Addicted to Base

Guest blogger Hamer reflects on the "national gnashing of teeth" that took place last week over a fo

The national gnashing of teeth that took place last week over a fourteen stone eight year old was as predictable as it was entertaining. Not that I find the boy’s circumstances funny; merely the reactions to them.

Amid the thinly veiled snobbery that’s always given an airing on occasions like this – well, those working class people are a bit think aren’t they?

Lord knows that healthy eating isn’t exactly rocket science – was a fascinating dichotomy. When debates about “responsibility” are under way in the national media there are certain groups within society that think that such terms apply to the likes of the eight year old kid and his mother, but not to them. We’re middle class, you know; our penne is ethically sourced and we keep our front porches clean. We don’t have responsibilities.

Well, actually, you do. As I approach my nine hundredth year of working as a bag-carrier to a Member of Parliament it never ceases to amaze me the casually contemptuous attitude that many people hold - not only politicians but representative democracy as a whole.

You only need to look at the letters page of the Daily Mail or the trendy lefty frothings on Comment is Free to read a depressingly familiar mirror-image of what a large number of MPs receive in their post bags everyday. “We never see you around here,” they write to say to their unfortunate Member, who probably hasn’t seen his or her family all weekend because they've been holding surgery after surgery. “I’ve voted for the [insert] Party all my life, but you have betrayed us over [insert issue]. Either you sort it out or you lose my vote”.

This, often, is the sole contribution that many people have with the political system: the exercising of their “rights”. The constant demands become rather wearing at times, especially when the only recommendation MPs read of themselves is the lazy-politicians-snouts-in-the-trough-what-have-they-done-for-me-lately analysis so beloved of people who see the state as a kind of sweet shop to which they are entitled to unlimited credit.

There’s rarely any sense that democracy is a reciprocal relationship where they have a duty to act as citizens rather than consumers, to hold their elected representatives to account. Not in the lazy way of the Question Time audience (and occasionally celebrity panel members) that dismisses all politicians as “liars” or, more recently “numpties”. It gets an approving round of applause, but it’s a hollow, meaningless response to a supposed deeper hunger amongst the electorate: the desire to be engaged.

As various middle-class nutritionists and self-appointed experts were so keen to tell us last week, healthy satisfaction is consequent upon a little work and preparation. A healthy democracy is just the same; it requires getting involved with your local community, taking an active part in the local school through the PTA, trying to understand the issues and conflicting views and pressures on the various actors, be they politicians, parents, residents, or teachers. Occasionally it means recognising that your individual good might not be the same as the common good, and that when politicians don’t do precisely as you want – which is pretty impossible when each constituency contains up to 72,000 voters all with a different idea as to what the best solution is – it’s democracy, not betrayal.

That’s not to say that politicians get it right all the time but when that happens, screaming at them harpy-like and then disengaging completely in a sulk is not the answer. The free market theory of democracy holds that we get the politicians we deserve and, as many loftily informed the unfortunate eight-year old’s parents, the battle to ensure that our system works well is what we grown ups like to call “personal responsibility”.

The popular model of society shouldn’t be “them” and “us”, and in an era when politicians are more desperate than ever before to actually get involved in communities and affect social change, to accuse them of perpetrating this perceived separateness speaks of the kind of laziness that blames McDonalds for our bulging waistlines. Yes, it is easy, damned tasty, and ultimately empty calories but you have a choice to eat it or not. And if you do, screaming at the manager of your local fast food chain that it’s not your fault you’re a lardy git is only going to generate limited sympathy.

So we should all stop cramming our faces with burgers and quick-fixes, whilst blaming somebody else for our obesity, whether that obesity is physical or metaphorical. Viewing the service politicians provide as a “right” whilst failing to engage in the “responsibility” of being an active citizen and participant in the state does not make for good democracy and blaming your lazy so-called disillusionment on somebody else smacks of the kind of lack of responsibility we were all so keen to mock in the mother of the unfortunate eight year old boy. Lord knows, it’s not exactly rocket science.

Getty
Show Hide image

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?