UK Economy Needs More Than Quantitative Easing To Recover

Britain's cycle of rising debt and dependence on consumption to drive growth make it unlikely to bounce back any time soon.












Britain has just been through what is now officially the deepest slump since the Great Depression – pictured, the unemployed marching in London in 1930.

Britain has just been through what is now officially the deepest slump since the Great Depression. Economic data from the pre-war era is not 100% reliable, but the drop in output after the sub-prime mortgage crisis appears to have been almost on a par with the contraction following the Wall Street crash. What's more, the recovery – such as it is – has been even slower than in the 1930s.

Talk of a lost decade is not misplaced. The economy is likely to grow by barely 1% this year and will struggle to do much better than that in 2012. At this rate of progress, it will be 2016 before output returns to its level when the recession started in early 2008.

This performance looks all the more miserable when you consider the amount of stimulus that has been thrown at the economy. Interest rates were cut to 0.5% in early 2009 and have remained there. The government has borrowed £390bn in total in the last three fiscal years. After printing £200bn of electronic money, the Bank has decided that is not enough and has announced plans to do a further £75bn of quantitative easing. The image that springs to mind is of John Cleese's response when Michael Palin's pet shop owner insists that were the Norwegian Blue not nailed to its perch "it would nuzzle up to those bars and 'voom'".

"Voom?! Listen mate, this bird wouldn't voom if you put 4 million volts through it. 'E's bleedin' demised."

This is not the view of George Osborne or Sir Mervyn King, although both admit it is taking a while for the dead parrot to awake. King said last week that the UK was in the grip of a financial crisis at least as severe as that in the 1930s and perhaps the worst ever. The chancellor has repeatedly warned that it will take a long time to recover from the debt binge of the last decade. Most post-war recessions were caused by a tightening of economic policy in response to inflation, but that of 2008-09 was the result of individuals and banks borrowing too much.

Still, the mainstream view is that sooner or later things will get back to normal. Over the past two centuries, western economies have always bounced back from economic traumas, no matter how severe. It is taken as read that industrial capitalism is inherently robust and adaptable. It is perhaps time to challenge this assumption.

The first piece of evidence comes from the Office for Budget Responsibility, the independent fiscal watchdog created by Osborne when he became chancellor. Forec asting has been outsourced to the OBR, which expects growth to be quite perky in the years ahead, leading to a fall in the UK's budget deficit. Crucially, though, this is only because the OBR expects household debt to rise in the years ahead, from £1.6tn in 2011 to £2.1tn in 2015.

Alert readers will spot the circular argument here. Britain has a personal debt bubble that goes pop. Government steps in to clear up the mess and ends up with record peacetime debts itself. The cure for this is to get individuals borrowing again. Well, maybe. All the signs are that this will prove harder than the OBR imagines, resulting in weaker growth and a higher budget deficit.

This leads on to a second point, which is whether the UK variant of modern industrial capitalism is really as robust and adaptable as our policymakers would have us believe. The story of the past 25 years and more has not been of a new model of sustainable growth emerging from the old. Not since the mid 1990s has there been a period where the motor of growth has been production rather than consumption. For the rest of the time it has been the tale of asset-price booms, the withering of the productive base and the onward march of big finance. Following the bubble to end all bubbles, the taxpayer had to dig deep to bail out the banks and prevent an even deeper recession, pauperising the state in the process. A model that relies on excessive personal indebtedness and ends with the innocent suffering from extreme austerity seems neither robust nor adaptable, just bankrupt.

Britain has not been alone in its long march down this dreary road, but it has travelled further down it than any other developed western country. King and Osborne agree something has to change. The upbeat vision of the future goes something like this: Britain, despite everything, has a sizeable manufacturing base and can enjoy the benefits of a 25% drop in sterling since 2007. The UK has top-notch scientists who will deliver a new wave of innovation. It has an independent central bank that knows what it is doing and a Treasury determined to keep interest rates low. The banking system is being repaired. Credit will eventually start to flow again, taxes will at some point come down, consumers will pay off their debts and firms will start investing.

The dystopian vision of the future sees Britain displaying many of the traits of a developing country. Here's what a typical developing country looks like. It is governed by an elite and there is a gulf between rich and poor. The elite extracts economic rents from the rest of the population, then salts them away in tax havens. Developing economies often rely heavily on one commodity, which crowds out activity in other sectors. To the extent that they have an industrial base, it is as an assembly plant for foreign-owned transnational corporations. The country tends to be deficient in physical infrastructure and human capital. All too often the best brains leave the country.Now consider Britain. The country is dominated by the City, which exerts an extraordinary amount of political power. There is a widening gap between rich and poor. The rich find ingenious ways to avoid paying taxes. Large parts of the country are dependent on the public sector, while the private sector is increasingly dominated by financial services. Industry makes up a smaller and smaller part of the economy and not one world-class manufacturing firm has been developed from scratch since the second world war. Firms complain they can't find skilled labour. The infrastructure is a joke – witness the lack of snowploughs to keep Heathrow open during last winter's snow. This is not an economy that is going places: it is going south.

Economic Crisis: What Is The End Game?

The cycle of woe and uncertainty surrounding the economic crisis continues, with gloomy surveys predicting a double dip, and even fears of a ‘Great Depression'. Sir Mervyn King, Governor of the Bank of England, believes this could be the worst financial crisis ever - even beating the 1930s for gloom - and the economy is in breakdown, so what we want to know is:



















How grim are things going to get?

Yesterday various reports told us the UK was bottom of the global confidence league, 43% of finance directors were preparing for a second recession while companies had delayed or cancelled £4.7bn of spending, reports the Daily Telegraph. "Today we report the OECD's leading indicator falling for the seventh month in a row, pointing to a slowdown, and the British Chambers of Commerce warning on stagflation."

Mindful Money asks commentators what they think will happen:

While we don't know if the recent injection of more QE will do any good, we do know that it automatically invites stagflation into our economy by pushing the pound down, say commentators.

According to Mindful Money economist blogger Shaun Richards, the most likely outcome if both politicians and central banks continue with the policies that they have now is, indeed, stagflation.

But he adds: "Those who look at the past I think miss an important point which is that it doesn't have to be 10% inflation to hurt people. A continuation of 5% a year combined with wages only rising say 2% will gradually turn the screw. Let's face it this has been happening already for the last couple of years so in general people are poorer."

Investors Chronicle says that Andrew Sentence, a former member of the BofE MPC believes that inflation is a bigger concern for the UK economy than a recession."High inflation and slow growth are inextricably linked."

What happens if stagflation hit?

Stagflation is a term which is formed by joining the words stagnation and inflation. It is used in modern macroeconomics to give a description of a period of uncontrollable price inflation combined with sluggish output growth. Stagflation raises unemployment.

The last time stagflation held the western world in a seemingly lethal grip was 30 years ago in the 70s and 80s, and it is threatening to emerge from the shadows again. Such fears are dismissed as irrelevant by those in favour of pumping money into the economy through quantative easing (QE), which they think will stimulate growth and avoid the dreaded ‘double-dip' recession. But so far, this policy has failed to prompt the necessary growth.

Thursday's announcement of another £75billion worth of QE played well with the stock market, but it is unlikely to cause much cheer for long. On the contrary it threatens to stoke inflation even higher, and meanwhile, there is the threat that growth stagnates.

"Stagflation" remains a word not uttered in the polite company of the financial world.

"But there remain only a few more tumblers to fall into place for a return to that awful word that conjures up images of the "malaise days" of the late 1970's and early ‘80s, where rising inflation and slumping employment tramped down economic growth," says CNBC,

However, some economists believe stagflation isn't something to fear at present.

Azad Zangana, European economist at Schroders, says: "While the current environment feels like a typical stagflationary environment, this is set to be temporary. The outlook is more positive as we expect inflation to fall from its current level back down to below 3%, mainly due to the passing of the VAT effect from the start of 2011.

"Meanwhile, we forecast growth to improve in the second half of 2012, and so the balance between real and nominal growth will improve. To conclude that we are entering a fully fledged stagflationary period, we would need to see significantly stronger inflation and wage inflation, and a continuation of weaker growth as seen in the 1970's. In our view, this is unlikely to occur."

What other threats may there be?

Another danger, however, is the rising threat of hyper-inflation. Shaun Richards says: "Whilst the self proclaimed "financial geniuses" persist in buying every gilt they can find there is a danger of this. Also it is the nature of things that when problems happen these days with the speed of trading it happens so fast that it is better not to run the risk at all. But I see this as rising but still low.

"So for now the danger is the silent drip drip of inflation and this is the enemy. The biggest problem of all is that as I keep pointing out it should not be a problem at this stage of the economic cycle and furthermore is being inflicted on us by individuals whose own contracts protect them against it.."

