Friday, December 18, 2009

Playing games with language

In the days where I was reluctantly forced into interminable business meetings, myself and some co-conspirators would try to reduce the tedium by playing little games. One such game was called "bullsh*t bingo". We would compile a list of meaningless business phrases and tick them off as they came up. "no brainer", "low-hanging fruit", "proactive", "treeing"- all would find their place in our little game.

Recently, however, I notice the spread of drivel a long way from the narrow world of business. It is not just the Dragon's Den TV show that has popularised corporate dull-speak, but across television a whole new language seems to be emerging which has very little to do with the way that people actually speak- or even think. For some reason, shampoo seems to be responsible for particularly banal phrases: "radiant shine", "dazzling" and- a particular bug-bear of mine- "fragrance".

Newspapers too- especially the tabloids- seem to have their own language too: "romp" is always a winner, along with "charms", and "manhood"- all strictly physical assets.

Now I find myself in front of the television playing the odd round of "bullsh*t bingo"- and strangely, it seems to be becoming easier and easier.

Tuesday, December 15, 2009

The calm before the fall

There have always been two schools of thought about the track of this particular crisis in the British economy. Firstly that the dramatic contraction in spending power would lead to price deflation- that the reduction in spending power would lead to a nominal fall in prices. The second was that the crisis would make money worth much less: that inflation would take a hold. Of the two, the policy makers fear deflation much more, because it is much harder to combat once it takes a hold- as the state of health of the Japanese economy has shown. Furthermore, inflation gradually reduces debt burdens, instead of increasing them- and the government has taken on a gigantic level of debt.

From the point of view of the consumer, though, inflation is quite bad news- essentially it reduces the value of holding money. This is why the inflation bears have become very strong gold-bugs, since gold typically holds its value when fiat money is being debased by inflation.

After the shocking absence of measures, in the PBR last week, to tackle the huge government deficit, perhaps we should not be surprised to see that inflation has indeed tracked up to 1.9%. The result may, however, be somewhat paradoxical and the root lies in the UK housing market. The fall in interest rates to historic lows has enabled some consumers to de-leverage, i.e. to pay back, their personal debts, but by contrast the mortgage debt market has actually recovered rapidly. We have seen increases in house prices, despite the generally poor economic outlook. To a degree, this was rational, since with the fear of deflation being so strong, it seemed that low interest rates would persist for some years. Yet it fails to take account of what is happening in the rest of the credit market.

The commercial property market in the UK is in a deep crisis: over 85% of loans granted over the past five years are in technical default. This could be simply that the value of a property has fallen below the stipulated loan to value ratio, but it clearly also includes large numbers of loans that are actually insolvent. We don't know how big a number these insolvencies may be, because the banks have taken steps - by stand-still agreements and so on- to ensure that there is not a flood of panic sellers which could undermine the whole market. We do know, however, that it was the commercial property book that destroyed HBOS. The numbers involved are therefore in the hundreds of billions of Pounds.

In the meantime, banks have been happy to lend to residential property, since they know that borrowers are highly motivated to keep paying- otherwise they lose their houses. With interest rates low, it seemed safe to maintain the stretched leverage ratios: lending five times a couple's joint earnings, for example.

However, if inflation is going to track up, interest rates will have to rise. Certainly the spike in Sterling this morning shows that the market is thinking about the prospect of higher interest rates in the UK.

Consumers in the UK have been pretty insulated from the global crisis- as long as you were in employment, low interest rates were actually making you better off. Now, it is clear that the crisis is set to move into a new phase which will substantially impact on British living standards. We already know that public sector employment is going to fall in line with some aggressive government spending cuts. Unemployment is set to rise sharply partly as a result. We already know that taxes in the UK will have to rise sharply. We already know that large numbers of high-earning foreigners are set to relocate from London in response to taxation and regulatory pressures. Now it seems that we will see a rising interest rate environment.

All of this is exceptionally negative for UK property prices. As it stands, UK property market is the most expensive market in Europe. In terms of price per square metre, London prime residential is nearly twice the comparable level for Paris and three times the level of Berlin. Yet the British economy remains in recession, while the Eurozone economies are generally recovering. This premium remains, despite the fall in the value of Sterling. Yet the supports for house prices are rotting: higher interest rates, higher unemployment, dramatic government cuts that -at best-will most likely keep the UK in a lower growth path; all seem set to create problems in the residential sector and underline the problems of the Banking sector as it still struggles to deal with the drastic weakness of the commercial property market.

The fact is that all of these policies: tax raises, expenditure cuts, and higher interest rates are necessary policy responses- but their combined impact could still be highly deflationary- at least for property prices. The distortion of the British economy by the overheated property market has been a long term problem. Now the situation is beginning to deteriorate- and that really will hurt the pockets of every property owner in the country.

The government may be trying to replay the 1970s, when high inflation reduced debt levels and made people feel richer as their houses went from being worth a few thousand Pounds to tens of thousands of Pounds- even if, in real terms, they rose much more slowly if at all. It may get 1990s Japan, when nominal prices fell.

In any event, either the price of Sterling or the price of property is going to fall dramatically. For which ever government emerges in 2010, it is political poison either way.

