“THE WORST BIT IS YET TO COME”
What happens when a sovereign issuer of its currency decides that it’s going bankrupt? Well, in the case of England David Cameron happens. We’re just beginning to see some signs of what’s to come as austerity sets in:
“LONDON — Last month, the British government abolished the U.K. Film Council, the Health Protection Agency and dozens of other groups that regulate, advise and distribute money in the arts, health care, industry and other areas.
It seemed shockingly abrupt, a mass execution without appeal. But it was just a tiny taste of what was to come.
Like a shipwrecked sailor on a starvation diet, the new British coalition government is preparing to shrink down to its bare bones as it cuts expenditures by $130 billion over the next five years and drastically scales back its responsibilities. The result, said the Institute for Fiscal Studies, a research group, will be “the longest, deepest sustained period of cuts to public services spending” since World War II.
Until recently, the cuts were just election talking points, early warnings of a new age of austerity. But now the pain has begun. And as the government begins its abrupt retrenchment, the implications, complications and confusions in the process are beginning to emerge.
In Coventry, Mr. Mutton said that the City Council was bracing for an uncertain future.
“The worst bit is yet to come,” he said. “We’re not just talking about cuts in services, but real people losing their jobs, not being able to pay their mortgages, families becoming homeless. I don’t want to be scare-mongering, but these are the kind of consequences we face.”
I am the last person to advocate wasteful spending programs and misallocation of resources, however, in this time of deflationary risk you just have to wonder why David Cameron is so concerned that England is the next Greece. Surely, cuts would be in order were there serious signs of inflationary threats, but this is simply not the case*. Throwing fuel on the fire is the downtick in housing prices:
“A U.K. housing-market gauge showed the first decline in prices for a year in July as demand for homes fell, in a sign the economic recovery may be losing steam. The number of real-estate agents and surveyors saying prices fell exceeded those reporting gains by 8 percentage points, compared with a positive reading of 8 in June, the London-based Royal Institution of Chartered Surveyors said in an e-mailed report today. A third more real-estate agents reported an increase rather than a drop in properties for sale. The housing market is faltering just as services and manufacturing also show signs of weakening after the economy’s fastest quarter of expansion for four years.”
David Cameron has called for the pain. It looks like pain is what the people are getting.
* Addendum:
UK CPI
Except for the fact that we have high inflation in the UK.
And house prices are falling (despite the easiest monetary policy in the 200 year history of the Bank of England) because they are still extremely expensive relative to earnings and rents.
See the addendum to the post above. The year over year CPI and RPI data is not only coming off of very low comps, but is almost entirely due to petrol and travel related price increases. Most of the other components are hardly worrisome. Personally, with the state of your economy I am not even remotely worried about demand pull inflation as the consumer is unlikely to warrant significantly higher prices.
That chart looks incomplete in that it seems to cut off at the low in Q2 2009, and misses the subsequent rebound to over 5%. And this during a period with, as you say, no demand pull inflation.
The chart is directly from your govts latest RPI and CPI report. It provides an excellent long-term perspective. And a close look at the data shows that most of the double digit gains are in fuel and transports (22% in liquid fuels for example). Food prices are up 1.7% YoY. Total CPI up 3.2% – more worrisome than here in the states, but a closer look at the data shows benign CPI in most segments outside of fuel (which will likely be a drag on CPI in the coming 12 months).
I was feeling bullish about the sterling until Cameron took office. They had their shot to distinguish themselves from the Eurozone (just as Ford recently did with GM and Chrysler), but they’ve blown it.
I can understand why a small, export-dependent economy such as Ireland would be stuck with austerity policies, but a large import-dependent economy such as the UK has no such excuse. This is what happens when economic gets politicized, particularly by those who know little or nothing about economics.
Cameron has proven that he knows next to nothing about economics.
Lets be fair. Cameron understands alot more about Economics than Obama, who just blindingly follows populist sentiment in search of votes. He will happily leave America addicted to seemingly never ending stimulus.
Battle of the economic lightweights here. Cameron is in the vast majority when he says the UK has a serious bankruptcy threat. How do you think he got elected? The only reason McCain lost in the states was because he was bordering on economic retardation (pardon the lack political correctness).
I’m not an investing or monetary pro like others here, but to me, it seems like a good idea for one of the bloated, overgrown western social democracies to finally start belt-tightening and reducing the debt load we are incurring for future generations. Perhaps we can argue about the speed at which the belt is tightened to avoid “shock”, but the deficits and debt *have* to be tackled; I only wish we in the U.S. had the political will and perseverance to do this also. Good luck to the U.K., may the pain be brief and may it eventually appear as the least bad alternative.
Cameron’s doing the right thing. Taking a little pain now so that they can heal and grow out of it sooner rather than later. It’s not easy, but it’s the right thing to do. What’s staggering, is that we in the US are going in the other direction. England has tried and now discarded due to failure many things we are trying to implement. What kind of fools are running the show here? (that was rhetorical for those wondering)
No debt = no money supply. And the purpose of austerity is what? To maintain England’s credit rating? So England can borrow money that it has the sovereign right to issue debt and interest free?
This should be very interesting. Austerity makes sense for households but not for nations whose money supply is debt. I suppose this is karma for England giving us the BOE.
