Monday, November 17, 2008

Weimar Here We Come ...

I noted a few weeks back that the UK was starting to feel a bit early 1930s. But I was being somewhat tongue in cheek - inflation at five or even ten per cent, while robbing those on fixed incomes (pensioners), isn't going to wipe out the savings of the middle classes and produce the (righteous IMHO - how would you like to play by the rules all your life and then have your savings stolen ?) anger which found an unrighteous home in the National German Socialist Workers Party.

A couple of wee straws - well, rather large ones, actually - make Laban uneasy.

First, Guido :

Gavyn Davies, a former Goldman Sachs managing director and MPC wise man is close to the Brownies - his wife Sue Nye was Gordon's diary secretary and is now the Director of Government Relations in Downing Street. So when he advocates, as he does this morning, turning on the printing presses at the Bank of England and just printing more money to solve our woes, you can believe this is being discussed in Downing Street.
Now that is scary. Davies is quite serious.

The sale of bonds needed to finance today's tax cuts can only be achieved if the rate of interest on these bonds is made sufficiently attractive to induce people to buy them. The resulting rise in real interest rates may harm consumer and company spending, offsetting the beneficial effects of the tax cuts. What then?This is where governments might need to be even more unorthodox. The tax cuts do not have to be financed by selling bonds. They can be financed by asking the Bank of England to offer an overdraft to the government, which is a polite way of saying by printing money. If you think about this as a process in which the central bank prints bank notes (essentially at zero cost) and gives them to the government to hand out in tax reductions, you would not be wrong in any meaningful way.

Trouble is, he's not the only one. Let's stand back a pace and review.

I keep reading comments on Robert Peston's blog to the effect that the UK may be heading for an Icelandic scenario - that the amount of dosh needed to bail out the banks will be rather more then UK plc can lay its hands on. Willem Buiter raised this possibility in a Today interview last week.

Will Hutton's saying more or less the same thing :

The foreign savers on whom the government and banks rely to finance their debts went on strike 12 months ago. Now they are actively withdrawing their cash. Last week one of the US's top banks, the Bank of New York Mellon, revealed that in September and October, three quarters of the capital that foreigners had brought into Britain in the preceding four years had left - more than £100bn.

What worries them is that with plunging property values, the viability of British banks remains questionable, but the UK government has not got a deep enough pocket to bail them out again. British savings are inadequate. If a company gets into this situation it declares bankruptcy because it has not the cash to continue trading. If foreign cash continues to leave, the UK faces the same fate.

And then ?

There is the Latin American option. Instead of trying to sell bonds, the government would simply instruct the Bank of England effectively to print money. It may want to do this anyway if deflation looms, but now its hand would be forced. But once on this path there is no easy way back; savers and investors are crowded out by the printing press and the country gets locked in a cycle of inflation in a broken-backed economy with an angry, rapidly impoverished middle class.

The next option is to organise a jumbo - up to $200bn - loan from the IMF, EU and US to tide the economy over. The Europeans and Americans would both insist that Britain negotiate a deal with the IMF as the precondition for the loan. It would be a re-run of Labour Chancellor Denis Healey turning to the IMF in April 1976 - only now it would be Alistair Darling and Gordon Brown. One insider, contemplating the prospect, acknowledged it would be political suicide.

The last, best and most palatable option is to join the euro.

Hmm. Interesting times. Two Nu Lab gurus talking about printing money. If Prudence was alive today (she OD'd in a crack house last month) she'd turn in her grave.

Of the three necessities, I see tinned baked beans have gone up by about 40% in the last month, and gold has also risen 20% because of sterling's fall against the dollar. I believe shotguns and cartridges are steady, but that won't last. Buy now.


Anonymous said...

The only tax cuts should be to raise tax thresholds a bit and do away with that family tax credit nonsense - instant saving right there. That puts a bit of liquidity in at the bottom end.

And raise interest rates, thus, hopefully pulling in some foreign deposits, increasing domestic savings and making people think twice about loopy borrowing decisions - hopefully.

dearieme said...

Like the 30s, perhaps, but the popular music now is crap by comparison.
Goodman, Ellington, Waller, Gershwin, Porter, Coward.....

Revolution Harry said...

The last, best and most palatable option is to join the euro.

That, I suspect, is what it's all about. Scaring us witless until we meekly surrender and join the euro. They're fully aware there's no other way we'd join and they need us to.

Of course joining the euro is far from either the last or best option. For more information on debt free stable currency options try:

Sam Tarran said...

I don't even think this government would be stupid enough to think they can print their way out of a recession. I think such a policy is so politically counter-productive that it wouldn't even be worth it to spite the next Conservative administration.

cramerj said...

Why not benefit from past experience and start a real war. Look how this helped governments in the 30-40s.
Afghanistan might be a starting point. Ot Ireland for that matter.
Not only would it create acceptable government spending but would test the metal and sincerity of all those new migrants.

TDK said...

Tim Worstall trashes Will Hutton here.

It really is a stupid idea and shows the great and good clutching at straws.

archduke said...

cramerj -> well, from today's headlines, a more likely war would be Somalia.

as in invading the place and wiping out all those pirates.

they've captured one of the biggest Saudi oil tankers today.

and when oil resources are under threat you can be damn sure that war will follow.

moriarty said...

I don't even think this government would be stupid enough to think they can print their way out of a recession.

I think they certainly would try it, it's the only way they can possibly find the money to pay for the budget bribes they'll need for the next election.

Squander Two said...

> the UK may be heading for an Icelandic scenario - that the amount of dosh needed to bail out the banks will be rather more then UK plc can lay its hands on.

That's not the Icelandic scenario. In Iceland, it's nothing to do with bailing out the banks: the debt is so huge that it's many times larger than the value of the nation itself. So the country's badly indebted regardless of whether the banks succeed or fail. In the UK, the debt is nothing like that, and the only reason it's looking so expensive is this silly insistence on keeping failing banks running. Let the failures fall and the debt would be their problem only, not the taxpayer's too.

Homophobic Horse said...

Whatever happens it will certainly be for the worst.