Typical Tory Jam Tomorrow

When I was a kid, my Dad always used to say that Tory governments always tell us that we have to go without today on the basis of promising us jam tomorrow. That was at a time when, not long after wartime rationing, jam was still a bit of a luxury for workers. Today, it's not such a luxury, though with Brexit it may become so again. Theresa May, having gawkily strode onto the stage, with all the grace of an arthritic spider, offered us again just what my Dad said Tories always offer us, more austerity today on the basis of a promise of jam tomorrow. 

The average deficit to GDP was only half under Blair/Brown to
what it had been under Thatcher/Major.  It was only after the 2008 crisis
that the deficit expanded.

May couldn't seem to get her story straight as to whether the eight years of austerity they have presided over was due to a profligate Labour government that had overspent, or the result of the global financial crash, which had caused governments to have to bail out the bankrupt banks. In fact, neither are true. The global financial crash certainly did cause banks across the globe to collapse, and the British government like governments across the globe, with the exception of Iceland, did bail-out those banks, at a considerable cost to the Treasury – currently estimated to be about £2 trillion in the case of the UK. It was that cost of bailing out the failed capitalist banks that massively increased government spending in the last years of the Labour government, not any profligacy, as the Tories have always tried to claim in their more dishonest moments. 

The imposition of austerity after 2010, when the Liberal-Tory coalition took office, in fact, had nothing to do with a need for it as a consequence of the financial crash, or to reverse a large budget deficit and debt burden caused by Labour profligacy. As I described at the time, in the months ahead of the 2010 election, David Cameron had been promising not only to meet, but to exceed Labour's spending commitments. David Laws, who became the Liberal Chief Secretary to the Treasury under the coalition, had also disclosed that in the negotiations ahead of the formation of the coalition, the Liberals had continued to set out their belief that any imposition of austerity would be a severe mistake, until the economic recovery that had already got underway, under Labour, had become firmly established. 

In the last quarter of the Labour government, GDP grew by 1%, and was
rising.  It was the Liberal-Tories, and their policy of austerity that caused
the economy to tank in the following period.

And, so it was. In the last quarter that Labour were in office, economic growth was 1%, or about 4% at an annualised rate. Once the Liberal-Tories took office, with their outlandish claims about Britain being like Greece, and their dire warnings about the need for severe austerity, that growth nosedived. Once Osborn implemented his first austerity budget, it fell even further, sending the economy into reverse from the rapid growth it had been enjoying under Labour, into recession, and a period of flat-lining growth that continued until 2014. 

The fact that the financial crisis did not require the implementation of austerity was shown by the US. Far from imposing austerity, the US, first under George Bush, and then under Obama, implemented large scale fiscal expansion, along with monetary expansion. The TARP Programme introduced in October 2008, by George Bush promised $700 billion of spending. In February 2009, Obama introduced the American Recovery and Reinvestment Act that provided a further $787 billion of fiscal stimulus, and in March the Public–Private Investment Program for Legacy Assets made provision for a further $2 trillion of fiscal spending. Obama then introduced further fiscal stimulus to provide support for the failing US car industry. 

In total, the Bush and Obama administrations provided spending and loan guarantees of $11 trillion, although only $3 trillion of that was spent by the end of November 2009. So, the US shows that there was no necessity to introduce austerity as a result of the financial crisis, and the diverging performance of the US economy to that of the UK and EU, where austerity was implemented after 2010, shows that the effects of austerity was a self-inflicted wound. 

The implementation of austerity had two causes. Firstly, in the US, an initial reaction to Bush's bail-out of the banks came on the one hand from the Left, from the Occupy Movement, that saw it – as indeed it was – as “Socialism for the Rich” - and on the other from the ordo-conservatives and Libertarians, who felt that the banks who had made reckless bets should be allowed to go bust. The Tea Party, which was a petit-bourgeois movement of these conservative forces, which gave voice to the Libertarian/Austrian ideologues, who had always been overrepresented amongst the world of stock market traders, and financial pundits, was able to give full vent to these ideas once it was no longer the neo-conservative Republican Bush in the White House, but the “socialist” Obama. At every step, these conservative forces began to try to frustrate the measures for fiscal expansion by the Obama White House, and Democrat Congress. They began to challenge Republican candidates in primaries ahead of the 2010, midterm elections, threatening any who did not agree to cut spending, and cut taxes with removal. 