And if we're being warned that this crisis beats the 1930s, what happened then?

What happened in the 1930s, given the governor believes the gloom beats this decade? This was the ‘Great Depression', where in America millions were genuinely destitute, and unemployment hit a staggering 25%. Two million Americans tramped the country, sleeping rough as they looked for nonexistent work, and malnutrition was widespread.

Southern England escaped reasonably lightly, but in the North there were pockets of extreme hardship. On Tyneside the collapse of shipbuilding left unemployment standing at 70%, prompting the famous Jarrow march.

There were soup kitchens on the streets and millions of families were subsisting on bread and margarine. In Germany, economic misery that had begun with hyperinflation in 1923 helped another world leader to power in 1933: Adolf Hitler.

So is there any cause for hope with growth and falling inflation?

Henderson's chief economist Simon Ward gives his opinion: "Assuming that an EMU break-up is avoided, the global economy may start to regain momentum from early 2012. Such a scenario depends on the US economy doing better next year, as suggested by recent money supply strength...

"Another reason for thinking global growth could revive from early next year is a fall in headline inflation due to recent weakness in food and energy commodity prices. Rising inflation has been a major contributor to the recent economic slowdown by squeezing consumer spending power and forcing monetary policy restriction in emerging economies."

And anyway, nobody knows.

Mindful Money's resident psychologist Kim Stephenson says: "Let's assume that Shaun's right..

"Afterwards, lots of people who said that we wouldn't get stagflation but something else (hyperinflation or whatever) will say - "ah, well, it depends on how you define stagflation (or hyperinflation, or whatever)", they'll twist it round to show that they were right when they were actually wrong. Or they will point to some action or event - from the Bank of England, IMF, German Government, something, and say "if that hadn't happened, it would have gone the way I predicted". Human beings don't like being wrong and they will selectively remember what they want to remember to avoid having to admit they were wrong.

"Similarly, human beings like being able to predict and control their world . The economy isn't just out of our personal control, it's clearly out of control (or even prediction) of anybody like the Chancellor, the EU etc. that are supposed to be able to control it. That is very scary. It's like when you're a child and you realise for the first time that your parents don't know everything, can't solve every problem, can't ease the pain, stop the bully or get you on the team every time. It hurts and it makes us afraid, so we desperately cling to the belief that somebody can predict it (if not control it) and that we can have some measure of understanding of what is going on. To contemplate the fact that actually nobody controls it, nobody really understands it or can predict it and that most of our predictions are going to be wrong is simply too much to take."

Immigrants Must Pass History Test To Earn UK Passport: Exam Will Cover Everything From Boudica To Churchill

Migrants will have to pass a quiz on British history and culture to receive a UK passport, David Cameron announced yesterday.

In a wide-ranging plan to ‘get a grip’ on our borders, the Prime Minister also urged the public to report suspected illegal immigrants to Crimestoppers.

And he admitted there was ‘discomfort and tension’ in some communities over the levels of migration.















Crackdown: David Cameron urged the public to report suspected illegal immigrants to Crimestoppers in a wide-ranging plan to 'get a grip' on our borders.













Pledge: The speech contained a suggestion to consider making forced marriage illegal - an idea critics claim could leave victims less likely to come forward.

Foreign nationals wanting to settle in the UK permanently have been required to sit a multiple-choice ‘Life in the UK’ test for the past six years.

But, in a highly controversial move, Labour ministers ruled it should not include a history section because there was ‘too much and it would not be fair’.

Instead, migrants are grilled on the structure of the European Union, state benefits, equal rights and discrimination.


















Yesterday, Mr Cameron said ministers would ‘revise the whole test to put British history and culture at the heart of it’.

Subjects to be covered include Roman Britain, Boudica, the Norman Conquest, Magna Carta, the Wars of the Roses, Elizabeth I, the Civil War, the Battle of Britain and Winston Churchill.

To make room, questions on the operation of the single market and on the differences between the Council of Europe, EU, European Commission and European Parliament will be dropped.

Making only his second major speech on immigration, Mr Cameron said he wanted to bring much-needed ‘fairness’ to the system.

‘While it’s crude and wrong to say immigrants come to Britain and take all our jobs, there’s no doubt that badly controlled immigration has compounded the failure of our welfare system and allowed governments and employers to carry on with the waste of people stuck on welfare when they should be working,’ he said.

The Prime Minister said that – in order to meet his promise to reduce net migration to the tens of thousands – the Government had to crack down on student visas, work visas, marriage, settlement and illegal immigration.

There were also proposals to make migrants pay a bond, possibly of thousands of pounds, before they are allowed to enter the UK. This would work to stop them disappearing into the black economy.

Plans were also unveiled to crack down on any migrant who owes the NHS £1,000 or more for non-emergency treatment.

They will either not be allowed a visa – preventing them from getting any follow-up treatment – or refused a renewal of their permission to stay.

Officials estimate the proposal to tackle ‘health tourism’ could save £20million over five years. The rules will not be applied retrospectively.

The speech contained a pledge to consider making forced marriage illegal – an idea critics claim could leave victims less likely to come forward.

A move to make firms count the number of foreign staff they employ was abandoned. Mr Cameron drew direct links between the culture of welfarism in Britain and the fact so many foreign workers, such as hard-working Poles, had secured jobs.

Shadow home secretary Yvette Cooper said: ‘Another week, another rewritten speech from the Prime Minister. Yesterday Downing Street said David Cameron would require companies to publish lists of foreign employees, and within 24 hours it has been dropped.

Will The Increased Offer Of Declining Pound Save British Economy?

Forex news. World economy is under the threat of crisis, which can become the most difficult ever and have more large-scale consequences than the Great Depression in the 20th century. This is how the current situation is viewed by Mervyn King, the Governor of the Bank of England.










The decision to expand the quantitative easing program, which was taken by the Bank of England on Thursday, is predetermined exclusively by the difficult economic situation worldwide, particularly in Britain.

Drawing historical parallels, Mr. King claimed that the current condition of world economy is characterized by the total deficit of money supply. Therefore, Central Bank emission is aimed at solving this problem, and the Bank of England decision to increase money supply is to be regarded exclusively from this point of view.

However, global crisis can only be overcome provided that there is a consensus at the highest level.


It is predicted that the entire sum of emission, ₤75 bln., will be directed at stimulating economy and increasing money offer. At the same time, Mr. King assured that inflation is unlikely to result from held recession. In general, he predicts that inflation will increase up to 5 percent in the nearest future; however, next year it will stop increasing and start declining rapidly.

Meanwhile, the rate of British pound has stopped forming long-term wave А(С) or reduced wave С(С) within long-term bear motion, which will be proved by passing pivot Mf at the point of 1.5665. Experts of the Department of Masterforex-V Trading System claim that subsequent FZR will start long-term correction wave В(С). Passing the bottom line of 1.5271 will continue long-term decline; however, before this happens GBPUSD pair will meet support at the points, where pivots MF are placed, namely, 1.5468 and 1.5296.

Third Of Tenants Face Underoccupancy Cut

Cutting housing benefit for working-age tenants who underoccupy their homes will affect around a third of those living in social housing, the government has revealed.

An impact assessment from the Department for Work and Pensions estimates that limiting housing benefit payments to the number of bedrooms that a social tenant actually needs will affect 670,000 people living in social housing.


















The report, released yesterday as part of the government’s Welfare Reform Bill, says most tenants only underoccupy by one bedroom, and will lose around £11 a week in 2013/14, when the change comes into play.

Those with two or more bedrooms that they do not use will lose an average of £20 per week, the assessment says. It also found that tenants in the north, east midlands and Wales were more likely to be affected than those living in London and the south east.

Around 46 per cent of social tenants in the north east will see their housing benefit cut by around £12 a week, while only 19 per cent of London tenants will be affected.

The National Housing Federation condemned the plans. David Orr, chief executive, said: ‘Ministers have long promised to protect the vulnerable and yet these plans could force thousands of people to move out of homes they have lived in for many years.

‘As a result of these changes, thousands of couples are no longer able to offer their grown-up children a room to stay in should their circumstances change, and many single parents will be pushed away from friends, relatives and support networks.’

Under occupancy penalty could force struggling families into hands of loan shark.

Plans to slash housing benefit for hundreds of thousands of low income families could lead to a huge surge in the number of people turning to loan sharks and doorstep lenders as they struggle to pay their bills, campaigners warned today.

The Department of Work and Pensions (DWP) intends to use the Welfare Reform Bill to slash housing benefit for tenants living in homes deemed too large for their needs - even if they have lived there for decades.

