States so often behave badly. They pick fights or provoke each other. They often boss or abuse their citizens. If they were people we would get fed up with them, send them to coventry, seek to change them or even put them in detention.

The next few years are likely to see a continuing struggle between the USA and China. Mr Obama’s “new” jaw jaw rather than war war approach to dealing with the world neighbours has broken down in the sands of Afghanistan, and is now having a bad time along the Great Wall of China. This week-end there is sabre rattling over Taiwan. Mr Obama intends to sell them lots of armaments for “defensive” purposes. China sees such an act as one of provocation, as she thinks Taiwan is part of greater China and does not want more military hardware in the way of her ultimate “settlement” of the Taiwanese issue. The USA needs to export more whilst also still needing to borrow too much money from the Chinese. China cannot afford to overreach herself and lose face at this sensitive time in her climb to world significance.

I have always thought that one of the most important moments in the evolution of China as the other great power of the world will be the moment when China demands Taiwan. If she tries too soon the USA could well rush to Taiwan’s defence. If China judges it correctly and has prepared the ground the USA will back off and we will know there are two super powers in the world. Meanwhile many in Taiwan will be seeking to keep the USA strong and on side.

I don’t think this week-end’s sabre rattling is the start of the denouement of this long running issue. I expect China to complain, impose sanctions, cool relations but not to force any military action. The oral spat is unpleasant but I hope and expect it will not bring the world to the brink of disaster. It is important that Mr Obama is very clear about his intentions, as indecisiveness or hints of a change of position could be dangerous in such a situaiton. Mr Obama needs to remember he does still run the only world superpower when it comes to the ability to project force beyond the homeland, even if he does need to borrow a lot of money from China to pay for it all.

This week markets took fright at the mountain of money Greece wants to borrow to pay its government bills. It needs to borrow about the same relative to its National Income as the UK. The markets have pushed the price of Greek government bonds down, so Greece now has to pay twice as much interest as Germany to borrow the same number of Euros for ten years.

Greece cannot devalue within the Euro. The UK has already knocked one fifth off the amount it has to repay foreigners who lent it cash by devaluing by a fifth over the last couple of years. Greece is saddled with paying back Euros, which have been more stable against the strong currencies of the lending nations. There are five possible options for Greece from here:

1. Leave the Euro and devalue. That cuts the amount of real money they would need to pay back, would make their exports more competitive and their imports dearer, leading to a shift from consuming too much at home to working harder for foreigners abroad. They would still need to cut their deficit by cutting spending, as they would still need to borrow to pay some of the bills and they would no longer be able to offer Euros for repayment.

2. Stay in the Euro and accept the discipline of the club. They are meant to keep borrowing down to 3% of their income. Instead it has soared to 12.7%. They could cut their spending substantially, restoring confidence and limiting the amount they need to borrow.

3. The strong countries within the Euro zone could lend them the money they want to borrow on better terms than the market, or give them grants to see them through this bad patch. London sends grants and loans to Liverpool so they can stay in the same currency union, so why shouldn’t Munich send cash to Athens, say some single currency single Europe exponents.

4. There could be a deal. Germany and her friends within the Euro zone could agree a package, where Greece cuts her deficit by spending cuts and then is eligible for some grants, loans or subsidies to make up the rest.

5. They could all decide to do nothing. Greece would have to pay more to borrow internationally, and would gradually have to take action to curb the deficit. Otherwise the interest rate she had to pay might become so penal the markets forced a crisis, requiring action under one of the four options above.

I think Option one, leaving the Euro, is unlikely. Greece is keen to stay in, probably hoping for protection from her own folly by belonging to the larger club, and hoping against hope for more loans and subsidies from within. Whilst some in Germany and France might see going back to a core Euro as an attractive and more stable option, the overall balance of opinion in the EU is likely to want to keep Greece in. If Greece left, the positions of Spain, Portugal and some others would also be in question. It could lead to a messy unravelling of the wider Euro project.

I suspect Option 5 is also running out of room, as the markets are close now to forcing action to correct the deficit or to force a bail out for Greece.

I would think Germany unlikely to simply offer to fund the excessive Greek deficit. It would be an open invitation to all the other ill disciplined Euro members to run up big debts and ask the centre for easy money to pay the bills. It would also start to place too much strain on Germany herself, as Germany is not without her own economic problems.

So that leaves the two options of tackling the deficit herself or doing so with European help and assistance for meeting various targets.

The whole saga shows the folly of premature currency union without proper arragements in place for transfer payments and common fiscal policy. The Euro is becoming a system to try to impose discplined policies on the periphery, as Ireland, Greece, Spain, Portugal and even Italy have to keep reining in their excesses to live within the Euro scheme. Their reluctance to do so creates unemployment and lower incomes in each of them, and will generate a series of debt crises and economic crises as they push against the need to control spending.

