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October 08, 2009



Excellent post!


You just don't get it do you? We are not going to 'return to growth' as if nothing had happened. The last 5 years or so of GDP growth have been an illusion, fuelled by borrowed money, by private individuals to buy houses and to spend on consumption, by companies to expand beyond what their profits would allow, and by the State to pay for its own pet projects. If the economy can only continue in its current form by borrowing more and more (both privately and publicly) does that not suggest that something is fundamentally wrong? You cannot borrow forever. Maths tells you that if your borrowings rise year on year your interest payments will take an ever increasing % of your earnings, to the point where you can no longer afford to support yourself.

As a nation we need to totally reassess what our standard of living should be, based on our true level of production.

Luis Enrique

I'm struggling with this bit:

"Our only chance of getting the deficit down seriously is to grow our way out of it. This requires that the private sector start borrowing again, which means that policies that “encourage saving”, such as the raising of the pension age, might actually raise the deficit."

Say growth arises from investment by firms. Firms borrow ... but who from? Why not from higher saving by households? Perhaps growth would be helped by firms, having invested, also hiring those 66 year olds?

Man, I still get in such a muddle over this sort of thing; it's embarressing. Thank Lord for internet anonymity. When you say we want the private sector "to start borrowing again", you don't mean that we necessarily have to borrow from overseas do you? But in a closed economy, borrowing equals saving, so what does it mean to say we want to see the private sector "starting to borrow again" at the same time as saying we don't want saving to rise too?


@ Luis - I did have in mind corporate borrowing. If firms borrow to invest, incomes rise and savings then rise. But part of the increase in savings consists of a decline in dis-saving by the government.
Remember as Duncan (ta for the kind words!) says, investment creates savings, via higher incomes:


"If the economy does grow nicely, the deficit will take care of itself."

Samuel Brittain says this but he doesn't explain his working. Darling's forecasts suggest that even with gdp growth returning to 3.5% then the deficit will only halve in four years time.

What sort of level of economic growth is needed to even begin to shrink national debt, let alone reduce it to the levels of 40% where it was at until very recently ?

Luis Enrique

Sure, I get that ... I think I just wrongly took you to be saying that policies that encourage household (as opposed to corporate) saving could discourage growth and raise the deficit. But if you had corporate borrowing in mind, then what's raising the pension age got to do with it?

[and that post by Duncan is odd. "for neoclassicists saving causes investment" - er... I don't think so ... and "Investment can be financed by borrowing from banks, which does not require savings because banks create money by lending" looks like hogwash to me too]



That's what credit creation is though - banks creating money!



I'd also add this:



I think you have it correct and Duncan is a bit imprecise with his language. But the bit about financed by... is confusing because the flow of funds has to be followed further to get the real meaning. He is naturally talking about the financial economy, which is something different from the real economy. Yes after the borrowing and investment the money flows to someone else - and so savings will increase. Planned savings and investment can be different, but realised savings and investment must always be equal (ignoring the foreign and government sector). So I think you too are saying something different - he is saying someone doesn't have to have saved first before investment can be made, and you are saying a given piece of real output cannot be both consumed and invested. You both be correct. Firstly, there is a confusion by ambiguity in the word savings between a stock and a flow, and secondly there is confusion between the financial economy and its shadow the real economy.

Luis Enrique


this isn't really the place for it ... but that pdf. says things about "neoclassical" economics I don't recognize. Look at the neoclassical benchmark Ramsey model, and what determines saving and investment therein. Yes, the model omits certain things Keynesians would say ought not be omitted, and assumes things it oughtn't assume too (clearing markets), but there's no "savings causing investment" that i can see. Unless you are thinking of neoclassical models with exogenous saving?

As for banks creating money, yes ... it's the "which does not require savings" bit that is wrong. (b.t.w. current account deposits are classified as savings; if they weren't savings wouldn't equal investment because some investment is funded out of current account deposits). Banks create money when somebody saves (deposits) money, then the bank lends it out again, then somebody saves it again, round and round. It does "require saving". If people weren't saving it, the banks couldn't lend it out.



