In today’s Times, George Osborne promises to be straight with us, unlike that ‘phoney’ Blair. At last, a politican that is going to be honest – someone should have thought of that earlier. Bet Labour are kicking themselves (and Vince Cable is hoping to sue).
Osborne’s most important statement follows. “We will turn an economy built on debt into one that saves and invests”. And this winds me up, because in its very vagueness this promise at the least is far from straight. For what does he mean by Saves, Invests, and Debt?
To see why my Goat has been Got, let us start with Japan. Is Japan in debt? According to Niall Ferguson (see the radio programme link), then yes: Japan’s government debt is somewhere in the record territory. But Japan is also in massive surplus with the rest of the world. It is the second largest holder of US government bonds, and has spent decades in Trade Surplus; that means, selling more stuff and services to the rest of the world than it buys. It’s government is in debt, but its household sector traditionally in surplus. The savings of the latter – via this wicked thing call debt - go towards the Japanese government. No-one can ‘do an Iceland’ on Japan.
So what about Britain? We all know about the government deficit, and everyone’s solemn promise to get it down. Let us park that debate for now, because Osborne’s promise surely goes further. It is about how the Economy works, and how that Economy becomes one that saves. Now we can consider several interpretations:
1. Britain shall start running a trade surplus. This may be a fine thing – higher net exports are a fairly unambiguously good thing if you want to get down leverage and still grow. But Japan is in this position, so it can’t mean everything. And nobody in their right mind thinks that the UK is in trouble because of its trade deficits. These numbers are not what sank us. We could have run a trade surplus and still had a financial crash.
2a. The private sector shall be in surplus. Since the private sector is the economy, really, then that is surely what he means. But does that mean no debt? Does it mean no longer being ‘built on debt’? No, of course not. What are 25 year olds meant to do to buy a house? Wait until they have saved the entire cost? No; they are meant to use this marvellous thing called ‘debt’, which enables other people who have ‘savings’ to lend them the money to buy what they need. The savers get a return, so they can stop working at some point.
2b. Furthermore, as anyone who has read Martin Wolf this past two years will know, the recession IS ‘the private sector (suddenly) going into surplus’, broadly speaking. Look at the figures here: we have a booming savings ratio. The public deficit is its demand-counterpart. This is why what John Redwood has just written here is so misguided (I am trying to be polite):
It is especially galling for all concerned that at the same time as the private sector is learning to live within its means, the government is busily placing us all at risk by taking on more debt than we can afford. Why did they learn nothing from the private sector debt crisis?
aaaarrrrggggghhhhh! If BOTH sectors save at once, where is the demand?
2c. Further furthermore: the debt ratio that got Prof Ferguson’s knickers so twisted is the GROSS private sector debt ratio. Some sub-segment of the private sector owes 4XGDP – or whatever (see McKinsey research) to some other sub-segment, via the banking sector, largely. Households owe 173 pc of their incomes. But the people who own the debts have an ASSET. We could keep 2b going well, and still have this large potential imbalance between the debt-owners and owers in our society. It depends on many things – in my view, above all the HOUSING MARKET. As Spencer Dale* and David Willetts have made clear, the latter has been a wonderful vehicle for enriching the old and property-rich at the expense of their opposites.
If G Osborne is hoping to do something about that, I’d be interested to know how; and how he will explain it to some Tory NIMBYS that are behind a lot of this problem.
3a. Perhaps he means the banking sector. After all, that is what got us in trouble. And the Conservatives are famous for being very intolerant of financial market excesses, aren’t they? Furthermore, there is a meaningful interpretation here: that the banks should no longer be reliant on debt (boo hiss!) from the flighty wholesale markets, rather than the stable, worthy source of deposits (hooray!). But if he is saying “banks shall not use wholesale funding” he is condemning the economy to a serious speed limit. Credit shall not happen until enough patient savers have put out enough deposits to finance it. Deposits grow slowly. Since a lack of credit is the current problem, we had better hope he means ‘in the very long term’.
3b. (UPDATE). Or is he saying: more investment from corporates, more saving by households to finance this? Possibly. And maybe instead of debt intermediating, he wants equity to intermediate. Who knows? And does this suit the pension funds? (by the way; errant post deleted may have lost comment, apologies)
I am not saying Osborne has put out an incoherent policy; merely one that doesn’t mean anything without some hugely important details. Some of the things that ‘move us from savings to debt’ are an unambiguous good, but impossible to promise: such as ‘develop a world beating export sector in something lovely’. Some promise to send us back to the financial Stone Age, like ‘ban or render impossibly expensive the use of debt. Save first in future’. If he wants to be called ‘straight’, he had better tell us which.
PS I am sure he means “More investment” – a bit like Wolf yesterday. But at least Wolf acknowledges the complications of getting there. Sometimes it involves debt
PPS George Osborne is not the only politician to be guilty of this. Anyone can raise a cheer by shouting “Down with Debt! We like saving and investing!” I’m sure I could google up a few Clegg- or Cable-isms on just the same lines. But Savings VIA DEBT leads to investments – unless you want us all to save for our own factories and windfarms. Let’s hope for a future stuffed full of debts, of the right sort.
First, any analysis of the increase in household debt over the past decade has to pay equal attention to the record accumulation of financial assets. They are two sides of the same coin. Second, changes in house prices do not result in significant changes in aggregate household wealth: for every winner gaining from higher house prices is a loser facing less affordable housing. But that does not mean that changes in house prices can not have significant implications for the macroeconomy.