The UK economy looks now in danger of an economic depression,how do we avoid it?

The UK has rumbled its way over the past two or three years with essentially the same problem which is one of stagflation. We have seen economic growth disappoint again and again but inflation remains over target. Yet the UK economics and political establishment keeps looking for quick fixes and indeed keeps looking for them in the same area which is monetary policy. They have even indulged in name calling as for a while it was popular amongst some to use the phrase “inflation-nutter” to describe those who had inflation concerns. Of course that phrase and the name calling fell into disrepute as inflation continued on its not very merry way above its target! Those using it dropped it fairly quickly as it drew attention to their own often wildly inaccurate inflation forecasts although only Adam Posen of the Monetary Policy Committee fell on his sword because of it.

The reason why I highlight this is because it has been a clear policy error in the UK to emphasis monetary policy as a response to the credit crunch. The “quick fix” has not worked and indeed it cannot now be quick and it plainly is not working either. Splashing money into the system and devaluing the currency are not working and yet we get more of it. Indeed today we are seeing three examples of it being persisted with and indeed intensified.

UK Monetary Policy

Quantitative Easing is back

Whilst the Bank of England is not currently making new purchases it is recycling some £6.6 billion which has matured. So today for example we have some “heavy-duty” QE is it buys some £1.1 billion of Gilts dated from 2028 to 2060.

The Funding for Lending Scheme will be on “steroids”

The Financial Times has published an article presumably leaked from the Coalition government about the FLS which so far has failed to increase bank lending which fell instead! It has however performed as another bank subsidy as they have received around £14 billion of cheap funding in return for a lending reduction. However now we will get this apparently.

“Can we extend it, can we increase it, can we direct it to SMEs? These are the things on the table.”

The Funding for Lending Scheme is expected to be extended and “put on steroids”

If we look at the first statement we wonder if they plan to give even larger subsidies to banks. Also the SMEs or Small and Medium Enterprises may have concerns over promises of money directed to them as this was what FLS was supposed to do in the first place! I genuinely fear that our political class of got into the habit of announcing things and get so caught up in their own rhetoric and hot air that they assume it has already been done. Indeed the Financial Times has presumably unwittingly confirmed this.

The FLS works by providing banks with cheap funds in return for commitments to lend to businesses and households

The first bit is true but it is easy to make “commitments” you never intend to follow-up on. We also have perhaps a side view into the UK’s productivity problem as it has taken three journalists to write a rather short article. Also steroids have some nasty side-effects and I wonder if this is something of a Freudian slip. Of course we also have the problem that all we are getting here is a repetition of the promises made when FLS began.

What troubles me the most is that we are genuinely “Turning Japanese” here as this is pretty much a carbon copy of their failed efforts. So much for us actually learning from their experience.

A falling pound

The UK establishment seems wedded to this and  it is ongoing as the latest weak economic numbers of which more later have seen us fall to US $1.484 this morning. It was only yesterday I pointed out that we have fallen some 8.5% against the Chinese remnimbi in 2013 so far. But in spite of many so-called experts and the Governor of the Bank of England telling us that a “rebalancing” is just around the corner since the 2007/08 fall of around 25% it has yet to appear. Indeed today’s figures show it to be as intractable as ever.

Excluding oil and erratic items, the deficit on trade in goods was £21.8 billion in the three months to January 2013.  This was £1.3 billion less than the preceding three months and £0.5 billion lower than the same period a year ago.

Whilst this looks as though at least we are not getting worseand maybe edging forwards there are two slightly ominous messages from the further detail.

Export volumes (excluding oil and erratics) were unchanged in the latest three months; import volumes fell by 2.0% in the same period.

So we are not exporting any more and worries about domestic demand are likely to be caused by the drop in imports which is something we have seen in the Euro area periphery as a harbinger of bad news.

Whilst these numbers cover up to the last twelve momths only they do highlight what has been the underlying picture. There was a small gain from the 2007/08 depreciation but unfortunately only a small one partly due to the fact that we are a nation prone to inflation.


We see here methods which are designed via monetary policy to increase the supply of credit via QE and FLS and demand in the economy via a falling currency making us more competitive. However the credit system as in our banks is part of the “liquidity trap” we are in as until we reform it and make it fit for purpose we will find ourselves fulfilling the analogy of pushing on a string. Back on the 27th of September I gave my ideas for reform and made this forecast.

You may have spotted that I feel that monetary policy right now really only has the power to reduce or increase inflation and that its ability to influence economic growth is low at best.

Whilst it is nice to be proved correct in many ways I would rather I had not been as I do not enjoy the economic suffering being inflicted. However if we return to bank reform I explained my ideas here.

As the Eagles put it we have had three or more years of “Wasted Time” when we could have been making progress. To escape our problems we have to start at the heart of the beast in my view rather than keep feeding it titbits to (hopefully) keep it at bay.

If we now look at trying to improve demand in our economy by encouraging a UK competitive devaluation we hit trouble with the word competitive. The evidence from 2007/08 was that either much of the UK economy does not produce products which are price competitive at the margin or we failed to take advantage for some other reason. Either way there is no logical reason that there will be a change for the falling pound in 2013.

UK Production

This area of the UK economy has opened 2013 in very poor shape as illustrated by today’s numbers from the Office for National Statistics.

Production on a seasonally adjusted basis fell by 2.9% in January 2013 compared with January 2012

Manufacturing on a seasonally adjusted basis fell by 3.0% in January 2013 compared with January 2012

Ouch! Also this does not really coincide with a FTSE 100 index which touched 6500 yesterday does it? The UK has joined the countries which have an apparent disconnect between their financial and real economies. Although of course it is also true that the FTSE 100 has less and less to do with the UK economy and more and more to do with the mining industry as time goes by.

