Reaction to Obama victory shows growing Tory confidence

Downing Street thinks this is may be their lowest point. And it isn't too low.

In case anyone missed the news that David Cameron was pleased to see his buddy Barack Obama re-elected, Downing Street released a photo of the Prime Minister chatting with the newly re-mandated Commander-in-Chief:

(It'’s a phone call, so you can only see Cameron and have to imagine Obama smiling affectionately at the thought of the future summits he'll spend in the company of his most essential strategic partner.)

The significance of the US election to the Cameron project has been heavily analysed and spun. (There are interesting pieces on the subject here, here and here. I also touch on it in this week'’s column here.)

In brief, the good news angle for the Tories is that an account of Obama’'s victory –- incumbent overseeing tricky economic repair job wins second term to complete task -– rehearses the campaign Cameron wants to run in 2015. The bad news angle is that Romney was ahead in opinion polls on measures of economic confidence but way behind in responses to the kind of “"understands people like me”" proposition that Cameron also struggles with.

Plus, the Republican image as overly concerned with the interests of rich white rich men is a hindrance that has certain resonance for the Tories. (Although that can be sold as good for Cameron, since it empowers him to slap his own right wing down a bit.)

In reality, the US election simply isn'’t that important to British politics. We obsess about it because American democracy is fascinating, it’'s a powerful country that matters to the rest of the world and the players have the courtesy to speak our language so it is accessible as spectator sport. 

One of the interesting things to observe in the UK aftermath of the poll is not the result itself but the licence it appears to have given top Tories to be visibly optimistic. The positive interpretation of Obama’'s win outlined above requires all sorts of caveats, not least the fact that Cameron might yet have to fight an election with an economy that has made people feel poorer, in which case a “let-me-finish-the-job” proposition rings pretty hollow. Yet the Conservative high command clearly feels it has turned some kind of corner.

That is certainly the impression I get from loyal MPs and ministers who, while wary of celebrating the emergence of green shoots, are ready to sound cautiously upbeat about both the economy and their prospects for victory in 2015. One factor informing that view is the feeling that Ed Miliband hasn’t capitalised on his relatively successful annual conference. They see no sign of momentum or surge of project-building energy –- no radiation of collective charisma –- from the Miliband camp.

Tories fully expect to lose next Thursday’'s Corby by-election, but even that doesn't seem to be getting them down. That is because they see most of their current woes as symptoms of a generic mid-term malaise and not necessarily irreversible structural weakness. 

Andrew Cooper, the Downing Street pollster, has a presentation that he gives to cheer MPs and party staffers up on this subject. It involves looking at long term trends in incumbent/opposition relations over time, with special attention paid to periods when the Tories are in power.

What tends to happen is that the party in office loses popularity, takes a real opinion poll pasting in the middle of the parliament, then recovers in the run-up to an election until it is within reach of victory. According to this analysis, the Tories are better off now than they were in the mid-80s. To make this model work you have to discount the period 1997-2005, when the Conservatives were behind in the polls almost constantly. That is explained away by claiming that Blair was a unique candidate, barely Labour at all in many traditional respects and the Tories were in a particularly dark place.

In other words, it was an anomalous time, whereas now normal cyclical service is resumed. The Conservatives are in power facing an untrusted and not entirely plausible Labour opposition. They are a bit behind –but who would expect anything else, especially given the economic circumstances. Arguably, they are nowhere near as far behind as they ought to be and there is plenty of time and capacity to bounce back. So, the pep talk goes, this is the bottom for the Tories and it isn’t all that low down.

Privately some senior Labour folk agree. One party strategist commented to me recently that “the Tories won'’t be losing much sleep over their poll ratings at the moment.”

Of course, this could all be wildly hubristic on Downing Street'’s side. There are plenty of public sector cuts yet to kick in which could suck demand out of the economy and produce gruesome social effects that reinforce the “nasty party” image. International economic turbulence is never far away. European divisions remain ruinous to the party’'s image as an effective force in government. The Tories’ well documented problems winning votes in the North and Scotland and among non-white communities haven’t gone away.

But Downing Street’'s hope is surely that a bit of confidence in the prospects for 2015 will promote discipline in the ranks and a virtuous cycle of unity and an aura of governing competence. (There is a solid core of MPs who remain implacably, viscerally hostile to Cameron but the appetite for harmony in the rest of the party is quite strong and impatience with the wreckers is growing.)

A steady spell of non-chaotic, half-way dynamic administration, coupled with positive GDP and unemployment indicators could see the situation quickly looking rosier for the Tories. More important, it would look bleaker for Labour, provoking another round of doubts in Miliband’'s capacity to animate an election-winning project and an explosion of disunity in the opposition ranks.

I don'’t say this is what will happen, just that it is a scenario the Tories think plausible and that allows them to feel upbeat enough to look at events across the Atlantic and put a quite fancifully positive spin on them. They may not know how to win, but they don’'t yet feel as if they are losing.

Barack Obama and David Cameron at Camp David earlier this year. Photograph: Getty Images

Rafael Behr is political columnist at the Guardian and former political editor of 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?