Chris Croft's Personal Blog

October 25, 2010

The real reason for the cuts

Filed under: News and Politics — chriscroft @ 9:27 pm

I’m thinking, how is it that under Labour we were OK, maybe a bit overspending but nothing too bad, and now suddenly we’re in melt down if we don’t save 80 billion RIGHT NOW!

Is somebody exaggerating, just a little bit?

Then I thought maybe they were going to say that the situation was terrible and huge cuts were needed, and then announce on 20th October that the cuts weren’t as bad as we expected. But that didn’t happen, they WERE as bad as we expected. So I’m still baffled.

I think there is an element of doing it all now while it can still be blamed on the previous goverment, and then before the next election we can have some of the finance given back as tax cuts etc as a bribe to get us to vote the Tories in again. (The Lib Dems will have imploded by then).

But I also think there’s more than that.

– it’s not that Labour overspent massively
– it’s not that baling out the banks cost us THAT much
I think it’s that we, as a nation, are genuinely bankrupt. It’s not a sudden thing, it’s been gradually piling up, ever since the 70s when our manufacturing became uncompetitive against the Japanese, so all our industries (cars, electronics, steel, ships etc) disappeared. A few union conflicts made no difference to the big picture, we just weren’t good enough. We’re not as clever as the Japanese or as cheap as the Chinese. (With a few notable exceptions, but in general terms it’s true)

Does it matter if manufacturing has dwindled? Not if we have North Sea oil, and a deregulated City raking in the cash. But what happens when the oil starts to run out, which is now happening? And the shell game of the banks gets exposed, which it has been? We’re left with what? Incestuous service industries which all feed off each other and don’t generate any money or export anything. Oh dear!

Add to that the ageing population, armies of longer-living pensioners who don’t generate any money or pay any tax, and who in fact need more money to keep their pensions going and their increasingly exotic healthcare going, and you have more demand and less supply of money. Oh dear!

The fact is that we have been living beyond our means since 1970 and now we are having to correct for that, all in one big lump. This could be scary.

I hope I’m wrong!

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9 Comments »

  1. I see the same in the US. The mean GDP per head was going up, but the median wasn’t moving – all the extra money was being made by a few at the top. And the money being spent was money that should not have been lent. So the economy was in truth never as big as it looked in early 2008. Now I worry. The mass of people will earn what it costs not to move the jobs overseas. And those with education are competing in a talent pool ten times as big as before, and much of that talent pool is better educated and more motivated than the American talent pool. Meanwhile the country pays for a Navy as big as the next 13 put together, and health costs are inflated by massive advertising for prescription drugs. Not optimistic.

    Comment by Martin Herrington — October 26, 2010 @ 12:16 am

  2. It’s funny but I have had the gut feeling that this waas the case for many years, but didn t have the economic knowledge to be sure. AT that time it wasnt public sector worker who were getting massive pay rises and perks, it was private sector but I dont remember anyone saying it wasnt fair and their wages and pensions should be cut down to our level.

    Off topic now – sorry – I work in social care and Im quite decided now that I will obtain the means to end my life before I become too frail. All the grossly obese 20 somethings we now see will be vastly obese 50 somthings when I’m 80 and they will absorb all the health resources available and more. At the present time we stand helplessly by while consultants are brought in over our heads who know absolutely naff all ( and could care less) about care but promise they can cut costs. Our council buys this snake oil at vast costs whilst cutting good value providers who work incredibly hard on the front line. I dont want to end up in the kind of geriatric ward I saw in the 70s, staffed by exhausted minimum wage people who have just done a double shift to make ends meet

    Comment by Yvonne Bonifas — November 3, 2010 @ 1:27 pm

  3. Hi Chris,

    I think you are wrong. I think we have talent etc., but we (especially management) reacted badly to the Chicago School of Economics philospophy and the OPEC oil crisis emerging in the 70s.

