In need of soul-searching - what should England be? Photograph: Getty Images.
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England dreaming, the break-up of Britain and what Orson Welles knew

As someone who was born in the 1960s, the son of wartime evacuees from London, I had a sense from an early age that Britain was oppressed by a lost greatness.

What does England want? What kind of country do we who call ourselves English wish to live in and be part of as good citizens, in an age of supranational institutions, of fluid, compound identities and of shared or conflicting sovereignties? Questions of national identity and purpose – especially for England, the dominant nation in these islands – will become even more pressing in 2014 as the September date of the referendum on Scottish independence approaches and we confront what seemed inconceivable only a few years ago, the possible break-up of the Union of Great Britain, with all the ramifications that it would have for the United Kingdom in the world.

Visit Scotland and you know an urgent and vibrantly self-questioning conversation is taking place. The Scottish elites – political, academic, journalistic, artistic, business – are grappling every day with fundamental questions of history, sovereignty, identity and culture. They are turning inwards but also looking outwards, daring to imagine what it might mean for Scotland to go its own way as a small nation in the world, bereft of all the supporting structures of the British state.

In England, by contrast, there is no such comparable conversation. Too many people, it seems to me, are either uninterested in the constitutional question or simply believe, or prefer to believe, that the Scots, when ultimately forced to choose, will opt for what they know. Certainly too many Westminster MPs – including many senior members of the Labour shadow cabinet – are complacent defenders of our existing constitutional settlement, the frustrations and inadequacies of which have left many Scots actively working towards separation and many English feeling disenfranchised and voiceless.

The last of England

As someone who was born in the 1960s, the son of wartime evacuees from London, I had a sense from an early age that England, or Britain (during my childhood the two nouns seemed to be interchangeable), was oppressed by a lost greatness. As my father grew older, he seemed to become ever more nostalgic for an England that no longer existed – or had never existed, except perhaps as a construct of the imagination. He spoke to me often about the war years and what it was like to have lived through the Blitz – his father refused to leave the house during air raids, even though other houses on their road were bomb-ruined and fire-destroyed. My paternal grandfather was a fatalist, and, as it happened, luck was on his side: he lived until he was nearly 90.

A sweeter, purer past

In Jeremy Paxman’s latest book, Great Brit­ain’s Great War, he writes that the end of the First World War was the point at which “the British decided that what lay ahead of them would never be as grand as their past; the point at which they began to walk backward into the future”.

I thought of these words last week when I went to see the Royal Shakespeare Company’s production of Richard II, with David Tennant impressively foppish and camp in the title role, at the Barbican in London. The play is not only about the deposition of a foolish king who too late reaches a kind of anguished self-knowledge, but about England and Englishness and what it means to walk backwards into the future.

Shakespeare was writing at the end of the 16th century. Richard II, who was crowned king as a ten-year-old boy in 1377, was deposed in 1399 and died the following year. Yet listen to or read John of Gaunt’s celebrated speech – “This royal throne of kings, this sceptred isle” – in which England is referred to as “this other Eden, demi-paradise”, and a question forms: is this what it means to be English, to be haunted by lost possibi­lities, to be banished from Avalon, which never did exist?

Throughout Richard II there are repeated references to English blood and to English soil. It’s as if an ideal of England has been violated. Richard, “unkinged”, dies at the end of the medieval period and Shakespeare is living through an Elizabethan golden age.

Yet there is a sense that the best is in the past; something has been irretrievably lost and those who came after the wretched Richard, including the Elizabethans watching and performing the play, are also walking backwards into the future. As Orson Welles once said: “I think Shakespeare was greatly preoccupied, as I am, in my humble way, with the loss of innocence. And I think there has always been an England, an older England, which was sweeter, purer . . . You feel a nostalgia for it in Chaucer, and you feel it all through Shakespeare.”

Welles is on to something here. The myth of America is all about making it new; about self-reinvention, about being the person you wish to be. It’s about the present and also about what you will make of the future. And the myth of England? This one is complicated – and it is bound up, I think, with living in the present as it relates to the past; to what has been. It’s not for nothing, as Welles said, that Camelot is the great English legend.

Statesmanlike surge

And so ends our centenary year. Our admir­able subscriptions manager, Stephen Brasher, tells me that in “20 years working on the New Statesman, I’ve never known a year like it”. It has been busy, for sure, and we as a team are delighted that we have been able to honour this great magazine in various ways – not least through publishing two splendid centenary volumes showcasing the richness and quality of our archive.