Ironically in the light of the above UK mining does not seem to be doing very well either as this is far from the first month with weak numbers.

However you spin it (and I expect plenty to try….) we see that where 2009=100 UK industrial production is now at 97.1. Is that what the Governor of the Bank of England meant by rebalancing?

Fiscal policy

Back when the UK election took place in 2010 I feared for whichever direction we took which kept my political balance. I feared that a new government -which came in the form of the Coalition- would be inexperienced and naive and I feared that a continuation of the existing one would have the problem that it would have to change its modus operandi. In the event if we avoid the austerity/stimulus debate it is clear that cutting capital rather than current spending was a policy error for which we are paying the price with exacerbated economic weakness. However it is also true that problems were awaiting us. From May 12th 2010.

Forecasts for the UK fiscal deficit going forward do not look good. Unfortunately they were based upon unrealistic economic growth figures so in fact they are even worse than they appear.

As it is now crystal clear that this is what happened we see that our establishment has failed to get a grip on either monetary of fiscal policy making them rather like Wilkins Micawber

Something will turn up

It hasn’t and if only we had followed his wife instead.

Experientia does it

Instead we are letting it go on for too long.




This entry was posted in Banking Reform, Banks, General Economics, Growth, Inflation, Quantitative Easing and Extraordinary Monetary Measures, Stagflation, UK Inflation Prospects and Issues and tagged , , , , , . Bookmark the permalink.
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  • James

    A few comments on your excellent piece, Shaun:
    1. The beauty of fiddling around with monetery policy is that no member of the public knows or cares about it;
    2. In contrast, look at what happens when they actually try to address the spending levels of government. Just in the last few days, we have revolts against:
    a) The spare bedroom issue;
    b) The overseas aid budget being ring fenced;
    c) the archbishop of Canterbury weighing in against welfare cuts;
    It just doen’t matter any more what you are trying to rein in – there will always be a lobby group to point out the plight of some poor devil suffering from the cuts. On the Radio 4 questuion time the other day, I heard the first ever cheer from the whole audience, which greeted Peter Tatchell’s attack on all spending cuts.
    3. Trying to have a sensible conversation about the deficit is simply impossible now. The great mansion tax being debated this afternoon will, I understand, produce a few billion, yet is seen as some sort of panacea which presumably lead to a land of honey and increased expenditure on everything. No-one, and I mean no-one, has even mentioned that it would, at best, shave a few per cent off the deficit.
    All of the above lead me to think that we cannot get out of this box. Everyone is quite happy for suggestions as to how to get other people to pay more, but no-one is prepared to reduce the deficit either by cuts or taxes on themselves.
    That leaves as the only policy bonkers monetising of debt and other wheezes like the FLS in your article.

  • max

    Shaun, Have you ever been invited to Newsnight or any MSM programmes? It would be nice to hear from somebody with more than a couple of brain cells on a programme like that.

    The banks are broken and this whole policy seems geared around maintaining the pretence for long enough that they are not. Also at any costs they try to maintain the housing bubble as the solvency of the banks depends on it. However, if a small 3 bed terraced house in London costs £1million and wages are not going up, how is there going to be spare money in the economy for ‘growth’? If that ‘growth’ is a temporary increase in house prices it is not going to last long unless wages start to nearly double.

  • forbin

    Hello Shaun,

    Seems pretty clear to me that any spending we do is done on projects that reduce our imports – like giving away free solar panels – this reduces electricity demand for at least 25 years ( plus increases employment largely at first then the maintenance)

    or even for a measly sum – see below

    Passiv Haus all our existing housing stock . I had cavity wall insulation for 200GBP – bargain – cut my fuel expenditure on gas – cuts gas imports

    Car funding – for cars that have the best fuel economy – trade in a gas guzzler for a frugal mini car for example – cuts imports of oil

    Build renewable and nuclear – oh sorry forgot NIMBYS and the Anti Nuclear League will kill that one dead!

    but you get the picture – lets build things that give a return to sell ( maybe ) or cuts expenditure overall

    I fear what we will end up with is what MiniTru are bleating about now

    As I’ve said before we’ll bail out the banks again and again ….. forever!

    “We’re on the road to nowhere ” – talking heads


  • Andy Zarse

    I’ve seen Shaun on Jeff Randall on Sky, and very good he was too!
    Incidentally Shaun, harking back to your blog a couple of weeks ago, you asked for some feedback on what’s happening in The Netherlands economy. I’m off to Rotterdam on friday, and will be speaking to several business people. Is there any aspect or line you’d like me to ask them about? I know anything I glean is strictly anecdotal evidence, but then I suppose it’s little different from the reports compiled by folk like local BoE agents. Anyway, happy to help if I can.

  • forbin

    I do wonder if the British public in general understand the debt issue at all. In reality of their current daily lives all is not lost and it doesn’t seem so bad – mastery action by the politicos there I think

    They get re-elected – the reason they exist is to be in power – otherwise they are nothing

    Find a minority to blame – and the public will follow – we’ve quite civilized now just blame the “rich” – the real rich pay hardly any taxes anyway and will continue to do so because they can – the other “rich” with property will suffer , small town houses that are not mansions will pay that tax

    as you said its fiddling around the edges – I truly believe they are waiting for something to turn up !

    We should have gone the Canadian way with cuts – 10% all round no arguements , everyone suffers . If they did that I think there would have been more realization of the debt issue and that we really are “all in it together ” ( hah hah hah so far )


  • James

    yes, we should have done the cuts as you say, probably with simultaneous tax rises so that, as everyone IS in it together, the voices are silenced. It is too late now.

