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George Osborne's Smoke and Mirrors Economic Austerity Cuts, Deficit and Debt

Economics / Economic Austerity Dec 05, 2012 - 02:14 AM GMT

By: Nadeem_Walayat


George Osborne in his Autumn Statement today will announce a further smoke and mirrors call to arms for greater economic austerity for the purpose of cutting the deficit and paying down Britain's debt, despite the fact that during the past 3 years there has been no real net economic austerity as the deficit has soared back to over £120 billion pear year and public debt remains on the exact same trajectory as it was on BEFORE the last general election, which illustrates a fundamental point that neither labour nor the Conservatives actually want the deficit and debt to reduce but instead utilise debt in the support of their differing ideologies where for Labour high debt to GDP as an Keynesian excuse to expand the size of the economy through the public sector and for the Conservatives to reduce the size of the Labour voting public sector and benefits claiming voter pool via economic austerity and to expand the economy via lower taxes for the private sector.

George Osborne's primary consideration today will be towards channeling government spending away from core Labour voters, towards middle income earners to entice them to become Conservative voters, hence his focus will be mainly on shuffling spending within budgets for instance for Education to cut bureaucracy whilst increasing spending on capital projects for 100 more academies and free schools to alleviate growing anger among parents at the lack of school places due to a significant deficit in school places in virtually every major city (Sheffield example).

No Real Economic Austerity

Today George Osborne will give a whole list of excuses as to why the deficit has not been cut and how and why it will be cut going forward by cutting public sector jobs and the benefits bill (Labour voters), when the reality is that there is no real net economic austerity as the deficit will remain high as this is how ALL governments BUY votes.

The government is set to spend an estimated £683 billion for the current financial year 2012-13, that is currently running an ANNUAL £128 billion deficit, i.e. the government will this year spend £128 billion more than it earns in revenue which is contributing to towards Britains inflationary depression.

What the above graph clearly shows that the UK government continues to sustain a high budget deficit at above £120 billion per year this despite forecasts (propaganda that it would be cut to near zero) by 2015-16. Furthermore the reality is for the trend for large budget deficits to persist going into the May 2015 election as the Coalition government sustains the deficit to buy votes, therefore there is a high probability that the deficit could even expand further, the net effect would be for a total accumulative additional budget deficit of well over £200 billion if not as high as £250 billion more than government forecasts / economic propaganda.

Meanwhile Labour will claim that Tory cuts are deep and severe when the truth is that the cuts are only deep and severe for LABOUR vested interests, that's mainly public sector workers both central and local government and the large 8 million strong benefits culture that Labour had engineered so as they could win election after election that the Coalition government is attempting to dismantle.

Why the Deficit Cannot be Cut

My analysis of October 2010 (UK Public Sector Spending Cuts Impact on Deficit, Debt, Unemployment and Economy)forecast that government spending would continue to grow to £739 billion by May 2015 and so far the Government in the preceding TWO years has done nothing in terms of cutting government spending to alter this trend trajectory despite all of the cuts propaganda to date.

The government has ring fenced more than 60% of government spending (NHS, Pensions and Education) for growth in spending that ensures that any cuts in other departments will be equalled or exceeded by continuing increases in spending for the the likes of the NHS, spending for which now stands at £127 billion (2012-13) and remains on target to expand to at least 140 billion for 2014-15, that is a £20 billion INCREASE in spending over the next 2 years , that will far surpass the £5 billion of cuts that George Osborne will announce today.

Looking Through the Smoke and Mirrors - The Quantum of Quantitative Easing

My recent in depth analysis (Bank of England Cancels Britain's Debt) illustrated the smoke and mirrors game that the coalition government has been playing as it masks the truth that the real crisis that has been facing Britain for the past 3 years is not the deficit or total debt but INFLATION as warned of in the Inflation Mega-trend ebook (FREE DOWNLOAD), as that has remained the primary tool for eroding the value of all debt away that the Bank of England has been busy monetizing and effectively canceling.

To date the Bank of England has officially printed QE of £375 billion, plus another £80 billion that goes by the name of funding for lending, plus at least another £50 billion of behind the scenes off balance sheets loans to the Bankrupt banks that date back to as long ago as April 2008 that are continuously rolled over which means that the total QE is at least £505 billion of which approx 75% is being utilised to to buy UK government bonds.

My article of July 2012 (The Quantum of Quantitative Easing Inflation is Coming!) explained that QQE amounts to the effective cancellation of government debt as the Bank of England repays the interest received on the debt held by the Bank of England back to the government as excerpted below:

The policy of QQE has subsequently been seen to be made manifest as illustrated by the recent announcement that the Bank of England has transferred it's first installment of £35 billion in interest received form the government back to the UK Treasury, which is then used as income to finance government further spending.