Greece has a simnple choice. Either live with German discipline, or run a shambolic fiscal and economic policy and be at the mercy of markets. The Euro is not the frree lunch some members thought it was going to be. It does not give a right to badly run countries to borrow at German rates of interest. You cannot run a single currency successfully unless you first create a single country and gain acceptance for the fiscal and other economic policies from all the voters of the enlarged area. The fact that we kept the UK out of it will mean the Euro is spared the bigger crisis of containing within it a large unruly subject with very different economic characteristics from the rest. It has also spared us in the UK major steps on the road to being subsumed into a European country.I helped oppose the Euro for the UK as a believer in an independent Britain, but one of the arguments I used was our actions would also spare the Euro a massive problem.

All past European currency unions have failed. All past attempts to create a large country or bloc of countries out of smaller European states have also ultimately failed. The plight of Greece a small chapter in the stpry of this latest project. If Germany and France are serious about a country called Europe they need to come up with deal quickly to keep Greece in on tolerable terms to both sides. If they are not, the sore will fester and the markes will dictate answers. Watch this space, and expect some messy compromises.

This morning Mr Blair returns to the centre stage of British politics. It is not a triumphant return. It is the return Mr Brown dreads. It is cross examination day over the Iraq war.

The 2005 election haunted Labour with their Iraq war. Anti war Labour candidates put up. The dislike of the war was one of the main reasons Labour’s vote slumped so low. Mr Blair was lucky, because the Conservatives were still unable to take advantage of Labour’s misery, and some Conservatives were keen supporters of the same war. A sullen electorate stayed at home in large numbers.

Many Labour strategists thought that was an end to it. When Mr Blair left office, they hoped the Iraq war left office with him. It was never going to be that simple. After all, Mr Brown was in the room when the decision was taken, and he had to pay the bills for the hostilities.

I read recently a Labour inspired comment that Mrs Thatcher would never have allowed a similar enquiry into her conduct over the Falklands. That is clutching at a straw that is well broken. The Conservative government did hold an enquiry into the Falklands war. That war was a popular, legal and just war. No-one queried its justice as it was designed to liberate people from an aggressor. It was legal under international law, as a country had been violated by another and sought intervention to free it. The hopes and good will of most of the country sailed with the Task Force.

The Brown/Blair war in Iraq was very different. It was never popular. Many people thought it unjust, intervening in an overseas country because the government did not like its Leader. Some thought it illegal, including we now learn a couple of senior lawyers at the Foreign Office.

So what can we hope to learn from Mr Blair’s appearance? I think the Enquiry should concentrate on three main lines of questioning.

The first would be to tease out the legal position. Parliament was always told the government had clear advice that it was legal. We need to know how many lawyers within government held a different view, how hard fought it was, and why the legal advice changed in the government’s favour at the last minute.

The second would be to find out why Mr Blair was so keen on going to war. Why was Parliament told there was an immediate and worrying threat from Iraq’s weapons of mass destruction when it appears there were no such weapons? When did regime change become the purpose? Why did the UK decide to change this particualr unpleasant regime by force, but not other regimes it disliked?

The third would be to ask why there was apparently so little intelligent planning for what was to happen once the war had been won. Why did they make such bllunders in handling Iraq after they had won?

Davos is a time for overpaid bankers and consultants to rub shoulders with the senior regulators and government officials who determine the rules for their money making games. Once again, just like last year, regulation will be a big topic of conversation.

Governments will be saying they want more of it. They will argue their favourite syllogism – Our purpose is regulation. Regulation has just failed. Therefore we need more regulation. Big businesses will be saying – Our businesses agree we need lots of regulation. We can live with all the regulation we currently have. If you impose any more the money making machines could break down. Both these stances are idiotic.

There will also be a delicious dance over the canapes. The politicians wil be seeking opportunities to cash in on the rich vein of public anger about bankers, polishing soundbites on how they too like President Obama will be tough on bankers and the causes of bankers. The bankers and consultants will be responding off the record saying that they cannot take too much pain, tactlessly saying that they are in a vicious squeeze already which means no remuneration over £1million until things have calmed down a bit.

The truth is there were both market failures and regulatory failures to create the Great Crash. Competitive markets work, rewarding the successful and customer friendly and weeding out the unsuccessful. The banking market is not a properly competitive market. In the UK the Competition authorities were asleep at the wheel or ordered by the government to turn a blind eye to the competition failures. They allowed mega banks to emerge, when they should have blocked the takeovers and insisted on more competition. We need to make the elaborate competition machinery work properly. That does not require more law or more regulators. It just requires a few senior regulators in the current structure to break up over large banks and to prevent new mega banks emerging from anti competitive mergers.

