The Gathering Storm
06/08/2016 Leave a comment
There is a storm coming… like nothing you have ever seen… and not a one of you is prepared for it.
Curtis, Take Shelter
During the six years that George Osborne was Chancellor of the Exchequer, he often used the metaphor of “fixing the roof” to describe his economic policy. Even as late at June 27th this year, in his last major speech in office, he again made reference to the roof:
I said we had to fix the roof so that we were prepared for whatever the future held. Thank goodness we did.
As a result, our economy is about as strong as it could be to confront the challenge our country now faces.
Ah well, that’s good! The roof is fixed, right? Hoorah!
Wrong, but don’t worry – it’s much worse than you think.
George didn’t talk a lot of sense while he was Chancellor, so it shouldn’t come as a massive surprise he finished on a low note. During his six years, George didn’t so much “fix” the roof as he did “patch it up with tissue paper and spit and then go on a big marketing campaign to inform everyone about how good the roof was.”
He frequently compared the economy with a family living beyond their means. Cutting spending, we were told, was responsible and spending money was not. It was though, an entirely false comparison. If a parent in a family earned £20,000 a year they could cut their weekly shopping bill, their Sky TV subscription, their dining out, they could buy cheaper holidays etc. and they would still earn £20,000.
The wider economy doesn’t work like that because, in the economy, my spending is your income and your spending is my income. When the government cut spending, they directly impoverished their citizens, avoided a proper recovery and left the economy in a far worse state than it would have otherwise been. Many economists spent the Osborne years calling for a fiscal stimulus to get the economy back on track but he ignored them – after all politicians don’t like listening to experts.
So now here we are six years later and that well-marketed roof isn’t looking particularly robust. That roof is in fact, in far worse shape than it was before the last financial crisis and if I were a weatherman right now, I would be forecasting a cloudburst.
This week the Bank of England cut the base rate from 0.5% to 0.25% and announced further quantitive easing. It is far from enough. Cutting interest rates makes saving less attractive and borrowing and spending more attractive. That’s why rate cuts are used to boost the economy. At the end of 2007, on the eve of the financial crisis, the base rate was 5.5%. When we needed to boost the economy we had some room to manoeuvre. It’s a luxury that we no longer have.
The cut this week from 0.5% to 0.25% made big news but to put it into perspective, in response to the financial crisis, we cut rates by 5%. We no longer have that wriggle room because we are up against the zero lower bound. Yes, we could make rates negative but that just makes hoarding cash in your mattress the more attractive option. That doesn’t help.
If we had had a proper fiscal stimulus and the economy had properly recovered from the financial crisis we would by now have interest rates within normal levels and ready to respond to negative shocks. But we didn’t and we don’t.
And now the storm clouds are gathering once again.
One of these days, and probably sooner than you think, we are going to feel the true price of politicians prioritising their ideals over basic economics.
And when it happens, I don’t think it is going to be pretty.