James Turk: The UK government’s borrowing and spending policy could trigger next major world financial crisis

With the UK government continuing to borrow and spend at record amounts — with British government debt increasing each month, where the man on the apocryphal Clapham Omnibus may be under the mistaken impression that it is decreasing each month — James Turk has predicted that the ongoing financial profligacy of David Cameron’s government could be the trigger of the next Lehman-style financial crisis.

Turk, the author of The Collapse of the Dollar and How to Profit from It, makes this prediction in the following King World News interview:

In the context of an absorbing and interesting interview, here’s what James Turk says just after 15:40 on the clock:

“…When I talk about the next crisis being another Lehman event, the catalyst does not necessarily have to be a bank. It could be the state of Illinois, it could be the state of California, it could be any one of a number of different governments around the world. Just look at the balance sheet of the UK government and the fact that they’re continuing to borrow and spend. Their deficit is not getting any narrower…They’re continuing to borrow at record amounts and piling on record amounts of debt. Maybe the UK government is the catalyst or the collapse of the UK bond market could be the catalyst that causes this Lehman-type event that I’m expecting in the first half of 2011? You can never predict what the trigger is…”

[John Redwood succinctly explains this growth of UK government borrowing and spending, and the difference between deficit and debt, in an excellent blog piece which should be read by Clapham Omnibus travellers everywhere.]

42 Comments

  • Recharge says:

    I have said it before and I’ll say it again because the truth is always worth repeating, so forgive me for plagerising my own posts.

    There is actually no debt crisis in the UK. Yes, you did read it correctly, but maybe read it again just to make sure it has sunk in.

    This sounds astonishing because of all the ill-informed and ideological nonsense we have heard over the past few months(usually aimed personally at Gordon Brown for his alleged profligacy), but it is in fact true. Let’s just take a look at the facts. National debt as proportion of GDP was below 35% in almost every year of the last Labour Government before the financial crisis. By contrast it was almost 44% in the last full year of John Major’s Tory Government. Since the financial crisis national debt has increased sharply both absolutely and as a proportion of GDP for two reasons: first, the direct bailout of the financial system – estimated at £850bn in total (now that is a big number) fortunately only around £110bn of which appears on the Government balance sheet as interest bearing debt; and second, the resulting global recession which has caused UK GDP to be 10% lower than it otherwise would have been thus significantly reducing the tax take. In November 2010 the debt (£955bn) to GDP (£1481bn) ratio was 64.5% which is not particularly high by historical standards (this is lower than the average of the 20th century which peaked at 250% after WWII), nor by international standards (Japan is 192%, Germany is 73%, France is 78%, Italy is 116% and the US is about 70%). Indeed, we are in a relatively strong position – thanks to Gordon Brown’s swift actions using all the skill and resources of the much maligned public sector – given the monumental size of the catastrophe unleashed by the almost complete collapse of the (private sector) global banking system (forgotten about that minor detail already have we?). Gordon Brown also had the forsight to take on debt with long maturity (12 year average – much longer than most countries).

    As the saying goes, you are entitled to your own opionions, but you are not entitled to your own facts. And the fact is, the UK economy has the capacity to absorb much more debt than the current level, so there is no urgent requirement to reduce the deficit – we can quite easily carry on taking on debt to spend on, and invest in, value creating (yes that’s right) public services and go back into surplus to reduce the debt in a couple of years.

    I almost have to admire the brass neck of the city analysts who directly and indirectly benefitted from the public sector bail out of their businesses (£850bn remember – that is a number which is always worth repeating) are now arguing that the debt is too large and we need to cut public spending on services which they mostly don’t use. You really could not make this up.

    • mrg says:

      You’re a bit of a mystery, Recharge. You’re clearly a clever chap, but you seem to enjoy applying your intellect to defending the indefensible.

      “By contrast it was almost 44% in the last full year of John Major’s Tory Government”

      Yes, Major spent recklessly, taking debt from 26% of GDP in March 1991 to 42.5% in March 1997. This does not excuse New Labour taking the debt from 29.1% in Feb 2002 to 61.8% in March 2010. I suspect many Cobden Centre readers were particularly unimpressed by Labour’s binge, but this isn’t about party politics.

      “Since the financial crisis national debt has increased sharply”

      In fact, the debt rose steadily from the low in Feb 2002 to 36.2% in September 2007. This rise was entirely unjustified.

      On Gordon’s watch, the banks behaved with extraordinary recklessness. When the supposedly-abolished bust came, Brown took the entirely unnecessary step of bailing out the banks. In a true capitalist system, shareholders would have suffered. Instead, Brown decided that losses should be socialised. By the end of his reign, debt had soared to 61.8%.

      It’s possible, perhaps probable, that the Conservatives would have made similar mistakes. That does nothing to excuse Brown’s behaviour.

      “we are in a relatively strong position – thanks to Gordon Brown’s swift actions using all the skill and resources of the much maligned public sector”

      Surely, you jest. How many nations envy our position, I wonder.

      “given the monumental size of the catastrophe unleashed by the almost complete collapse of the (private sector) global banking system”

      You understand the role that central banks play. You resent the privileges that banks enjoy. Do you really maintain that banks are operating in the private sector? The reality is that even before the crash, banks were heavily subsidised, and they continue to enjoy the option of borrowing low and lending high. The crisis was not a failure of the free market. It was a failure of our socialist/corporatist banking system.

      “And the fact is, the UK economy has the capacity to absorb much more debt than the current level, so there is no urgent requirement to reduce the deficit”

      You know, too, that the official debt understates the government’s obligations, and that dividing by GDP is not as reasonable as most people assume. The absolute debt, the cost of servicing the debt, and the ratio of debt to the *private* component of GDP are all significant.

      What is your game?

      • Recharge says:

        mrg,

        Since your post was first, I’ll reply to yours first. My wife is already complaining that I spend too much time on the Cobden Centre web site, so Current will have to wait a few days!

        “You’re a bit of a mystery, Recharge. You’re clearly a clever chap, but you seem to enjoy applying your intellect to defending the indefensible.”

        Thanks for the compliment, but I would say I am just trying to put some balance and some context into this discussion and I am not trying to defend the indefensible. I find it strange that conventional wisdom has converged on the view that our levels of debt are unprecedented, that we face imminent catastrophe if we do not take drastic action, and that the UK is in a similar position to Greece or Portugal. The reason I find it strange is that a quick look at the actual numbers (which can be found in ten minutes on the internet) shows that the UKs level of debt (excluding pension liabilities – I’ll come to that in a minute) is not particularly high by international or historical standards. When anyone quotes any number at me, the first thing I do is look for context (ie. how does it compare?) and I have seen virtually no context in this discussion at all. Not once have I seen on any news programme a graph of how the debt position has moved over the last decade (or the last fifty years for that matter); not once have I seen any comparisons of the UK with other countries; not once have I seen a graph showing how the UKs debt rises like a rocket after the financial crisis. It is true that it had been rising steadily from 2002-2007 but at a very slow rate, and as you say it was still a modest 36% of GDP just before the financial crisis http://www.statistics.gov.uk/pdfdir/psf1210.pdf). I think that this context is absolutely critical to understanding our position and for making the right policy choices for the future and I am simply astonished that no one is providing it. So I thought I would.

        I also think that there are many people who don’t actually want a rational debate about this issue – they simply want to use it as an excuse to cut public spending and reduce the role of Government. I suspect that is why the context is being left out – because our position does not look that grim when the context is provided. It is still not great – don’t get me wrong – but it is very far from the catastrophic position that some of the more hysterical analysts are claiming. Similarly, although the financial crisis has had a massive impact on the UKs debt position, this seems to have been collectively forgotten, and it is all put down to Gordon and his profligacy. I am sorry, but that story just does not hold up to close scrutiny and I think that needs to be pointed out so that we can have a rational discussion.

        “On Gordon’s watch, the banks behaved with extraordinary recklessness. When the supposedly-abolished bust came, Brown took the entirely unnecessary step of bailing out the banks. In a true capitalist system, shareholders would have suffered. Instead, Brown decided that losses should be socialised. By the end of his reign, debt had soared to 61.8%.”

        I have no argument with you there – I agree with most of this, and this is actually my big problem with the last Government: they were catastrophically lax in regulating the City, and when the big reckoning came they were only too willing to pick up the tab. The key point here is that this is the real cause of the astonishing increase in the UKs debt level (just take a look at the graph) not a general profligacy over a ten year period which is what the revisionists (eg. in the Telegraph) are now claiming. And I have to say that I heard very few (actually none) voices from the right of the political spectrum during the boom time suggesting that the City was out of control. Indeed, I worked in the City as an equity analyst for a while during the good times and I can tell you that most of the analysts, traders, investors and investment bankers that I knew only ever complained about excessive Government intervention, too much regulation and bureaucratic red tape and how they would all be going to another country if the Government did not get off their backs. I cannot recall anyone ever complaining that the banks were excessively reckless and that the Government should do something about it. This is the context and the culture in which the Government was acting, and even now (in spite of the banking catastrophe), all attempts by Government to regulate (eg. bankers bonuses) are immediately denounced by the usual suspects (CBI, IOD, Telegraph etc) as unnecessary and costly interference with business.

        “You understand the role that central banks play. You resent the privileges that banks enjoy. Do you really maintain that banks are operating in the private sector? The reality is that even before the crash, banks were heavily subsidised, and they continue to enjoy the option of borrowing low and lending high. The crisis was not a failure of the free market. It was a failure of our socialist/corporatist banking system.”

        This is a very interesting point and again I largely agree with it. The problem we have here is that there is a massive confusion between what is in the public and private sector. I agree that if you follow it through logically then the entire central banking system and the commercial banks that are part of that system are essentially one large public sector enterprise (I think the recent bail out proves beyond any reasonable doubt that they are essentially public sector entities). The problem is, they do not behave like public sector bodies and most of the time they are not treated like public sector entities: they want all the freedom that comes with being in the private sector (including the freedom to award themselves huge bonuses and take enormous risks to justify said bonuses); but they also want (and get) all of the protection that comes with being in the public sector. The banks also have many defenders in the business press who claim to be supporters of the free market but who seem to have no idea that banks are quasi-public sector organizations. Similarly, many of the same people who rail against debt seem to have no idea that debt creation is central to the entire modern monetary system and that loans in aggregate cannot and will not ever be repaid. This is why (in my view) we need to fully nationalize the money creation process and make it explicit that a public authority is spending new money into existence. The banks can then become true private sector businesses and can be allowed to fail as and when they make bad commercial decisions.