Doesn't Ramsey model include the 'rate of return on savings' as a fairly crucial variable?

So the line in the PDF "neoclassical
S => I through changes in i." seems pretty fair? I give you it's more complicated than that.

Also this comment is worth a read:


Luis Enrique


[embarrassment looms; I haven't checked text book before putting hands to keyboard]. Yes, the rate of return on savings is the marginal product of capital ... I think it's more accurate to say the quantity of saving and investment are chosen with respect to this (and objective function parameters), which is "caused" by the production technology and initial conditions (K, L), rather than saying there is a choice of S that somehow causally effects I, via i.

That comment is interesting. It asks questions that just cannot be expressed in the sort of simple markets-always-clearing model like the Ramsey. For example rommeldak asks whether the decision to increase investment must be preceded by somebody's decision to save more, to make the funds available. In the Ramsey model, why would the economy "decide" to invest more? Perhaps a positive productivity shock. In which case firms decide to invest and households decide to save more, and the interest rate moves, simultaneously (I think).



No need for embarrassment!

This is why I find post-keynesian economics both fascinating. It asks interesting real world questions. Importantly it asks stuff that often simply can't be modeled. This supposed lack of rigour is what has led to it being too often ignored.


"This requires that the private sector start borrowing again, which means that policies that “encourage saving”, such as the raising of the pension age, might actually raise the deficit.
If the economy does grow nicely, the deficit will take care of itself. "

Chris, this is cloud cuckoo land.

* Credit rating agencies are making it very clear that Britain could see it’s debt downgraded if the next government doesn’t put the UK debt burden on a secure downwards trajectory over the medium term.

* People really can’t comprehend the scale of the debt and how far Treasury figures [or in some cases, the total absence of them] are highly optimistic and wide of the mark.

* Net borrowing will remain around £140mn until 2017/18, although the Treasury says it will drop to £97bn by 2013/14 and then to £30bn by 2017/18. This is cloud cuckoo land.

* The 2009 budget does not forecast unemployment, it avoids it, but CEBR uses current government figures and other projections to estimate 2.8 mn by 2011, whereas CEBR maintain it will be closer to 3.2mn.

* The fiscal operating rule requires that public sector spending be cut by £123bn. On the government’s optimistic figures of £1,540bn debt by 2017/18, they would meet their target. However, the Treasury figures are bunkum.

* The 50% tax rate will reduce growth by 0.4% and increase public borrowing by £1.8bn by 2020/21. Broadbased tax increases spread throughout the community will initially boost public finances but would go negative after 7 years due to the supply side effect.

* Economic growth for 2009/10 is -2.5%. This contrasts with City market projections which see an upturn.

* The stock of government debt is set to rise to 94% by 2013/14 and 113% by 2017/18 [CEBR]. This is £32,000 per person.

* VAT, if continued and increased, gives short term gains but long term losses in terms of the dynamic effects on GDP and unemployment.

In lay terms, the debt will increase under the current administration to astronomical proportions, the supply side or the productivity increase of the nation is already non-existent to negative and there simply will not be jobs to be had. At this worst possible time for people, taxes, especially stealth taxes are proliferating, tax receipts are falling due to people’s fleeing and avoidance, e.g. the welfare state, yet public spending is still rapidly expanding.

What is the government’s solution?

£175bn in new money has been created since last year, the BofE is printing £1bn a day, with banana republic effects. The pound is now roughly 70% against the Yen, 50% against the Swiss Franc and 28% agaisnt the U.S. dollar.

Advisers to foreign companies and ratings agencies are saying that they can’t believe the UK is acting like an economy many times smaller and naive, e.g. Iceland. Lenders are becoming less prepared to invest in UK plc as they can’t trust the fiscal management.

We are plunging deeper and deeper because socialists have no clue what to do and massage the figures to pretend it isn't happening.

Vino's Political Blog

James, the gilt yields on UK gov't debt are actually low - showing that people are prepared to invest in UK debt. The US, Japan, France and Italy have much higher debt to GDP ratios than the UK - and people are still prepared to buy their debt.