  • Anonymous

    Hi Shaun,

    The theory that devaluation making UK exports cheaper will boost UK wealth & earnings needs to be debunked.

    Lower wages do not bring wealth – Africa has some of the lowest wages on the planet, and their exports are not increasing. Poverty appears entrenched. Do British workers want to bid down to the bottom against the third world ?

    Successful exporters are improving product quality, functionality and desirability – BMW, Mercedes and Honda etc are profitable because they can command a higher sale price with a better profit margin. British workers are better off competing in world beating innovation and quality engineering.

    I suggest that productivity improvements are a path to a wealthy future and that competing solely on price is a path to poverty.

  • DaveS

    Hi Forbin

    I think we are in danger of looking for a solution where non-exists.

    10% cuts sounds like real austerity to me – Greek or Spanish style – the sort of austerity that has been heavily criticized on this blog as being self- defeating. I suspect the outcome would have been crashing GDP (like Greece) and rising Gilt yields. Tax revenues would have crashed along with the housing market and the deficit persisted. Mervyn could have stepped in to buy Gilts as he is doing now but then we would also have crashing pound and rising inflation alongside falling GDP.

    So I would have voted for 10% cuts but I doubt it would have changed anything. I don’t really buy the argument that big government is killing the private sector – it certainly isn’t in Germany, Globalisation and 30+ years of bad government killed our industry and it isn’t coming back – devaluation or no devaluation.

    We are already bankrupt, any success in cutting the deficit is too little. too late. We will and are defaulting. You can choose hard default or soft default by inflation – but default we will. As I have said before – the powers that be will never choose hard default.

    There is no solution except default. But the underlying assumption is that we are a rich western nation and we will recover after the default (after all we did in the 70′s with help from the IMF). Thats a big assumption….

  • anteos

    Great article as always Shaun.

    I agree with you James. I really can’t see a way out for the uk. The public
    are up in arms over austerity, but it never happened. We’re spending more this year, than last. And the deficit has increased.

    Mp’s would rather be relected than make tough decisions which will benefit the uk in the long run. An example of this is the stakes in the banks. The tories would rather sell at a loss, than allow the SP to rise and have labour benefit from this. this is tax payers money which is being defrauded.

    We going to pay 45bn in interest payments this year. How much will this be at the next election when the national debt is 1.5tr.

  • Alex

    And excerpt from the bbc link above…

    “Crazy promise

    In fact, so ingrained is the aversion to inflation, that some economists argue that the credibility of central bankers is the problem.

    The outspoken left-wing economist Paul Krugman
    has called for the US Federal Reserve to “credibly promise to be
    irresponsible” – to say that it will continue stoking inflation even
    after the US economy has already recovered.

    According to Prof Krugman, that is the only way that the
    central bank could convince everyone that they really ought to go out
    and start spending their money right now before prices start rising.

    Others have gone further, saying the Fed chairman Ben Bernanke should don a Hawaiian shirt and smoke a bong, to make the crazy promise more credible.

    Across the Pacific, many have blamed Japan’s central bankers
    for being too half-hearted about tackling deflation. In 2000, and again
    in 2006, the Bank of Japan was all too ready to raise interest rates at
    the first sign of a return of rising prices.”

    What do they mean – stoking inflation even after the US economy has already recovered?
    Aren’t they doing that before they’ve got to the recovery? And isn’t that the rub – they’ve not got to the recovery after five years of trying?

    Once everyone’s gone out and spent their money, with no growth in disposable income/ wages over the intervening years , what happens then? No doubt that will be the time they raise interest rates, when there are few savers left to benefit?

    The first sentence dealing with the credibility of the Central Bankers hits the nail on the head. They are the people who got us where we are, and are therefore not the people who are going to lead us out.

  • DaveS

    Absolutely. We can’t compete on labour costs.

    But competing on innovation is a tall order. We have spent 30 years persuading our best and brightest to become bankers, lawyers, accountants, doctors, psychologists – not engineers. This is reinforced by the domination of public schools in elite education and their preference for liberal arts & the white collar professions.

    Also the whole economy has been restructured to services. We invest in property not industry. We consume goods, we don’t produce them.

    It would take a generation and the very best leadership to turn this around .Even in that unlikely event we would be competing in a world with a billion Chinese and a billion Indians equally capable of competing on innovation. Our elite engineering courses are already stuffed full of them.

    Perhaps its not impossible, we have a tremendous history and still have some world beating engineering firms. But we would need massive structural changes and massive capital investment.

    What do they propose instead – build 50,000 new houses – why because it inflates GDP and keeps the economists happy. We love houses……

  • Alex

    That article, it just get worse….

    “The actual monetary mechanics are a little hazy, as Stephanie Flanders has explained at length.

    But they would work something like this:

    The Treasury issues a £100bn-IOU to the Bank

    In return, the Bank hands over £100bn in newly-created money to the Treasury

    The Treasury spends the money

    Note that step 3 is the critical one that differentiates
    helicopter money from QE, and it requires a Treasury willing to engage in more spending.

    In theory, there is no debt created.

    So long as you consider the Bank to be part of the government
    – which, incidentally, official measures of the government’s debt do not – then the £100bn-IOU is just money that the government owes itself.”

    This is our esteemed BBC reporting!!..monetary mechanics are a little hazy to them :) )))

  • DaveS

    Definitely nuclear. Already putting up windmills faster than anybody else – think solar is questionable at our latitudes.

    But guess what. our obsession with the private sector means that we outsource the nuclear build to private companies. Of course non of our domestic utility companies want to take the risk and looks increasingly likely that foreign companies won’t either.