    The Chicago School of economics is a symbolic centre for the neo-liberal policy of clawing back even greater profits for major shareholders, following the relative dip in such in the 60s (though major shareholders were doing very well). With that pressure increasingly applied to global production margins, and the oil price rises, the management had to react.

    But the reaction in the UK was to give directors and hire-and-fire (mainly fire) managers of companies huge bonuses as they squeezed their employees (sounds familiar – councils are forking out for “trouble-shooters” all over the place as they make staff redundant). They just went all out to alienate the work-force.

    Now I think the Tory dominated Coalition is simply using the current public cynicism about politicians to drive through public sector cuts. It’s in their political DNA, and they are part of a UK political class that accepts the Chicago SAchool of Economics philosophy.

    Relevant to this, is the US. Obama is commissioning Spanish skills in rail-building to upgrade the terrible US rail network. The implication is that the US does not want to create jobs for an industrial work-force and have to negotiate with that work-force. I think it’s a reality of Finance Capital-led economies like the US and UK where you have a hyper-Chicago School of Economics phenomenon.

    It’s a world in which people increasingly do not count.

    Comment by Kelvin Yearwood — November 3, 2010 @ 2:20 pm

  4. Chris,
    You’re right. Labour was happy to promote a spending boom of virtual money based on artificially high house prices and create non-jobs in the public sector based on a high total tax take.
    Of course the public liked to think they were getting richer when in fact they were borrowing the money from China and a few other places. City and banking fat cats got rich skimming the margin. It’s now pay-back time and as we are finding we live in an overpopulated country that is no longer economically sustainable. Only now are some politicians starting to get real about the future prospects for UK Plc. The economy needs to manufacture more, export real high value products and become more self sufficent, at least dare I say it, within a European macro economic zone.

    Comment by Nick Hicks — November 3, 2010 @ 4:10 pm

  5. Nick – great to hear from you – how’s things at the Uni?

    Kelvin – I agree with you, there is a Tory / DNA agenda, and people increasingly don’t count, unfortunately. I agree about bonuses and firings, I think that we do have the talent but it’s a management problem. We need leadership if we are going to compete globally, and that’s a rare thing at the moment.

    Comment by chriscroft — November 3, 2010 @ 4:33 pm

  6. It’s a credit crisis.
    There is too much debt in the economy, the banks couldn’t originate enough good debt, which had a sudden and catastrophic impact. We are still reeling from that impact.

    The gov. dropped interest rates to stimulate borrowing and so that the burden of servicing the debt we had did not take us under, of course this also meant they had to bail out the banks (a mistake in my opinion) because without much debt origination combined with interest rates they couldn’t make a profit on- their cash flow dried up and their balance sheets looked very shaky.

    There are just not that many creditworthy people out there to lend to, lots of potential borrowers, but few who want to put the money into productive ventures (and who have assets for security). Most want to put debt into consumption or fixed assets (housing).

    Lots of the debt in the system is bad, in a credit crunch this bad debt must be flushed from the economy before it can recover.

    In the mean time we are stuck.
    We can’t stimulate more borrowing (interest rates are low and there are few good borrowers), all we can do is try to stimulate overseas demand by dropping the value of our currency and hold interest rates down.

    But after a year this has not resulted in any sort of export led recovery.

    Anyone who believes that manufacturing will pull us into recovery is mad.
    Point 1, it takes a lot of capital to increase manufacturing capacity;
    Point 2, manufacturing creates pollution and there is too much resistance to that.

    You only need to look at the results of crashing the value of the pound by 30%… ….manufacturing exports went up- but only in VALUE terms, not volume terms.

    Manufacturers just put up their prices, they didn’t make more stuff.
    That is not a recovery; we effectively just took cash from importers and gave it to exporters. The finance industry is our best hope for a rapid recovery and they are the ones that got us into the problem in the first place. So that’s just plain crazy.

    We are using QE to buy long term gov. debt in the bond market; 60 yr duration, which is effectively borrowing from our children- we should be ashamed of ourselves.

