Financial Times, Letter to the Editor - We have to be told just how bad the situation is

Today’s Financial Times published my letter to the Editor concerning the financial crisis. Here is the letter in full.

From Mr Terry Smith.

Sir, I refer to the debate being conducted in the pages of the Financial Times between those who propose further Keynesian measures, such as Martin Wolf ("Struggling with a great contraction", August 31), and those who do not accept that they will work, such as Wolfgang Schäuble ("Austerity is the only cure for the eurozone", September 6).

Such so-called Keynesian measures as advocated by, among others, Ed Balls, Samuel Brittan, Paul Krugman, George Magnus and Barack Obama as well as Mr Wolf have not worked to date, and they will not work. Their advocates seem to assume that their repeated failure to solve our economic problems just means that the medicine must be repeated, which reminds me of Richard Nixon's motto that "if two wrongs don't make a right, try three".

I say "so-called" Keynesians because these advocates seem not to realise that Keynes' theories did not rescue us from the Great Depression. They are also asymmetric in their application of his theories - calling for ever larger deficit spending, having overlooked the bit about running a surplus in a boom. But above all, they do not seem to realise that they cannot work in a period of debt deflation in which a recession is preceded by the collapse of the banking system, as their current failure is demonstrating.

To the ordinary person in the street, the idea that we can rescue ourselves from a crisis caused by excessive borrowing by borrowing even more must seem mad. In this respect they are possessed of far more common sense than those who are currently advocating just such a course of action and purport to be our leaders.

The first step in rectifying this situation should be to make a clear and unambiguous statement about the actual debt the UK is carrying.

To give a lead to this, today we have circulated to every member of parliament a tin can emblazoned with the UK debt figure - £3,589bn including commitments for public sector pension commitments, private finance initiative and banking sector guarantees, so that they can see what it is they are metaphorically "kicking down the road" with their present policies. This, ahead of the party conference season, I hope might spur some considered and honest debate on this issue.

It is time for those who wish to lead us out of this crisis to tell people how bad the current situation really is and the painful remedies which will be needed to remedy it.

Terry Smith, Chief Executive, Tullett Prebon, London EC2, UK

Comments

[John G. Stewart]

Of course, and the longer we put off these unpopular solutions, the greater and longer they will take to work.

[Gill]

Excellent! I, too, am one of the ordinary 'Joe Public' who can see that borrowing more when you are already up to your neck in debt is utter madness.

My very astute husband was talking about government deficits some years before the proverbial ordure hit the fan - I'm sure that he wasn't the only one. But the government of the day did and still do suffer from 'grafitti blindness', I'm afraid!

[Mahavati]

It's a bit unfair to say Keynesian policies were ineffective in the 30's since just about nobody in power had a clue what the implications were regarding his theories and so were never really applied.

Yes that's a hell of a big can! I see the only solution being for China to return to its recent agricultural past and let us resume our rightful manufacturing leadership of the world. Not going to happen is it? We're over-populated, over indebted and insolvent. As Charlie Bean at the BoE said in 2008 "What has happened is possibly the biggest calamity in human history." At the time I thought that this steady, thoughtful central banker was exaggerating, now I am convinced he wasn't and Armageddon is just around the corner.

[prohyp]

Perhaps someone could remind those who continue to advocate 'more of the same' that
Einstein defined insanity "as doing the same thing whilst expecting a different result"

.

[Geoff Rowlands]

The reason no-one will reveal just how bad things are, is because the whole edifice is built upon misplaced confidence. The European banks knew that the Greeks would not be able to deliver the austerity measures but could not afford to admit it, because to do so would immediately ruin them. Here in the UK, banks are well aware that the house prices are 20% overvalued but won't admit it, because that would immediately slash their asset base. They know it though, and that's why they still insist on 20% deposit for buyers with immaculate credit rating.
So what are you going to do? ; admit you are dying and lie down, or carry on as long as you can pretending that you are getting better.

[Mark Constantine]

Sir, I too share and understand your frustration showing through the erudite observational recommendation deriving from what seems to be a continuous and perplexing lack of coherent and methodical action taken by the political and economic leadership.

However, it is becoming increasingly evident that said leadership is using repeatedly failed policies in order to accomplish a certain objective, because if not, one would be forced to assume that the very status quo our society is relied upon, consists of individuals who lack the ability and sensibility required to resolve the current troublesome matters.

