Dec 08 2008
Good news and bad news on UK borrowing
There is some good news about the massive £157 billion the UK government has decided to borrow this year. They seem determined to use the banking system to lend them some of the money, to make it a bit easier to lay their hands on it and to try to keep long term interest rates down.
They will also doubtless keep up the regulatory and actuarial pressure on pension funds, which has been a feature of recent years, to get them to lend more to the government as well. Indeed, the policy of undermining the pension funds, forcing many of them to close for new members or even for continuing member contributions, was a stroke of genius for funding the government’s excess spending. The more pension funds that are “mature” or closed, the more they have under current actuarial and regulatory practise to buy government bonds. The government created a virtuous circle for itself, creating more natural buyers of government debt at ever lower interest rates.
The bad news is that all this borrowing is not achieving the desired effect of stimulating the economy and sorting out the banks. All the time the banks are sending much of the money back to the government at a loss, the private sector will be starved of funds and the banks will remain weak owing to poor profits.
So what should the government do, I hear you ask me again? Let me briefly repeat:
1. Cancel the VAT reduction early.
2. Revisit the regulatory framework for the banks, to give them some more transitional capacity to lend by amending the Tier One Ratio and related rules
3. Revisit the £450 billion package of bank support, so the banks wish to use it more
4. Reaffirm government support for all the major UK banks
5. In private negotiate the repayment of the Preference capital to taxpayers through asset sales, item 2 above and banks generating more profit.
6. Accelerate Gershon style public spending reductions.
7. Cancel undesirable public programmes like the ID card and related computer databases.
16 Responses to “Good news and bad news on UK borrowing”
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
I find the Government coercion of the pension fund sector terrifying.
Simply, it’s a direct violation of individual freedom. The funds are privately owned and populated with private capital. To have their investment *directed by the State* is absolutely foul.
It is also theft, pure and simple, for the reduction in the rate of money those funds earn by being forced to buy what they would not otherwise buy is money taken from the individuals who have their money in those funds. This is absolutely wrong.
It also means they are intensifying the consequences of failure – those funds are more and more dependent upon the State and as we’ve seen, the State is not economically competent.
APL Reply:
December 8th, 2008 at 1:16 pm
Blank Xavier: “To have their investment *directed by the State* is absolutely foul.”
Agreed.
Blank Zavier: “It is also theft, pure and simple, for the reduction in the rate of money those funds earn by being forced to buy what they would not otherwise buy is money taken from the individuals who have their money in those funds.”
Agreed.
It is but one step away from Argentinian style confiscation.
I was always curious as to whether the current Government had an ulterior motive when they decided to tax private pension dividends.
Subsequent action of requiring the pension schemes to hold Government debt simply reinforced my doubts.
Is Labour just trying to get cheap debt for the Government or do they see it as a way of nationalising the private pension schemes, or as they would put it “socialising” them?
Blank Xavier Reply:
December 8th, 2008 at 12:54 pm
As you may know, in Argentina, Kirschner has nationalised the private pension funds.
Those funds hold assets worth about 30,000 million dollars. They were created because the State kept spending the national pension funds.
Kirschner is currently experiencing a large fiscal deficit. The 30,000 million dollars of private money invested in private companies has been appropriated by the State (with a promise, made and broken on a number of previous occasions, to honour the payments required for those pensions).
Governments inherently tend to spend more than they tax. As such they tend to end up in deficit. A Government which believes in “social equity/justice/etc” will justify the appropriate of private funds with the mantra of “social equity/justice/etc”. It will do so rather than cut back on spending, because Governments are unable to cut back on spending. In doing so, it utterly violates individual freedom and further damages the economy.
Ian Jones Reply:
December 9th, 2008 at 3:59 am
The case in Argentina seems to be more financially based (i.e. the Govt needs the money to dig it out of a hole) rather than a strategy to “socialise” pensions as part of a greater plan of wealth redistribution.
However, as the British banks now owe £800bn or more in short term foreign currency denominated debt and the private pension schemes have significant assets held overseas its not beyond the realms of possiblity that they are “swapped” for British government debt…… i.e. do an Argentina.
Crikey. So now the govt is going to do a Robert Maxwell on the pension funds. All in the national interest of course and with a cast iron assurance from Brown/Mandelson that their measures will again secure record breaking levels of economic growth and so enable all debt to be repaid in full at no disadvantage to the holders of the pensions themselves.