Most people agree there does need to be some addtional regulation on banks and other deposit taking institutions besides enforcing a competitive market. We need the reassurance that the banks will be able to pay our money back. That requires regulation of cash and capital. Again, that is already part of the present system. There are plenty of highly paid people who are meant to do that. The only change we need to is to have a few people in each major jurisdiction who know how to do it properly. It does not take many people in the UK, as the banking market is so concentrated. If you get the top ten banks right you have sorted out the problem. One person could do that, armed with the right regulatory powers, if he or she understood bank balance sheets.

Large companies like all present regulation because it keeps competitors out. They have spent the money on complying with it, and don’t want that changed. Just because the regulators and the large companies agree does not mean we should. The truth is much current regulation is a waste of money, an anti competitive practise, a nonsense which does not keep our money safe. If Davos wanted to do somehting that actually helped get us back to stronger growth it needs to do three simple things:

One: Assert the need for more banks and a much stronger enforcement of competition policy. The UK could pledge to create half a dozen new banks out of the two it currently owns
Two: provide simple counter cyclical rules on cash and capital to ensure we have better endowed banks in future
Three : Prune the other regulations, so more businesses can start up in competition against the established players.

Bolting on more rules to a system which does not work is a bad idea. Failing to create a competitive banking market means business as usual.

The government keeps telling us borrowing more, spending more and printing more boosts the economy. They should look at the figures and ask themselves Where has all the stimulus gone? The figures are amazing.

Since 2005 the government has doubled central government borrowing (on its own understated figures ) from £469 billion to £922 billion – an injection of £452 billion.

Since 2004-5 money supply (M4) has surged from £1,212 billion (£1.2tn) to £2,100bn (£2.1 tn) – it has also almost doubled. Notes and coin have gone up from £42 billion to £55 billion.

And what has happened to real output? It is almost the same in Q4 2009 as it was in Q3 2005! No growth at all for 5 years.

So where did all the stimulus go? Much of the public borrowing went on inefficiencies and on imports. Some of the extra money went into price inflation, and some is just circulating less rapidly now, given the poor state of the banks and the new regulatory toughness.

The government needs to go back to the drawing board on whether these sorts of stimuli work. If they had studied Japan over the last twenty years they could have seen for themselves that huge boosts to public spending and public borrowing just put the state more into debt but did not lift the growth rate. It could have saved us a lot of money and false hopes.

13 years of Labour goverment has produced even greater income inequalities. The Labour response is likely to include new tortures for people who work hard, try to get on in the world, who aspire for themselves and their children.

What we need are policies which raise the sights and motivate the energies of the many. The way to reduce inequality – and to make most people better off – is to encourage and foster, not to regulate and tax in a fit of jealous anger that some have still succeeded.

We need an enterprise package to make it easier to set up and run your own business, a small business package so more small businesses can expand and take on more labour, and a shake up of some schools and training Colleges so more obtain worthwhile qualifications.

I have been interested in the wide range of responses to my piece on prisons. It is right that many burglars and petty thieves are never caught, so prison does not act as a great deterrent. It is also right that some of the thieves who are caught are not up to holding down a normal job, especially those on drugs. We do need to do more work on getting people off drugs, on getting them into a condition where they can do something useful and earn an honest living. Some will need to go to prison to do that.

So that was what it was all about? All that well orchestrated hype, all those well honed briefings concerning the end of the recession, brought forth a mouse of a recovery, the smallest margin possible. Let’s hope the figures are not revised downwards. We know the economy struggled again in January, with a couple of weeks of snow bringing much of the country to a halt. The government must be hoping the next couple of months pick up speed, so the first quarter figures this year do not show an overall reduction again.

The bigger picture is alarming. The economy has fallen 6% from its peak, taking it back to levels of output in 2005. So this long Labour led Parliament has produced a standstill Britain, a UK going nowehere. To bring about this worst ever economic performance for a post war Parliament, the government has doubled the national debt and printed more money than any of its predecessors. Then they want us to say “Thank you” for spending all this money we have not earned, claiming it has made us stronger.

The Conservatives have rightly argued that if we do not start cutting the deficit now interest rates will be driven higher by the markets, and more damage done to the halting recovery of the private sector. They also need to point out that we have a two tier interest rate structure in the UK. Interest rates for small businesses and much of the private sector are already too high. It’s only the banks and the government that enjoy rates related to the notional 0.5% the MPC solemnly sets each month, and then only for very short term borrowing.

As Quantitative easing ends, so you would expect the government’s borrowing rate to rise further. Then the MPC has a simple question to answer. Does it wish to carry on with the fiction that 0.5% is the short term interest rate in the economy, so it can endow banks with a bigger windfall, or does it want to get its rate back in charge of market rates for the rest of the economy, in which case it has be higher.

When the Opposition says we need to cut the deficit to keep or get interest rates down, they are right. There remains the gross distortion of our current interest rate structure to sort out. It has been created by a government that wanted to offer sweetheart deals to the public sector and the banks at the expense of everyone else. They are running out of road for this policy, as the markets will extract a higher price for their excesses.