The measure will hit 670,000 council and housing association tenants - a third of all working-age housing benefit claimants in the social rented sector across Great Britain.

The DWP has suggested that households seeing their benefit reduced - by 13% for those with one 'spare' room and 23% for two or more 'spare' rooms - should 'move to accommodation which better reflects the size and composition of their household' - or make up the shortfall from other income sources.

Each claimant is expected to lose an average of £676 a year if the Government succeeds in introducing the measure in 2013. Tenants will face a tough choice of either downsizing to a smaller home to avoid the penalty or staying put and paying a much higher level of rent from their own resources.

But even for those who do look to downsize there is by no means any guarantee they will find a smaller social home to move into. Around 180,000 social tenants in England are 'under-occupying' two-bedroom homes, but just 68,000 one bedroom social homes became available for letting in a single year (2009/10).

The average social housing household in receipt of housing benefit has an annual income of just £8,320 a year. The proposed 'under occupation' penalty will leave vulnerable families with a shortfall of £676 to make up from their savings or other allowances. Many are at risk of falling into debt because they simply would not have the money to pay all their bills.

Currently, around 2.5m people borrow from doorstep lenders at rates often in the region of 272% APR for new customers. A further 200,000 are estimated to borrow from loan sharks, who can charge anything up to 2,000% APR. A majority of those financially excluded are social housing tenants.

If a tenant took out a £700 loan to cover the under occupation penalty with the doorstep lender Provident, they would pay an APR of 272.2% on the loan, according to a typical example given on their website. That would mean repaying £1,274 back over the course of a year. For people going to illegal loan sharks the rate could be ten times as much.

Federation chief executive David Orr said: "The Government's plans to penalise hundreds of thousands of low income families who are adjudged to be 'under occupying' their property is harsh and regressive.

"In the vast majority of cases, people will simply not be able to make up the shortfall themselves and could end up being sucked into poverty and spiralling levels of debt.

"The Government has repeatedly said that it will look after the most vulnerable, but pushing thousands of people into the arms of doorstep lenders and illegal loan sharks is wrong and will lead to a huge degree anxiety for many of the poorest in our society."

Niall Cooper, National Coordinator of Church Action on Poverty said: "There is a real danger that people will be pushed into the hands of loan sharks by the housing benefit cuts.

"Many tenants are already struggling to make ends meet, and can ill afford the cost of borrowing from high cost lenders who routinely charge anywhere between 200%-2,000% APR for loans.

"For some, this will push them over the edge - into a spiral of debt, or even homelessness."

Dustbowl Britain: The New Depression

YES, it’s official: this could be worse than the Great Depression of the 1930s – men slumped on street corners and kids with bare feet.

Inflation, fascism and economic war in Europe. “This is the most serious financial crisis we’ve seen at least since the 1930s, if not ever,” says Sir Mervyn King, governor of the Bank of England.












Now, I may be missing something, but isn’t this just the kind of alarmist headline-grabbing remark that central bankers are supposed NOT to make in case it spooks the markets? It’s people like me who are usually criticised for resorting to sensational forecasts about Great Depressions and the like. The commentariat is being done out of a job by the godfather of prudence. Whatever happened to “Keep Calm And Carry On”?

The Prime Minister, David Cameron, is said to be livid. Only 24 hours before King forecast the end of civilisation as we know it, Cameron had told the country to “bring on the can-do optimism”. Well, not in the Bank of England, clearly.

It’s hard not to read this as an implicit condemnation of government economic policy. At the very least, the PM and his Chancellor look as out of touch as the Labour PM, Jim Callaghan, when he said “crisis, what crisis”, just as the International Monetary Fund was about to take over the reins of the British economy in 1976.

So what has spooked Mervyn? Well, it’s the Greeks isn’t it, stupid? Actually, it isn’t the Greek default – it’s us. Mervyn’s panic attack coincided with the news that ratings agency Moody’s had downgraded the status of a raft of British banks just as inter-bank lending was seizing up.

Essentially, Moody’s is warning people with money in banks including Royal Bank of Scotland, Santander, Lloyds and so on that they might not get it all back. Why? Because the banks are becoming stressed again, just like 2008, and there is no chance that this time the Government will have the will or the means to bail them out. There’s very little public money left and the economy is slowing to a halt, which will make it hard for the Government to pay its own debts, let alone that of the banks.

The bailout of the UK banks in 2008-09 required £1.3 trillion, according to Mervyn King’s own figures. And what did we get for putting up all that money? Well, Stephen Hester of RBS got £11 million last year. Bank bonuses accounted for another £13 billion. The rest disappeared into the bowels of our rapacious financial institutions.

So what now? Well, if there isn’t any public money, let’s just print some. The last round of quantitative easing – creating more money – placed £200bn in the banks’ accounts in 2009.

What happens is this: the Bank of England electronically creates money, which it uses to buy bonds from the banks. This injects funds directly into the banks’ balance sheets, wiping out their losses and “restoring the health of the financial system”. The money is supposed then to be loaned to small businesses and people wanting mortgages, thus boosting economic growth.

Except that this didn’t happen. The banks hoarded it instead and paid themselves huge bonuses. All QE1 really succeeded in doing was increase inflation to 5%, which is generally what happens when governments print money. This has eroded people’s savings, pensions and salaries, meaning that they haven’t been buying much in the shops. Which in turn is why the economy is sliding back into recession. Britain has one of the lowest growth rates in the OECD and has one of the highest fiscal deficits. Stick that in your budget, Mr Osborne.

So why on earth is the governor printing another £75bn of QE? It looks like the economic equivalent of blood-letting: a pointless medical procedure that only weakens the patient. This is the great unanswered question of the age: why are policy-makers unable to see any solution to economic crisis that doesn’t involve stuffing the mouths of bankers with gold?

When historians look back at this period they will criticise governments for inactivity, short-termism and denial. But they will condemn them utterly for throwing oceans of public money at the very people who caused the crisis and were least to be relied upon to resolve it.

Instead of handing money to banks, in the vain hope that it will boost economic activity, why doesn’t the government hand it to poor people?

I’m not joking. At least lower-income groups can be relied upon to spend the cash in the high streets – in shops like Tesco, which has just announced its worst sales figures for 20 years. Give them VAT rebates, interest-free loans, tax “holidays”, elderly care grants, home improvement loans – anything to get money into the system.

Giving liquidity to people who don’t have it is the surest possible way of boosting economic activity. QE is like trying to get the car started by giving money to oil sheiks in Saudi Arabia.

Of course, the bankers would respond that, yes it’s all very well giving money to people other than us. But if you don’t hand over your cash, we’ll just go bust like Lehman Brothers, and that will cause a global financial and economic collapse. Ha ha.

And of course, they’re right – they are too big to fail. If, say, RBS went under, the shockwaves would be so great that bank lending would halt overnight. This means that companies which depend on short-term loans from banks to manage their accounts would go under too. International trade would freeze because there would be no credit for exporters.

There would also be a run on the banks, as happened in October 2008, when people and businesses withdrew their cash from banks like Northern Rock and HBOS because they didn’t believe their funds were safe. In 2008, according to the then chancellor, Alistair Darling, Britain was 24 hours away from the ATMs closing and people being denied even cash withdrawals.

Could we really be going back to all that? Well, yes – the Belgian-French bank, Dexia, has just gone bust for the second time in three years because people started withdrawing funds at an unsustainable rate and its share price collapsed. It could be the first of many, and governments cannot bail them all out.

Which means that if you are lucky enough to have more than £85,000 in any one bank – the limit of the deposits guaranteed by the government’s deposit insurance scheme – then you’d be well advised to get it out sooner rather than later.

I know that sounds alarmist,

inflammatory, but listen closely, and that’s what the Guv’nor is saying.

But there is an alternative. Instead of pouring more printed money into the banks, why not nationalise them completely? We already own RBS and most of Lloyds. The nationalised banks could be used to set up smaller, more responsible banks with a remit to lend to industry rather than speculate on derivatives and the commodities market, which is what they have been doing since 2009.

If the financial crisis really is as bad as King says it is, and we are about to drown in a hyperinflationary sovereign debt crisis, then the Government would be able to freeze asset deposited in the banks and conduct a kind of debt “triage”.

Those with more than £85,000 in deposits would be required to accept a proportionate reduction in the value of their deposits in order to stabilise the financial system and remove the debt burden on the state. This could be done by converting bank deposits into government bonds, redeemable at a later date. This is rather like QE in reverse. Needless to say, all bank bonuses would be scrapped, and bankers put on civil servants’ salaries.

There would be howls of anguish from the rich at their wealth being hijacked in this way. But they should be told that the alternatives are much worse: a run of bank failures, which means they would lose ALL their funds over £85,000. Bondholders would not just have a haircut – they would be decapitated by default or by hyperinflation.

