Home truths and House lies

Next door to us there’s a small Italian restaurant we call ‘home away from home’. Whenever I feel too lazy to cook we pop over for a plate of fresh but inexpensive pasta, a glass of wine and a chat with the owner.

Yet we and our neighbours didn’t do this often enough, for yesterday the owner told me he was closing down. ‘How much would it take to keep going?’ I asked.

‘Sacchi di soldi,’ he said, and then translated, ‘A lot.’ ‘What’s a lot?’ ‘Well, we need to advertise, hire more staff…’ ‘How much, Mario?’ I pleaded, cutting to the chase. ‘Oh, a quarter-million or so,’ sighed Mario wistfully.

‘Not a problem,’ I answered, whipping out my chequebook. ‘Here, you can pay me back later…’

I’ve just told a lie. I didn’t give Mario £250,000 – I don’t have it to give. The only way I could possibly have bailed Mario out would have been either to start an illegal counterfeiting operation or re-mortgage the house.

Occasional speeding apart, I don’t do illegal, and a new mortgage would reduce me to penury. So I just shook Mario’s hand and wished him good luck.

Judging by his new budget, George ‘Subprime’ Osborne doesn’t have similar qualms about the national economy. His scale is obviously larger, but he’s doing exactly what I was reluctant to do: he takes on ruinous debts, then counterfeits money to pay them (or not, as the case usually is).

Unlike Adam Smith, George and his likeminded thinkers don’t believe housekeeping principles apply at the macro level of national economy. Here’s a typical statement by Samuel Brittan, the FT economics guru: ‘Since my undergraduate days, I have been pointing out that a government budget is not the same as that of an individual…’ He is right about that; it’s not, not these days. That’s precisely the trouble.

Nor do this lot learn from even recent history. Otherwise they’d cast a quick look at the 2008 crisis (that’s still with us) and ask themselves what were its immediate causes.

Let’s see. Bill Clinton and the Federal Reserve system decided to do a Thatcher and promote wider property ownership. To that end they kept interest rates artificially low, while encouraging, bribing and coercing banks to offer a subprime mortgage to anyone asking for it.

The assumption based on nonexistent and counterintuitive evidence was that property prices would defy gravity by only ever going up. Yet in short order prices began to stagnate, inflation beckoned and the Fed in its wisdom quadrupled interest rates overnight.

A deluge of defaults ensued, the property market collapsed, so did other markets, so did some venerable banks, so did the rest of our securely globalised world… Now if you were our Chancellor, what lesson would you learn from this?

Here’s the lesson George has learned, and I bet it’s different from yours. Having inherited an economy severely compromised by Labour’s suicidal spending and borrowing, so far George’s shilly-shallying accompanied by cheap PR stunts has done nothing to improve the situation. His response is to follow the US model – not of getting out of trouble but of getting into it.

George will continue to keep interest rates low, while using the public purse to underwrite 95-percent mortgages, mostly for first-time buyers. This, he says, will stimulate the housing market, and no doubt it will. Then what?

The public purse is worse than empty – it’s saddled with debt approaching 90 percent of our GDP. The cost of servicing this debt already equals our defence budget, and anyone who studied economics for five minutes knows that this sort of thing is unsustainable. What will you use for money, George?

This is where the Canadian wizard Mark Carney, the newly appointed Bank of England Governor, comes in. When he takes over in three months, he’ll push the button on the old printing press and put it into a high ‘queasing’ gear, piling billions on top of the 375 of them already counterfeited… sorry, injected into the economy to such a resuscitating effect.

Generally speaking I refuse to don Cassandra’s mantle, for fear of looking silly if my predictions don’t come true. This time, however, I’m fairly confident.

The first whammy of George’s one-two, cheap and easily available loans, will boost the demand for properties and it’ll quickly outstrip the supply. Prices will skyrocket, and mortgage sizes along with them. Having reached the new plateau, there the prices will more or less stabilise, for Newton showed that nothing can go up indefinitely.

When the second whammy belches out another couple of hundred billion in counterfeit cash, inflation will climb, further boosted by the rise in property values. Visions of Weimar, street battles and wheelbarrows full of banknotes will flash before our spivocrats’ eyes. Even they will know that hyperinflation would have to be prevented at all cost.

The only way of doing so would be to make money more expensive, that is to raise interest rates. Suddenly mortgage repayments will at least double, a spate of defaults will follow and you know what’ll happen next – 2008 all over again.

So why is George, egged on by Dave, doing this? It’s not an economics textbook but the calendar that provides the answer.

Our spivocrats are gambling on the timing of the boom and bust. They hope that the former will come before the 2015 election and the latter after it. If this pans out, the Tories just may be re-elected, and that’s what politics is all about, isn’t it?

And you know what’s really scary? The other lot are even worse.



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