By far the best contribution to the parliamentary debate on the Emergency Budget was by the MP for Wycombe, Steve Baker. Using impeccable analysis and respected (ONS and Bank for International Settlements) data sources, Mr. Baker painted a frightening scenario in which the fiscal policies of western governments are unsustainable, and were even before the recent crisis erupted.

The government can’t borrow much more, it can’t spend much more and it can’t tax much more; nor can it grow the economy out of its current mess (as if it ever could!). The only other way to pay off its debts is by massive inflation, which would produce a catastrophe reminiscent of the Weimar Republic after World War One.

The implications are national insolvency down the road and it is against this background – and the failure of Keynesian spend-your-way-out-of-it policies that the historic Emergency Budget must be judged. Keynesian policies of fiscal and monetary excess have brought the country to the brink of ruin and need to be repudiated … again, as they were after the IMF crisis in 1976, before the vampire reawoke.

The figures Mr. Baker cited are truly worrying: official debt of £772 billion, itself a not inconsiderable sum, but utterly dwarfed by the government’s existing pension obligations, which raise the total to £4,771 billion, about six times as much. And, if you add in the obligations of the banks, now a ward of the state in more ways than one, you get a figure (using ONS data) of about £6.3 trillion or £6,300 billion – or if you prefer, £6,300,000,000,000. Figures of this magnitude have so many zeros they become incomprehensible, but to give this last figure a sense of magnitude, it is over four times UK GDP.

A billion here, a trillion there, and we are soon talking about real money…

These figures make national bankruptcy inevitable, unless the most drastic measures are taken to avert it.

One hates to add to the general cheeriness, but I would like the suggest that these numbers – though truly frightening, and based on solid sources – are in fact not nearly frightening enough:

1. Most ‘experts’ think that real returns in future will be lower than in the past (lower equity premium, etc) so we should downscale our projections of future real financial returns. This makes the outlook considerably worse.

2. Most projections of pensions obligations ignore longevity risk – the risk of people living longer, unexpectedly, so drawing more from the pension system. (This problem blindsided the supposed experts, the actuaries until post-2000 – think of Equitable Life.) My point is that mortality improvements are much stronger than most people realise and the implications for future pension schemes are very considerable. To give a rough idea, over the next forty years, we might be looking at an increase in pension costs from this factor alone of perhaps 40-50%. Experts are already talking about the ‘toxic tail’ of how many older people will make it to their nineties: this will itself bankrupt many schemes that managed to survive Gordon Brown’s notorious pension fund raids, which wrecked the non-state pension system.

3. Most important of all, the PAYGO pensions/social security nexus is, in essence, just a Ponzi or pyramid-selling scheme. Once one accepts this point, then the rest follows with an unstoppable almost mathematical certainty, i.e. the young get suckered paying ever more into a system that will give them nothing back, the problem gets worse over time, and collapse is inevitable anyway – remember Madoff?

4. One is looking a future of intergenerational warfare, in which the oldsters (who benefited from the system) become more numerous and want ever more entitlements (expensive medical care, etc) for ever longer periods, and expect their children and grandchildren to honour up debt obligations incurred well before they were born. This was always an unpleasant deal but the kitty is now empty. The youngsters meanwhile have their college debts to pay off, can’t get on the housing ladder, face ever more difficult labour market conditions, face higher tax burdens and have none of the economic security (guaranteed pensions, medical care, etc) of their predecessors, which they will have paid for, but won’t get themselves.

In 1930, Maynard Keynes wrote a splendid essay (”Economic Possibilities for our Grandchildren“) in which he looked forward 100 years hence. His musings did not age well: he anticipated that by then the economic problem – endless toil – would be resolved and we would be working 3 hour days to keep our hand in as it were, and he worried about the effects of so much leisure time and boredom on our mental health. This was the same genius who told us the government should spend its way out of recession and that in the long run we were all dead anyway.

Update: Click here to read Toby Baxendale’s review of Kevin Dowd’s new book, Alchemists of Loss, which will be launched at the IEA on 30 June (details of the event here).