The global warming theorists have been in overdrive predicting extreme outcomes.

We have now heard or read:

1. The Arctic ice will all have melted within 5 to 7 years
2. The Himalayan glaciers will all have gone by 2035
3.Tropical storms are now the result of man made global warming
4. The UK will run out of water thanks to the dry hot summers
5. Champagne grapes will shrivel in France and will have to be grown further north in England
6 The sea level will rise drowning several large cities
7. The UK will have a barbeque summer in 2009 and a mild winter 2009-10

We are now witnessing some backtracking. The IPCC has apologised for the glaciers, admitting it was an error. Some global warmists were uncomfortable with Mr Gore’s Arctic ice prediction, as we will soon know how accurate it was. Apparently the settled science is not sure that tropical storms and other extreme weather events are all the result of man made global warming. The Uk weather forecasts are of course about weather and not climate, so they are mistakes that could happen to anyone in the meteorological business. We are assured that when the weather goes in the wrong direction, it is just weather and not climate.

From CEO
To Shareholders

I told you Conco were a busted flush. The latest market research shows people are not going for their nonsense that we need to stop spending and borrowing so much. Thank heavens they are so stupid. We can win the Board elections after all.

Enough of these minor matters. As your company’s grand strategist I have my mind on bigger things. I have good news to announce this week.

We are currently having a strategy conference with our Afghanistan subsidiary managers. During this I am going to launch my latest initiative to spend and borrow more. We have come up with the idea of offering cash back or incentive payments to all those Afghans who have been trying to damage our company in recent months.

I think you will agree with me that we can’t go on as we have been doing. Managers have been attacked, and some Afghans seek to undermine our brand. So why not offer them money to be part of our team? That way we can expand our spending and borrowing further, and cement a new bloc of customers to our Afghan operation. Pretty shrewd, don’t you think?

This builds on the success we are having with our never knowingly underbribed approach to key customer groups closer to home. Our ever popular cash back benefit offers now affect around half the population. The huge take-up of these offers led us directly to the idea of simply printing the money, cutting out the middlemen involved in borrowing it. I know we dressed it up as borrowing to buy back borrowing, but it was really printing it.

We will also be having another conference on how to regulate banking operations. As you know, now we own two of the largest banks in our main territory it is all so much more straightforward. We just tell them how much they need to lend to UK PLC and they stump up the cash. It takes the waiting out of wanting, I find. However, there are still unenlightened parts of the world where the main companies have not bought their own banking subsidiaries. We need to be at the table to discuss what to do about this.

I think the best course of action is to design more taxes and regulations for everyone else’s banks. That way we might be able to bring them down to the levels of performance of our own banking subsidiaries, which will make it easier for us in managing our huge conglomerate.

I have heard some people criticise us for having banking subsidiaries that are larger than the rest of the company. I used to think they were wrong, but now I have some sympathy. So I am now putting my thinking cap on to how we can accelerate the size of the non banking bits to catch up. The answer, of course, is to bring more customers in through our cash back benefit offers, and to borrow and print more to finance all our growing activities.

Our message boffins have been working on what we should call this new offer. After our ever popular “Tax a Tory toff today” campaign, they are thinking along the lines of “Treat a terrorist today”. Is it just too much alliteration to put it altogether as “Tax a Tory toff to treat a terrorist today”? That might put the wind up Conco! Let our spin doctors know what you think.

It’s coming on a treat. Yours in clover, welcoming my new Afghan friends,

The CEO

Let me make it clear at the outset before the spinners get to work. I think prison is the right place for anyone who represents a threat to the public. If people have committed acts of violence from terrorism to burglary with assault, they should go to prison for a good long time.

However, our cuts in spending need to be wide ranging. One good cut would be fewer criminals in prison. There are two big categories we need to look at.

The first is all those people who commit crimes by taking money or property that does not belong to them, ranging from the common thief to the fraudster. Surely it would be much better to prove to them that crime does not pay. They should be made to pay the costs of the police and judicial system in handling and prosecuting their case. They should make full restitution to any third party affected by their actions, including an element of compensation.

If someone stole my car, for example, I would like them to buy me a new replacement. I do not wish to pay for them to spend time in prison as well as being financially as worse off from the loss of my vehicle and the ensuing insurance claim. That’s a further punishment for me, the victim. The thief or fraudster would have to work harder and longer hours to meet the bills. Of course if the thief was unable and unwilling to work and refused to pay the bills then prison would be the last resort.

The second is the wide range of new crimes this government has dreamed up to pursue its political correctness and power of the state agenda. Many of these should never have attracted a possible prison sentence in the first place. Judicious changes to the penalty clauses – or outright repeal – would cut down the numbers of such offences.

