfare system? They already exist in the form of voluntary organisations who gain donations or Church organisations. People are more reluctant to claim if they can see the people providing the handouts, rather than some faceless factory system, where the government churns out the public's money. Of course we only get widespread unemployment when the free market tries to correct the governments wrong doings. Otherwise shocks to the whole system wouldn't occur, outside of a natural disaster of course.
Coming full circle back to Hayek and Keynes, I always find history is full of interesting stories. One such story is before Keynes wrote his famous book in 1936 becoming the de-facto textbook in economics, Hayek had critiqued Keynes previous works. In Keynes previous work, Hayek had done such a good job that Keynes declared to him that he no longer believed in what he wrote and had gone back to the drawing board to write his famous general theories. When this later book was released Hayek decided not to critique it as he didn't wish to waste his time again and felt everyone would see it to be as flawed as his previous works. The rest, they say, is history.
John Maynard Keynes
The General Theory of Employment, Interest and Money
“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”
F A Hayek
The Fatal Conceit
Both quotes above are taken from the recent econstories rap video that has been showing up all around the Internet which can be viewed here. A very lucid video crammed with factual information, so don't be put off by it's format as a rap song. As we start a new decade, more people will see the ill's of our economic system and formats such as this will help inform people on all levels, as I realise many people find history and economics a very dry and boring subject.
The video contains many subtle messages. The receptionist not recognising Hayek, Keynes book in place of the bible in the hotel room, a party at the FED - the old alcoholic analogy along with "Tim" and "Ben" as the bar tenders. It compares our current solutions to nothing more than the 'hair of the dog', painting a clear picture of what needs to be done. The video is not biased either, with a fair representation of Keynesian economics.
Back in the real world Greece finds itself on the ropes once more, the bond vigilante's are turning up the heat sending rates upwards meaning rollover default is becoming a real danger. As quick as the pansy states will be able to cut their budgets, the rates on their bonds will rise over the long term negating all of the spending cuts. Portugal was thrown in the same gladiatorial arena, as the med club cousin found it couldn't find buyers for some of its bonds. Who's next - Spain, Italy, Japan, the UK, the landscapes getting ugly as distress in the bond bubble is on display for all to see. The Euro fell, but the Germans seem to be having no Southern Shenanigans. Staunchly opposed to any bailouts instead demanding nations begin to get their house in order as their Bunds still look as solid as any other government debt instrument out there. Could the Chinese bail the Greeks out? Yu Yongding doesn't believe so declaring the assets as unsafe.
What seems to have surprised many is the speed of events and how the Greek economy has fallen into the abyss. Well this is what happens when a government runs out of bullets, the market always catches up with you. It took near 80 years for it to catch up with Communist Russia but when it did, it fell in spectacular fashion. The decades of decay are still there for all to see.
Pimcos Bill Gross has given a big no, no on UK Government Gilts as he sees not only real rates of return as an issue but the devaluation dilemma. When the UK politicians still have access to devalue, investors wisen up and realise its not just the interest rate you need to worry about, its a question of will the currency still be worth the same 10 years down the line? Italians used to perform this form of default when the basket case lira was around, nonetheless international money gets smart and knew not to trust an Italian Government. Similar to their driving, reckless.
In Britain it goes from bad to quite simply awful. Over in America Obama has felt the peoples backlash of late, with all the Wall Street bailouts and excessive government intervention coming back to bite him. Meanwhile the 'Great' British public reward Gordon Brown, increasing his bounce in the polls, even though the current Labour government are doing all they can to make the fundamentals worse. That's the British for you, we believe in the free lunch and that Government can solve the issues of the day. We like illusions, inflation, governments and think there's not enough spending on public services despite our gigantic deficit. Americans talk of dollar death, they should think about coming over to Europe and see how to really mess things up! Sorry Peter Schiff, its not just America that's the 'Caboose', its pretty much the whole of the West.
Japan has been in the news a fair amount lately, with many commentators declaring default could occur there first. While Japan is a basket case, their savings rate is not what it was and they are all getting a lot older, they still have a lot of currency reserves, second only to China. They will sell these first to pay for the latest Government who are following Keynes advice just like the previous Government did for the past 20 years. They will also stop buying US Treasuries at some point, which they still seem to have an appetite for, instead buying their domestic bonds. Of course they will go pop at some point. You don't build up 200% of government debt and not pay for it. Any slight move in rates would be fatal, therefore expect the above actions to be taken first.
