Gordon Clown .Com

With less than a week to go now until Gordon’s last ever budget speech (hopefully at least), nobody can have failed to notice the sharp slide in share prices that has reverberated around the trading floors of the world this week. Traders in London today particularly noticed, as over 150 points were wiped off the FTSE 100 leaving it teetering on the brink of the key psychological 6000 barrier.

The cause of these upsets, it seems, is a crisis of confidence in the sub-prime mortgage lender sector of the US economy, and the wider economy in general. One of the biggest sub-prime lenders, New Century, is now effectively out of business, and a whole bunch of others are lining up to follow suit. Obligingly, one enterprising blogger and former New Century employee has decided to post up his inside story of the company, and that will doubtless be worth watching over the next few days and weeks as more is revealed.

The headache for Gordon is that the bad news can’t realistically be contained just to the US. New Century’s biggest investor was none other than Barclays Bank, a name best known as one of the big four retail banks in the UK, who have been buying up Mortgage Backed Securities from other banks in an effort to increase their asset base for Basel II. One supplier of those securities it seems was New Century, and it now looks like Barclays is about to lose a whole heap of cash as the deal has turned sour. This news follows pretty soon after HSBC, another big bank in the UK, ran into trouble with its US subprime lending unit as well.

When the US economy hits trouble, and it starts costing UK banks money and threatens to hit the UK economy as a whole, you can expect the lending industry over here to sit up and take notice. Those 110%, 35 year, 5 times salary mortgages may not look quite so appealing to Abbey and the rest just now, as it becomes clear they fall right into the sub-prime category that is beset with so many difficulties in the US. And when those deals gradually dry up, the overall credit environment tightens, robbing Gordon of the “economic growth” by debt based inflation that he has been so proud of over the last 10 years. It may be too early to say that a Credit Crunch has arrived in Britain, but risks seem to be growing by the day that we’ll get one, and day by day Gordon looks ever more worried.

It appears that when Gordon vacates number 11 later this year, he will leave behind a legacy of tax-and-spend that sees the Government’s spending as the largest share of national income for nearly a quarter of a century. But it’s all alright for him, as when the house of cards collapses he can simply blame it on whichever sucker steps up to take his place. It seems as though Brown is planning to use Jack Straw, one of the biggest suckers around, as his sacrificial lamb. This Sunday’s Telgraph says:

Gordon Brown’s 10th - and final - budget is on March 21. In the run-up to his swansong, it is increasingly clear that the Chancellor has driven Britain onto the fiscal rocks.

New official figures suggest that this will be the seventh successive budget in which Brown is forced to revise his borrowing figures upwards.

Between April 2006 and January 2007, the central government current budget deficit - tax revenues minus day-to-day spending - was £11.6bn. That’s almost £1bn more than the comparable figure last year, despite Brown’s insistence that the deficit would shrink.

These numbers add to a growing sense that the Chancellor has spent too much taxpayers’ money, without securing a compensating improvement in public services.

Richard Jeffrey, the economist, calculates that government spending under Brown has risen by 98 per cent in cash terms, while the economy overall has grown by 69 per cent. That’s why government spending last year claimed its biggest share of national income since 1983.

The International Monetary Fund, the world’s most important financial watchdog, is now raising concerns about Brown’s “credibility”.

In its latest report on the British economy, published last week, the IMF said the Chancellor faced a “critical test” and called on him to rein in public spending after years of largesse.

Brown’s actions have led to “a sharp deterioration in the fiscal balance and rising net public debt”, said the IMF, while predicting that government borrowing would spiral beyond the Treasury’s forecasts.

And next week business leaders too will indicate how worried they are that this high-spending chancellor is undermining Britain’s ability to compete.

“We are at a fork in the road,” says Miles Templeman, the director-general of the Institute of Directors, in the IoD’s forthcoming Budget submission.

“There is nothing inevitable about a rising burden of taxation - since 1993 public spending in Spain has fallen by almost 11 per cent,” he says. “Perhaps the UK needs some Spanish lessons, as the current size of our state is not globally competitive.”

The IoD document highlights how “fiscally exposed” we are in the event of a sharp downturn. “There is no buffer in the public finances to absorb the impact of such an event,” says Templeman.

That’s true - even Brown’s repeatedly rigged “golden rule” shows a surplus of just 0.1 per cent of national income.

The Chancellor knows the fiscal crunch is coming. That is why he has deferred the tough decisions until the second Comprehensive Spending Review (which has itself been postponed from the summer to the autumn).

By then, of course, he will be ensconced in No 10. Brown can then blame the fallout on his successor as chancellor - his new friend, Jack Straw.

When the IMF starts sending out the warning signals, you know things are getting serious.

The media over the past few years, in reporting inflation and rumours about it’s true levels, has worked on the general principle that rises in the prices of essential commodities are a bad thing, and that the government and Gordon Brown are cleverly trying to hide them from us by sleight of hand.  There is one basic necessity commodity, however, that has always escaped this consensus, that commodity of course is housing.  As evidenced by various sensationalist headlines, like the one seen on Friday in the Daily Express shown here, it seems that  continuing inflation in the price of homes is news to be “toasted” and “celebrated” by Britons, and this can only be a good thing for the country.  It certainly helps Gordon appear to be doing a bang up job anyway.  Or does it?