    And sadly we decimated our nuclear industry – I used to work in it and spent a year working on Heysham. Now we are reliant on foreign technology.

    End result – we will have no new nuclear this side of 2030 – quite possibly never. That is going to change our lives.

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  • ernie

    The election win in 2010 was wasted, since a new government could possibly have got something radical done with spending then. Unpopularity would not have mattered so much at that time as Labour was fresh in the memory. I think one big problem is the pathetic level of debate/information in the main media. For example why don’t we have more searching questions asked of the so-called economist talking heads? Interest rates have been cut from 5% to 0.5% with no resultant growth. About 400 billion has been “qe’d” – no resultant growth. The pound has been devalued over and over again(see 1967 onwards) with no resultant improvement in the balance of payments deficit. So, why don’t more “journalists” start banging the drum? The present policies have demonstrably failed, it’s not like we’re waiting to see how they pan out! Sure, people don’t seem to care, but I still believe they might at least be given the chance to hear the other side of the argument, instead of the current idiotic Keynesian chanting by almost the entire political and economic establishment.

  • Anonymous

    Perhaps UK needs the threat of future action eg Japan, Krugman et al ?
    Can I suggest capital gains tax to be introduced in 2015 on all house sales – this should ensure those who have gained on house prices have a definite time to cash in – a flood of house sales should reduce prices with sellers willing to accept a discount to save tax – overall house prices should fall and some tax receipts as a bonus.
    Housing would then be treated as other investments subject to capital gains tax.
    While I am at it shouldn’t stamp duty apply to all -Tobin tax for the punters but not the casino banks?

  • HW

    I have often thought the question to ask those that want to claim even more taxes from others is ” how much of your own salary are you prepared to give up? a reduction down to £10k £15k £20K?” And the little extra for the MPs is to give up the pensions and then find them on the open Market, focus would then be sharpened somewhat.

  • DaveS

    Not quite – quite a bit of that 45bn goes to the BoE – and they hand it straight back to the Treasury.

    Who said there is no such thing as free money………….

  • forbin

    Chris ,
    this cannot happen , will not happen ! god god do you want another run on the banks and more bailouts? possible quicker fatality to the UK Government than the poison they’re taking now ?

    The banks run the country ! drop the house prices and whoops! there goes every politicos next job!! crash, bang ,wallop, go the banks as they go bust …

    Sure we need house prices at a level people can afford realistically – remember when it was a boom if they were 3.5 x times income

    Build more houses or flats if you could get the British to value them , and legislate that no mortgage will be more than 3.5 x income , sure they’ll cheat – Libor tells us that so does PPI – thats just lax regulation – and we’re back to reforms of the banks again – one of Shaun’s favourate subjects ( and mine the bu@@ers need it for all our sakes )


  • forbin

    “We have spent 30 years persuading our best and brightest to become
    bankers, lawyers, accountants, doctors, psychologists….”

    oh dear that didn’t turn out well either did it ! . Shipman , Mervin , Sir Fred, the fab 5 of Rover……..

    Damm I knew I should have gone into Finance instead of Engineering …. look at my peers – even the builders did better than me !

    Can we find room for not 50K of houses but 500K because thats the minimum we need – and where ? We’ve been creative in Slough you know , all those garage conversions…..

    Can’t we just persuade 500K of people to leave ? ( well, we’ve manged that with about 10K of supa riche )


  • DaveS

    I was an engineer that went into finance – well finance IT – I build those weapons of mass destruction they call risk models.
    Builders are still doing better than me.

    Why not build a million new houses and export them ? Perhaps we can float them off on container ships – the Chinese love mock English style. Those Wimpy boxes probably stack well.

    Anyway no point keeping them – we won’t be able to heat or light them in a few years.

  • steved

    Just get the cable between ourselves and Iceland built quicker will solve a few power issues and nice green energy too. By the way has the size of the global market reduced and if so have we managed to increase our share of it with a reduced pound?

  • forbin

    Now all we need is for the BBC/MiniTru to drop Peston in favour of some called Swann and….

    he he


  • forbin

    damm it should have been this link :-)

    There’s a hole in my Budget ……….

    strange we’ve been ‘ere before…… just change the names


  • DaveS

    Yes, we should do that too.

    But would cost 2 Billion+ for 5Twh – about 1 nuclear reactors worth or less than 2% of our total use.

    Would have been better to produce our own but perhaps its too late now to be fussy. If Iceland is happy to accept Mervyn pounds for all that lovely electricity – then lets get printing !

  • James

    The problem is the pay rates for white collar non-scientific jobs are completely off the scale for scientists. I run a biotech company with dozens of PhD staff and hardly any of them get a starting salary for a law firm in London.

  • DaveS

    Quite right Forbin – we need tax breaks to help young people get on that wonderful housing ladder – so they can be rich too.

    How about deductible mortgage interest for first time buyers ? Nope better to make it housing tax credits…

  • Anonymous


    Passive Haus products sourced from Germany/Austria/Scandinavia

    New cars will be made where ?

    Renewables – ‘cheap’ PV panels from China, generators from ..?

    Cheap 2nd hand Nukes (from Germany?)

    UK companies can make margin on this business, but it would suck in mega imports.

    Where are our engineers and men in sheds creating world class IPR? Without them, the end looks sticky.

  • forbin

    LoL! send that to Camera -on !!


  • Taurus

    “Shaun, have you ever been on Newsnights or MSM programme.”

    If I recall I think Shaun has been on RT which (with AL Jazerra) I watch more than the BBC.

    Shaun, have you ever been invited to appear on Max Keiser. I know Max enjoys grandstanding but in the second half of the programme his interviewees are people with a viewpoint on global economic matters who are usually ignored by the MSM. Prof. Steve Keen, Jim Rickards, Gerald Celente et al.
    It’s just a thought as he has a large following and your forensic analysis would reach a wider audience.

