Archive for May, 2010

Monday, May 31st, 2010

Some Worrying Figures

Whilst media attention is focused once again on the finances of members of the Cabinet, we think it is time to look at the big picture. There are some disquieting figures. Here are some of them.

If we look at where the real cash is, we look at the foreign currency reserves of of the World. The total for all countries is just over $9 trillion. China has the most at $2.5 trillion. If we add to China all the other key economies of S.E Asia with Japan, India and Russia, we come to $ 5.4 trillion, which is 65% of the total. If we add up the US., the UK. and the whole of the Eurozone we come to a mere $.65 of a trillion, or a tiny 9.6% of the total. If that figue does not scare you it should.

Next, let us have a look at the moneterist measure of M3. This is a broad range of bank account balances throughout an economy and monetrists use it as a measure of what is really going on beneath the surface. In the United States M3 is shrinking at a faster rate than at any time since the onset of the Great Depression. It is not just moneterists who are getting worried in the control room of the world’s largest economy.

Now let us look at external debt. This is money, goods and services owed by a country to overseas creditors, judged in foreign not domestic currency. This means it cannot be reduced by the country involved devaluing its currency. If it does that the debts get bigger.  All this kind of debt in the world (the latest figure go to June 2009) adds up to 98% of the world’s GDP. America has the largest debt but also the largest economy. The ratio of debt to its GDP is 94% or $43,000 per head of population.

The figures for the UK are appalling. Our debt to GDP ratio is 416%, which amounts to a staggering $ 147,000 for each and every one of us. That is very scary indeed. We are also in second place behind the US, although our economy has now sunk to number eight. To drive the unwelcome point home, Greece’s GDP/foreign debt ratio is 167%, or $49000 per head. Or perhaps a more realistic comparison, we owe almost as much as Germany and France put together, with more than twice our population and both with bigger economies.

There is revealed, in this snapshot, evidence that the Western economies are by no means on the road to recovery yet. Among those, we are in a much bigger relative mess than we are willing to admit. There is also doubt, born out by the US M3 measure, of whether the Western fiscal stimulus is working, or whether it is just piling up debt. This is what the arch monetarists think.

What we do know is  the economies with the cash are the ones which are growing apace. This crisis has always been billed by our politicians as Global. As with their own expenses, they have been rather less than frank. It is actually Western. We are at the epicentre.

Monday, May 31st, 2010

Cameron’s Mistake

Now the new Chief  Secretary’s financial affairs are all across the Telegraph. I do not intend to dissect or discuss the expense and taxation rules which are now the subject of claim and counter claim. Whatever the outcome the coalition is damaged.

There are two elements to the damage. This Blog recommended Cameron appoint a big hitter from the Tory benches to fill the vacancy left by David Laws. There was good reason for this. The Laws issue was a potential coalition disaster, which could be contained only if Cameron showed very tough leadership. On the one hand he had to appoint a known ruthless cutter to the financial hatchet job (there is plenty of  softer balance in the cabinet) and on the other he had to send a signal to the Lib Dems that he was not pleased they had messed up. His own backbenchers, who now outnumber their Lib Dem counterparts by a ratio of nearly ten to one, need reassurance, as do the markets. But the coalition partners need a signal too.

The Lib Dems were not prepared for government because they under-estimated the generalship of their leader. They therefore arrived without having conducted a ruthless analysis of  all their MPs’ expenses as the Tories had done, at least according to the Telegraph and the mounting evidence. Cameron needed to wield the stick. Instead he did the decent thing and put the interests of the coalition above the strength of the government. He has signalled that he is going to sustain the coalition come what may, but in doing so he has raised a question of its ability to govern.

Outside the sympathetic and forgiving Westminster village, there remains a very angry public and very nervous financial markets. This coalition looks a good deal less secure than it did. The pressure on Cameron to go for an election before the constitutional reforms are effected may become irresistible. The prospects of big Tory gains to give a comfortable majority may look just too tempting. A weak, scandal disrupted Government a la Major is not an option now.