Switching gears, Shells profits collapsed forcing the sale of its assets and job losses for the oil giant due to oils lower price. You always hear about price rises in the media, but never hear about the falls. When oil was around $148 a barrel, it was the 'evil' oil companies that was causing the price to rise, profiteering at the expense of the public. When it collapsed, the same reasoning didn't add up as the same companies were scrambling to mend their books. 'Why didn't the price of oil fall at the pump substantially when its price fell from $148 to $40' - simple its hedged. The free market insulates consumers from the volatility in the commodities markets by using futures contracts to hedge against price spikes and dips. Hence the price at the pump stays fairly stable in comparison. The only reason the price rises over the long term is from Government Monetary mismanagement. Of course the government likes to blame speculators, oil companies, Arabs and the public generally buys the lies. Against gold of course oils price doesn't really move anywhere over the long term, but enough on minor details such as these.
Reports again come out detailing inequality is larger than it was thirty years ago. As Milton Friedman once said "We all start the race from the same point, but each one of us has a different finishing line". Markets enable us all to prosper and follow our own goals, using our available talents. Governments are the ones who ensure further inequality. The monopoly on money ensures the currency is inflated, enriching the asset rich at the expense of the asset poor. Lower incomes are also crushed further as a larger chunk of money is used to buy everyday goods, food, energy and so forth. The Government welfare state has meant the 'why work?' culture further expands creating an increased disillusioned underclass stuck in a vicious circle. Charity starts at home and the only way to help people is to allow them to help themselves. Who says the free market can't run a social welfare system? They already exist in the form of voluntary organisations who gain donations or Church organisations. People are more reluctant to claim if they can see the people providing the handouts, rather than some faceless factory system, where the government churns out the public's money. Of course we only get widespread unemployment when the free market tries to correct the governments wrong doings. Otherwise shocks to the whole system wouldn't occur, outside of a natural disaster of course.
Coming full circle back to Hayek and Keynes, I always find history is full of interesting stories. One such story is before Keynes wrote his famous book in 1936 becoming the de-facto textbook in economics, Hayek had critiqued Keynes previous works. In Keynes previous work, Hayek had done such a good job that Keynes declared to him that he no longer believed in what he wrote and had gone back to the drawing board to write his famous general theories. When this later book was released Hayek decided not to critique it as he didn't wish to waste his time again and felt everyone would see it to be as flawed as his previous works. The rest, they say, is history.
Friday, 16 October 2009
Japan a Deflation Death? - Nope Stagflation
Gordon Brown this week announced what can only be described as a car boot sale of UK PLC's bric-a-brac goods, an attempt to sooth markets regarding the budget deficit. Many of the items have been for sale before, but I'm sure the government in their current desperation will be willing to accept lower offers this time around. I agree with privatisation in getting the state out of our lives, but a student loan book and a crossing in Kent are hardly big ticket items, never mind the fact that they are assets that generate money. Thatcher sold the majority of the family silver during the eighties privatisation bonanza however contrary to common belief there's plenty more the state could sell. Institutions such as the NHS, education the road infrastructure and so forth could all be sold, but these are not politically palatable areas that the public can swallow, meaning they are off limits for any politician that doesn't want to ruin their career. The Prime Minister once more began another Keynesian rant stating that the Conservatives proposals would lead to the same problems experienced by Japan for the past two decades. The title 'Prudent Chancellor' seems ever more absurd as time goes on, his emphasis on yet more needless spending in an attempt to bankrupt the nation. It doesn't matter if its Americas Great Depression or the lost decade in Japan, economists, politicians and journalists all seem to draw the wrong conclusions. What Gordon Brown in fact proposes are the very same policies that were pursued during both periods above and resulted in stagnation. Japan didn't get ravaged by the 'dangers of deflation', it was instead a good old classic stagflation.
