[Marxism] Fears of a lost decade for Britain

Louis Proyect 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

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 
adequately addressed.

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 
quantitative easing.

“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 
AAA rating.)

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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