Blog 2023 Malcolm Blair-Robinson

This blog has been consistently against the notion of an economy fuelled by house price inflation and once again the Tories are taking the cheap ticket to economic recovery and introducing, three months early, their help to buy scheme. This is reckless and cynical, since nearly everybody who can add up a column of figures with even partial accuracy, knows that this is the very biggest mistake possible in economic policy.

The reason this country is the second most indebted in the world is its inability to organise economic growth on a foundation other than the housing market, which is so over-valued that it requires continuous inflation to function and the rate of inflation has to be greater than general inflation in the economy. The housing market depends on borrowing and the percentage of income required to service a modern starter mortgage  is so high as to leave nothing for saving or extras, leading to yet more borrowing. Thus the debt mountain of the UK is second only to the US. However in the US it represents about 1xGDP, whereas in the UK it is around 4xGDP. Moreover UK personal debt as a percentage of income is among the highest in the world.

The financial authorities have been at pains to try and set the mechanics of the economy on a more durable basis and have increased the level of deposit needed to buy a house and required stricter financial disciplines in selecting acceptable borrowers. This has slowed the housing market and, apart from London where currency tourists are snapping up property to rid themselves of depreciating cash, prices have been either steady or slowly falling. This has been good news and would, were it backed by an energetic construction programme of at least 250,000 new affordable homes to rent every year,  achieve the rebalancing of the economy needed to sustain recovery.

Now Osborne, driven by an impatient Cameron, has swung his wrecking ball on this good work and gambled on fuelling a boom in time for the next election. Even if the plan succeeds, and no government plan in living memory except the poll tax, has had so many professionals advising against it, it will become a bust, just as all the other such booms in 1963, 1972, 1990 and of course 2007. All Tory governments except the last. That was the famous fighting duo of Blair and Brown.

House prices are already beginning to overheat in places, so there is a real prospect of the whole thing going pear shaped before 2015, not after. In that event the Tories can kiss good-bye to any prospect of a parliamentary majority for at least a generation, possibly two.

Apologies to our readers and followers. We had a system failure and have been off line for several days, but everything is now fixed. Watch this space!

The Federal Reserve has given the markets a fillip with its decision to keep pumping new money into the financial system, known a Quantitative Easing. The reason is that the US recovery is not yet secure and unemployment is not falling fast enough. In other words improving but not yet well.

It is much the same story in the UK. Things are looking up, but the recovery is slow and fragile. Retail sales fell in August. This is hardly surprising since inflation is higher than wages and the squeeze on incomes is real. Unfortunately QE in the form practised on both sides of the Atlantic has the effect of bolstering the financial sector, whilst leaving the wealth creating sector of the economy in continuing doldrums. Both America and Britain are doing better overall than much of the EU where QE is subject to a German veto. In Britain there are now alarming signs of rising house prices in some parts of the country and warnings of a housing bubble multiply. QE is linked to this as it is having the effect of boosting asset values but not making new wealth. Meanwhile corporations are generally still sitting on cash piles, unconvinced that the economic recovery is for the long term and not a short term rally.

This blog has for long argued that in addition to Bank of England QE to boost the financial sector and hold down interest rates there should be Treasury instigated QE to finance infrastructure and public house building. QE used to create, in a whole variety of ways, wealth, has a far more beneficial impact on growth. I have argued this at length in a paper which I may shortly publish. Watch this space.

The vote by the British parliament to block the military strike on Syria was described by this blog as historic and has turned out to be so. It caused chaos in Washington, which suddenly realised that without its closest ally it lost the mantle of protector and took on one of aggressor. The American people backed the British people in opposing air strikes and Obama was pushed into a corner looking very unhappy.

Putin stepped in, seized the agenda and suddenly bestrode the world stage riding a wave of public opinion. The Obama administration was caught like a rabbit in the headlights. It did the only thing it could. It grasped the lifeline offered by Putin to avert the need for cruise missiles and agreed a deal which should in the end lead to the destruction of Syria’s chemical arsenal. America has been outsmarted by its own voters in partnership with the Russians. This is a seminal moment for American politicians and those of both parties need to grasp the new reality of a shift of diplomatic gravity.

