Britain’s coming economic collapse, and the not-to-be-criticized illusions that have fed it

An Indian living in the West writes:

Going back to what I said here about the economy and the massive dependence of the majority of Britain’s people on the state: I am going to stick my neck out and say that Britain’s currency is not far away from collapse. Government largesse is out of control and the country no longer produces anything of value. Compare it with Germany (Europe’s strongest and most robust economy). The Germans are the world’s greatest exporters, from cars to precision tools to heavy machinery to high speed trains. Germany remains an economic powerhouse. German-built quality speaks for itself. “Made in Germany” remains a hallmark of superb quality. What about Britain? What does it produce these days? Other than Rolls Royce engines and JCB construction equipment, I cannot think of anything else that is British made and visible outside Britain. Having spent considerable time in Britain, I was often shocked and appalled at the sheer incompetence and laziness that characterised a good portion of the workforce. I know I will get a lot of heat from your British readers when you hear this. But those are the facts. There is a reason why British industry has been crushed by the Germans, the Japanese, and now the Koreans and Taiwanese in one industry after another. British built quality is rubbish (with some notable exceptions).

The post-1980s Thatcher boom was built on financial services and easy credit (private debt in Britain is the highest in the world—higher than even America) and the export of North Sea oil. North Sea oil production is no longer large enough to satisfy even domestic demand let alone leave enough for exports and financial services is on its last legs (for reasons that are too numerous to mention here).

The British have been living the high life on borrowed money for at least a decade, if not more. When Brown was Chancellor he liked calling it a “miracle economy.” This is true. The fact that so many were living the high life despite producing zilch was certainly a miracle! The party’s over now. It’s time to deal with the hangover and pay the bills. It’s not going to be pretty to watch. Watch out for a Sterling crisis in the not too distant future. Britain will soon be mentioned in the same breath as Greece—which is not entirely unfair, the economies of both nations are grossly over-indebted and produce nothing of value that can be traded.

LA replies:

Your comment came in just as I was posting the article by Matthew Lynn which makes the same point.

ILW replies:

The problem has been brewing for a long time. The mainstream press started noticing this after the Lehman debacle. I was saying this to my business associates in mid ‘07. You cannot borrow and spend in perpetuity and expect to stay solvent. If individuals and households cannot do that, countries cannot do that either.

This is another symptom of the moral decay of Britain. They used to be a thrifty people. But their healthy prejudice towards savings were wrecked by post-war social engineering and Keynesianism.

ILW continues:

By the way, America is going along the same road. Have a look at this movie.

LA replies:

Here’s something I don’t understand. The things I mainly write about—immigration, Islam etc.—are outside the mainstream, counter to the orthodoxy, hard for people to understand.

But problems like these financial messes are not outside the mainstream, they are not hard to understand, they are part of the accepted common sense of the world. And yet all the great experts, ignoring this common sense, have led their countries to insolvency.

ILW replies:

True. The press wants to say and write about things that people want to hear, generally speaking.

And people don’t want to be told that their country is in deep trouble financially. So all these years when New Labour was massively expanding government spending and running up debt in an orgy of financial indiscretion, no one in the press in Britain wanted to confront them and say that they were engaging in irresponsible behaviour and that this couldn’t last. If an anything, there were too many who believed that the ephemeral prosperity of those years (built on borrowed money) would last forever. When the Tories tried to point this out in elections between, they got crushed every time. The press labeled them “the nasty party.” I thought that was a symptom of what the country had become—suckers for sappy nonsense who didn’t want their debt fueled party interrupted by sensible killjoys.

Now that the chickens have come home to roost, they need to deal with it. The whole country is up to its eyeballs in debt (so it’s not just the government). In a decade, you will see Britain mentioned in the same breath as a number of other countries that are called economic basket-cases. As a side point, I think immigration itself will become less of an issue because what attracted immigrants to Britain was prosperity. When that disappears, you will see a big drop in numbers. In fact, most of the Poles have already returned from what I hear.

The mistake people make is that they think this is all new. Britain went bankrupt numerous times after WWII but was saved by the United States every time. This is why Britain is not mentioned in the same breath as Argentina. Check this out as an example from the 1970s. Back then, the country was without power four days of the week! Most people these days have no idea what things were like just a few decades ago.

I regret to say this but they are going to have a repeat of this. And this time, it is going to be a whole lot worse.

LA replies:

But every bubble—an expansion of wealth built on the expansion of credit and the expectation that the expansion of credit will continue indefinitely—comes to an end. Repeat: all bubbles come to an end, generally suddenly and unpleasantly. Everyone knows this. I, with a sub-normal understanding of economics, know this. The 1929 stock market crash. The 1987 stock market crash. The dot-com crash. The housing bubble crash. And numerous other popped bubbles throughout modern history. So how could any economic policy person or business finance officer not realize that this was dangerously unsustainable and would lead to a crash?

Again, with my issues, like immigration, almost no one understands the underlying realities and principles, and understanding them requires that one oppose the sacred beliefs of modern society, so it’s understandable that no one in the establishment gets the disaster to which their beliefs and policies are leading. But with these economic issues, everyone who knows anything about economics and business understands the principle that you can’t live forever on ever-expanding credit. Therefore it’s inconceivable that the entire system allowed this castle to be built on credit, without people in responsible positions forcefully warning the country against it. Yet that is what seems to have happened.

