“From New Labour to hard labour” was Alex Salmond’s verdict on the Chancellor’s emergency budget last week. Actually there’s not likely to be a lot of labour, hard or otherwise, since many of us will be unemployed by the time the Darling squeeze hits in two years time. .The rate of job losses in recent weeks has been astounding, with famous names like Woolies and MFI joining BT, AstraZeneca, Citigroup. You could be forgiven for thinking that the roof is falling in.
Of course, the government has tried to fix the roof (which they insist was in a very good state anyway) by the Chancellor’s much-vaunted fiscal stimulus. Last week was supposed to be a give-away budget, but not a lot was given away – about £20bn – and most of us don’t intend to spend it anyway. Given the state of the public finances, Darling’s room for manoeuvre was not great. Then there’s the issue of consumer fatigue.
In Keynsian economic theory – the government’s version of it anyway – the way to stop the economy from seizing up is to persuade people to buy more stuff. You may have wardrobes stuffed full of rubbish already. Primark clothing is clogging landfill sites. And the nation may be mired in debt as a result of retail therapy. But no: your duty is to consume. So get out there onto the Christmas front line and spend spend spend!
Except that if we have half a brain we won’t. Spending more money we don’t have on rubbish we don’t need is not a rational response to this credit crisis. Nor is it a rational approach to the environment. And we’re just too well informed nowadays to respond to crude Pavlovian stimuli like upfront tax cuts. We can all read on the internet that taxes are going to go up sharply in two years to take it all back. The only sensible thing to do right now is to save and pay off debt
But the government is determined to force us to spend even though they know, and we know, that the days of mindless consumerism are over. When this fiscal stimulus fails, as it did in America last year, the monetary authorities will turn to more pernicious ways of forcing us to spend. In the States, the Federal Reserve has turned to what they call “quantitative easing” and what the rest of us call printing money.
The Fed Chairman, Ben Berenanke, is often called “helicopter Ben” because he once said that, to head off deflation, he would drop piles of dollars on Wall Street by helicopter if necessary. The Fed is throwing hundreds of billions, indeed trillions of unfunded dollars at the broken banking system – buying up worthless mortgages and keeping bankrupt behemoths like AIG and Citigroup and Fannie and Freddie going. This will cause a fall in the purchasing power of the dollar, but the monetary authorities hope that this inflation will cut the value of the huge debts of banks and homeowners and make them more inclined to lend and borrow again. Inflation penalises savers, and forces them to spend because if they don’t, and if interest rates are low, the value of their bank accounts will just dwindle to nothing.In other words, the cost of this bailout could be the impoverishment of millions of people who are about to retire and live on fixed incomes. Talk about moral hazard! Who is ever going to save again if all they do is reward people who get into debt?
Now, there is a lot to be said for Keynsianism, but a lot of things are being done in the late economist’s name of which he would surely disapprove. Irresponsible monetary inflation is one of them. Keynes advocated ‘deficit financing’ (government borrowing to invest) in very different circumstances to those operating today. In the 1930s, there was huge unused capacity ( factories and machines lying idle) in Britain and America. Today, most manufacturing has been out sourced to countries like India and China, where factories are becoming idle at a rate of a thousand a week. It isn’t so easy to promote productive activity in an economy like ours which has become dominated by a huge parasitical financial services industry.
Government borrowing is looking bad enough already without any more deficits being financed The institute for Fiscal Studies has calculated that the squeeze in public spending – the Chancellor wants it to fall to 1.1 percent in 2011-14 – will involve GBP37bn being cut from planned departmental budgets – more even than the Tories were calling for before the budget. Yes, while condemning George Osborne for seeking to cut schools and hospitals, Labour were planning to do exactly the same.
And that’s on the Chancellor’s best case scenario of the economy coming out of recession next year, which is complete fantasy. This recession is going to be long and deep. Moreover, the government figures don’t include the cost of the banking bailouts, the PFI projects that have to come onto the public spending figures under new accounting rules next April, or the unfunded liabilities of public sector pensions. This amounts to a colossal risk added to the public accounts.
We are not talking of ‘just’ a doubling of public debt next year to GBP 118bn, but potentially very much more than that. This is why the international markets are turning against sterling. Really, we are in for very substantial spending cuts – far greater than the GBP 500m off the Scottish budget that the First Minister flagged up last week. This will lead to job losses in the labour intensive public sector just as the private sector is dumping hundreds of thousands on the dole.
Things are not good for UKPLC. Our delinquent banks have been borrowing beyond our means, turning Britain into something like a giant hedge fund. The emergency budget will make little difference. Financially, we are in a similar situation to Iceland before the crunch, and we cannot rule out sharing their fate. Hyperinflation could follow a brief deflation next year and there is likely to be a run on the pound. No one knows how to deal with this yet. Unlike the US, we cannot export our debt to other countries because sterling isn’t a reserve currency.
There seems only one solution and that is to ask the EU very, very nicely if we could – ahem – join the security of the single currency without delay. All of Brown’s 1997 ‘tests’ are anyway met. The only thing he has to fear is fear itself.