Many Keynesian economists are still baffled by Japan. Over the years, policy after policy has been proposed by their school of thought, all of which involve some form of government action, but time and time again they all seem to fail. The classic Keynesian rebuttal whenever these policies fail is "Well, the authorities didn't do enough". Just like they apparently didn't do enough during the Great Depression. Yet put forward the question regarding Americas 1920-21 Depression and all Keynesian theory goes out of the window. Here Warren Harding, Americas president at the time, cut government spending, cut taxes and in fact did very little during a time when the economy was contracting at an alarming rate with the measure of unemployment rising faster than during the subsequent Great Depression. Yet the economy with market forces in full control, liquidated unprofitable lines of production and subsequently America during the 1920's experienced one of the greatest economic booms in history. The unemployment rate came dramatically down in no time at all, without government spending to alleviate this process as we are now all told. Herbert Hoover, who was later to become Americas President during the next depression, unsurprisingly didn't agree with Harding's polices, a pre-cursor of what was to come. Don't mention any of this to the Keynesian's though, it will give them a real headache.
What did Japan do when their bubble burst? Cut taxes? Cut Government spending? Liquidate? They of course carried out the exact opposite. Their Government debt used to be as low as the UK's before its recent exponential trajectory however Japans now stands at 200% plus and keeps growing. They propped up their infamous zombie banks, crippling the pricing mechanism that is so vital for an economy to prosper. Increases in taxes will choke the economy as rising social costs increase. In order to assess what really happened we need to deal with the aspect of deflation, or what is currently assumed as the bogeyman to economic growth. Japan never entered a downward death spiral of prices, that consistently fell year on year, in fact the lowest their CPI hit during this time was -1%. During the mid-nineties it spiked back up to 2%. There was only around 6 years of official deflation during the two decades using the Governments metrics. What gave the impression of price deflation was in fact asset price deflation. Both real estate and stock prices completely collapsed and have not returned since, instead stagnating for years. The reason why they never recovered to their previous highs was exactly what the Government did, they took over and tried the command economy approach. Roads to nowhere, propping up banks that were insolvent, not allowing private enterprise to take over the means of production. Rather than money going into the private sector, Japanese savings that were accrued during their economic miracle were funneled into Government bonds, wasteful Government consumption. It was quite simply a classic stagflation, that is still ongoing.
The UK are now pursuing similar policies and will go into a long period of stagnation unless the current direction is reversed. However it is useful to try and make further sense of Japans situation during that time, compared with our own. When the crunch came for Japan they ran budget surpluses, had high domestic saving rates for years and were a creditor nation. The UK on the other hand has the complete opposite and relies heavily on overseas investors to buy our Government bonds. Japan only began to run double digit Government deficits eight years later. They were able to sell their bonds to domestic citizens. They were still obtaining plenty of foreign currency as they exported more than they imported. The UK has already printed in excess of 10% GDP to pay for the debts, is running a huge budget deficit only two years after the current financial crunch and for the past decade its citizens have had low savings rates.
So what does all the above mean? Quite simply the UK is in a much more highly inflationary situation that Japan was. Japan's government couldn't really print money until over 10 years later as a last resort due to there being ample savings to pay for the Government debt. Japans government created their budget deficit, the UK has a structural one in which politicians are notorious for not tackling the shortfall. While Japans significant industries, electronics and car manufacture, continued to grow with global demand, the UK's key revenue streams, finance and North Sea, are in decline.
Another key factor is if the Government Bond market is in a bull or bear market. During Japan's economic disaster the bond market was in a bull market. Interest rates kept falling, people still had faith in many paper financial assets. Since 1981/82 Government Bonds have been in a bull market however these things always move in cycles, typically we should be seeing the end to this trend at some point. 25 years plus is a good run and in the near future this will turn into a long, grinding bear market, we may have already crossed that point. In a bear market, interest rates on bonds rise, which means Governments have to increasingly spend more on interest payments, diverting money away from spending such as health or education. Recently the CEBR said interest rates will stay low for the foreseeable future during the first half of the next decade, however that would mean the bond bull market lasting for over three decades, a highly improbable situation.
