Accountable: A letter in the Sunday Times called for Osborne to begin spending cuts a year earlier than planned

In February 2010, twenty economists published a letter in the Sunday Times calling on George Osborne to begin spending cuts a year earlier than planned. The key sentence of that letter stated that, ‘In order to be credible, the government’s goal should be to eliminate the structural current budget deficit over the course of a parliament.’

The logic was clear. If you say you’re going to do something hard but essential, you need to do it at a credible pace. Saying you’re aiming to do something in five years time and after a general election is rather like admitting that you’ve no intention of doing it at all.

You probably agree with that logic. If you are in charge of your household budget and you notice that your expenditures are running ahead of your income, you’ll almost certainly want to address that gap right now this minute. It’s not pleasant doing it, but you do it anyway. Businesses think the same way.

What’s strange then is why those same economists have now reversed themselves. Just three of the original twenty economists are thought to stand by their original view. The Daily Telegraph will this week print opinion pieces from a range of other economists all calling upon the Chancellor to reverse course, slow down the fiscal tightening. Spend more, tax less.

Some of the specific ideas have real merit. Britain has an acute shortage of good affordable housing. Plenty of people would seek to buy a house if suitable properties were available at a vaguely sane price. Yet, as things stand, planning restrictions artificially restrict supply while the construction industry is staggering under its post-Olympic hangover. In principle, therefore, you could release demand and reignite an industry by changing planning laws so as to enable the provision of new homes.

Another good idea is widespread tax reform. The British tax system is too complicated and tax rates are too high. Simpler, broader taxes would allow tax rates to be lowered without any overall loss of revenue. The economy would surely benefit from such a reform. There would also be a huge boost to fairness, as the super-wealthy would find themselves having to pay tax instead of dodging it.

Bad plan: Certain other plans for spending cuts are just bananas, such as cutting stamp duty. Britain has long suffered from a huge property bubble, which is at its worst in London
So some of the ideas floating around at the moment are entirely valid. Some of the reforms mooted are obvious and overdue. But certain other ideas are just bananas. Cut stamp duty? Really? Britain has long suffered from a huge property bubble, which is at its worst in London.

A valid alternative? Alistair Darling wants new investment in power stations, airports and railways

Stamp duty is a tax that’s hard to evade and which keeps some kind of lid on prices. Abolishing the tax will just encourage prices upwards: a disastrous step backwards to the bubble economy of 1997-2008.

And higher prices will of course make it even harder for ordinary people to own their own homes, which should be a perfectly reasonable aspiration for working families in a twenty-first century democracy.

Other ideas are more marginal. Alistair Darling wants new investment in power stations, airports and railways.

He’s right, of course, that Britain’s infrastructure does look ragged compared with that of our European competitors. New investment makes good sense, in principle. But why should we expect the government to fund that investment? If there’s a market demand for new airport capacity, the private sector should be able to fund it. If planning restrictions get in the way, Osborne needs to look at the planning laws – he shouldn’t just pull his chequebook out. Same with the railways. Same with power. Those services need to exist, but they need to be funded by the people who use them. Any other approach is a reversion to the jam-today, pay-tomorrow culture of the previous decade.

This debate is going to rumble away for some time to come. Osborne will face a thousand calls from a thousand directions to reverse course, to back off, to ease the pain. But before you join that chorus, please just remember the position we’re in. According to the IMF’s data, the British government will this year borrow 8% of GDP. That’s £124 billion. Of every £1 that the government spends, about 18p is borrowed money. That’s plainly unsustainable.  If you look at all debt in the economy – household, government, corporate, banking – then our debt to GDP ratio is a terrifying 500%.

Those numbers were produced in April. Since then, the economy has deteriorated, the outlook darkened. That doesn’t make is less needful to get the finances in order, but more needful. This entire crisis – from the collapse of Northern Rock to the travails of the Eurozone – arose because of too much debt. Too much stupid debt. Urging George Osborne to borrow more for longer is like telling an alcoholic to use cider as a way to get through his whisky withdrawal pangs.

For the same reason, it’s sheer madness for the Bank of England to cast around for new ways to loosen policy. The IMF’s commodity price index has almost doubled from its early-2009 lows. London house prices are crazy. The financial markets are also at unsupportable levels. These things are certain harbingers of inflation – and sure enough, last month, the RPI inflation index rose again, to 3.2% and it won’t stop there.

You would think these things would act like a cold shower on policy-makers. That they would remind them of basic truths: that debt is bad, that fiscal responsibility matters, that money-printing is destructive. Instead, though, it sometimes seems that those in charge of policy will do anything but face the facts. There’s talk about changing the way inflation is calculated – the classic government dodge: if the facts don’t change, fiddle the numbers. Meanwhile, the IMF wants the Bank of England to cut the base rate from 0.5% to 0.0%, as though current rates aren’t already absurd. The lunatics are trying to take over the asylum.

But personally, I think George Osborne understands all this. He’s not a dummy. He gets that you can’t cut expenditure without causing pain. He understands that too many people are still hooked on the Ponzi-ish belief that we can enjoy things today and pay for them tomorrow. Over the next few years, George Osborne might not be Mr Popular. He may yet prove to be Mr Right.