Today we are asked if we should abolish the fixed age of retirement. The answer is “Yes” and “No”.

The answer is “Yes”, because people should not be made to retire at a fixed age against their wishes. If they and their employers want to carry on with the contract, or if they wish to carry on and they did not sign a limited life contract, they should be free to do so. When I advised on pensions policy in the 1980s I proposed a flexible “decade of retirement” (from 60 to 70 in those days- it would now be from say 63 to 73 given greater longevity) so both men and women could chose.

The answer is “No” when it comes to the terms of the State retirement pension scheme and public sector pension schemes. A pension scheme needs to have a stated age from which the pension will be paid. This can be the default or average age, with increases in pension if you work and contribute longer, or reductions in pension if you retire earlier.

Given the state of the public finances we need to raise the retirement age for pensions purposes. Those wanting to contribute for less time should receive smaller pensions.

I fail to see how anyone can claim that the Fed or the Bank of England have been well run in recent years. We have just lived through the biggest boom and bust in money policy we have ever seen. The two main Central Banks that caused the blow up and then supervised the collapse should take the blame.

I appreciate Mr Bernanke was not primarily responsible for the build up of excess credit, but he was responsible for the bust phase. He should be replaced with someone who forecast the recession and demanded earlier action to deal with it.

The President’s wish to split off hedge funds, proprietary trading and venture capital from utility banking on the High Street could be done. If he just tries to do it in one country, even a large and powerful country like the USA, the mega banks will simply shift their ownership of these areas elsewhere in the world. If the US claims extraterritorial jurisdiction, then the mega banks based in the US could switch their HQs to another overseas territory. If he still pursues them, they could split their capital structures.

If all the main banking jurisdictions of the world agree some new Basel accord on the subject it is likely the big banks would get the message. They could sell off their private equity, trading and hedge fund arms as separate companies, or they could split themselves into investment banks containing the “naughty” business as defined by the President, and utility banks.

All this implies two things that I do not agree with. The first is, it implies the three specified areas were the ones that caused the problems, whereas in many cases this is not true. Secondly it implies that future bail outs of utility banks is acceptable. Surely we ought to be seeking a world where bail outs are not needed? Why does the taxpayer have to face more pain for banking incompetence and Central bank idiocy?

What we ought to be discussing is how to regulate cash and capital by banks in a way which makes failure less likely. We need to discuss why the main Central Banks got it so wrong, why they kept interest rates too low for too long to create the bubble, then held them too high for too long to create the slump. We need to understand they ran a boom and bust policy, and both phases were wrong. We need to find people to run the Central Banks who don’t drive by looking in the rear view mirror, but who can think ahead.

If we stick with the regulation of commercial banks, the Regulator could make it clear their guarantees only extended to the utility bank subsidiary in their jurisdiction, and that such businesses could be separately accounted so in the event of a crisis that could remain solvent and independent if the rest of the Group went down. Alternatively, we could just strengthen deposit insurance so all who we wish to protect in a crash have the reassurance that their money is safe and there is no need for a run on the bank to add to its other troubles.

In the UK we need to split up RBS and Lloyds whilst they still have large public stakes. If the minority shareholders do not like it then they must arrange for buyers to take all the government’s shares at a profit for the taxpayer to allow them to call the shots. We need to strengthen our competition policy, by explaining to our Competition authority that the aim of policy is to get much more competition into High Street banking in the UK, supporting the policy of splitting RBS and Lloyds.

Which leaves us with the need to regulate cash and capital. I still favour this, though there is no evidence from the recent past that the Regulators knew how to do it. We should try again. All banks and financial businesses taking positions on their balance sheets and offering to pay people their money back at some point in the future should be expected to keep minimum levels of cash and capital. These levels should normally be higher than they were in 2007. In the short term they should be lower, as we need to generate more loans and financial activity to help the recovery.

Soemtime we need to come off quantitative easing and very low official interest rates. This is just a money go round to let the government spend too much, and to allow the banks to earn easy money. It does not help the rest of the economy, still struggling with too little credit at too high a price as a result.

I have been asked what I think of Mr Obama’s comments on bank regulation. I think they are good modern politics. For Mr Obama, it was bash or be bashed.

The US public – like the UK public – were not happy that so much of their money was tossed into propping up banks, or put at risk underwriting them. They became livid when those same banks, a year later, were busy paying their top executives mega bucks in bonuses as if nothing had gone wrong, as if they had earned the money by their own great talents.

Mr Obama has just had a very bruising encounter with the US electors. Both the winning and losing candidates in Massachusetts stated that the big issue was Obama’s very own unpopular health care plan. Mr Obama says he is quietly parking or delaying the offending big idea. Now he needs to change the topic and find people and institutions more unpopular than himself. Enter the bankers.

