This week's New Statesman: The new patriotism

What the Olympics tell us about modern Britain + Fiction special

The Olympic Afterglow by Ed Smith

In this week’s New Statesman cover story, the former England cricketer and NS columnist, Ed Smith, considers how the Olympics can “reboot” Great Britain. Sceptics, writes Smith, once argued that the Games have become detached from sport; in which case “the logic follows that Britain must have succeeded at something much more important”.

While “[a]rguing that a sports tournament could heal the scars [of last summer’s riots] sounds quixotic,” the Olympics has provided the “surface and the pretext . . . the opportunity to reboot” the capital – or even the country. One logic, at least, has been left underexplored:
Team GB could not have won many of its medals without the support of the state. Only a few sports can nurture elite athletes (and their coaches, equipment and nutritionists) in a free market; most require handouts from the taxpayer.

And Smith draws a parallel between the success of the Olympic champion Mo Farah and that of London itself, host city of the Games:

[C]oldly calculating, London should be able to stage a great Games, just as Farah was favourite to win the 10,000 metres. But somehow that only exacerbated the tension. It was hard, watching the race, not to imagine all the ways in which it could go wrong . . . We had all imagined similarly disastrous scenarios for the whole Games . . . Farah’s victory brought to life what we had hoped these Olympics would be about.

David Blanchflower: The recession deniers are wrong. Build now!

Following the Q2 reports of a 0.7 per cent drop in GDP – confirmation that Britain is in a double-dip recession – the New Statesman’s economics editor, David Blanchflower, predicts growth for the year of below -1 per cent: “a long way from the 2.8 per cent predicted for 2012 by the Office for Budget Responsibility in its cloud-cuckoo-land ‘emergency’ Budget forecast of June 2010”.

The data from the quarter, writes Blanchflower, points to “a collapse in construction, driven by the coalition’s decision to kill off public investment”. Data from the ONS and RICS survey show no sign of private-sector recovery to offset the cuts, “leaving little optimism for recovery in the near future.”

Employment data is also consistent with this trend. Blanchflower notes, through comparison of the UK and US’s labour markets of the last two years, that “in job-creation terms, Barack Obama and his Treasury secretary, Timothy Geithner, easily beat Cameron and Osborne”.

Summer fiction special with a new short story by Adam Foulds

This week’s Critics opens with “A kindness”, a new short story about hope, charity and a chance encounter in Britain’s bleak winter by Adam Foulds, the award-winning author of 2009’s The Quickening Maze.

Elsewhere in this Fiction special, Leo Robson, the NS’s lead fiction reviewer, explores the lofty ambitions of first-time novelists; Claire Lowdon is only faintly amused by Nicola Barker’s Man Booker Prize-longlisted novel, The Yips; Jonathan Coe admires Javier Marías’s attempts to reimagine the novel and Sophie Elmhirst meets the essayist and Pulitzer Prize-winning author Marilynne Robinson

The Quiet Australian: Tim Soutphommasane

Ed Miliband’s new political guru, Tim Soutphommasane, is the subject of this week’s NS Profile. Speaking to George Eaton, Soutphommasane explains why “liberal patriotism” holds the key to Labour’s success at the next election:

“The task of rebuilding and reshaping the British economy after the financial crisis and after austerity is something that could be a patriotic project.”

He argues that the success of the Olympics and the praise for Danny Boyle’s opening ceremony is an opportunity for Ed Miliband to redefine the debate over national identity:

“Sometimes political parties can let these moments do the work for them. But the patriotic goodwill generated by the Olympics does provide an opportunity for Labour. It is almost as though Boyle has managed to pave the way for a new chapter of British nation-building.”

Elsewhere in the magazine

  • Peter Wilby on Lords reform, work-life balance and snacking on salad in First Thoughts

  • In the Politics Column Rafael Behr explores whether the coalition is tearing itself apart 

  • In the NS Essay, Malcolm Beith reports from the vicious drug war in Mexico

  • John Burnside on Berlin’s wild wasteland in the Nature column

 

All this and more in this week's issue of the New Statesman, coverdated 13 August 2012, and available on newsstands around the country from today or for purchase online here

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?