How Labour caused the economic crisis

Four weeks ago I demonstrated how the current financial crisis was a disaster of government's own making. However, most of that was focussed on the American government. In so doing I failed to point out how Gordon Brown (as both Chancellor of the Exchequer and Prime Minister) created the problem.

It is true that the US governmetn deserves much of the blame for forcing banks to lend to un-creditworthy (sub-prime) borrowers and (through the para-statal company Freddie Mac) inventing the practice of securitizing the debt.

But the main source of the problem has been the massive expansion in credit - and indeed money - over the past decade. And while the American government has been as guilty as any of inflationary policies over the past decade, it is Labour that has led UK investors up the garden path with dangerously loose monetary policy.

Having spent ten years allowing Gordon Brown to fan the flames of in an inflationary boom, we are now reaping the whirlwind.

But, I hear you cry, has inflation not been running at around 2%? Isn't that very low>

Well, yes, but only if you look at consumer/retail prices. Sadly for us, economic inflation isn't caused by inflation in the price of consumer goods, which have in fact been falling in real terms since China got its act in gear in the 1990s. Inflation is caused by loose money, which floods through banks, via loans, to be invested in (particularly) capital-industry and land. So the important measure of the inflation isn't CPI or RPI but the money supply.

And how much has the money-supply been inflating over the past decade? The Market Oracle provides this handy chart, which suggests that over the last 5 years the quantity of money swirling around in our economy has doubled.

And where has all that spare cash, utterly un-backed by a corresponding doubling of growth (see GDP figures for 2002 and 2007), gone?

It has been used to bid up the prices of property, shares and capital goods.

However, as demand for them is not actually changed by the new banknotes (electronically) manufactured by the Government, the inevitable "readjustment" is at last taking place as the cost of these goods begins to fall, reflecting their real, non-inflated, value and the cost of consumer goods begins to rise to accomodate the new money in the economy.

As I mentioned a three days ago, further inflation, interest rate cuts and borrowing cannot stop the recession. They can perhaps delay it, and certainly extend it, but in the long run recession is inevitable. We have Labour to thank.

Gordon Brown and the financial crisis: a 1 minute comparison

Three ways to worsen a credit crunch:

1. Lower interest rates: this discourages saving because one gets little reward for delaying one’s gratification (in economic parlance, time-preferences are undervalued), while at the same time encouraging borrowing, thus further reducing the supply of credit relative to demand;
2. Allow inflation to escalate: this also discourages saving because the nominal reward for saving (the amount one’s money goes up) is eroded by the fall in the value of money (what your savings are actually worth), and for the same reason encourages borrowing: at present, the Bank of England base rate is lower than inflation which means that savings are worth less with time (in economic parlance, interest rates are negative);
3. Increase public borrowing: This takes money out of the credit markets: money that is being saved and would be invested in profitable businesses is now diverted into Government bonds and then invested in businesses that are not creditworthy (if they were, they would not need a Government bail-out).

Government policy:

1. Lower interest rates
2. Allow inflation to escalate
3. Increase public borrowing

Remember than the next time somebody tells you that Brown is having a good crisis.

A jolly morning's voting

An unexpected treat landed on my door courtesy of Electoral Reform Services.

Yes, it's Party election time!!

No sign of the one we've all been waiting for, but in the meantime an excellent opporutnity to support old friends, laugh at people's artwork and make instant and probably utterly-unfair judgements about people.

My favourite was the chap who was standing for the peers list who wrote "60 years a liberal" at the top. How can one resist?!

Two names did jump out and me that deserve a vote:

1. Jock Coats for Federal Policy Committee: Jock is known to many of you through his blog. He has an excellent graps of policy and has an answer for almost any problem (the same one, admittedly ;o) and would be a real asset to FPC, fighting for sound liberal economic and social policy and fending off the errors of interventionism;
2. Tony Vickers for the peer's list: Tony is Chair of ALTER and a long serving Liberal Democrat councillor.

I should hasten to add at this point that I am not a member of ATER and my internal jury is still out (if an internal anything can be out) over LVT. But it has been a party committment for a century and yet the policy establishment have brushed it under the carpet in the Cowley Street boardroom every time it has come up.

There are also dozens of other people I know on the lists, but I can't sit here listing everybody and their attributes. That is what your artwork was for!

Anyway. Enough of all that. I've seen a photograph of a women in a barbour so I'm going to send her to Europe!