Under the Soviets the theme of their foreign policy was peaceful co-existence and non interference in the internal affairs of other countries, held together by a sphere of influence which must be maintained if necessary by force, and which could be expanded by coercion. America’s foreign policy was to counter the whole project, if necessary by force.

The Soviet empire then imploded. For many years Russia was something of an onlooker on the diplomatic scene, though it was slowly putting together  a new theme for the post Soviet Russian Federation to use as the bedrock for its future role in the world. America got on with its own thing. This was to become the world’s policeman and impose its will everywhere, backed by military assets of a scale several times above any other nation on earth.Its foreign policy did not have a theme other than the preservation of rather ephemeral ‘American interests’. This led to Iraq, Afghanistan,  Libya and the failure of all three.

Now the Russians proclaim the rule of international law as the first objective and oppose regime change by force and or foreign intervention not authorised by the UN. They argue that small countries who feel unprotected by failure of the UN to control its most powerful member, will seek protection through developing their own weapons of mass destruction. Russia also argues that America is confused when it sees itself as exceptional or endowed with exceptional power. The majority of thinking world opinion now backs the Russian theme as does the majority of the American people who argue it differently but mean the same thing.

The governments of America and Britain and to some extent France have been outflanked by President Putin speaking a language in tune with the feelings of their voters. This is a most extraordinary development that has changed the whole dynamics of the template of western diplomacy, which has been suddenly shown as out of date and out of favour. Moreover, unlike the grey suited Soviets and their unfathomable culture, Putin speaks directly to the American people through the New York Times and the TV channel RT, which is drawing ever bigger audiences. This does not mean it is always right but it does mean that Americans, whose international news coverage is not very good, now have access to an alternative view before making up their own minds.

This is a new experience for the US political and military establishments. They will not like it, but it could in the end bring about some overdue changes which will revitalise a war weary nation and re-energise the American dream. This is about Americans in America, not about being world policemen.

Meanwhile the Foreign and Commonwealth Office needs to burn some midnight oil.

The Chartered Surveyors were right to call on the Bank of England to keep house inflation at moderate levels, but their suggested rate of 5% per year is too high. House prices are already far too high and must actually fall in real terms over the next decade, if the economy is to enjoy any kind of sustained recovery based on the creation of new wealth as opposed to the failed model of continuous asset inflation. To compete in world markets labour costs must not be too high, but if housing costs are above average either workers have to be paid more or the government has to subsidise them with housing benefit.

I have argued since 2009 that house prices must not be allowed to rise more than inflation and must be reduced in the long term by a huge programme of house building. It is good to see the surveyors are now adding their influential voice to this self evident economic truth, but the figure they have chosen is wrong. You can only store up problems leading to another bust if house prices rise faster than inflation. The two must be linked (or house prices held lower) and the market must be brought under the official inflation remit to the Bank issued by the Chancellor.

In the near term a preferential mortgage rate can be available for new homes, to encourage building, but the government mortgage guarantee is a serious miscalculation, widely criticised by economists and commentators, which will eventually lead to an unwelcome house price surge and the unravelling of the credibility of the Chancellor.

Some commentators are suggesting that John Kerry made an off the cuff slip, when he suggested the US would call off military strikes if the Assad regime gave up its chemical weapons stockpile, and has thus handed the advantage to the Russians. This is nonsense. First, President Obama has admitted to discussing the idea with President Putin at the G20 and, second, the reason the Russians have the advantage is that the American threat of military action is deeply unpopular everywhere among populations weary of war, including and especially in the United States itself. The American political and military leadership is out of step with majority world opinion while the Russians are walking neatly in time.

There are a multitude of tacky elements to the US position and that of the UK government, but not its parliament. No fuss was made when Saddam Hussein, then an ally of the West, used such weapons against Iran, nor when he used them again against the Kurds. There is now clear evidence that the original Aleppo chemical strike which gave rise to the red line declaration, was launched using improvised munitions and non military grade gas. This points to the rebels. Any American military action must have the inevitable effect of degrading Assad’s military infrastructure and give advantage to those who oppose him. Yet he is not America’s enemy and has not threatened the United States. On the other hand a leading element of his enemy is Al Qaeda and affiliates, perhaps the best organised and best led of all the many formations. Al Qaeda is America’s sworn enemy.

