Tuesday 15 May 2012

The dangerous power of political lies

When I started this blog in 2006, one of the main drivers was to discuss the intersection of business and politics. With hindsight, in the midst of a leveraged fulled boom and several years of stable Labour government in the UK, this was not a topic high on many peoples' agendas.

How much has changed since, here we are 6 years later and there is a visceral fight to the death between politicians and the markets. In Europe, populist politicians, ignorant of anything economic, have led a campaign of 'anti-austerity'. As if there is some kind of valid choice. Of course, the people are also not well informed and it is part of human nature to hope there is a better answer to all life's challenges - the cancer can be cured, the relationship saved, the house afforded etc.

But now to peddle this fantasy is a dangerous lie. There is a simple choice, repay debts or default. Promising instead 'Growth' is a nonsense. Governments cannot create growth, only can they create the environment for it. Of course, this does nto stop Governments trying, which is why the size of the state rises inexorably across European countries as Governments try to deliver on their impossible promises.

The limits of this attempt have now been discovered. Vast monies have been spent on welfare states with 50% of GDP coming from Governments who at most raise 40% in taxes. No more can this be sustained without the reductions in Government spending. This is of course very painful for the populations.

The alternative though is default and Euro exit, not some dreamland 'third way.' Thus this promise of an end to austerity is the worst kind of fantasy - lying to gain votes and then potentially tipping countries into an economic darkness for which they are unprepared. Here sits the Greek Party Syriza. Europe has a history of this, the last great depression of the 1930's also led to populist, nationalist, socialist governments to come to power. Promising people an economic fairy tale they could not deliver on.

The collapse in Greece is however, sadly, to be expected. Too far gone are the debt dynamics to save Greece and too incompetent the Government structures to be trusted with another bailout (but, yet it may come in one scenario).

With all this populist outrage across the channel, the UK has its own promoters too. The siren calls of the Labour party and its Union masters mimic the same tune - no cuts! no austerity! nothing to change! tax the rich! create growth with greater debt!

For many people, this is the nirvana mix in the current economic dark days. Why should we have worse schools, hospitals etc, why can't things be different?

Yet of course, Labour have no alternative, no different policy. Darling's predictions pre-election 2010 and Osborne's response have been similar to within a few percentage points. So this outrage is entirely manufactured - the job of opposition, perhaps one might say with a shrug of the shoulders.

The Tories for their part, with the Lib Dems, have a terrible hand to play and are doing an average job - when we needed an excellent Government. But even so, the damage caused by Labour lies is telling. The people believe in wishful fantasy alternative, not aware that Britain and Greece share many of the same, frightening, economic statistics. Only the Pound and the Printing presses (and the City, able to secure money for its host nation whilst turning a blind eye in a way that Eurozone states could not expect) keep the UK relatively afloat.

So finally, the Great Lie; The Euro. A political project without economic merit, which has sunk the periphery nations of Europe and enriched Germany and the northern states. A credible plan to end the currency area over a 2 year period is needed. The markets and economics cry out for this. Instead, Politicians proceed as if this is impossible - when even now discussing kicking out Greece. A Grexit will lead to a run on Portugal and Spain - so bad is this end that another bailout would be much cheaper. The lie though must continue, Europe is a single currency area and countries and adjust internally, even whilst demand collapses. A complete fantasy - but an acceptable one. Greeks still want Euro's, even after the tragedy it has inflicted on the Country - there we have it in pure essence, the power of political lies.


Anonymous said...

Well said.

The "narcissm of small differences" explains the fury between Osborne and Balls over their almost shared fiscal policies.

Anonymous said...

It is not just the Labour Party and the Unions who peddle these dangerous lies.

It is also the taxpayer-funded, public-sector leftist BBC.

Anonymous said...

Your comments are utterly wrong. The current UK policies are an experiment which appears to be failing.

The only consolation for George Osborne is that there are even more spectacular failures-Angela Merkel's doomed handling of the Eurozone.

Attempting premature fiscal tightening in the hope of improving business confidence and encouraging investment is the Osborne approach.

It seems to have failed and stopped the UK economy in itstracks.Unsurprisingly, to anyone with an ounce of economic understanding, the deficit is worse than expected due to reduced economic activity (higher unemployment, lower tax receipts).

Your comments about the limit of the welfare state are nonsense. There is no relationship between public spending and the economic problems-Germany is doing rather well, last time I looked.

But don't let the facts get in the way of your story.

hovis said...

Anon 12.18 I think you are a little off kilter. The tax take used to fund the public sector will affect growth once too large, stifling chnaces of growth.

That said simply cutting spending is not enough. But given that fact at a macro level there are no spending cuts only tax rises.