There is still a great deal of wealth in Britain – £7 trillion in household assets alone, according to the Office for Budget Responsibility – but this is largely held by the very wealthy and “sterilised” in property and other assets. If we are facing the ultimate crash, the Government will have no choice but to commandeer these resources and use them constructively to manage the national finances. President Franklin D Roosevelt did something similar in 1933 when he ordered all the gold held by individuals to be deposited with the government.

I doubt if any politician has the cojones to put this kind of scheme forward right now – most of them are intellectually in hock to the City of London anyway. But what is not in doubt is that the Bank of England is already thinking the unthinkable.

Various schemes for crisis debt restructuring are surely already being run through the Bank of England’s computer models, and though they can’t admit it, this will inevitably involve some control of bank deposits and an orderly run down of debt. The Government will probably opt to raid pension funds first, because they are harder to move offshore. This is what the Argentine government did in 2001 when it defaulted.

What the Bank of England governor is warning of is a truly apocalyptic financial event. The Government has already seized large parts of the banking system and resorted to money printing. It may not be long before it breaks into people’s accounts directly. You have been warned.

Ed Miliband Has Offered An Alternative – But Will Anyone Vote For It?

Miliband's indisputable leftward shift has put Labour at ease with itself but risks making the party less relevant than ever.












Ed Miliband hopes his vision, that he set out at conference, will connect with 'the country's wider shared values'.

Many years ago, I was walking down a street in London with a rising Labour politician. On a lamppost we caught sight of a poster advertising a SWP meeting. "Is there a socialist alternative to Kinnock?" the poster asked. "Yes, there is a socialist alternative," laughed Gordon Brown. "But the problem is that no one will vote for it."

Ed Miliband is certainly no Trotskyist. But his speech to the Labour conference in Liverpool this week is already raising some of the same questions that the old SWP poster did. For Miliband is gambling that there is an alternative to contemporary orthodoxy. He believes that the experience of financial collapse, public spending cuts and recessionary inequalities requires a resetting of the collective moral and economic compass. Crucially, he believes that the electorate can be persuaded to embrace it.

Miliband chose his words very carefully. Terms like socialism and capitalism do not appear in his speech. But they were implicit in it. Read in conjunction with the recent New Statesman article by Miliband's strategist Stewart Wood, this week's speech adds up to an attempt to reclaim social democracy as Labour's core route-finding principle. Cautious it may be – Wood sees Labour's aim as the creation of "a better capitalism", which won't please everyone in the Labour ranks – but the argument is put with clarity. It is indisputably a leftward shift from the New Labour years. It is also what Miliband has always wanted, which helps, sort of.

The large question now is whether Labour will succeed in shifting the national argument so that his version of social democracy stands at the centre of public debate. Miliband's conviction that it can is central to his entire leadership. It was embodied in the many sections of this week's speech that tried to connect Miliband's own vision with the country's wider shared values. If he succeeds in setting an agenda of market, welfare and community reforms that voters really want to and do believe in, then he may indeed reshape British politics. But if he fails, Labour's slide to the political margins will continue.

Less than three days after the speech, most of the reaction to it has already fallen into one of two camps. These strike me as too crude in both cases. On the one side there are those who welcome Miliband's commitment and think he can succeed – this was the general mood at Liverpool. On the other there are those who dismiss what Miliband said and think his approach is doomed to failure – which is what the Conservatives will undoubtedly say next week in Manchester.

In fact, the impact of Miliband's speech could be less straightforward than that. This is not an argument between a wholly laissez-faire approach and a wholly dirigiste one. In reality it is an argument about shifting the balance within a narrower set of priorities than those who insist on talking about the end of neoliberalism ever admit. Even so, this was one of the few party leader's speeches that may be remembered for longer than a week after it was given. Most of its actual phrases may already have gone down our mental chutes into the waters of oblivion. But it is quite likely that a lot of people will remember this as the moment when Miliband turned the party away from the New Labour orthodoxy that compromise with global markets is inevitable.

But there are turns and turns. To take an obvious example, which Miliband will have to address eventually, there is all the difference in the world between maintaining the coalition's tax and spending levels and committing to raise them. There is also a gulf between attacking economic predators and extolling producers, as Miliband did this week, and putting strict regulations in place to deny the former and promote the latter. And there is a massive difference between being a party of free trade, a principal that the left has always managed to embrace, and being a party of protection.

If he is dumb, Miliband may be tempted to do what the Tories would love him to do and promise to clamp down directly, almost certainly ineffectively and in all probability with unintended consequences, on morally indefensible excessive pay and bonuses. If he is smart, he will use the bully pulpit, as he did on Tuesday, at least as much as the tax system to encourage the better capitalism, and the better companies, to which he aspires.

The idea that there might be a workforce representative on remuneration committees caused outrage in the rightwing press this week, but it ought to be just the start, not to an expanded role for the unions, but for well-argued and flexible new models of workplace co-determination of the kind that have done so much for German companies.

The best news for Labour I heard in Liverpool is that Andrew Adonis is planning to focus on new thinking about industrial policy, a subject riddled with old ideas, especially in the unions, but which is crucial to any long-term reimagining of the UK economy. It does not follow that the left's traditional state-centred responses are the new centre ground just because people are outraged by the bankers and by indefensible wealth.

The experience of the last three years suggests public opinion has moved to the view that government deficits are part of the problem, rather than the solution. Thursday's vote in Germany and this week's budget in France were the latest reminders of that. Labour was canny about the economy this week: Ed Balls got the balance right in his speech. But parties of the left are losing ground across the world right now and Labour shouldn't imagine there is a magic moral bullet that will enable it to buck that trend.

Labour's move to the left can be, and has already been, exaggerated – by friend and foe alike. Yet it has been a significant declaration by the party nonetheless. The coalition parties will undoubtedly respond, and not merely with abuse and caricature. Expect surprise moves that try to undermine Labour claims to ethical uniqueness.

Electorally, the danger for Labour is that the party will have convinced itself that it has rediscovered its own sense of ethical virtue without persuading sceptical voters that it can run the economy. The party may be more at ease with itself but less relevant than ever. Miliband may want to see himself as the new Clem Attlee. But his ratings suggest that the voters still see him as the new George Lansbury – an unworldly leader and an electoral failure.

Planning Reforms: Greg Clark Admits Changes 'Could Have Been Clearer'

Greg Clark has admitted that there are flaws in the Government’s controversial proposals to reform the planning system.












Greg Clark MP, planning minister, signalled there would be changes to the National Planning Policy Framework.

In the first public debate since Prime Minister David Cameron intervened in the row earlier this week, the planning minister said that some of the proposals on brownfield land, housing targets and "sustainable development" could have been clearer.

The comments provide clues to how ministers are likely to amend the controversial National draft Planning Policy Framework, which has attracted fierce criticism from countryside campaigners, after a consultation closes in the middle of next month.

Mr Clark told a seminar at a London law firm organised by the British Property Federation that it was difficult to express the Government's intentions at the same time as reducing bureaucracy.

He said: “When you distil more than 1,000 pages to around 50 ... Inevitably it is the case not every thing is expressed in the clearest way possible but that does not signal malign intent or an intention to subvert the process."

Protesters have accused the Government of trying to rip up the planning system by removing protections for the countryside in favour of development.

Mr Clark strongly denied this suggestion and said that the Government was willing to listen to critics. He said: “This is a genuine consultation. It does not imply any agenda of the Government to change the nature of planning.”

Afterwards, Mr Clark told The Daily Telegraph: “Any consultation wants to make sure that everything are expressed more clearly. My view is that these safeguards are there and are clear to all, but if people think they are not we will respond to them.”

Mr Clark is pushing through plans to replace 1,300 pages of planning regulations in England with just 52 pages in the new NPPF.

The framework writes into the rules a new “presumption in favour of sustainable development”, without defining clearly what it means, leading campaigners to fear that large areas of England will be concreted over.

Mr Clark added: "The intention of the presumption in favour of sustainable development is not to provide a loophole where alien developments will be imposed on the community rather the NPPF wants to replicate the kind of policies a reasonable local authority would put in place."

Campaigners, led by the National Trust, have suggested the Government has tried to change the planning system so that it is biased in favour of promoting growth, rather than the environment.

The Daily Telegraph is also running a campaign called Hands Off Our Land urging the Government to reconsider its plans.

There was a breakthrough this week when Mr Cameron personally assured the Trust in a letter to its director general Dame Fiona Reynolds that the environmental benefits of developments would be assessed before new projects were given permission.

Mr Clark hinted at some of the clarifications that he was planning as part of the Government’s response to the consultation, which ends on Oct 17.

