Is There an Economic Crisis

BELIEVING IS SEEING the debt crisis as just another story – or why are we prey to a single narrative?

CURRENT DEBT – GDP RATIO
....about 63 %
(we owe about two-thirds of what we are worth – like having a mortgage)

...and what does the Maastricht Treaty allow?
(i.e. What did Margaret Thatcher sign up to?)
......a debt limit of ............. 60%
.....but how does that stand historically....?

Britain's Debt / National Income Ratio, 1691-1990 Year Percentage Year Percentage 1688/91 6 1901 43 1759 137 1911 39 1801 197 1921 179 1811 202 1931 207 1821 288 1938 171 1831 231 1941 154 1841 175 1945 261) 1851 150 1950 240) look! 1861 123 1960 133) 1871 86 1970 82 1881 73 1980 52 1891 53 1990 35 Source: Mitchell (1990). 1980 and 1990: Central Statistical Office (1992) Red = period building the Welfare State

....or look at it another way Our current debt is at an historically low level

“ ....but cheap American money in the post-war period ,” you say? … Government has cheap money now – interest rates are low and Government owns banks “ but that was long-term debt,” you say. … So is ours today – 13-14 years. “ ....but that post-war period, too, was a time of great austerity ,” you say? … But we were building a welfare state then, free universal education, expanding the university sector– right now we are dismantling the welfare state and abandoning state funding of higher education .

....and another way to see debt...looks pretty random, doesn’t it? Source: CIA World Factbook (Notice: Canada went through extreme austerity measures only recently and has a higher debt than the UK!)

Built-in (structural) imbalance of Government’s incomings and outgoings – e.g. Public sector costs + servicing the debt against tax receipts, proceeds from growth and exports.
So – are Public Sector costs too high – or GDP/growth/tax receipts too low? You can work on both sides of the equation.
CG says 80% cuts (one side) and 20% tax receipts (other side). Why? Why not 50/50...20/80...0/100? It’s political.
But what does ‘structural’ mean?! Look at recent history. There’s a dynamic relationship between deficit and borrowing – they balance each other out.

Conservative Government We borrowed our way out of debt under Thatcher!!

But what is more structural than the tax take? Is this where the deficit is ?? Source - Eurostat newsrelease – June 22 nd 2009 Tax as a proportion of GDP (2007 - %) EU 16 40.4 Austria 41.9 Belgium 44.4 Czech Rep 36.4 Denmark 48.9 Finland 43.0 France 43.6 Germany 36.2 Hungary 39.3 Iceland 41.4 Italy 43.3 Luxembourg 36.9 Norway 43.4 Spain 37.2 Sweden 48.2 UK 36.6

GDP = Consumer spending + Business Investment + Government Spending + International Trade income
It’s an estimate, based on surveys of < 2% of UK businesses. So it’s a guide a rough indicator – not a fact
And GDP is multiplied by the Velocity of money -
(how many times a £ is spent in 1 year). Increase V and you increase GDP. But banks have RESTRICTED the flow of money – so artificially dampening GDP.

This is investment – we have bought shares in banks. Why count it as debt?
In the long term how much will we recoup from these investments?
more importantly….
If we can invest in banks and make public sector pay – why can’t we invest in public sector and make banks pay?

UK net debt is £903 bn
Excluding Financial sector intervention , debt is £771 bn*
Or 54% of GDP!
Source: Office National Statistics ( updated June 18, 2010 )
*This includes £100bn+ of the banks’ debts that is now UK Government debt

Increasing or reducing the supply of money into the economy through household and business lending – i.e. Manipulating the Velocity of money
EXAMPLE: housing equity renewal increased from £4bn in 2001 to peak at almost £18bn in 2004, an annual injection of between £10-14bn into the system during the 2000s. Since 2008, as a result of the credit crunch, banks have pulled £8bn per year out of the system and slowed down the circulation of money by making loans expensive (i.e. To raise the price of money – their main commodity)

So – is public sector cost too high?
Or GDP too low?
Or growth too low?
Or tax receipts too low?

What kind of society do we want when the economy is performing to capacity? If we are cutting the ‘structural’ elements of debt that means we don’t plan to bring them back. What do we want:
Free health care?
Winter fuel allowance?
Good schools?
Historically low taxes on the wealthy?
A well run railway?
Child benefit?

Financial services share of UK GDP rose from 5.7% in 1995 to 7.6% in 2007
The manufacturing sector share of UK GDP has fallen by over a third from 20.3% in 1997 to 12.6% in 2007
Source: International Financial Services, London Report 2008

Private sector debt is about 4-5 times larger than public debt and that is sustainable
Anyway, it’s not debt that matters – but our capacity to pay it (like a mortgage). And our capacity is historically high, because:
Increased wealth and income inequality (see the Gini co-efficient)
UK’s long-term debt repayments (14 years)
Government access to cheap money (we own two banks!) –
Doesn’t that make the value of debt historically low?

The Gini Coefficient – the most disgraceful curve of all Low = lower wealth disparities; High = greater inequality Public sector compensates for wealth inequalities – so why are we not EXPANDING the public sector???

Notice that the Gini Coefficient has been rising (more wealth concentrated on the wealthy) while higher rate taxes have been reduced (the wealthy taxed less). So the money to pay for public sector has shrunk. Where can it come from?
..........not from growth...the financial sector has suppressed that! LOOK!

Growth rates The financial sector and banks in recent years also suppressed growth – compared to 6-10% growth of ‘tiger economies’

Public utilities privatised - prisons, more and more schools, many health services, council services etc
Around 20% public current expenditure outsourced to private sector (£124bn) with more to come as ‘commissioning’ steps up;
Around 20% public sector employment transfer to private sector over recent 2 decades

YES…..…BUT……..
Not between the public and private sectors
Between the financial and manufacturing sectors

The UK is not broke – “there’s no money left!” is economically illiterate. We have the 6 th highest GDP in the world
What about our assets in bank holdings ?
Why pay off 100% of our deficit in 5 years, when our debt is historically low and we have 14 years to repay our borrowing ?
But national debt is never paid off – its part of the dynamic of a healthy economy. YOU may pay off your mortgage – but the next owners bring another one – your house ALWAYS has debt
Why not explore options to meet debt payments and reduce the deficit? i.e. pay more when we have growth, reschedule loans in 10 years, increase wealth taxes, public enterprise.

National debt? NO
Current account deficit? Depends on your values - it’s political
Economic governance? YES
Democracy and public debate? YES

"Thinking's a dizzy business, a matter of catching as many of those foggy glimpses as you can and fitting them together the best you can. That's why people hang on so tight to their beliefs and opinions; because, compared to the haphazard way in which they are arrived at, even the goofiest opinion seems wonderfully clear, sane, and self-evident.” Dashiel Hammett ...so...why are we prey to single narratives?

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Is There an Economic Crisis

by kushnerbarry on Aug 13, 2010

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Is There an Economic Crisis — Presentation Transcript