I agree that Cameron’s moves may be ill-advised given the deflation risk. On the other hand, despite what Cameron says, I’m not so sure he actually thinks that the U.K. could default if bond vigilantes came knocking. I think he’s using that in his speeches as a proxy for de facto default through inflation. Whether through technical default because no one will buy your debt or de facto default because the BOE “prints” cash to buy the debt (both generally considered bad, even if the latter is a softer landing), the underlying cause is the same: the U.K. simply cannot afford the level of services it provides.
The “don’t cut during deflation” argument is strong, but there’s something to be said for the counterargument: government spending is generally inefficient and creates distortions, while private spending is generally more efficient and injects dynamism into the economy. Thus, reducing gov’t spending as percentage of GDP may be stimulative over longer time horizons, even if it’s painful in the short term. Keeping spending high either requires higher taxes (deflationary) or QE (which depreciates private savings in favor of gov’t-directed spending, which only perpetuates the problem). And finally, I have no evidence for this other than personal observation, but I think there’s something to be said for the incentives created by a diminished safety net. Dynamism in any economy results from individual action, but most (especially those with families) will choose a regular paycheck (even with the possibility of being fired) or government handout, if available, over building something for themselves. Only when the more comfortable options are removed are some individuals incentivized to hustle and build for tomorrow.
The Fed has put the U.S. on methadone, while Cameron wants the U.K. to go cold turkey. Withdrawal is tough but kicking methadone is tougher than kicking heroin, and I suspect in 20 years the U.K. will be much better off for it.
Cameron has courage, something no US leader has. Our leadership is a bunch of half men including Obama. If we get into a greece style situation in the US things could get completely out of control. I know that the US cant default, but we can for sure have a hyperinflation.
Courage would have been allowing this debacle to more fully play out in 2009. Instead, we stuck a silver spoon in every banks mouth. Cameron is punishing the wrong people based on a misdiagnosis.
Cameron has courage
I don’t see how it is particularly “courageous” for a Conservative to run on a conservative, anti-Labour platform, after (sort of) taking the helm in a throw-out-the-bums election. This is pretty much what one would expect (which is why I lost what optimism that I had had for upside in the pound once he won the election.)
TPC’s point is that markets value growth, and austerity programs are bad for growth, which means that austerity is bad for markets.
Claiming that austerity is a benefit is like trying to save money by quitting your job, just so that you can cut your commuting costs. Economies need growth, and growth comes from increasing economic activity, not by deliberate cuts in it.
TPC and Paul Krugman have never been seen together in the same room. Good job Brit for thinking long term something TPC claims no one in the US does (correctly) but then blames other countries for doing. Who will have a better footprint in 10 yrs? UK or bloated stimulus dependent US? I guess when you are a Krugman devotee you say US under guise the US can grow out of it. Or I suppose debt does not matter because it is just an accounting treatment so the UK is just silly.
TPC is barely Keynesian. And the UK will never have a better footprint than the USA.
I am a Krugmanite simply because I believe teachers should not be be fired when bankers wreck the system? I am a Krugmanite because I realize that without any govt spending the system is slowly being debited of available cash and the private sector is being forced to take on debt?
I have never said that govt spending is the solution to our problems.
@TPC I am no fan of the banking elite which have taken the country hostage but the public sector worker has as well. In almost no other sector does tenure mean more than merit like teaching. Cameron is trying to bring size of govt into line with private sector. The US should do the same. You blithely say no default in US because country can tax its member citizens from here to infinity but perhaps you forget how the bottom half live as you deal with millionaire clients and take 2 week European vacations. Most of us cannot take new VAT taxes or higher sales taxes or whatever the politicians will bestow so my fellow citizen can retire in the public sector at age 54 in Greek like fashion with full pension while I slave away for another 10 to 15 yrs. Do you ever ask how much less stimulus would be needed if salaries in public sector matched private? or even better if benefits lined up?? You do realize much of the shortfalls are now unfunded pension liabilities…many of which are outrageous when benchmarked vs private sector. Maybe then the need to hand my money out to keep teachers employed would not be so great. Instead we hand money out and ask no questions and require no reform. After all…all we need to do is tax the citizenry even more since austerity is for the birds. TPC you need to spend a year out of your upper crust neighborhood and see what impact the taxes paid so your excess spending plans can continue will have on people on the wrong side of the tracks.. The reality is not the same when its real world and not ideological or viewed in aggregate. Many in this country do live paycheck to paycheck and the coming increases in taxes will just be a new step to crush them.
Anyone who knows me knows that I am not some upper crust schmuck.
Cameron understand that if cost arent reduced now the sterling will crash because it is overvalued even without the current problems. Thats said Cameron knows small government happens when you take the money away and thats what he is doing. It might be bad for the next 5 years but after that Britain will flourish , released from a over mighty goverment.
More debt means we push the can down the road. The public sector intervention during the free fall of 2008 and early 2009 was necessary to amortize the shock, and at this point this is what we should expect additional debt to accomplish. At some point, whether it’s through default, inflation, or payback, the debt must come out of the system. It can be many years from now, enough to forget about the problem in the meantime, especially if equities continue to go up.
How come there is no outcry that official public net debt was discovered to be STG 4 Trillion and not 900 billion?
http://prudentinvestor.blogspot.com/2010/07/excuse-me-again-but-britains-public.html