History is always an important guide to future trends, however it is crucial to compare given contexts in their current time frame. I have seen articles recently stating that Britain had debts in excess of 200% of GDP after the Napoleonic wars, indeed I have mentioned it myself before, however this didn't count for much when the UK went broke in 1976 with debts as meager as 48% of GDP. In the prior scenario the UK was the global superpower but a much bigger factor was that the UK didn't have a Welfare State. There was little government expenditure, with the majority of taxes just going to pay off the debt as alternative expenses didn't exist. Contrast that with current Government spending in which the interest payments are now comparatively small along with a rainbow of other Governmental expenditure, we see how context is key. Somehow, within the time frame of 150 years, Britain had transformed itself from one of the leaders of laissez faire, into a nation that was almost turning Communist in 1976. An ever expansive state, a declining currency, an economy with little productive purpose, meant investors wouldn't lend the UK any more money, despite the debt being around a quarter the level than that of the early nineteenth century.
Japan recently has around the same debt as the UK did 200 years ago and is still able to pay for it. It's dangerous to compare Britain with Japan, as Britain will not be able to sustain a public debt level that high. Japan built this debt up during a bull market in Government bonds and had savings to pay for it. The UK doesn't have either of those luxuries. It's one of the key concepts that many forecasters and economic commentators overlook, the fact that interest rates can rise over time and enter bear and bull markets. Payments for the interest are already predicted to soar as the debt increases based on the current low rates, but what about if those rates double 10 years from now? The government admits the earliest they can balance the books is around then therefore debt is almost certain to keep going up.
Do not believe predictions regarding long term interest rates and the level of debt a country can absorb, no one can forecast precise figures in these areas. Instead look at the fundamentals. Are the government balancing the books? Has the printing press been shut down? Has liquidation occurred? Until fundamentals return then stagflation looks the most likely outcome here in the UK. Just like Japan, only I fear much worse.
Many Keynesian economists are still baffled by Japan. Over the years, policy after policy has been proposed by their school of thought, all of which involve some form of government action, but time and time again they all seem to fail. The classic Keynesian rebuttal whenever these policies fail is "Well, the authorities didn't do enough". Just like they apparently didn't do enough during the Great Depression. Yet put forward the question regarding Americas 1920-21 Depression and all Keynesian theory goes out of the window. Here Warren Harding, Americas president at the time, cut government spending, cut taxes and in fact did very little during a time when the economy was contracting at an alarming rate with the measure of unemployment rising faster than during the subsequent Great Depression. Yet the economy with market forces in full control, liquidated unprofitable lines of production and subsequently America during the 1920's experienced one of the greatest economic booms in history. The unemployment rate came dramatically down in no time at all, without government spending to alleviate this process as we are now all told. Herbert Hoover, who was later to become Americas President during the next depression, unsurprisingly didn't agree with Harding's polices, a pre-cursor of what was to come. Don't mention any of this to the Keynesian's though, it will give them a real headache.
What did Japan do when their bubble burst? Cut taxes? Cut Government spending? Liquidate? They of course carried out the exact opposite. Their Government debt used to be as low as the UK's before its recent exponential trajectory however Japans now stands at 200% plus and keeps growing. They propped up their infamous zombie banks, crippling the pricing mechanism that is so vital for an economy to prosper. Increases in taxes will choke the economy as rising social costs increase. In order to assess what really happened we need to deal with the aspect of deflation, or what is currently assumed as the bogeyman to economic growth. Japan never entered a downward death spiral of prices, that consistently fell year on year, in fact the lowest their CPI hit during this time was -1%. During the mid-nineties it spiked back up to 2%. There was only around 6 years of official deflation during the two decades using the Governments metrics. What gave the impression of price deflation was in fact asset price deflation. Both real estate and stock prices completely collapsed and have not returned since, instead stagnating for years. The reason why they never recovered to their previous highs was exactly what the Government did, they took over and tried the command economy approach. Roads to nowhere, propping up banks that were insolvent, not allowing private enterprise to take over the means of production. Rather than money going into the private sector, Japanese savings that were accrued during their economic miracle were funneled into Government bonds, wasteful Government consumption. It was quite simply a classic stagflation, that is still ongoing.
The UK are now pursuing similar policies and will go into a long period of stagnation unless the current direction is reversed. However it is useful to try and make further sense of Japans situation during that time, compared with our own. When the crunch came for Japan they ran budget surpluses, had high domestic saving rates for years and were a creditor nation. The UK on the other hand has the complete opposite and relies heavily on overseas investors to buy our Government bonds. Japan only began to run double digit Government deficits eight years later. They were able to sell their bonds to domestic citizens. They were still obtaining plenty of foreign currency as they exported more than they imported. The UK has already printed in excess of 10% GDP to pay for the debts, is running a huge budget deficit only two years after the current financial crunch and for the past decade its citizens have had low savings rates.