All this talk of a downgrading of sovereign UK debt sounds silly to me. In a situation where the UK defaults on its debt [unlikely except in case of war or major shortages of oil and other resources], there will be so many other crises that most private sector debt will be even less likely to be honoured. Also, given the credit ratings agencies are the ones who wrongly gave sub-prime US mortgage debt the thumbs-up, why should anyone take them seriously?



Why do you think the Tories' new policy on the pension age will tend to increase saving now?

A more generous interpretation of the Tory proposal on pensions is that they think the structural deficit is too high and raising the pension age is a sensible way of reducing it over time. They're announcing it now because it's a major policy change they propose to make in government that will affect many people.

That bond yields are low now and the deficit needs to be high now does not mean that the Lib Dems and Tories - and, being dragged kicking and screaming, Labour - are wrong to be thinking and talking about the major political challenge of fiscal retrenchment in due course. That Osborne's proposals would barely make a dent on the deficit, as you say, shows how big the challenge is.

Rob C

Is the problem not the muddling of structural and cyclical debt by the media? Are the Tories really talking of reducing cyclical debt rather than structural? Debt now is certainly cheap and the Tories have delays in their cuts but at some point a structural debt must need to be addressed?

john b

"Advisers to foreign companies and ratings agencies are saying that they can’t believe the UK is acting like an economy many times smaller and naive, e.g. Iceland. Lenders are becoming less prepared to invest in UK plc as they can’t trust the fiscal management."

JamesHigham, are you insane or just lying? Because there is no other context in which you could say something as transparently false as the above.


Who gives a good shit what "credit ratings agencies" say any more? Credit ratings agencies said all those bonds made up of $1m condos 60 miles from town and 50% rusks, water, and E107 colouring were AAA, and the rest that the banks kept was even better! They said that a bond made of the mortgages that didn't get into the above bonds plus 20% more overcollateralisation was AAA as well!

Before that, they told us that Enron was an investment grade credit risk because it didn't have much debt, whilst at the same time telling us that the special purpose vehicles it was hiding its debts in were also investment grade credit risks because...Enron guaranteed them.

And they told us around about the same time that GBLX, 360Net, and Worldcom bonds were even better than Enron ones because their fibre routes (even the bits that weren't built yet) were valued at X - without noticing that the valuation was based on the notional price they all agreed to swap tiny slices of capacity for, multiplied by the capacity of the link.

And before that, they told us that Mexico and Argentina were so totally good for another ton of loans! Is there any institution of modern capitalism more thoroughly discredited than a credit rating agency?


I have read Samuel Brittan's piece in the FT and found it strange in the extreme.

He says the Treasury Red Book shows the public sector deficit rising from 30% of GDP at the beginning of the 1990s to 65% in the current financial year, and that this is comparable with other Western countries.

But what about off balance sheet debts? The CPS think tank recently estimated that including off balance sheet items such as PFIs and public sector pension liabilities the true figure is 157% of GDP, and even this figure presupposes a relatively small overall cost to the taxpayer of the bank bail-outs. This is far larger than any other Western European country, and puts us in the same category as third world basket cases and banana republics.

And it’s not as if we have much to show for the government's borrowing spree. Where are the high-speed rail lines, the comprehensive motorway networks, the efficient electricity transmission grids you see in every other Western European country?

The new PFI-funded schools and hospitals that have been built we will still be paying off in 25 years time, with the huge profits squirelled away in tax havens.

We are also the only Western European country that faces power cuts because of the government's failure to invest in any new generating capacity.

It seems to me this mountain of debt has been wasted on inflated welfare payments, useless wars, a massively increased bureaucracy, incompetently managed public projects and IT systems, £5,000 a day consultants and a bloated Quangocracy that is completely beyond any democratic control. Read the book ‘Squandered’ by David Craig and weep.

The future seems very bleak indeed. Look at what's happening in places like California, where expenditure has been so much higher than income for so long that the inevitable has happened and the state is defaulting, laying off large numbers of public sector workers including teachers and nurses. Keynsian borrowing only works if governments build up reserves for rainy days, which this government so conspicuously failed to do.

"I sincerely believe... that the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale." --Thomas Jefferson

Amen to that.

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