Blowing Bubbles

Vince Cable has clearly been tearing his hair out more effectively than his fellow doomster Cassandra!

 I’m forever blowing bubbles

Pretty bubbles In the air

They fly so high

Nearly reach the sky

Then like my dreams

They fade and die

Fortune’s always hiding

I’ve looked everywhere

I’m forever blowing bubbles

Pretty bubbles in the air

Vince Cable the Business Secretary was reportedly “slapped down” by George Osborne in a cabinet meeting for suggesting that the Chancellor’s Help to Buy scheme was re-inflating the housing bubble.

Vince Cable may be wedded to the tested-to-destruction interventionist policies of a 70s Labour Chancellor, but his warnings over Osborne’s bubble are right on the money.

The chart above shows an economic wonder. It’s as if a physicist had managed to repeal the law of gravity. In the deepest recession since the 1930s Osborne somehow stopped economic gravity and house prices rather than executing a neat swallow dive all the way down to somewhere a lot more affordable were suspended in mid-air. The bubble burst but Osborne was so attached to it that he wouldn’t let it dissolve. Humpty fell off the wall and the Chancellor put him back together again.

Somehow as the economy collapsed house prices never even fell below the unprecedented multiple of 5 to earnings that they reached in at the end of the 80s boom. And now they’re heading back into the stratosphere.

But Osborne’s suspension of economic gravity like other tricks loses a bit of its magic when the secret is revealed.  The Chancellor succeeded where King Canute failed by unleashing the four horsemen of economic apocalypse. In short: the vast bank bailouts which let the bankers get away with crippling the economy; the creation of £375bn from thin air which has debased the currency (QE); the ultra low interest rates that penalise saving and encourage borrowing; and last but not least the unprecedented government borrowing that will double the national debt over the lifetime of the coalition.

As to why Osborne didn’t let capitalism take its course and fix the problem, the answer is simple. After 13 profligate Labour years, the adjustment to reality would have been painful. Millions are employed in the wrong jobs and hundreds of billions of capital are in the wrong place. Rebalancing the economy would involve millions of redundancies and many painful bankruptcies. And Osborne and Cameron wanted to be re-elected in 2015. So they set out to achieve a pain free recovery. And what that amounted to was more of the same debt financed consumer boom that got us into trouble in the first place. 

It should also be said in their defence that even if Osborne and Cameron had wanted to save their country from the now certain bankruptcy they could only have done it with the understanding and support of a majority of the British people. And in the context the mendacious poison endlessly pumped out by the BBC and our educational and media elites, that would have been an uphill struggle to say the least.

Osborne’s Boom

But perhaps I’m being too hard on the Bullingdon boys. Unbalanced though it is, many pragmatists have argued like Eddie George, the former Governor of the Bank of England, that “Even unbalanced growth is better than no growth at all.” After all, rather than the frankly disappointing 1.5% growth predicted for 2013 back in the summer it was announced in December that very likely Britain grew at the rip-roaring pace of 1.9%. There was even a wonderfully stirring prediction that the UK economy is doing so well that it would be the biggest economy in Europe by 2030.

Sadly, for the millions who will pay for Osborne’s folly the apparent health of UK plc is a mirage. The pain free recovery is in effect a recovery free recovery.

More than 90% of the reported growth is in consumption and housing construction. And all of it if being paid for with borrowed money. George Osborne’s solution to the impending economic catastrophe of the most indebted country on earth has been to encourage another debt binge.

Hamlet Without The Prince

Back in 2010 when the Chancellor set out his vision for Britain he correctly diagnosed the problem. Britain was borrowing and consuming too much and producing too little. The solution in his emotive phrase was “The march of the makers”. And in these sentiments he was exactly right. Unfortunately the lying toe rag didn’t mean it.

Now 4 years into his plan British GNP is just 2% shy of its 2008 peak. But in obscene contrast to his stated goal, manufacturing is still more than 10% below its pre-recession level and business investment is down a whopping 25%.

No surprise then that the UK current account deficit with the rest of the world rose to £20.7 billion, or 5.2% of GNP in the third quarter of last year ─ the highest percentage for 24 years. This is, of course, just another form of borrowing and the liabilities we're building up abroad are staggering.

It’s the lack of investment that makes Osborne’s so called recovery “Hamlet without the prince”. As far as recoveries go investment is the be all and end all. No investment, no recovery.

The lack of investment tells us two important things. There is no confidence among the wealth creators in the future of Britain, and after the credit card is maxed out the recovery will peter out due to capacity constraints.

Without investment stagnation is the best possible outcome. But it’s not the most likely one.

Economic Armageddon Looms

As interest rates will surely rise towards their long run average the housing bubble will burst again. And it won’t be the only one.

Government debt stands at 70% of GNP.

Personal and mortgage debt is approaching 100% of GNP.

Our businesses and banks together have debts equivalent to 350% of GNP.

Saving the banks incurred liabilities of 71% of GNP.

Labours PFI boondoggle adds another 16%.

And unfunded public sector pensions equal 306% of GNP

All together these liabilities total 913% of GNP.

When interest rates rise, bubbles will be bursting left, right and centre and bubble blower Osborne will have to take kick boxing lessons from Deputy PM Clegg to slap down all the Jeremiahs.