        “You know, too, that the official debt understates the government’s obligations, and that dividing by GDP is not as reasonable as most people assume. The absolute debt, the cost of servicing the debt, and the ratio of debt to the *private* component of GDP are all significant.”

        But again I have seen no context. When Durkin wheeled out the old Tory big-beasts (Howe, Lawson), they both expressed astonishment and outrage at the £4.8tn debt level (including pensions). But I have never seen any graph showing how this has developed since the days when they were in the driving seat (the IEA report just provides a snap shot of the present situation). This pension liability didn’t just come out of nowhere on Gordon’s watch – it has been building up over several decades – so why have we suddenly decided only now that it should be included in the national debt? Again, I detect a (not very well) hidden agenda, namely we need to cut public spending and stop re-distributing wealth.

        As I said to Current on another thread, there is a sense in which I agree with you that the debt and pension liabilities are unsustainable: they are unsustainable in the sense that our whole way of life is unsustainable. That is, we are rapidly approaching the “Limits to Growth” (great book by the way). I don’t think that the Government will have a problem honouring any of these obligations provided that the economy is able to grow at 2-3% a year (exponential growth is so powerful that the economy doubles in size every 25-30 years at this growth rate). The problem is we will not be able to grow at this rate (or maybe not at all) in the future because several physical limits are being reached simultaneously, inter alia, climate change, peak oil (just look at the price), depletion of fish stocks, deforestation, reduction in bio diversity. This is actually the real problem we face, and reduced pension payments are just one of the many consequences of this situation (and a relatively minor one the truth be told).

        “What is your game?”

        There is no game. I’m deadly serious.

        • mrg says:

          Thanks for your replies, Recharge. I now understand your position much better.

          It’s reassuring to see that we have a great deal of common ground.

          “When anyone quotes any number at me, the first thing I do is look for context (ie. how does it compare?)”

          This is a good policy.

          “Not once have I seen on any news programme a graph of how the debt position has moved over the last decade (or the last fifty years for that matter)”

          I agree that news programmes typically leave out the necessary context, and this annoys me too. I think independent research, blogging, and sites like the Cobden Centre can help, and I’m glad that people like you are around to keep us honest and offer an alternative perspective.

          FWIW, I often refer to ukpublicspending.co.uk for historical information.

          “not once have I seen any comparisons of the UK with other countries”

          This report from the Bank for International Settlements has cross-country comparisons. If you find others, I’d be interested to see them.

          “not once have I seen a graph showing how the UKs debt rises like a rocket after the financial crisis”

          The figures I quoted above are from a Guardian article. They put their usual spin on it. It shows the upsurge you were after. I’m glad that you agree that it was wrong for the government to socialise the losses of the banks.

          “The banks also have many defenders in the business press who claim to be supporters of the free market but who seem to have no idea that banks are quasi-public sector organizations”

          This is a big problem.

          “This pension liability didn’t just come out of nowhere on Gordon’s watch – it has been building up over several decades”

          I absolutely agree. All parties have been complicit in this Ponzi scheme. All must have known that the post-war settlement was unsustainable, but all were happy to kick the can down the road.

          I too would be interested to see the IEA’s reckoning of debt measured back through time, but I’m less interested in party politics, and more interested in getting people to appreciate the seriousness of the situation.

          If there is increasing attention paid to the issues now, I think it’s because the illusion of perpetual prosperity has been shattered. It’s time that all parties recognised reality.

          “Limits to Growth” is an interesting topic. I’ll try to find time soon to reply to this and your other response; my wife has a similar view about the time I spend on the Cobden Centre web site :-)

    • Current says:

      > I have said it before and I’ll say it again because the truth is
      > always worth repeating, so forgive me for plagerising my own posts.

      I agree, the truth is always worth repeating, so I’m going to do the same :)

      > Let’s just take a look at the facts. National debt as proportion of
      > GDP was below 35% in almost every year of the last Labour Government
      > before the financial crisis. By contrast it was almost 44% in the
      > last full year of John Major’s Tory Government.

      That may be right. The average figure for Labour pre 2007 sound right, I’m not sure about the 44% though.

      > Since the financial crisis national debt has increased sharply both
      > absolutely and as a proportion of GDP for two reasons: first, the
      > direct bailout of the financial system – estimated at £850bn in
      > total (now that is a big number) fortunately only around £110bn of
      > which appears on the Government balance sheet as interest bearing
      > debt;

      Some of it should appear, but not all of it. Because, the government will get a great deal back, but probably not everything.

      It’s very difficult to tell if they’ve accounted for the right amount.

      > and second, the resulting global recession which has caused UK GDP
      > to be 10% lower than it otherwise would have been thus significantly
      > reducing the tax take.

      Why are you considering that a government is responsible for low national debt during a boom, but not responsible for high national debt during a bust? I don’t agree with this asymmetrical view. In my view it reflects well on a government if they have a low deficit and low debt during a boom, and badly if they don’t. Some Tory governments didn’t and that reflects badly on them. However, I think that a government can’t escape responsiblity for it’s situation during a bust.

      > In November 2010 the debt (£955bn) to GDP
      > (£1481bn) ratio was 64.5% which is not particularly high by
      > historical standards (this is lower than the average of the 20th
      > century which peaked at 250% after WWII), nor by international
      > standards (Japan is 192%, Germany is 73%, France is 78%, Italy is
      > 116% and the US is about 70%).

      But, as Robert Sadler explained to you when you posted this back in November the debt figure doesn’t encompass all of the debt repayments that future governments have to make. There are a great many large liabilities that are not accounted for. It’s not reasonable to compare modern debt figures with those from an earlier era.

      In your earlier discussion Robert Sadler pointed out that the reasons that the IEA and others quote a much larger figure for UK public debt is because they include the government’s responsibility to pay pensions too.

      In response to that in our earlier discussion you said: “It is not a legal obligation which is why it is not debt.”

      I agree that it may not legally be a debt. But, is this discussion really about what is strictly legal? From your posts you appear to be a Social Democrat. Now, I think you’ll agree that the basic state pension is very little to live on. Do you think it should become nothing at all?

      The irony about this argument is that you seem to be saying that the future population of Britain will be made up of particularly hard-hearted libertarians who won’t care if pensions go unpaid and pensioners have to sleep in the streets. Even I don’t think that, though I disagree with the initial creation of state pensions I certainly think that the state should meet it’s commitments to existing pensions in a reasonable way. Those may not be legal commitment, but aren’t they moral commitments? Realistically speaking, I don’t think the people of Britain will accept anything else either. So, the pension liabilities is effectively a debt, and for realistic accounting should be added to the overall UK national debt.

      For these reason taxes have to go up in the medium-term to tackle the debt.

      > Indeed, we are in a relatively strong
      > position

      I agree Britain is one of the tallest pygmies in the forest, the other tall ones are the US and Germany.

      > – thanks to Gordon Brown’s swift actions using all the
      > skill and resources of the much maligned public sector – given the
      > monumental size of the catastrophe unleashed by the almost complete
      > collapse of the (private sector) global banking system (forgotten
      > about that minor detail already have we?).

      But, what caused the unsustainable boom? Not the private sector but the Bank of England’s policies.

      In other threads you have been discussing the various Austrian theories of money and the business cycle with me. Are you saying that you believe Rothbard’s theory of money without believing his theory of the business cycle?

      > Gordon Brown also had the
      > forsight to take on debt with long maturity (12 year average – much
      > longer than most countries).

      I agree, that was a clever move.

      > I almost have to admire the brass neck of the city analysts who
      > directly and indirectly benefitted from the public sector bail out
      > of their businesses (£850bn remember – that is a number which is
      > always worth repeating) are now arguing that the debt is too large
      > and we need to cut public spending on services which they mostly
      > don’t use. You really could not make this up.

      But, they are right. Quite apart from whether there should have been a bailout in the first place it’s existence is a big problem for state finances.

      Perhaps you would rather things were like they are in Ireland where I currently live. When the government made massive guarantees and bailouts to the banks here in 2008-2009 the respectable financial commentators didn’t point out the effect it had on the national debt. Only a few less respectable commentators did that. Perhaps if they had spoken out Ireland wouldn’t have gone bankrupt.

      There is no danger of Britain going bankrupt since it has it’s own fiat currency. But, taxes levels will inevitably be much higher in the future.

      That the Conservatives have raised them now has good points and bad points. The good aspect is that it sets a precident for the future. The bad aspect is that it’s contractionary, which isn’t wise in a recession. If I’d been George Osborne I would have risen taxes and cut spending too, but I would have done it differently. I would have cut spending more, and risen taxes different. I would have risen taxes in a way that takes into account how price-changes (or “stickiness”) works, I’ll talk about that some other time.

      • mrg says:

        Glad to see you’ve weighed in here, Current.

        Perhaps I’m one of those hard-hearted libertarians, but I don’t think future generations should be held responsible for the profligacy of their forefathers. They shouldn’t feel obliged to continue paying into the pensions Ponzi scheme, nor do they have any moral obligation to honour the debts that ‘we’ have run up.

        That’s not to say that I think anyone should suffer extreme poverty. An argument can plausibly be made that basic poverty relief is a public good. Where private charity proves insufficient, we should provide the bare necessities for all, young or old. This would cost a tiny fraction of what we currently spend on the welfare state.

        “The good aspect is that it sets a precident for the future”

        Tax rises are not a good precedent. Whether in a recession or not, for both moral and pragmatic reasons, tax rates should be kept as low as possible.

        Firstly, there is a reasonable argument that reducing tax rates would increase tax yields (the classic Laffer Curve).

        Secondly, rolling spending back to 1997 levels (adjusting for inflation) would put us in surplus. There is no need for tax rises.

        • Current says:

          In terms of pensions, what I would support is a “cut-off” of some kind. Everyone born after some date is not eligible for state pensions of any kind. But, at the same time that generation would be eligible to pay lower taxes. The result would still be unjust as that generation would have to pay more in taxes anyway. But, in the longer-term it would solve the problem.

          The main issue here *isn’t* “intergenerational justice”, it’s eliminating intergenerational justices as an issue. The best thing we could bequeath to our children is a world where they will not be squabbling with their children about wealth redistribution.

          Regarding taxes…. I think that in most situations a rise in taxation is better than a rise in government debt. If the public don’t want to cut certain services then it’s best if they feel the cost of that choice straight away by higher taxation. Notice what I was saying here wasn’t “if I was hypothetical dictator of Britain” it was “if I was chancellor”. I was giving a view on the best politically acceptable thing to do.

          • mrg says:

            “I think that in most situations a rise in taxation is better than a rise in government debt”

            I can agree with you there, at least. Indeed, I think government debt should be illegal. Then socialists like our friend Recharge would have to engage in an honest debate about the extent and manner of income redistribution.

