[Marxism] Fears of a lost decade for Britain
lnp3 at panix.com
Fri Nov 20 11:20:47 MST 2009
NY Times, November 21, 2009
Fears of ‘Lost Decade’ Grow for British Economy
By LANDON THOMAS Jr.
LONDON — Britain may be emerging from recession, but that is
little solace for those who suggest that the economy here might
follow in the steps of Japan’s lost decade in the 1990s unless the
twin threats of burgeoning national debt and ruined banks are
The parallels are easy to see: Like Japan, Britain enjoyed a
decade of booming growth, fueled by aggressive bank lending and
real estate investments. Haunted by the comparison, policy makers
have been extra aggressive in using fiscal and monetary levers to
prevent the type of sustained period of stagnation and banking
stasis that plagued Japan for so long.
Some economic indicators this past week have been positive: an
uptick in retail sales, fewer jobs being lost and an export
revival. Yet analysts say they may well turn out to be tease,
cloaking deeper, more structural flaws in the economy. On top of
rising debt, the tax base is collapsing and the crippled banking
sector has yet to show it can generate profits by lending to
“We expect 1 percent growth next year and 0.7 percent in 2011,”
said Douglas McWilliams of the Center for Economic and Business
Research in London. “Technically it’s a recovery — but it’s a very
weak economy indeed.”
Comparisons with Japan have been made in the United States as
well, but some believe that the more appropriate analogy is
Britain, given the more pronounced contribution that the banking
sector has on the economy here.
The prospect of a period of Japan-like outcome in Britain was
publicly aired last month by a senior member of the Bank of
England’s monetary policy committee, Adam S. Posen, who was just
appointed in June.
An American and a senior fellow at the Peterson Institute for
International Economics in Washington, Mr. Posen was speaking as
an outside expert on Japan’s lost decade. He noted his views were
his alone and not those of the bank.
But they also carry the weight of one of the decision makers on
the bank’s strategy of buying of government bonds, known as gilts,
as a means to inject liquidity into the economy, a policy called
“The United Kingdom has an uncomfortable parallel with the
Japanese financial system when the Japanese economy began to
recover in the mid-1990s and was unable to sustain it,” he said in
his speech. “The closer one looks, the more worrisome this
specific parallel becomes, given the concentration of the UK
banking system in few major, mostly still troubled banks, and the
relative underdevelopment of alternative non-bank channels for
getting capital to non-financial businesses in the U.K.”
While defending the quantitative easing as necessary and
non-inflationary, Mr. Posen also pointed out that the Bank of
England’s massive purchase of gilts — the bank now owns 30 percent
of those outstanding — is in itself a consequence of the British
financial system inadequacy in providing credit to businesses
through the issuing of corporate bonds.
Like Japan, the capitalization of Britain’s private sector bond
market as a proportion of gross domestic product is very low —
0.16 percent, the smallest among G7 economies and significantly
behind the U.S. figure of 1.2 percent.
For a financial system heralded to be one of the world’s most
sophisticated, this is an eye-opening statistic and it raises the
possibility that credit starved corporations, dependent as they
are on Britain’s still-wobbly banks, may not get the capital they
need, all of which might bring about a double-dip recession or
even a Japan-like slump.
Mr. McWilliams of the Center for Economic and Business Research
forecast that bank lending to corporations will decrease over the
next two years.
Mr. Posen would argue that the Bank of England’s buying of gilts
is unavoidable, especially in light of the fact that sufficient
liquidity does not exist in the private bond market.
But a growing number of bearish analysts see the bank’s buying
spree as dangerously distortive, in that interest rates have been
kept at a low level that does not reflect the dire state of
Britain’s public finances.
The severity of the problem was underlined this week, when the
government released an £11 billion borrowing figure for the month
of October, which brought the half-year tally to £86.9 billion,
the highest since public records began in 1946. That makes it
almost certain that the government’s forecast of £175 billion of
borrowing for next year would be exceeded. And it would produce a
budget deficit of about 13 percent of G.D.P., or nearly twice the
average in the euro zone.
Simon White, a partner at Variant Perception, a London-based
research house that caters to hedge funds and wealthy individuals
takes an especially dire view.
There is a caveat: Variant Perception, which is run by former
traders, is noted for its contrarian perspectives on certain
markets. A few months ago it put out a controversial note on
Spain’s real estate troubles titled “The Hole in Europe’s Balance
Still, its negative view on British gilts and sterling is one that
is becoming more and more mainstream.
In a note sent out to clients this week, Variant broaches the
prospect of a debt and/or currency crisis as Britain’s collapsing
tax base — too dependent on real estate, financial firms and the
already highly taxed rich — results in declining revenues.
Taken together with the already high levels of spending, the
result is a deficit that grows even beyond 13 percent of GDP,
further harming the country’s fragile creditworthiness. (Both
Fitch and Standard & Poor’s view Britain’s economy as the most
vulnerable to a downgrade of the 20 or so countries that carry a
Once the Bank of England, which has already spent about £200
billion buying British bonds (or about 14 percent of annual
G.D.P.) stops, rates are expected to immediately push up. That
could prompt already skittish foreign investors, who hold more
than 30 percent of government paper, to become sellers.
To be sure, such a scenario presumes that British politicians will
be like their counterparts in Japan in the 1990s and not have the
political will to tackle these economic problems — a bold
assumption given that the Conservative Party, which is far ahead
in polling for a spring election, has staked its legitimacy on
bringing down the country’s debt.
Still, until more such conviction is shown, worries about a period
of stagnation, or a more devastating shock, are expected to continue.
“The likelihood of a debt and sterling crisis is just not factored
in,” Mr. White said, noting that, on average, these types of
crises have occurred every 15 years since 1947, with the last
occurring in 1992. “If this gets out of control it will flip very
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