Like many modern politicians Mr Obama is good at moods and soundbites. He ought to be, as no doubt they spend a fortune tapping the mood and polling the words. So far he has proved useless when it comes to executive action, unable to develop honed policy and put it through. Closing Guantanamo was a great soundbite, but a year on it hasn’t happened. Changing the approach to the Middle East with a new kind of foreign policy sounded good, but the intensified Afghan war looks like Bush mark two. Offering healthcare to those who could not afford it sounded heroic. Instead many middle Americans feel threatened with higher cost health care and higher taxes.

So what is Mr Obama offering for his new banking policy? We do not know. There were two short paragraphs, designed to send a single message – he welcomes a fight with Wall Street. It worked with the tabloids, but it is scarcely a considered policy towards banking regulation.

He also implied that some banks were too big, without defining how big a bank should be and without naming the ones he had in mind. He wants big banks to get out of hedge fund activity, proprietary trading and private equity.

If he had bothered to thinik about the crisis we have lived through, he would have noticed that the two biggest catastrophes in the US were Freddie and Fannie. These are both specialist mortgage banks, brought down by advancing too much mortgage to too many people. His remedies do not tackle that issue. He might have spotted that Lehmans went bust. That was a specialist investment bank, that would also be unaffected by his two paragraphs. If he had looked across to the UK he would have seen that Northern Rock, Alliance and Leicester and Bradford and Bingley were also all specialist mortgage banks.

Out of his soundbites could come a sensible policy. As readers will know, I do want the two UK state owned mega banks broken up. They were too big to fail and too big to bail. The break up of banks that needed taxpayer support and might need it in the future is a good idea. Ensuring that in future they have more capital at the dangerous stages of the cycle would also be a good idea.

So was George Osborne right to back Obama? Yes, he played it shrewdly. He welcomed Obama’s interest in better banking regulation, and said it must be done globally. He also implied that Mr Obama’s message was the beginning of a long process of negotiation, not a settled answer for the world. That would be a kind way of putting it. Mr Obama came up with a bare knuckles soundbite. Maybe sometime the governments of the world will get round to getting some justice for hard pressed taxpayers, who were made to put too much into propping up some banks that did not not deserve it. They should have helped depositors, but they should not help bankers pay themselves too much.

A few years ago the world’s four largest economies were the USA, Japan, Germany and the UK. We have long warned readers of the UK’s spectacular fall from grace, which is still continuing. The UK is now in seventh place and still declining. The sharp sell off in sterling last year, allied to the contraction in GDP, has propelled the UK below France and Italy.

The rise of China will also be familiar to visitors to this site. China has stormed up the league tables, to reach the second slot in a table of the world’s largest economies. This has mainly been achieved by growth rates of close to 10% per annum, based on her huge success as an exporter.

When I wrote Superpower Struggles in 2005 I forecast:

“A much more effective competitor to the US, potentially a major global player, is rising in the Far East. … It (the Chinese economy) has already overtaken Italy to become the world’s sixth largest economy, and will soon pass the size of France and the UK at market exchange rates. By the next decade it will be larger than Germany, in third place, poised to overtake Japan.”

The forecast was almost too cautious, as China only waited for three weeks of the new decade before announcing her second place.

Before the latest phase of China’s rise and the UK’s decline, the top four economies of the world had a certain balance. The US and UK were heavy borrowers. Their consumers sucked in imports from the successful exporters. Their banks and borrowers drew on capital from the savings of the successful exporting economies. In contrast, Germany and Japan were economies driven by savings and manufacture for export. It is true that the US was a lot bigger than the other three, but for a number of years it was a relatively stable system which let the Anglo Saxons borrow and spend, and the others save and sell overseas.

China’s rise now has an important impact on the world economy. China’s huge stimulus last year helped end the recession in many parts of the world. Now China’s early wish to rein in bank lending before the bubbles grow too big is sending shivers around world markets as changes in the Fed’s attitude always do. The arrival of another export led high savings economy at the top of the tables makes it even more competitive for Germany and Japan, struggling to handle the sharp downturn in demand triggered by the bursting of the borrowing bubble on both sides of the Atlantic.

Nor should we think China’s arrival in second slot marks an end to this period of rapid change. Whilst it is going to take a good few years for even China to catch up with the size of the US economy, we could well see India from just outside the top ten and Brazil from tenth slot advance up the rankings. Going in the opposite direction could well be Spain and Italy as well as the UK, as all suffer from economic weakness in an ever more competitive world.

What lessons should we draw from all this? The first is that this remains the age of the Pacific. Two of the largest economic gainers are and will be China and India. There is a decisive shift in economic power occurring from old world and western world, to new world and eastern world. It could have a lot further to go, as these emerging economies have many more people to shift from agriculture to more productive activities. They remain with low incomes per head, able to apply existing technology to catching up the west.

