In recent weeks there has been a lot of talk about the need for a Plan B. If not for a Plan B to be implemented now as Ed Balls would advocate, then at least for a Plan B to be drawn up, just in case as the IMF have suggested things don't go as the Liberal-Tories expect, and we enter a double-dip. But, the question now is, is it too late for a Plan B. Moreover, what exactly would Plan B be?
Let's be clear about a few things. The Liberal-Tory argument about the crisis being due to a profligate Labour Government is nonsense, as I showed previously - Here - the vast majority of the debt was accumulated after 2007, when the Credit Crunch began. As I wrote there,
"Public Sector Borrowing and Repayments shows that, contrary to Mike McNair's account, in the period after 1999 up to 2002/3, Labour was actually paying down the debt rather than intervening with Keynesian stimulus under instruction from Capital. Between 1979 and 1997 borrowing accounted for 3.4% of GDP, between 1997 and and 2005 it averaged just 1.2%. Moreover, even when Labour did begin to act counter-cyclically, under Brown, the increase in the deficit was nothing extraordinary. It is clear from the data that the significant change DID come in 2008/9, when, even excluding the amounts pumped into the Banks, net debt rose from 36.5% of GDP, to 43.2%, a bigger cumulative rise than in the previous 7 years combined!"
But, it is also true that, precisely because the injection of all of this spending was an emergency, counter-cyclical measure, it would at some point have to be reduced. So it is true to say that the deficit has to be tackled, the question is how?Liberal Economy With The Truth. They continued to believe that it would be a mistake to begin to introduce Cuts until the recovery had been secured, which meant not until 2011.
But, the problem is that although, in reality, the Cuts have not started until now, for more than a year, we have had both the Liberals and Tories telling us in the most catastrophic language that the deficit was a huge problem that needed to be dealt with immediately, that we were in the same position as Greece and so on. It was no surprise then that given this massive talking down of the economy, it has its effects last year on what Keynes called the “Animal Spirits”. Workers in the State Capitalist Sector told that they would have their pay frozen, that more than likely they would lose their job, and that they would have to pay more into their pension, not surprisingly pulled their horns in, and began to reduce their spending.
It was no surprise then that the growth that had been established and was beginning to take hold as a result of Labour's fiscal stimulus, began to quickly fade under the Liberal-Tory Government, and by the end of 2010, had actually already gone into reverse. Although, the preliminary figures for 2011 Q1 showed a modest rise in GDP, it only cancelled out the fall from Q4. Yet, all of that is before the cuts have begun to be introduced. All of that was at a time when the rest of the global economy was growing as a result of being pulled along by Asia, and the more dynamic economies, as well as from the fiscal stimulus introduced in the US and elsewhere.Paul Mason writes the BIS is already warning that global interest rates have to rise to avoid serious problems developing. Paul Mason says, that its unlikely that the Bank of England, under pressure from the Government to keep rates low, will raise rates any time soon. But, that assumes that Monetary Policy is controlled by the Bank of England. It isn't, its controlled by the private financial institutions that create credit, and who also determine market rates through their buying and selling of Bonds.
The Liberal-Tories have made a big deal over the low yields on UK Government Bonds. In fact, the yield on the 10 Year Gilt at the beginning of 2010 was not much different than it is today. It was, in fact, falling as UK growth picked up, unemployment was falling, and borrowing was coming in lower than expected. After the Liberal-Tories came in, the yield, after their June Budget, rather than falling, actually rose to over 3.8%. Today, yields in the UK, as well as in the US, Germany and other large economies are falling to new lows. But, the reason for that has nothing to do with fiscal restraint.