He suggested that a presumption to build on previously developed areas or “brownfield” sites, which is in current rules, would be written back into the guidance.

He said: “It was never my intention, and it certainly was not the Government’s intention, to depart from the obviously desirable situation in which derelict land should be brought back into use. That is always the intention.”

“If not mentioning brownfield at all leads people to conclude there is a different intention, then without pre-empting the consultation, that is something that I am hearing being said.”

Mr Clark also said he had been misunderstood over targets for local authorities to provide 20 per cent more land for building.

He said that this does not necessarily mean that more houses will be built, but simply that more options for development are made available. The intention was “not to have more homes built than the locality needs”, he said.

Mr Clark added: “Not every site that is earmarked for development turns out in practice to be developable. Problems arise. So you always need to have something of a buffer to make sure that the number you plan for is developable.”

He also admitted the “presumption in favour of sustainable development” was open to interpretation and needed further work.

He said: “I think the presumption in favour of sustainable development requires sustainability to be there, to be guaranteed but we will listen (to the consultation).”

Campaigners welcomed the softening in tone in the minister’s comments. Shaun Spiers, chief executive of the Campaign to Protect Rural England, said: “Mr Clark was acknowledging that there are clearly huge parts that can be improved. It helps the tone of the debate and it has good to feel that the minister is listening.”

Dame Fiona Reynolds, director general of the National Trust, told the meeting that she had been "horrified by the draft" because the document focused on promoting the economy over environmental concerns.

She added: "It’s good to hear Greg Clark's confirmation of the goal of balance and his warm words about genuine consultation. I now look forward to seeing amendments to the draft NPPF which deliver balance - this is what's now needed.”

David Cameron: 'Recovery Out Of Recession Will Be Difficult'

Prime Minister David Cameron has warned that the recovery from the recession will be ''difficult'' as shares continue to fall and investors worry about the global economic outlook.



Addressing the Canadian parliament in Ottawa, Mr Cameron said the economy was still suffering from the economic collapse of 2008.

Finance ministers and central bankers from the G20 group of countries have promised a "strong and co-ordinated response" to the problem.

Operation Twist Won't Be Enough To Save The World Economy

Twist and shout....loudly, for help. The $400bn action taken last night to by the Federal Reserve to boost the US economy backfired, by alarming the markets it was meant to reassure.

Global shares fell sharply this morning with £56bn wiped off the FTSE 100 index - that's our pension money, by the way.

Taken along with the International Monetary Fund's stark warning of a 300bn euros black hole in the eurozone banking system, due to sovereign debt risks, the Fed's move was interpreted, correctly, as an index of just how bad the situation is out there.


















U.S. Federal Reserve Chairman Ben Bernanke hopes that Operation Twist will help boost the U.S. economy.

Operation Twist, as Bernanke's $400bn mission is nicknamed - is so-called either because it has not been attempted for 50 years, when the Chubby Checker song was in the hit parade, or because it is an attempt to twist the 'yield curve' - in simple terms, to bring down long-term interest rates and thereby boost economic growth.

I could explain this in full, but believe me, you wouldn't want me to.

Along with Operation Twist, the Fed issued a gloomy prognosis on the US economy and the risks from the eurozone, echoing the sentiments from the International Monetary Fund that time is running out rapidly to fix the vulnerabilities in the financial system.

The financial crisis that had its genesis in the banking system was always going to spread to sovereign nations.












The financial crisis that had its genesis in the banking system was always going to spread to sovereign nations.

Now we are indeed entering a new and dangerous phase, and the really worrying thing is the utter and abject lack of convincing leadership, the absence of any big world figure with a convincing vision of how to get out of this awful mess, and what the world might look like when we eventually do.

Share markets have been incredibly febrile so the FTSE 100 and other indexes are quite likely to bounce back.

But this is a deep and real crisis.

The eurozone is facing an existential crisis and the US as the world's dominant economy, is staggering under a mountain of debt.

Hang on to your hats.

World Bank Warns Of 'Danger Zone' As Global Stock Markets Are Sent Tumbling

UK shares suffered their biggest fall in nearly three years today amid fears a global recession.

It came amid a warning from the World Bank of a 'danger zone' and last night's backfired attempt by the Fed in the U.S. to prop up confidence.

All leading global stock markets indices plummeted with the FTSE 100 down 4.7 per cent - a colossal slump of 246.80 points to 5,041.61, its biggest points fall since November 2008.

The fresh sell-off was primarily sparked by America's announcement last night of a £250billion rescue operation to prop up its feeble economy.













Taking stock: A Barclays Capital trader holds his head while working on the trading floor at the New York Stock Exchange, which has seen huge amounts wiped off the value of firms.

The Dow Jones slumped on opening and was down 3.4 per cent by the time of the close in Europe. It adds to a fall of 2.5 per cent on Wall Street yesterday. Germany's DAX closed down 5 per cent.

Fresh evidence also emerged overnight of a slowdown in China and a warning from the World Bank further added to the panic in equity markets.

President Robert Zoellick said the world was 'in a danger zone'.

'Europe, Japan, and the United States must act to address their big economic problems before they become bigger problems for the rest of the world,' he said at the annual meeting of the World Bank and International Monetary Fund. 'Not to do so is irresponsible.'

'Some developed country officials sound like their woes are just their business. But my confidence in that belief is being eroded daily by the steady drip of difficult economic news. The world is in a danger zone.'

Banks were among the biggest losers, now the norm in sell-offs, with Lloyds Banking Group shares down more than 10 per cent at 32.51p and Barclays off 9.4 per cent at 138.85p.

Miners also fell victim, due to the expected slump in demand for commodities, with Vedanta Resources shares plunging 13.3 per cent and Antofagasta down 12.7 per cent.

The huge threat facing the British and global financial system was laid bare last night as the U.S. took unprecedented emergency steps to aid the world’s largest economy.

Frightening evidence that the crisis in euroland is spinning out of control also emerged as the International Monetary Fund revealed that a £263billion black hole has opened up in its banks.

The turmoil on both sides of the Atlantic will spark fears that the world is heading for its worst economic crisis since the collapse of Lehman Brothers three years ago.

The Federal Reserve, America’s central bank, launched a £250billion operation to lower borrowing costs for businesses and for consumers in the U.S., selling its shorter-term securities to buy longer-term holdings.

Its move came amid escalating fears over the health of its banking system.

A trio of the country’s biggest banks – Citigroup, Bank of America and Wells Fargo – had their credit ratings downgraded by leading rating agency Moody’s. The UK is in danger of being caught in a vice caused by the problems on both sides of the Atlantic as the eurozone and the U.S. are our biggest trading partners.

The Fed is already engaged in enormous efforts to stimulate U.S. growth and has held short-term interest rates near zero since December 2008.






04.35pm, 22 Sep 2011 FTSE 100 (UKX)
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Prices delayed by 15 minutes.


It is under pressure to revive an economy that has limped along for more than two years since the recession officially ended.

As well as the rescue – the first of its type for 50 years when a much smaller exercise was undertaken – the Fed issued a grave warning about the ‘significant downward pressure on global markets’.


















Fury: People from all over the U.S. have gathered on Wall Street in New York to voice their frustration with the economy and banks.

It said this has been caused by the failure of the euro area politicians to take tough decisions to resolve the turmoil in the single currency area.

The Washington-based IMF echoed the Fed’s swingeing cricitism of Europe’s leaders for failing to rescue their banks and restore stability.

It said that if they do not do so quickly, lending across the region would dry up, accelerating the downward spiral which has brought growth to a shuddering and dangerous halt.

The IMF’s top financial stability official, Jose Vinals, said: ‘Sovereign [debt] risks have spilled over to the region’s banking system.

‘This has put funding strains on many banks in the euro area and has depressed their value.’ Since the euroland crisis flared up in Greece last year an astonishing 40 per cent has been wiped off the market value of Europe’s banks.

Mr Vinals called for an immediate bail-out of the banks across Europe even if this meant nationalising them.













Eurozone: Protesters hurl rocks at police during a violent demonstration against austerity in Greece, a financial crisis which continues to depress markets.

‘The worst thing that you can have are banks that cannot get funding,’ he warned.

Mr Vinals blamed inaction on ‘weak politics’. Failure of leadership on both sides of the Atlantic has led financial markets ‘to question their resolve’.

The IMF estimated the direct exposure of the banks to the struggling PIIGS – Portugal, Italy, Ireland, Greece and Spain – to be 200billion euros (£175billion). But when the banks’ lending to each other is taken into account the number climbs to 300billion euros (£263billion).

Britain moved to bail out its banks three years ago in the wake of the Lehman collapse when the government took big stakes in Royal Bank of Scotland and Lloyds Banking Group and effectively nationalised Bradford & Bingley.

