9th December, 2009

It has been an extraordinary day this day, and something to witness: this frenzy of pre-election fisticuffs.

Extraordinary because Conservatives, like mindless bullies, are fighting a phoney war against the victims of this crisis.

The fact is the Tories are spineless scaredy cats, too timid to take on the perpetrators, who have successfully bribed them with various inducements, including the playground’s shiniest marbles.

As a result they have turned away from the perpetrators, and   are picking on nurses, policemen, teachers, civil servants, Alzheimer-carers, school cooks, hospital cleaners and psychiatrists - to categorise but a few.

All these victims of the financial crisis now stand accused - by the Tories and their friends -  of pillaging Treasury coffers of £250 billion  - the rise in government debt since this crisis started in 2007.

In the schoolground-type frenzy that has ensued, the Tories have been joined by most mainstream commentators including the BBC’s Stephanie Flanders and Robert Peston whose analyses are happily amplified by the smug and largely economically illiterate guests invited on to Newsnight.

Vainly they call for reinforcements - from the Ratings Agencies who have steadfastly refused to join in the bunfight, but whom the bullies claim to have on side.

Then as the dust flies and the victims scream for help, Labour and the Liberal Democrats pile in - like the nervy boys in a class hovering around the school bully as he beats up on innocent, if puny weaklings.

The Tory tactics are clear and were best expressed by Gerry Robinson on Newsnight on Tuesday 8th December.  Government spending on the public sector must be slashed. (They never attack government spending on the private sector - i.e. £400 million on the ‘cash for clunkers’ scheme that went straight to the private car companies.)

The civil service and public sector must be decimated, and at least another million workers forced onto the dustheap of unemployment.

The City of London - the big bad bully that has wrecked the playground - must be defended against all those puny weaklings - and from what Mr. Robinson petulantly called ’spiteful populist attacks’.

Let’s remind these bullies and their minders of the facts.

Britain’s annual income is about £1,450,000,000 - £1.45 trillion.

According to the governor of the Bank of England, the taxpayer has provided about £1 trillion of that annual income to a tiny elite in the finance sector - in bailout resources.  These are not just taxpayer funds - they include the BoE’s generous liquidity injections and the Treasury’s guarantees to the finance sector.

By contrast the government’s deficit for this year is 17% of that: about £175 billion - due to rise to £178 billion.

When this crisis started government debt (i.e. the stock of debt, accumulated over time, not the annual flow of income and payments - the deficit) stood at a very reasonable 37% of GDP - and amounted to £650 billion.

Today, two years into this financial crisis, government debt has risen by 20% - that is by £250 billion.

£150 billion of that rise in debt is directly attributable to the bailout of the finance sector, including the financial rescue of banks like RBS, Northern Rock and Lloyds - according to official statistics. The rest can be attributed to the costs the government is incurring in cleaning up the mess - paying unemployment benefit, providing fiscal boosts etc.

So the rise in the government debt and the rise in the annual deficit - is directly attributable to the profound economic failure brought about by the financial recklessness and greed of a small elite in the financial sector - and their cheerleaders in governments and regulatory institutions.

As a result of that economic failure the Chancellor announced today that Britain’s GDP had contracted by 4.75%.

In the playground that would be called by its real worth -  £69 billion.

In addition investment has collapsed by 13.6% - roughly £30 billion - over this last year.

And consumers - who make up the bulk of Britain’s GDP (60%) - have cut back by 2.5%.

That sounds like a small number, but because the share of our national cake taken up by consumption is so big - 2.5% equals £20 billion.

Those numbers explain the massive ‘crater’ that has been bombed out of our economy by the finance sector.

A ‘crater’ of collapsed private sector output, investment, consumption, and rising unemployment.

A crater that cannot be filled by an over-indebted and comatose private sector. (See yesterday’s (8th December, 2009)  CBI and NIESR data).

The private sector is so worn down by the burden of its debt - piled on by banks and private equity companies - that businesses are not even asking for loans for new investment - they are relentlessly focussed on liquidating their debts.

Some - many - may not succeed, and may instead go bust.

So, because of its massive debts, and because of the slump in demand,  the private sector cannot compensate for the ‘black hole’ or ‘crater’ in the economy - only the government can.

Hence the really urgent need for government spending. And hence the disappointment in Alastair Darling’s timid budget - which includes plenty of cuts in government spending, and which bullied the innocents with the threat of another rise in national insurance taxes.

All of these political kids, fooling around in the political playground - have failed to understand the nature of this crisis.

It is a debt-deflationary crisis..as Irving Fisher so acutely explained……in which debts must be liquidated, which leads to distress selling (of property/assets/stock) - which in turn leads to a fall in prices. That then leads to a fall in profits, followed by a reduction in output, in trade and in employment of labour.

A fall in output, trade and employment leads to a loss of confidence, which leads to hoarding ‘and slowing down still more the velocity of circulation’.

A fall in output in a welfare state economy, leads to a fall in taxable income (income tax, VAT, national insurance) no longer paid by the unemployed, and to a rise in welfare benefits paid.

And it is this fall in tax revenues, exacerbated by rises in unemployment benefit spending - added to the massive costs of bailing out the finance sector (£150 billion) that explains why the government’s debt and deficit has risen.

This collapse in prices and liquidation of debt then causes ‘complicated disturbances in the rates of interest….in particular, a fall in the nominal, or money rates and a rise in the real, or commodity, rates of interest.

That, and not the ratings agencies, is what we must fear most of all.. The impact of a debt-deflationary crisis on interest rates….

Compared to that threat, dealing with the bullies in our political playground will be a pushover.