The second is that the big gulf between the exporters and the borrowers has become too large and is now a cause of instability. Adjustment hurts both sides. Indeed, Germany and Japan, the exporters, took a bigger hit than the leading borrower, the USA, during the last downturn. From here we think the borrowers are going into leaner times, as they have to rein in some of their excess consumption and borrowing.

The third is that there remains too much capacity around the world. The older and dearer exporting countries, like Germany and Japan, will probably struggle more to adjust than the newer and cheaper exporters like China.

Yesterday in the Commons during the debate on the deficit reduction I warned the government again about rising interest rates. I tried to explain to them that if they persist with huge borrowings and so much overspending, it will drive interest rates higher, damaging the recovery in the private sector. I explained that the markets could do this on their own, whether the Bank of England left interest rates on hold or not.

This morning I awoke to read that Skipton Building Society, one of Labour’s own preferred mutuals and a specialist institution taking deposits and lending for house purchase, has hiked its interest rates. It feels it cannot compete for deposits from savers unless it does so.

The Minister of course was unable to refute, comment on or accept my remarks. It is such a pity they neither listen nor understand what is happening to the economy, preferring their ludicrous soundbites to the realities of the markets that are now beginning to bite them.

Skipton have hiked their standard rate from 3.5% to 4.95% – a big rise of 1.45% or over 40%. It’s 5.2% if you do not pay by direct debit. That’s a mighty long way from the 0.5% the government boasts about in the Commons.

I must say I enjoyed reading the Skipton’s account of what it is doing. Their site begins with an all too true remark “At Skipton BS we know every penny matters”. No doubt that’s why they need more of them.

There are many unsung heroes in a working democracy. Each of the main parties relies on volunteers to deliver leaflets, to tell the public about their local and national party policies and actions, and to support their Council candidates. They also rely on volunteers to come forward to contest seats where the prospects of winning are not good as well as where they are good. No greater love hath man or woman than this, to give up their evenings and week-ends to campaigning in places where in the past their parties have done badly.

I remember it well when I fought Peckham for the GLC and for Parliament before I came to Wokingham. I am therefore usually sympathetic to Labour candidates in Wokingham, who see the need to tell us about their party and its national ambitions and deeds, but who in the past have not found enough support to win. We need Labour to take Wokingham seriously, just as Conservatives should take Peckham seriously. A national party needs to feel comfortable in both places and to understand the needs and views in both. They are different in many respects. To be a national party you need to explain your views and actions in every constituency, and keep alive political activity in your name. National parties should not take victory for granted in some places, and write off their chances elsewhere. Upsets can happen.

I am pleased that Labour has an active prospective candidate sending out press releases and seeking attention in local newspapers. That is good news for democracy. No-one should resent a fair debate. Democracy is about choice, and electors should have all the main offerings before them when they vote. What I find disappointing is that our local prospective Labour candidate is silent on the big issues of the day. He does not tell us about how Labour will control the large deficit they have built up. He does not explain why the UK is still in recession according to the Chancellor when most other countries got out of it months ago. He does not explain why they spent so much money on propping up banks, yet small businesses are still unable to borrow enough at realistic rates of interest.

He has instead one main interest – my expenses. If he wishes to make that the big issue I think he has some explaining to do about Labour MPs’ expenses. In order to help him I have some questions for him that he might like to answer when he next writes about it.

In 2007-8 I was the 19th cheapest MP, with total expenses of £105,917. I set myself the task – before the expenses issue blew up in the papers – of cutting my costs by 10% in each of the following two years. I am pleased to report that my expenses will come in well below the £95,000 target I set for 2008-9 when we see the total audited figures, and should come in well below the £83,000 I set for 2009-10 this year. This compares with an average of £144,000 for all MPs in 2008-9 (this audited figure is now available at last).

My questions are these. Why do Labour MPs cost the taxpayer so much more than I am doing? It’s not all additional travel for the ones that come from further away. Why do London Labour MPs on average charge more than I do? Why did the average Labour MP cost around £50,000 more or one third more in 2008-9 than I charged? Why did the Prime Minister have to pay back more than £11,000? Was he wrong to claim that money in the first place?

What would his budget be for the first year were he elected? If he thinks he could do it for less than me, can he explain why current Labour MPs cannot? I would give serious consideration to any sensible budget he cared to propose, as we can all learn how to do better with less spending.

I want Parliament to offer a lead in cutting the deficit. We have to show we can deliver more for less, because we are going to ask the rest of the public sector to do just that.

This week the government announced prices are going up by 3.8% a year before the VAT increase, excluding mortgages, or by 2.9% on its preferred measure of the CPI. Most commentators think that will rise again in January. Meanwhile the Council leaders announced there would be no pay increases this year. That means local government workers join the many industrial workers who had no pay rise last year, though it still will leave them better off than the many workers in the private sector who have been on short time, experiencing pay cuts.