A similar headline appeared in the Telegraph on Friday stating that rises in house prices are now outstripping earned income from regular jobs for many people.  Why work hard at your 9-5 when you are “earning” more money every day due to the inflated value of your home?  However it would seem from some of the comments left by Telegraph readers on the online edition of the newspaper, that sentiment amongst the great British public is not as clear cut as that.  Here are some edited highlights:

I’m afraid Gorden Brown is ‘guilty’ in making it appear to lucky home owners that they are quids in, when actually rising house prices makes everyone poorer (unless you sell up and move somewhere much cheaper). The government is raking it in with stamp duty and death duty and the more you have to borrow the less disposable income you have.I live in London -I know no one under 40 who owns their own home borrowing for the average home here requires 8 - 10 times the average income.  Society will eventually see mass homelessness of whole families.  Listen to Nick R, Elizabeth his comments say it all.  I am praying for a crash for the sake of my kids and my elderly mum who is worried sick about the amount of tax we will have to pay on her over inflated valued home when she dies.  A house is a home, a basic need not an investment.  When there are NO first time buyers left and that is almost so now in London, will we feel so well governed by the chancellor I doubt it!

That from Rose Konstam.  And this, from Helena Holtom:

The boom in house prices doesn’t “create wealth which is spread across a broad cross-section of our society”. It reduces average disposable income by massively increasing the proportion of income that people spend on mortgages. The fact that an individual’s home is worth more doesn’t improve their living standards, and the equity can only be released if they don’t want to own a house any more. Yes, ‘ordinary’ people can now become property investors through buy-to-let, but every person making money out of a second property has reduced supply, and hence pushed up prices, for the ‘have-nots’, ie first-time buyers.

And from Toby Barnett:

I can’t believe someone thinks Gordon Brown should be congratulated. He is certainly responsible for the ridiculous house prices - huge stamp duty costs mean people only move when they absolutely have to, cutting supply and fuelling price rises - and he should never have allowed the multiples of income that lenders are offering. What could possibly be more iinflationary than that?

I live in a dull London suburb where prices for a 30s semi are now topping £500,000. It can only be a matter of time before essential workers are forced out of the capital. Armageddon awaits.

This from Urel:

Greed is the driver of the market along with the fear of missing out on the gravy train by first time buyers,and the estate agents & lenders gorging themselves on easy money,from the naive speculators.  If any other consumer goods rose at the rate of houses there would be an out cry.  Greed has a blinding effect.

This from Matt O’Donnell:

Gordon Brown has allowed a whole generation of people to be effectively priced-out of ever owning their own home. Luckily, the massive resentment this is causing, and will continue to cause, will result in him being voted out of government at the next available opportunity. Good.

And finally that of John Sanderson:

What a revolting cesspit confronts the avergage Briton. Like some obese child fed on a diet of greasy chips and cheap icecream Gordon Brown has shovelled his cheap credit at a lemming like nation for the past ten years.

He has bought our votes with our own money - or own debt I should say (or our childrens debt). Shame on us for being such mugs.

And faster and faster the train goes. Past the lessons from Lawsons boom, past the lesson from the japanese economy, past the crash in Sydney house prices, past the crash in American House prices and only just past the USA ’sub-prime’ loans catching up with the British banks!

What is prime about a loan on 5 times earnings for a house on the edge of manchester we may well ask ourselves?

They see all this and yet still keep stoking the fire. We are being led by reckless madmen and jelly like civil servants.

Before they slip away as the inevitable sickening thud happens could somebody please electronically tag them. Surely they must be held to account for the misery they are going to cause - its just so wrong what they have been allowed to do.

They really have no excuses - we have only just been there before re 1992.

Utterly disgusted, thats me.

Not everyone is a delighted beneficiary of Brown’s booming Britain, it would seem.

Newspapers are reporting today that the International Monetary Fund has sent a severe warning to the “Iron Chancellor”, that taxation is at breaking point and public spending must be slashed to avoid disaster for Britain’s public finances. The news will come as a blow to tax-and-spend Gordon Brown, who has in the past 10 years shown his love for all things civil service by pumping cash into the public sector.

The IMF also warned that there is a “significant chance” of a fall in house prices, an event that - if it were to happen - would surely spell disaster for an economy built on debt, perpetual house price inflation, and consumer spending funded by second mortgages. The IMF also urged the Bank of England that interest rates must be upped to 5.5%, and soon, to avoid sending the economy into an inflationary spiral.

The IMF calculated the tax burden, based on the ratio of taxation to Gross Domestic Product, is now at 38%, a level last seen in the mid 1980s. Their calculation, of course, does not take account of the fact that official government statistics consistently underestimate the level of inflation, although this is not so much taxation as institutionalised systematic confiscation of an individual’s wealth.

