The case for pessimism

Sterence

This provides an interesting counterpoint to the "debate", if it can be called that, on more spending vs cuts. To the extent that there is a case for the relentless fiscal expansion called for by Brown and Balls (however contradictory of their own figures this might be), it is that one should not cut while the economy is still in recession. There is some merit in this as a general point, though clearly acknowledging that Darling's V-shaped recovery is a fiction would blow a massive hole in the deficit figures. If the chart you show above indicates what we can expect in the present cycle, this means we should be expanding the deficit for another two years, while GDP continues to shrink. (Fortunately Eichengreen and O'Rourke are somewhat more optimistic that the policy response has been more constructive now than in 1929; but some of their figures for industrial production to date are significantly worse, eg France & Japan.)
So can anyone hazard a guess what the UK budget deficit would be if we did continue with present policies in the light of a V-recovery not materializing? Maybe £250bn in 2011, maybe more? With GDP still shrinking it seems pretty unlikely that this will be fundable, especially as the AAA rating would have gone sometime next year.
As someone once said, "I wouldn't start from here"...

Denis Cooper

The UK economy is being sustained by massive government borrowing to finance public expenditure - about 25% of the money being spent by state bodies is now borrowed money, one pound in every four.

So, for example, a public sector worker may get his £2000 monthly salary payment as usual, and all may seem to be well, but in effect only about £1500 of that is now covered by tax and other revenues - the remaining £500 has been borrowed by the government.

Moreover, the government is only able to borrow on that colossal and unprecedented scale because the Bank of England is creating new money and using it to buy up UK government bonds, gilts, at the same time as the Treasury is issuing new gilts to meet the government's budget deficit.

Almost all of the new money being "printed" by the Bank is being passed to private investors when the Bank buys previously issued gilts from them, and then passed on to the Treasury when the private investors buy new gilts.

It has to be done by this indirect route, because if the Bank simply bought new gilts from the Treasury, or allowed the government to overdraw on its account at the Bank, then that would be in breach of the EU treaties - Article 101 of the Treaty establishing the European Community, on page 83 here:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2006:321E:0001:0331:EN:pdf

"Overdraft facilities or any other type of credit facility with the ECB or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments."

The crunch may come when the Bank's Monetary Policy Committee decides that there is no longer any plausible justification for continuing to print more money.

Without the Bank using newly created money to prop up the gilts market, the government may no longer be able to borrow enough to cover its budget deficit, and then there'd have to be immediate and massive cuts in public spending - including wage cuts for public sector workers.

Moraymint

Yes, for months now I've been surprised at the number of commentators willing to talk up the global economic outlook.

Whilst relentless talk of gloom and doom is itself unhelpful, so too is unfounded optimism. When you throw in Labour Government deceit the propensity for economic, and the concomitant social disaster is high.

Let's do everything we can to sustain an honest and realistic debate about the UK economy in the context of the global economy and maybe that way we can indeed avert a disaster.

Right now, the Labour Government's behaviour on this matter is deplorable, reflecting the culture of deceit and spin that has so characterised its time in power.

Once again, I add my voice to those calling for an early General Election and with it, hopefully, the obliteration of this particular incarnation of the Labour Party - a shameful outfit if ever there was one.

It's all about Labour Party leadership, or rather the lack of it.

donald fraser

A statistical comparison of the current decline in world industrial output with the Great Depression is a valuable reminder to step back and look at the bigger picture. Psychologically we are conditioned to believe things will pick up as they always did since the "free market philosophy" took over in '79. Several panics and recessions during a 30 year period were overcome by steadfast reliance on that philosophy. Might only a fool or doomsayer abandon it now? Won't doomsayers be proved wrong when everything rights itself automatically, as the free market philosophy dictates it will?

"Free market philosophy" is of course a misnomer because every nation always reserves some areas (such as policing) for state control beyond the absolute minimum requirement of self-preservation, national defence spending. With threat of a new long-term economic crisis, it means the bigger picture (slightly easier to look at now that Communism is written off) needs understood. The challenge is to be able to view size and context of this picture correctly. There is a natural tendency to distort the very issues that require framing to satisfy our psychological need to understand the familiar. One challenging yardstick is how long it took for Keynesian theory to be put into practice. An ignored voice at the 1919 Treaty of Versailles his influence peaked in the 1960s.

