Sunday, November 9, 2008

The New Labour Economic Plan

Over the last month or so, the government has put together a seven point plan to save the UK economy.

Here, for the first time, is a comprehensive survey of the New Labour Economic Plan. It will explain the policies that Brown and Darling believe will prevent a recession and avoid a painful reckoning for all those extravagant years of bubbles and borrowing.

1. A larger government deficit, more government debt

We start with the centerpiece of the strategy; New Labour will borrow and spend their way out of recession. Rather than maintain sound public finances, the chancellor will mortgage our future in order to keep us happy today with a few extra pips of GDP growth.

In order to tart the policy up, Brown will throw in few tax cuts. Already, newspapers are touting around a figure of ₤15 billion. This should nicely complement this years government deficit, which likely to be around ₤65 billion for this year alone.

It is an old discredited policy that was tried during the 1970s. Back then, it led to rising inflation, ballooning government debt and financial chaos. New Labour have chosen to forget the bitter lessons of 30 years ago, and think they can succeed where previous socialist governments have failed.

2. Discourage savings with negative real interest rates

New Labour doesn't need savers, it needs deeply indebted consumers. So it has pressurized the government department known as the Bank of England to cut rates by 2 percentage points below the inflation rate.

The objective of the policy is to reduce the personal savings rate to zero. Don't try to put money away for retirement. Resistance is futile. So you are better off spending it now while you have it, rather than wait and watch your savings disappear in a cloud of inflation.

This policy has the added advantage of making everyone dependent on the state pension. It is social engineering at its worst; designed to make old age paupers of us all.

3. Nationalize the banks

After years of regulatory neglect and reckless lending UK banks are mostly insolvent. Happily New Labour is coming to the rescue with a big bag of taxpayer's money. Nationalisation is the order of the day. New Labour will turn the banks into now state owned enterprises, ready to hand out credit according to the political priorities of the government.

4. Bully the banks into lending

The government needs the banks to start borrowing again. Darling called the bankers in this week and told them to cut their rates. After all, the banks aren't commercial enterprises anymore; they are owned by the government.

Unfortunately, the banks tried to maintain higher interest margins in the hope of covering up past losses. Bank CEOs haven't yet fully appreciated the new reality and are still harbouring the illusion that they are employed to manage their banks. Not so. Darling is in charge, and bank CEOs are merely highly paid civil servants.

5. Flood the banks with liquidity

Despite this week's rather unpleasant meeting about mortgage rates, the banks are getting some help from the government. Darling was most sympathetic when the bankers had complained about a "lack of liquidity". The government ordered its highly subservient central bank to flood the banks with a wave of cheap credit.

This wall of liquidity has the added advantage of making the previously private banking sector even more dependent on the state.

6. Government guarantees for the interbank market

The banks also told the government about the "lack of trust" within the industry.

Again, the government was there with a helping hand. In future, it will guarantee all unsecured interbank loans. Don't worry if a bank should default, the government will be there to clean up the mess and pass the bill onto the taxpayer.

7. Put a floor under the housing market

The UK economy can not survive without an inflated housing market. So the central objective of government policy is to try to stop the market from crashing.

Part of the answer lies with a renewed round of bank credit, and hopefully a renewed wave of speculation. However, the government has also cut stamp duty and instructed local authorities to buy up unwanted overpriced city centre flats.

The seven point plan will fail

The government and their servants at the Bank of England have put together a sorry collection of failed initiatives.

The common themes running throughout their plan is evasiveness and short termism. Rather than resolve the deep rooted crisis afflicting the economy, New Labour tries to find a quick fix. If the banks are in trouble, give them money; If consumers stop spending, cut rates to make them borrow; if they won't buy houses, make the banks lend more money and offer tax breaks to new home buyers.

Short term fixes to long term problems do not have a happy record of success. This motley collection of ill-conceived policies will only exacerabate our economic difficulties and delay the recovery from ten years of excess.


  1. Hello,

    You write a orderly posting here, please keep up the fine work. One of the expressions you made to my appreciation, 'Short term fixes to long term problems do not have a happy record of success.'
    I am curious of yours' and your UK readers' viewpoints of what I shared in my posting today (11/09 regarding the US economic woes. Please feel free to comment on my blog if your wish.



  2. excellent summary Alice, a service to us all

  3. everything we worked so hard for, for so going to be undone and taken away through currency debasement and escalating prices.

  4. Its true Alice, you do get the word out most effectively.
    I like the seven point plan breakdown, the point being that even taken individually they are crass ideas.