The IMF accused European leaders – German chancellor Angela Merkel and French president Nicholas Sarkozy – of failing to address problems full on.

The euro area needed to act ‘decisively and expeditiously’ to resolve the sovereign risks to the world economy and the spill over to the weak banks.

If there is to be a recovery in Europe then the ailing banks ‘need to have sufficient muscle to support economic recovery through lending’, the IMF said.

A leading IMF official acknowledged that in Britain the Project Merlin agreement between the banks and the Government meant that lending was taking place.

But the official made it clear that the targets need to be revisited on a regular basis and that lending to small and medium sized enterprises needs attention.

RIGHTMINDS

RUTH SUNDERLAND: 'The financial crisis that had its genesis in the banking system was always going to spread to sovereign nations. Now we are indeed entering a new and dangerous phase, and the really worrying thing is the utter and abject lack of convincing leadership, the absence of any big world figure with a convincing vision of how to get out of this awful mess, and what the world might look like when we eventually do. Share markets have been incredibly febrile so the FTSE 100 and other indexes are quite likely to bounce back. But this is a deep and real crisis. The eurozone is facing an existential crisis and the US as the world's dominant economy, is staggering under a mountain of debt.'

Meanwhile, disappointing news about China's economic prospects emerged overnight.

A key survey by HSBC revealed factory output in China fell for a third month running in September, sparking fears of a slowdown in the world's second biggest economy.

Liberal Democrat Leaders Say Fair Taxation Is Key To Cutting Deficit

Danny Alexander outlines plans to kickstart economy by ensuring money hoarded by Labour is spent on infrastructure.












Liberal Democrats should fight the next election by aspiring to lift those earning less than £12,500 out of paying income tax, says Danny Alexander.

The Liberal Democrats should fight the next general election by aspiring to lift anyone earning less than £12,500 out of paying income tax, Danny Alexander said.

The chief secretary to the Treasury, a close ally of Nick Clegg, also set out the "next steps in our plan for growth", including a pot of £500m drawn from "unallocated funds" across Whitehall. Later, in an interview with the BBC's Andrew Neil, Alexander said these funds had been taken from savings found across government and did not amount to a stimulus.

Although this money comes from within the "spending plans", he said, the cash will now be disbursed with more urgency to kickstart infrastructure projects currently struggling for credit, with the hope of galvanising private spending.

It is the third indication from the Lib Dems in the past week that they intend to concentrate efforts on accelerating capital projects, which marks a subtle shift in emphasis towards greater public spending, without busting the headline deficit reduction plan.

Clegg made a speech on the subject last week, announcing that Alexander was now in charge of 40 projects across Whitehall, ensuring they are implemented rather than delayed.

They are pressing because they believe that if government funds already allocated can be spent rather than hoarded – which they believe was the case under the last Labour government – modest upfront sums "gear" up to become substantial amounts of fresh capital.

The business secretary, Vince Cable, also evoked the policies of Franklin D Roosevelt in the 1930s when he called for a "New Deal-style stimulus" for capital investment in an interview on Saturday with the Guardian. In his Q&A with Neil on Sunday evening at the party conference, Alexander refused to back Cable's language, but said he preferred to express it as the government "straining every sinew" to get the economy growing more.

As well as further schemes to drive capital investment, and the aspiration of the party going further in its bid to take the low paid out of tax, Alexander also set out measures to increase tax revenues.

He repeated a pledge made in last year's conference speech that there would be a clampdown on tax evasion, with 2,250 HMRC staff working on evasion and avoidance. He said the government was already raising £2bn in this way this year, which he pledged would rise to £7bn annually by the end of the parliament.

In one month's time, an "affluent team" will begin looking at the 350,000 wealthiest taxpayers who each earn more than £2.5m a year, in addition to the 5,000 who are already monitored: "These are the people who pay or should pay the 50p rate of tax," he said in his speech on the first morning of conference.

"My message to the small minority who don't pay what they owe is simple – I agree with the chancellor. We will find you and your money and you will pay your fair share," he said.

He was sanguine about the 50p rate of tax – which Tory colleagues expect will be dismantled if a review winding up in January shows it yields little revenue. Once Alexander had said he believed it was "cloud cuckoo land" the rate would be discarded despite Tory colleagues regarding him to agree he was not ideologically committed to it should it emerge to be unlucrative.

Tories say the debate behind the scenes is turning not on whether the 50p tax rate stays or goes but rather on what amount the replacement levy raises – the sum the previous Labour government intended it to raise when they introduced the tax; or the amount the 50p rate has actually brought in. The question then becomes what tax on the wealthy be brought in its stead.

Alexander said: "Fair taxation of the wealthiest is key to our deficit reduction plan. Of course, if a better way can be found to raise the money from this group, I will be willing to consider it."

Later in his interview with Neil, Alexander talked about ensuring the "tax burden" on the wealthy remained high.

Earlier in the day, Clegg also made it clear the party's negotiations on the 50p rate would not see them martial an ideological commitment to it, but rather they would accept its replacement by some other form of levy on the well-off.

He told the BBC's Andrew Marr programme: "It stays unless we can first make more progress on lowering the tax burden on people on low and middle incomes, and secondly making sure as the chancellor himself has said we can find other ways the wealthiest can pay their fair share."

In Birmingham, Alexander's speech was remarkable for placing an emphasis on how to push ahead with another aspect of the Lib Dem income tax policy, at the other end of the scale.

He told the conference hall: "In the next parliament, I want us to go further; our aspiration should be that someone working full time on the minimum wage should pay no income tax at all. An income tax threshold of £12,500 – think what that would do to work incentives, think what it would mean for basic fairness. Let's put that on the front page of our next manifesto."

The coalition agreement pledges that both parties in government will raise the income tax threshold to £10,000 by the end of the parliament and it is one of the policies the party is proudest of.

The policy has received support on the centre-right of the political spectrum with Tories sympathetic to its aims of cutting tax for the less well paid, but it has been criticised for being poorly targeted; in its original form this was a tax cut enjoyed by all, regardless of income.

The policy also has its Tory critics within the cabinet who fear a policy that removes people from paying tax would sever the relationship between government and the people.

Now the Lib Dems have committed themselves to raising the tax threshold still further, putting on the record an early indication of how they might seek to differentiate themselves from the Conservatives towards the end of the parliament.

Alexander's speech was occasionally heckled by one audience member with a shout of "rubbish" when Alexander criticised the Labour policies of Gordon Brown – a reminder that some delegates in the hall do not agree with the party leadership's decision to back plans to eliminate the structural deficit by the end of the parliament.

The coalition is currently trying hard to devise policies that will stimulate the British economy without busting either of the two targets they hope to hit at the end of the parliament – eliminating the structural deficit by 2014-2015 and bringing down the debt-to-GDP ratio.

While insistent they will not resile from the so-called "plan A" both on and off the record, the new imperative is to find ways of using existing capital spending commitment to encourage the private sector to part with their capital and increase the amount of capital in the economy.

On Friday, the business secretary Vince Cable, published a pamphlet for the CentreForum thinktank in which he suggested that alongside a new round of quantitative easing, he also believed new infrastructure projects were necessary including new roads built as toll roads.

This would have the advantage of encouraging the private sector to embark on a capital investment with a certain revenue stream not coming from the public purse.

Insisting his proposals amounted to a radical Keynesian package – using language and ideology not associated with the Conservative chancellor, George Osborne – Cable said that in the face of a stagnating economy ministers had to "pull all the levers available to government. We are not powerless."

Cable said: "It was four years after the Great Crash that Roosevelt came in and several years before they could do anything. Dams started being built 10 years after the Great Crash. What I have set out is a Keynesian approach to a demand crisis, but operating in a new world in which governments are highly constrained by these very febrile international financial markets. We constantly have to pay attention to them."

Now Alexander will disburse a "Growing Places fund", which he hopes enable the creation of local infrastructure across England.

"£500m to deliver key infrastructure and unlock development and create jobs. Providing a one-off upfront capital investment to kickstart developments that are stalled due to cash flow problems or lack of confidence.

"Putting local areas in the driving seat, enabling local government to invest in the key strategic infrastructure projects that they have identified as priorities and getting people into work."

Alexander said: "As Liberal Democrats, our judgments about what needs to be done should be driven by the liberal economy we want to build – sustainable, balanced, competitive, fair. To get there we must break down the vested interests – the enemies of growth that stand in the way of future prosperity."

"Too many businesses are being held back by congested roads, slow railways, inadequate broadband. Now more than ever, we need to get on with this work."

