And so Standard & Poor’s finally did it. Yesterday was the day when a credit rating agency put a large, somewhat menacing, question mark over the sustainability of US debt. And yet the agency has surely failed to get to the nub of this particular matter.
There are no shortages of press reports this morning saying ‘told you so’. The UK government has even managed to accumulate political capital out of the move. You may recall, the UK’s own credit rating was put in doubt back in May 2009, but has since, by dint of all those cuts, been put back on the best possible footing. “So well done us,” say George Osborne and his fans.
And now, they say, the Obama administration must learn the lesson of the Cameron government, and start implementing cuts.
It’s the three Cs. Cut, cuts and cuts. For the US they are surely unavoidable.
But as ever, the credit rating agencies are behaving like belligerent children who, having lost their favourite toy, look around trying to put the blame on anyone who falls within their line of sight.
The S&P timing was simply ridiculous. For the first time since the financial crisis erupted on the world-stage, both Republicans and Democrats have begun to agree the deficit needs to be pulled back. For the first time in quite a while, the Obama administration has been making noises about reining in its debt. It was as if the agency reacted to the US government acknowledging it has a debt problem on its hands by saying “Err …, what was that? Err … US debt … Let’s see … oh yes, it is high, isn’t it, we had better put out a warning.”
But then again, the timing in May 2009 was pretty bad, too. The UK was in election fever. What would the new government look like? And then slam, our triple-A credit rating was put in doubt.
But credit rating agencies should not engage in politics.
The UK was not close to bankruptcy in May 2009. In fact, we had no serious problems at all in funding our debt at that time. It is the same with the US now.
The problems in the UK and the US are long term. And whether the solution lies in cutting public spending, thereby creating space for the private sector to expand into, or whether it lies in using fiscal stimulus to inject life into the economy, is open to debate.
You may not agree with the concept behind Keynesian stimulus, but you must accept that some argue it is a legitimate economic policy. Indeed, some argue that the purpose of fiscal stimulus is to get growth moving again, so that tax receipts will rise, benefit payments will fall, and public debt will then improve. In other words, some say that government spending in the short term is an effective way to reduce government debt in the long term.
There is an argument to be made for saying that all the problems with the US and the UK economies are because companies are saving too much, and that therefore governments need to borrow from this pool of savings to stimulate the economy.
The real problem in the US lies with its healthcare, and its unwinding will take decades. Spending on healthcare is set to balloon. This can only be fixed by doing something very dramatic. For example by accepting that healthcare entitlements need to fall, or by pushing the retirement age up much higher, or by getting people to pay much higher taxes.
The George Dubya Bush regime implemented tax cuts which are still in force. Alan Greenspan now reckons they need to be restored to the levels seen during the Clinton era, and he is probably right. To a large extent, Americans saved the extra money they received in tax cuts. So all the US government is doing is helping its citizens save, and then spending that money.
The US is not facing up to the bigger problem in waiting; nor are the credit agencies; and nor are the markets.
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees
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That idea of the public sector as a kind of reservoir for fiscal surplus that can be depleted in times of need, to stimulate more natural private sector growth, says a lot about contemporary UK politics, where each party seems to take a turn at juggling the economic balls, in such a way that their opponents will always have the greatest difficulty in ever catching them. Whereas the American circus seems yet more confrontational. The democrats providing that big top with tight-rope walkers, wild animal tamers and trapese artists, while the republicans provide the sharp-shooters, knife throwers and the clowns.
Perhaps the world economy could be cured with the same medicine prescibed for the banks. Mutual segregation of core functions, from the risks of too much tinkering by politicians.
Rating agencies misrepresented high risk US mortgage bundling that led to current financial crisis so agree this seems a knee jerk reaction. In absence of consumer demand why would companies invest their surplus cash? Surely now is time for pump priming with UK government spending on strategic issues such as flood control, water storage ( in advance of Summer hosepipe ban) and indigenous energy production etc.