You know, there would have been a time when a financial contributor for the Daily Mail was restricted to the little stuff. Share tips, muttering about monetary policy, that sort of thing.

Not any more. Over the last few years, there’s been no breaking news like finance news. No war, no election, no natural disaster has long been able to displace finance from the front pages. This new emphasis makes perfect sense. When your job is threatened, your pension demolished, your child’s prospects seriously impaired, you need to know why these things are happening. The answers all revolve around matters financial.

So: another week, another row. Hot on the heels of last week’s news – another banking scandal, another repentance-free resignation – we have this week’s headline. Ed Miliband wants to force the big banks to sell up to 1000 branches each. He wants a specialist financial unit inside the Serious Fraud Office. Vince Cable has lambasted the banking sector’s ‘anti-business’ culture and accuses it of ‘throttling’ an incipient British recovery.

And they’re right. Bang-on-the-money, hole-in-one, jackpot-hittingly right.

Take each of those points in turn. Should the big banks be forced to sell branches? Of course they should! How is there even any argument? The mergers, acquisitions and bank failures which took place during the 2007-09 period have left British high streets with a dangerously oligopolistic industry. That means less competition. It means aworse deal for borrowers, a worse deal for savers – and a much-reduced capacity for corporate lending. It’s a market gone badly rotten. Competition from sizeable, properly funded institutions is essential for us all.

As for a specialist finance unit inside the SFO – I’m frankly astonished there isn’t one already. What’s more, such a unit needs to be lavishly funded. It needs to be able to employ professionals who understand the nuances of the financial markets. If that means paying top dollar, so be it. The money would easily be recaptured from the fines that would result.

And after all, how much more evidence do we really need that these banks have utterly lost touch with their ethics? They are happy to mis-sell a wide array of products to consumers. They are happy to fiddle interest rates. They are happy to sell totally inappropriate derivatives to corporate users. They will help an entire country, Greece, fiddle its books so it can enter the Euro.

I was about to write that there is nothing these people won’t do, and then I wondered. Mass murder? Genocide? Are there perhaps some limits still prevailing? Some matters a board of bankers would still not countenance? I don’t know. Maybe. But until those bankers find their ethics again, we need a fraud unit with as much finding and as much investigative authority as it plausibly needs. The hard truth is that until we see a fair few bankers serving long jail terms, these people will continue to feel immune. And no wonder. They have been immune. Bob Diamond may have resigned last week, but he hasn’t apologised, he hasn’t handed back any of his £100 million pay, he hasn’t indicated that he intends to waive his £20 million odd serverance package – and he isn’t facing jail. (Incidentally, Barclays stock price has declined 52% since February 2011 and 75% in the past five years. So how exactly does he think he earned that money?)

Blame: Vince Cable has slammed the banking sector’s ‘anti-business’ culture and accused it of stifling the chances of a speedy British economic recovery

As for Vince Cable’s comments about the anti-business culture of these firms – well, duh! Of course they have an anti-business culture. Banks have made money over recent years by (i) acquiring lousy assets (Greek bonds, American subprime debt, over-leveraged domestic mortgages), (ii) mispricing them on their books (so they don’t recognise the true impairment in value), (iii) waiting for the Bank of England to print more money as a way to support creaking asset markets and, when in dire straits, (iv) waiting for a handout from the taxpayer. None of these items have anything at all to do with real, ordinary banking business. None of them supports the broader economy. You’ll also note that the last two items involve massive support from the state, yet that support is somehow not inconsistent with the payment of massive bonuses. Explain that one if you can.

The trouble is that many banks are a zillion miles from becoming responsible citizens again. Their balance sheets are rotten. They may not admit that rottenness in public – there would be a bank run if they did – but they know perfectly well that their balance sheets are in a desperately weakened state. Because of that, they flinch from offering corporate loans – which involve real business risks in a difficult climate – and prefer to trade government paper. That way, their capital ratios look alittle better, no matter than no real banking work is being done.

You don’t have to take my word for these things. A strong bank will have a stock market ‘price to book’ ratio of more than one. That is: the stock market regards a given bank as being worth more than the collection of financial assets (less debt) on the bank’s balance sheet. A ratio of one exactly would mean that the bank was worth its financial assets but that its actual franchise – its ability to generate additional profits from those assets – was worth zero.

Action: Labour leader Ed Miliband wants to force the big banks to sell up to 1000 branches each

Most of our banks are today rated at far less than one. Barclays Bank, for example, has a price to book ratio ofjust 0.36. That is: the market regards the bank’s valuation of its own assets as laughably optimistic. While that continues to be the case, the bank willhave neither the strength nor the outlook needed to finance recovery.

So Miliband is right. Cable is right. The Tories are, on the whole, lamentably silent on this issue. (The worst offender is the bankers’ own apologist, Boris Johnson.) That’s not to say the Labour record has been glorious – very far from it. Ed Balls’s recent Oscar winning performance in front of the LIEBORgate enquiry was a frightening reminder of how useless and responsibility-evading his party was when in power. Until we have politicians ready to accept accountability and transparency while in power, we will continue to have a government that is wholly ineffective in the face of the banking lobby.