There were times in recent years when it looked as if the New Statesman would not make it. Once on life support, it has now returned to robust health. Our website traffic is at a record high, buoyant advertising revenue has allowed us to increase the number of pages in the magazine, the circulation is rising steadily, our app has been successfully launched, we keep getting great scoops and we will return to profit in 2014.

None of this would have been possible without the loyal support of our readers. I wish you all a happy Christmas and a peaceful New Year.

Jason Cowley is editor of the New Statesman. He has been the editor of Granta, a senior editor at the Observer and a staff writer at the Times.

This article first appeared in the 19 December 2013 issue of the New Statesman, Christmas Triple Issue

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We're racing towards another private debt crisis - so why did no one see it coming?

The Office for Budget Responsibility failed to foresee the rise in household debt. 

This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous. 

The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017. 

This is what the OBR was projecting what would happen around now back in 2015:

This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:

First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”

As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram. 

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).

So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.

We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)

There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.

Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.

But of course debt has to be owed to someone. These charts show who owes what to whom.

The crisis in private debt

Bearing all this in mind, let's look at those diagrams again - keeping our eye particularly on the dark blue that represents household debt. In the first, 2015 version, the OBR duly noted that there was a substantial build-up of household debt in the years leading up to the crash of 2008. This is significant because it was the first time in British history that total household debts were higher than total household savings, and therefore the household sector itself was in deficit territory. (Corporations, at the same time, were raking in enormous profits.) But it also predicted this wouldn't happen again.

True, the OBR observed, austerity and the reduction of government deficits meant private debt levels would have to go up. However, the OBR economists insisted this wouldn't be a problem because the burden would fall not on households but on corporations. Business-friendly Tory policies would, they insisted, inspire a boom in corporate expansion, which would mean frenzied corporate borrowing (that huge red bulge below the line in the first diagram, which was supposed to eventually replace government deficits entirely). Ordinary households would have little or nothing to worry about.

This was total fantasy. No such frenzied boom took place.

In the second diagram, two years later, the OBR is forced to acknowledge this. Corporations are just raking in the profits and sitting on them. The household sector, on the other hand, is a rolling catastrophe. Austerity has meant falling wages, less government spending on social services (or anything else), and higher de facto taxes. This puts the squeeze on household budgets and people are forced to borrow. As a result, not only are households in overall deficit for the second time in British history, the situation is actually worse than it was in the years leading up to 2008.

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

An inquiry

In 2015, around the time the original OBR predictions came out, I wrote an essay in the Guardian predicting that austerity and budget-balancing would create a disastrous crisis in private debt. Now it's so clearly, unmistakably, happening that even the OBR cannot deny it.

I believe the time has come for there be a public investigation - a formal public inquiry, in fact - into how this could be allowed to happen. After the 2008 crash, at least the economists in Treasury and the Bank of England could plausibly claim they hadn't completely understood the relation between private debt and financial instability. Now they simply have no excuse.

What on earth is an institution called the “Office for Budget Responsibility” credulously imagining corporate borrowing binges in order to suggest the government will balance the budget to no ill effects? How responsible is that? Even the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up.

The OBR told the New Statesman ​that it was not aware of any errors in its 2015 forecast for corporate sector net lending, and that the forecast was based on the available data. It said the forecast for business investment has been revised down because of the uncertainty created by Brexit. 

Still, if the “Office of Budget Responsibility” was true to its name, it should be sounding off the alarm bells right about now. So far all we've got is one mention of private debt and a mild warning about the rise of personal debt from the Bank of England, which did not however connect the problem to austerity, and one fairly strong statement from a maverick columnist in the Daily Mail. Otherwise, silence. 

The only plausible explanation is that institutions like the Treasury, OBR, and to a degree as well the Bank of England can't, by definition, warn against the dangers of austerity, however alarming the situation, because they have been set up the way they have in order to justify austerity. It's important to emphasise that most professional economists have never supported Conservative policies in this regard. The policy was adopted because it was convenient to politicians; institutions were set up in order to support it; economists were hired in order to come up with arguments for austerity, rather than to judge whether it would be a good idea. At present, this situation has led us to the brink of disaster.

The last time there was a financial crash, the Queen famously asked: why was no one able to foresee this? We now have the tools. Perhaps the most important task for a public inquiry will be to finally ask: what is the real purpose of the institutions that are supposed to foresee such matters, to what degree have they been politicised, and what would it take to turn them back into institutions that can at least inform us if we're staring into the lights of an oncoming train?