So what does all the above mean? Quite simply the UK is in a much more highly inflationary situation that Japan was. Japan's government couldn't really print money until over 10 years later as a last resort due to there being ample savings to pay for the Government debt. Japans government created their budget deficit, the UK has a structural one in which politicians are notorious for not tackling the shortfall. While Japans significant industries, electronics and car manufacture, continued to grow with global demand, the UK's key revenue streams, finance and North Sea, are in decline.
Another key factor is if the Government Bond market is in a bull or bear market. During Japan's economic disaster the bond market was in a bull market. Interest rates kept falling, people still had faith in many paper financial assets. Since 1981/82 Government Bonds have been in a bull market however these things always move in cycles, typically we should be seeing the end to this trend at some point. 25 years plus is a good run and in the near future this will turn into a long, grinding bear market, we may have already crossed that point. In a bear market, interest rates on bonds rise, which means Governments have to increasingly spend more on interest payments, diverting money away from spending such as health or education. Recently the CEBR said interest rates will stay low for the foreseeable future during the first half of the next decade, however that would mean the bond bull market lasting for over three decades, a highly improbable situation.
History is always an important guide to future trends, however it is crucial to compare given contexts in their current time frame. I have seen articles recently stating that Britain had debts in excess of 200% of GDP after the Napoleonic wars, indeed I have mentioned it myself before, however this didn't count for much when the UK went broke in 1976 with debts as meager as 48% of GDP. In the prior scenario the UK was the global superpower but a much bigger factor was that the UK didn't have a Welfare State. There was little government expenditure, with the majority of taxes just going to pay off the debt as alternative expenses didn't exist. Contrast that with current Government spending in which the interest payments are now comparatively small along with a rainbow of other Governmental expenditure, we see how context is key. Somehow, within the time frame of 150 years, Britain had transformed itself from one of the leaders of laissez faire, into a nation that was almost turning Communist in 1976. An ever expansive state, a declining currency, an economy with little productive purpose, meant investors wouldn't lend the UK any more money, despite the debt being around a quarter the level than that of the early nineteenth century.
Japan recently has around the same debt as the UK did 200 years ago and is still able to pay for it. It's dangerous to compare Britain with Japan, as Britain will not be able to sustain a public debt level that high. Japan built this debt up during a bull market in Government bonds and had savings to pay for it. The UK doesn't have either of those luxuries. It's one of the key concepts that many forecasters and economic commentators overlook, the fact that interest rates can rise over time and enter bear and bull markets. Payments for the interest are already predicted to soar as the debt increases based on the current low rates, but what about if those rates double 10 years from now? The government admits the earliest they can balance the books is around then therefore debt is almost certain to keep going up.
Do not believe predictions regarding long term interest rates and the level of debt a country can absorb, no one can forecast precise figures in these areas. Instead look at the fundamentals. Are the government balancing the books? Has the printing press been shut down? Has liquidation occurred? Until fundamentals return then stagflation looks the most likely outcome here in the UK. Just like Japan, only I fear much worse.
Friday, 19 December 2008
German "Crass Keynesianism" Lesson
"All this will do is raise Britain's debt to a level that will take a whole generation to work off ... The switch from decades of supply-side politics all the way to a crass Keynesianism is breathtaking ... When I ask about the origins of the crisis, economists I respect tell me it is the credit-financed growth of recent years and decades ... Isn't this the same mistake everyone is suddenly making again, under all the public pressure?"