Hugh Grant: style watch

OK, so Italian politics has its problems, but at least they know how to dress. Hugh Grant, on the other hand, here lends weight to the old style adage that British men can't do casual.

When it comes to rocking a three-piece suit with a pocket square, the Savile Row gent still leads the world, but a certain type of British man still flounders as soon as let off the strictest dress code leash.

The trouble with this outfit is that the messages are mixed: was he trying to look smart but didn't have time to pull himself together and tuck his shirt in, or was he aiming for casual and put a suit jacket on as an afterthought? I suspect he was aiming for the kind of rakish dishevelment that Bill Nighy has made his own. But to pull that off takes effort.

Only the most perfectly fitted jacket looks good rumpled. Lucky for Hugh he's only addressing the Lib Dem conference. He'd never make it at London fashion week.

UK Inflation Figures Make A Mockery Of The Economic Assumptions Of Old

News emerged last week that during August, UK inflation went up. Again. The consumer price index (CPI) index last month showed that prices were 4.5pc higher than the same month in 2010.












It is noteworthy, also, that UK construction orders plunged 16pc during the second quarter – to their lowest level since 1980. So the outlook for construction is now worse, even, than during the "credit crunch" proper.

Given the growing sense that a tumultuous "euro-quake" end-game may soon be upon us, or at least the still traumatic acknowledgement of an explicit Greek default, the newsflow from Europe last week was almost overwhelming. So there was, perhaps, less comment than there should have been on the fact that UK inflation had just equalled its three-year high.

It used to be reasonable to assume that when the economy slowed, and unemployment rose, then inflation was likely to fall. Well, the UK has just endured its worst recession in more than 60 years. The economy shrank, peak to trough, by more than 6pc. Despite this historic drop, growth has failed to bounce back, remaining as low as 0.2pc during the second quarter.

Yet still, price pressures have been rising. Not so long ago, the publication of data showing that CPI inflation had overshot the Bank of England's 2pc target by more than 1 percentage point would have dominated the news agenda. The Bank's resulting public letter to the Chancellor, triggered by the 3pc breach and designed to explain the divergence, would have been forensically analysed by the commentariat. Such letters are now so common that hardly anyone reads them.

Over the past three years, monthly CPI growth has averaged – yes, averaged – 3.3pc. Those of us who've raised objections, pointing out that this might become a problem, have been dubbed "inflation nutters". It's as if the British economics profession has contracted collective amnesia, immune to the lessons of history, failing to highlight the danger that inflation in the 4pc to 5pc range can very quickly spiral out of control, as high and self-fulfilling inflation expectations become entrenched.

The UK's economic outlook weakened markedly in August. Survey data suggest the risk of the British economy re-entering recession, the dreaded "double-dip", has grown considerably. All three of the main CIPS survey measures fell last month, the main services index dropping at its fastest rate for 10 years.

It is noteworthy, also, that UK construction orders plunged 16pc during the second quarter – to their lowest level since 1980. So the outlook for construction is now worse, even, than during the "credit crunch" proper. This matters not only because the sector accounts for a chunky 7pc of the UK economy and employs millions of people. Construction is also a reliable "bellwether", with trends in the industry often pointing to what the economic future holds.

It looks likely, then, that we'll see virtually no growth in Britain for the rest of this year, even if global financial markets avoid meltdown.

It's also likely, though, that inflation will keep rising from 4.5pc over the coming months, above 5pc and beyond. The old retail prices index (RPI), more realistic than the CPI that replaced it, is already at 5.2pc. Such inflation numbers, amid a ghastly slowdown, make of mockery of the usual economic assumptions.

A big reason still higher UK inflation looks inevitable in the coming months is the price of energy and other commodities. Utility bills are soaring, as are UK food prices – which rose 6.2pc during the year to August. These miserable outcomes have their origins in the fact that global energy prices, to the surprise of many, have remained remarkably firm despite the latest Western slowdown. As such, another economic assumption of old has been upended.

Until recently, a slump in the "advanced countries", most of which are oil importers, was enough to generate a fall – expected, actual or both – in world oil prices, due to the impact of weaker Western energy demand. This was very useful for the developed world because the lower oil prices that resulted when our economies slowed helped to bring about our recovery. Cheaper fuel and heat would cut household and industry costs, boosting disposable incomes, profits and growth itself. Lower oil prices also helped tame inflation, giving our central banks the room to cut rates, so consolidating recovery.

Global oil markets, then, have long provided a crucial "self-correction" mechanism for the Western world. In light of the cardinal importance weaker crude prices have played in bringing about previous Western recoveries, it's worth examining their recent path.

Last month, amid fears relating to Europe's banks and Western sovereign debts, financial markets obviously took a big hit. The S&P 500 index of US stocks gave up all its 2011 gains, ending August 4pc down since the start of the year. Analysts slashed their growth forecasts for the US, the UK and mainland Europe. Yet, incredibly, the price of oil, while it has oscillated, has stayed pretty much where it was. Brent Crude remains up more than 21pc since the start of 2011, averaging no less than $112 (£71)/barrel so far this year.

Why is this happening? Typically, signs that the West is slowing, on cue, bring oil prices down too. But the markets now judge that the fundamentals suggest crude prices should stay roughly where they are, even if the West is struggling, not least because the bulk of oil demand in the world now derives from elsewhere.

The non-Western world today accounts for 55pc of global oil use. The insatiable energy appetite of China, India and the other large emerging economies – most of which are still growing by pc to 8pc – means they now set the tone on world commodity markets. The numbers are truly incredible.

The US Energy Information Agency (EIA )has just released estimates that the world will use 88.2m barrels of oil daily during 2011 – an all-time high, despite sluggish Western growth. As the emerging markets have expanded, engaging in massive infrastructure building, while their huge populations have become richer and adopted more energy-intensive lifestyles, global oil use has risen no less than 15pc over the past 10 years.

The EIA forecasts oil demand of 99m barrels daily by 2015, another 15pc rise from today, but this time in five years. Even in 2009, when the world economy contracted, world oil demand fell just 2pc, then grew 4pc the following year. So the oil market's long-held assumption of "demand destruction" when Europe or America slumps, is now being seriously tested.

The supply-side of the oil market also looks tight. The credit-crunch cut investment in exploration and well-development. The EIA sees a short-term deficit of 1.4m barrels per day in the fourth quarter of this year. Looking forward, oil traders are now showing a lot more interest in rapid depletion and falling yields at Ghawar, Cantarell and the world's other giants fields.

The politics of Opec have also recently been turned upside-down. Just a few years ago, Saudi Arabia made sure the exporters' cartel targeted $25 a barrel, so as to keep the Western world buoyant and oil demand strong. But now the Middle East can sell crude, as fast as it can pump it, to the emerging giants of the East. Meanwhile, the "Arab Spring", and resulting social expenditures to placate restive populations, mean that Saudi, and other oil exporters in the Gulf, need oil above $100 just to balance their budgets.

Like so much in economics these days, our usual assumptions about the oil market, in place for decades and reassuring for the West, are being revised before our eyes. The implications of these revisions we'll ultimately find impossible to ignore, even if so many continue to dismiss the inflationary dangers we face.

UK Politics: Recovery Postponed

Dismal growth prospects have sharply redrawn Britain’s political landscape, write George Parker and Elizabeth Rigby.











Political cover: David Cameron, right, seen with Nick Clegg, has come to realise how useful his junior coalition partner is in protecting him from his own party's ranks - not least over issues such as Europe, tax and health.

This week Britain’s cabinet was confronted with a bleak political picture. In cold and precise terms, George Osborne, chancellor of the exchequer, told colleagues in Downing Street on Tuesday that UK growth prospects were deteriorating and did not look like they were coming back soon. The significance of his analysis is only slowly being grasped by Britain’s political classes: everything has changed.

“The reality we face is stark,” confirmed Nick Clegg, deputy prime minister, in a speech on Wednesday that reflected the growing sense of foreboding around the coffin-shaped cabinet table. “There is now little margin for error,” he added. One minister confirmed that Britain was facing “a terrible situation”; another said it felt like 2008 when the financial crisis hit.

Much has changed during Britain’s long and dismal summer. Mr Osborne confirmed to ministerial colleagues that the eurozone crisis, shrinking export markets, the US slowdown, high inflation and rising commodity prices had all taken their toll, draining demand from an economy already sapped by the biggest fiscal consolidation of any major economy.

The riots that ravaged British cities last month may have been little more than mass copycat looting, but images of burning buildings and police struggling to regain control of the streets were reminiscent of the conflicts that scarred cities across the country during the brutal recession of the 1980s.

As Britain’s politicians prepare for the annual party conference season, the implications of economic slowdown – and the possibility of another recession – are slowly becoming clearer. The economy will dominate debate and shape strategy; a new phase in politics is opening up.