If Assad falls the so called moderate rebels are not anywhere near strong enough to control the chaos which will follow, whereas Al Qaeda and other Islamic groups almost certainly are. Thus the outcome, even if the chemicals are destroyed in the apparently ‘tiny’ missile strike, may be that the country falls into the hands of the worst enemy of all.

Outside the White House, Pentagon, Downing Street and the Elysee Palace, the rest of the world knows this and wonders at the contradictions and confusion. It also vehemently believes that no kind of bombing can be carried out without civilian casualties and cannot see how this can alleviate the suffering of the ordinary people of Syria. Nor can it guarantee the destruction of the gas, the storage of which is said to be spread among very many sites, some of which may already be in rebel hands.

As one who spent his early childhood never far from his gas mask and later survived the unpredictable bombardment of VI and VII missiles which decimated many streets in my neighbourhood, I am still able to recall just what it is like to live in a war zone. I also recall that it was widely accepted at the time that the reason the Germans did not use gas was not that they had signed a treaty, but the knowledge that if they did we would use it on them big time. It was called deterrence.

But in the end any weapon used against civilians is uncivilised and the death of a child, whether blown apart by shrapnel or suffocated by poisonous gas, is still the death of a child. Oh, and what about napalm in Viet Nam? The biggest problem which the United States faces is the way it manipulates its principles to serve its interests of the moment. It is a problem entirely of its own making and belongs to a past era. Others have moved on. There are better ways of doing things. If history tells us anything it is that killing cannot save lives.

Ed Milliband knows that he has both public opinion and the majority opinion of rank and file union members on his side, when he talks of reforming the relationship between the Union movement and its political party. There is certainly a case for modernisation to a model which suits the world in which now we live, which is a very different one to that of the early nineteenth century.

Nevertheless it is not as simple as it looks and great care must be taken before knocking the structure down before there is a clear and stress tested plan of what is to replace it. Labour is not just a political party. It is a crusade for human justice and a fair deal for those who serve or toil;  is the voice of the underdog, the forgotten, the sick and the weak; its values are fashioned from life and not form luxury; it believes in all of us together rather than me first. It is a Movement, not just a Party.

When we write it we say Labour in the singular; when we speak of the Tories or the Lib Dems, they are plural. The reformers believe that if people contract out of block affiliation and go for individual membership of the Labour Party its roll will increase. This, if it happens, would buck the modern trend. People no longer want to be members of political parties. They want to be members of Facebook or Twitter and through instant social media they like to join campaigns to achieve something worthy. They become followers, not members.

This does not mean that there should be no modernisation to make the Labour Movement more in tune with modern trends, but to base it on an expected surge in individual membership if automatic affiliation is cast aside, is to look back to a different social structure to the one we live in today.

Watch it Ed. You could drive the Labour bus over a cliff.

George Osborne claims, with justification, that things are moving up rather than down and there is a slow recovery under way. It is certainly broader based than the ‘no more boom and bust’ model driven into the ditch by Labour, which remains confused about what it would actually do to make things better rather than worse.

Nevertheless this recovery is still too reliant on consumption rather than manufacturing and production;  it is about spending  existing wealth rather than creating new. It is also fuelled by quantitative easing into the financial sector which has raised share prices and is now feeding through into increasing house prices, but is not fuelling expansion in production to anything like the same extent. None of this is good news and it means that such a recovery as will develop on this foundation will be subject to severe correction trauma at some point down the line and before it has succeeded in transforming Britain’s chronic economic decline relative to its peers.

Inherent in the current situation is a single explosive anomaly. Assets are rising while living standards are falling. In particular house prices are now rising significantly faster than inflation. If this is not ringing a very loud bell at the Bank of England it should be. In many blog posts and in my book published in 2009, I argued the case for a separate Bank of England controlled Mortgage Rate, operating alongside Bank Rate, to allow a signal for the increase in mortgage costs to curb house price rises, whilst leaving interest rates for business low. It is time to look at this idea.

Failure to curb rising house prices, rising as they are from an excess value anyway, will guarantee one thing for sure. This so called recovery may last until the general election in 2015, then it will blow up. It may be that is Osborne’s plan. It is certainly where Labour should concentrate its economic guns. If it has any.