Keynesianist stimulous is a perfectly legitimate policy when it is implemented from a position of strength. Arguing for more govt. stimulous when your debt:gdp ratio > 10% is quite another matter.
Had the UK been operating balanced budgets post 2000, then we would indeed be in a position to continue fiscal stimulous, perhaps along the lines Chris suggests.
The fact remains we didn’t: operating budget deficits at the wrong time during the economic cycle.
These budget deficits left us with a national debt of around 6-700 billion, with an added 3-400 billion for the bank bailouts – depending upon what is and what isn’t on the national balance sheet.
For the UK, quantitative easing and Labour’s 1% fiscal stimulous post 2008 was a last gasp – all that the country could manage.
In the absence of domestic consumer demand, companies should invest their savings to increase supply to those areas where there is demand… eg Europe (predominantly Germany), BRICS and emerging markets.
It is for the government to ‘encourage’ them to do so: given the fiscal situation, the only way it can do this is through supply side measures… eg cutting red tape, easier access to finance/export insurance, reduced bureacracy etc. etc. The problem with this is that it takes time for things to improve…
Thanks Gentlemen. Starting from a position of almost total ignorance, as I so often do, the only way forward for me is to stimulate the argument with any bit of nonsense and see what comes out.
Thinking survival depends on understanding, people use whatever means they know. But no science is ever absolute and even the best attempt at truth is retrospective. They say ‘Time will tell’ and it’s been proved right so far……..but it won’t be rushed.
Tony,
I’ve often thought the logic you mentioned here could indeed be applied to other areas of govt. policy.
“Perhaps the world economy could be cured with the same medicine prescibed for the banks. Mutual segregation of core functions, from the risks of too much tinkering by politicians.”
For example, the NHS could be operated on similar lines to the independent Bank of England Monetary Committee…
ie Set up a committee of the great and the good: some doctors, nurses, health economists and accounts and a few CEO types.
HM Govt. then funds the NHS committee based, perhaps, on the real GDP growth performance of the economy – ie funding rises and falls according to GDP, or perhaps a Keynesian type smoothing formula – where funding is linked to the long term growth potential of the economy, say 2% or 3% growth per annum and guaranteed funding accordingly.
The system leaves the ‘experts’ in charge, thus avoiding the constant switching between “tight rope walkers” or “clowns” as politicians of different hues re-arrange the deckchairs on the Titanic to suit their constituents. It might also help remove the boom and bust cycle from NHS over/under spending.
If this sounds too centralised… well the funding that arrives at the committees door is passed down to a regional level… this could be SHAs, PCTs or perish the thought… GPs… or we go back to the days before the NHS and have self governing hospitals.
Mmmm… self governing hospitals – now that sounds like govt. education policy…
Garry,
Thanks for your comments which I think give the current economic viewpoint.
My contention is that we are at a tipping point viz:
US dollar printing & economic shift to BRICs -leads to high gold, gas & oil prices -hence higher UK energy costs & likely downward spiral with lower living standards, unemployment etc.
Change in weather patterns causing flooding & droughts!
UK trade deficit with Europe likely to worsen as PIGS see us as local market.
Garry, I do like that kind of lateral thinking. What a shame most present politicians show so little of the same reforming zeal and seem content to hide behind such bland and careful party lines. Little wonder some of the greedier entrepreneurial directors feel emboldened to do as they please to our companies and society’s detriment, against such half hearted opposition for leadership.
“Wait and see” is ok as a temporary bluff, but it’s never as convincing as an imaginative cunning plan.
Chris,
We MAY be at the tipping point.
Firstly, don’t forget that high food and commodity prices affect the ICS part of the BRICS (India, China and South Africa) and emerging markets more than the advanced Western economies and even Japan. The latter use food, oil and commodities more efficiently – ie they use less per unit of economic output.
Secondly, it’s still not too late for the US to step back from the abyss. With reasonable economic growth and cuts in govt. spending, it might, might just be able to pay off its debts – thus improving its fiscal position going forward.