To understand the scale of the shift, consider the outlook at the start of the year. The Treasury was drawing up plans to start selling its stakes in banks, nationalised during the crisis, in 2012 in a sign of confidence returning to the City of London.

Government advisers talked confidently of next year’s Olympic Games in London as “a pivotal moment” – a shining light on the horizon – when austerity Britain would regain its verve. (Queen Elizabeth’s diamond jubilee would further lift the spirits.) All parties expected to fight the 2015 general election against a backdrop of plenty that would have followed a few years of tough-but-necessary choices.

Now the bank sales have been shelved until after the election and few in the cabinet mention shining lights. Party strategists have suddenly stopped talking about “spending the proceeds of growth” in the second half of the parliament.

Of course, the picture could change dramatically again, but for now Mr Osborne’s grand political plan – two years of pain, three years of recovery – seems in doubt. Ministers admit that come the election, the economy may still be mired in low growth and few now expect the independent Office for Budget Responsibility’s forecasts to be achieved. As recently as March, the OBR forecast growth of 1.7 per cent this year, 2.5 per cent in 2012 and 2.9 per cent in the two years before the election. Current consensus forecasts see 1.3 per cent growth this year and 2 per cent next year.

The strains were showing in the Conservative-Liberal Democrat coalition even before the economic outlook worsened; now the two sides will have to march together through what could be almost four years of economic hardship, punctuated by public sector strikes over the cuts.

Pressure is also mounting on David Cameron, prime minister, to do something to cheer the rightwing of his Conservative party, which has applauded the government’s tough economic message but feels badly let down on other issues, including Europe, tax, schools and immigration.

Tim Montgomerie, editor of ConservativeHome, an activists’ website, says Mr Cameron has been able to contain this unrest by pointing to the coalition’s success in sticking to its central mission: “sorting out the mess” in the public finances left by his Labour predecessor Gordon Brown. “That could change if the economy goes wrong and the coalition gets the blame,” Mr Montgomerie says.

Mr Cameron is drawing up a growth strategy built around delivering big infrastructure projects, cutting red tape and reforming planning laws. But he is under growing pressure from some in his party to emulate Margaret Thatcher and administer the type of radical economic shock therapy that she delivered as prime minister in the 1980s. Suggestions include cutting the 50p top rate of tax, scrapping European Union labour laws, reintroducing selective grammar schools and engaging in ambitious supply side reforms.

Tory MPs have been scrambling to put their advice to Mr Cameron down in writing before the conference season. David Davis, who ran against the prime minister for the party leadership, has co-edited a book – The Future of Conservatism – claiming that Tory ideals have been “significantly diluted” by what he once dubbed the “Brokeback coalition”.

Priti Patel, one of five new Tory MPs to contribute to After the Coalition, another book, says: “Being in coalition should not be an excuse for holding back on many critical issues such as sentencing, immigration and Europe. David Cameron is in charge and with a Conservative majority in cabinet there is no reason why the status quo should become the default option.”

. . .

The grumpy mood on the Conservative benches is reinforced by a suspicion that Mr Cameron – who describes himself as a “liberal conservative” – is using the Liberal Democrats as cover for refusing to deliver a more rightwing agenda. Indeed one Tory official admitted the coalition had been “brilliant for us” because it allowed Mr Cameron to stick to the centre ground.

The prime minister is also blamed by some Tory MPs for a big review of parliamentary constituency boundaries – almost everyone is affected; some will lose their seats altogether – while others complain that the well-heeled Mr Cameron is remote and disconnected from the grassroots. “We’ve been taken over by a Bullingdon Club clique,” complained one senior Tory MP, referring to Mr Cameron’s past membership of a plummy-yet-boorish Oxford university drinking club. “It’s almost Edwardian.”

Mr Cameron’s team rejects this as an inaccurate caricature, pointing out that the prime minister has been dining with MPs and visiting the House of Commons tea room regularly – a classic manoeuvre to try to quell unrest in the ranks. But he knows that the ongoing economic gloom – manifested in rising unemployment and falling living standards – will only make party management harder.

Nevertheless, Mr Cameron appears unperturbed for now. That is in part because he believes he can win the 2015 election even if the economy is in the doldrums – provided he can blame external factors and claim that he had taken the tough action on the deficit to ensure things were not even worse. Clinging to the mantle of “economic competence” has become yet more essential to the prime minister.

Under Ed Miliband, the Labour opposition has so far failed to regain its reputation for economic credibility, which suffered under what Alistair Darling – the party’s last chancellor – has admitted was a period of “chaos and crisis” during the last years of Mr Brown’s government.

One coalition minister says: “All our feedback tells us that people don’t like what we are doing but they attach no credibility to the alternative. I think people have made up their mind about the Labour leadership.”

Mr Miliband must give a strong performance at his own party conference to reassure the doubters, fleshing out an alternative economic Plan B that does not simply remind voters that it was Labour which presided over the surge in borrowing in the first place.

Shaping Labour’s economic strategy is Ed Balls, a former Brown lieutenant, who has long argued that the coalition’s rapid deficit-reduction plan would hobble the economy. He talks of a “growth crisis” and told the BBC this week: “The evidence is clear that I was right and they were wrong.” But being right may not be enough.

Lord Mandelson, former Labour business secretary, says his party must recognise “the economy will not be growing quickly and real incomes will not be rising” at the next election. Writing in a new pamphlet called The Purple Book, he argues Labour must develop policies for tough times, including plans to modernise public services, to keep taxes low and to keep the economy competitive.

. . .

For Mr Clegg the economic downturn presents a major political challenge as he prepares for his Lib Dem party conference in Birmingham next week. Members of his centrist party have been prepared to go along with the coalition’s tough fiscal plan on the understanding that things would be better by 2015. Now what?

The deputy prime minister is determined to stay the course; he believes there is a big political prize in securing a record of economic competence in government. But Lib Dem strategists admit they were betting on fighting the next election in good times and are having to rethink.

“The Tories can get away with an election in bad times, because they can say they are still trying to clear up the mess left by the socialists,” says one party strategist. “It’s harder for the Lib Dems, we are a party which thrives on optimism – that may be in short supply.”

To raise morale, Mr Clegg has sharpened his party’s identity in the coalition, fighting to water down “Tory” health reforms, opposing the removal of the 50p tax rate or the introduction of private profit into the schools system. Like Mr Osborne, he needs to show that the coalition has a strategy for growth to counter the downturn.

But Mr Clegg has always warned his party not to think of itself as an “internal opposition” in government. His allies say he needed to “turn up the dial” in differentiating himself and his party from the Tories following dismal local election results – and defeat in a referendum on electoral reform, a core Lib Dem issue – in May. But, they predict, he may turn the dial down again once the conference season is out of the way. “The next year is going to be very tough,” says one ally. “We’ll have to knuckle down and get on with the job.”

Europe: Sceptical genies brood in the bottle

In Brussels every crisis is an opportunity to further European integration. But at Westminster, particularly among most MPs in the Conservative party, the eurozone crisis offers a chance to move in the other direction. For them the current euro troubles are a rare opportunity to take Britain further from the centre of a European project they detest.

For David Cameron, prime minister, turmoil in the eurozone is thus not only an economic danger, but a political one too. Once the Tories were split on Europe; now almost the whole party is eurosceptic. (This week at least 100 MPs discussed a new “moderate” agenda to reclaim powers from Brussels.)

Mr Cameron’s problem is managing this visceral dislike of Europe. “I was told never to seek a meeting with David to discuss Europe,” says one Tory minister. “He thinks that even wanting to talk about Europe is swivel-eyed.”

The prime minister – who describes himself as “a very practical eurosceptic” – fears that when the Tory party talks about Europe, it starts to sound like a strange cult, out of touch with voters’ real concerns such as health and crime.

Tory MPs see the negotiation of a possible new European Union treaty to reinforce eurozone integration as their moment. They want Britain to use its veto to take back powers from Brussels on issues such as criminal justice, employment policy or immigration. Their hopes were raised last week when George Osborne, chancellor, said such a treaty was “on the cards” to pursue the “the remorseless logic” of monetary union: closer fiscal union. He knows that the tighter the core of the EU, the less likely Britain would ever be part of it.

Mr Cameron hopes that the crisis can be addressed without treaty change – a view shared by Herman Van Rompuy, EU president.

Tory demands for the repatriation of powers would strain coalition relations with the pro-European Liberal Democrats, who say Britain should be helping to solve the eurozone crisis.

So far Mr Cameron has managed to hold his party and the coalition on Europe. But many Tory colleagues believe he is hiding behind the Lib Dems as an excuse for not delivering the European policy they demand.