            As long as it is possible for the current generation to live at the expense of future generations, that debate will not happen.

          • Robert Sadler says:

            Brilliant dissection of Recharge’s comments Current and also excellent comments by Mrg.

            I would go further and say that an increase in government debt is a future increase in taxes. Likewise I would say the same about an increase in government spending. In my view, the only true tax cut is a cut in government spending.

            I am leery of any tax increase however, primarily for the reasons you state Current. The risk of a tax increase is that it will result in a reduction of tax revenues. Personally, I think that the VAT increase is appalling. 20% VAT now. To the average person it represents a grotesque double taxation. You pay a 20% income tax when you get paid and then 20% VAT when you spend your own money. Awful. In actual fact though it is truly a tax on landowners and producers and the net effect is to make everyone that much poorer.

            I agree with your idea of the cut-off point for pensions. I think this is what will eventually happen. Also, I believe the pension age will eventually rise to the point where few people will live long enough to draw a significant amount.

        • Recharge says:

          “Perhaps I’m one of those hard-hearted libertarians, but I don’t think future generations should be held responsible for the profligacy of their forefathers.”

          I take it you don’t use fossil fuels then? Now that is profligacy on a grand scale: consumption of non-renewable resources without giving any thought of how to replace them for future generations; and use of a pollution sink (the atmosphere) whilst discounting the costs (climate change) that will fall on future generations. Or do you only object to “profligacy” when it involves the redistribution of wealth by the Government?

          “That’s not to say that I think anyone should suffer extreme poverty. An argument can plausibly be made that basic poverty relief is a public good. Where private charity proves insufficient, we should provide the bare necessities for all, young or old. This would cost a tiny fraction of what we currently spend on the welfare state.”

          You and I just have to disagree about this. I think progressive taxation and the re-distribution of wealth is absolutely central to a civilized society. I know that my personal wealth is dependent on so many things other than my own personal hard work – many of which are just plain random good luck – and I see no problem in the state seeking to mitigate some of the effects of this random distribution of good luck.

          “Firstly, there is a reasonable argument that reducing tax rates would increase tax yields (the classic Laffer Curve).”

          One question I always have about the Laffer Curve is what is the turning point at which the income tax-take starts to fall as the income tax rate increases and has this been demonstrated empirically rather than being drawn on a napkin?

          • Robert Sadler says:

            I wouldn’t worry about the depletion of fossil fuels. We have plenty of oil to last a 100 or years. Secondly, the Universe never runs out of energy. This is because the discovery of one energy source (i.e. coal) leads to the discovery of another source (uranium) and so on. A few centuries ago there were no internal combustion engines to speak of and now nearly everyone has one. We should worry less about running out of existing forms of energy and occupy ourselves with discovering the next one. That is progress.

          • mrg says:

            “You and I just have to disagree about this. I think progressive taxation and the re-distribution of wealth is absolutely central to a civilized society. I know that my personal wealth is dependent on so many things other than my own personal hard work – many of which are just plain random good luck – and I see no problem in the state seeking to mitigate some of the effects of this random distribution of good luck.”

            No doubt you are right that ‘good luck’ (especially in our genetic and social inheritance) has a lot to do with the comforts that many of us currently enjoy.

            But I don’t think that someone else’s ‘bad luck’ is my fault. If anyone is to blame for their situation, it is their parents. I might be inclined to help them, out of basic human empathy, but I don’t owe them anything. Nor do I begrudge those who are luckier than me; we each have to play the hands we’re dealt.

            We also shouldn’t forget that the worst-off in Britain are better off than those unlucky enough to be born in the Third World. Surely if there is a moral imperative to compensate for ‘bad luck’, we should be spending less on welfare, and more on foreign aid.

            In reality, I think domestic poverty relief has more to do with placating the mob (part of the ‘public good’ argument).

            But even if you think redistribution is morally justified, you must recognise that our welfare state fails on its own terms. It doesn’t lift people out of poverty; it traps them in it.

            You might be interested in a recent article by Jeffrey Miron for National Affairs: Rethinking Redistribution (PDF).

            It’s set in an American context, but I think most of the same issues apply here.

      • Recharge says:

        Current,

        “Why are you considering that a government is responsible for low national debt during a boom, but not responsible for high national debt during a bust? I don’t agree with this asymmetrical view. In my view it reflects well on a government if they have a low deficit and low debt during a boom, and badly if they don’t. Some Tory governments didn’t and that reflects badly on them. However, I think that a government can’t escape responsiblity for it’s situation during a bust.”

        Fair point – I was just pointing out that the steep increase in debt was caused largely by a one off event initiated by private banks and the actions of the MPC. Gordon Brown should rightly take his share of responsibility for this fiasco, but somehow I don’t think Mr Osborne would have done anything differently – it is indeed built into the system. But it was most definitely not caused by sustained profligate spending on Government quangos which is what we are all being led to believe.

        “It’s not reasonable to compare modern debt figures with those from an earlier era.”

        Fair enough. So show me the figures that are comparable. The IEA have given a snap shot of debt plus pensions but they have not shown how it has developed over the last fifty years or how it compares with other countries. That means I can’t meaningfully say whether it is a large or a small number.

        “But, what caused the unsustainable boom? Not the private sector but the Bank of England’s policies. In other threads you have been discussing the various Austrian theories of money and the business cycle with me. Are you saying that you believe Rothbard’s theory of money without believing his theory of the business cycle?”

        I can’t claim to be an expert on Rothbard’s theory of the business cycle but from what I do know my gut feeling is that he is correct. So I agree that the existing monetary system has the seeds of destruction built into it. But this again reinforces my point that it is not a problem caused by a profligate Labour Government, it was caused by the financial system itself including the private sector bankers and their supporters.

        “I agree that it may not legally be a debt. But, is this discussion really about what is strictly legal? From your posts you appear to be a Social Democrat. Now, I think you’ll agree that the basic state pension is very little to live on. Do you think it should become nothing at all?“

        Well I have to say Current, you are a stickler yourself for legal technicalities when it comes to fractional reserve banking (bailment v debt). I am just pointing out, as a matter of fact, the legal status of pension liabilities. As I said to you before, I don’t think it is truly debt, but it is a relatively strong claim on the future of the economy: I’d say that gives it a status somewhere between debt and equity (convertible shares maybe). My point though is really that this has never been considered a debt in the past, so why have we suddenly decided it is now debt? As I said to mrg, this has been building up over decades and didn’t just spring up on Gordon’s watch. But it is being used to imply that this is all part of the overall profligacy of Gordon Brown.

        “Perhaps you would rather things were like they are in Ireland where I currently live. When the government made massive guarantees and bailouts to the banks here in 2008-2009 the respectable financial commentators didn’t point out the effect it had on the national debt. Only a few less respectable commentators did that. Perhaps if they had spoken out Ireland wouldn’t have gone bankrupt.”

        No. I am very glad not to be in Ireland thanks and good luck to you – you really are in deep.

        Current, I think you and I (and mrg for that matter) actually agree on many of these things. I don’t like the current financial system: I don’t like the confusion it creates between public and private, the lack of transparency, and the instability. You (and mrg) seem to object because you think it allows Governments to tax and re-distribute wealth by stealth, and I object because it allows private banks to re-distribute wealth into their own pockets through various hidden subsidies.

        Where we profoundly disagree is that I approve of re-distribution of wealth and progressive taxation (I see this as a good thing not a necessary evil) and you do not – but that is a moral question, not a question of economics. I would be more than happy to untangle the financial mess and have an honest debate on this point which is the real issue.

        • mrg says:

          “Where we profoundly disagree is that I approve of re-distribution of wealth and progressive taxation (I see this as a good thing not a necessary evil) and you do not – but that is a moral question, not a question of economics. I would be more than happy to untangle the financial mess and have an honest debate on this point which is the real issue.”

          Do you agree that government borrowing is a large part of the problem?

          Borrowing allows governments to buy votes today with the wealth of future generations. Unless the current generation feels the full pain of redistribution, as well as the benefits, we cannot have an honest debate.

          Also, if governments were to balance the books, they would be less reliant on the bankers, and monetary reform would be easier.

          • Recharge says:

            “Do you agree that government borrowing is a large part of the problem?”

            I think it depends on why the Government is borrowing. If they are borrowing to fund capital investment then I can see no problem – after all, future generations will reap the benefits of such investment. I suspect you think that this will crowd out private investment and should be ruled out for this reason. I don’t believe that is right because there are many investments that the private sector cannot or will not make. Take the (now aborted) Severn Barrage project. A private company would never do this because at commercial discount rates any benefits beyond about thirty years would be discounted to zero. However, it will still be churning out (fully depreciated and therefore almost free) megawatts 80-100 years from now. This is in fact an example of the current generation leaving a legacy for future generations (we pay they benefit) not the other way around (it is almost a mirror image of using fossil fuels – we benefit they pay – where the costs of climate change are discounted to zero beyond thirty years).

            Similarly, there are other forms of expenditure that have the character on capital investment, for example education, which is investment in human capital. Again, future generations will benefit from this.

            But I agree that “pure” redistributive expenditure should be funded from current taxation.

          • mrg says:

            “I agree that “pure” redistributive expenditure should be funded from current taxation.”

            That’s a start :-)

            ‘Investment’ is a much-abused term. I see very little evidence that the shower of money on education and healthcare under New Labour has delivered, or is likely to deliver, commensurate benefits.

            But setting aside the question of whether money is more likely to be wisely invested in the private or the public sector, there is something unique about government debt.

            A father might decide to ‘invest’ in his children’s future by borrowing to pay for private education, or specialist training & equipment for some niche sport. The investment may be wise or unwise. His children might “reap the benefits”, or it might turn out to have been a colossal waste of money.

            The key point is that the children aren’t liable for their father’s debts. The evaluation of cost, benefit, and risk was his, not theirs. They might have made a different choice. It is not reasonable to hold them responsible for their father’s decision.

            In the case of government debt, future generations are held liable. It is wrong.

            Looking at the scale of the tax take (£520bn for 2009-10), it is hard to imagine any projects that couldn’t be funded ‘honestly’, through taxation. Suppose the Severn barrage would cost £40bn. That’s an extra 7.7% of a single year’s take. Spread over 4 years, it would only be 2%. But taxes wouldn’t necessarily have to rise to cover investments that the voters consider worthwhile. They might decide they want fewer bureaucrats, and more ‘green’ energy projects. Borrowing is not necessary for investment. Nor is it reasonable to expect future generations to pay for today’s white elephants.