In many ways the whole tax spend debate is ridiculously crude and completely misses the point that it is not levels of expenditure, but how and where the money is spent.

I totally believe that public expenditure is too high,but it requires removal of government functions (including implicit subsisidies to the corporate sector) NOT simply chasing numbers.

Incedentally we can put many reasons for German success, efficiency, mercantilism and a capture currency area but I have never heard of the position that public spending has been a driver of German economic growth.

Malcolm Tucker said...

Premature fiscal tightening?
How premature could Osborne be? If anything, he was much too late and risked the AAA he sought to maintain.

UK public spending
as % GDP 2000 = 35%
2009 - 45%

{excluding unfunded pensions, PFI and the usual off balance trickery}

In Billions
2006 - 524
2007 - 549 {start your crisis calculator about now}
2008 - 582
2009 - 629 {uk gdp rises above 50%}
2010 - 669
2011 - 691
2012 - 713

CityUnslicker said...

Anon - thanks for your comments, like a challenge.

How is it that public sector jobs are good fro GDP growth again, we borrow to fund jobs that pay 35% tax pack and the rest is spent? This is good but how would one pay back the interest?

There is a total fallacy about the keynesian idea of digging holes in the road and filling them back up again. Someone has to fund it, if this is borrowed, then the interest has to pay back too - this means the orgininal investment needs to payback over the cost of funds. However, if this was a service, say a hip replacement or a light bulb change, then this is very unlikely to produce a commercial return. Oh dear, death by debt deflation here we are.

Osborne is indeed wrong, raising taxes in the teeth of a recession is crazy. we can't create demand without debt, so we need to take a greater share of what there is in the world - a big devaluation is a start, followed by some moves to beomce competitve - wage deflation that kind of thing, lower taxes on productive work. We are on the road, but only just about. the Govt chose to leave the stabilisers in place in terms of benefits which is why the deficit still increases, even as we cut services.

How would a higher deficit help this really? It is utter fantasy that the market would stand for it - proved by the behaviour of gilt prices as the 2010 election approached. the further deficit mad labour were from power th better the prices. Let's see what happens in 2014 - it will repeat as a mirror image.

Finally, if you thinkg osborne is so wrong, whay would you do..and assuming you are a Balls supporter, what is his actual plan, rather than just the criticisms of the current lot?

Zorba said...

If any of you have a balloon,
now seems to be the right time to let it go up.

Electro-Kevin said...

I can't see it ending nicely and - to be perfectly honest - the vast majority of people in Europe and the UK don't deserve a happy outcome.

Either for being childishly demanding or for failing in duty to make a stand.

dearieme said...

Is this a good time to buy a house in London?

Anonymous said...

The Condem's would have had a tiny chance of not being a one-term administration if they'd put some banksters and crony capitalists behind bars.

'All in it together' is a farce when we see rewards for failure at every turn and the banksters back to their old ways after having socialised debt.

CityUnslicker said...

Dearime - maybe relatively to what will happen - London house prices akin to gold?

Timbo614 said...

Listening to brooks on t' telly and the links to all and (powerful) sundry it is fairly obvious THEY are all in it together - we are just the unwashed.

Zorba - thank you, first chuckle all day - and just look at he time

HarryD said...

Seeing as how the rich French are soon to be dying to leave a house in London seems like a sound investment for a pay off in the next two years.

Weekend Yachtsman said...

I'm sure the Greek people understand this all too well.

However, in the same way as the Euro is/was a political project, their reponse is a political response, and what they are saying basically is "whatever it is that needs to be done, we don't want the Germans telling us".

Most of Club Med Europe would do that same, freed from the stranglehold of its political class and the "technocrats" parachuted in by Merkel et al. Sooner or later, they will.

Anonymous said...

To the other "Anon": The real problem here is NOT the debt. We could paper over that by simply printing the cash, as we have done before and as we are doing now. The real problem is that we have a cashflow problem within government that left untreated would lead to its bankruptcy. Too little income and too much spending. At the same time imports exceed exports. This clearly indicates that we have too few people in the private sector generating the exports to pay for our imports. Reducing the size of the public sector and putting people into the "holding camp" of unemployment is the first painful step towards rebalancing the economy to something that will work in the long term.

A failure to do this will result not in MORE socialism but in rather LESS. Nations that have low incomes cannot affored a welfare state and revert to outright capitalism - the people with the money must pay up front for what they want and everyone else can go hang. This is what is happening in Greece right now - the state cannot re-distribute its income because the people that have an income are refusing to pass it on to the state - the people are using their income to buy what they want directly, leaving those without an income to starve. Socialism is an expensive business, and in Greece it is failing.