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REPUBLICAN PARTY NEWSLETTER

For a Civic and Constitutional Republic

www.republicanparty.org.uk

 

Issue No 62 Friday 09 July 2010

 

 This week 

  • Why The Austerity Programme Will Not Work

News Stories

Highlighting news stories important to the Civic Republican view, particularly those that are overlooked or little covered in the main media.

   

ECONOMY 

  • Why The Austerity Programme Will Not Work

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.

As far as we know, no democratically-elected government has ever been able to reduce its debt burden DURING A CREDIT CONTRACTION. A number of governments – including the US and Britain – managed to reduce their debt in the ‘80s and ‘90s. But that was when their economies were booming.

As long as the economy is growing faster than the debt, the burden of debt will decline as a percentage of GDP. The ‘80s and ‘90s were boom years. Credit was expanding. People were buying more and more things they didn’t need with more and more money they didn’t have.

Obviously, that kind of boom can’t go on forever. And when it came to an end in 2007 it changed the financial picture for governments as well as households and businesses.

 

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 restructurings.
 

“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.

“It won’t stay that way for long. There is a major black cloud hanging over British and American banks. In the easy credit years before the meltdown, banks did huge business lending to dodgy property tycoons and financing new office blocks, warehouses and shopping malls.

“And those properties have been sitting empty for a long time now. In the US, commercial property values are still down about 40% since the 2007 peak. And about 18% of all office space is now sitting vacant.

“More than $1.4 trillion of loans secured by commercial properties will need to be refinanced between 2011 and 2014. And there are over £300bn outstanding in Britain. If you compare it with subprime mortgages, which totalled something in the region of $300bn, you begin to recognise the scale of the problem.

“Without a major recovery in the commercial property market soon, a lot of US banks will end up with a huge burden of failed debt on their balance sheets. Many will go bust.”
 

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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If you wish to comment on these articles email

peterkellow@republicans.org.uk

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……. …….until next time

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Comment from Richard Middleton

 

Hi Peter

Most people would agree with you. The Lib-Con Government is not being honest about anything. Its Lib-Dem members now expect us to forget the explanations they were giving and criticisms they were making, only two months ago. Their volte-face makes them look ridiculous.

Both Lib Dems and Conservatives are trying to tell us - in true Animal-Farm style - that the Labour Party's spendthrift ways caused the financial crisis. We know that the real reason was the need to rescue the entire banking system. I have seen no evidence, which suggests that the Conservatives [whose mid-1990s policies Gordon Brown was following] would have done anything differently.

Throughout thirteen years of New Labour, Thatcherite Tories [a contradiction in terms, when first used, back in the 1980s, because true Tories believe in a degree of social justice] accused Gordon Brown of strangling business and the City with "red tape". At every juncture, they urged "Deregulation! Deregulation!". Digby Jones, the former head of the CBI, was brought into the Brown Cabinet, in an effort to keep them quiet.

Now, Osborne and Cameron are saying that Uncle Gordie didn't regulate things enough! Which story are we to believe? Perhaps, when Dave became Tory leader, someone should have cautioned him. "You do not have to say anything but it may harm your credibility, if, when questioned by the media, you fail to mention something, on which you later rely in the Commons."

The deficit is an issue but, as it will be halved naturally [i.e. without any major change in policy] by 2014, the situation is not as bad as some would have us believe. The object of the exercise, it seems, is making the dogmatic IMF think that Osborne is a man of action.
 

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.

Whatever the truth, measures such as cuts to housing benefit [a cut of £1.8 billion from a total housing benefit budget of £21 billion] will make no difference.

The Crossrail scheme [rail tunnels right across London, costing £16 billion] is going ahead, despite the fact that much cheaper alternatives could deliver the same result. HS1 [nee "Channel Tunnel Rail Link"] is being sold for £1 billion, a fraction of its cost. It is making a profit too! How can its sale provide value for money?

There have been indications that HS2 - the high-speed line to be built solely for the benefit of businessmen going to Brum - might still be laid [at a cost of £40- 50 billion]. The government is determined to press ahead with the new Trident ICBM system- a colossal waste of money at between £80 billion and £100 billion.

The NHS - a black hole for taxpayer's money which never does anything to improve the health of the public - is to be exempted from cuts. Furthermore, despite warnings from public policy analysts of the disaster that will follow, it now seems that the doctors, who have been bleeding the system dry for years, are to be given complete control over spending. [Is there any truth in the rumour that "parasitology" is the study of the behaviour of medics?] If you see a massive carnival in central London, next week, it'll just be the BMA and the pharmaceutical industry having a party.

In short, the new government is not serious about saving money. It is continuing to waste it. However, it is good at looking tough- by picking on the most vulnerable people in our midst.

It is noticeable that the cuts have hit the poor and those in the North- in other words the people who would never dream of voting Tory. The changes to benefits and pensions have already been examined in the press. Rail passengers in the North West are suffocating in overcrowded, outdated trains. Liverpool Central station often has to be closed at peak periods because it is too small to cope with the numbers of people using it. Rail usage in the North West has almost tripled, since British Rail was abolished [It's dangerous to read into things too much. The former was not necessarily a consequence of the latter.], but all over the North, transport improvements have been cancelled. Meanwhile, London Victoria [in the city where, coincidentally, Dave Cameron's mate, Boris, is in charge] is having £700 million spent on a new entrance, which will basically save Londoners the bother of having to cross the road.