  5. Nice work once again Alice.

    Why is it that the failed policies of the 1970's are coming back. It seems that so many people within power are in shock by what has happened, they won't stop Alistair Darling from turning Britain back into a 'Spend your way out of trouble' economy.

    I mean I though the golden rule was 'Keynesianism doesn't work' - 18 years of opposition was meant to teach these idiots something.

    I feel that the current plan is so obviously not going to work, it makes me angry that senior government officials know this, but are willing to proceed anyway.

    I now really want them stopped. Just like the 1970's, I would even accept the destruction of social policy that comes with a Conservative government, just to see a smarter approach to the economy.

    At what point did we forget the destruction of the 1970's policies, and why do the government think they can spend their way out of trouble.

    The worst economic crime of all is to try to prevent a housing market correction. If a correction starts it isn't by accident, it's because it needs to take place, and this Labour government promised in 1994 - 1997 not to go back to failed interventionist policies of the past.

    I don't know what's would be worst, if they succeed and manage to force this debt bubble back into action again, which would make the proceeding inevitable collapse extraordinarily bad; or the fact that this collection of spending policies will fail, and will have been wasted money that fails to get to the source of the problem. In other words 'throwing good money after bad' with nothing to show for it at the end.

    Why is it that when the economy starts heading for recession we don't do like we promise at the start of an upturn, the old ' we won't make those mistakes again' approach, and actually take the downturn on the chin and deal with spending money in a way that doesn't force an artificial bottom to the crash, but instead delivers stimulus after the bottom has naturally been found. I know its votes and panic that causes all common sense to be ordered out of the building, but for once I want politicians to stop interfering and pretending that their panicked solutions are in fact strong leadership.

    Waiting until the next election seems too long to wait for a stop to Alistair Darlings stupid policies, to much damage will have been done by then. If only there was something that could be done right now, not to make Labour change, but to just get rid of them altogether.

  6. I think we need civil unrest to get rid of these New Labour morons to be quite honest.
    Prudent people are getting sick of this lot wrecking what they have worked for, throwing away our sovereignty and values, promoting a divided society etc...
    I feel we are very near breaking point and it's about time some form of action was taken to vent our anger and disgust.
    Brown has absolutely NO RESPECT for the people that HE is meant to serve, so give the bast*rd a taste of his own medicine I say !

  7. Alice,

    I cannot help but feel that your analysis of the situation is fundamentally flawed. We are not in an inflationary position as we were in 1973/4. In 1974 oil prices quadrupled. Today oil prices are standing at around $60, having fallen from a peak of $147 just 15 weeks ago. Most other commodities have fallen between a third and a half over the same period. Only today, the ONS reported the price of manufactured goods falling by 1% in October. I don't recall that happening in during whole of the 1970s.

    Moreover the Labour market is completely different today. In 1975 the trades unions had 11.7mn members. Today it's around 6.5mn in a much expanded workforce. More importantly, trades union militancy no longer exists. Where are the Arthur Scargills and Red Robbos of 2008? Nowhere, that's where! So I see no reason to assume that increased Government expenditure will prove to be inflationary.

    The real problem with policy to date is that it has been too fixated with inflation. Only belatedly have the MPC woken up to the danger of deflation, hence the 200 basis points cut in the last two months. Still you can hardly blame them, given the one-dimensional nature of their remit.

    Incidentally, if you think inflation is going to persist you have a perfect vehicle for preserving your savings. NS&I indexed linked savings certificates are currently paying RPI plus 1%. They're tax free and you can invest up to £15,000 in each issue. Given that there are a couple of issues each year, you should be able build up a healthy pot of cash, whilst all the time, house prices crash.

    History does repeat itself, but I don't see tank tops and platform shoes making a comeback any time soon.

    Young Mark

  8. Anon above -

    Ironically, wage inflation is the one thing we really need right now; wages have been generally suppressed over the past couple of decades.

    A deflation of incomes, given the size of the debt mountain to be repaid, would be an absolute disaster, even form those with savings and no debt - not even the government would be safe from bankruptcy under such conditions.

    What is really needed, in my opinion, is essentially a cordoning-off of existing mortgage debt to be converted to very-low interest rate (2-3%), fixed repayment terms, no extra advance terms, with the loans effectivly taken off of the banks books. All new lending would be done uer strict rules (i.e. 3x income maximum). Personal unsecured debt would have to have similar terms. Such a mechanism may allow normality to resume; blanket insistancer on high IRs will just destroy everything, however moral it may seem.

