Monday, September 16, 2013

Anne Pettifor: This is not the road to recovery, but to Wongaland

In her Guardian column, Anne Pettifor questions whether a UK economic recovery based on low interest rates and housing speculation is really the cure for an economy suffering from excess debt from a prior housing bubble.

Much of her argument applies equally well to the US.

The question posed is this: is the direction of the supposed recovery a sound one? Is it based on solid foundations? The reason I doubt that is ...
Before becoming chancellor, George Osborne provided a sound analysis of the British economy. In his Mais Lecture of February 2010, he said: "The overhang of private debt in our banking system and our households weighs heavy on future prosperity." A new model, he announced, rooted in more investment, more savings and higher exports, would require "new policies and new institutions". 
Then, as chancellor, he changed direction. He ignored the vast burden of private debt, which has not been deleveraged. ... 
For three years the government has revived and propped up a very old, Victorian model of the economy. 
Just as in the 19th century, bankers or creditors dominate policymaking, ensuring that the value of their assets (mainly debt) is not just stable but rises relative to profits, wages and incomes. Above all, as in pre-Keynesian times, creditors lobby to ensure limited public oversight or regulatory control over their huge power to determine the rate of interest on the full spectrum of lending.
So the nationalised Bank of England is stealthily recapitalising the private banking sector with low rates of interest while turning a blind eye to the much higher rates charged to productive economic actors. 
All the time, the illusion that the Bank's base rate is dominant, and that overall rates are very low, is maintained, encouraging consumers and homebuyers to go shopping – and the poor to turn to payday lenders for "help". 
But that illusion has already been shattered by the bond markets. Yields on government bonds – which will ultimately influence mortgages – have been rising, and the chancellor, governor Mark Carney and his colleagues at the Bank are determined to leave control over these rates to the money-lenders. 
As retail sales increase, a new threat looms: rising imports that satisfy consumer demand but worsen the trade deficit. ...
At this point, the next election began to loom on the political horizon. 
The government decided to deploy taxpayer resources into stimulating economic recovery. But the resources are aimed not at increasing investment in productive activity, but rather at subsidising, for instance, buy-to-let investors speculating on future house-price inflation. 
So, far from pursuing a "new economic model" based on investment, savings and exports, it's back to the old inflate-the-housing-market-and-boost-consumption meme – but this time with a high-debt, low-wage economy. That is the road to Wongaland.

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