The de-industrialisation of Scotland has left many communities, both rural and urban, without jobs and without hope. This deterioration accelerated rapidly as the UK focused on finances and allowing market forces to control economic policy, first under Thatcher but then even more so under consecutive New Labour Governments with over-reliance on services, in particular financial services, in London and the South East.
Looking at London and the South East (LSE) as an entity, by 2020 the UK Government expects each to experience a one million increase in population over the next 7 years. This on top of the fact that the populations of LSE have already roughly doubled in my lifetime.
Economically this mass migration has had a major economic impact, creating a massive earnings imbalance. Income per head in London and the South East has been measured at 70% higher than the UK national average.
Over-reliance on Volatile Financial Markets, Have Unbalanced the Economy
In order that financial services and investment markets thrived, successive UK governments followed polices of keeping the pound consistently strong. This strategy may have been good for the City (in the short term) but it devastated the manufacturing industry as exports became too expensive for foreign countries to buy. Significant investment in high value manufacturing, research and development could have mitigated this decline and maintained a balanced economy, but we were told the days of making things were long gone. We were told there was no alternative – Germany decided otherwise and that worked out quite well!
The de-industrialisation in the regions, as a result of the strong pound/London finance dominated policies, meant that much of the UK regional, Scottish and Welsh industrial workforces lived in deprived areas where generations experienced poor education levels, low investment in skills levels, poor job prospects and thus with no opportunities for advancement, were economically unproductive.
For example, over the last 50 years economic growth in Scotland has been 40% below that of comparative small European nations.
People have to follow the jobs, and this resulted in a massive population shift southwards, which unbalanced the UK democratically, and led to accelerating calls for devolution and independence. Roughly one in three UK voters lives in London and the South East and so in general terms any political party that wants to form a UK Government needs to offer a policy platform that suits London and the South East. This has meant that even with slogans such as New Labour and the Caring Conservatives, we always get right of centre, finance and City of London dominated governments, regardless of what party Scotland votes for.
The rise of UKIP and their success in London and the South East, whilst conversly losing their deposits in every seat in Scotland at the last general election, is a case in point. For example, where as Scotland has never delivered a majority of Conservatives in seats or votes in my lifetime we have had Conservative government in the UK for roughly half my lifetime. In the same timeframe London and the South East have never had a government they did not vote for. Even when we have had governments we have voted for, New Labour had to adopt city led policies to win in London and the South East. So a change of Government can’t help Scotland, only a change in the way we are governed can do that.
A Culture of Debt
What this has meant politically and economically is plain to see, but what has it done to the social and economic policies under which we live?
For the last 30 years the UK has been one of the leading nations following the neo-classical economic model (free markets, low regulation, consumerism, consumption, and widely available personal credit). This economic model, we were told, is the only available option. Crucially neo-classical economic theory does not take debt levels into account, it believes that market pressures will regulate lending to a healthy level and therefore government economic policy and fiscal policy need not act to control lending. This led to the deregulation of the banks and financial markets, and to Gordon Brown and Alastair Darling, two global political leaders of the Neo-Classical theory (others include Bush x2, Reagan, Blair, Thatcher), to declare ‘an end to boom and bust’.
What had actually happened was that at the point in the cycle when we should have had a bust, the banks kept lending at unsustainable levels so that people could keep on buying houses, stereos, clothes, cars, etc. The neo-classical economists said:
“hey this is great, and obviously we don’t have a debt problem or the markets would stop the lending”.
Alistair Darling’s disastrous deregulation of the UK banking system is a case in point. Scotland’s budget in 2011/12 had four thousand million pounds taken out of it, just for interest payments on our share of the UK debt mountain.
Those economists and economics commentators like myself who never trusted the unhindered free market approach were not so confident; I felt like we were strapped into the front seat of a car speeding towards to the edge of the Grand Canyon without any brakes.
I actually attended several meetings with UK Government Ministers and with representatives of the Bank of England, including members of the Bank of England Monitory Policy Committee ,in 2006/07/08 where I made the case for acting to cut lending, and was basically told:
“don’t be silly, Scotland has never had it so good!”
Some Recent Historical Context
I actually didn’t know about the problem with American property investments, I saw the recession looming because of personal debt levels. In 1964 household debt as a % of income was a manageable 14% yet in 2009 it was an unmanageable 80%. It has often been said that a government needs bailed out when its borrowing costs reach 7%. I have seen payday loan companies on TV advertising 2000% APR and recent figures show 400 Scots a month are entering some form of bankruptcy. Personal debt does impact on the real economy, big time, in consumer spend terms but it also impacts on the liquidity of the banks themselves. Think we are over the personal debt problem think PayDay loans and think again.