Thirdly, recent events in Japan may yet lead to a changing globalisation model. Companies may begin to re-assess the security of their supply chains – leading to more regionalised production hubs.
Fourthly, increasing food and commodity prices are more inflationary for BRICS and emerging markets – perhaps leading to wage/price inflationary spirals and an overall rise in labour costs. Thus, again, possibly leading to a re-assessment of the current globalisation model.
I would look to population increases, rather than climactic issues – as population is based on known facts while climatology is based upon theoretical models. The weather in the forthcoming year may be good or bad – you can’t predict it.
And as for the PIGS: I would ask what do they have to sell us? Given what they might have will be priced in euros, there’s little chance we can afford it given the pound has lost about a quarter of its value against most currencies, including the euro. OK, we may go on holiday there – but even this assumes we can afford it given the rising cost of everything holiday associated (food, airline fuel, tickets, accommodation etc.). The sick pound doesn’t go very far these days in the PIGS.
Gary,
Thanks for your clear analysis most of which I agree with. The main point I think is that the world is changing and UK needs a strategy of import substitution for the long term. A lot of our food & energy supplies now comes directly from or via the EU and whilst we could in theory take a hard line as a major customer we are in a weak negotiating position regarding contributions to the EU & Euro funds etc.
Chris,
As the Bank of England is beginning to realise: the problem with the loss of industrial capacity (in manufacturing) is exactly that: it is lost.
Industrial capacity is difficult, but not impossible to replace… perhaps HM Govt. should concentrate on some or all of the following:-
The UK would do well at this point to encourage more exploration in the North Sea, which at 8% of current GDP is not insignificant. Imports of oil and gas are beginning to impact the trade balance. It also has the advantage of being a high value added industry – which benefits the manufacturing sector in this area. One off tax hikes for the grand total of 1p off fuel duty was not a smart move.
Nuclear new build: for Christ’s sake get on with it… the decision to go ahead was made in 2005. Despite the fact UK plc sold Westinghouse to Toshiba, and, British Nuclear to EdF – there are going to be considerable opportunities for UK manufacturing and skills in this area – despite the fact that most provision is foreign owned.
Transport Infrastructure: High Speed 2 and Crossrail should hopefully re-generate the UK’s railway industry with Hitachi eventually replacing the loss of Alstom’s Washwood Heath train manufacturing plant. With more luck than judgement, Bombardier has managed to survive in Derby.
Dare I mention airport expansion: cancelling increased capacity in our airport infrastructure as a sop to the green movement and LHR constituencies was not a great move to improve UK competitiveness in transport infrastructure.
Finally, I’d add a big drive on encouraging foreign investment… think similar to the Japanese cars plants and Korean electronics plants in the 1980′s but for the 21st Century. It seems that thus far, domestic Chinese companies prefer to buy out smaller German companies or locate in countries like Slovakia or Bulgaria. Why is this? Why not the UK.
I could go on… but it’s a nice day outside…
Well said Mr Hawkins, I would probably vote for most of that. The snag with democratic government is that political expedience (showmanship) generally prevails over less conspicuous common sense. Just as rhetoric and grand gestures have sacrificed such a large part of the great opportunity that was North Sea Oil, even till this recent budget, which some say has cost the UK 10 to 15 billions dollars of foreign investment so far (with Chevron still agonising over whether to take the risk for the reduced upside, West of Shetland). And while there has never been a better time to start doing what might have been deemed wise several years ago, but could now benefit greatly from recent nuclear experiences, building a new generation of nuclear generators that could incorporate all the protection needed to last till Kingdom Come, we all know that any future building will be dogged by irrational and mainly political protest, based not on what we know now and can do, but on fear and fantasising over other peoples past mistakes.
As you say, the Sun’s still shining, enjoy the day.
Happy Easter .
Perhaps we can now seriously consider Thorium reactors- no need for Uranium & no Plutonium as by-product.
Simple soluble plug arrangement would prevent any overheating & runaway reaction.
Chris,
Thorium power?