It is an absolute requirement of the re-balancing of the British economy so that it can sustain a continuous period of economic recovery, rather than a flash in the pan, that housing costs relative to living costs and earnings fall very dramatically. At the moment they are going in the opposite direction. This is not good news for Mr Osborne, or for anybody.

There is further controversy surrounding this project, focussing once again on the financial argument that it is not worth the money.

The problem with Britain, and in particular England, is that its infrastructure falls short of modern needs. It is not just about money, it is about political will and the venerated status of the notion of protest. Thus the nation which sparked the industrial revolution, built an empire on railways, invented the computer and television and much else besides, is now in growing trouble.

All the major European nations have significant inter-connecting high speed railways. Britain has one line, opposed in its infancy by the Tories and every kind of campaign group. A costly white elephant and a blight upon the countryside. In the event the cross channel connection is a vital artery to the continent and the new commuter services are transforming the economies of the communities which the only modern railway in the country serves. Barely anyone notices the line is there and there are no protesters whatsoever.

HS2 is not about its budget any more than was the building of the first sewers in London or water mains in big cities. It is about moving civilised life forward in the ever expanding prospect of improvement. What is expensive at the outset becomes a bargain for later generations. The failure of the British to be able to see their noses in front of their faces and their propensity to select and elect politicians bereft of vision has led to a crisis in power generation due to lack of replacement of both nuclear and coal stations with anything but fantasy talk, inadequate road and rail systems to provide modern connectivity of regions and communities, a chronic housing shortage and a perpetual crisis in national IT projects.

Britain is the only country within the range of its GDP which cannot send a rocket into space, has destroyed its industrial base, still relies for a good many of its services on engineering undertaken by Victorians and expects, once again, to grow its economy on the foundation of house price inflation.

Britain already ranks in the mid twenties on the measure of GDP output per head of population, and is at number two in the world for both the size of its external debt and the size of its balance of trade deficit. On every measure of economic performance it is sliding down in the the tables. The time has come for every British person to recognise the need for a re-think. Above all end the mean habit of thinking little and about me. It’s time to think big and about my country and future generations. For the first time since the peasants came in from the countryside to the cities, the rising generation of the UK will get a less good deal than their parents. That is the most telling measure of all.

To many the declaration by President Putin that Russia may be willing to back the use of force in the UN against Syria, if it can be shown beyond doubt that Assad was responsible for the chemical atrocity, comes as big a surprise as the UK Parliament’s No vote. Yet, however high the bar he has set, this does, for the first time, offer the prospect of fruitful dialogue over Syria in the G 8 at St. Petersburg.

It is maybe worth listing some of the scenarios which might account for the troubling anomaly that, although all the intelligence services have evidence which points to the Assad government’s complicity in firing of the chemical munitions, it had almost nothing to gain and everything to lose by their use. Conversely the Rebels have everything to gain if their use brings a punishing strike on the regime’s military assets.

There are several possibilities. One is that the equivalent of special forces within the rebel mix, did manage to fire some artillery rockets from government territory into their own lines in order to create a crisis for the regime. This is theoretically plausible and has a clear motive as the rebels are slowly losing the battle, but most discount the logistical capability of rebel forces. Another is that Assad’s brother or some other senior officer in his military ignored orders and used the forbidden munitions. Yet another is a deliberate act by a rival within the government to discredit Assad in order to get rid of him. Intriguing is the possibility that some units overtly loyal to the regime are covertly with the rebels. This is a common feature of civil wars. This could mean the attack originated from government territory deliberately to bring down a western strike which would cripple it.

Putin has hit the nail on the head when he argues not against the use of force, but establishing guilt beyond the doubt as a condition of action. This must be to the satisfaction of not just  the Prosecution, which is the US and some hesitant allies, but to the satisfaction of the Jury, which is all the rest of the world. At the moment the US has managed to convince only its own government. If it wants to act without being cast as a headstrong aggressor angry at being challenged by a weaker party unable to hit back, it will have to convince the rest of the world.

As for its argument that it will embolden Iran and North Korea in their development of nuclear weapons if the US does not act, the opposite is true. It creates an imperative to possess them. None of these conversations would be going on if in response to a surgical strike, Assad had the power to take out New York.