The Lib Dems face  their greatest opportunity as members of this government, but they face oblivion if it fails because of their dirty linen.

Saturday, May 29th, 2010

So It Has Happened

Nobody can be immune from sympathy for David Laws. Nevertheless public money, at a time when extreme sensitivity surrounds MPs’ expenses, was involved and he was the Treasury No 2. The tragedy for him and for all of us is the ending suddenly of a career in government more widely acclaimed and respected than any other in this brave new politics.

David Cameron was both kind and generous in his letter. He was also generous to the Lib Dems, shuffling to keep the job within the Lib Dem contingent. I think he should perhaps have been tougher as my previous blog suggests. At least this way he has signalled his unwavering determination to make this coalition between two parties work no matter what. That certainly is a very good message.

Everybody now needs to get back to the job in hand. There is a lot to do.

Saturday, May 29th, 2010

Oh No! Not Again!

First, this Blog will not comment on the particulars of his revelation, other than to say at a personal level David Laws is a gifted and sensitive man whose life has taken a nightmare turn and we extend personal sympathy at a very testing hour.

Second this Blog will comment on the political consequences. For whatever reason and motivated by whatever emotional pressures, this important Cabinet minister has made a bad error of judgement. The error is not in his understanding of opaque rules, or applying an unduly narrow definition in his own case.  The theme, as the public knows so well, of that corrupt expenses system, was that the money was yours for the taking if you could find a plausible excuse. And make sure you keep it quiet because details of Members’ expenses are secret.Then along came the Telegraph. The scandal broke. MPs rushed to repay and apologise. Some were censured and went down. Others were censured and survived. Others escaped. A few were arrested. Amid public outrage without precedent in our history, there was a cleansing time, when it proved possible to come clean, pay back and move on.

Unfortunately David Laws did not come clean then. Now is too late. We have moved on and we are not going back. The political consequence is that the new Government is damaged. How badly is not yet clear, but the public will be shocked that in the midst of the drama of an unfolding International Sovereign Debt Crisis, when great personal financial sacrifice will be mandated upon the many, we are back to the misuse of public money by the few.

Cameron must act today. Sadly David Laws must go. Next The Prime Minister must show leadership and authority. Clegg and Cable are at fault for not vetting their candidate for the cabinet more thoroughly. Doubtless the prospect of being in the cabinet did not occur to them until after the election, at a time when nobody slept. Nevertheless this is a lapse in quality control which is bad for the Lib Dems and a blow to Cameron, who has been generous to them. He should make them pay.

He must replace Laws with a Conservative. There is one who stands out for this post. He is anti big government and waste, but has recently shown himself creative over capital gains tax and supportive of the Coalition. John Redwood. His appointment would strengthen Cameron’s authority where now it matters most, his own backbenchers. It would also strengthen the Government. Redwood is a big hitter.

The Lib Dems will not like it, but they screwed up. Anyway they have no choice. If it came to the crunch Cameron and the Tories could go it alone. That is clearer now than it was two weeks ago.

Friday, May 28th, 2010

Downing St. and the BBC

The No 10 Press Office made fools of themselves yesterday over refusing to field a Cabinet Minister because Alistair Campbell was on the panel. In the event The BBC went directly to John Redwood. Good choice. He was more than a match.

Meanwhile it is a useful settling in experience for new blood at No 10. The first thing you need to know about the power of the most powerful address in the land is its limitations. Especially since Blair, who devalued its authority with too much spin and a cavalier relationship with the truth behind the truth. Who was his right hand man? I forget.

Thursday, May 27th, 2010

Government Debt Crisis.

This is where the results of the flawed economic model upon which the entire Western economic structure stands now have to be dealt with. It is the second and inevitable phase of the Global Financial Crisis. Whether it moves to a third phase depends on how well the West deals with phase two.

At the very heart of the problem was the notion that you could enjoy a personal, local, national and international living standard which was way higher than income at any of these levels predicated and that the gap could be filled by borrowing. Simply put, it is okay to borrow to invest but not to live. New cars and kitchens and clothes are not investments because mostly their value drops off sharply after purchase.

