The United Kingdom has too much debt. Reports normally focus on government debt: currently around 80% of national income, unless you take into account (as you should) the debts of the bailed-out banks and their toxic portfolios, which would pretty much double that figure.

But what about consumer debt? Mortgage debt? Business debt? The huge slabs of debt incurred by our banking system? The truth is, if you want to know how much the United Kingdom owes, you need to add up everything.

And the answer is terrifying. We owe about 500% of GDP. So for every pound you earn in a year, someone, somewhere owes £5.  Add it all up and you get to a total just shy of £8 trillion.

Burden: Including bank bailouts, the UK’s national debt is already around 160% of GDP

You don’t have to be a rocket-scientist to figure out that this is a problem. Indeed, you’d have to be living under a stone not to have noticed that our economy has plunged into a depression because of this weight of debt. The banks started it, but we’re all in it together. And it’s not just Britain, it’s Europe too. And the US economy is way more fragile than is sometimes reported.

The dictionary definition of a depression is ‘a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen by some economists as part of the modern business cycle.’ That’s us. That’s where we are. The Great Depression of the 1930s did not destroy output to the same degree and recovery was faster. This is the worst depression in British economic history.

And what is the solution to this crisis, as cooked up between George Osborne and Mervyn King, the Bank of England chief? 

I love Wimbledon, it's Smashing!

George Osborne and Mervyn King have announced their intention to make around £100bn of cheap loans available to banks, allowing them to lend to businesses

Answer: more debt! Clearly, these wise souls believe that the whole problem with the British economy is that we don’t have enough debt. So let’s have more. In fact – and how’s this for a plan? – let’s make soft loans at cheap rates to the same klutzy British banks that created this mess in the first place and hope that somehow that sparks off a spiral of investment and innovation. You might as well plan for world peace by selling arms to the Middle East. (Or, come to think of it, making Tony Blair a peace envoy.) It’s the same crazed logic.

Fortunately, though, businesses aren’t stupid. The main barrier to investment isn’t the availability of credit; it’s the dire economy. Businesses are, quite rightly, looking at the devastation and lack of governance around them and thinking this might not be the best possible time to launch new ventures or expand old ones.

And the solution?  Well, there isn’t one short of de-leveraging. The only way to a problem of excessive debt is to have less debt. You can’t achieve that by waving a magic wand, you achieve it by working hard, paying down your loans, and remembering that, next time, you better keep your credit card in your pocket when you pass those nice, inviting stores.

But meantime, the plan does reveal something important about the decision-makers in charge of the economy. George Osborne I have some time for: at least he realises he needs to get the government to borrow less; at least he knows that the banks have to be tamed. But Mervyn King: what is he for? We are currently paying him to print money and shovel cheap loans at dodgy banks fueling a property bubble of epic proportion. 

Athens burns: Does this look like the creation of aggregate demand, Mr King?

Creating asset bubbles and money printing are terrible policies that King has become addicted to. He’s past his sell by date and has to go.
 

I published this in the Daily Mail

The book is by Suzanne Collins, who published her novel one day before Lehman Brothers collapsed: the moment that inaugurated the collapse of a fragile and bloated financial system. Since that day, a tiny coterie of the wealthy and powerful – notably the barons of the international financial system – seem to have done remarkably well for themselves, while ordinary citizens have suffered job losses, wage freezes, high inflation, perennial financial scares, and the destruction of value in their savings and pension funds. We aren’t yet battling each other to death in exchange for food, but give it time. We’re not even four years on.

Naturally, policy makers want us to believe that everything’s going to be OK. George Osborne’s tough talk about borrowing our way into crisis and earning our way out is intended to be Churchillian. This is going to betough, but with enough blood, tears, toil and sweat (he means yours, of course; no one’s expecting bankers to chip in), we’ll get through it.

Unfortunately, economies don’t respond well to stirring words. They respond to facts. And, as I’ve long predicted, and as the OECD’s latest data also suggest, the British economy is back in recession. We’re not earning our way out of anything. The economy is shrinking. Our debt is growing. The problem’s not smaller than it was; it’s bigger and getting worse.

That bad news isn’t restricted to the real economy. Mortgage approvals for house purchases have dropped sharply and are expected to fall yet further. Such falls will drive house prices down from their current (unsustainable) levels and will put further pressure on bank’s balance sheets and household confidence. And given that bank lending is already falling short of unambitious targets, the news is hardly better for a struggling corporate sector.