  • Anonymous

    Actually Britain ought to back it’s own AGR nuclear generating system. It’s much safer than the meltdown prone BWRs & PWRs.
    (As sold by Westinghouse, Areva & Rosatom)

  • Noo 2 Economics

    “drop the house prices and whoops! there goes every politicos next job!! crash, bang ,wallop, go the banks as they go bust” – and this would be a bad thing???

  • Anonymous

    Germany has shutdown 8 reactors and plans to shutdown another 9 within the next 10 years.

    France runs 58 reactors, of which 22 are over 30 years old. I don’t know what their service life is, the short answer is that the 1 reactor at under construction at Flamanville cannot replace them.

    Ergo Western Europe is likely to suffer power shortages and price increases. Big price increases are likely to trigger a reactor building boom and subsrquent bust.

  • Noo 2 Economics

    “I don’t know what their service life is” – a friend in the nuclear industry mentioned in passing the other day that the service life can be extended. I don’t know if that extension is finite or otherwise.

  • Anonymous

    Hi DaveS
    You raise an interesting point about the difference between Canada’s experience and that of the Euro area periphery. I will look further into that but I can think of a few factors for starters.
    1. Canada has her own currency
    2. Canada sets her own interest rates
    3. The international environment was more favourable.
    I am not sure if the resources card came into play or not…

  • Anonymous

    Hi Max
    I have been on Jeff Randalls business show on Sky as Andy says and also on Russia Today. The BBC have contacted me quite a few times saying they like my output and would like me to appear (mostly on the radio) then nearer to the event change their minds presumably because of the same views that attracted them in the first place……

  • Anonymous

    Hi Andy
    It will be interesting to hear what Dutch businessmen think of the state of play in their own economy. Perhaps the housing market is a good signal…

  • Noo 2 Economics

    Hi Alex,

    Unlike English inflation, US inflation is low and has been under 3% for the last year. Despite Fed activity US inflation has been on a downward trajectory over the last year and is currently 1.6%t. I wonder what the rate would be without Fed intervention, although the Fed appears to be sterilising a lot of it’s purchases.

    I think the theory runs that once money is being spent this will encourage companies to increase production in response to increased demand (they already have the cash piles to achieve this) which will require them to hire more people. By the time the helicopter money runs out it will have been replaced with expenditure by newly employed people.

    Completely agree your Central Bankers comment, they are definitely part of the problem so cannot be part of the solution.

  • Anonymous

    Hi Forbin and Alex

    It was interesting that particular section was titled “Mad about Inflation” with its inflation nutters symbology!

    My eyes particularly alighted on this bit.

    “That debt built up in the decades before 2008, reaching five times our yearly economic output, and has not gone away since.”
    They make it sound like it might have gone for a stroll or hidden itself behind the sofa…..

  • Anonymous

    Hi Noo2

    Those are indeed the official figures but there is the argument expressed as ” I cannot eat an I-Pad!”. The economist John Williams who puts back the changes made to US inflation measures feels that the numbers should be considerably higher and he makes his case here.

  • Rods

    Hi Shaun,

    A realistic, but depressing view of the UK economy, as least you tell it how it is rather than brushing it under the carpet, like much of the MSM.

    With an estimated £60bn of undeclared UK bank losses, there will need to be plenty more BOE schemes and wheezes to boost the bank’s profits to cover these.

    Without fiscally neutral real spending and tax cuts to kick start the economy to produce private sector investment and growth I can’t see where any growth is going to come from and we know this will never happen with the current three main political parties. It is politically easier to tinker around the edges and talk a good game, like the economy is improving and there will be plenty of jam tomorrow.

    The only other possible area is the Government creating the conditions for private investment in infrastructure, like a dash for gas to keep the lights on.

    At the moment if you are an employed Mr/Ms Average with no dependent children, earning £27,000, about 50% of your earnings go in all forms of tax. So you got up yesterday battled through the bad weather, did a hard 7.5/8 hours work pleased with what you have accomplished and earn’t, except all that money belongs to the Government, the same with today’s earnings, tomorrow is a bit different, you work for the Government in the morning, but get to keep the rest of your money in the afternoon, along with Thursday and Friday.

    Now if you are on double average pay or higher, so you are well into the 42% tax band, then you will be working most or all of Wednesday and maybe some of Thursday as well.

    On these real tax rates, what is the point of working more hours, to give at least 50% of them to the Government to waste.

    It is any surprise that we have a massive brain-drain with 150,000 of the 200,000 UK residents that leave the UK every year are our best and brightest, the movers and shakers of the future.

    Personally, I think the current main parties are perfectly happy to drive the UK economy off an economic cliff where they are pro-EU and pro-Euro, so when we have our major Sterling crisis, with massive inflation and require Troika help, they will insist that we adopt a nice stable, low inflation Euro.

    The politicians know that they will never get the Euro adopted through a referendum, but by this they can by the back door.

    I convinced that where the 19th century belonged to the UK where we lead the industrial revolution, the 21st century will belong to Asia, where we lead in the 1950 and 60′s with nuclear power (now India) and next generation Maglev railways (now China, South Korea and Japan), they are the global leaders with the money and drive to make these changes happen, while we continue to invest in white elephants like slow, high cost, high maintenance Victorian technology with HS2!

    The EU and UK Government all seem obsessed with equality, minority and human rights, so as the 21st century continues, we will have ever increasing equality of grinding poverty and misery, for all but the ruling elite!

