Scotland's Simon Cowell?

I've been portrayed as some kind of godawful combination of Elizabeth Bathory, Simon Cowell and Bird

Those of you who read this blog with any kind of regularity will know that I’m currently locked in a potentially unsafe spiral of typing and more typing with food, sanity, sleep and all of that other being alive stuff removed to a safe distance so that it can’t interfere – which isn’t really a spiral, now I think of it, more like being trapped in a lift in an abandoned building with - well, with me, in fact. How dreadful.

The disadvantages of this heady and artistic lifestyle have recently involved my developing an exhaustion- and anxiety-induced ear infection and going all wobbly for a few days before the antibiotics kicked in.

And this was the perfect preparation for a week spent talking to creative writing students at Warwick University. It meant I could sit in a borrowed office, facing a succession of bright-eyed and hopeful typists, waving manuscript pages (that seemed to have been both savaged by a dog and copulated-upon by some sort of red-ink-secreting insect) and simultaneously yelling, “LOOK AT THIS ! SOME OF THESE HAVE BEEN PUBLISHED ! WHAT WAS I THINKING ! ? WE NONE OF US KNOW WHAT WE’RE UP TO, YOU KNOW ! SCARED ? OF COURSE YOU’RE SCARED. I WAKE UP IN THE MIDDLE OF NIGHT, BLOODY TERRIFIED – BEEN LIKE THAT FOR DECADES. THE PURSUIT OF PERFECTION - IT LEAVES YOU MAD-EYED AND WAVERING ! NO. I MEAN, IT WRECKS YOUR HEALTH AND RENDERS YOU FRIENDLESS ! NO. I MEANT TO SAY – IT’S A VERY GOOD THING. MADE ME WHAT I AM TODAY !”

Actually, we have another dandy crop of students this year and very few of them are scared of me. Given that all the other lecturers have spent weeks portraying A.L.Kennedy as some kind of Godawful combination of Elizabeth Bathory, Simon Cowell and Bird Flu, I have turned out to be a terrible anti-climax.

Puppies have been mentioned, there have been gifts of baking… my ability to appear even remotely evil seems to have been sapped by rewriting all night and tutoring all day. Appearing unhinged is, obviously, much easier under these (and any other) circumstances – so I’ve aimed for that. Plus, a number of undergraduates seem to have encountered me first as a stand up, so I am settling into my usual role as Temporary Village Idiot.

I did take an evening off to watch the first episode of “The Devil’s Whore” and see a variety of folk in big hair galloping about South Africa. I kept expecting a scene where someone asked Cromwell, “Isn’t that an impala ?”

“No. That’s a typically English sheep.”

“It looks like an impala to me.”

“It’s a sheep. An Edgehill, long-horned sheep.”

“I thought this bit was in Newbury.”

“Well, anyway, that’s not an impala and the thing chasing it isn’t a leopard. It’s a peasant – in a special hat.”

“God, the Civil War’s complicated.”

“Not to worry, that Andrea Riseborough will show you her knees again in a minute and then John Simm will take his shirt off – fun for all the family. And remember the old verse - When Adam delved and Eve span – we had parliamentarians who were willing to die for democracy. You wouldn’t even joke about that now, would you ? ”

There’s nothing like a bit of historical drama. That’s why I loved “Eistein and Paddington” so much – very well-crafted piece about the forbidden love of a remarkable physicist for a small Peruvian bear. This, of course, led to the discovery that God has a moustache. I was moved.

And meanwhile I’m recovering from a big double dunt of Shakespeare and that lovely feeling he leaves you with which runs along the lines of – you’re a hack, you’re a dreadful, weasely hack, you shouldn’t be allowed to touch a pencil, why do you even bother with your unmelodious and stringy bits of syllables and nonsense, you ought to be ashamed and then a bit more ashamed than that and then you might want to nail your tongue to an upper window frame, wrap it round your neck and fling yourself out into the morning - or whatever time of day would be relevant, but I’d suggest morning, that would get it over with.

Of course, low self-esteem and brooding are a narcissistic waste of energy and imagination when you’re engaged in professional typing, but I have to say that a healthy bit of awe and a good, attractive mountain top to aim at are often very useful. And I can report, to the four or five of you who are in any way interested, that I am perilously close to having finished the next book. Huzzah ! Watch this space – by the next blog I should be on to the next whateveritis I said I’d do.

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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?