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Bad news at the Guardian – is it too late to apply the brakes?

The Guardian’s abiding problem is that the people who run it seem unable to add up, or at least read a balance sheet.

When I was writing about the Guardian and its then editor, Alan Rusbridger, for the New Statesman in 2012, an ex-employee told me that “he’s driving the thing at high speed towards a brick wall”. Now Rusbridger has left the editorship to lead an Oxford college but the brick wall looms ever closer. Operating losses are likely to exceed £50m in the current financial year, a whopping sum even by the Guardian’s standards. An “investment fund”, boosted to nearly £1bn in 2014 by the sale of the parent company’s remaining stake in Auto Trader – which, it was said, secured the paper’s future “for generations to come” – is already down to £735m. The chief executive, David Pemsel, has just announced 20 per cent cuts, almost certainly including job losses. Whether it’s too late to apply the brakes remains to be seen.

You could argue long into the night about the company’s past decisions and Rusbridger’s role in them. New presses costing at least £80m to print the newspaper in the Berliner format; gleaming new premises near King’s Cross Station; newsrooms in the US and Australia to establish the paper as an international digital brand; a “civic space” for cultural events in a former railway shed in King’s Cross – all these ventures, plus the refusal to countenance any sort of paywall for the website and then the sale of Auto Trader, a long-standing cash cow, are widely criticised.

The Guardian’s abiding problem, however, is that the people who run it seem unable to add up, or at least read a balance sheet. Company revenues are up 10 per cent over the past five years, which isn’t bad in these straitened times. Alas, costs rose by 23 per cent, with 479 new editorial and commercial staff hired to work on a paper that already has many more journalists than its rivals. The top brass may argue they were caught out by the slowing economy, though there were ample warnings in their own financial pages. For a relentless critic of Tory policies, the Guardian showed a touching faith in George Osborne’s economic miracle.

The press and useful idiots

Pemsel’s demand that the Guardian “align editorial and commercial operations” and do more “native advertising” or “branded content” will cause particular alarm among hacks. These are polite terms for running more commercially sponsored features that often blur the distinction between advertising and properly independent editorial. Having spurned a paywall, the Guardian desperately needs online sponsorship, particularly with readers increasingly using apps that block conventional adverts.

The Guardian already accepts quite a bit of “native advertising”, something that has existed for decades; for example, all upmarket newspapers used to run supplements sponsored by Middle Eastern sheikhdoms and similarly dubious regimes. Leftist hacks and readers protest, particularly when the sponsors are tax-dodgers, climate-polluters, labour-exploiters and so on. Guardian editors should follow my practice at the NS, which was to ask complainants why I would turn away capitalists who wanted to pay the costs of an anti-capitalist publication.

The BBC’s OAP tax

If we lefties want to preserve independent media, untainted by the wickedness of commerce, we shall have to pay up. Not only does the Guardian invite us to show “deep support” by paying £60 a month to become “patrons”, the BBC implores us to keep paying the licence fee, currently £145.50 annually, even when we’re over 75 and entitled to a freebie. The corporation should take care. If enough oldies respond, the Tories may decide they can safely exempt everybody from the compulsory licence fee, leaving the BBC to survive as a subscription channel.

The Met gets “Nicked”

After the police announced they had insufficient evidence to charge Lord Bramall, the 92-year-old former head of the British army, with historical child abuse offences, some commentators suggested those accused of sexual abuse should have the same rights of anonymity as their accusers. A better solution would be for the police to treat claims of “paedophile rings” involving “top people” with polite scepticism. The world is full of folk who claim to be victims of high-level conspiracies and cover-ups, often involving the Duke of Edinburgh. The conspiracies involve all manner of things – loss of job, suppression of a world-changing invention or, in Mohamed Al Fayed’s case, his son’s death in a car crash with Lady Diana – and paedophilia gets added to the list when it’s in the news.

Most journalists, MPs and detectives are familiar with such cases. The Metropolitan Police presumably failed to recognise the allegations of Bramall’s accuser “Nick” as an example because of the hysteria that followed Jimmy Savile’s belated exposure.

Parkinson’s bum note

Some men deserve their reputation. I met Cecil Parkinson, who has died aged 84, only once. It was in the bar at the Conservative party conference. He nudged me and, with an expression on his face for which the word “leer” might have been invented, nodded towards a young woman, saying, “She’s got a jolly nice bottom, hasn’t she?”

Swiss snow is best

With El Niño and global warming, I sometimes wonder if we shall ever see significant snow in London again. So during a visit to Geneva, it was good to be reminded on a train journey into the Alps of the beauty of a pristine, snow-covered landscape. Here and on the US eastern seaboard, snow brings fretful activity as we struggle against what our newspapers call “chaos”. In Switzerland, it seems to create a sense of calm and good order. When we set off, it had snowed most of the night and was still falling in significant quantities. I asked at the station ticket office if the trains were running. The tone of the answer suggested this was an idiotic question that only the English ever asked. And true to Swiss form, our trains ran to the precise timetabled second. 

Peter Wilby was editor of the Independent on Sunday from 1995 to 1996 and of the New Statesman from 1998 to 2005. He writes the weekly First Thoughts column for the NS.

This article first appeared in the 28 January 2016 issue of the New Statesman, Should Labour split?

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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?