In other words, this year, even before the Election, millions are contemplating a year in which their spending power falls by at least 2-3%. It takes special economic incompetence to deliver a fall in living standards on this scale.

Some months ago I forecast a big squeeze on living standards on this site. Labour immediately seized on my remarks and tried to make out I recommended it or wanted it. Let me make it clear again today. Like most MPs I want to see living standards rise. Unlike a majority of MPs, I recommend economic policies which could deliver that happy goal. Then, as now, I am predicting what will happen under Labour’s economic policies. They encouraged the private sector to live well beyond its means in the boom days. They presided over banks that lived well beyond their means. Now they are bloating the public borrowing, making the public sector live well beyond all our means. Even they at last recognise this cannot go on. After their booms come their busts.You cannot solve a crisis of over borrowing in the private sector by borrowing too much in the public sector.

I expect the plan was to try to keep things going until after the election – borrow all they could to see them through. Unfortunately for them the markets are running out of patience, putting interest rates up. The pound has fallen, so their money goes less far, as we learn today with the Foreign Office budget. And now, the Councils have been squeezed a bit so they are telling us the truth. If they are to avoid major redundancies, they have to offer no pay increase. Against a background of surging prices that means lower living standards.

The private sector, which was living well beyond its means, has been reining back hard on the debt. Individuals have been repaying credit card borrowings and cutting the mortgage where they can. New borrowing has been very restricted. It is now the public sector which has gone to extremes with the new borrowing. Yesterday we debated the Deficit and the government’s absurd Fiscal Responsibility Bill. I pointed out that the government has taken out a whopping mortgage for us all, which it has told us about,(gilts) but it has also taken out a second mortgage,(bank nationalisations) lots of hire purchase(leases) and maxed out on various credit cards ((PFI/PPP)without putting all those figures into the official borrowing stats they like to quote. Now we are into the final phase, the visit to the Pawn brokers. This week UK shareholders sold the rest of Cadburys which they still owned to a foreign buyer. There will be more of that to pay the bills we have run up not covered by our earnings. If we carry on importing our lifestyle from China, we have to find a way of paying off the debts we incur as we do so.

Many of Cadbury’s shareholders who will shortly vote to sell their company are overseas individuals and institutions. In this gobal world one group of overseas shareholders will sell to a new group of overseas shareholders. It is not quite as some present it. The Cadbury family ceased to own and control it years ago. As a major quoted company on an international stock market anyone can come along and buy shares.

Cadbury is currently led by an international management team. It is true the UK is well represented in that team. It is the senior managers who are keen to sell to the new overseas shareholders. The new shareholders will put in a different international management team, which will also include some British people in some of the important jobs.

Of course there is in me that same feeling as many share today. Why can’t we have great British brands, with products from good British factories, owned by British shareholders? Wouldn’t that be good? The answer to both, is Yes, we can and it would. No government, however, is going to stop British managers selling out if they wish, or stop international shareholders selling their shares for a good price, unless there is a competition policy reason to block the merger. Cadbury ceased to be a plucky British company years ago. Fewer than 10% of its employees work in the UK.

Will the UK factories survive? I hope so. The truth is that British managers and British shareholders have been known to close UK factories and switch produciton abroad when the figures show that is the right commercial thing to do. British ownership does not protect all UK jobs. Foreign ownership does not mean automatic closure. Nissan. Toyota and Honda have done much more for UK motor industry jobs than Britsh Leyland, Rover and the UK government did. Time will tell how much commitment to the UK Kraft will have. The workforce and the British government can make the future of the British factories more certain by their actions. It needs to be better made in Britain. The UK needs to have an attractive tax and regulatory system so people want to invest here.

Mr Blanchflower resigned from the Monetary Policy Committee. He now thinks it should be abolished because it did not agree with him whilst he was on it, and may soon disagree with him again.

Readers of this blog will know that I too have been constantly critical of the various calls the MPC have made, in the run up to the Crunch, during the Crunch and in the aftermath of the Crunch. The MPC was told to keep inflation around 2%. They allowed it to soar well above target, they forced it to slump well below target,.and now they are letting it surge well above target. It is not a good record.

The MPC are given the task of regulating the economic clock so it always gives steady and reliable time. Instead they speed it up too much when it is already running fast, and slow it down too much when it is already in danger of stopping. Mr Blanchflower is someone who favours speeeding the clock up. He recommends lower interest rates and loser money. He is trying to fight unemployment and recession, and thinks you can do that by printing money – if only. Inflation well over the target rate does not seem to worry him.

The MPC remit is to control inflation. They have failed to do this. They need to think again about why they have got it so wrong, and try to do better in the future. Who are they kidding with their current 0.5% interest rate? Have they not noticed that everyone else has to use much higher rates than their recommended rate, and even the government now has to pay a lot more for most of its money.