The government is now seriously considering lending people money (directly or indirectly) they don't have to buy cars they don't need (presumably to impress people they don't like).
The key phrase is here: "Business Secretary Lord Mandelson said work to boost credit had begun ..."
*sigh*
You can't just go round 'boosting credit'. You have to imagine the economy as a series of ever smaller concentric circles, or a cone built up therewith:
1. The biggest circle is "the economy" i.e. people specialising and exchanging goods and services. This happens in the most straitened circumstances, e.g. smuggling and black market during wartime, even when there's no 'confidence' or trust in your counter-party, basically a barter economy.
2. Once things settle down, there is a smaller circle called "trust" or "confidence" where people exchange goods and services on tick, or for "credit" or a tradesman takes on an apprentice and trains him up - this wouldn't happen without a reasonable degree of faith in the future - that the customer pays up or that the investment in the apprentice pays off.
3. To oil the wheels of barter economy, we have another smaller circle, this fine thing called 'money', a measure of (relative) value, a medium of exchange and a store of value. It is a way of measuring the trust that we have in each other, or indeed the soundness of the money itself. If I agree to mow your lawn (a service worth £10) on the promise that you'll baby sit my kids next week (another service also worth £10) that is a form of "money" - it measures our relative indebtedness to each other. Whether you give me a tenner this week and I give you it back next week is irrelevant.
4. The next smaller circle within "money" is "money deposited with banks" which banks lend out to homebuyers and businesses to be repaid out of their future income. The depositor has to trust the banks; the banks have to trust the borrower; and the borrower has to have faith in his own future earnings capacity
5. Within the tiny circle "money deposited with banks" there is an even smaller circle called "money lent to borrowers" and so on.
6. Right in the middle of all this is a minuscule circle called "numbers on bits of paper" which have precious little to do with anything, this teeny tiny sub-sub-sub-circle represents a tiny tip of the giant cone called "the economy"
Mucking about with numbers on bits of paper achieves nothing if the bigger circles (the economy, trust, confidence etc) are shrinking. Giving people government-backed loans to buy cars just ain't going to work. Most car companies have been offering cars on credit at low interest rates for years, that all worked fine as long as people were still labouring under the illusion that the economy was doing fine, but not now and not for the foreseeable future. The only thing that might get those cars shifted is massive price cuts, maybe 50% off list price or something.
It's like standing in your front room, blowing up a balloon and expecting your whole house to expand as a result. It doesn't - it just takes air out of your living room and into the balloon. If your house is collapsing, it won't make any difference.
*/sigh*
Put On Your Big Boy Pants, Maybe?
4 hours ago
14 comments:
Yeah, but FREE CARS! I'll have me one of them Ferraris.
Compared to the squillions spunked up the wall by Doom & Darling, what difference will it make if they give me a free car?
Where do I sign up?
But think of the environment!
PS What's wrong with making car workers accept a cut in pay!?! It should be easier for them to accept now that the economy teeters on the brink of depression!
Excellent analogy at the end with the balloon and house.
Or lending money to buy deckchairs on the Titanic; won't stop the ship sinking, won't be of any help when it does.
Snafu, the vast majority of car workers have already taken pay cuts. Many are already out of a job. I work at a car parts supplier; we had three laid off in my office today (out of 20) with more to come and a 20% pay cut for the rest of us. The pension is already closed. Workers in our three UK factories are on long term layoffs, due to massive reductions in orders, their pension is about to be handed to the PPF. All out closure is likely in the next few months. Our suppliers are going bust all over the world. The same is happening at my customers, major car companies.
MA, when I do this anti-bail out posts, I do always remember that it affects real people and real bloggers like you. But I'm into economics, not into politics, so that doesn't change the underlying argument.
OK MW, I know. In my first comment I was just trying to be funny (coping mechanism) In my second, I agreed with you; apart from anything else, it isn't going to work, it is money down the drain. In my third I was pointing out to Snafu that it is already happening - what else does he want?
So MW, as an economist what to do?
We have many industries that are dying, for a host of reasons, mostly external to the companies involved. These industries employ lots of our population in jobs that pay decently. If they don't survive; that industry, its jobs and knowledge could be lost forever - not companies failing - whole industries. What replaces them?
We have been cushioned from the reality of the collapse of our productive society by the bonanzas of vast profits and tax receipts from the pyramid scheme that is the City of London, the ever falling prices of stuff we don't need from China, increases in public sector employment and the easy availability of cheap credit.
We've seen the North, Wales, NI turn into Soviets where the majority of the population is supported by the state paid for out of the taxes paid in the South. This has happened because Coal, Steel and Shipbuilding died and nothing replaced them. How can we have a country that has no employment other than a few fat city cats, a large public sector and lots of minimum wage jobs taken by immigrants because benefits pay citizens better?
I really do despair; any wise words?
This all goes back to inflation and what it really is. I always struggled with the view set out in my economics books that inflation is the of the rise in prices. I prefer the quantity and velocity of money idea. Price rises are the result of inflation not the cause of it. In other words too much money has been made, and its price has therefore reduced - oversupply. The things that were measured in that money, cars, labour (time) are still the same price, but now as the pounds are smaller more of them are required for any given value of wealth or labour. To solve this the supply of money has to be reduced (this is why the banks should either be allowed to go bust or be forced into debt for equity swaps - doing either of these will disappear excess money from the system).
Cars are bought on finance. 90% of them - btw I own all my cars outright! Finance requires money to expand. How is this going to be done when the forces of the market are forcing it to contract money supply, aka deflate?
