In this week's New Statesman

Clegg the martyr: will the Lib Dems sacrifice their leader?

This week's New Statesman is now available on newsstands around the country. Single issue copies can also be ordered here

The Martyr Complex: Rafael Behr on Nick Clegg

In the New Statesman Cover Story, Rafael Behr travels up to Nick Clegg’s Sheffield constituency to investigate whether the Deputy Prime Minister is vulnerable to leadership decapitation by the Liberal Democrats. As Labour and Conservative MPs “gloat in private that Clegg cannot possibly fight the next general election as Lib Dem leader”, Behr finds members of Clegg’s own party increasingly speculating along the same lines:

“It is the topic that people talk about most in the party,” says a prominent activist. “But it’s a whispered conversation because people find the whole thing a bit difficult.”

Behr looks back on the weight of expectation that British voters attached to Clegg in the run-up to the 2010 general election to explain how he has become the emblem of weakness and false promises in politics:

[T]he act of compromise, without which two-party government is impossible, reinforces the Lib Dems’ reputation for weakness and cynicism. It is a terrible fix – the device that defines coalition has become, in Clegg’s hands, also the practice that debases it.

Richard J Evans: Europe on the verge of a nervous breakdown

In the NS Essay, Richard J Evans, Regius Professor of History at the University of Cambridge and author of The Third Reich in Power 1933-39, asks whether soaring youth unemployment and a resurgence of the far right signal that Europe is on the brink of repeating the catastrophe of the 1930s:

Where extremism flourishes, political violence is never far away, and the desire for a restoration of public order can often play into the hands of right-wing politicians who, as Hitler did, promise to end the chaos on the streets, even though, like Hitler, they were one of the main forces behind it in the first place. It is no surprise to learn that a large proportion of the police force in Athens – perhaps as much as 50 per cent – voted for Golden Dawn in the 6 May election.

Top independent school headmaster attacks Gove

In the Politics Interview, the Master of Magdalen College School in Oxford, Tim Hands, talks to Alan White and slams Michael Gove’s plans for education reform:

“I simply don’t understand what Michael Gove is doing. He seems to be stuck on a Scottish moor, shooting off rockets in different directions which look brilliant in the night sky but are actually beacons of distress.”

With which reforms does he have a problem? “Gove seems to be a reversionist . . . The idea we have to go to terminal exams is wrong. That’s not how you’ll be judged at work or at university. So, almost de facto, you should have continuous assessment in school.” He shakes his head sadly. “Idiotic.”

Tim Montgomerie: Cameron needs a new emblem

The editor of the ConservativeHome website, Tim Montgomerie, offers a view of David Cameron in this week’s NS Politics Column. Unlike Margaret Thatcher, who chose to brandish a shopping basket to show that she understood the needs of ordinary families, and John Major, with his little wooden soapbox, the current Tory Prime Minister, Montgomerie notes, chose a “very different defining moment”:

Climate change was just one of the metrosexual issues that Cameron chose to suggest that the Conservative Party had changed. More women candidates and the concept of the “big society” were two others. The [danger] for Cameron was always that he wouldn’t be as committed to these changes as he needed to be and that he would run the risk of Tory modernisation appearing shallow and inauthentic. And so it has come to pass. Cameron has in fact played fast and loose with each of his great change factors.

Montgomerie warns that, as the next general election approaches, Cameron needs a new defining image – something like that of his predecessors – which will “pull him closer to blue-collar Britain”.

Elsewhere in the New Statesman

  • In Observations, Laurie Penny warns that David Cameron risks incurring the wrath of Britain’s young people; Dan Hodges on the change in Ed Miliband’s fortunes, brought about by his “moody and acerbic spin doctor” Tom Baldwin; and, following last week’s New Statesman cover story, Mark Leonard argues that Germany, led by Angela Merkel, is Europe’s only possible saviour.
  • In the Diary, the Irish comedian Patrick Kielty offers some words of advice to his “mate” Jimmy Carr and considers the Queen’s handshake with Martin McGuinness (“For the jubilee girl, it’s just another backstage meet-and-greet on the ‘Sorry one’s ancestors came’ world tour”).
  • Grayson Perry talks rubbish art, cross-dressing and running around with guns in the NS Interview with Jemima Khan.
  • In Lines of Dissent, Mehdi Hasan asks if the rise of the Muslim Brotherhood in Egypt should worry us.
  • In the Critics, poet Craig Raine writes about Tate Liverpool's exhibition of late work by J M W Turner, Monet and Cy Twombly; Helen Lewis is engrossed in Breasts: a Natural and Unnatural History by Florence Williams and Andrew Adonis reviews The Passage of Power, the fourth volume of Robert A Caro’s monumental biography of Lyndon B Johnson.

For all this and more pick up a copy of this week's New Statesman, available from today on newsstands around the country. Single issue copies can also be ordered online here

Original cover artwork by Chris Price

Alice Gribbin is a Teaching-Writing Fellow at the Iowa Writers' Workshop. She was formerly the editorial assistant at the New Statesman.

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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?