    Today, if Isambard Kingdom Brunel was of our current generation, he would probably be a human right lawyer working in Cherrie Blair’s chambers!!!

    Once a country losses global market share, capital and wealth and world leading industries, it is a very long hard road to try and get these things back, ask any natural resource poor ex-Soviet country.

  • Anonymous

    Hi steved and welcome to my part of the blogosphere.

    The world economy has been growing -albeit something that I am sure is measured poorly- and according to the World Trade Organisation then world trade began to grow again in the summer/autumn of 2009. Indeed they have expanding by around 25% since then which leaves us in the UK way behind.

  • Anonymous

    Hi ExpatInBG
    I had been wondering about that myself as we used to have a thriving industry in this area. What happened to it? I do recall that there were reliability issues with the AGRs but will be interested to hear from you and those who know more.

  • Anonymous

    Hi ernie
    I am afraid that thinking and reflecting requires intelligence and some courage to face a possible barrage whereas joining the consensus is much easier and of course gives you plenty of press releases to quote.

  • Noo 2 Economics

    Hi Shaun, I don’t know if you mean your title question of today’s blog tongue in cheek but if you don’t this is the wrong question.

    We are already in a depression and have been since about 2009 so we can’t avoid it. Your comment on industrial production backs up my position. I would say this depression is greater than “The Great Depression” of the 20′s/30′s as it is already longer. The only reason it is not as deep as that of the 20′s is because of all the official intervention to mask it. This official intervention will ensure that the depression goes on much longer (although it will be shallower and people will not be as harshly affected as in the 20′s). I believe economists never realised at the time that they were in the midst of a depression in the 20′s. It was only until some years later that, with hindsight they looked back and saw they had been in a depression, so it will be for this depression.

    The solution is, I am afraid, political, spending needs to be moved away from Public sector (Civil Servants etc) and targeted at infrastructure, really just repairing existing roads and replacing the entire rail network including the signalling system so it can cope with high speed trains. This would lead to quicker journey times for workers and logistics companies on the existing infrastructure.

    The banks? well, I agree with you and they need to be reformed today but that would require international co – operation to prevent authorities entering another race to the bottom on who provides the lightest touch regulation to entice the banks to their part of the world.

    Debt, generally, must be reduced so I would not allow increased aggregate lending, not only that, I would contrive a mechanism that froze house prices for years to come whilst wage growth marched on at no more than 3% pa until we once more arrived at a situation whereby a standard 3 bed semi cost no more than 3.5 times average salary, then I would ensure this link was never broken ( unless the economy was going to be destroyed for some reason I cannot conceive of as a result of my “3.5 times rule”).

    The touch paper to rejuvenation would be lit by the infrastructure projects at public cost (awarded to Private companies with little or no profit in it for them so we get tax payer value for money). The projects I am talking about would run for years and would be financed by drastic Public sector reduction (meaning no increase in current expenditure levels). I would even be open to allowing projects to be extended in time (subject to no cost increase) as companies found they could do profitable work in the private sector as the economy picked up – calibration of that change over would be critical.

    This is my master plan when I rule the world!

  • Anonymous

    Hi HW and welcome to my part of the blogosphere

    I agree this would be an excellent question to ask those who want extra taxes for others and imply it is a national duty to pay more.

    Meanwhile more and more seem to find it possible not to pay. I put out a tweet today on the subject of “luvvies” as more and more seem to go bankrupt rather than pay their taxes. This is interesting as their profession seem to have ever more suggestions as to what we should do with the money!

  • Anonymous

    Hi Taurus
    Thank you and yes I would enjoy being on Max Keiser’s show but have not been invited on it so far.Let’s hope that I do.

  • Noo 2 Economics

    Thanks for the link Shaun, I didn’t know this. Is UK CPI calculated in similar fashion?

  • Anonymous

    Hi Noo2
    Actually what is a depresion and how it is defined is something that has been discussed more than a few times on this blog. The conclusion was that whilst there are factors one can pick there is always an element which remains tenous. That is until you look back in time and it becomes clear which is of course too late.

  • David Lilley


    I have been reading your blog for a few months now. It is always excellent and, as with some of the comments below, I would like you to have a bigger platform. And I do worry that you may not be getting sufficient reward for your efforts.

    I’m sorry that I often disgree but that is because I’m naturally argumentative and sometimes I crave contradiction so that I can learn and go forward corrected.

    I was being tongue in cheek when I put it to you and Simon Ward that UK GDP was flattened by deleveraging. That going to the bank to take loans to spend at Comet etc exaggerated GDP whilst going to the bank to pay off debt detracted from GDP. Do I need correction?

    Do you read Simon Ward’s blog?

    My comment by bullet are as follows:

    1. Without QE we would have lost our AAA in early 2010. Who else would have bought our Gilts when we had the highest deficit in the G7 and were, and still are, the most indebted counrty in the world (individual, corporate and sovereign)?

    2. We must distingush between net lending and gross lending. Mortgagers have been receiving more repayments than they have been lending to new mortgagees in the last four years. Those individuals and businesses who are able to are deleveraging big-time and this is killing GDP growth. But that is not a bad thing. It means less repossesions, business failures and credit card write-offs in the future. Only the sovereign is increasing spending.

    3. It is great news that unemployment is falling and you have pointed out that the 600,000 new jobs were for the most part real full-time jobs. Jobs growth is up, GDP was up 0.3% last year despite deleverging. Things are generally good here compared to the PIIGS and Japan.

    4. The £ fell but this wasn’t contrived like Japan. There was no massive BoE currency interventions (?). Our QE was necessary to fix a lending/deficit/AAA problem that hit sterling by default. And, as you have recently demonstrated, currency devaluation is a no win game.