The Bank of England Cancels 1/3rd of Britain's Debt

To date the Bank of England has monetized government debt to the tune of approx £375 billion (31%) of the total debt mountain that stands at £1.2 billion in perpetuity, because the monetized debt will never be repaid but constantly rolled over, and left for inflation to do its job by eroding its value away. The effect of this is as I have illustrated above that the government is thus currently paying itself interest on approx 1/3rd of its own debt which effectively means that the Bank of England has cancelled 1/3rd of Government debt to date, this despite it continuing to officially exist in terms of debt statistics, but to all intents and purposes it no longer has an impact on government finances which is why market interest rates remain low.

The rate of QE since March 2009 has been averaging at about £120 billion per year, which approximately covers the whole of the governments budget deficit and therefore ALL of the new deficit debt that is being issued on an ongoing basis is being effectively cancelled and there is no sign that this trend is going to end anytime soon, especially in the run up to the 2015 election as the Collation government will increasingly attempt to buy votes with further money printing QQE.

Therefore my Debt to GDP graph has been updated to illustrate the impact of QE to date, and additional QE of at least £75 billion per year into 2016, and then coupled with the policy of of QQE effective debt cancellation that translates into a truer picture of Britain's public debt burden that also takes into account the inflationary consequences in terms of inflating GDP that depresses debt to GDP.

Therefore REAL UK Debt to GDP Burden is currently approx 40% of GDP (against 70% official), and is expected to rise to just 43% by March 2016 as opposed to my forecast of 79% on the official statistics as a consequence of the effective cancellation of approx £600 billion or 40% of outstanding government debt by 2016.

The above in a nutshell singularly acts to condense down the impact of QE, QQE and Inflation on Britain's actual government debt burden that blows apart ALL of the academic economic models that focus wholly on academic theories of debt and gdp without taking account of the critical factor of QQE that respective governments such as the UK, US, Europe, Japan and elsewhere have been engaged in since at least early early 2009. This turns the economic world literally upside down whose primary consequences that contrary to what the academic models constantly imply that deflation is always imminent, the reality is the exact opposite, that QQE as I warned in July 2012 implications are for an acceleration in the respective Inflation Mega-trends as the price paid for effective debt cancellation.

The Politics of QQE Debt Cancellation

One of the primary reasons why the coalition government is perpetrating QQE through a myriad of smoke and mirrors is ideological, i.e. the Coalition Governments wants debt to GDP to be high so that it can use it as an effective reason for dismantling Labours 6 million strong public sector gravy train and benefits culture pool of voters. Therefore understand this that the debt is NOT the reason for the benefits and public spending cuts programme but Tory ideology, as their aim is to maintain the deficit and debt as a consequence of low taxes.

Similarly the ideology of Labour is to go on a deficit spending spree as soon as they get elected so as to rebuild their vested interest public sector workers and benefits claiming voter pool.

So neither party wants total debt to shrink. Instead both parties (all parties) want to utilise debt to buy votes.

Inflationary Implications of QQE

The below graphic illustrates why not only deflation is not possible but also why inflation will continue to surprise the clueless academics and pseudo economists that most of the population are exposed to courtesy of the the cycle of Government deficit spending, debt printing, Bank of England money printing debt monetization programme that is feeding the exponential Inflation Mega-trend.

QQE allows the government to maintain its budget deficit as a % of GDP with impunity as more and more of the debt gets monetized, and which I forecast to reach 40% of total debt by March 2016. As the government effectively has ceased to pay interest on that portion of national debt thus resulting in an effective lower Debt to GDP burden. However the fact still persists that the continuing deficit spending is not backed by any economic activity, and therefore it is just an increase in fiat currency in circulation that is chasing the same goods and services. Which means that each years annual deficit translates into another wave of money printing inflation, just as I I have been warning for over 4 years now and as illustrated at length by the Jan 2010 Inflation Mega-trend Ebook (FREE DOWNLOAD), that the only solution the governments have is to print money, no matter what they call it, be it loans, deficit spending, transfer payments, Quantitative Easing or printing debt (government bonds), because as the accumulative debt graphs illustrate that DEBT IS NEVER REPAID, but constantly rolled over and added to. This is the policy that ALL governments are engaged in that results in the debasement of ALL fiat currencies where all we witness in the exchange rates is the differing rates of free fall between currencies.

The Exponential Inflation Mega-trend

Whilst the mainstream press and academics WHOLLY focus on the annual CPI Inflation graphs, the reality is that of an exponential inflation mega-trend as illustrated by the below graph that shows that despite the British economy having been in economic depression for the past 4 years, yet it has still suffered inflation of 15%.

