Predicting the Past!

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By Andrew Graeme

Here’s an interesting fact – UK business is sitting on a mountain of spare cash, $1.2 trillion at the last count. 

US business is sitting on about $2 trillion, but then their economy is seven times the size.  But that $1.2 trillion is the equivalent of 55% of our GDP and more than enough to get our economy back on track.

Why is British business not investing?  We’ve got all this cash and a recession that just won’t go away – what is going wrong?

As an economist, I am often asked what is going to happen next.  Just how will the present financial crisis develop?

If you ask me that, I shall look you in the eye and tell you that I am indeed all-wise and all-seeing and say, with a perfectly straight face, that I am able to predict anything – absolutely anything – except of course the future.

Predicting the past is hard enough, but predicting the future is completely impossible!

You would imagine that, given all the computing power and the thousands and thousands of highly numerate economists that beaver away at the tea leaves, we should have been able to fine-tune our economy and not be in the mess we’re in.  All those clever economists, myself included, can predict what has happened already with remarkable accuracy.

Sometimes and with the help of a little wind in our backs, we can even tell you things that are about to happen very soon.  What we can’t tell you, is the real consequences.  We can’t do that, because we have imperfect information – certain bodies, people and institutions hide the truth.  They are lying to you and they are lying to me.

For example – back in 2006, it was very, very, very easy to see that the housing bubble in the UK, the US and elsewhere was about to burst.  If a house that is bought in 1998 for £100,000 is then sold in 2006 for £650,000, then you certainly do not need a degree in economics to realise that a bubble is going to burst.  Almost any conversation in any pub in Britain could have told you that.

What we did not know, was that this was just the tip of an iceberg. 

We knew something was wrong, because money just seemed to come from nowhere.  House prices just kept on climbing and mortgages came free with Nectar Points.  The banks were getting money from somewhere and Government spending just went through the roof – there didn’t seem to be a single problem that New Labour could not solve by throwing vast amounts of money at it.

We knew some of it came from borrowings, but Gordon Brown pulled a long face and spoke of “steady and responsible easing of existing financial constraints” and it all sounded so terribly reassuring – for a while.  But the government and the banks were hiding what was really going on.

Debt was going through the roof, but by carefully and wilfully renaming and reclassifying the debt as pension obligations, private funding initiatives and even calling the piling of more debt upon old debt “rescheduling existing financial instruments” by 2008, the British Government was sitting on the largest mountain of debt in UK history.

At the same time, the banks had created a whole new poker game in the back room and the chips were collateralised debt obligations (CDOs).  Originally, these were rather boring and sensible ways of repackaging mixed debt bundles and selling them on the securities market.  But by 2006, most CDOs were almost exclusively made of high risk debt, such as so-called sub-prime mortgages and delinquent credit card debt. 

In February 2007 the Dow Jones fell by 400 points and buyers of CDOs were beginning to ask for more collateral.  By July, two hedge funds based around CDOs at investment bank Bear-Sterns collapsed and shares in CDOs were getting harder to sell.  In September, Stan O’Neal, CEO of Merrill Lynch, was told by his new risk assessment team that the bank was probably insolvent.   A year later even the giant Lehman Bros (after twisting this way and that) had collapsed. 

The banks had created the World’s largest Ponzi scheme and then fell for it themselves.

That was five years ago and the bad news just keeps on coming.  We now have that double-dip recession that the government told us was not happening and if the Euro-crisis deepens, there is far, far worse to come. 

Business has long since stopped trusting the UK government.  Instead of providing us with investment opportunities, the Westminster Government is taxing more and spending less and by doing so, reducing its own tax-take.  I cannot invest in Britain, because the government is spending 20% more than it takes in taxes and is obviously mismanaging the economy on a grand scale.

The UK government obviously does not know what to do next.  The more it cuts, the less it gets.  The less it gets, the more it cuts.  Businesses are under a legal obligation to maximise profits and we cannot invest in an economy that is being driven into the ground. 

So we sit on our cash and prefer to maintain value by buying commodities and non-UK shares.  At the same time, the UK desperately needs investment in infrastructure.  We are the only country in Europe that makes people wait for healthcare, the electrical grid is in a lamentable condition, flood prevention schemes are practically non-existent, we have no high-speed trains and our roads are hopelessly inadequate. 

I could go on – affordable housing, water supplies, investment in new energy sources and energy conservation – if anything happens, it is always at best a nominal amount.  Just enough to say that we are doing something, but never enough to make a real difference. 

Rather than facing reality and rolling up their sleeves to get the country going again, after the desperate mess Labour left us in, the Lib-Con coalition sits idly by, wringing its hands and telling us there is no Plan B.  Like Mr. Micawber, they are hoping that something will turn up.

It won’t!  Time for Plan B . . .

Andrew Graeme is an economist and businessman and convenor of the Dingwall branch of the SNP.