I can’t find the reference now sorry but the Argentinian govt was doing sthg like this a few months back although that was one step further – i.e., outright nationalisation of the pension funds. So in effect Brown and Mandy take their economic policy from such illustrious types as Mugabe’s Zimbwabe (e.g., monetary inflation to give aggregate demand a good prod)) and a former South American banana republic who just 5 years ago had its own financial financial meltdown which culminated in runs on its banks and the country defaulting on its international debt. And to think at the time people arrogantly said “It couldn’t happen here”. Well at least we can now reply that Mandleson (& Brown) are doing everything they can to prove such people wrong.
John,
I fear that you are misunderstanding the financical genius in charge of our country: The Rt. Hon. Mr Grodon Broon PM, MP, 1st Lard of the Treasury etc..
He is not engaged in stimulating the economy, and you should not be judging his success in that, it is not his aim.
He is trying to simulate an economy, to fool us into voting Labour in again.
Yours Faithfully, (keep up the good work)
Marksany
I watched the lamentable debate in the House of Commons this afternoon.
Talk about learning nothing and forgetting nothing! I personally am unaffected by the pension scam, but, judging by the defensive arrogance of the Labour people this afternoon, I can see that there is absolutely no chance of your urgent points 6 and 7 being put into place, let alone any form of their relenting on the others.
Their war cry seems to be that the Tories do not have any plans at all in this crisis. Your remarks this afternoon disprove that.
All sensible things John, except that if you trust the banks with our futures you must be as crazy as people who think the government can be trusted with it.
The truth is we cant trust anything now and we would all be crazy to trust anything outside our own direct influence and control, ever again. The only thing we could ever have trusted is the soundness of our money. Without which nothing we do for ourselves except spend like there is no tomorrow makes any logical sense.
I have been dealing with banks for nearly 30 years as a small but highly geared manufacturer. Although I personally trust my bank manager not to steal my watch while shaking her hand. My personal experience, having survived 2-3 recessions has shown me that the banks are indeed working in a criminal conspiracy with government to steal the benefits of my hard work from me and my family. They have not succeeded, thank our god, but that is not because of the banks or the government, but very much in spite of them BOTH.
The government of any country can not operate without the ‘co-operation’ shall we say, of its own central bank if it has one. If it does not it has a British controlled one, or it has no real banks at all.
Without which it could not cause inflation or dishonestly create Boom and Busts, neither could it finance or fight wars for more then a few days.
This situation has not suddenly changed, simply because we now have a so called socialist government. It has long since been the case.
Your job John is not to protect the interests of what are essentially mafia type organizations. If they take silly risks with their customers money thats there problem. It is only ours as well because we are effectively OWNED by our central banks.
The Bank of England as you surely must know is not a nationalized bank, but is a privately owned corporation, that just happens to have the British tax payer underwriting its entire losses but never taking a penny in its profits. As we now clearly know. The Bank of England is controlled in turn by The Bank of International settlements in Switzerland. This bank also runs the IMF which are both controlled by the Rothschild’s and there family and friends in the British, American and Papal Establishment.
What we needed was a properly state owned central bank, with which to regulate minimal interest rates, and the money supply. Now it is far too late for such a thing as the existing system is now up for a long awaited and planned globalist change.
The ruling elites have grown tiered starting wars and revolutions just to help them monopolize and collectivize power. They now want to cut out the middle man, which is the electorate, and simply take a more direct and more honest approach to absolute power using establishment creations such as the EU and the UN.
John my advice would be to make as sure as you can that whatever system these psychopaths come up with, respects our much died for property rights. That is preferably before all the ordinary people that trusted in you enough to vote for you or OUR party care about, is desperately preventing themselves from starving or freezing to death in their own homes.
One other thing.
Please be reminded that without people like myself, big corporations could and therefore would charge whatever they like for their products and services. As genuine competition between the largest private or government corporations is in reality NON EXISTENT. Service would become virtually invisible and product quality would quickly reach Soviet standard. Product diversity could also vanish completely from the shelves, anywhere but Harrods. As for jobs of any quantity or quality outside the direct control of the state or the large corporations that own the state, forget it. Cuba here we come in a hand cart, if we are lucky.
I run my company for my benefit, not just so I can tell people I do so entirely for the benefit of my staff. If I had known that I was building a company for a future British government in conspiracy with the establishments banking system to simply steal everything I have at a later date. I would have got a job with the government or become a politician 30 years ago. In stead of training and employing up to a hundred of my own common people. While producing over £50 million worth of highly taxed products.