    5. Inflation went up above target but that was the least of our worries and we called it “flexible interest rate targeting” in retrospect. Without QE interest rates and domestic inflation would have shot up.

    6. UK inflation has been imported and not domestic, due to default devaluation. Domestic inflation has been where is should be, in decline. The customer focused economy and wages are reducing their prices.

    7. What is the mix of product balance of payments and invisables? We export a lot of great price insensitive products from distillers, ARM, Asos, RR, high tech and pharma. The list is endless. But we are also massive on the invisibles like Lloyds of London and financial services. And as you have pointed out our FTSE 100 earn 70% of their income abroad.

    8. An unintended consequence of FFL hs been the mass exit from savings accounts and into equities. Excellent. Who needs FFL when we are diverting funds to investment in industry?

    As I said in my intro, I would love to be corrected.

  • Andrew Baldwin

    Until the January 2002 CPI update, the US Bureau of Labor Statistics only updated its basket once every decade at most. So this update, which replaced a 1993-95 basket with a 1999-2000 basket, set a new standard in timeliness, albeit still nothing to rave about. Since January 2002 the US BLS has updated its basket CPI biennially, not annually as is the case for most G-8 countries, but then each basket also covers two years, so all years are fairly represented in the CPI over time, just as with annual updates. For example, the January 2002 update had a 1999-2000 basket, which was replaced with a 2001-2002 basket with the January 2004 update.

    Starting in August 2002, the US also began producing a chained CPI (C-CPI-U) series, with a Törnqvist formula and a 24-month revision period. One can bicker about the choice of formula (I would have preferred the Edgeworth formula, or even the Walsh formula, which is actually used now to calculate the Swedish CPI), but there is no doubt that a chained revisable consumer price series with a formula that passes the time reversal test is the best way to eliminate upward commodity substitution bias from consumer price series. The UK has gone about as far as a country can go in eliminating such bias using unrevised chain Lowe indexes, with annual basket updates and a timeliness in its basket updates of just eight months. Although the UK might try to increase timeliness by another month to get to a December link month for the RPI and the CPI, realistically any further progress is going to come from imitating the US in calculating revisable chained indexes..

    While it is true that resources have been directed towards eliminating substitution bias in the US to achieve budgetary goals (both President Obama and the Republican House Majority leader seem to agree on escalating Social Security benefits by the chained CPI, although it hasn’t happened yet), possibly at the expense of other ways to improve these series, surely these reforms have addressed a real problem.

    As a Canadian who spent a lot of his career working on the Canadian consumer price indexes, I am somewhat envious of the American indexes. When I started working in the prices sector in the early 1980s, the plan was to update the CPI basket every four years, although this wasn’t always achieved. The US was backward compared to Canada. Now they are way ahead of us, and most other countries in the West.

  • Anonymous

    I can’t comment on the reliability. Britain built a unique design each time, where France rolled out many copies of standard designs. The French model reduces costs.

    When you shutdown a BWR/PWR you need to actively pump coolant through the system for weeks. The nuclear reactions will continue and gradually slow down. If you have a complete power failure and cannot pump the coolant, the reactor overheats and melts down. (As seen in Fukushima)

    When you shut down an AGR, the residual nuclear reactions are cooled by gas convection (hot air rises and draws in more cooler air). Hence the AGR shuts down safely in the event of total power failure.

    Sadly the safety features are not rewarded because of international treaties limiting liability way below the true cost of a meltdown near a major city.

  • forbin

    hello shaun

    51 comments? record result!


  • Patrick

    Am i missing something… “… we will have ever increasing equality of grinding poverty and misery, for all but the ruling elite!”

    This sounds like what has been the case in recent, and perhaps current years in Brazil, India, China and Russia. Also, was it not the case that much of the endeavour and invention attributed to Brunel and his ilk, came off the back of an exploited underclass.

    Not trying to be combative, and happy to be put back in my box, but it still seems that the BRICs are all on the same circular western croney capitalism journey that will result in exactly the same situation as seen in Europe and the West. Exploitation of a native underclass via underpaid labour, tempered via brain washing consumerism, that leads to higher exploitation of finite natural resources, forcing prices up, inflating wages, triggering out sourcing as corporate bodies legally protect the bottom line and so on and so on… I’m looking forward to making nike shoes to fund my retirement.

  • Noo 2 Economics

    Thanks Andrew,

    I think I understand that you are questioning the efficacy of the shadowstats article and implying that the difference in inflation rates between the UK and US cannot be explained away in it’s entirety by different methedologies of calculation. I am afraid this level of discussion is way beyond my capacity.

  • Anonymous

    James, whenever you hear the code ‘child poverty’, you know that the charity/quangos are getting into gear. It’s depressing that so many knees are jerked with so little discussion of the issues, especially on the BBC. That situation now includes the CoE bishops, who really ought to understand that poverty in the UK is a relative concept, and one that is dubious mathematically. And as you and Shaun rightly say, people are debating the margins, margins that cannot affect the real problems that we suffer. The UK needs a clear step downward in living standards until we improve our productivity quite dramatically. That change will hit harder the day the borrowing capacity runs out and prevarication is no longer on the cards..

  • Anonymous

    When someone buys the £1m house, cash changes hands (usually). The recipients may reinvest in property, but some will spend the money on goods and services, at least some of which will be in the UK. Plus the transaction raises a lot of tax.

  • Anonymous

    ‘ Sure, people don’t seem to care, ‘

    An indictment of our lousy educational system, coupled with endless faith that our government will ‘look after us’. Oh, dear. Evidence to the contrary all around.