I regret being the victim of paranoid susceptibility, but I am forced to choose a probability that administrative entities are prone not only to corruption, but also by allowing dubious political as well as financial agendas, in order to promote artificial, superficial short-term and ineffective solutions. Otherwise, I would have to accept the incompetency engulfing my own leadership.

Keynes’s own theories required prudent implementation and were unable to rescue us from the current depression because not only have been applied asymmetrically, but also because they were meant to be used within a sustainable financial system free of human corruption and reckless intervention.

Ironically, Keynesian theory applied in a depressed and corrupted socioeconomic system, seems to provide the appropriate foundations required for the inception of an economic transfer union resulting in further wealth disparity and most importantly, risk homogenization.

[Richard]

Thanks Terry - about time somone said that.
Here's another thought.....

When the Radio 4 News announces the daily change in the FTSE100, I have always wondered what relevance it has for the ordinary public. Either they invest (in which case they probably already know what the FTSE has done) or they don't (in which case they don't care).

If, on the other hand, Charlotte Green announced that public sector debt had gone up another 0.X% then they might finally grasp it.

Our politicians wouldn't be far behind them....

[shtove]

Are you trying to start a Tea Party?

[Andrew]

What you guys seem to be missing is that savers money wealth is created from debtors debt.

Bondholders for example are wealthy today because there is a market for bonds today where the government is an active market maker in that debt. If you want to reduce government debt then one way to do that is to get bondholders to sell their bonds to the government. 3.5T debt can be vaporised today in an instant. Many bond holders with cash are not necessarily going to rush to spend. They would be cash holders with cash savings. There is not much difference for them. They can already 'spend' bonds by selling them instaneously in the highly liquid markets that exist already. These people evidently want to save rather than spend.

Buying bonds is the method the government uses to reduce interest rates. The government can create any short term interest rate it wants regardless of the amount of inflation.

You are then only dealing with an inflation problem where an inflation problem and low interest rates encourages people to spend and savings are spent and money wealth is transfered to the debtors - who have less debt.

If you focus too much on austerity you make the bond holders feel safer, and they have no desires to spend. Instead via inflation they have to feel sufficiently uncomfortable that they do sell to the government in sufficient amounts that inflation can be maintained. Importantly you do not want others in the economy rushing to buy bonds as protection to undo your efforts to create spending.

Yields near zero is partly because the government is buying bonds but is partly because these debt holders feel safe in government debt not spending.

Huge debts creates huge savings. Huge spending of savings reduces huge debts.

There is only an inflation problem to focus on.

I think you guys need to consider from where came your wealth that you have as savings. You need to do your duty rather than imagine you are better than those who 'invested' to enable you to become wealthy in money terms.

This is not to say that debt is good or anything like it. The issue is however how best to direct policy to get thru this crisis of too much debt and excessive savings. Too much debt *must* mean there is excess savings.

The danger of austerity talk is that somehow people can imagine that deflation is in some manner good, because the money savings that evidently become more valueable are good. These savings only came from debt though.

The other angle to consider is that if the debt is held by foreigners do you really want to protect them when all they have to do is spend to prevent deflation?

There is therefore method in the madness of government spending with QE and low interest rates and massive debt.

[Terry Smith]

To shtove

I'm not but would you join if I did? I am staggered by the way that the Tea Party's resistance to Obama & Co's madcap finances are blamed for America's ills. They are not in power, he is! America's problems are not caused by the recent wrangling over the debt ceiling by the policies which got them to that point.

[Terry Smith]

To Andrew

I am sure you are wrong but let's not disagree about it as we will soon see whether the government "vaporising" debt by buying bonds will succeed in rescuing us from this crisis. It hasn't to date.

[Andrew]

Terry, I think you misunderstand me. We cannot be rescued from this crisis. The issue however is 'do we want managed stagflation at worst or deflation - controlled or otherwise'?
Savers got their monetary wealth from debt. Those debtors without income or assets have no way of escaping debt if savers refuse to spend. Savers can however move to the safety of assets or have their (very low) income supported by government policies.

[Nigel]

Terry, I am not sure if people can scale the sum of £3,589bn. Maybe £58,138 for every man, woman and child in the country is more easy to imagine. Its a frightening figure.

[Terry Smith]

To Nigel

That's a very good way of looking at it. If we restricted voting to those who can shoulder their share of this I suspect we would instantaneously find the political will to solve our problems.