This blog is for understanding the present, making educated guesses at the future, and telling truths, usually unpleasant ones. There aren’t a lot of places like this left on the Web. Every year I fundraise to keep it going. If you’d like to help, and can afford to, please Subscribe or Donate.
So, it’s clear from the response to my last post that some readers aren’t familiar with the effects of austerity on balance of payments and vice-versa. Balance of payments is, oversimplified, how much money is going in and out of a country.
When money goes into a domestic economy, if it is used to buy something that is imported, that effects balance of payments negatively.
If you’re selling more than you buy, which can mean services as well as good, then that helps balance of payments. It also includes financial games: so if people are sending money to the London financial center, well, that improves BoP. London’s the world’s second largest financial center, after New York.
Now here’s the thing. Britain doesn’t grow enough food to feed its population. It doesn’t have a lot of industry left. North Sea oil is depleting, to the point that Britain became a net importer of oil in 2013. (Take a look at that chart.)
When the government spends money it isn’t magically siloed from causing import demand. The government cut back on heating subsidies, for example, and limited child support payments to two children. Without that money, oil and other demand is not as high as it would be otherwise.
Indeed, nothing is really siloed. If the government spends, almost always some of that money is going to go overseas and spike imports.
Britain controls its own printing press. It can print as many pounds as it wants, but it can’t make people in other countries take the money. The more they print, the less the pound will be worth, and the more inflation there will be because the dropping pound will increase prices of imported goods.
The pound is not the world trading currency any more. It hasn’t been since WWII. It can’t print pounds the way the US can print dollars and expect everyone to just take them.
Austerity is, in many ways, cruel and stupid, but if Britain (or Canada, or Australia, or even Europe) is to print money without it causing serious economic issues and to actually reindustrialize, it has to be done intelligently, along with serious industrial and domestic economic policy. (Currently tons is printed, but siloed to the rich, which keeps general demand from exploding but destroys markets’ ability to function properly.)
Now the thing is that Britain is a high cost of living economy: food and housing are expensive. Very expensive. Workers need to be paid well to survive, and that makes Britain un-competitive against lower cost (or higher productivity) countries.
If you wanted to make Britain competitive again, you’d have to crash housing and rent, to start. You can imagine how politically fraught that is: people who have high net worth due to real estate aren’t going to like it.
Then there’s the issue of the City, the financial center. Financial center profits are HIGH. That’s a problem, because people would rather put money into finance than into industry or farming or whatever since returns are better. Finance cannibalizes the rest of the economy. So you have to weaken the city and silo it, and probably tax it a lot. That’s hard to do, because the City has a lot of power, and there’s a real issue because it does, actually, bring a lot of money in to Britain, it’s just that money doesn’t get spread around.
When you industrialize, or re-industrialize, you have to make sure that money in the domestic market buys domestic goods, doesn’t buy a lot of foreign goods, and is used primarily on industrialization: capital goods, primarily. It’s unpleasant, it means a lot of goods (imported goods) aren’t available or are very expensive. Your new industry, ideally, either serves the domestic market, or is good for export, or both.
Austerity doesn’t exist just because governments are run by stupid psychopaths (though that’s part of it), it exists because of very real constraints caused by a need to send more money out of the country than is coming in to the country. In the seventies the UK was in so much trouble it had to actually go to the IMF for help, and join the EU so Europe would help it bail out.
Now, again, there are ways around this, but they require taking on powerful interests and hurting a big chunk of the population, especially in the short to medium term (about twenty years or so.) It means, as much as possible, making do with what you can produce yourself, and when you can’t, going cheap. No foreign fresh fruit imports, except the cheapest (hope you like bananas.) Cheap phones and appliances. Etc…
It also means ending all sorts of stupid financial games: no more Private Equity. No stock buybacks. No huge stock option grants. You want money reinvested. Currency controls so money doesn’t flood out. Possibly a dual currency.
All of this is painful. But if you don’t do it, decline inevitably continues and eventually you’re back to being a third world country.
Austerity is a pressure bandage on a wound that still won’t stop bleeding. It slows down the decline, but it doesn’t heal the wound.
Update: Just for kicks, here’s Germany’s BOP:
And China: 
What strikes me is our loss of leadership competency, from the extremely competent people who managed us through the depression and through WWII to the clowns of today.