  • Mark Standley says:

    Oil isn’t just a fuel. It is used in a huge range of modern materials such as plastics, materials which may prove hugely important in exploiting future energy sources.

    To use it all up running internal combustion engines is not something our childrens children will thank us for….

    • Robert Sadler says:

      You are assuming oil as fuel is the last fuel we’ll ever begin to use.

      You are also assuming we won’t find a successor to the internal combustion engine. That’s like thinking in the fifties that we would never find a successor to typewriters.

  • Recharge says:

    Robert,

    “I wouldn’t worry about the depletion of fossil fuels. We have plenty of oil to last a 100 or years.”

    This is true only if you take the largest estimate of total oil reserves (3012bn barrels) and divide it by the current rate of consumption (30billion barrels/year). Unfortunately, demand for oil is growing exponentially at 2-3%/year and currently proven reserves are a much lower 1240bn barrels (http://www.eia.doe.gov/emeu/international/reserves.html). If you factor these numbers in to the calculation the oil runs out in about 25 years. Furthermore, the key question is not when oil runs out, but when production of oil reaches its peak, as it is the rate of production that determines how much useful energy is available at any point in time. There is a reason that the oil price is heading for $100/barrel and it is not because of those much maligned speculators: they are simply the messengers and are providing a useful service by signaling that there is a very serious problem approaching.

    “Secondly, the Universe never runs out of energy.”

    True, energy is conserved (first law of thermodynamics), but unfortunately that is not the issue. The issue is how much useful (high grade) energy there is, and this is where the second law of thermodynamics comes in. Every time we convert energy from a higher to a lower grade (ie. whenever we do anything at all) we irreversibly increase the entropy of the universe. The problem we have on planet earth is that we are currently living off (high grade) solar energy captured over several hundreds of millions of years (fossil fuels) and we are degrading it at an enormous rate into useless forms of energy. Mother nature has been carefully saving up for us over hundreds of millions of years, and this profligate generation has almost blown the lot in 100 years. And when it is gone, it is gone forever. Like I said, this is profligacy on an industrial scale and it is leaving our descendents with the mother of all problems.

    “This is because the discovery of one energy source (i.e. coal) leads to the discovery of another source (uranium) and so on. A few centuries ago there were no internal combustion engines to speak of and now nearly everyone has one. We should worry less about running out of existing forms of energy and occupy ourselves with discovering the next one. That is progress.“

    I applaud your optimism and I sincerely hope you are correct. But I have to say I am very puzzled by your attitude. On the one hand you fret endlessly about the sustainability of our debt and pension liability and express outrage that policy makers could have allowed this to happen. On the other hand you are cavalier to the point of negligence about our reliance on an unsustainable energy and resource base (‘something is bound to turn up’ appears to be your mantra). In the end, it is our ability to manipulate physical resources that is the source of our wealth. If we degrade these high quality resources too much without leaving a viable alternative for our descendents, we leave everyone with a lower standard of living in the future and not just the holders of a pension claim. Indeed, if you are indeed correct and there are no meaningful future resource constraints, then we will simply grow our way out of these pension liabilities, so there really is no problem if we adopt your cornucopian world view.

    • mrg says:

      “There is a reason that the oil price is heading for $100/barrel and it is not because of those much maligned speculators: they are simply the messengers and are providing a useful service by signaling that there is a very serious problem approaching.”

      As it happens, I read Matt Taibbi’s “great vampire squid” article yesterday. He maintains that supply and demand had nothing to do with the the previous spike, when “the price of a single barrel went from around $60 in the middle of 2007 to a high of $147 in the summer of 2008”:

      That summer, as the presidential campaign heated up, the accepted explanation for why gasoline had hit $4.11 a gallon was that there was a problem with the world oil supply.

      But it was all a lie. While the global supply of oil will eventually dry up, the short-term flow has actually been increasing. In the six months before prices spiked, according to the U.S. Energy Information Administration, the world oil supply rose from 85.24 million barrels a day to 85.72 million. Over the same period, world oil demand dropped from 86.82 million barrels a day to 86.07 million.

      I haven’t investigated his specific claims, and I don’t know whether the current surge in oil prices is genuinely due to supply and demand, but we shouldn’t assume that every jump in the price of oil is due to rational expectations about the future oil supply.

    • Robert Sadler says:

      Recharge,

      Let’s not conflate two completely different issues e.g. energy and government debt.

      When I look at the history of civilization I see a continued if oft interrupted technological progress. From the abacus to the personal computer, from fire beacons to mobile phones, the human race is constantly finding new solutions to existing problems. If we assume for the sake of argument that we will run out of oil at some point, well then it is pointless to fret about it. If there are 25 years left of oil and we reduce our consumption by half so that it lasts 50 years, well, we are still going to run out. Conservation is a negative and anti-human argument. We need to direct our resources towards finding new sources energy and using them more efficiently rather than wringing our hands about something we cannot avoid.

      Government debt is a drag on the economy and will impoverish all of us. It results in capital consumption which means you and I will be poorer as a result. Forget your children’s children because this affects you right now. This is money out of your pocket right now and a reduced earning power for you in the future. Rather than complain that you haven’t seen numbers showing how bad it is, go out and get the numbers yourself. I have, and they do not make for happy viewing. If things are not fixed Britain’s credit rating will be downgraded which will have a real and tangible affect on your life. Be under no illusions.

      Incidentally, capital consumption will make it much harder for the human race to resolve its energy problems.

      • Recharge says:

        “Let’s not conflate two completely different issues e.g. energy and government debt.”

        But they are not two completely different things – they are very intimately related – that is my whole point. GDP growth is predicated upon increasing energy throughput and the ability to service debt is predicated upon GDP growth.

        “Rather than complain that you haven’t seen numbers showing how bad it is, go out and get the numbers yourself. I have, and they do not make for happy viewing.”

        I have seen the numbers. My point is that I can’t say if they are particularly bad or not as there is no historical or international comparison for context. What I can say is that the UKs traditional measure of debt (excluding pensions) is not particularly high by historical or international standards. I can also say that if the economy grows at 2-3% a year for the next 60 years we will have no problem at all meeting these pension obligations. So why are you fretting and hand wringing as you seem to think that growth is not a problem.

        “Government debt is a drag on the economy and will impoverish all of us. It results in capital consumption which means you and I will be poorer as a result.”

        Nonsense – if the Government takes on debt to make sound investments then it creates economic value: that makes us all richer not poorer. I do not think it is a coincidence that since the creation of what you would no doubt call ‘big Government’ (ie. post WWII) we have seen an explosion in affluence across the Western world. That is a brute empirical fact. Be honest Robert, you don’t like the redistribution of wealth and you want to use this phony crisis to cut back Government redistribution of wealth and discredit Gordon Brown into the bargain. That is the simple truth.

        • Robert Sadler says:

          Recharge,

          On energy:

          I am referring to the issue of fossil fuel depletion. Whether and when we run out of oil is not directly related to the government’s ability to service its debt. Nor is it related to whether or not government should even be allowed to have a debt.

          On the numbers:

          The way to approach this is not to look solely at comparables especially at times and places that were as bad or worse, it is to look at the actual ability of the government to service its debt and what the actual consequences of continual increases in debt and why they occur. I am “fretting” as you put it because I can see the current and future financial impact on me as an individual and on society in general if the government does not get its finances in order. You may wish to consider why the credit agencies are warning that the UK will likely get a credit rating downgrade if the Coalition Government’s plan fails. Do you think credit ratings don’t matter?

          If the debt gets out of control the budget would be dominated by interest payments and the government would no longer be able to perform its function.

          On Capital Consumption:

          Redistribution of wealth is theft and unethical, and harmful to the economy and society at large. The government wouldn’t know a sound investment if Marc Faber and Jim Rogers smacked them in the face with one. Without the ability to conduct economic calculation government cannot determine whether it has created economic value or not. The government cannot conduct economic calculation because it does not have a profit motive. The government consumes capital because it arbitrarily takes money from you and I and wastes it on projects inferior to the ones we would choose to undertake. We have seen an explosion in affluence across the Western world in spite of government not because of it. If the government could create value the Soviet Union would be the wealthiest country on Earth.

          Phony crisis? You must be a government employee…

          • Recharge says:

            “Do you think credit ratings don’t matter?”

            I am highly sceptical about the ability of credit rating agencies to tell us anything worthwhile given their recent track record, so I don’t really understand why anyone takes anything they say seriously.

            “If the debt gets out of control the budget would be dominated by interest payments and the government would no longer be able to perform its function.”

            The problem with your argument Robert is that we are nowhere near this level.

            “Redistribution of wealth is theft and unethical, and harmful to the economy and society at large. “

            You and I just have to disagree here. It is not theft (and it is just silly to call it theft as it is perfectly lawful), it is not unethical and it is not harmful to society: on the contrary it is beneficial to society.

            “The government wouldn’t know a sound investment if Marc Faber and Jim Rogers smacked them in the face with one. Without the ability to conduct economic calculation government cannot determine whether it has created economic value or not. The government cannot conduct economic calculation because it does not have a profit motive.”

            Do you honestly think that the Government does not do an economic assessment of its investments? Have you never seen the Government’s guide to Cost Benefit Analysis (CBA) for infrastructure? If you haven’t, go and take a look on the various departmental web sites. Do you also seriously believe that no public sector activity (teaching, policing, medicine etc. etc.) creates economic value? Try living in a place where they don’t exist (Somalia maybe) if you really do believe this idea. Furthermore, we are constantly being told that the Government will get more than its money back from the banks it acquired at the height of the financial crisis (I heard some city pundit the other day saying it will turn out to be an excellent investment). This means that every private sector company in the world (every single one) missed this outstanding investment opportunity and only Gordon himself was capable of making the necessary economic calculation and seizing this fantastic opportunity.

            “The government consumes capital because it arbitrarily takes money from you and I and wastes it on projects inferior to the ones we would choose to undertake.”

            They do not arbitrarily take money and waste it. They take it in a structured, transparent and lawful way and invest it in projects that the private sector cannot or will not invest in (for various reasons).

            “We have seen an explosion in affluence across the Western world in spite of government not because of it.”

            I love this argument. What you really mean is that because the evidence does not support your a priori assumption that more Government is always bad, you move the goal posts and compare the actual outcome(which you don’t dispute was an explosion of affluence) with an imaginary result which was even better. You then conclude that we are actually worse off than we should be. Ingenious is the best that can be said about that.

            “If the government could create value the Soviet Union would be the wealthiest country on Earth.”