The Tories saw the success of these tactics, and David Cameron, who fully expected to have lost to Gordon Brown, switched overnight from promising to outspend Labour, to accusing Labour of overspending, and accusing it of profligacy, so as to shore up its core voter base, in the way the Tea Party had been doing in the US, inside the Republican Party. Conservative parties across Europe, adopted a similar strategy, now more comfortable after the traumatic shock of 2008 was disappearing into the rear view mirror, and thoughts of an immediate collapse of the system were set aside. 

In other words, a major reason for the adoption of austerity in 2010, was nothing to do with economic rationality, let alone necessity, but was down simply to political calculation, ahead of the general elections that were looming. In that sense it was a forerunner of the sacrificing of the real economy to short term political calculation that was seen in the calling of the EU referendum by Cameron, for no other reason than to resolve infighting within the Tory Party. 

But, austerity served another purpose. The 2008 crisis was inevitable given the huge inflation of asset prices that had occurred, but what provided the spark for that crisis, as had been the case in 2000, 1994, and 1987 was rising interest rates. The rise in interest rates in 2007/8, was a direct consequence of the fact that the long wave expansion that started in 1999, was causing the demand for money-capital to rise relative to the supply. Already, by 2007, workers in a number of countries and a number of industries were beginning to demand above inflation wage rises. The prices of primary products such as copper, iron ore, oil as well as foodstuffs were rising sharply, as demand rose sharply, and supply could not expand fast enough to meet it. The global working-class had increased by 30% since 2000, and its living standards were rising along with it. In 2005, Chinese consumption of meat was 2.4 times what it was in 1990, milk 3 times, fruit 3.5 times, vegetables 2.9 times, fish 2.3 times, whilst its consumption of cereals, mostly rice, fell by 20%. The large rise in demand from China, and other developing economies, was part of the reason for the spike in global food prices, at the end of 2007 and beginning of 2008. Demand for food rose so sharply that shortages began to appear, which, along with the price spikes, caused riots in a number of countries in 2008. The higher costs of raw materials, and of wages meant that the demand for money-capital rose, whilst it also meant that the rate of surplus value and rate of profit was being squeezed, reducing the relative supply of money-capital from realised profits. 

As interest rates rose, it caused asset prices to fall, and a large part of the Ponzi Scheme that was in place whereby asset prices were inflated on the basis of continual borrowing collateralised on these paper assets and property, was precisely the delusion that those asset prices could only ever continue to rise. Once they started to fall, the whole scam fell apart like a house of cards. A major part of rebuilding that house of cards, therefore, involved central banks printing even more money, so as to buy up these worthless paper assets and property, which is what the TARP etc did, along with the programmes such as Help To Buy, designed to artificially inflate demand for already massively overpriced houses, whilst at the same time depressing economic activity via austerity, so as to stave off those very economic forces that caused interest rates to rise. 

It meant undermining the real economy solely in order to reflate the prices of fictitious assets, which now form the more or less sole basis of private wealth for the top 0.01%. 

The imposition of austerity since 2010 has nothing to do with a need to have done so for economic reasons, but everything to do with protecting the private paper wealth of that top 0.01%, and that goal just happened to fit conveniently with a short term political manoeuvre of conservatives in 2010, who used it to distinguish themselves from their electoral opposition. That May is talking about that austerity coming to an end, therefore, is nothing to cheer about, other than in the way that a slave might be glad that a slave master promises to stop beating them, some time in the future. 