There is something else to be worried about pensions. With the government forcing down real interest rates, the returns on pensions will also go down. That is the pot accumulated to retirement will be much less (due to compound interest) and the returns that the annuity will give will be much less.
Those pension funds holding bonds will get a one-off boost every time the interest rates go down, but the impact of pension funds having to hold ever-larger quantities of their funds in near zero-return assets will create the following problems.
1) The pension deficits will balloon, just as companies see operating profits plunge with the recession. The government will have to nationalize the pension funds, to save the businesses.
2) Many people will try to put off retirement, just as the workforce is shrinking. The government will have to subsidize people’s pensions
3) Many financial institutions will be unable to meet existing annuity payments (if those funds are affected), so may offload this onto new annuity quotes, or ask the government to bail them out.
The general thinking that we should be lowering interest rates to near zero should be re-visited. With plunging house prices, and the prospect of losing their jobs, folks are not going to buy houses, or incur more debt at the moment. You are right, Mr Redwood in saying that we should reverse the VAT reduction early. However, along with a few spending cuts, this may be much too little, too late.
8. Reduce income tax or heighten thresholds for the low paid.
9. Put all the spending plans into a party manifesto and let the people decide whether they want them at a General Election.
10. Install a Tory Government to make swingeing cuts to public spending by installing Sir Peter Gershon as head of the oversight committee on public spending in accordance with new government policy to get Britain back to work in a real economy.
11. Rip up the Lisbon Treaty.
12. Form an independent committee to report back with a cost benefits analysis in respect to Britain’s EU membership and then let the people vote on our continuing membership or our movement into EFTA.
13. Reduce VAT and remove it completely from domestic energy.
Force QUANGO’s to cut their budgets by 25% over two years or face losing their public funding meaning that they sink or swim by charging service users for their services , raise the state sector retirement age to 65 , end RDA’s , replace JSA & IB with one sort of payment to slash economic inactivity , end the New Deal and ID Cards & IT schemes , freeze civil service recruitment, cut procurement costs via a greater usage of market forces and suspend EU contributions until their accounts are signed off while no longer giving aid to rich places like China.
Public spending could be 100% frozen until the PSBR was 80% less as a share of GDP than the level inherited by the next Tory government. The above cuts could help fund priority areas in the context of state spending being frozen in real terms.
In the first fiscal year of a Tory government basic rate payers could all get a £1,000 cheque as a one off addition to the PSBR to get a recovery going. A further £22 billion boost as a one off would get things moving on the high-street then from the second fiscal year onwards as recovery started the public spending freeze could begin until the PSBR was 80% less than it was in the last full fiscal year of Brown’s Premiership.
To help the next Tory government we need the feel good factor at the start to gain support for having got the economy going so that we can take tough measures to make the recovery last thanks to greater stability.
John,
I’m interested in your viewpoint on this.
While you suggest adjusting the tier one ratio to help the banks lend, would you consider tighening the ratio as we come out of the down turn/depression so that we can use it as a control measure the next time this happens??
It seems to me that it is a bit like interest rates. The more we cut them, the less impact we have up our sleeve. If we tightened the ratio it would give us some manouvarability in the future. The fact that it has been low for so long has removed it as a potentially effective management tool.
Obviously the banks would hate this, but they have had their chance to show that they can manage on their own.
Reply: Yes, of course. Regulation should be counter cyclical- dampening down extremes, not pro cyclical, making them more extreme.
Any chance of anyone asking in PMQs if the PM still says that Britain is best placed out of all the major economies to weather the recession? The news is universally dire and getting worse. All the figure show we are going to be hit harder and longer. Surely, not even the PM can deny it, can he?
not an economist Reply:
December 9th, 2008 at 11:24 pm
Is there any point? I am not being dismissive of what you say but whoever asks wil just get the response that the Tories would do nothing wherease Labour is doing everthing to help people get thru all this.
I think Cameron has got this right (although still concerned about Europe).
Cut public Spending and get the finances in order as soon as possible. Once the finances are sorted then you can cut taxes. It is exactly what Thatcher did, although she had the advantage of selling off the nationalised industries, with the help of Mr. Redwood. It will therefore take Dave longer to put the books in order, I fear that it will take too long for him to achieve it, before Mandy gets back in.