Peer Steinbruck, German Finance Minister
It is very rare that economic sense is spoke in the mainstream media. All too often 'experts' are paraded in front of the media circus to explain what needs to be done to amend the current financial crisis. Sloppy Journalism has become all too common, with many of the main newspapers and television companies rarely exposing the truth. Peer Steinbrucks recent comments were a breath of fresh air and comments that expose how many governments of the world are now proceeding to make the crisis worse. Comments like these expose the policies for what they are, short term political popularity contests that have no benefit in the medium to the long term. The particular attack on Britain was fully justified and words that our leaders should take great alarm to. The markets have also begun shorting the UK, as McDonalds debt has become cheaper to insure against default. Peer Steinbruck is not the first German to expose the weaknesses of the UK economy. Back in October of last year, when the Credit Crunch was still in its infancy, a team of German Economists warned that the UK economic miracle was nothing more than a mirage, built on debt and short term consumption. At the time I remember a lot of the 'experts' deriding this report as nonsense, with the politicians ignoring these warning signs, but here we are 12 months down the line the Germans are spot on again. The UK is in dire shape, with Brown and Darling still with their fingers in their ears. Well I suppose Brown apparently saved the World recently.
Gordon Brown's popularity in the polls has perversely gone up recently, and he has begun capturing ground against the Conservatives. Could he be trying to call a Summer election in 2009, before the economy implodes in 2010 and beyond? Brown was originally going to call an election in 2007, as he knew the economy was about to nose dive off a cliff. He backed down in the end and decided to ride out the storm as he didn't want to loose his life's long ambition, of being Prime Minister. Of course these fiscal paternalistic policies are just more smoke and mirrors, eco-matrix policies to confuse the public. Peer Steinbruck views are a minority. Legitimacy is gained when Paul Krugman, a Nobel prize winning economist, praises the central banks and the fiscal polices of governments, stating that we can not repeat the mistakes of the past. A Nobel Prize winning economist who came out saying that during the Great Depression they didn't cut interest rates like we have now - it makes you wonder what history books he reads. These neo-Keynesian economists just know one thing, and that is too inflate, so its no surprise that governments galvanise these economists. Recently, unbelievably the media have begun mentioning the 'helicopter drops' of money, ones that Ben Bernanke remarked about in 2002, just as this bubble was being inflated. Yet no one from what I have seen has come out and said how stupid these ideas are. Printing money has never worked and never will. It has become so bad that for once I am actually worried what our leaders are doing along with the complicity the media and mainstream economists seem to be showing towards such dangerous actions. No currency seems safe these days, with everyone trying to inflate. Yet economics editors, people that you hope have been educated in finance, seem to think this is a good thing.
"It is not inconceivable that banks could start charging customers to hold their money – after all, their business model is predicated on positive interest rates"
Statements like these sum up the delusional state the UK has found itself in. What savings? Do you think the banks are going to start charging people for their money, when they are insolvent? Do you think members of the public will pay banks to store their money, when we get double digit inflation? There still seems to be a propaganda mission among some, that we are are entering a deflationary spiral that will last for years. However once this sell off period has ceased, inventories and stock have been sold off, production has been cut back and the government has printed up more money, can you really see deflation taking hold? The goods and services in the real economy will decrease, capital is running scared therefore there are no productive investments being made, yet the amount of paper money will increase - this is classic stagflation, the phenomenon that smashed Keynesian economics apart during the seventies.
We've been here before of course. Back in 1973-74 the world was in a similar situation we find ourselves in now. There was a commodity bull market, oil price spikes, an expensive war, recently Iraq, back then Vietnam and a serious bust that was occurring during this time. Yet at the time there was no unified economic response to the above as the seventies credit crunch hit. Rates of inflation varied greatly in Europe through 1973-79, the years after the crunch, with the UK, Ireland, Spain and Italy averaging around 16% during this period while West Germany, Holland and the Swiss averaged around 5%. Yet history seems to be repeating. West Germany back then pioneered the monetarist approach and shyed away from reflation, opting instead to control government spending and the money supply, allowing the deflationary forces to amend the market during 1973-74. Meanwhile the UK chose reflation, by implementing the opposite polices to the above. It joined the other Western European basket economies at the time, by experiencing some of the worst inflation in the euro zone. Once again the Bundesbank are stating the principles they undertook in the past, but these policies are not populist polices politicians like to hear. Once again, the interpretations of history they use are inaccurate, thus they fail to see the causes of the Great Depression and the stagflationary seventies. Government intervention and inflationist policies caused the above, not the market, as what is commonly mis-perceived.
