Why George Soros is talking nonsense

[blue]

This week's shock fourth-quarter GDP figures minus 0.5 % , are a harsh reminder that the British economy remains in distress.


George Soros believes the UK Chancellor's austerity plans can't be implemented without pushing the economy back into recession

Household debt is still at near-record levels, barely a start has been made on getting the public finances back on to a sustainable footing, credit is still shrinking and private demand remains flat on its back.

Is it not folly, in such circumstances, to be launching, full-steam ahead, into the most severe fiscal consolidation since the immediate aftermath of the Second World War? To rub home the point, along comes George Soros to say the UK Chancellor's plans can't be implemented without pushing the economy back into recession. Would it not be better to delay until conditions are unambiguously better?

The answer to this question, which refuses to go away as an object of intense political and economic debate, is a definitive no. Plainly the Government must remain flexible in its approach to events, but the wobble in the economy makes it more vital still that the Coalition holds its nerve and the broad outline of the deficit reduction programme is stuck to.

People worry about the coming austerity, but actually, it is already here. While Mr Soros and much of the rest of the world's elite busy themselves with the irrelevancies of Davos, for ordinary mortals, grim reality is biting hard. The erosion of living standards referred to this week by Bank of England Governor Mervyn King may not have been obvious to high earners, but it is already painfully felt by almost everyone else.

As Mr King points out, Britain is heading for the most prolonged and biggest squeeze in real wages since the 1920s. It's not so dissimilar in many other advanced economies, and in some of the periphery eurozone nations, it's even worse.

Remarkable though Mr King's observation was, it was certainly in no way a revelation. Devaluation in combination with rising commodity prices, booming emerging market demand and increased sales taxes is causing UK inflation to outstrip wage growth by a wide margin. In some parts of the eurozone, nominal wages too are falling, and in most countries there is rising unemployment.
Mr King characterises this adjustment as part of a wholly necessary adjustment after years of living high on the hog. It's the price we have to pay, he says, for the financial crisis. It's also what has to be done to rebalance the UK economy away from credit-fuelled consumption to production, investment and exports.
As Mr King explained, monetary policy can do little to avoid this process of adjustment. The UK economy is being made competitive again, and to do this, relative living standards must fall. Ours is an inflationary adjustment, rather than the deflationary one we are seeing in parts of the eurozone. That makes it seem less painful, but over time the effect is much the same.
Central bank governors are meant to sound majesterial and omnipotent, so Mr King's refusal to accept that the Bank had in any way breached its remit by failing to grind down on inflation is perhaps understandable.
The Bank's own role in fostering the crisis by running too loose a monetary policy, and its complete misdiagnosis of the inflation risk since, are a column for another day. There will be no admission of error from Mr King until after he's retired, if then.
Whether culpable or not in the economic mess, Mr King is right to argue that monetary policy cannot do anything about the adjustment. Sure enough, he could have put up interest rates to counter external inflationary pressures, but by raising unemployment and mortgage rates, that would have made the squeeze on consumption even worse.
We needn't bother ourselves here with the sort of token interest rate rise urged by two members of the Bank's Monetary Policy Committee, which would have little effect on growth but might help signal the Bank is serious about inflation. The bottom line is that easy money may smooth and spread the adjustment, but it doesn't eradicate it.
The same is true of expansionary fiscal policy. However much publicly borrowed money is chucked at the problem, the best that can be expected of it is that it delays the consequences of the financial crisis. It cannot remove them.
Self-imposed fiscal austerity will always be politically very difficult, but it is far preferable to the austerity likely to be imposed by others – markets and the IMF – if action is ducked. Growth sustained today is only growth stolen from tomorrow.
Greece, Ireland, Portugal and Spain are all being forced to make their fiscal adjustment under pressure from the markets, which won't lend to them except at ruinous interest rates.
Britain has, admittedly, been under no such pressure. Spreads remain remarkably benign. That's in part because of massive quantitative easing (QE). By turning on the printing presses, the Bank of England managed, in effect, to finance about 85pc of the deficit in 2009. QE has now come to an end and cannot resume without further devaluing the pound and therefore adding to inflation.
The reason markets have remained benign despite the loss of QE support is that since then a credible medium-term deficit reduction strategy has been put in place. Without it, Britain might be in much the same place as Spain. The consequent recession would make the loss of economic momentum felt in the fourth quarter look like a stroll in the park. By voluntarily embarking on fiscal adjustment, Britain remains in control of its destiny.
As it is, a prolonged double-dip recession remains unlikely so long as the world economy remains on its present, above trend growth trajectory of 4pc to 5pc. Strong external growth ought to underpin resurgent investment and net trade. Unfortunately, that doesn't mean the adjustment to living standards is set to ease.
With rising taxes and public sector cuts now biting hard, the squeeze on consumption can only get worse. But the idea that you can somehow ignore one of the worst deficits in the OECD without experiencing the same drubbing that lesser offenders find themselves on the end of is just delusional.
Who knows? Maybe Mr Soros is right in thinking another UK recession is on the way. The misconception is to think this would be wholly avoidable were it not for the masochism of fiscal adjustment. In fact, deficit reduction is a vital building block for sustained economic growth.