23 thoughts on “Keynesian policies have brought Britain to the brink of ruin”

  1. Posted 24/06/2010 at 12:37 | Permalink

    Keynes’s musings were based on real growth in income per capita of just over 2 per cent a year — which is what we have seen for many years and which we can probably hope and expect to achieve in future.

    I object to calling the ‘pay as you go’ system of public sector pensions a ‘Ponzi scheme’ (though I believe Neil Record himself has used this term), since its basis is reasonably transparent. Ponzi schemes, in contrast, are based on fraud, on criminal deception.

    A better analogy is the ‘chain letter’, where if everyone ‘obeys’ the instructions, you get a lot of money when your name comes to the top. That is not fraudulent: nobody promises that everyone will keep the chain going.

  2. Posted 24/06/2010 at 12:44 | Permalink

    […] It’s even worse than I thought. f you dare, read more here. […]

  3. Posted 24/06/2010 at 13:00 | Permalink

    A Pay as you go system is structured exactly like a Ponzi scheme, except that the pay as you go scheme, think the social security system in the US, has government backing.

    A public sector pension that had some sort of investment system – like the Caisse de dépôt et placement du Québec, the pension fund of the province of Québec that incidentally owns a large share of London’s airports – would provide a better return for a reduced cost even if per capita income growth was only 2% a year.

  4. Posted 24/06/2010 at 13:00 | Permalink

    Is it not the case that since our children will be immeasurable richer than we are, (probably) regardless of the actions of today’s, or any other government, it is only fair for us to borrow from them, and them from their children. Their income will certainly be adversely affected, but that is not the point.

    We have more to gain now than they will in a generations time.

  5. Posted 24/06/2010 at 13:11 | Permalink

    You might have written this article differently had you seen the Wall of Debt page in the Times yesterday. The Government could have printed a modest GBP 50 billion to obviate the 5 billion of cuts planned for the first year, the 23 billion planned for the second, and 22 billion of the 42 billion planned for the third year. Really, the markets wouldn’t have noticed.

  6. Posted 24/06/2010 at 13:39 | Permalink

    We have almost reached the point of no return. It is likely we will go down the inflation route rather than pay our liabilities back honestly.

    I don’t think Weimar-esque is out the question. Indeed, I think that it is a more likely scenario in the US due to their politicised central banking system. Nonetheless, default or inflate, both are equally catastrophic to the “structural integrity” of an economy.

  7. Posted 24/06/2010 at 14:45 | Permalink

    David – I disagree, I think paygo schemes are Ponzi. They are transparent to the generation imposing the burden, but the generation paying has no vote and, to large degree, has not been born (indeed not enough of them will be born to pay the bills!). That is exactly like a Ponzi scheme – the people at the top know what they are doing, the people at the bottom don’t know what is going on.

  8. Posted 24/06/2010 at 15:36 | Permalink

    “Is it not the case that since our children will be immeasurable richer than we are”

    No. If the state continues to loot the productivity of the people and throw away the money on welfare and sh!t schools / boredom factories while imposing ever more detailed and rigorous regulations on us then there will be no innovation, enterprise or growth.

  9. Posted 24/06/2010 at 17:01 | Permalink

    Even if the government does walk such a path, any realistic worst case scenario still leads to them being much, much richer than us. Even if we were only to free-ride on the technological improvements of other countries while systematically hampering growth, that would almost definitely be enough to provide a higher average material standard of living for the next generation.

  10. Posted 24/06/2010 at 17:12 | Permalink

    @ Michael Petek (June 24th, 2010 at 2:11 pm)
    “The Government could have printed a modest GBP 50 billion … the markets wouldn’t have noticed”

    I haven’t read any of your other posts, so I’m not sure whether you’re joking. The government could have done this (it’s a mere quarter of the QE debasement). If they had, the split would have been 100% (stealth) taxes to 0% cuts, instead of the actual 77:23 (or 60:40, if we’re honest). The markets would have reacted very badly indeed to this naked Zimbabwe-style government funding ploy.