The unworkable was made to work by the notion that you could remain solvent on this borrowing binge by inflating the value of assets without improving their worth to the economy. House prices went up and up for example. This was an illusion. What actually happened was the value of money and its actual availability went down and down. Moreover equity, some of it downright fraudulent, was created which in turn created notional money, which in reality never actually existed.

I will explain. Just before the start of the crash if you added up all the foreign currency reserves of all the countries in the Western system, ie the Euro-zone, the U.S and U.K. the amount held by this combination collectively was only 8% of such reserves in the world. Yet the latest estimate I have seen for the total losses suffered by those economies in the crisis is 200 trillion dollars. Essentially this is money that was never there in the first place and only imagined to be so because of over valuing assets as a mater of trade rather than of improvement.

Thus it happens that there are countless families who owe more than they own. This is at its worst in the U.S and the U.K. There are also countries, all of them, who have borrowed in order to raise the standard of services and benefits to their populations, beyond the level of the revenue their taxation generates. The worst of these, relative to the size of their economies, are Greece and the countries of southern Europe.

All of them have to economise and cut in order to pay their huge interest bills on accumulated loans, cut again and increase taxes to bring their budgets into balance and cut yet more in order to have enough over to repay those loans. If they cut too much and their economies shrink further the problem gets worse. If they do not cut enough and the loans grow bigger the problem gets worse but in a different way. None of it creates buoyant conditions in the market where we send over half our exports. This reduces our ability to expand our way out of trouble.

There is no certainty that austerity measures can be imposed on the scale necessary to remedy the problems. Some countries may have to default and restructure their debt. This could produce a domino sequence, like the global financial crisis itself and engulf all the indebted nations. As I have said previously a government debt crisis is the biggest crisis of all. This has now begun.

Wednesday, May 26th, 2010

Storm Clouds

This Blog and my book are adamant in saying continuously that we cannot come out of the recession following the financial crisis with the same model that took us in. This is becoming ever clearer. It is also becoming clear that the worst may be far from over and that the apparent recovery based on pumped up government spending, rather than a reconditioned economy with all the dead wood cut out, may not be sustained or be sustainable. In other words a false dawn.

The clouds are these. First came the fraud charges at Goldman Sachs. This raised serious concerns about exactly what banks are doing to make money. Then came the banking reforms in the U.S which will curb those activities and make them more riskey for the banks. Next came Greece and the discovery that it was not just Greece, but the Euro, which is in trouble. There followed the realisation that the European  banks are not as well capitalised as those in the UK and the US and  have lent very large sums to the high spending governments in the South and to the property speculators in those countries. Smaller Spanish banks started to go under at the weekend needing government rescue.

Meanwhile Italy, Spain and Portugal have all rushed through austerity measures to try and prop up their debt ridden economies, but it may be too little too late. There is now a very real risk of a meltdown in Europe. Even if that is avoided there is going to be a weak Euro and a weak European economy. This gives to Britain the worst possible hand. The pound is down against the dollar making our raw materials and energy costs higher, whilst the falling Euro makes our exports to Europe, in pounds, less competitive. This is sixty per cent of our trade. On top of that the austerity measures in the spendthrift countries will dampen the ‘soft’ markets where sales have been easiest.

Our new government has a lot to think about. There was a subdued nervousness yesterday on the government benches where Tories and Lib Dems rubbed shoulders uneasily for the first time. The Labour benches looked more relaxed. Here they were at last free from responsibility for what happens next. They have an opportunity to find a new leader and re-position themselves in the political spectrum. If they get it right their day will come again.

Meanwhile the coalition is faced with a tough budget, higher taxes, dramatic cuts and a wholesale vanishing of public sector jobs, many of them pointless. However desirable and absolutely necessary all this is, it will not make it easier to bear, nor will it make the rising tide of unemployment look smaller. The honeymoon period for the new government may well be cut very short. The opposition may come to see its election defeat as a blessing.