Bank of England figures have fueled predictions of further property price falls

This fundamental frailty comes in part from our own head-splitting debt hangover, but it comes also from Europe. Italy’s hopes of paying back its massive debts rest partly on swingeing austerity, but mostly on finding some path back to economic growth – a path it hasn’t been on for a decade and more. Alas, the OECD reckons that the Italian economy is contracting, not growing, which means its debt burden is increasing.

Anxiety over the Euro remains so acute that even government advisers – Steve Nickell of the Office for Budget Responsibility – admits to MPs that he checks William Hill for the odds of a euro collapse. (You can get odds here, if you’re worried.)

The authorities’ response to these things has been part-good, part-feeble. The good part is that we have a government which understands that debt is not a good thing, that money has to be repaid, that borrowing from the future to fund consumption in the present is an idiot’s game. An idiot’s game with a horrible ending.

Box office hit: Jennifer Lawrence as Katniss and Liam Hemsworth as Gale in a scene from the Hunger Games

The bad part is that the Bank of England still loves debt. Inflation is high? Hey, who cares, let’s print some more money. Let’s monetise our debt and try to to inflate it away instead of properly addressing and properly restructuring it.

Dilma Rousseff, the Brazilian president, talks about the world being swamped by a ‘monetary tsunami’. She’s right. And that tsunami is like an addiction to borrowing: you get the nice bits upfront (low interestrates, some impact on growth); you get the bad parts later (inflation, inflation, inflation.) You want to know why the price of gold is so high? It’s because professional investors are watching the progress of that tsunami. It’s still offshore, but it’s heading towards us and getting bigger all the time.

And meantime, where is the recovery going to come from? George Osborne does seem to understand, intellectually, that recovery will come from jobs growth from small and medium businesses. (The big firms will create jobs too, but they’ll also be cutting them, so the net effect is not reliably positive.) Yet that intellectual understanding isn’t matched by radicalism of action. The tax and regulatory burden facing small firms wanting to grow islike a massive weight that has to be rolled uphill before the firm can even think about generating sales and hiring new staff. And why, for example, is there not a huge effort to slash payroll taxes? If we want more jobs, why in God’s name are we taxing them?

Collins’ book, The Hunger Games, was the first of a trilogy. Which seems optimistic to me. A trilogy of misery – I’d take that like a shot. But I don’t think we’re in a trilogy. I think it’s a soap opera and we’ve only just introduced the characters. The OECD has just welcomed you to the double-dip recession. Next up: the triple-dip. You heard it here first.

This blog was published in todays Daily Mail
 

The price of strawberries is up this year.

‘Inflation falls.’ That’s the headline countless British consumers have been longing to see. And inflation isn’t just falling: the Bank of England predicts that prices rises will be down as low as 1.7% some time later this year. If that’s true, it’ll be a blessed relief for countless consumers.

Personally, though, I’m just about able to contain my excitement. Yes, inflation is falling, but it’s still very high. Prices are still rising way above the Bank’s 2% target. What’s more, the Bank of England has consistently failed to achieve its target. Since the start of 2007, inflation has been almost permanently above 2%, twice nudging above the frightening level of 5%. Given that the Bank has been permanently wrong about inflation for years, I’m not placing too much faith in Sir Mervyn King’s latest boosterish prognostications.

What’s more, I don’t believe the inflation figures anyway. There’s too much massaging going on. Why, for example, does news attention tend to focus on the consumer price index (where price increases are currently running at 3.6%) instead of the retail price index (where price increases are growing  at 3.9% down from a stonking 4.8%)? After all, the retail price index includes house prices. Since, I assume, many of my readers live in houses, it seems reasonable to study an inflation index that includes the associated costs.

What’s more, back of the envelope type calculations focusing on what ordinary people actually spend have consistently suggested that inflation has been running way above published rates. Last December, for example, the Mail reported that the price of basic purchases, including food and fuel, had soared by 43% over ten years, far ahead of the published 27% increase in the CPI. These days, with wages stagnant and prices soaring, those essentials occupy a far larger and more important share of our shopping baskets than they ever used to. It’s probably the thing you personally think about when you think of inflation. Indeed, oil prices were $100 a barrel as recently as October; they’re touching $118 now. Petrol and utility bills are soaring.

Indeed, I’d like to take these thoughts further. I’d like the Bank of England to publish a regular Essential Goods Index. Rather than exclude items like food and fuel because they’re ‘volatile’, it would include them because they’re critical to most household budgets. When Sir Mervyn King writes to the Chancellor to explain why, yet again, he’s failed to meet targets, he might want to include a paragraph or two on what that failure means for ordinary households.