The case for pessimism in 2009 is that even if the voice of Keynes is currently out there, it would be hard to recognise. If the same timeline holds true, it could be another 17 years before a new "General Theory" we await is published. Keynes published his in 1936, 17 years after he foresaw war reparations as leading to another war. Of course all analysis of historical patterns and timeframes is very flexible. It does not demean history's analytical value but instead demands an intellectual detachment only a sage has. Mediocre social and economic historians can find comfort in statistical comparisons precisely because it does not require them to invent explanations for distortions in patterns or timeframes. Equally those outside of our discipline can take comfort such comparisons with past events simply reinforce a view the past is abstract and inapplicable for today. That is when it is without relevant "flexing" analysis to provide meaning. As gambles go it is better to hope things pick up in a year or two as they have always done for the last 30 years. Yet pessimistically the threat of a Second Cold War looms, starting over Georgia, because the recently finished (First) Cold War has not delivered the necessary political stability that China and Russia require.

Optimistically this is a Web 2.0 Depression. The digital cultural industries in the UK and other post-industrial nations will flower and power the next "up-wave" before the battle lines of a Second Cold War (fought around Sino-American rivalry building satellite shields) become drawn. However a "General Theory Web 2.0" has to answer the bigger questions in a way that the people will allow governments to reserve new areas of the Web 2.0 economy for state control. Without such a theory, none of the current answers (ID cards, taxing Internet services, digital copyright protection, road pricing) are justified because the framework is not written to benefit the people. If ever implemented as currently proposed it simply expands the "fiefdom of bureaucrats" and does nothing towards arriving in a new economic beginning. While most of the arguments are probably written they are not woven into a unified theory. Pessimistically it may require many, many years of social and economic hardship before nations are willing to grapple with answers.

Ian C

Less than a fortnight ago I read a comment from a Wall St trader that went something like this: "everything is returning to normal, soon we'll all be borrowing and spending too much again"! This was as an expression of confidence comment that the worst is behind us!

So this sort of remark and my guts, not to mention a great many charts of individual shares and stockmarkets are still extremely bearish. Certainly 25%+ reductions in, for example exports out of Japan, China and other countries are indicative of depression (although these %'s have reduced recently as stocks are re-built) - and a worldwide one at that. The USA and the UK, ironically, are currently much better off than the export dependent countries. But we cannot continue to sell ourselves services when there is massively reduced world trade to service. Depression it definitely is. Not as deep as the 30's but still of depression proportions.

There are those who belive that China can lead the world out of it. But I doubt there are many Chinese who think that, nor would they want the burden that it would imply. Besides, if their markets are in recession/depression who will have to recover first before they do? And you cannot believe the official GDP figures the Chinese Gov't put out or the headlines that follow them.

hadrian

Let's be blunt- if Government fails to slash its spending to the bone then long term we will be broke. The recent reputed 'upturn' is a lull, in no small measure down to 'funny money' being printed by the Bank. We need to address the implications of such delusion- now.

figurewizard

The irony is that the cost of the 'funny money' that hadrian refers to will rapidly soar to unsustainable heights if there is any sign of recovery in the US and elsewhere anytime soon. The resulting (and already stated both by the US and Germany) consequence will be a sharp reversal of fiscal stimuli in their countries to forestall spikes in inflation. This must in turn have an effect on the value of Sterling; something that seems to have been overlooked here.

Colonial

I'm getting thoroughly bored with recession talk. The reasons for it are dead simple - but are being grossly overcomplicated. To give hope, so the peasantry spend and in the process are milked even further?

1. Consumer spend and debt in the West ballooned as it never has before.
2. A resultant tidal wave of money washed through the economy.
3. It gave rise to a consumer lead mega boom.
4. Debt reached a ceiling. Spending tapered off. Subprime happened. The elastic had snapped.
5. End of story. The business capacity that arose to fill artificial demand will wither away. The economy will not go back to where it was - unless another tidal wave of spending materialises. And we all know that is not going to happen. QED.

If someone can tell me how I can go on a mega binge, cash in my savings, push my bond to the old limit, run up massive debt.....and then, hey presto, get rid of it without curtailing my spending.... I'll believe this is a V and not a 4-5 year L.