Why George Soros is talking nonsense - Telegraph

[Butterfly]

the conservatives are going to make the same mistakes as they did in the early 80s with Thatcher,

you will soon be the laughing stock of EU,

[crippen]

Cartoons | Mail Online

[Marmite the Dog]

the conservatives are going to make the same mistakes as they did in the early 80s with Thatcher,

The same mistakes that gave the UK a healthy economy? Oh no...

[Butterfly]

^ what do you know about Economics and how it works ?

[sabang]

Action and consequence. Any form of economic policy you choose has consequences.
The UK has chosen the 'austerity' route. The consequence is lower economic growth and quite possibly a double dip recession.
Had they chosen expansionary monetary policy, the consequence is a higher- and perhaps unsustainable- debt load, and currency debasement.

[socal]

what is the nonsense ?

The austarity might push the economy back into the mainstream definition of the word "recession." A drop in GDP. A more classical definition to the word is a period when credit is contracting(interest rates going up)

Recessions correct the imbalances that where created during the boom. They are necessary.

[Thormaturge]

the conservatives are going to make the same mistakes as they did in the early 80s with Thatcher,

The same mistakes that gave the UK a healthy economy? Oh no...

The only "healthy" economy Thatcher created was based on the strange notion tht you could treat the money you receive from selling assets as being income, That's fine until you run out of assets.

To draw a comparison.

Year one you sell the fridge and take a holiday.

Then the cooker goes to pay for a night at the dog races.

Then the TV goes to pay for the car insurance

Then you sell the car to pay for roof repairs

Then you take out a mortgage so you can pay for a family holiday

If you treat the money received from those sales as income then, yes, you can make anyone believe you have transformed the economy. Funny how Sterling couldn't even keep up with the Spanish Peso or the Italian Lira at the time.


Once upon a time BP was British, as were the railways, and the utilities.

I couldn't believe Cameron selling off the cash cow St. Pancras - Chunnel rail link. Here we go again....

[Butterfly]

The only "healthy" economy Thatcher created was based on the strange notion tht you could treat the money you receive from selling assets as being income, That's fine until you run out of assets.

ah someone who got it

[The Ghost Of The Moog]

The UK is kicking the can up the road, as they all are.

Its austerity-lite, and yet, whilst folk agree with the idea, they don't think they personally should have to undergo any austerity, but that somebody else definitely should.

Its really not possible to do austerity in a democracy, as everyone gets bored with it, and votes for a party that promises the opposite.

[lom]

Recessions correct the imbalances that where created during the boom. They are necessary.

They are only an evidence of a previous failure.
Error in a system should be corrected immediately and not compensated for afterwards.

A recession is like closing the dam gates fully because they were previously left fully open.
A system in balance keeps the gates at a level where enough water flows out without emptying the dam.
A system in balance does small up and down adjustments to the gate level, responding immediately to a change in the dams water level.

[Bower]

The UK is kicking the can up the road, as they all are.

Its austerity-lite, and yet, whilst folk agree with the idea, they don't think they personally should have to undergo any austerity, but that somebody else definitely should.

Its really not possible to do austerity in a democracy, as everyone gets bored with it, and votes for a party that promises the opposite.

I am sure you will be proven right here.

[StrontiumDog]

^^^ Indeed, Thatcher famously destroyed a third of the manufacturing base of the UK within the first 2 years of her office...it never recovered....

Oh yeah and privatizing everything that could be, was just great...now most of the UK utilities are owned by overseas companies....

She was a goddamn genius...

[socal]

Recessions correct the imbalances that where created during the boom. They are necessary.

They are only an evidence of a previous failure.
Error in a system should be corrected immediately and not compensated for afterwards.