In 1964 loans represented 46% of the value of UK bank balance sheets – in 2009 it was roughly 497%. Hands up if you think it is wise to let a bank lend up to nearly 500% over the value of its capital assets? The money lent across all the UK banks amounted to more than four times the entire wealth generation capacity of the UK. This was allowed to happen without any real government oversight – why? Because Alistair Darling, then Chancellor and now leader of the No Campaign, believed that less regulation and London-centric economic growth meant more wealth for the country.
Let’s be clear, lending more than your capital assets, only became possible when the law was changed to allow banks to create new money; money that they could lend, that they didn’t have, and that actually didn’t exist, until they made the loans. Most people think that the Government creates new money but private banks actually create 97% of new money out of thin air and then charge interest on it. No I am not making this up, and they still went bust!
The general idea was that those loans had to be secured against physical assets so that if they were not repaid, the banks could grab the assets (people’s homes usually) and stay afloat. Property was the asset that most loans and investments were secured against, and that was okay as long as market forces meant property maintained a high value.
Housing and Debt – The False Boom
But there was a new market force at play, one the chancellor seems not to have understood but the banks did. The banks could now lend billions they didn’t actually have, against property, and this rapidly increased competition for house purchases thus increasing the sales value of the houses they lent against. As a result the values of property went through the roof, and as property values rose the banks could print (I mean lend) more money. People were offering 80% over asking price to secure properties because they could get cheap credit, but the only thing keeping prices high was the banks ability to keep lending.
The politicians who worshiped the neo-classical economic model kept on winning elections and why wouldn’t they, they had delivered an end to boom and bust! Things were so good for Brown and Darling that they didn’t even get suspicious when the banks started offering million pound bonuses to fairly unskilled traders and started calling themselves “The Masters of the Universe” and drinking £1,000 bottles of champagne at Davos like it was going out of fashion. Of course the banks were profitable, who couldn’t make money if the Government was giving them the right to make money out of thin air?
Then the Boom, went Boom
The global economy slowed a little, personal debt and lower wage inflation meant people couldn’t keep up payments to debts, especially mortgages in the USA and the bubble burst. The banks were bankrupt, left holding assets whose value was in free fall, simply because their value was based on access to easy money that just no longer existed.
Worse was to follow, not only had the banks been printing money on the back of over valued properties, they had been selling one another their bad property debts, in bundles of thousands of properties at inflated prices and with the help high ratings from credit agencies, pretending they were worth more than they were paying, by overvaluing the properties.
When the crash came, governments the world over had to decide if they should let the banks go bust, if they should let shareholders (including pension schemes) take the hit, after all those shareholders got rich on the boom. Or if the taxpayer, you know, you, me and the guys whose household debt is 80% of their income should take the hit.
There were other options at the time in terms of how Alistair Darling could have managed the credit crisis. In the end, it is he who invested billions of taxpayer money with limited guarantees of real economic and social return on our investment (like lending to small businesses to boost the economy or our money back in a decent timeframe to pay down debt). There were and remain other options for paying down the debt rather than the austerity agenda of the Tory-led Westminster Government. But we should not have got ourselves into this mess in the first place and the Westminster system doesn’t offer a credible path to sustainable economic growth in these circumstances.
No one saw it coming!
The oft-used defence, the only defence used by Westminster and the banking sector, is that no one saw it coming. One of those that did see it coming and who is, in my opinion, one of the leading economic thinkers of our generation, has some advice for Scotland.
Australian Professor Steve Keen, the Revere Prize winning economist said
“the ‘UK economy is a ponzi scheme that is about to go bust – Scotland should get out while it still can’.
I don’t necessarily agree with the sentiment, but from such an authority on economics, it makes you think.
Britain is bust, not just economically but politically and democratically. There is no political solution, it is a system problem and so no change of the party of Government without a corresponding change in the democratic system of Government can make a difference. Addressing the balance through devolution while maintaining our social and trading union has helped, but we need to go further than devolution – Scotland should become an independent country, but we should do it in a way that doesn’t disadvantage the other home nations and that includes maintaining sterling as our currency to maintain our common market without barriers.
There is time to make the change before our economic options run out. It is time to fire Westminster on the grounds of at least two generations of political and economic systemic incompetence. It is time to have business and economic policy decisions that impact on the social needs of the people of Scotland, made by the people of Scotland. That is the fundamental truth, at the heart of the referendum debate.
All Pro-Independence business people should sign the Business Declaration - Read More
Portrait of the South East – Office for National Statistics
Going South: Why Britain will have a Third World Economy by 2014
Steve Keens book Debunking Economics – for those with a serious apatite for detailed analysis!