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12 November 2014

Getting to Grips with the Numbers



It seems as though the media had almost forgotten about the debt and deficit until very recently. They have been waxing lyrical of course about the slightly unbelievable growth figures that the UK has been showing. (It does all depend how one measures growth; if you’re just adding more unproductive debt through housing schemes then it is a stretch to believe what we’re told - “The fastest growing economy in the G7”, apparently.) It’s amazing what a bit of financial engineering and creative accounting can do and begs the question of how long the statisticians can pull the wool over the people’s eyes.

The political conference season opened up old wounds with talk of the deficit, or in one case a total lack of comment. The Conservative pledge to wipe out the deficit in this parliament seems to be in tatters, which is hardly surprising when one considers the current state of tax revenues due to under employment, zero hours contracts, minimum wages and the tax threshold increase. If the majority of people are earning next to nothing it is difficult to see any real change soon.

What do the Numbers Mean?

So what are the numbers? They are quite difficult to visualise or comprehend without seeing them in print and then broken down into more meaningful words. UK debt currently stands at about £1.3 trillion. £1,300,000,000,000 or one thousand three hundred million million. The deficit, slightly easier to comprehend (the difference between tax revenues and spending) stands at about £80 billion give or take. £80,000,000,000 or eighty thousand million. When one breaks it down into total debt per capita it is more meaningful. £20,000 per head or about £35,000 per person in employment. With average salaries standing at £26,500 and probably dropping things don’t look too promising. Finally, the cost of servicing the debt is roughly £40 billion a year which is why it’s a good reason for UK rates to stay low for as long as possible providing the market agrees. (We could be in for a bit more QE in time in order to hold rates down!)

Solutions?

So now we understand the numbers how exactly do we propose to deal with them? This is not just a UK problem, of course. Western governments have tried a number of ways to cut debt levels; however they are not too friendly towards Joe Public.

First, currency devaluation has been tried in order to boost the export side of the economy to produce more income. Potentially it sounds quite a good idea until one realises that all deficit countries are trying to do the same thing in order to become competitive. A short term solution it could be, until one also realises it’s not so smart because we are actually a net importer, so devaluing our currency makes life more difficult as we start to import inflation by buying foreign goods at higher prices. Having off-shored much of our manufacturing capability to cheap labour in the East doesn’t help revenues either.  

Austerity is another option and has certainly been attempted successfully in Greece with 60% of the population now living below the poverty line. Cutting government spending by cutting benefits and public sector jobs for example is actually a positive solution but does risk the civil unrest seen in many countries across Europe. 

Financial repression is a far more robust and sneaky way to reduce debt levels. This is achieved by reducing nominal interest rates which reduces debt servicing costs while creating inflation which produces a negative real interest rate which  in turn erodes the real value of government debt. Savers, pension funds and general fixed incomes are the big losers alongside the poor who end up paying more for the inflated essentials of life (food and energy). The rich of course have those same increases but are aided by the inflation created in asset values such as land, property, stocks, fine art and so on. Money chases yield and subsequently risk assets rise in value creating bubbles. The end result of this type of policy is a polarisation of society as the rich get richer and the poor get poorer.

Don't Expect a Miracle

Deficit reduction based on these policy tools really does seem an exercise in political futility.  That said, the electorate has been cajoled nicely by the government up to now; however, based on the current trajectory the country as a whole faces years of lower living standards. There is no easy solution to the problems created by global financialisation and off-shoring. The fractional reserve banking model, which has supplied the world with unsustainable debt alongside a largely financially illiterate political establishment which has shown itself to be unable to control a profligate financial elite, has much to answer for. Don’t expect a miracle any time soon. 


This article was written by Richard Horswill. All opinions expressed are strictly his own.

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