  • Anonymous

    Forbin, I was a scientist and moved into finance in my 20′s. Why? Well it wasn’t for the interest, believe me! Finance is often dull and repetitive. It was simply because my earning potential was around 4 times greater on average, and in reality around 10 times as great. Somehow the UK has to get around this problem. Finance people have their uses (though less in these days of computers), but frankly we need the science and engineering bods much, much more. You can’t export much of the product of accountants! Others can do it for themselves, cheaper, Our whole social structure, dating from the Victorian period, grossly overvalues the input of our flawed financial ‘masters of the universe’.

  • Anonymous

    Exactly so. The ‘market’ does not work either for scientists or for the financial wizards.

  • Anonymous

    There is a lot of sophisticated thinking around the way in which the monetary aspects of our economy work. QE is perhaps the most revealing (and extreme) of these sophistries, but there are many others. Some of the more academic (and I suspect left-wing) commentators tend to scorn the idea that the economy is rather like a household budget, quoting all the devious means by which it is possible to ensure that water can indeed be made to flow uphill indefinitely with no extra effort!

    I do not agree with that proposition. Long term (I mean over 5 years) the wealth of an economy is directly proportionate to the input and value added of the population. Yes, you can rig the system for a while, and use the resources of savers to support borrowers. You can be clever with the way in which inflation is described, trying to fool people into thinking it’s lower than it is. Through ultra-low interest rates, you can play games with the exchange rate, though that has been greatly discredited by SR among others, unless you are deliberately creating inflation. You can stifle comment about the massive unrecognised losses in the banks which are related to the overblown state of the housing market, many recent entrants to which are in reality in negative equity. But you can’t go on doing these things for ever. At some point you have to stop these short term pretences at improvement and revert to the underlying realities of the economy. The required pretences get more and more extreme with time.

    Productivity in the UK is poor, perhaps 20% below comparable countries. That is the heart of the problem, and the fact that we have started to abandon manufacturing. What are we doing about these matters? Playing around with QE, inflation, nominal austerity and ultra-low interest rates is fine as a prevarication. But fixing the problem? When do we start?

  • max

    thanks for the reply barncactus. Sure, I take your point, but if the house cost only £10,000 then I would have £990,000 to spend on goods and services in the first place. :)

  • Anonymous

    Yes, it will change everything. And who is aware of this matter? That in 10 years or less our electricity costs will have doubled or even trebled? Get that overcoat now while you can and stock up on firewood.

  • Anonymous

    Hi Andrew
    Thanks for the input and may I add do you think that it passes my economics test? As in it measures what people think and believe inflation is rather than going for statistical purity….
    Also in case you have not spotted it both CPIH and RPIJ are now in existence in the UK…

  • Anonymous

    Hi ExpatInBG
    So we have another example of regulation leading to lower and not higher standards?
    Also we touched on the situation in Bulgaria recently and I noted sadly today that someone has immolated themselves. Are things deteriorating?

  • Anonymous

    Hi Forbin
    Thanks for the note and yes it is a good score. Indeed the comments section has been a strength of this blog since its early days. But over Xmas we did have one which passed 100 comments.

  • Anonymous

    Hi Shaun,

    I struggle to understand why people immolate in Bulgaria. Yes things are very tough, with low wages and many people not covered by unemployment insurance. Unemployment is very high. Rumour suggests that the previous building boom wages were mostly in the black economy – hence the wage statistics and gdp reduction are probably wildly inaccurate and the actual contraction is probably much greater.

    The construction boom came crashing to a halt in 2008 as the money from the UK & RoI dried up. Construction Employment has been very tight ever since.

    The first immolater in Varna held a sign complaining about the Varna mayor and alleged TIM links. The mayor subsequently resigned. Copycat acts followed, in Plovdiv and Sofia without any reported political messages.

    The US consulate has held events promoting press freedom & solidarity with journalists who write critically about TIM.

    I’ll let wikipedia comment on TIM –

  • Russell

    Hi Shaun, I’ve just listened to a podcast with slides by two guys called Gordon T Long and Charles Hugh Smith here –

    In it, they actually make many of the points that you make, but in slightly different words (for example, what you call “can kicking” they call “papering over the cracks”) that are equally illuminating. One graph in particular that was worrying showed the total level of indebtedness of all the major nations. The UK was top, with a debt to GDP level of 497% (once you sum govt debt, bank debt and personal debt).

    I asked you many months ago what you thought the end game might be. You replied that it would likely be a steady drip drip of inflation that brought the payment burden under control. Personally, I’m erring more towards the fact that there will be a major readjustment that could well see a partial collapse of civilisation as we end up with lawless militia, starving, homeless masses, rioting, looting and the breakdown of law once the true nature of the bankruptcy hits, and we can’t afford to pay a police/army. I don’t think this is too far away – certainly within the next few years. I have no solution, except to learn how to survive….

  • Anonymous

    That’s my conclusion and that’s why I’m emigrating.

    The UK is going over the cliff. It’s just a case of choosing your poison. Have a big party and go over slightly earlier or slam on the brakes and go over slightly later. Hey – why not party and go out in style?

  • Craig

    Sure, but there’s a rather small number of industrialised countries to pick from where you can live the same quality of life as in the UK. The ones that don’t have similar or worse austerity measures in place are generally the ones that are quite picky about who they take. After all, they didn’t get to be so financially stable by accepting every whining moocher who came along.

  • Anonymous

    Maybe they are picky. I’m in one and so far the standard of living is way up. Certainly forget London. Last time I ever live in a “global” city also. Super rich and super poor do fine, for the middle it’s a joke. And by “middle” I mean less than the top 2% down to who knows where.

    I’m not a whining moocher, I’m well qualified, in demand and out of the UK, but thanks for the utterly feeble ad hominen.