            This is a great example of what is known as the Straw Man fallacy. I am arguing that the Government can invest and create economic value not that they always do so. As I said before, some things are best done by the market and some by planning – it is choosing the right policy tool for the job that leads to the best outcome, not deciding that one tool is best a priori (market or planning). In addition, it simply does not follow logically that if Government’s could create economic value then the Soviet Union would have been the wealthiest country on Earth.

            “Phony crisis? You must be a government employee…”

            No, I’m in the private sector – always have been – and I recognize a phony crisis when I see one.

  • Nibbly says:

    “…consumption of non-renewable resources without giving any thought of how to replace them for future generations”

    This strikes me as hand-wringing nonsense.

    What on Earth would be the point of NOT using fossil fuels so our children can… what? NOT use them so that THEIR children can… not use them either?

    Are we to save our fossil fuels for enternity?

    It makes no sense to save such fuel for future generations who will just burn them up anyway. Perhaps we should all complain that previous generations didn’t bother to keep breeding horses?

    How am I supposed to go anywhere in my buggy without a decent supply of horses? There’s nowhere NEAR enough horses to go around!

    When you think about it, our previous generations failute to ensure our current horse supply is just criminal. Providing of course we use the same screwy logic as “saving our fossil fuels for future generations”.

    I mean all this forthcoming greenery power IS the power of the future, right?

    Or do you really mean that us plebs should walk, while government employees get to whizz past us in the blacked-out SUVs and military toys?

    N.

    • Recharge says:

      “What on Earth would be the point of NOT using fossil fuels so our children can… what? NOT use them so that THEIR children can… not use them either?”

      Please read the post properly and tell me where I said we should not use fossil fuels. What I actually said was that it was irresponsible to use them without a thought for how we would replace them. That is something entirely different.

      “Are we to save our fossil fuels for enternity? “it makes no sense to save such fuel for future generations who will just burn them up anyway.”

      The argument is slightly more sophisticated than that Nibbly. Of course we can use fossil fuels, but we use them according to the following (summary) principles:

      (i) Where there is a renewable substitute we ensure that the non-renewable resource is priced at the same level as the renewable substitute;

      (ii) Where there is no renewable equivalent we ensure that the non-renewable resource is consumed at a rate no higher than the depletion rate, namely: the current annual consumption expressed as a percent of estimated remaining resources (reserves plus yet-to-find).

      (iii) The price level is achieved through quotas and auctioning (like pollution trading).

      “Perhaps we should all complain that previous generations didn’t bother to keep breeding horses? How am I supposed to go anywhere in my buggy without a decent supply of horses? There’s nowhere NEAR enough horses to go around! When you think about it, our previous generations failute to ensure our current horse supply is just criminal. Providing of course we use the same screwy logic as “saving our fossil fuels for future generations”.

      Horses are renewable. We can breed more very quickly any time we like. Your analogy is therefore conceptually nonsense. We cannot breed more oil or coal any time we like.

      “I mean all this forthcoming greenery power IS the power of the future, right?”

      Right – but their development is currently too slow. If we were to price fossil fuels in line with the principles outlined above the adoption would be much faster.

      “Or do you really mean that us plebs should walk, while government employees get to whizz past us in the blacked-out SUVs and military toys?”

      Ehh????

      The wider point here is that there is a strand of libertarian rightist thought (which appears to be quite well represented here at the Cobden Centre) that has a massively inconsistent belief set. On the one hand, they get extremely worked up about Government debt being some kind of immoral imposition on future generations; on the other hand they are cavalier to the point of negligence about consuming non-renewable resources without a second thought about the legacy left for future generations. I find that strange, don’t you? After all, a debt is just an allocation of a claim on future resources, whereas the underlying physical resources (and our ability to manipulate them)is the ultimate entity on which this claim is made.

      • Robert Sadler says:

        The market will efficiently allocate fossil fuel according to the pricing mechanism. When the supply gets lower, prices will rise and people will adjust their use of it accordingly.

        I detect in your use of words like “we ensure” a preference for central planning. That will ensure Nibbly’s nightmare scenario of important officials like Al Gore riding round in luxury while the rest of us peddle bikes.

        There is no need for conservation policies or centrally planned direction of oil consumption. When the supply is lowered and the priced raised a substitute will be found.

        • Recharge says:

          “The market will efficiently allocate fossil fuel according to the pricing mechanism. When the supply gets lower, prices will rise and people will adjust their use of it accordingly. There is no need for conservation policies or centrally planned direction of oil consumption. When the supply is lowered and the priced raised a substitute will be found.”

          There are (at least) two things wrong with this somewhat simplistic argument that immediately spring to mind.

          First, the market cannot decide whether we should use these scarce resources today, or whether future generations should, for one very simple reason: future generations cannot bid in present resource markets and so their claim is not there to set the price. It is all too easy to argue that future generations will be better off due to inevitable “progress” and therefore not worry about the unrepresented claims of the future on exhaustible resources. But this is just code for saying I don’t care about the future and they can look after themselves. By adopting depletion quotas, as outlined in my last post, we adjust current market incentives to take account of the fact that we do not know what the future holds, and we try to create a framework for some kind of re-distribution of usage over time whilst allowing the market the allocate resources in the present – this is what markets do really well.

          Second, you seem to be unaware of the power of exponential growth. Global energy consumption is growing at around 2.6%/year – this means it doubles every 28 years. This also means that more energy will be consumed in the next 28 years than has been consumed in the entirety of human history to date. This, in turn, means that any delays or imperfections in the system of feedback (ie. the price signals in the market that trigger new investment) can have catastrophic results because the system will not be able to respond quickly enough. In concrete terms this may lead to significant ‘demand destruction’ to balance supply and demand. Demand destruction is of course a civilized code for people at the margins starving to death. If we try and create the conditions for a smooth transition to a new energy source through depletion quotas then we can avoid the worst consequences of demand destruction. If it turns out not to have been necessary then that is fine. After all, I don’t regret buying insurance for my house even if it doesn’t burn down.

          “I detect in your use of words like “we ensure” a preference for central planning. That will ensure Nibbly’s nightmare scenario of important officials like Al Gore riding round in luxury while the rest of us peddle bikes.”

          Again, you have a very simplistic black/white view of the world. I don’t have a preference for central planning. Rather, I have a preference for using the correct tool for the job rather than assuming a priori that there is always one perfect tool (ie. the free market). Sometimes the right tool is a free market, sometimes it is an artificial market (eg. emissions trading), and sometimes it is a central plan. We use our democratic system to determine which tool is the right one in which circumstances.

          • Robert Sadler says:

            Recharge,

            You seem to know me better than I know myself. I didn’t realize I had a simplistic black/white view of the world but I suppose I can count myself in with some great company; visionaries like George Bush and Bob Crow.

            I would caution you not to assume that concise comments always come from a simple mind. I would also suggest however, that sometimes (although not always) the simple argument is the correct one. Keynesian economics is an exercise in complexity but is also almost completely incorrect.

            I did have to smile to myself when after telling me how simplistic my argument was you told me about the “simple reason” I was wrong…

            Banter aside, I still believe you have a preference for central planning but I should make it clear I do not think you are a socialist. What I meant was that it appears to me that in this case, you think somebody, perhaps you, should decide how energy use is managed. This somebody would be a government agency that would centrally plan energy use, deciding on how to allocate and essentially establishing some form of rationing (depletion quotas?). The degree of central planning involved could be a lot or a little, depending on the preference of those in power.

            That said, as simple as my argument was and as complex as yours was, I do not see why letting the market process work uninhibited by the government is in any way inferior to your ideas of setting so-called “market incentives.” You have not explained way the market pricing mechanism would not efficiently allocate oil nor why if the supply fell, and demand rose, why a substitute would not be found.

            Btw, I am quite aware of the concept of exponential growth but I thank you for refreshing my memory on it. I don’t see how it proves that “depletion quotas” imposed from without are superior to the market process.

      • Robert Sadler says:

        “the legal status of pension liabilities. As I said to you before, I don’t think it is truly debt, but it is a relatively strong claim on the future of the economy: I’d say that gives it a status somewhere between debt and equity (convertible shares maybe). My point though is really that this has never been considered a debt in the past, so why have we suddenly decided it is now debt?

        The definition of debt can be “an obligation to pay or do something”. The government has an obligation to pay pensions ergo pension liabilities are debt. It has always been considered a debt.

        • Recharge says:

          “The definition of debt can be “an obligation to pay or do something”. The government has an obligation to pay pensions ergo pension liabilities are debt.”

          Well I can say that about almost anything. The Government has an obligation to educate the young, to defend our borders, to enforce the law, etc etc (take your pick depending on what you think the Government should do). Let’s add up all of these future ‘obligations’ and call it debt shall we? The point is there are many future claims (often no more than strong political expectations) on the future value of the economy. Some are legally debt and some are not. Pensions are not. That’s just another brute empirical fact.

          “It has always been considered a debt.”

          No it hasn’t. That is why the IEA has had to write a report saying that it is debt and why there are no historical figures to compare it with – it was never included in the debt calculations in the past.

          • Robert Sadler says:

            The clue is in the name. Pension Liabilities. A liability in the context of a financial liability, such as a pension liability, is an obligation to pay money to another party. It is not the same as say a bond, but it is indebtedness nonetheless. If you don’t like the term “debt” fine, just say liability. It’s obviously pointless to argue semantics. But regardless, a corporation must disclose its pension liabilities in its annual report and the Government should do the same. If I was looking to invest in a company and it had unfunded pension liabilities several times larger than its long-term debt, I would want to know about it.

  • Robert Sadler says:

    Recharge,

    Apologies for the multiple comments but I just saw this and had to comment:

    “In November 2010 the debt (£955bn) to GDP (£1481bn) ratio was 64.5% which is not particularly high by historical standards (this is lower than the average of the 20th century which peaked at 250% after WWII), nor by international standards (Japan is 192%, Germany is 73%, France is 78%, Italy is 116% and the US is about 70%).”

    Based on the Govt’s own June budget, if all goes well the nation will have a debt at the end of the fiscal year of £1.1tn. That is a debt to GDP ratio of 73%. As I have covered elsewhere (http://www.cobdencentre.org/2010/12/spending-cuts-student-revolts-and-the-debt-crisis/) if everything goes according to the Govt’s plan by 2015 we will be at 93%. Regardless, to compare our current situation to a time when the nation was completely bankrupt (just after WWII) or to compare us to other countries that are struggling as well does not mean that things are just fine now. Japan is a basket-case, Italy is on the verge of bankruptcy and the US is going to get downgraded. If the debt is not reduced the same will happen to us.

    The UK is not at breaking point yet but using broke and bankrupt countries as a standard by which to judge the state of our public finances is not rational.