I’ve been involved in Youtube exchanges where some idiot creates a video claiming how we “saved” the USSR in WWII via Lend-Lease. First, that is that factually untrue. The USSR saved itself; Lend-Lease was such a trickle in 1941-1942 that it had essentially NO effect on the Battle of Moscow in December 1941, and very little impact on the Battle of Stalingrad in the fall-winter of 1942. Stalingrad at the very least marks the point where “the USSR will survive and not lose” so Lend-Lease didn’t “save” the USSR. Lend-Lease did help the USSR, but the bulk of it (60 %) came in the last 10 months of WWII well after the USSR had turned the tide and driving back the Wehrmacht out of the USSR. The most important part of Lend-Lease help wasn’t the weapons we sent, nor the locomotives, nor the steel, nor the petrol, nor even the trucks (the most common ‘fact’ brought up). It was the food we sent–in 1942 42 % of the USSR’s arable land was occupied, and the USSR instituted a rationing program where soldiers, workers in essential industries, and children got first priority on food. If you weren’t one of those, you didn’t get much, and hunger contributed mightily to the USSR’s civilian death rate in the war. The FDR administration promised the USSR 10 % of US food production to help, but could only manage to deliver 3 %.
But my point in mentioning Lend-Lease is that such Youtubes miss the main reason why we did what we did in aiding the USSR. It wasn’t some act of friendship or mercy, we weren’t just ‘being nice’; we did it OUT OF ENLIGHTENED SELF-INTEREST. George Marshall and the US military leadership were not sure we could win WWII without Soviet help; at the very least if the USSR went down to defeat and Hitler obtained access to the USSR’s resources it would prolong both the length and sacrifice of the US and UK. The military problem the US faced was war both in Europe and the Pacific, with far-flung bases and long supply lines that “ate” up manpower and required a powerful Navy and Air arm to protect. We thus couldn’t raise an army of hundreds of divisions and supply it overseas, to do the work that the Soviets were providing the West by grinding up the Wehrmacht. Keeping the Soviets in the war was quite vital; ergo Lend-Lease.
In short, Marshall and his ilk had a clear and correct notion of what the US could do, and what it couldn’t do. The manpower restrictions on ground forces meant “no land war in Asia” which meant we wouldn’t field armies in China. Instead, we focused on a ground force manpower-minimizing “island hopping” strategy where we only took relatively few key islands and just left Japanese ground forces in elsewhere stranded and cut-off from supply. The bulk of the ground forces we did raise were going be used to defeat Hitler, whom Marshall correctly identified as the biggest threat to the US, given Germany’s technological skills and industrial base.
This kind of calculation is what we’ve lost. In WWII, we knew we were powerful, in some ways relative to the world more powerful then than now, but we knew we couldn’t do everything and that we shouldn’t even try. But after WWII, inside the US spread the notion (largely spread by conservatives and the anti-communists) that we had really ‘done it all’ and won the war without much of anyone’s help. Why did we cave to Stalin at Yalta? Why didn’t we let Patton drive the Soviets out of Eastern Europe? We had the bomb after all! (cue in Henry Stimson rhetorically patting his coat pocket). WE WERE OMNIPOTENT!
The first generation who acted on this belief, a belief definitely not shared by those who planned and executed WWII, was the “Greatest Generation” who had fought it as common soldiers when they assumed leadership—JFK through Reagan/Bush I. It led to Vietnam and to interventions everywhere, because we could and should impose our will upon the world. It was exacerbated when (as you say) financial means of scoring economies replaced measures of actual industrial capacity and output, from Clinton to today. What gets me is that the US’s leadership is more arrogant and more convinced of its supremacy despite the fact by all objective measures, whatever power the US actually has is far less relative to the rest of the world than the US during WWII during Marshall’s and FDR’s time. Yet Marshall and FDR knew we weren’t omnipotent and couldn’t ‘do it all’. And I fear nothing less than a massive comeuppance will change their attitudes.
(This blog is for understanding the present, making educated guesses at the future, and telling truths, usually unpleasant ones. There aren’t a lot of places like this left on the Web. Every year I fundraise to keep it going. If you’d like to help, and can afford to, please Subscribe or Donate.)