A recession is like closing the dam gates fully because they were previously left fully open.
A system in balance keeps the gates at a level where enough water flows out without emptying the dam.
A system in balance does small up and down adjustments to the gate level, responding immediately to a change in the dams water level.

No, not even close. A recession is like partially closing the dam gates because they where fully open.

Printing money and lowering interest rates after a credit contraction is like taking an excavator and bashing the opening wider, and collecting some of the water and dumping back on the other side. "Recovery !" yeah right.

Forget the analogy, if you don't think that recessions are good and necessary then you know nothing about economics. The boom is the problem, the recession is the solution.

[Butterfly]

^^^ Indeed, Thatcher famously destroyed a third of the manufacturing base of the UK within the first 2 years of her office...it never recovered....

Oh yeah and privatizing everything that could be, was just great...now most of the UK utilities are owned by overseas companies....

She was a goddamn genius...

without her, England would have shined again in Europe as a manufacturing hub

Germany and France have taken that lead role instead,

she literally destroyed the UK, the birth place of the Industrial Revolution, what a foolish old bat

[Norton]

Its really not possible to do austerity in a democracy, as everyone gets bored with it, and votes for a party that promises the opposite.

The tricky bit for politicians is to make sure the cuts are felt by a minority of the voters. If cuts effect majority, then it's goodbye at the next election. Democracy in action.

[lom]

The boom is the problem, the recession is the solution.

Yes the boom is the problem, without a boom there would be no need for a recession.
So a recession is evidence of a failure to solve the problem where it did originate, the recession is not a solution to the problem, it is only a substitute for a solution what we call a work-around.

[The Ghost Of The Moog]

Its really not possible to do austerity in a democracy, as everyone gets bored with it, and votes for a party that promises the opposite.

The tricky bit for politicians is to make sure the cuts are felt by a minority of the voters. If cuts effect majority, then it's goodbye at the next election. Democracy in action.

There are two primary voting constituencies that the British Government has to win over

1) Home owners
2) Welfare recipients

Hence why interest rates are being kept low for political reasons (supporting house prices), and why they have to keep benefits reasonable.

Thats one aspect of giving the Vote to people who aren't stakeholders (in the sense of paying for it), because they favour non-austerity, and redistribution of wealth from those who aren't minded to do so. With universal suffrage, Thailand too has to handle this dimension.

[tomta]

Forget the analogy, if you don't think that recessions are good and necessary then you know nothing about economics. The boom is the problem, the recession is the solution.

You seem to think that economics is merely a matter of numbers and that it does not involve people. This is incredibly narrow. The people who become unemployed in a recession won't feel that the recession is good because it's for the sake of some abstract economy reaching its heavenly and perfect ideal of equilibrium.

Economics involves political choices about what gets made and who it is distributed to. It's not just mathematics.

[socal]

The boom is the problem, the recession is the solution.

Yes the boom is the problem, without a boom there would be no need for a recession.
So a recession is evidence of a failure to solve the problem where it did originate, the recession is not a solution to the problem, it is only a substitute for a solution what we call a work-around.

Maybe, but you are not suggesting that there is solutions to booms are you ?

It is possible to solve the problem that causes booms, to prevent future booms but once a boom happens there is no solution for that boom.

The problem originated with an over expansion of the money supply through a fractional reserve banking system run by politically motivated central banks.

[socal]

Forget the analogy, if you don't think that recessions are good and necessary then you know nothing about economics. The boom is the problem, the recession is the solution.

You seem to think that economics is merely a matter of numbers and that it does not involve people. This is incredibly narrow. The people who become unemployed in a recession won't feel that the recession is good because it's for the sake of some abstract economy reaching its heavenly and perfect ideal of equilibrium.

Economics involves political choices about what gets made and who it is distributed to. It's not just mathematics.

I study Austrian economics which is heavily based on human action.

The boom is what mis-alocated the capital that created an unproductive job that the unemployed person had. That is a fact, not just something made up.

The unemployed have the boom to blame or the people that created the boom, politicized central banks. Boom are all caused by artificially lowering interest rates and not allowing the market to determine them.

[Butterfly]

[The Ghost Of The Moog]

The boom is what mis-alocated the capital that created an unproductive job that the unemployed person had. .

And that is exactly what has happened in the UK, with jobs created by the Government - borrowing money - and inventing well paid non-jobs (Diaper Awareness Workers and Diversity Officers, Transgender Outreach Co-ordinators) for people who are otherwise essentially un-productive.

[socal]

you know fuck all, thats why you didnt even say anything.