Brown does not get this. This can be seen in his expansion of credit in Sterling whilst prices of goods were being kept low by inceasing efficiencies in foreign manufacturers. He thought he had mastered inflation. He does not understand what inflation is. Now that the World has cottoned on to his inflation we have to pay more pounds Sterling for our imports.
What really hacks me off is that UK car makers are now broadly as good or better than anywhere else in the world. It is not their fault that people have no confidence, and nor is the credit available for them, to buy cars.
So yet again we see lefty abandonment of sound money and the consequential fake money spent on overheads killing off good businesses and driving (pun intended) unemployment.
Vote Labour. Vote wealth destruction. Vote poverty.
Marksany 22.29 - partly true, but some industries have migrated overseas because of the law of comparative advantage. In those cases benefits have been used to sustain unsustainable communities. In previous times of change (the lead mining industry in the NE is a good example) the labour moved or retrained itself when the old industry died or moved elswhere. In the lead mining case many of the workers went to - I think - the Americas, where their skills as lead miners were wanted.
If we were at all courageous or even vaguely sensible we would use the current decline to recapture a lot of the work lost overseas, but once people are paid to do nothing, guess what, they do nothing. If they paid me enough I would, and so would you. It's rational.
Basically we are paying ourselves more than we earn.
I do not agree that the City is a giant Ponzi scheme. Bits of it are/were. These were the banks and the hedge fund industry which needed Gordons avalanche of cheap money, and disfunctional regulationary system, to lubricate their schemes.
City industries like insurance, fund management, custodianship, shipping and ship broking etc etc are good businesses operating well. Other services like law and accountancy are also valuable. The English courts are often the place of choice to settle international contract disputes.
In my corner of financial services much good work is done for all sorts of clients and is profitable without the ludicrous 2 and 20 scamming charges levied by hedge funds for what have transpired to be very successful wealth destruction businesses.
You cannot imagine how much I sympathise with people laid off from good businesses brought down by this crisis, which is, I agree, the result of a giant Ponzi scheme, but not the City's, Gordon Brown's.
MA, "We have many industries that are dying ... What replaces them?"
We have had many industries - tin mines in Cornwall, gold mines, the coach and horses industry - that disappeared - because they were superseded by other industries. This process will go on for ever until there is nothing new to invent.
"We've seen the North, Wales, NI turn into Soviets where the majority of the population is supported by the state paid for out of the taxes paid in the South."
Agreed on the 'Soviet' point, but the taxes 'paid in the South' arise because The City was sucking up wealth from e.g. NI via unsustainable house price increases there (and The City was in turn merely abusing the money that Gordon Brown was throwing around - as Lola points out), and then having it trickle back down via the vastly inefficient tax/state spending system.
My wise words? Cut state spending, cut subsidies, cut taxes on production, introduce LVT.
L, good points on inflation. But however good UK carmakers are, inflation/credit bubble did not result in lunatic price rises (as with housing) it merely resulted in a lunatic increase in capacity (for the same price per car). We can't blame the car industry for not having seen the dramatic fall in demand coming, but that's no reason to excuse them either.
Lola,
you are quite correct, I didin't mean to denigrate my friends in insurance, real banking and those other City industries and institutions you mention. My ire is, of course, directed towards the world of "international high finance" responsible for the economic collapse we are suffering. I agree Gordon is to blame for the Ponzi scheme.
MW,
there aren't new industries and inventions coming through that will employ the vast hordes of unemployed in the UK - far vaster than the gummint admits and growing fast too. What new industries and inventions there are are either highly efficient in their need for labour (as pointed out by Tim Worstall last week), or are already centred in China. Nothing has replaced coal, steel or ship building in the UK, and nothing is going to replace the car industry either.
The comparative advantage of China and India is such that wages and standard of living in the West must fall until that comparative advantage is reduced. That process is beginning now in earnest.
MW, your prescription is spot on, of course; but let's face it: it ain't gonna happen.
MA, "The comparative advantage of China and India is such that wages and standard of living in the West must fall until that comparative advantage is reduced."
OK - nobody wants our living standards to fall to theirs, but what if their living standards were to rise to ours (via better government etc)? Wouldn't we then all be better off? Free markets are a positive sum game.
Of course my 'prescription' won't happen, people have been campaigning for this for centuries and I have no illusions that it will happen on my watch either. That doesn't stop it from being the truth.
MW - I totally agree about the credit bubble boosting unsustainable capacity in car production.
IMHO most people buy a car of a type / price that they cannot afford. They can only do it through daft credit deals. Mrs Lola and I earn decent-ish money (Oh how I wish it was indecent!) but we have run old cars, or good value new-ish ones for a long time as the only thing we can afford. But everywhere we look there are people earning less than we do driving better brand new cars. There are are two points here, one they are doing it on credit and as half of them work for the state, I am paying for the pension they should be paying for themselves.
And, there is global overcapacity in motor manufacture sustained by mercantilist policies by every national government but particularly the French, the Japanese, the Italians, the Germans and the US.
How do you sustain a vibrant free trade ecomony against the forces of statist, bureaucratic, mercantilists, protectionists pursuing beggar my neighbour policies?
Answers on a postcard to:
G Brown
10 Downing Street
London.
I think the Austrian comes out in this post. Public sentiment has shifted and there are few good investments out there to lend for (mainly due to overcapacity in everything).
Thus fiddling with paper, as you put it, will be either ineffective or harmful
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