Nevertheless, and that said, Miliband and Cable are currently seeing these things more accurately than George Osborne and his colleagues. So here’s what has to be done. Break up the banks. Stop printing money. Deflate the housing bubble created by QE. Punish fraud. Force banks to publish honest balance sheets. The solutions are obvious. But will they happen? Of course they will: a Brit just needs to win at Wimbledon first…

Mitch Feierstein is CEO of Glacier Fund and author of Planet Ponzi: How politicians and bankers stole your future

I published this in the Daily Mail.

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

Facing a challenge: George Osborne

Flaky banks, a hideous deficit, soaring debts, public services that had become hooked on ladlefuls of new cash, and an economy that had become disturbingly over-reliant on a financial services industry of dubious value and uncertain profitability. Those are huge problems and no one could expect them to vanish overnight.

But we do have a right to expect visible improvements. On debt and the deficit, Osborne is making progress. It’s slow – slower than I’d like – but these things take time. Reforming the public services is going achingly slowly, but at least you can see a government keen to do the right things.

Elsewhere, however, what’s going on? Public sector austerity is a reasonable financial strategy, especially given wipeout in the eurozone, but it’s not a growth strategy. It’s the opposite of one. It’s an anti-growth strategy, which hasn’t yet kicked into full operating force but which has already thrust the country into the second dip of a double-dip recession I’ve been forecasting for six months and more now. (My book, Planet Ponzi, is still the best available map to the on-going crisis.)

Though the country may be starting to stumble out of recession now, you shouldn’t get excited. As austerity starts to bite at home, as the United States starts to tackle its own (awful) public finances and as our European friends continue to make a mess of their beautiful continent, Britain will be back on Recession Row within a year. You heard it here first.

And meantime, what is the government doing to energise growth? Or, rather, let me rephrase that: what in hell’s name is the government doing?

Well, there’s Project Merlin for one thing. That was a plan to get the banks lending again, to fire up those private sector afterburners and watch high-tech small companies blast us off to a different economic orbit.

Alas, the banks forgot to lend, smaller private firms are starved of cash… and even though we own the damn banks we don’t seem able to control their behaviour. Meantime, the government ‘investments’ in terminally-ill Zombie Banks still look horrible. And the bank’s bosses are still paying themselves insane amounts of money.

And then, for another Growth Strategy From Hell, try quantitative easing. The strategy is so dumb, a schoolchild could see through it. Don’t get too bogged down in the technicalities of how QE works. Essentially the strategy boils down to this: ‘Let’s print vast sums of money, slosh it around the financial system and see what happens.’ 

Well, I can tell you what happens. If you print money, it will eventually create inflation and do nothing at all to help small businesses grow.

If we had a banking system that was good at funnelling spare resources to promising business ventures, my verdict might be a little less scathing.  But we do not have that banking system and everyone knows it. So the most recent bout of quantitative easing (nicknamed QE2) delivers more or less the same quality of ride offered by the Titanic. A short colourful ride, followed by a journey to the bottom of the ocean. Just make you’re your cabin is close to the lifeboats.

Finally, there’s also the misreporting and the misrepresentation that has become a standardized exercise in ‘creative accounting practices’ across the Western world. Government debt currently stands at just north of a trillion pounds. But when the Government puts out its data releases, it states the figures after ‘excluding the temporary effects of financial interventions’. Huh? Just what exactly is that supposed to mean?

The answer: when we nationalised the banks we nationalised their debts. It’s true, of course, that we nationalised their assets too … but their assets were crummy, overstated and unsaleable: that’s why nationalisation was necessary.

What’s more, to talk about these nationalisations as ‘temporary’ is deeply questionable. Something is temporary if you take something into government ownership, clean it up, and quickly flip it. But RBS has been in taxpayer hands for years now and there is no prospect of any imminent sale. So that’s not temporary. In fact, RBS shares are nearly worthless.

Worthless: The state is unlikely to make money from its bailout of RBS

And do you want to know the extent of British government debts if we account for those bank debts the way any private sector corporation would be forced by law to account for them? And are you sitting down? The answer – according to the government’s own statistics – is an eye-watering £2,181 billion. That’s more than double the number the government (and most media commentators) routinely use. Unfortunately, it’s the only number that makes sense.

In summary, then, Osborne could have done worse. But he needs to do a whole lot better. He needs to understand the fundamental failure of the financial system to perform its function: the essentially modest one of funnelling capital to the people who can use it best. He needs to forget about QE as a strategy and he needs to set a new level of transparency and honesty in government reporting.

Osborne also needs to get government out of the way of entrepreneurs. There must be a bonfire of regulations and tax complexities that flames high enough to entice businessmen into risking their time and money again on new ventures. Britain used to be good at that stuff, you know. Somewhere in our DNA, we still have that memory of success. At the moment, sad to say, the memory’s fading.

This article 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.