Tuesday, May 25th, 2010

Justice For Children

The country is rightly appalled at the ordeal of all three children in the peculiar case at the Old Baily. It is entirely preposterous and uncivilised to try children for adult crimes. As for rape? One wonders if they are even physically equipped for such a thing. They cannot possibly understand what is going on, either the accused or the victim. Then there is the Jury. The Jury system requires the accused to be tried by their peers. Adults are not children’s peers. It does not matter whether you start at the crime end or finish at the verdict end. This whole process was inappropriate and to some extent abusive and cruel. It reflects very badly on our country, most of whose citizens were unaware hitherto that such processes legally existed.

As part of my campaign to change the structure of family Courts from an adversarial to an inquisitorial system, I made proposals for the establishment of Child Commissioners, with the power of a judge and supported by expert and qualified Child Officers to carry out investigations. These were in that context expected to be into allegations of abuse or custodial disputes. It seems to me wholly right now to extend the idea to all young crime under the age of sixteen. This would take the Police, the CPS and the adult Courts out of the whole arena.

It is a sad matter of fact that very young people commit wrong acts, which in adults with full understanding of all the implications of what they do are considered crimes. Our response to this sorry phenomenon in the young should be to apprehend, investigate, if necessary punish and, always necessary, rehabilitate. The purpose is not to frighten but to enlighten. We must stop these children becoming criminals, not brand them with a criminal record before the youngest can even read it properly.

The more advanced countries of Europe look at the pageantry of our State Opening and see a charming adherence to ways of old in a modern setting. They look at a trial of ten year olds of the rape of an eight year old in the Central Criminal Court of our capital with all the media coverage that has occurred and they see something backward and quite disgusting. Not in the behaviour of our children. But in our response to it.

Tuesday, May 25th, 2010

Queen’s Speech

There were no big surprises here. Some will doubtless emerge when the detail of the Bills is published. That will be the moment for us to comment as it is in the detail that this Blog finds the devils.

I am not convinced about the expansion of Academies plan. I have nothing against these schools, some of which use their independence well. What is so important is to return to local authorities much more power and responsibility in running education policy in their area. We also need to restore an LEA budget so that the authority itself can also run schools, if that would serve local preference or need.  I do not think this is going to happen but we must wait and see.

Monday, May 24th, 2010

The New Government

Osborne and Laws gave an impressive and coherent performance at their news conference today. There is something refreshing about any new government and the new dynamics of coalition make this one especially impressive. The last time that there was a real sense of getting to grips with intractable problems was in 1951. The Conservatives came back to power not promising to roll back the boundaries of the Welfare State, but to make it work. This they did quickly and it gave them three election wins. Since then new governments have come to power when there have been pressing issues to deal with, but nothing on the scale of the bleak austerity, food was still rationed, of 1951. Until now.

What faces us now is bigger than we can imagine. Today a start has been made on saving money and cutting down government. The pain is yet to come. It will be a huge test of government resilience, parliamentary cohesion and public acceptance. On a recent radio programme I heard  a distinguished elder statesman and an academic discussing the summer reading for MPs who wanted to mug up on the working of coalitions. Names like Pitt, Charles James Fox, Peel and Disraeli were discussed together with their various biographies. It was very wise and learned but I felt missed the point.

Britain is now different. It is no longer a country of empire, of aristocracy and class, of establishment or tradition. It is a country of celebrity and innovation, looking forward with very little collective knowledge of what has gone before. It is a Britain where British does not mean English. It is a Britain in which people are informed, through new technology, by each other and not by those in authority. It is a Britain where citizens, most of them, feel they have a stake and that their own interests are paramount.

The aspiring new MPs will need to look to the here and now for their inspiration. J.K Rowling has blazed for them a more modern literary path than Trollope, though both use symbolic fiction to make social commentary of their times. There are moments in history, not many, when what has gone before has little connection with what is due to come. This is one of those moments. The exciting thing about this government is that there are signs it knows that. It will be interesting to see if Parliament is up to speed also.