    • Recharge says:

      Robert,

      “The UK is not at breaking point yet but using broke and bankrupt countries as a standard by which to judge the state of our public finances is not rational.”

      These historical and international comparisons are very important – they set the context for a rational debate yet they are rarely quoted. Normally, we just hear a lot of hysterical nonsense about the deficit with no rational argument about what it means.

      The truth is, the current level of debt is very far from unprecedented and is below the average of the last century (not the peak, the average). As I said, it peaked after WWII at almost 250% of GDP and thereafter reduced rapidly to 100% by 1970 and about 42% by 1979 (the end of the post war consensus). Bear in mind also that this debt reduction took place at a time of rapidly increasing public expenditure. So the empirical evidence tells us that we have extracted ourselves from a much higher debt burden whilst increasing public spending simultaneously in the not too distant past. We were able to do this because of economic growth. So, if you believe in never ending growth stop worrying about the debt – it really is a non-issue.

      By the way, if you are so viscerally opposed to Government debt, would you rather have surrendered in 1939 rather than take on the debt necessary to defeat Mr. Hitler? (That is a cheap shot I know, but it illustrates very clearly that Government debt is not necessarily a bad thing).

      • Robert Sadler says:

        Recharge,

        I agree that historical and international comparisons are important but I don’t that comparing the UK to countries that are equally screwed or by comparing us to a time when we were even more screwed necessarily shows that things are just rosy right now.

        Our post-war history was a series of deepening recessions, a decline of the Empire and Britain’s standing in the World, capped off by an IMF bail-out in the Seventies. By the end of the Seventies even the Italians were laughing at us and we were known as the “Sick Man of Europe.” This is not a time we want to go back to. What makes you think government debt will lead to never-ending growth?

        Is a reduction from 250% to 42% over 35 years rapid? That’s nearly as long as I’ve been alive. I wouldn’t want to live through that. In any case, if we are going to have a government it makes sense for it to live within its means (means being a budget that declines over time). If you or I incur a debt we will mostly likely pay it off ourselves, with our own money. If the government incurs a debt, put simply (I know you like simple arguments! ) it is likely some future taxpayer will have to pay it off. That is unethical.

        250% debt or German domination of Europe. Is that my only choice? I have to say though it looks like we got both…

        • Recharge says:

          Robert,

          “But regardless, a corporation must disclose its pension liabilities in its annual report and the Government should do the same. If I was looking to invest in a company and it had unfunded pension liabilities several times larger than its long-term debt, I would want to know about it.”

          A sovereign state is not a company. Pension liabilities on a company’s balance sheet are legally enforceable contracts. Public sector pension liabilities are not. That is just a fact.

          “I agree that historical and international comparisons are important but I don’t that comparing the UK to countries that are equally screwed or by comparing us to a time when we were even more screwed necessarily shows that things are just rosy right now.”

          I didn’t say things were rosy – just that they are nowhere near as bad as we are being led to believe by people with a political agenda (namely, to cut the size of the state and reduce or eliminate the re-distribution of wealth). Similarly, the current situation was not caused by what we are being led to believe (namely, a profligate Labour Government) but largely by the financial crisis caused by the private sector banks and its economic consequences (I repeat, look at where the debt/GDP ratio graph skyrockets – it is in the immediate aftermath of the financial crisis: before that the debt level had been rising very slowly and was only 36% of GDP).

          “Our post-war history was a series of deepening recessions, a decline of the Empire and Britain’s standing in the World, capped off by an IMF bail-out in the Seventies. By the end of the Seventies even the Italians were laughing at us and we were known as the “Sick Man of Europe.” This is not a time we want to go back to.”

          You make a number of assertions Robert, but now let me introduce you to the facts. The post war period to 1979 was one of almost uninterrupted growth. GDP expanded in every year except 1974 (-1.3%) and 1975 (-0.6%). In contrast, there were three years of economic contraction on Mrs Thatcher’s watch from 1980-1991, two of which – 1980 (-2%) and 1991 (-1.4%) – were worse than the worst year of the1970s. So it turns out that the ‘ever deepening recessions’ really started with Mrs Thatcher. Moreover, economic growth from 1949 to 1979 averaged 2.7% and in the 1970s it averaged 2.4%. This is in contrast to the glorious years of Mrs Thatcher (2.3%) and the Thatcher and Major eras combined (2.2%). So it turns out that the ‘Sick Man of Europe’ got a lot sicker once Mrs Thatcher applied her Snake Oil cure. In reality this label was just a piece of propaganda made up by the (Tory) tabloid press in support of Mrs. Thatcher’s election in 1979. I can’t say whether the Italians were laughing or not however.

          “What makes you think government debt will lead to never-ending growth?”

          I don’t. But the empirical evidence of the post war years indicates that rapid economic growth is possible with much higher levels of debt than we have today. So I repeat, if you believe that we can continue to grow at 2-3%/year because resource constraints are not a problem then I don’t see why today’s level of debt is a problem. The empirical evidence tells us that it is not.

          “Is a reduction from 250% to 42% over 35 years rapid? That’s nearly as long as I’ve been alive.”
          In my book yes it is rapid. Maybe when you have been around a bit longer you might learn to start thinking long term ;-)

          “If the government incurs a debt, put simply (I know you like simple arguments! ) it is likely some future taxpayer will have to pay it off. That is unethical.”

          Why is it unethical to take on debt to make value creating investments? If you think about it, every time we do anything at all we leave some kind of legacy for future generations. When we destroy an ancient woodland (that is literally irreplaceable) to construct a by-pass for example, we take something away from future generations. Is that also unethical? The justification we have for doing this is that we leave them with a more valuable asset, namely the by-pass. Similarly, when we take on debt to invest we leave the future with a negative (the debt) and a more valuable positive (the value created from a highly educated population for example). What is the conceptual difference between these two cases?

          “250% debt or German domination of Europe. Is that my only choice? I have to say though it looks like we got both…”

          Would that be the Germany that is ‘equally screwed’ like us because their debt level is higher? Or is that the Germany with outstanding manufacturing capabilities and the best infrastructure in the world (no doubt funded from debt) coupled with the strongest trade unions in Europe, very high marginal tax rates and a very generous welfare state (universal child benefit is much more generous in Germany than the UK). Personally I wouldn’t mind being dominated by some of that.

  • Recharge says:

    mrg,

    I couldn’t reply to your earlier posts because the space ran out so I’ll reply here.

    “No doubt you are right that ‘good luck’ (especially in our genetic and social inheritance) has a lot to do with the comforts that many of us currently enjoy. But I don’t think that someone else’s ‘bad luck’ is my fault. If anyone is to blame for their situation, it is their parents. I might be inclined to help them, out of basic human empathy, but I don’t owe them anything. Nor do I begrudge those who are luckier than me; we each have to play the hands we’re dealt.”

    It is not a question of blame or fault. I just think that where we can collectively make a difference to improve people’s lives who have been dealt a poor hand, I think we should try to do so. You clearly don’t. There any many things we cannot change and life will always be inherently unfair, but that does not mean we should do nothing where it is within our power.

    “We also shouldn’t forget that the worst-off in Britain are better off than those unlucky enough to be born in the Third World.”

    Yes – largely because we have an excellent welfare state. Otherwise there would be blind beggars on the corner of every UK city street like in Mumbai.

    “Surely if there is a moral imperative to compensate for ‘bad luck’, we should be spending less on welfare, and more on foreign aid.”

    In my opinion we should be spending a greater proportion of GDP on both. The trouble is, every attempt to increase foreign aid is blocked by right wing libertarians.

    “But even if you think redistribution is morally justified, you must recognise that our welfare state fails on its own terms. It doesn’t lift people out of poverty; it traps them in it.”

    In some cases that is true. But I would rather be trapped in modern welfare state poverty than the more disagreeable workhouse style poverty.

    “You might be interested in a recent article by Jeffrey Miron for National Affairs: Rethinking Redistribution (PDF). It’s set in an American context, but I think most of the same issues apply here.”

    Thanks – I’ll take a look.

    “‘Investment’ is a much-abused term. I see very little evidence that the shower of money on education and healthcare under New Labour has delivered, or is likely to deliver, commensurate benefits.”

    Really? Have you visited a local hospital or school recently? My old comprehensive school has been completely rebuilt in the last five years and has fantastic IT and sports facilities. Similarly, our hospital’s have world class medical facilities and waiting times are down significantly (I know as my grandfather has been very ill recently). I remember the old Victorian schools and hospitals of my youth and it is a complete transformation. What a legacy for future generations – I’m looking forward to getting old already. Of course the benefits will take time to feed through into official figures and no doubt Mr. Cameron will take the credit. But to say nothing has changed is just nonsense.

    “But setting aside the question of whether money is more likely to be wisely invested in the private or the public sector, there is something unique about government debt. In the case of government debt, future generations are held liable. It is wrong.”

    There is also something unique about Government investment – it is a public good and much of this investment would not happen without the coordinated action of the Government. Of course the investment is not perfect (what is), but it is not unreasonable to take on debt to make investments today to deliver value tomorrow. Again, I don’t understand why you are so concerned about the liability of future generations to debt, when you seem to lack concern about the depleted resource base we will leave them (which to me is a much more dangerous legacy). As I explained before, debt is just a legal claim and, in the limit, can be wiped out at the stroke of a pen. Physical resources on the other hand cannot be created at the stroke of a pen. Is your real concern that Government debt involves Government orchestrated redistribution of wealth rather than any legacy we leave for the future?

  • Current says:

    I’ve been busy recently, and I thought Mrg and Robert Sadler were doing a good job. But there are a few things I’d like to say about the environmentalism discussion.

    Somewhere in the discussion above Recharge wrote: “GDP growth is predicated upon increasing energy throughput”. This is a physicalist fallacy. Drawing trend lines through graphs of oil stocks as though the indicate something about GDP is all wrong. The wellbeing of people is in no way directly related to physical energy. Energy is needed to heat our homes, grow our food and for hundreds of other purposes. But, the input of energy isn’t proportional to the output in terms of satisfaction.

    Energy saving technology and energy saving investments may provide the same output for less energy input. But, more importantly, energy input has no necessary relation to satisfaction. A good film, for example, may cost the same number of joules to make as a bad one. Cross substitution means that as prices change for energy sources the relative prices and demands of other goods change. If energy prices rise then people reduce consumption of goods that require a lot of energy and raise that of goods that require less. The costs are born on the margins.