One of May's promises in that regard was in relation to housing, where she has promised that the ridiculous cap on Councils being able to borrow to build council houses is to be lifted. But, again, it's clear that the Tories have absolutely no clue when it comes to understanding the real nature of the housing crisis. They seem to think that the key to reducing house prices is to increase the supply of houses. In fact, the truth is that for years they have had no desire to reduce house prices, because the Daily Express and Mail reading Tory voters have for years been obsessed with the delusion that higher house prices somehow made them wealthier. Now even that seems to have turned on the Tories, as many of them now see those higher house prices as stopping them moving up to a better house, and also stopping their children and grandchildren being able to get any house at all. 

But, of course, the supply of houses will only increase if builders can see that its profitable for them to build more. Yet, even with today's astronomical and unsustainable level of house prices, builders find it unprofitable to build more than around 150,000-200,000 per year. Anything beyond that amount, and they are unable, even with all of the bribes such as Help To Buy, and hugely subsidised mortgage rates, to get sufficient buyers. That means that any additional houses above that amount would indeed cause prices to drop, but that would mean that the builders profits would also drop, or even disappear. The builders are not in business to build houses, but to produce profits. They do not build houses for the fun of it, or as some kind of public service. 

For the builders to be able to sell more houses profitably one of two things would have to happen. Either wages would have to rise massively, or else the builders costs in building houses would have to fall substantially. Wages would have to rise by about 50%, before they start to bring house prices back to long term levels of affordability. That isn't going to happen in the foreseeable future. Moreover, as wages rise, and interest rates rise, pushing up mortgage rates, the actual cost of buying a house goes up, and thereby makes them less affordable again. Whilst, its high time there was a revolution in house building, to reduce construction costs, the scope for doing so is limited, because the reality is that more than 70% of the cost of building a house today consists of the cost of the land on which the house is built. 

Unless land prices crash, there is no prospect of substantially reducing the cost of building new houses, which means that builders will not substantially increase the number of houses they build, because they would not then be able to sell them at prices that were profitable. As mortgage rates rise, the demand for those houses will fall even more, meaning that builders would have to build even less houses, so as to be able to sell them at prices that return a profit to them. Unless the current house price bubble is burst, which requires interest rates to be allowed to rise, there is no way that land prices are going to fall, unless the government was to announce something like the nationalisation of land, the scrapping of the Green Belt, and the provision of large amounts of such land at low prices to builders. A Tory government is not going to do that. 

After WWII, when large numbers of council houses were built, the land on which the council estates were built was very cheap. In many cases, the land was actually given to the council for free. Today, with land comprising more than 70% of the cost of a house, it's obvious what the immediate effect of the proposal to scrap the cap on council borrowing will be. Council's will have to bid for this massively overpriced land, which will then push the price of that land even higher. The immediate beneficiaries will be that land owning class that comprises part of the Tory core membership. Having paid these astronomical prices for building land, Councils will then have to charge appropriately high rents for the council houses they build on it. Given the Tories policies of Right to Buy, the next beneficiaries will be those who have been able to get one of these properties, and who are then able to buy them at a discount. 

It will do next to nothing to help resolve the housing crisis. In actual fact, a more immediate resolution to that crisis may be at hand. A few months ago, I forecast that global bond yields were about to gap higher. In emerging markets, like Turkey we have seen official rates rise to 24%, and in Argentina to a staggering 60%. This has been in response to a flight to safety out of these economies, which saw money go to safe havens like US Treasury bonds, which temporarily led to yields on those bonds falling. Now that is again reversing. I spoke previously of US 10 Year Treasuries gapping up from 3.10% to 3.50%, having fallen back to around 2.85, those bonds have now gapped higher to 3.24%, as US growth continues to be robust, employment continues to increase, and wages are rising. 

For all the attempts to restrain economic growth over the last 8 years, via measures of austerity, and all the attempts to divert potential money-capital away from the real economy into financial speculation via QE, the underlying strength of the long wave expansion that began in 1999, is again showing through, and as happened in 2007/8, it is causing global interest rates to rise. That is the prelude once more to an inevitable crash in asset prices, including property and land prices. Given that asset prices have been even more ridiculously inflated than they were in 2008 – the Dow Jones is nearly twice its peak of 14,000 in 2007 – and given that global debt levels are much higher today than they were in 2008, we are on the verge of a global financial crisis greater than the world has ever seen.