UK CPI Inflation Index

The bottom line is that Britain rather than having a Debt Crisis instead has an INFLATION Crisis, as most people have been successfully brainwashed by relentless propaganda to believe that Inflation is good and deflation is bad. Inflation remains the primary mechanism for eroding away the value of the deficit and all debt that governments of all political parties utilise to buy voters with at each general election, which is why no matter what George Osborne states today with regards cutting the deficit and paying down the debt, it will be purely more smoke and mirrors that will not materialise ahead of the May 2015 General Election.

My next article in this series will seek to look at the probable impact of wages and unemployment on Inflation. To get this analysis in your email in box, ensure you are subscribed to my always free newsletter.

Source and Comments:

By Nadeem Walayat

Copyright © 2005-2012 (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of three ebook's - The Inflation Mega-Trend; The Interest Rate Mega-Trend and The Stocks Stealth Bull Market Update 2011 that can be downloaded for Free.

Stocks Stealth Bull Market Ebook DownloadThe Interest Rate Mega-Trend Ebook DownloadThe Inflation Mega-Trend Ebook Download

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 600 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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© 2005-2022 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


05 Dec 12, 06:24

With the 'race to the bottom' of developed countries currencies and the desire of developing countries to maintain their competitiveness what are we debasing against?

Countries such as Norway/Australia with healthier finances?

Commodities with a use (oil, gas, food)?

I fear that the 'net that no one should fall through but can rise above' is straining under the weight of those in it, how do we stop others falling into it, jumping into it and help people out of it?

05 Dec 12, 08:06
Inflation Stealth Theft

the value of your money is debasing, your earnings purchasing power is debasing, the value of your savings and through high taxes your assets. All the Savings you have worked hard all your life to save is going up in smoke! Your pensions are going up in smoke!

Currency debasement is pure and simple THEFT!

You don't help people by inducing them to park themselves onto benefits for life, people only get one shot at life and there is nothing worse than the whole lives wasted that the benefits culture promotes. Instead there needs to be a clear incentive to work and disincentive not to work.

One of the ONLY assets that you can use to protect yourself from the inflation stealth theft is the house you live in, which is why I have been suggesting the beginnings of an embryonic bull market for much of 2012.



05 Dec 12, 15:24
purchasing power

For an erosion in purchasing power the cost of goods must go up here in the UK. Is it reasonable to equate this to the cost of the energy to make and distribute increasing? e.g. Oil/Gas prices?

Housing supply is limited and not keeping pace with population and the desire is strong but how does ability factor into it? With stricter lending policies, erosion of purchasing power could a loss in confidence in Sterling cause interest rates to rise and crash the market?

05 Dec 12, 15:46
Peeling the Onion


To arrive at the most probable, many layers have to be peeled away of which this article is just one layer.

And Housing has many layers, so to build a probable scenerio I have to go through the process of which next will be wages and unemployment.

It is highly probable that rising interest rates will have the opposite effect on the housing market, but I need to go through the whole process.



08 Dec 12, 15:53

My thoughts about interest rates. Higher interest rates would bankrupt half the population so wages would have to rise to prevent this.I believe it is rising interest rates that will eventually set off the wage price spiral.

A couple of years of 20% pay rises (instigated through pay rises in the public sector) to diminish debt in real terms is what will be needed to avoid a deflationary depression.

It will also be house price positive.

However it will be a Labour govt that kicks it all off when they announce an end to austerity.

09 Dec 12, 03:51
Money printing


The bank of England has printed enough money that curteosy of fractional reserve banking is enough to more than double house prices.



09 Dec 12, 11:05
Housing and Money Printing

But if there is no demand for mortgages as people can't afford a deposit how does fractional reserve banking have an affect or am I missing something?



09 Dec 12, 13:37
UK housing

This is why I need to continue writing it all up so that all Q's are answered.

Else the comments would end up becoming as long as the articles.

The time line is -

Inflation this month

Housing market Jan 2013.



09 Dec 12, 22:16

Hi Nadeem,

I analyzed the exponential CPI index graph. The graph reaches a inflection point sometime in 2015. Would this translate economically to a point in time where the inflation rate become unmanageable for the average household. Would interest rates change to accommodate this? Does this coincide with the FED targeting to raise rates at that point in time?

Is currency debasing the only way America and developed nations can accommodate such a large aging population?

I would greatly appreciate an article on the long term analysis of health care in the United States.


10 Dec 12, 04:36
Currency debasement


All governments since Roman times have used currency debasement, i.e. make the silver / gold coins thinner , put holes in them or mix with other metals, it is the only answer governments have ever had.

The exponential trend in inflation is permanent, only the name of the crisis change from time to time i.e. ageing population, war, energy costs etc.



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