If you are a Capitalist, or a large financial institution, you have to invest your money somewhere. At current deposit rates that is even more necessary. But, if you think the European, and large parts of the global economy could be about to be thrown into crisis, you will not want to be over exposed to Equity Markets, where the value of your shares could drop 10, 20, 30 or more per cent, or be wiped out altogether of companies go bust. And, although the yield on Greek Bonds is as high as 30%, you will not want to invest in them if you think Greece will default on those Bonds. So lots of available Capital is being forced to buy UK Gilts, German Bunds, US Treasuries etc. It is also why, CNBC reported a few days ago, that central banks around the globe have stopped selling and started buying Gold. It is why as Paul Mason reports, Switzerland has reported a 50% rise in Gold watches exported to Greece, as people there fearful of a return to the drachma, which could have as much value as a piece of toilet paper, begin to hoard things of real value.
But, a look at the UK demonstrates the problem. The Yield on the 10 Year Gilt is currently 3.2%. But, inflation in the UK is already running at more than 5%. In other words you are paying the UK Government 2% to borrow money from you, because when the Bond is redeemed it will be worth 5% less than you paid for it in real terms. Sooner or later, Bond investors decide that is not a good deal.
And herein lies the major problem for the UK Government. Its argument has been that by introducing the austerity measures, it could keep interest rates low, and this would facilitate borrowing and investment by the private sector, which would then employ workers from the State capitalist sector, and would generate business via exports.
When a group of leading economists wrote a letter setting this out a few weeks ago, the Government and others responded that economists had written a similar letter in 1981 in response to austerity measures by a Tory Government, but that in the months to follow the economy actually did grow strongly. But, this is a re-writing of history. In reality, although the Government in 1981 did announce Cuts, in reality it failed to implement them.
Milton Friedman at the time expressed his frustration saying that, in fact, Tory Ministers had become hostage to their Departments, and the Departments were able to use the Ministers to fight their corner in Cabinet. We can see plenty of instances of Government Departments, already attempting to repeat the experience today, with almost daily stories coming out of the Ministry of Defence for example.
When growth did begin to increase in the late 1980's, and into the 90's, it was not stellar then, and was punctuated by crises every few years, such as the crash of 1987, and the recession of 1991. But, the reason for the growth that did occur was quite simple. In the late 1980's the Tories deregulated financial markets. They opened the monetary spigots, and encouraged everyone to borrow money as though there was no tomorrow. Coupled with what seemed like free money if you bought shares in the privatisation schemes, where share prices rose by 50% overnight, or if you bought your Council House with up to 60% discounts, and so on, this created a credit boom.
But, the very opposite of that is true today, that trick cannot be repeated. In fact, at £2 trillion, private sector debt in the UK, tied up in mortgages, credit cards, student debt, store cards and so on, is more than twice the Public Debt. Instead of being able to take on more debt to finance consumption, households are needing to deleverage, to pay down the debt they have.
But, as I said at the beginning, it could be too late now for Plan B. If the Liberal-Tories were to turn around and perform yet another U-Turn, this time on the economy, it would confirm the view that has been quickly taking hold for the last year that this is a weak, inept, and incompetent Government.
My guess, is that in the background the EU has been saying to the Greek politicians, particularly of the opposition, “Vote through these measures even if you have no intention of implementing them. Then we have cover to give you the money.” But, in fact, it looks like even if the Greek Parliament does not vote through the austerity measures, the EU will find a way to stump up the money. It has to because it cannot let Greece fail.
What is happening at the moment is EU capitalist States attempting to allow individual Capitalists, and Capitalist Institutions to get their money out, before they lose a large chunk of it. Lending money to Greece as even the Governor of the Bank of England has said cannot solve Greece's problems. But, it can solve the immediate problem of all those Capitalists, and capitalist institutions who hold Greek debt.
But, that could also be done as far as Britain is concerned too. If the IMF, for example were to stiffen its latest report, and to say that global economic conditions called for a global response from Governments, it could sanction a Plan B, based on fiscal expansion in the UK. It could then be co-ordinated with a similar expansionary policy in Europe.
But, in reality such a development would not be to abandon Plan A, for the kind of Plan B being currently discussed. It would be to go to Plan C or D or F, straight away.