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REPUBLICAN PARTY OF GREAT BRITAIN
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REPUBLICAN PARTY NEWSLETTER
For a Civic and Constitutional Republic
Issue No 62 Friday 09 July 2010
Highlighting news stories important to the Civic Republican view, particularly those that are overlooked or little covered in the main media.
The big story of last week everywhere (including this newsletter) was the introduction of the ConLib coalition’s “austerity” measures. Many were congratulating the new coalition on their resoluteness in tackling the deficit and being prepared to put the British people through untold hardship to do it. But barely as soon as the sense of muted relief at the adoption of the programme had arrived, the doubts started to emerge. Would the measures work? Would they perhaps even make things worse? Would it all be for nothing?
Such doubts were expressed in the last Republican Party Newsletter No 61 of seven days ago, and even since then more evidence has accumulated to suggest that the medicine being applied to our economic problems is not going to work. Even if the British economy were isolated from the rest of the world, it is doubtful if austerity would cure it but given that it is going to be subject to all sorts of outside forces over which we have no control it seems even less likely.
Comparisons with the period of the last Conservative government in the eighties are pertinent for that was the last time that a similar giant experiment was carried out on the British economy. Then it all inevitably ended in economic crisis and failure with many people losing their jobs and their houses but it was bailed out for a number of years by the massive tax revenues of North Sea oil and sell offs of state industries. But these were one offs that fell uniquely to Prime Minister Thatcher to squander. And oil revenues and privatisation receipts are a shadow of what they were in her day. This time there is nothing left to plunder to prop up failed policies.
Not that Brown’s New Labour had any real alternative policy to present to the ConLib austerity programme. It simply wanted to spread the pain out over a longer period and be less ambitious about reducing the national debt. This approach did have the merit of allowing for flexibility as unforeseen circumstances arose. The ConLib programme however is based on the assumption that austerity will definitely work. THERE IS NO PLAN B.
That the pain will be felt by large sections of the British population has been admitted and accepted as part of the plan. But what hasn’t been thought about is what happens if the economic figures start to go bad – if the stock market crashes, if house prices crash, if the currency goes down the pan. What if the government cannot sell its bonds and, worst of all from the government’s point of view, what if we get mired in low growth or even recession?
The economist and historian, Niall Ferguson, on BBC’s This Week last night declined to commit himself on whether the austerity plan would work - although his introductory piece gave plenty to suggest that he thought it would not. He said the key to the programme working was confidence in the private sector. The programme has at its heart the Neoliberal ideology that by reducing the public sector the private sector will prosper. Well, we know we are going to get the first of these, but will the second follow? Ferguson posed the question: Will the Osborne plan refloat the economy or send it to the bottom of the river?
A fundamental problem is with the plan is that it does not take account of the negative effect it will have on the British economy. The economy is going to have increased taxes sucked out of it and public services massively cut. These measures will make it weaker not fitter and less able to finance repaying the governments debt. It is like whipping a donkey harder and harder to get more work out of it. In the end the donkey keels over and you get nothing.
The argument that the private sector will step in to boost the economy to many people is wishful thinking on a dangerous scale. This is what Bill Bonner, editor of The Daily Reckoning has to say
Cameron is calling for ‘austerity’. He
wants the British public to make sacrifices so that British
public finances can be brought back under control. We have
some doubt that he will succeed.
That is devastating enough as an analysis of what will happen within our shores but to get the full picture we have to take into account what is happening in the rest of the world.
What the ConLib plan ignores in facing Britain’s debt problems is that Britain is not the only country - or the only anything - to have massive debt.
To translate this into a personal situation, imagine you have big debts but you live in a town where no one else does. Now imagine that you have the same big debts but you live in a town where everyone else is in the same boat with the same big debts. The question to answer is: in which situation are you going to be more likely to be able to manage to repay your debts? The answer is pretty obvious.
Britain lives in a world where there is loads of debt. This is going to hold back the world economy. And it is going to make it horrendously difficult for Britain to trade its way out of debt. This is Bill Bonnor again:
Today’s global economic problem is
breathtakingly obvious: too much debt. The solution is
obvious too: debt that cannot be repaid must be destroyed –
by defaults, repossessions, bankruptcies, write-downs and
“Defaults, repossessions, bankruptcies, write-downs and restructurings”. This is the world in which the coalition government is intending to pay off government debt with measures that even by their own admission are extreme.
But that isn’t all, by any means. We have not mentioned the euro so far. The crisis over the euro is now an ongoing story that will not go away. The stresses it is causing in the eurozone and beyond are mounting not diminishing. The reason for this is that the problem is structural and was built into the euro project at its inception. The problem is simply stated as follows: currencies have to be coterminous with states. There has never been an exception to the iron law – except that is until the euro was born. But then its founders always had in mind the creation of a European superstate of which the euro was but a building block.
But if the intention is a “Euroreich” this should have preceded the common currency so that the currency could then be properly administered. The reason why this was not done was that the idea was to get the superstate in by the back door. Just found the currency then pretty soon it will be obvious to everyone that a unitary state will be necessary to make it work.
But it is not happpening like that. There simply is not enough impetus for a Euroreich and the EU is going to tear itself apart on this issue and in doing so plunge itself into increasing debt. The economic results of the strife will be dire for all members of the zone but also for their major trading partners. And, yes, that means Britain – a country that is banking on growth and exports to revive its economy in the face of the austerity cutbacks and tax burden.
