With the UK election race now under way, we can say, that, the fun has just begun!
The choices facing the electorate are fairly stark.
Labour, with Gordon Brown's experience as the first theme to hit the news stands. Perhaps it's TV advertisement with a man walking down a dusty road to nowhere epitomises the future if we choose Labour for another term. I will deal with the Labour manifesto and what it will mean to elect another Labour Government later.
They Conservatives possibly have a point in their less Government more choice theme. The few tax cuts will strike a chord with many, but again, are they up to tackling the deficit? Yes less Government in the medium term is one of the ways open, but it is not clear cut when they fail to spell out how they are going to reduce the bureaucracy that makes up Government.
The LibDems with their theme of trusting them and their judgement, based on their opposition to the Iraq war and Vince Cable's anticipating the Banking crisis. There claim to have a fully costed plan for reduction of the deficit and that the other parties to be in denial, does not quite stand up to scrutiny. Although there are ideas.
While they scored with Vince Cable being nearer the truth on the economic disaster we were heading into, they lost the plot when he started pontificating about forcing the banks that we had taken over into increased lending (in other words not using their normal risk assessment strategies) when the very factor that created the crisis was the rather laissez faire lending by Banks.
The economy must ultimately be the battle ground for the election.
The question is, which is right? More control, less control or pumping money into the economy.
Instead of trying to answer that let me outline the situation.
The UK economy is stagnant, we have built up a record level of debt, we have nationalised or part nationalised more than a third of our banking sector, popular wisdom that devaluation of our currency would result in an export led recovery has proved false. Unemployment or under-employment is growing, in spite of people being removed from the unemployment statistics on one or other pretext.
We have not yet tested our credibility in the financial markets as we have masked most of our borrowing requirements through money creation … euphemistically called quantitative easing. Negative real interest rates have not provided an expenditure stimulus as people have grasped the situation and batten down the hatches for the oncoming storm.
As our money is looked as "fiat money" by the new emerging economies like China, we cannot expect the International markets to have a strong appetite for the British Government debt issues that must come. "Fiat money" means money without any backing (remember, we disposed with the last of our gold reserves at the bottom of the gold market), so our money is really "I declare" money, Gordon Brown simply said let there be another £225 billion and so it was. Perhaps easier to understand if we said it was now monopoly money.
The problem that really faces us is, how do we bring our debt under control. It is not a question of the absolute amount of debt, frightening though that be, but how do we bring it under control. Japan for example has a far bigger National Debt as does Germany, however in both those cases the National debt is funded by their own people, ours by the international markets.
Popular wisdom is that there are two ways of reducing the Government Deficit … increase taxes or reduce Government expenditure. This is not really the case at all. The issue is whether the Government deficit relative to the size of the economy can be afforded by the people within the country, in the cases of both Germany and Japan the answer to that question is a resounding yes. The route open to all three political parties is of course inflation. Inflation results in increased tax takings without raising the rates of taxation and as long as increases in Government expenditure can be kept below the rate of inflation the relative deficit will drop.
The policies espoused by all three political parties have indicated that to a greater or lesser degree they will rely on inflation to balance the books. The Labour Party reaction to the crisis was to embark on classical Keynesian reflation. Vince Cable's comments on what the Nationalised Banks should be doing shows a very strong leaning toward inflationary economics. Five years of double digit inflation will virtually double the size of the economy and therefore halve the relative deficit over the term of the next parliament … roughly the promise being made by all three political parties. It might be noted that no Political Party is claiming that it will halve the deficit in absolute terms.
What I am saying is, that to a greater or lesser degree, inflation is going to be part of the next five years regardless of which political party is in power. From my perspective inflation is always bad as it amounts to an erosion of the purchasing power of ones income or currency.
With this as background what choices should we the people be making?
I sincerely believe that the Labour policies will take us down that dusty road toward oblivion, so well depicted in their manifesto advert. Gordon Brown claims to have learnt from his mistakes, however it is not at all clear that he wont lurch to they other extreme and operate excessively inflationary policies … he has shown a very strong predilection toward a "buy now pay later" scenarios that can only bring disaster.
The Conservatives have promised to bring about smaller Government, without really telling us how they are going to get there. There is certainly some hope that those attitudes will ultimately cut the deficit without excessive inflation. There are naturally a lot of question marks on their social attitudes and whether their policies will in fact bring about a fairer society.
The LibDems can claim the moral high ground on many issues, however it is doubtful that they have the depth of people to make up a good Government.
What will the ideal result be?
I believe that Democracy can only be served when we have a government that seeks consensus as opposed to being autocratic and would strongly hope for a hung parliament.
A Labour / LibDem coalition is probably the worst outcome as both are strongly inflationary in their policies and will hasten the need for a very strong dose of Margaret Thatcher.
A Conservative / LibDem coalition has a lot of attractions the LibDems would add social conciousness that I am not convinced exists in the Conservative Party, in spite of David Cameron's nice words. I think that combining smaller Government with a healthy amount of social consciousness and possibly a curbing of our fondness for military adventures will bring about a Britain with hope for the future.
A last word on the Government deficit.
The risk entailed by the deficit is largely that we do not finance it internally and are reliant on foreigners picking up our Government paper. Ultimately they may well find that the amount gives them indigestion and our credit rating will be downgraded resulting in higher interest rates, which compound the problem. This risk is best defended by reducing the amount of Government debt that needs to be funded from abroad, which could probably be achieved through a loan levy on incomes above a certain level coupled with forcing Banks and Pension Funds to hold a greater proportion of their assets in Government paper. (See one of my earlier blogs on the subject).