This is not 1937 all over again, as some have suggested. It is 1981 (Take 2). However, as you've said, the economic circumstances of today are totally different from those of the early 'Eighties. Although living standards have improved substantially for most, things are much worse for the economy. The facade is impressive but the foundations are crumbling.


As I've already said, the "spending crisis" is by no means the most important issue. Unfortunately, the country's real economic problems are so big that no UK Government has the courage to tackle them.

The British economy is not in good shape. The City's heyday has passed. Banks have been told to restrict lending, until the "loans:deposits" ratio is judged to be acceptable by the Bank of England. Thousands of viable businesses have gone under and hundreds of thousands of people have been thrown on to the dole, as a result. Oil and gas from the North Sea have almost run out. Without those two magnets, there is nothing to attract a large input of capital- either from overseas or from within the UK.

To me, the crux is the trade deficit (which North Sea Oil and the City helped to mask, during much of the last thirty years). The problem of government spending is a doddle, compared with the imbalance in external trade. We simply don't earn enough to pay for the things we buy, so we've "put it on the slate" [that slate now being controlled by the People's Republic of China, as much as western banks]. No individual could survive indefinitely on loans (although some tried with endless transfers of credit card debt).


The Treasury and most politicians assumed, for years, that invisible exports [mostly in the financial sector] would make up for the destruction of our manufacturing base. That was always a risky strategy. We may not have a single-cash-crop economy or "banana republic" but perhaps, in the 1990s, we became a "financial services republic". [I'm sorry for using the word, "republic", in such a negative context!] It is a certainty that the financial sector cannot lift us out of recession. Manufacturing is now a third of the size it was in the 1970s. The rump has not been boosted, as the Treasury had hoped, by a weak Pound.

That leads me to the only point of disagreement with your thesis. I can't see the Pound rising. Foreign investors won't want it because of the underlying economic instability of the country: Britain is not a good long-term bet. If Euroland gets into serious difficulties, the Pound isn't likely to stay high, relative to the Euro, for the reasons that you've given. The UK is too closely linked to the rest of the EU- as things stand.

Perhaps it's time to reassess Britain's policy focus and place in the World [membership of the EU and the moribund NATO, Security Council seat] and think of radical solutions- such as an end to so-called Free Trade. Britain is relying on the reputation and status it enjoyed in the 1930s. [Evidence for that can be seen in the ludicrous diplomatic service, which is larger than that of any other country. We no longer rule a third of the World's population but someone forgot to post a little note to that effect through the door of the big, useless, Victorian pile in King Charles Street.] If we want to be at the top table, then we have to earn the right and go on earning it- by creating an economy and society at home, which are examples to the rest of the World. That would give us real  influence.


[Similarly, giving up nuclear weapons would give Britain much greater moral authority and perhaps start a wider process of disarmament.]

Those, who make peaceful evolution impossible, make violent revolution inevitable. [The man, who said that should have applied it to his dealings with Cuba.] The World's up-and-coming powers will simply laugh at the UK and by-pass it. I note how Brazil recently brokered a nuclear-research deal with Iran, leaving the USA out of the loop. [The usefulness or otherwise of that deal is not the issue: Brazil acted as if it were a major power. It soon will be.]

[The one thing that Britain had going for it in diplomatic circles during the 1970s, 1980s and 1990s was its apparent independence from the USA. Look at the number of Security Council resolutions, which the Americans voted against and Britain supported. This detachment was particularly important, when dealing with the Islamic World. Iraq and Afghanistan strengthened the Special Relationship, in the short term, and gave Britain access to American diplomatic muscle- for example in trying to propel Turkey into the EU in order to frustrate the Federalists in Brussels. However, there are few signs of those gains today. The long-term consequences were extremely damaging. Britain looked like a lost little boy, hanging on to "Mommy Liberty's" apron strings. The country also looked like a loser because neither military campaign was successful, although that is definitely not the fault of soldiers or airmen.]

Unrestricted "Free Trade" could easily be replaced with a system of "Fair Free Trade", in which trade barriers would be completely removed between countries, which had agreed to common labour, welfare, health and safety, legal, and environmental standards. Most of the old EU would find it easy to sign up, as would Japan, Australia, New Zealand, Canada and the United States but membership of the new "Fair Trade League" would be open to any country- provided that it met the requirements.

The trouble is that the PRC and the World Bank would never allow anyone to discuss the idea and, largely because of the incompetence, shortsightedness and (possibly) treachery of politicians and senior civil servants in London over recent decades, those two Great Powers, to whom the UK owes huge amounts of money, effectively control Britain's economy.


In the end, political independence and strategic influence are much more closely connected with economic and financial power than they are with military capability. [Don't they recruit history graduates at the FCO anymore?] That is a point, which almost no one in Whitehall has grasped (or wants to acknowledge). If we want to survive as an independent country, we have to pay off our debts because our "bank managers" will use the leverage they have to strengthen their own positions and weaken ours. To raise money quickly, we need to create the conditions, which will lead to a trade surplus.  The question is "How do we do that, when we have already lost so much of our independence?". We are, to some extent, caught in a vicious circle.

RICHARD MIDDLETON