Indeed, while we’re on the subject of total transparency, I’d like the Bank to include data on asset price inflation. House prices, for example, have barely fallen in this recession, despite the fact that the number of houses being traded are at 27-year lows and unemployment hit a 16 year high toady. The FTSE 100 stockmarket index is nudging 6000, despite the fact that the outlook for the British economy is more precarious than it has been for decades.

These things are hardly hidden from view. The ratings agency, Moody’s, has placed the UK on credit watch for a likely downgrade of its AAA debt rating. That assessment simply mirrors the stark reality of our current predicament. Indeed, the extraordinarily low interest rates at which the British government is currently able to borrow – and of which George Osborne so frequently boasts – are simply the flipside of a crazy run-up in government bond prices.

Those things might sound remote from your ordinary life, but what we’re witnessing is the creation of yet another asset bubble – and a bubble in which the Bank of England is, once again, utterly complicit in creating. When that bubble bursts, as bubbles always do, the destruction inflicted on normal households and taxpayers will be prodigious. It’s that potential destruction which makes Moody’s – quite rightly – so anxious.

And, I’m sorry to say, I agree with Moody’s. I have no faith in the Bank of England. I don’t believe its headline inflation numbers. I don’t remotely trust its record on controlling asset price bubbles. And I’m willing to put my money where my mouth is. Back in 1999, Gordon Brown sold 400 tonnes of gold at around $377 an ounce. I bought some of it – and I’m pleased that I did because the gold price is now around $1730.

Posen promised to resign if UK inflation is not 1.7 by August

So here’s the bet. I’ll bet Sir Mervyn King one ounce of gold that inflation does not come down to 1.7% within the course of 2012. If I’m wrong, I’ll be happy to pay up, because that’ll be a sign that Britain – finally – might be returning to the path of financial probity. Somehow, though, I don’t think he’s going to take my bet. In the meantime, he shall keep writing monthly form letters explaining his failures to the Chancellor of the Exchequer.

Swervyn Mervyn Loving the Serving

Nice to be so secure in your job that you can reject any idea of checks and balances on your all-but-supreme power. Nice that ex-Chancellors of the Exchequer view you as some Sun King beyond any check. Nice to have a £400,000 salary and plenty of time to enjoy Wimbledon in the middle of an economic crisis.

But does Merv the Swerv actually know what he’s doing?

Let’s see. His job, his main one, is to make sure that inflation is at 2%, give or take 1%. Inflation has recently fallen to 4.2%, having been 4.8%. That’s a lot more than 2%.

And it’s also not the real inflation rate. The new headline stat they like to throw at you is CPI – the Consumer Price Index – which ignored mortgage interest payments. But mortgages need to be paid. You can exclude anything you like from a price index, but that doesn’t make it a sober record of changing values.

And if you look at the RPI – Retail Price Index – you find that inflation is a stunning 4.8%, down from an even worse 5.2%. What’s more, this awful record is no blip: it’s been running this way for years.

What’s more, these terrible statistics ignore strong suspicions that the official index vastly understates the inflation which most ordinary people face in their lives. A study by the Resolution Foundation suggested that, over the decade to 2010, the cost of essentials soared by some 43% – way more than the 27% reported in the official stats. A recent study for the Mail found that the elderly faced inflation rates of 10% or more – rates that they simply have to pay if they want to heat their homes and put food on the table. Electricity prices are up on average around 17%.

If you have a front row seat on Centre Court and have that nice £400,000 salary to take care of things, you probably don’t care too much about these facts – but millions of ordinary Britons are in no position to be so complacent. (The same, of course, is true of US citizens under the kindly rule of Helicopter Ben Bernanke. – We’ll deal with those issues another day.)

Meantime, speculation is growing that Swervyn Mervyn is keen to indulge in yet another round of Quantitative Easing – a polite way to say printing money. And what does printing money do? It creates inflation. That’s what happened in Weimar Germany, what happened in Zimbabwe. What always happens everywhere, when the printing presses create too much currency.

Inflation won’t bother the Sun King. If you’ve got a nice job and don’t have to worry about food, fuel and transport prices, maybe it won’t bother you. But it bothers ordinary people a lot. They’re hurting now and will hurt much worse if the country sees more QE. The Sun King should stick to tennis. Inflation fighting is clearly not his game.