The Telegraph gives this news front page billing, as shown above, not a very pleasing sight for Gordon. The summary below the headline even includes the dreaded bullet point: “Property prices headed for a sharp fall”, doubtless striking fear into many of the great British public. What a mess Gordon has got us into. The treasury, of course, chose to focus on past performance, stating that “the economy has seen continuing economic growth, for a record 58 consecutive quarters”, failing to mention the obvious flaw in that argument, that Britain has been the only major economy without a recession in that time, thanks to an ever inflating debt bubble that is inevitably set to burst. The IMF had this to say about the housing market:

“In the short term, forward-looking indicators of housing market activity suggest that house price growth is likely to remain elevated.

“In light of estimates that house prices are already overvalued, this would increase the subsequent risk of an abrupt downward adjustment.”

In other bad news for Brown, the Times led with the frontpage headline “Record Tory poll lead, and it’s likely to grow”. Seems that the polls are continuing to show that Labour are well behind the Tories, and that were Brown to replace Blair, the Tory lead would be extended even further. Gordon had better enjoy the 3 or so years he is likely to get as Prime Minister, because it doesn’t look like it’s going to last much longer than that…

It has been a few months since the last time we checked on Gordon’s prospects in the Betfair markets, so lets see how he’s doing now. Then we will gauge reaction to his Budget speech in a few weeks time by checking on the odds again afterwards.
In the “Next Labour Leader” market, we can see that Gordon’s odds are now 1.29, significantly shorter than September’s odds of 1.45. Things are starting to shake out in the leadership race, and it is also a lot clearer now that Blair is likely to stand down soon, so Brown has less time to make any “cock ups” and therefore a better chance of winning. There are, however, two more interesting things to note in the market. Firstly the odds of Brown’s nearest challenger David Milliband have come in significantly to only 11.0. Betfair are good enough to provide charts of how the odds have changed over time and these are displayed below:

The second, and perhaps more important, market to monitor is the “Next General Election - Most Seats” market. This shows how well Brown is doing against Cameron, and it does not make for good news for Gordon. When we last checked in September, the odds on Labour vs. the Conservatives were 2.22 to 1.83. This has now shifted even more in favour of Cameron, and now stands at 2.28 to 1.77. Combine this with the poll results, and things are not looking too good for Gordon.

Desperate to save as much money as possible to balance the books, Gordon has announced that public sector wages will increase by an average of 1.9% in this years pay round. Given that RPI, the traditional measure of inflation used when calculating pay increases, is currently running at 4.2%, this makes a real terms wage cut of 2.3% for the public sector, or £38 a month for a civil servant earning £20,000 a year. Gordon is truly stuck between a rock and a hard place this time around - he is potentially throwing away the votes of over 6 million public sector workers - votes he cannot afford to lose if recent polls are anything to go by. On the other hand, he is currently about 20 billion pounds in the hole with public sector finances, so every pound saved is vital. The third aspect to the conundrum is the spectre of wage inflation that faces Gordon head-on. If wage inflation spirals out of control as some say it might, interest rates will eventually have to be risen to match, which would permanently destroy any remaining reputation of Gordon as a steady hand on the economic tiller. The only direct influence he can bring to bear on wage inflation is by setting the wages of his own 6 million employees, and praying the private sector does likewise. Some hope.

Trouble is already kicking off over this, and strike action may threaten at some point, as reported in the Guardian today:

Some union officials warned that the increase might trigger calls for industrial action in the NHS. Amicus said it understood the health sector’s pay review body had recommended a rise of 2.5%, but the Treasury had decided that the rise should be staged.

Health minister Lord Hunt, asked what he thought about possible industrial action by nurses, said: “I certainly hope that would not be contemplated, I do not see this as a pay cut at all.”

He added of the unions: “They may be disappointed about the staging decision, but the important thing to remember is that we have accepted the pay review bodies’ recommendations in full.”

His lordship’s comments about the unions must be like red rag to a bull. Implying they no longer have any power to influence decisions on wage bargaining may be something he later lives to regret.

The situation must be fairly serious for nurses and the NHS, as apparently they now have to rely on charitable donations from footballers, a few of whom have agreed to give a days wages to effectively help subsidise the NHS:

West Ham United captain Nigel Reo-Coker is one of several soccer stars to have signed up to the Mayday for Nurses campaign and agreed to donate their wages for May 13 to help nurses.

The campaign’s founder, Noreena Hertz, said she was hoping to sign up all 556 Premiership players, as well as managers, commentators and others in the football community. Any money raised will go towards a hardship fund for nurses who get into financial difficulties in the first few years of their career.

The campaign is also calling on the government to raise nurses’ wages to bring them in line with comparable public-sector workers such as social workers and police officers.

So there we go, not just the NHS but whole swathes of the civil service to be bailed out by the football industry. I wonder if this is what Gordon had in mind when sculpting the “miracle economy” we now bask in. The votes appear to have been cast, as witnessed by the number of sign-ups to the may day campaign.

Meanwhile, the economic miracle has been stuttering fairly severely in the city this week, with massive losses hitting the FTSE. Things seem to be turning fairly serious fairly quickly for good old Gordon.