    There’s also a 5th point of bad news for those of us in the West: the inevitable rebalancing of the global economy.

  11. Posted 24/06/2010 at 17:55 | Permalink

    MRG, your posting makes no sense in that you haven’t answered the undergraduate essay question: “How Much Money Should There Be?”.

  12. Posted 24/06/2010 at 18:49 | Permalink

    Any amount you like. It’s the redistribution and reckless manipulation that concerns me.

    Happy travels.

  13. Posted 24/06/2010 at 19:33 | Permalink

    I agree with Philip here: PAYGO schemes fit the definition of Ponzi schemes as the youngsters do not know what is going on and were not even born before being enrolled; also there is fraud in that the system makes them promises it cannot fulfill.

    Another feature that is deeply wrong about this system is that they were not given the right to opt out – taken to its limit, this is like being born into slavery.

  14. Posted 24/06/2010 at 20:19 | Permalink

    ‘Any amount you like’, so where’s the basis of a unique right answer?

  15. Posted 24/06/2010 at 21:00 | Permalink

    “Mr. Baker painted a frightening scenario in which the fiscal policies of western governments are unsustainable, and were even before the recent crisis erupted.”

    It is nice to see others think this.

    As for Keynes, if we lived as people did 100 years ago, with the same housing, wardrobe (and churn), heating, diet, furnishings and appliances, modes of transportation and leisure pursuits, I am sure most people could get away with 3 hours work a day. Problem is, would you work that extra hour for that central heating? Or a bigger home? Or inside WC? Or a good healthcare package? Schooling for the Kids?

  16. Posted 25/06/2010 at 17:40 | Permalink

    Michael Petek is a lunatic!! Once again – the government should not be creating inflation by printing money and nor should it control the money supply! The markets might not notice but the people who’s savings have been destroyed by inflation might…

  17. Posted 25/06/2010 at 19:02 | Permalink

    Michael Petek:

    Nobody knows the ‘right’ amount. That’s the point. But the great equation solving miracle machine of the ‘market’ will work it out. Hence if the State makes more money than it should (where the State monopoly of money exists), prices of goods and services calculated in that money rise. The market adjusts to the new ‘debased’ lower value money. Go on printing money and Zimbabwe here we come.

  18. Posted 25/06/2010 at 20:28 | Permalink

    Guess what, Whig and Lola! I’ve got a great idea. Let’s abolish money and trade by barter! That way we’d get rid of inflation altogether.

  19. Posted 28/06/2010 at 06:59 | Permalink

    Even if we were only to free-ride on the technological improvements of other countries while systematically hampering growth, that would almost definitely be enough to provide a higher average material standard of living for the next generation.

    Yes, exactly…like the people of North Korea, for example! Rich b*******, the lot of ‘em!

  20. Posted 29/06/2010 at 18:22 | Permalink

    Keynesianism is meaningless in the context of a command economy such as North Korea. By the way, can someone provide argument refuting the heart of Keynesianism: that time, money and uncertainty of the future converge to ensure that the burden of adjustment is borne by quantities, not prices?

  21. Posted 30/06/2010 at 11:19 | Permalink

    I think that North Korea provides a sufficient justification of the idea that the more government intervenes in an economy, the less that economy will grow! That seems to be a refutation of the ‘heart’ of Keynesianism.

  22. Posted 30/06/2010 at 14:41 | Permalink

    Whig, your analysis is as deep as Mount Everest and as sharp as a football.

  23. Posted 04/07/2010 at 12:32 | Permalink

    Is it surprising that nations which depend for their money supply on systemic debt owed at compound interest to the banking system should find themselves bankrupt?

    What’s really surprising is that sane people should accept the arbitrary requirement of orthodox economics that every unit of money created should generate an equal unit of debt. If all loans were repaid without further debt being undertaken, we would have no means of exchange.

    For a simple reform which would correct this fundamental problem, see The Bank of England (Creation of Currency) Bill 2010 at

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