If we compare the current German economy to the UK, we see a stark contrast. Germany has a trade surplus, managed to balance the budget (thanks to Peer Steinbruck) before the downturn occurred, has much less personal debt and has savings of around 10% of income. The UK has none of the above and all its macroeconomic indicators are in bad shape. So essentially Germany is a producer nation, while the UK is the unsustainable consumer maxing out every credit card in sight. I'm not saying Germany won't be effected by the current downturn, there are very few economies in the world today who practice autarky in the globalised economy we live in. But the German economy has far better fundamentals than the UK. Don't be fooled by our governments spurious claims that we have 40% GDP public sector debt. It will soon be 50% then 60%, and keep rising further. With off book debts this figure is more like 200%, as just looking at pension liabilities with a conservative estimate, this would be around 100% of GDP alone, not mentioning other liabilities. Yet the UK economy will contract further - thus increasing these percentages. With the pounds recent slump, the worst since it experienced a run and was consequentially removed from its Gold backing back in 1931, external debt has in effect become more expensive (well at least until other currencies fall against the pound as will no doubt occur). To illustrate how bad this is the graph below indicates how exposed the UK is compared with the other G7 nations. This is public and private debt the UK owes to the rest of the world as a proportion of the economy. With the pounds devaluation recently, this has just got a whole lot more expensive to service, as quite substantial amounts are borrowed in other currencies.
Since Otto Von Bismark managed to unify Prussia with the other German states to form what we now know as Germany, Europe and indeed the World has always looked suspiciously at her. Victory in wars against Austria and then France, during the later part of the nineteenth century displayed early remnants of the economic powerhouse, that would become one of the main European powers. France and Britain today still cling to their old superpower status that has long gone, and will not accept Germany as the current European superpower. Germany took in huge numbers of Yugoslav refugees during the ethnic 'cleansing', much more than the UK, but as soon as they tighten their boarders we brand them as Fascists, showing our Deutschtum phobia. It seems that the UK along with other nations are unwilling to listen to the Germans. They ignore this advice at their own peril.
Peer Steinbruck, German Finance Minister
It is very rare that economic sense is spoke in the mainstream media. All too often 'experts' are paraded in front of the media circus to explain what needs to be done to amend the current financial crisis. Sloppy Journalism has become all too common, with many of the main newspapers and television companies rarely exposing the truth. Peer Steinbrucks recent comments were a breath of fresh air and comments that expose how many governments of the world are now proceeding to make the crisis worse. Comments like these expose the policies for what they are, short term political popularity contests that have no benefit in the medium to the long term. The particular attack on Britain was fully justified and words that our leaders should take great alarm to. The markets have also begun shorting the UK, as McDonalds debt has become cheaper to insure against default. Peer Steinbruck is not the first German to expose the weaknesses of the UK economy. Back in October of last year, when the Credit Crunch was still in its infancy, a team of German Economists warned that the UK economic miracle was nothing more than a mirage, built on debt and short term consumption. At the time I remember a lot of the 'experts' deriding this report as nonsense, with the politicians ignoring these warning signs, but here we are 12 months down the line the Germans are spot on again. The UK is in dire shape, with Brown and Darling still with their fingers in their ears. Well I suppose Brown apparently saved the World recently.
Gordon Brown's popularity in the polls has perversely gone up recently, and he has begun capturing ground against the Conservatives. Could he be trying to call a Summer election in 2009, before the economy implodes in 2010 and beyond? Brown was originally going to call an election in 2007, as he knew the economy was about to nose dive off a cliff. He backed down in the end and decided to ride out the storm as he didn't want to loose his life's long ambition, of being Prime Minister. Of course these fiscal paternalistic policies are just more smoke and mirrors, eco-matrix policies to confuse the public. Peer Steinbruck views are a minority. Legitimacy is gained when Paul Krugman, a Nobel prize winning economist, praises the central banks and the fiscal polices of governments, stating that we can not repeat the mistakes of the past. A Nobel Prize winning economist who came out saying that during the Great Depression they didn't cut interest rates like we have now - it makes you wonder what history books he reads. These neo-Keynesian economists just know one thing, and that is too inflate, so its no surprise that governments galvanise these economists. Recently, unbelievably the media have begun mentioning the 'helicopter drops' of money, ones that Ben Bernanke remarked about in 2002, just as this bubble was being inflated. Yet no one from what I have seen has come out and said how stupid these ideas are. Printing money has never worked and never will. It has become so bad that for once I am actually worried what our leaders are doing along with the complicity the media and mainstream economists seem to be showing towards such dangerous actions. No currency seems safe these days, with everyone trying to inflate. Yet economics editors, people that you hope have been educated in finance, seem to think this is a good thing.