    But this is essential because it’s the bond market that actually controls our interest rates, and the treasury buying loads of gov. bonds keeps the prices up and the yields down (supply and demand).
    If the treasury don’t buy them, then our gov. bonds would have to be cheaper and the rates higher to attract buyers… and those higher bond rates will get reflected in the bank rate.

    Now, there is only so much QE we can do as it really affects the value of our currency.
    And this pushes up the cost of imports (like food).
    So this whole elaborate scheme has bought us some time not fixed anything.

    Imagine, it’s a bit like being in a band.
    …You are living beyond your means and you are maxed out on your credit card. Your income does not cover your expenditures.
    ….You then take out a new credit card to pay the minimum payment on your old one.
    Yes, you have kind of prevented your bankruptcy …. but all you really did was postpone it.

    What you gonna do now?

    Then you have a great idea ….you book yourself a few gigs at top money and pay for yourself using your new credit card.

    It looks like you are doing better, your income just went up, the band is getting top money for playing, and the new gigs get you seen and perhaps some more work.

    What a great scheme, you’re a genius!

    It’s funny how the wife thinks you need to cut your credit cards up and stop SPENDING.

    She is SO unfair, does she want you to be poor, doesn’t she understand you have to speculate to appreciate.
    And after all…. what else can you do?

    The problem is that as a country we are trapped.
    The cut backs won’t be enough to solve our deficit (yearly shortfall), or enough to hold interest rates down or enough to stop us having to devalue the currency further (which means food and energy goes up).

    Debt origination won’t be enough to stimulate investment for manufacturing, or stimulate consumption, or save the banks, or replace the bad debt, or support the housing market, or just allow us to service the present debt.

    What’s going to happen to our expenditure? The cut backs still don’t remove our deficit, only reduce it.
    What’s going to happen to our tax income? The shrinking economy and rising costs will compress margins, and this will reduce tax income.

    We are trapped, and this is not a trap that ends well.

    Anyone got any ideas out of this?

    Comment by j.wilson — November 3, 2010 @ 10:56 pm

  7. I agree with Chris. I’m a doctor – a consultant in ICU. Something this country can’t really afford because we’re highly qualified, trained over a long period at great expense and provide something the public aren’t sufficiently interested in to take personal responsibility. And it’s not just the medical profession that’s guilty.
    We convince ourselves we’re all worth more than we receive – and obviously more than the next person but most of us produce nothing of any immediate value.
    The saddest aspect to me is that those who can (and that would mean all of us if we were in that position) take everything they can get away with and present the image of “Earning it” while overall the economy simply spins in an ever downward spiral to the point where we can no longer service the debt.
    The UK population believes us to be a rich nation – not like the poor second and third world countries – poor souls. In reality there is little to differentiate us from the poor nations that is real. We have spun a web of conceit around ourselves and no-one has really been prepared to broach it till now.

    Will we ever be honest to ourselves probably not but the world keeps spinning and there are more important things in life after all!

    Comment by Geoff Watson — November 5, 2010 @ 9:21 am

    • yes, I was stuck by this when on holiday in Greece – a once great nation that still thinks its great, but of course it’s just a crumbling shell now. We are next! And they still have the weather to bring in the tourist money, whereas Theme Park Britain (London, Bath, er…) isn’t going to be enough to keep us all in the way we’re accustomed…

      Comment by chriscroft — November 5, 2010 @ 9:50 am

  8. We use 25 billion litres of petrol and 20 billion litres of Diesel every year in the uk.

    Since the pound got de-valued, petrol went up from about £1 per litre to about £1.23 per litre. Its about the same for diesel.

    So thats a 23p increase per litre….. times 45 billion litres. Hmmm.
    Thats £10 billion. PER YEAR!

    Over the 3 years of these cut backs, (worth £80 billion), we also have to find an extra £30 billion just for fuel.

    And what about our other imports?

    Does it matter that the £ is getting devalued?

    Comment by j.wilson — November 6, 2010 @ 11:24 pm


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