You could just have well said bog standard nuclear fusion or helium 3 nuclear fusion… these things are all years away coming into fruition… if ever. It’s all a pipe dream unless somebody gets a Kennedy style Apollo moment.
Perhaps the UK should adopt EU Associate status and use the membership fee savings to build some coal fired power stations and re-open the mines… create a bit of employment in the North.
Time for a sharp exit…
Garry. I think Chris has a very good point actually. Although Thorium and U233 technology was new at the time when I left the UKAEA in 1966, I understand that great progress has been made in those 45 years, a lot of it in India, where apparently they have more Thorium than Uranium.
I make no claim to knowing much about it, never having kept up with developments after serving my time there, but what little I do know leads me to think that most of the present doubts over nuclear safety might be resolved with what appears to be a much more flexible technology.
One obstacle however, might be that “old incumbent advantage” (the fact that so much effort has already gone into Uranium mining and reactor design). A problem which accounts for the slow progress away from fossil fuel. Another might be the higher radiation risk from U233. (?) But these are small in comparison to the positives.
Tony,
There’s plenty of Thorium in the UK too.
Given we’ve been vacillating over whether we should or shouldn’t build nine or ten nuclear power stations, since the early days of the Labour Govt. post 1997 – what credence do you give the possibility of the UK giving the go ahead for a major investment in Thorium Power?
That’s what I was getting at.
Can you see this generation of politicians having a JFK light bulb moment? Far more likely we’ll end up having to switch them off at the rate we’re making progress.
Dare I mention the fiscal position?
Post Fukushima, I struggle to see the private sector getting the necessary investment for subsidy free nuclear power – regardless of how much the nuclear assisted electricity bills are ramped up.
HM Govt. is going to have to insure the post nuclear clean up bill regardless… and given it can borrow money at lower rates than private companies (PFI Nuclear anyone?)… it may end up building the stations itself anyway… either that or end up in the same mess as they did with Metronet and Tubelines PPP on the tube.
I’m pretty ambivalent about the Nuclear new build itself… I just don’t buy into the reasons why we’re buying nuclear – because of CO2 emissions and alleged climate change.
If you accept climate change as a given, then Nuclear is the only way to go – otherwise it’s lights off, until such time as somebody gets wave and tidal energy to work.
I suppose Easter Monday is as good a day as any to show some faith in miracles. Not easy in present circumstances, I agree, but if necessity really is the mother of invention as some say she is, the bitch may yet surprise us with a fantastic litter, very soon.
Tony/Chris,
See what I mean, when I say we need an “Apollo” moment from todays politicians:-
http://www.youtube.com/watch?v=VgKfS74hVvQ&feature=player_embedded
Worth an hour of your time.
Garry.
Thanks Gary. A very interesting presentation. The points I noted were i) that when it comes to confidence and the capability to produce on the grand scale, America is still #1; ii) that same confidence can create blind spots sometimes, when looking at the overall picture, they do sometimes tend to write off things beyond their own national boundaries as secondary and insignificant; and iii) the clip was two years old. I read recently that both India and China have several different designs of closed fuel cycle Thorium reactor presently in use.
Finding out the right information, then delivering it into the right places, is what counts… Like Blair said “Education, education and education”. (Easier with kids than those in charge).
Tony
I have spoken with your Jeff on the phone and he suggested I leave you feedback on the blog. I have used The ShareCentre for some years now but find it surprising that when viewing company charts and clicking the ‘More’ charts Options for ‘comparisons’ [FTSE 100 etc] or ‘Indicators & Annotations’ [Moving Averages, 'Overlays' of Bollinger bands or 'Lower Indicators' of say MACD ,Chaikin etc] as used in Technical Analysis that I have to reselect my favourite settings each time I view a different share. It would be really useful if I could set my computer up to retain my preferred settings and not have to re-select my preferences for this welcomed facility.
Hi Bob,
Apologies for the late reply.
Your feedback has been passed on to our IT support team who are looking into the issue.
We hope to have a solution to your issue in future releases to the website.
Kind regards
Luke