The Office of National Statistics has just reported that the UK's annual deficit in trade with the rest of the world in goods has widened for 2015 to stand at £125 billion a year. When you take account of a surplus of trade in services this has resulted in an overall deficit of £34.7 billion. Just in one year.
In my day (don't say I didn't warn you I was going to say that!) this would have caused a run on the pound, a national scandal, a storm of media coverage and brought the government down. Harold Wilson ran a deficit of this order for a short while and it resulted in the devaluation of the pound, the ruination of his reputation as an effective manager of the economy and the loss of the next election. The current deficit is more chronic. It has been going on for over a decade and isn't getting better.
What this means is pretty basic. We are buying more things from abroad than we are making to the extent of over £2,000 for every man woman and child in the country. The average worker needs to make around £4,000 more value every year without buying anything more. It isn't possible to continue getting stuff from other countries for ever without sending enough things of value back to them to compensate.
The obvious way to go about fixing this is to invest money in increasing the efficiency of UK manufacturers by improving science, technology, design and infrastructure. One of the prime reasons that this isn't being done is because George Osborne has decided that it is morally wrong for the government to invest money. He thinks it is a moral imperative to make sure the UK government's budget is in balance every year. Indeed he wants a £10bn surplus every year.
Fair enough, many people will think, if you ain't got the money you shouldn't spend it. But the government is not the same as a family. It can do things that none of us can. It can tell the Bank of England to print money out of thin air and pump it into the economy. So after 2008, under governments of both Labour and Conservatives, the printing presses or more accurately the electronic counters were put to work and £375 billion was created.
Anyone who lived through the reign of Margaret Thatcher (this time I'm not looking back through the rosy glow of nostalgia) will tell you that the government can't just print money and spend it or we'll get horrible inflation. Like everything in economics it depends on the circumstances. Thatcher may well have been right about the danger of inflation in the 1980s. Yet in the last 8 years massive amounts of money have been printed and inflation has plummeted. The rate of inflation was negative for part of last year and remains hovering around zero. Clearly this time printing money didn't cause inflation and since it was also done in the states to the tune of $3,000,000,000,000 means that the same thing happened in more than one country.
After 2008 the business community and consumers lost confidence and a lot of decision makers decided that if banks can collapse so easily that it might not be a bad thing to hold on to as much money as they can for as long as they can and build up their assets. For economists the speed of transactions slowed. So any extra money created by the Bank of England or the Fed was counteracted by a change in the tendency of businesses to spend any money that came their way. Quantitative easing simply ironed out a dangerous trend towards a downturn.
The way all this extra money was used was truly extraordinarily stupid. With the support of Labour and then Conservative governments what the Bank of England did with huge amounts of money it had created for free was to pump it into the banking system. They bought from banks almost any piece of paper that said it was a long term asset. They gave them cash to replace dodgy long term investments that they couldn't sell on the open market.
The logic behind this was relatively simple. If the banks had collapsed then so would the rest of the system. But in these circumstances the collapse of capitalism wouldn't have been replaced by the communist utopia. It would have simply been a case of every cash dispenser in the country ceasing to function and the supermarkets running out of food because they wouldn't be able to pay for their just in time deliveries. In other words mass unemployment, mass misery and unpredictable chaos.
It seemed preferable to give the banks some free money and the theory was that when they got their hands on this cash the banks would lend it out, hopefully to small and medium enterprise businesses, and the economy would get moving again. A little bit of this happened. What also happened was that the second the banks got off the hook they went back to their old habits. They started lending money where it was most profitable not where it would do the most good.
So if someone wanted to borrow money to buy an exclusive flat in a nice area of London they got a loan and the interest rate looked quite reasonable relative to house price inflation in the capital. If someone wanted to borrow money to build up a portfolio of stocks and shares, or more likely an empire of complex betting positions on the value of credit default swops squared then they too got the loan. If you wanted to invest in expanding a company building solar panels or installing insulation or exploiting a new piece of technology then the charges looked a lot more scary. Not enough of that investment happened.
So whilst the government was refusing to invest in science technology and manufacturing, because it thought it was morally wrong for a government to do something useful, private enterprise was failing to invest in it because it could get a better return on speculation. No wonder the service sector expanded last year whilst manufacturing contracted. The stock market was doing well, London property prices were doing well, and bankers were back to making very nice bonuses on their loan books thank you very much.
If those bankers worried about a repeat of the 2008 crash they didn't show much sign of it. Not surprising, perhaps, when not one senior banker has gone to jail for the huge frauds that took place last time round. Bankers were asked to pass a few financial stress tests which they were almost bound to pass because the Bank of England had just made sure that they had a lot of liquid cash for free. Otherwise nothing fundamental was done to get them into good habits of sensible sustainable banking practices.
Unfortunately the chickens now look like they might be coming home to roost. The stock market has fallen rapidaly and keeps having days of panic that look like investors haven't entirely forgotten what it felt like to be owning a declining stock in 2008. We keep being told that this is because there is a panic on about China. It is a strange panic that is generated by a country growing at a rate of 6% a year. The UK would love that. Nevertheless since China has made the mistake of pegging its currency to the US dollar rather than allowing it to float freely there is a serious risk of a devaluation of the Yuan. A disorderly devaluation might make a lot of money for George Soros but isn't going to help the world economy to stabilise so this is indeed part of the cause of the market worries. But not the main cause.
In this atmosphere of insecurity, where we have a huge world economy and no effective world economic management system the key trigger of the problems stems from something that ought to be very good news for ordinary people. The drop in the price of a barrel of oil to $32 helps most folk financially and it certainly helps most businesses. It is a cut in price plain and simple.
Yet every cut in one person's spending is a drop in someone else's income. Taking this amount of oil money out of the hands of the Saudi Arabians and the Russian ultra rich is no bad thing. Nevertheless it immediately cuts off large supplies of cash from the hot money markets. London property prices and share prices are much more influenced by a shortage of all that lovely reckless spending than they are by worries about China slowing from 8% to 6% growth rates.
In other words the Bank of England and the Fed has ended up printing a lot of money to give it to banks who have used it for speculation and the speculative bubble that this has created now looks like it might be in the process of bursting. Another period of stock market chaos is going to happen sooner or later but no one can know when. Right now the system looks highly vulnerable. A UK economy that has skewed itself even further in the direction of dependence on the City of London's financial sector looks even more vulnerable.
There is, of course, an alternative. There is always an alternative (another nostalgia attack - I am sure Margaret Thatcher must have said something wise and sensible along those lines!).
If we can print money to be used on useless short term speculation then we can print it to be used on sensible long term investment. We could set about restructuring the UK economy so that we modernised our industry, got ourselves at the forefront of the need for low energy, low impact production and products. We could get our energy costs down by investing in conservation and in increasing the efficiency and the implementation of low cost green energy production and storage.
We can't, of course, print money for ever or use the money that is created foolishly. But provided we manage a further round of quantitative easing with care then Britain will be producing enough new products and useful services that the newly printed cash will be exchanged for new things made in the UK and we won't get any inflation.
What all this means is therefore pretty simple. George Osborne is talking about the importance of being responsible and holding to a long term economic plan. In reality he has been hugely irresponsible and his ideological obsessions look increasingly like they have led him into a massive short sighted economic blunder. Austerity doesn't work. Investment in the future does.
If you want to call the alternative people's quantitative easing then that's fine by me.