  9. Alice, the question is not one of preventing a recession... it is of avoiding a prolonged depression.

    While, politically, I'm behind the idea that government spending isn't the solution... I feel that it will prove essential... the problem, I fear, is that it will be seen as a cure-all, and the cause of today's malaise will not be addressed.

  10. Why the 70s re-run? Because Brown and Co. are old 70s lefty ideologues. Wasn't Darling in the IS? Or the IMG? Or the CIA? Or the BBC? Or was he Matt Busby?

    No, this is Brown's wet dream of wet dreams what is going on now, and allowing him to apply to the maximum his insane "economic" "theories" (both quoted intentionally).

    If you can flee, then do so. This is scorched earth economics going on here, which will enslave the country for at decades.

  11. Excellent summary.

    As to Young Mark's quibbles,

    a) You can only invest up to £15,000 per annum (or is it per issue? I can't quite work that out) in NS&I index linked, so that's not much help if you are seriously loaded.

    b) There was indeed a spike in oil price recently, it's now going down again. So what? As a general rule, recessions are preceding by a house price bubble and an oil price spike.

    Old Mark

  12. It's an 8 point plan, actually.

    The 8th point is to lie and to dissemble so much that people don't realise what's being done to them.

    When the stark difference in living standards between us and other G7 nations becomes fully apparent then you'll have your civil unrest, Markbaldy.

  13. "Ironically, wage inflation is the one thing we really need right now;"

    Oh lordy! Repeat after me - printing money does not create wealth.

  14. Mark Wadsworth,

    You can invest 15K per issue. There are currently 3 year and 5 year issues and an individual can invest in both. Moreover there are new issues of both 3 and 5 year certificates every year or so, so that's somewhere in the region of 200k tax-free that a couple could accumulate. If you have a brace of children below the age of 18, you can invest on their behalf as well, so that doubles the tax free sum to around £400k. Is that enough, or would you call it small change?

    I thought I had made the point about the oil price spike sufficiently cogently in my first post. Apparently not. Let me spell it out. In 1974 the oil price quadrupled and stayed high for the next 5 years, after which it trebled again. Moreover the militant trade unions which existed in the 1970s were able to enforce inflation busting pay deals which meant that the after the initial oil price shock the economy experienced secondary inflation. Against such a background it would indeed be imprudent to "spend our way out of a recession". However, we are not in such a position (as Alice would have us believe). Oil prices are well under half the level they reached in July and most other commodities have fallen by almost as much. In other words, there is plenty of scope for increased Government spending and/or tax cuts without them necessarily leading to increased inflation. Funding such measures is another matter of course.

    Like Alice (and probably yourself) I'm very keen to see house prices continuing to fall. What's more they will, notwithstanding the efforts of the Government to soften the effects of the recession.

    Young Mark

  15. There are three potential problems with NS&I index linked, similar to those for with US Treasury Bonds.

    1. The NS&I interest rate is way below the real rate of inflation, because that the RPI, like the GDP etc., is deliberately distorted to reduce state costs and hoodwink the public.

    2. If the state sinks, they may decide to seize the money out of desperation, just like the rape of private pensions.

    3. If the EU absorbs the UK, and ends the UK state (a nightmare of mine), the NS&I may become far less safe, and may even be ended.

  16. If you like NS&I index linked, why not look closer at index linked gilts? It looks like the 2013 issue currently yields inflation plus 3%. I think the coupons are taxable, but not the uplift on maturity, so even after tax much better than NS&I. No measly 15k limit for those that were worried! I expect the NS&I rate will need to improve soon.

    As for previous poster problems with NS&I, (1) I agree RPI has problems but (2) seems unlikely and (3) not true. Euro may break up but the bonds will stick with the state of origin. Look at German Bunds, French OAT, still very strong while all others (Italy, Greece etc) crumble.

  17. Jayman,

    Good point, but the advantage of index-linked certificates is that you don't have to hold them to maturity.

    My own view is that RPI inflation will fall rapidly over the next few months and will probably undershoot the 2% target i.e. new index-linked savings certificates are a very bad new investment.

    Of course it's a different matter if you believe inflation really will persist. However, I don't think Alice really does hold this view. She merely hopes it will. My suggestion of investing in index linked savings certificates was rather tongue in cheek. I've held my own certificate for just short of two years and will be expecting to have to cash them in over the next few months.

    Young Mark