Tuesday, January 20, 2009


Spiralling to disaster

How the eff did we get here?

Legendary investor Jim Rogers (co-founder with G Soros of the Quantum Fund), reckons we're finished:
"I would urge you to sell any sterling you might have. It's finished. I hate to say it, but I would not put any money in the UK."

There are rumours that a major credit rating agency is about to downgrade British government debt from its vital AAA rating (a status we didn't even lose during Labour's last economic disaster - aka the 1970s).

And despite pumping limitless further billions of our friggin' money into a massive bank bail-out, it's so useless, bank shares have collapsed even more.

Meanwhile all our bankrupt "government" can say is that they're the innocent victims of American incompetence and evil bankers.

Let's take those bankers first. Sure, some are truly evil, in the sense that they've ponzied our widows and orphans, and lied through their teeth about their toxic waste deposits. In fact, you'd almost think they were politicos.

But most are only evil in the sense that their actions are driven by Mammon. And sorry, that's what bankers do. In fact, that's what we need bankers to do.

What's really evil is a government that not only condoned, but actively encouraged those bankers to take risks way beyond the capacity of our financial system to withstand.

To start with, against the specific advice of the Bank of England Governor (and others), Labour imposed an untried and untested tripartite regulatory system. That system totally failed to understand or even monitor the risks (see many previous blogs on the shambolic amateurish box-ticking FSA).

Second, far from raising a proverbial eyebrow, Labour actually celebrated and embraced those who were inflating our huge wobbling debt balloon.

We all know about the knighthood they awarded Fred The Shred Goodwin, the man who gave us the multi-billion disaster that is RBS. But there was also long-time NuLab insider Lord Dennis Stevenson, the man who was so well regarded he was put in charge of selecting Bliar's laughably named "Peoples' Peers" (see this blog). Stevenson chaired the multi-billion disaster that is HBOS. (See here for Oborne's take on Labour's love affair with the city spivs).

Why did Labour do this?

We know why. Even setting aside the direct financial support some of these people provided to the party, they did it because they thought it was somehow free money.

As we blogged here, Brown's boom was built entirely on the explosive growth of financial and business services. Two-thirds of our overall GDP growth from 1997 to 2008 came from just those sectors - it was a one-legged boom:

And no less important was the contribution to Brown's tax revenues. As a classic socialist spendaholic, he was always desperate for revenue to fund at least part of his extravagant spending programmes. At the height of the boom, it's reckoned that City financiers were generating a quarter of his corporate tax revenue, and his instinct was to cheer - not to ask how a sector comprising only some 6% of the economy could possibly make that much money.

So when Brown claims our problems are down to evil bankers, we need to spit. And then we need to ask how come he was so crap that he never asked questions until now?

And what about those incompetent foreigners?

To nail that one, all you have to do is look at the European Commission's latest economic forcasts. They show that Brown has left our economy far worse placed than any other major.

This year, the EC expects the UK economy will shrink by 2.8%, compared to an EU average of 1.8%. The cause-of-all-our-woes US is only expected to go down by 1.6%. What's more, both the US and Europe are expected to recover much more quickly than us in 2010.

So we are much worse, having also been much worse last year (the luridly unsettling chart at the top shows the EC's Economic Tracer for the Euro area - if they'd done one for us the plunging line would probably go down to at least this paragraph).

When we look at those much fiddled figures for debt and borrowing, the EC says that 0ver the next two years our government will need to borrow the equivalent of 18.4% of GDP - twice the EU average. Hardly surprising that by 2010 we will have more government debt (71% of GDP) than the EU average, and that includes such longtime basket cases as Italy and Greece. Remembering also that our figure excludes the vast bulk of this bank bail-out cash, just as it excludes all the PFI/public sector pensions Enron debt we've blogged so often.

So if we can't blame it on the bankers, and we can't blame it on incompetent foreigners, who can we blame it on?

Yes, that's right - ourselves.

We (well, more specifically, you) are squarely to blame for not learning the clear lesson of history. Labour governments always always ALWAYS end in economic disaster.

Look, let me spell it out for you:

  • Ramsay McDonald - economic disaster
  • Clement Attlee - economic disaster
  • Harold Bloody Wislon - economic disaster
  • Jim Callaghan - economic disaster
  • Bliar/Brown - economic disaster

See? See the pattern?

Now, try to remember it.

(See also Iain Martin's excellent Telegraph piece this am).

PS Nick L has updated us on Brown's bank equity hedge fund (see this blog). Net Asset Value continues to spiral, and as of last night, the fund was down £22.5bn, or 80%. Not bad for less than 3 months.

Update: A beady-eyed reader Mark L, has queried our original figures on the size of the financial sector. The facts according to the ONS are that Financial and Business Services accounted for 29.9% of GDP in 2003 (the current base year). And that's the basis of our calculation on its two-thirds contribution to GDP growth (see previous blog referenced above). The figure of 6% also mentioned in the blog refers to a narrower definition comprising just the City -ie the guys who used to wear the braces. And admittedly it is much flakier - ie it is not an official ONS figure. But that doesn't change the Big Picture.

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