As the crisis continues, Labour just looks tired

If it's safety first and safety last, then the party is doomed to disappoint.

Shhhhhhhh. Quiet!! Labour is sleepwalking to the next election. Don’t wake it up. It might die of fright. Whisper. Don’t rock the boat. It's one more heave but without any heave. If it doesn’t move or make sound – then it might cross the finishing line of the election first without anyone noticing.

Next week, Labour is having its annual conference.  An event where nothing will happen. As I write, G4S or some other outsourcing behemoth will be putting up barriers around the Manchester conference zone to conceal nothing – absolutely nothing.

I’ve never known the run up to a party conference to feel so lame, so uninspiring, so flat and lacking in energy and vitality.  There are no rumours, no conflicts and little life.  Even the unions are silent.  I guess everyone must be happy. The election is in the bag. The next Labour government will sweep all before it and rule for a generation, creating Jerusalem in our midst. Oh, happy days.

Out there, in the wide-awake club, the ice caps melt, the eurozone teeters on the brink of collapse, the Tories rip the hope out of the lives of millions of young people, and the CBI calls for what’s left of the public sector to be privatised.  Neo-liberalism continues unabashed and untamed.

In fairness, Labour did have a half good idea about a British Investment Bank – but it was nicked by The Thick of It and then by Vince Cable. It's still got some other policies, like a five point-plan no one can remember, that would make virtually no difference to economic growth, and a promise to charge students £6,000 fees. Three thousand pounds more then they paid before but hey, £3,000 less than the Tories. Who says politics isn't about real choices? But it's giving little else away – that would be risky wouldn’t it?

Compare and contrast two things. First, Labour in 1994-97, when the party was last in opposition. There are no bigger critics of what became of New Labour than this happy scribe, but at least it had a sense of energy and ambition. Ideas frothed. New think-tanks bubbled up. Tireless work went into strategy and language. The "third way" was endlessly debated.  Of course, most of it turned out to be nonsense but at least the party had a go.

Second, look at the energy in the Tory party. Pushy backbenchers churn out tomes like Britannia Unchained that fizz with new policy ideas. Boris Johnson bounces round the fringes of the government – threatening a right-wing regime that is popular.  And Tim Montgomerie and chums set up Conservative Voice as an alternative government-in-waiting.  They all know where they want to take their party, the country and how. 

Labour, meanwhile, looks limp. Laid low to the level of a coma by an opinion poll lead that merely flatters to deceive. The decline of the Lib Dem vote just helps the Tories. The economy is bound to pick up. Of course, Labour might win – but what then? What do we do about the bond market, the public finances or the euro crisis? Labour is still hooked on the same political economy of setting finance free and redistributing the crumbs from the table. Hence its outright objection to a financial transaction tax (FTT) levied in Europe, making no attempt whatsoever to persuade the USA of its obvious virtue in stabilising markets and supporting essential social expenditure.

The party has nothing to say on public sector reform, nothing to say on welfare reform and nothing to say on climate change. If they have, then I, and everyone else, has missed it. Why not a genuine Green New Deal or an FTT? Why aren’t we pushing harder on a living wage, a German-style KfW environmental bank, real separation of retail and investment banking, new rules on takeovers, a national carers scheme, taxes on land and wealth and so much more?

This accidental or intended strategy seems to take its cue from the Australian Labour Party circa 1998-2001.  It was called the "small target" strategy. The party had almost been wiped out at the previous election and nervous shadow ministers decided the best chance to win was to stop rocking the boat and become a "small target" for Conservative attacks, on economic credibility in particular. If the party curled up into a tiny enough ball no one would notice and it might just win. But the ALP had no credible story that could capture the popular imagination or revive the party’s base. They lost even more seats.

I’m sure Ed will make a good speech – he might even make a great speech.  After all, he’s been right about responsible capitalism – but the age of the speech as a political lever is over. It’s now the age of emotion, action, campaigns and alliance building. Hope is loaded onto Jon Cruddas's policy review, but what if everything is vetted and stripped of any meaningful content? If it's safety first and safety last, then the party is doomed to disappoint.

The serious point is this. Capitalism has done two things – with devastating effect on Labour and the wider left. First it went up and then it went in. It went up to a global level– in so doing it cut itself free from any democratic accountability. Second, it went into our minds – as our identities and aspirations became steadily defined by what we bought.  The combination of financialisation and consumerisation destroyed the salience of class politics. Without a homogenous, organised and disciplined working class base Labour has become increasingly lost. It will stay lost until it finds or, better still, creates a new moral politics, new constituencies of interest and finally accepts that it's no longer 1945. The world has moved on and has become more complex and pluralistic.  Against the backdrop of the biggest crisis capitalism has ever suffered, Labour just looks tired.  

It's not as if the party is even being complacent – no one I talk to from the right or the left is under any illusion that winning will only be a slightly better disaster than losing.  Journalists and campaigners are gleefully calling and emailing me to express their relief that, for the first time in their lives, they aren’t going to conference. And who can blame them? Who wants to spend a week listening to Labour snore?

Sleep tight, my party.

Neal Lawson's column appears weekly on The Staggers.

Labour's annual conference opens in Manchester this Sunday. Photograph: Getty Images.

Neal Lawson is chair of the pressure group Compass, which brings together progressives from all parties and none. His views on internal Labour matters are personal ones. 

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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?