But its gets worse. As the euro goes terminal this will shake confidence and its value will fall. That means a rising pound which is the last thing Britain needs if it is to grow its economy.
Coming back to the home economy, further gloomy news is on the horizon. The Bank of England is sometime going to have to raise interest rates off the floor if it is going to sell government bonds. At present the stock market is still reasonably high (in spite of recent large falls) and this is because of two reasons. People don’t want money in cash with interest rates so low and because some of the quantitative easing money released to the banks has been used to acquire shares. As rates rise and QE stops so share will become less attractive.
Stories of City banks selling off shares massively in advance of the interest rise are circulating right now. There is no solid justification of the high stock market and many are warning of an immanent sell off. This plunging stock market is likely to be a further feature of the background to the implementation of the austerity programme. It would lead to an inability on the part of companies to invest and so put any hope of growth or avoiding further recession into fantasyland.
All that is in the “real” economy of production but when we turn to “money” economy - the world of finance and banking - the horrors only deepen. Western banks are still holding huge amounts of toxic debt. It is not declared as such on their balance sheets and if it were their market values would plummet and maybe vanish altogether. No western bank has been properly stress tested and governments are afraid to do so. If the British government were to properly test the assets of the banks it owns, or has a share in, they would in all probability be shown to be bankrupt.
Apart from being disastrous for the banking system this would result in even more debt for the government. You might justify the resistance to stress testing the banks toxicity on the grounds that it will be a long time before anyone will be able to put a reliable figure on the real losses the banks will face. Under normal circumstances if the assets a company holds is not known, the only sensible thing to do is to write it down as zero. But in the fragile economic world we live in few have the guts to do that and certainly not this government coalition.
But dread of the real state of the banks is amplified by another big factor. These debt unknowns hardly bare thinking about once we seriously confront the exposure of most western banks to a sector that is little mentioned now by most financial commentators. But it will be mentioned – when it cannot be avoided any longer.
This is commercial property. The problems in the housing market have been well rehearsed. We know that in the USA the housing market and house prices are continuing to shrink - here we have seen something that looks like some stabilisation although this can’t last. Commercial property is the unseen base of the property iceberg. Its toxicity is not too evident at present as the commercial property financing arranged with the banks in the boom times is still in place. But many such arrangements will soon come up for refinancing and at that moment the values of the properties will have to be reassessed. This is the iceberg that the banks are helplessly drifting towards. As the banks hit another major crisis the government will be again faced with bailing them out. But this time that cannot happen. Economies would implode if they did.
Sounds too much to believe? London trader, Riccardo Marzi wrote recently
“The stock market has rallied hard for 12 months. And with
most economies emerging from recession, the toxic debt
problems that sent the global banking system into meltdown
seem a distant nightmare.
Again let us not forget, this is the background against which the British government is running its austerity programme where the private sector is expected to be the cavalry that rides to the rescue.
Think again about the analogy of the indebted person trying to earn to repay debt surrounding by equally indebted people.
There is no way that a piece like this is going to end on an optimistic note so let’s just remind ourselves of this week’s report from the IMF that downgraded its growth forecast for just about every major economy. Britain went down from 2.5% to 2.1% - a substantial drop. And Bill Bonner wrote this week:
Earnings in the private sector
[companies] in the UK are falling at their fastest rate
ever... down 1.1% in the first quarter of the year.
Meanwhile, the economy is in a ‘savage’ recession; GDP
growth was negative by 1.9% in the first quarter, the worst
performance in 30 years.
And Willem Buiter, a former member of the Bank of England’s Monetary Policy Committee, said:
“The economy will be shrinking into next
year. We’ll be in recession and have sharply rising
unemployment for the next year or year-and-a-half.”
The odds are stacked against the austerity programme working in paying back government debt. What will work for sure is the imposing of horrible financial misery and deprivation of essential services on the British people. It goes without saying that the poorest and most vulnerable will be the worst affected.
It will be a long time before it is accepted that the programme has not worked and so in the meantime all manner of additional sacrifices will be demanded of the British people. They will be used as fodder in the war on the national debt - a war that cannot be won.
But when it is finally by accepted the government, whichever it may be, that austerity did not work, it will have to then look at the options outlined in the last RPN - namely defaulting on the debts or printing money. THERE ARE NO OTHER OPTIONS. By that time our economy and our society will be in an unimaginably terrible state.
As someone once said. “It’s not over ‘til it’s over.”
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……. …….until next time
Comment from Richard Middleton
Generally speaking, there are two ways,
in which government debt can be paid off: the first is
greater "tax take" from increased growth (and, in the past,
an export drive would have been part of the solution); the
second inflation, which eats up the value of debt. As most
of Britain's primary and secondary sectors have been shut
down by thirty years of New-Right Globalist nonsense,
inflation is our only option.
However, if, for the sake of argument, we
accept that Osborne is right [in saying that public spending
is out of control], then his attempts to cut the deficit
have been pathetic (but, nonetheless, potentially very
harmful to certain sections of society and sectors of the
economy). The Treasury's figure was around £166 billion for
the current financial year [the overspend] but a more
realistic estimate is probably around £180- £190 billion.