"It is not inconceivable that banks could start charging customers to hold their money – after all, their business model is predicated on positive interest rates"
Statements like these sum up the delusional state the UK has found itself in. What savings? Do you think the banks are going to start charging people for their money, when they are insolvent? Do you think members of the public will pay banks to store their money, when we get double digit inflation? There still seems to be a propaganda mission among some, that we are are entering a deflationary spiral that will last for years. However once this sell off period has ceased, inventories and stock have been sold off, production has been cut back and the government has printed up more money, can you really see deflation taking hold? The goods and services in the real economy will decrease, capital is running scared therefore there are no productive investments being made, yet the amount of paper money will increase - this is classic stagflation, the phenomenon that smashed Keynesian economics apart during the seventies.
We've been here before of course. Back in 1973-74 the world was in a similar situation we find ourselves in now. There was a commodity bull market, oil price spikes, an expensive war, recently Iraq, back then Vietnam and a serious bust that was occurring during this time. Yet at the time there was no unified economic response to the above as the seventies credit crunch hit. Rates of inflation varied greatly in Europe through 1973-79, the years after the crunch, with the UK, Ireland, Spain and Italy averaging around 16% during this period while West Germany, Holland and the Swiss averaged around 5%. Yet history seems to be repeating. West Germany back then pioneered the monetarist approach and shyed away from reflation, opting instead to control government spending and the money supply, allowing the deflationary forces to amend the market during 1973-74. Meanwhile the UK chose reflation, by implementing the opposite polices to the above. It joined the other Western European basket economies at the time, by experiencing some of the worst inflation in the euro zone. Once again the Bundesbank are stating the principles they undertook in the past, but these policies are not populist polices politicians like to hear. Once again, the interpretations of history they use are inaccurate, thus they fail to see the causes of the Great Depression and the stagflationary seventies. Government intervention and inflationist policies caused the above, not the market, as what is commonly mis-perceived.
If we compare the current German economy to the UK, we see a stark contrast. Germany has a trade surplus, managed to balance the budget (thanks to Peer Steinbruck) before the downturn occurred, has much less personal debt and has savings of around 10% of income. The UK has none of the above and all its macroeconomic indicators are in bad shape. So essentially Germany is a producer nation, while the UK is the unsustainable consumer maxing out every credit card in sight. I'm not saying Germany won't be effected by the current downturn, there are very few economies in the world today who practice autarky in the globalised economy we live in. But the German economy has far better fundamentals than the UK. Don't be fooled by our governments spurious claims that we have 40% GDP public sector debt. It will soon be 50% then 60%, and keep rising further. With off book debts this figure is more like 200%, as just looking at pension liabilities with a conservative estimate, this would be around 100% of GDP alone, not mentioning other liabilities. Yet the UK economy will contract further - thus increasing these percentages. With the pounds recent slump, the worst since it experienced a run and was consequentially removed from its Gold backing back in 1931, external debt has in effect become more expensive (well at least until other currencies fall against the pound as will no doubt occur). To illustrate how bad this is the graph below indicates how exposed the UK is compared with the other G7 nations. This is public and private debt the UK owes to the rest of the world as a proportion of the economy. With the pounds devaluation recently, this has just got a whole lot more expensive to service, as quite substantial amounts are borrowed in other currencies.
Since Otto Von Bismark managed to unify Prussia with the other German states to form what we now know as Germany, Europe and indeed the World has always looked suspiciously at her. Victory in wars against Austria and then France, during the later part of the nineteenth century displayed early remnants of the economic powerhouse, that would become one of the main European powers. France and Britain today still cling to their old superpower status that has long gone, and will not accept Germany as the current European superpower. Germany took in huge numbers of Yugoslav refugees during the ethnic 'cleansing', much more than the UK, but as soon as they tighten their boarders we brand them as Fascists, showing our Deutschtum phobia. It seems that the UK along with other nations are unwilling to listen to the Germans. They ignore this advice at their own peril.
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