    Similarly, growth is not connected directly to input resources. Growth has never occurred exclusively through usage of more pure inputs. Improvements in efficiency of usage have always been very important. According to neo-classical economists improvements in productivity are the main source of growth, not greater use of non-renewable input resources. Though I don’t agree with them that it’s possible to break it down x% vs y% I agree that productivity is most important.

    Technological and economic progress has constantly brought new resources into use. Uses have been found for things that were useless. Until relatively recently in historical terms oil was useless. So was uranium ore, aluminium ore, silicon, most rare earth metals, most lignite and most deep-sea fish. All those things came into use either in the 19th or 20th centuries.

    We have a tendency when looking back at the past to consider everything then to be the same kind of asset it is now. That wasn’t the situation at the time though, many things have changed from being economically useless to being valuable resources. So it ought not to be any surprise to us that when we don’t clearly see what things will become resources in the future. I thought Nibbly’s comment about that was great. Recharges reply that horses are renewable and oil isn’t misses the point. The point is we can’t judge the output of the far future by considering the technology of today.

    Recharge accuses Robert Sadler of not understanding exponential growth. In my view it’s he who doesn’t understand it. Growth doesn’t mean use of more energy or necessarily increased inputs, it doesn’t mean using the same resources we have in the future.

    The demand keeps coming from environmentalists for us to “think of the future”. But, we do think of the future. All humans are forward looking and take decisions with the future in mind. That goes for consumers and owners of resources as much as anyone else. Those who love central planning coat their expectations of the future in worry and elaborate language. But that doesn’t mean that other people or ordinary people don’t think about it, they do, just more discretely.

    The idea that the wishes of future generations have no weight in capital markets is equally wrong. In the long run we are all dead, but we’re not all dead at the same time. Generations overlap and earlier generations have expectations of future generations buying capital that exists at that time. Suppose I plan to build a house, for example. I could build it to last 50 years because by the time it falls apart I’ll be dead. But, that it’s necessarily sensible because the value of the house at any time depends on the flow of services that it will provide in the future to anyone who can pay for them then. If I build it to last 50 years and decide to sell it 25 years later then potential buyers will factor in that it only has another 25 years of life left. Indeed because this is expected to happen the lifetime of the house will be factored into it’s value when it’s built. So, what I should do is to calculate the costs of building houses of various durabilities and compare that with the prices I can get for them and pick the best trade off.

    It’s quite true though that future utility is discounted by the rate of interest. Those who like government intervention ought to consider what the likely discount rate of a government is given it’s short term in office. The tendency for modern governments to push problems into the future is simply because they don’t have to deal with the consequences.

    The idea that humans are diminishing resources with no thought about replacing them is similarly wrong. Just look at all the research going on into new energy sources and the investment going into energy saving. Certainly states are investing in that, but so is the private sector. If I read the discussion above correctly everyone agrees that speculators are forward looking. With this in mind isn’t it wise to be sceptical about claims that oil is going to imminently run out? If it were then speculators who follow the oil industry closely would be taking advantage of that knowledge by storing oil now for later. Oil companies would be storing it by leaving oil underground in wells instead of extracting it. In fact, it would take a very imminent shortage to make it worth the while of oil companies to do that. If oil were to become twice as expensive in 20 year it still wouldn’t be profitable compared to the rate of interest. This doesn’t mean the market is short sighted, it means that there are better things to invest in for the next 20 years. Personally I won’t be investing in oil for my retirement, but rather in shares because as usual the real shortage is in human talent and effort and good businesses to channel them.

    It could be claimed that Robert Sadler and I are being ideological by approving of debt doomsaying but not environmental doomsaying. What we are doing though is simply following the view of history and the market. Throughout history many regimes have been impoverished by the reckless spending of their rulers. Few have suffered from self-inflicted environmental disasters. The markets believe that the chances of default, either by inflation or by direct default, are high hence the mutterings about downgrading and the low price of sterling. But the markets believe the chances of “peak oil” coming anytime soon are low as shown by the fact that even marginal oil resources are being exploited.

    • Recharge says:

      Current,

      Apologies for the delay in replying but I have been busy. What you are saying, in summary, is basically Julian Simon’s argument in ‘The Ultimate Resource’. This is great in theory, but as you know Current, I like to look at the empirical facts.

      “Somewhere in the discussion above Recharge wrote: “GDP growth is predicated upon increasing energy throughput”. This is a physicalist fallacy. Drawing trend lines through graphs of oil stocks as though the indicate something about GDP is all wrong. The wellbeing of people is in no way directly related to physical energy. Energy is needed to heat our homes, grow our food and for hundreds of other purposes. But, the input of energy isn’t proportional to the output in terms of satisfaction.”

      I agree that there is no direct proportional relationship – it is much more complex than that. But it is simply an empirical fact that economic growth has always and everywhere been accompanied by growth in physical energy throughput. It is true that the energy intensity of the Western world has reduced over the last few decades, but total energy consumption has always increased year on year whenever there has been economic growth. So whilst it may be theoretically true that we can grow and reduce energy consumption simultaneously, it has, as a matter of fact, never been achieved. It is also a fact that the poorer you are the more direct the relationship is between consumption and well being. Since the majority of the world’s population live in (by Western standards) extreme poverty, this means that for most people in the world there is a very direct relationship between energy consumption and well being. Try camping for a few nights if you don’t believe me. This means that there will need to be significant growth in energy consumption to facilitate significant increases in GDP for most of the world. Indeed, according to the US Energy Information Administration’s (EIA) International Energy Outlook 2010 total world consumption of energy if forecast to increase by 49 percent from 2007 to 2035. The largest projected increase in energy demand is for non-OECD economies. Similarly, they illustrate clearly the relationship between energy use and GDP: “In the IEO2010 Reference case, world energy consumption increases by 49 percent, or 1.4 percent per year, from 495 quadrillion Btu in 2007 to 739 quadrillion Btu in 2035. The global economic recession that began in 2008 and continued into 2009 had a profound impact on world income (as measured by GDP) and energy use. After expanding at an average annual rate of 4.9 percent from 2003 to 2007, worldwide GDP growth slowed to 3.0 percent in 2008 and contracted by 1.0 percent in 2009. Similarly, growth in world energy use slowed to 1.2 percent in 2008 and then declined by an estimated 2.2 percent in 2009.”

      “If energy prices rise then people reduce consumption of goods that require a lot of energy and raise that of goods that require less. The costs are born on the margins.”
      A new equilibrium will be reached for sure, but not necessarily a better one. Like I said, demand destruction is the ultimate substitute, but it is not necessarily very pleasant. If you are very poor, demand destruction may mean going without food and other basics, not switching from two holidays a year to one, and turning the thermostat down a notch.

      “Similarly, growth is not connected directly to input resources. Growth has never occurred exclusively through usage of more pure inputs. Improvements in efficiency of usage have always been very important. According to neo-classical economists improvements in productivity are the main source of growth, not greater use of non-renewable input resources. Though I don’t agree with them that it’s possible to break it down x% vs y% I agree that productivity is most important.”

      Growth has never occurred exclusively through usage of more inputs, but it has also never occurred without more inputs. That is another empirical fact.

      “I thought Nibbly’s comment about that was great. Recharges reply that horses are renewable and oil isn’t misses the point. The point is we can’t judge the output of the far future by considering the technology of today.”

      No. You missed my point. It is for the very reason that we can’t see very far into the future that we should be extremely cautious when using non-renewable resources – precisely because we do not know what useful purposes they may have in the future. Nibbly’s analogy would only be correct if our ancestors had killed all horses and none had survived (as we are currently doing with many species). In this case they would have destroyed our option to use horses in the future. This is indeed exactly what we do when we consume non-renewable energy: we take away an option for the future. That does not mean we should not use non-renewable resources, but it does mean we should use them very carefully (ie. depletion quotas).

      “Recharge accuses Robert Sadler of not understanding exponential growth. In my view it’s he who doesn’t understand it. Growth doesn’t mean use of more energy or necessarily increased inputs, it doesn’t mean using the same resources we have in the future.”

      This is just wrong. All of the empirical data indicates that growth does indeed mean increased use of energy (see above).

      “It’s quite true though that future utility is discounted by the rate of interest. Those who like government intervention ought to consider what the likely discount rate of a government is given it’s short term in office. The tendency for modern governments to push problems into the future is simply because they don’t have to deal with the consequences.”

      As a matter of fact the UK Government uses a lower discount rate for assessing capital projects (eg. roads and railways) than commercial entities. Similarly, Stern was strongly criticised (mainly by right wingers like Nigel Lawson as I recall) for using a low discount rate in his report on the economic costs of climate change.

      “The idea that humans are diminishing resources with no thought about replacing them is similarly wrong. Just look at all the research going on into new energy sources and the investment going into energy saving. Certainly states are investing in that, but so is the private sector..”
      Hang on – most of the work that is being done on renewable energy and energy efficiency (even in the private sector) is driven by Government policy one way or another (regulation or subsidy). All of the key renewable technologies have developed in those markets (Denmark – wind; Solar PV – Germany) where Government policies were explicitly introduced to support them.

      “If I read the discussion above correctly everyone agrees that speculators are forward looking. With this in mind isn’t it wise to be sceptical about claims that oil is going to imminently run out?”

      No one said oil will imminently run out. The point is that peak production/annum will be reached imminently (if it has not already been reached). At this point 50% of the ultimately recoverable oil remains to be exploited, but it also means that oil production will fall year on year as soon as the peak is passed. This in turn means that oil prices will fluctuate around an ever increasing underlying trend. Take a look at the oil price over the last few years – this is exactly what has been happening. The speculators are doing exactly what you would expect if peak production was being reached – driving the price up to unprecedented levels.

      “Throughout history many regimes have been impoverished by the reckless spending of their rulers. Few have suffered from self-inflicted environmental disasters.”

      Not true – there are many historical examples of civilizations depleting or degrading the physical environment that supports them which ultimately leads to their collapse. Take a look at Joseph Tainter’s seminal work ‘The Collapse of Complex Societies” for detailed descriptions.

      • Current says:

        What you are saying, in summary, is basically Julian Simon’s argument in ‘The Ultimate Resource’.

        I haven’t read that book. I’m not sure that I’m making the same argument, though I expect it’s quite similar.

        So whilst it may be theoretically true that we can grow and reduce energy consumption simultaneously, it has, as a matter of fact, never been achieved

        Until quite recently the same could have been said for population growth. Now though several countries have had economic growth while population has remained stable or shrank.

        Growth has never occurred exclusively through usage of more inputs, but it has also never occurred without more inputs. That is another empirical fact.

        It’s important to separate what I’m saying here from the normal meaning of “theoretically possible” in engineering and physical sciences. When we say “economic growth” we’re talking about how productivity improvements show themselves on aggregate. All other things being equal we don’t have any reason to think that productivity enhancements due to technological development and capital accumulation will cease.