ILW replies:

That first sentence in your e-mail is straight out of Von Mises. Mises said this about credit expansion and fiat money. Of course, the Austrians are considered “crackpots” by the “mainstream” economists. And part of the reason why we are in this financial mess is what has become of mainstream economics as a discipline in universities.

You would think that Keynesianism having been thoroughly discredited in the 1970s would be thrown into the trash heap. Yet we have Keynesians like Krugman winning Nobel Prizes and advising the U.S. government to keep running deficits into the indefinite future because the whole world has no option but to finance American profligacy.

LA replies:

What you’re saying is, this disaster has happened because the statement, “A country cannot enjoy sustained and ever-expanding prosperity created from ever expanding credit,” has become as forbidden as the statement, “Different races and nationalities have different mean IQs.” And, interestingly, the first statement stems from liberalism as much as the second does. Liberalism is the belief that all desires of all human selves should receive equal fulfillment and the maximum possible fulfillment. To say that universal prosperity, built on ever expanding credit, cannot endure, is to say that not everyone can enjoy prosperity; it is to return us to an unequal, constricted world. So the statement has been prohibited.

ILW replies:

You should watch “Great Offices of State,” a BBC documentary. All four parts are very interesting. There is one episode which deals with the Home Office and its troubles dealing with crime and immigration. Another with the Foreign Office and the last deals with the Treasury.

The episode on the Treasury is very interesting because it chronicles the various bankruptcies Britain has experienced after WWII. At the end of that they have an interview with Alistair Darling who served as Chancellor of the Exchequer after Brown became Prime Minister. On the Lehman collapse and the subsequent banking crisis, I found it amazing that he says blatantly, “But no one saw it coming. Find me one economist who saw it coming.” That I thought was a truly astounding statement. But that means that the government could absolve itself of all responsibility. It is true of course that the mainstream economists were utterly clueless.

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Rufus W. writes:

You asked:

Here’s something I don’t understand. The things I mainly write about—immigration, Islam etc.—are outside the mainstream, counter to the orthodoxy, hard for people to understand.

But problems like these financial messes are not outside the mainstream, they are not hard to understand, they are part of the accepted common sense of the world. And yet all the great experts, ignoring this common sense, have led their countries to insolvency.

I don’t suspect that that the experts are truly so ignorant. While much foolishness has doubtless been justified by pseudo-scientific economics, at the core it’s a humanities study which means that at its best it’s just codified common sense.

The impression I have is that it is the politics of indulgence, not failure to understand what’s going on that causes the problem.

I’ve been learning of recent just how little popular conceptions of Keynesianism have to do with what the man actually said. An example, this. It’s fairly well known that governments were engaging in deficit spending and other supposedly “Keynesian” practices long before the General Theory was published. Likewise this. A startling number of people believe things that economists of all stripes would say is obvious nonsense.

I conclude that financial experts and economists have very little control over monetary decisions that governments make. In general they are ignored, especially when it comes to tough, but necessary, but politically unpopular measures. That’s not to say they’re completely useless to the people actually making the disastrous decisions; having a few economists for decoration around lends an air of scientific legitimacy to their actions, and they can potentially be used as whipping boys when something disastrous happens.

I wouldn’t even be that surprised if a good number of regulators, lawmakers and the like have a dim understanding that what they’re doing is not sustainable, but are quite confident in their ability to shirk blame and get out of the game before the collapse has any effect on their own well being. As you say, the entire scheme of things violates common sense.

May 10

Michael N. writes from England:

I was very impressed with your postings and exchange on Britain’s economic collapse. Who is ILW? Does he live in London? He sounds like someone I would like to meet. His observation, in particular, on how the press treated ANY adult comments by Tories—labeling them the “nasty party”—is dead on.

I have a very good banker friend, whom I meet for dinner regularly, who has 35 years’ worth of tales to tell. In a nutshell, the bank CEOs simply did not want to hear what they did not want to hear—they were making too much money to have someone rain on their parade. Also, banks simply eviscerated the entire program of training in risk management that all bankers used to get. Worse, banks begain promoting LAWYERS and marketing guys to the top positions—not risk managers or guys who really understood what was going on.

Also keep in mind that quite a few people did sound the alarm. I would also read the recent book on John Paulson, the hedge fund manager who made $3 billion in one year betting against the subprime market. He is not a villaon—in fact, he is one of the few people who really does his homework. And LOTS of people ignored him or ridiculed him for telling people that the whole thing was a house of cards.

All this said, everyone was opering under two perfectly reasonable assumptions: 1) the real estate market would not decline EVERYWHRE (it had not since the Great Depression, after all); and 2) portfolios rated AAA by the credit rating agencies was an accurate assessment of their true risks. I’ve read twelve books on the financial crisis so far, and it is clear that virtually everyone was operating under these two reasonable—but very wrong—assumptions. (Their internal emails confirm it again and again.)

I could write much more about this, but I’ll stop there.

Keep up the great work!

Posted by Lawrence Auster at May 09, 2010 07:00 AM | Send