        The question is whether productivity improvements will be able to compensate for a decline in available resources. The question is which “force” is “stronger” in this particular case.

        Think about this for a moment…. Suppose in some economy availability of input resources falls and output continues to rise. Does that prove that the same would happen in any other particular case? It doesn’t because we’re talking about the aggregate results of lots of local behaviour.

        It is also a fact that the poorer you are the more direct the relationship is between consumption and well being. Since the majority of the world’s population live in (by Western standards) extreme poverty, this means that for most people in the world there is a very direct relationship between energy consumption and well being.

        I agree with you there.

        A new equilibrium will be reached for sure, but not necessarily a better one. Like I said, demand destruction is the ultimate substitute, but it is not necessarily very pleasant.

        Well demand curves can move to the left. That’s not necessarily a bad thing or a good thing, and it isn’t a “substitute”. It can happen because other substitutes have been found for a good which are as good or better. That was how demand for whale oil and buggy whips was destroyed. Or it can mean that living standards have fallen, like a fall in demand for luxury goods in a war, or the examples you give.

        As I understand it “demand destruction” is a term for reductions in demand that come about because earlier price rises in a good have forced buyers into capital investment to avoid buying that good.

        My point here is that not everything turns upon new technology, there is substitution too.

        You write:

        If you are very poor, demand destruction may mean going without food and other basics, not switching from two holidays a year to one, and turning the thermostat down a notch.

        And:

        Indeed, according to the US Energy Information Administration’s (EIA) International Energy Outlook 2010 total world consumption of energy if forecast to increase by 49 percent from 2007 to 2035. The largest projected increase in energy demand is for non-OECD economies.

        What exactly are you arguing here? Are you saying that developing countries will first grow, then as resources run out they will shrink? Or, are you saying that they won’t grow at all?

        I fear the latter outcome, but not because of rising energy prices. What I think is more important is the stability of developing countries, their governments and their other institutions. Remember there must be economic growth in these countries first to allow them to have the option of buying more oil even at current prices.

        That does not mean we should not use non-renewable resources, but it does mean we should use them very carefully (ie. depletion quotas)

        I agree with you that we must use them carefully. But, private actors are already motivated to do that through the possibility of future profit. “Depletion quoatas” aren’t necessary. Governments are very unlikely to want to slow down resource exploitation, they’re much more likely to speed it up. In most places where oil has been found, a governments owns the rights and that government sell the rights to oil companies they have imposed financial penalties for extracting oil too slowly. There is no electoral capital to be gained from jobs and growth in the future while another government is in office.

        As a matter of fact the UK Government uses a lower discount rate for assessing capital projects (eg. roads and railways) than commercial entities.

        For capital projects there are electoral benefits that go beyond the economic benefits. In my opinion governments like construction projects not because of the future growth they bring, but rather because they can take credit for creating jobs for important interest groups. Accepting a low rate of discount isn’t a clear demonstration of greater forward thinking, think about negative discount rates for example.

        Hang on – most of the work that is being done on renewable energy and energy efficiency (even in the private sector) is driven by Government policy one way or another (regulation or subsidy).

        Take cars for example, research into more energy efficient engines and into aerodynamics was (and is) funded to a great extent by car companies. Many other energy efficiency improvements have been pursued by businesses. Power station construction companies, electricity companies, telecommunications companies, lighting companies have all pursued a path of improving the energy efficiency of their products. This has happened because of the scarcity of the energy inputs, as well as because of government subsidies. I won’t deny that government subsidies have been provided for energy efficiency research in these areas too.

        I worked quite a lot on energy-efficiency when I worked for Dell.

        The worlds government’s can’t take full responsibility for this progress by any stretch of the imagination. Energy consumption today would be far higher without the technology the private sector has developed for energy efficiency.

        All of the key renewable technologies have developed in those markets (Denmark – wind; Solar PV – Germany) where Government policies were explicitly introduced to support them.

        I’m sure you know that it was already well known how to build Solar panels before German government subsidised them to encourage installation.

        Wind turbines are similarly not that complex. They are built mostly using knowledge and technology from other fields. (Though there are some clever tricks in there I know).

        Let’s suppose that these technologies are economic in the long term. In that case what the Danish and German governments have done is to encourage there use before they became economic for the private sector. They have brought forward their creation and adoption. But, if these technologies are economic and other energy sources will not last then they would have been adopted anyway as prices of those other energy sources rose.

        The point is that peak production/annum will be reached imminently (if it has not already been reached). At this point 50% of the ultimately recoverable oil remains to be exploited, but it also means that oil production will fall year on year as soon as the peak is passed. This in turn means that oil prices will fluctuate around an ever increasing underlying trend.

        Extraction per year is not economically connected to the amount of available oil. The “stock” is different to the “flow”. How extraction occurs depends on the costs of it and the expected prices of oil in the future compared to now.

        The speculators are doing exactly what you would expect if peak production was being reached – driving the price up to unprecedented levels.

        What I was trying to say earlier was about speculation and it’s relationship with future prices. If future prices are going to be much higher then speculators will buy oil and have it stored. As a result, due the gap between the spot price and future price narrows.

        Let’s suppose that due to “peak oil” the price of oil will be twice as high as it is now in five years time. If that really is the case then why don’t speculators store it? In many cases it could be stored by simply not extracting it from a well, though only direct owners of oil can do that. So, we’re left with the question why oil owners are not keeping their oil. In general this is the problem with the peak oil theories, the proponents seem to believe themselves to be more knowledgeable than the oil industry. But, it’s the oil industry that has the local knowledge about stocks and production.

        Not true – there are many historical examples of civilizations depleting or degrading the physical environment that supports them which ultimately leads to their collapse. Take a look at Joseph Tainter’s seminal work ‘The Collapse of Complex Societies” for detailed descriptions.

        I’ve heard of that book though I haven’t read it. I thought that Tainter’s claim was the “societal complexity”, according to some vague definition, has diminishing returns. I thought it was Jared Diamond’s claim that degrading the physical environment is important.

  • Recharge says:

    Robert,

    You have been very busy….

    “You seem to know me better than I know myself. I didn’t realize I had a simplistic black/white view of the world but I suppose I can count myself in with some great company; visionaries like George Bush and Bob Crow.”

    It is nothing personal Robert – I think many libertarians have a very black/white view of the world. They seem to hold many a priori beliefs that have very limited or no empirical evidence to support them, but always cite them as if they are self-evidently true (eg. the market is always right in all circumstances (this is an article of faith), government spending never creates economic value, high taxes always dis-incentivise hard work, tax take increase if tax rates are lowered etc. etc). I find this approach to the world simplistic because most of these propositions are not self evidently true and there are many examples in the real world where they are manifestly not true.

    “Banter aside, I still believe you have a preference for central planning but I should make it clear I do not think you are a socialist. What I meant was that it appears to me that in this case, you think somebody, perhaps you, should decide how energy use is managed. This somebody would be a government agency that would centrally plan energy use, deciding on how to allocate and essentially establishing some form of rationing (depletion quotas?). The degree of central planning involved could be a lot or a little, depending on the preference of those in power.”

    I don’t have a theoretical preference for planning. I take a look at the situation, try to understand its nature, and see which policy tool is most likely to provide an efficient and equitable solution. Sometimes this does require central planning (fighting a war for instance), and sometimes it requires a free market (regulated to some extent especially with respect to competition). The point is that I try to judge what the right tool is and not decide a priori which is right. You appear to decide a priori that markets are always the right answer. I find this approach simplistic.

    “You have not explained way the market pricing mechanism would not efficiently allocate oil nor why if the supply fell, and demand rose, why a substitute would not be found.”

    I have said that I do not think markets are necessarily very good at allocating finite resources efficiently over a long period of time because future human beings cannot bid into current resource markets. This means our trivial use of a resource will always outbid a future potentially more important use. I agree that the market will always find a substitute in the sense that supply and demand must always balance, but the question is not whether a substitute will be found, but what kind of substitute will be found and how we adjust to it. You appear to assume that the substitute will necessarily be better (inevitable “progress”) but I do not think that you are warranted in making this assumption (it reminds me of the old joke about the economist on a desert island with a tin of beans – “Let’s assume we have a tin opener”). If this substitute turns out to be more expensive or less flexible, then a large amount of our existing infrastructure may become obsolete in a very short period, so the costs of transition may also be very high. In the limit, demand destruction is the final substitute, but as I said in a previous post this is not necessarily a pleasant experience.

    “Btw, I am quite aware of the concept of exponential growth but I thank you for refreshing my memory on it. I don’t see how it proves that “depletion quotas” imposed from without are superior to the market process.”

    Well we will soon find out (btw 20 years is soon in my book).

  • Tim Lucas says:

    Hi there,

    Going back to the original debate of the UK government’s debt management problems, I think that the following is interesting:

    The average maturity of UK government debt is the highest in the world at 14 years, all borrowed in Sterling. Most other countries group around 5-6 years, with Germany at 6 years and the US at 5.

    http://www.telegraph.co.uk/finance/financetopics/profiles/5226378/Robert-Stheeman-the-gatekeeper-of-UK-debt.html (sorry can’t find a better source).

    In combination with the debt/GDP statistics that were given by Recharge above, it seems reasonable that the UK government is far less likely to renege on its debt than other nations. They’ll fail first. This is reflected in bond yields with UK government bonds offering just 3.6% currently, comparable to other nations considered “good risk” with similar central bank rates.

    However, despite all this, I can’t agree with Recharge’s conclusion that the UK government has “capacity to take on more debt”.

    The real concern for the UK is not current government debt, but the combination of this plus the private sector debt held in the banking sector (Royal Bank of Scotland alone has debt of £1.6tr which is 1.5x UK government debt) and the absurdly high prices of property.

    In effect, the government is hooked on financial services taxes which can only continue with a policy of extraordinarily loose money. I think that financial services taxes provide some 30% of total tax take and that propery taxes add to this. No correction of bubble property prices and no change in the policy of feeding these insolvent banks can occur without alarmingly reducing tax-take. This really would scare the markets into marking up the cost of UK government debt.

    At least 30% of government revenue comes from businesses that are essentially insolvent, unsustainable businesses, entirely dependent on continued money-printing! On top of this we should add all the other bubble activities engendered by low-inerest rates which would surely go belly-up at the moment that liquidity tightens. This is eye-watering!

    It is because of this that the UK government cannot afford to take on any more debt. Given that tax take is already at a very high level in the context of history the only viable solution is to cut spending.

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