Saturday, December 12, 2009

Vitali Vitaliev: Life as a Literary Device

Sometimes a book comes along that defies categories and recently Vitali Vitaliev has written a truly enthralling, unique book. (Full disclosure: Vitali is an old friend of mine). I have even- for the first time- reviewed the book for Amazon.com.

Here is what I thought about the book:

"Vitali Vitaliev is used to journeys, and in this book he takes us as a companion on a journey of time and space- dozens of countries over two decades- and a journey of the mind. He is a great companion. By turns wry, tragic and laugh-out-loud funny, in the end he delivers a tour-de-force of warmth and humanity. The stream of consciousness structure creates links between places and people- Tasmania and Clive James, London and Peter Ustinov- that scintillate with wit and wisdom. he meets his triumphs and disasters and eventually treats those two impostors just the same.

Moving in a zig-zag across the globe from his native city of Kharkiv in Ukraine to Folkestone, Melbourne, the Falkland Islands, the fall of the twin towers on New York, Mount Athos, Edinburgh, Siberia, a luxury round-the-world trip, Tasmania and on to the eccentric Letchworth Garden City where he now lives, he always returns to his beloved London. The contrast of Ely Place- physically London but for a long time legally Cambridgeshire- is where he espies his own identity: a Russian from the Ukraine, of Jewish heritage with an Australian and now a British Passport.

All the time he links the experiences he gains with the books that continue to inspire him. In the end the book and life itself overlap or blur. The cornucopia of literary riches include reflections on Valentin Kataev, whose "Mauvist" ideas blurring literature and life inspired the very structure of this book; on Simon Grey's "The Smoking Diaries"; on Chekhov and his clothes, on arranging to meet Joseph Heller- author of Catch 22- the day he died; his visit to the House of Aleksander Solzhenitsyn- all these amuse-bouches are little jewels offered by a true literary connoisseur.

From Huge wealth and fame, he slowly loses everything- marriage, job, health and even his beloved children- ending in a squalid corner of Folkestone. Yet this is not the end: he emerges reborn from an operation to fix his serious heart condition reflecting that he is indeed "a very lucky boy". He determines to share his fortune with us in a series of survival tips- the survival tips of a writer facing the challenges of life and overcoming them. This is the best book that Vitali has written so far, and is a rich an warm expression of his carefully gathered literary maturity. It may have claim to be one of the most important books of the decade- it is certainly one of the most charming."

I think the reason why I think this book is important is that the structure reflects so much of what else is going on in our culture and society. The structure of Norman Davies History of Europe- small vignettes amid the text- or even the endless branching links of the Internet reflect the growing knowledge we have of how the brain stores ideas and relates them to each other. In the same way that Virginia Woolf scatters extraordinary detail in her text, with different scents being followed by the hounds of the mind, so does Vitali's book. It is an exploration of literature and life for the quantum age. Yet all the while, it holds our attention: it interests us and amuses us along the extraordinary arc of its journey.

You can see for yourself by ordering it at Amazon here.

Friday, December 11, 2009

The UK: paying the price for failure

The last week has seen a whole slew of economic figures, but much of this was drowned out by the failure of the pre-budget report to address the growing fiscal crisis in the UK. However this crisis is just one of the problems that now beset the British economy.

We have seen an increase in the gap between the value of what Britain exports and what it imports. This reflects the fact that import costs have increased as a result of weaker Sterling. Meanwhile there was the announcement that British industrial production has stagnated. Yet, this stagnation is despite the fall in the value of the Pound that should make our goods much more competitive in the global market place.

The trend is instructive: in 1980, manufacturing represented 26.5% of UK GDP, in 2005, the last year for which we have comparable figures, the figure was 13.6%. It is estimated now that manufacturing represents less than 10% of current British GDP. Whereas the United States can return to being a workshop for the world, the UK has lost the skills required to compete in global industry. The industrial base of Britain is now exceptionally small when compared to its global competitors. The country has put virtually all its eggs into the financial basket- and now the whole basis of that sector is being undermined.

The response to these numbers is usually that manufacturing- being polluting and dirty- is far better off being relocated to China or India, while the high value added service of design and the control of intellectual property that this comprises remains in the UK. However, we are now seeing that this rests upon a fundamental fallacy: that the quality of design in the manufacturing sites cannot rise to match that of the West, and from mobile phones to automotive products we are now seeing not just competitive products, but competitive brands emerging from the emerging economies. In the same way that Japanese auto brands, Toyota, Honda, Datsun/Nissan emerged to compete and then destroy the previously dominant brands such as Austin, Riley or Triumph, now we even see Western brands, such as Jaguar, coming under Indian control.

The British have happily auctioned off their core brands, from Rowntree to Marconi. Control of intellectual capital is following industrial production in leaving these shores.

Yet we have been free to fall into every single one of these elephant traps because at every crisis since the Second World War, we have chosen to take the soft option. Instead of challenging the communist cadres who, funded by the Kremlin, were the root of much the British industrial unrest in the 1960s and 1970s, we compromised. Instead of using our capital as an endowment, we chose instead to eat our seed corn. We failed to invest in capital infrastructure and instead chose to generously fund welfare provision: a current expenditure that only had a current benefit. All of this was short term decision making based on the swing of the political pendulum. It was said of the 1930s that they were the years which the locusts did eat up; how much more true was this of the post war world of "Butskillism".

Perhaps the great measure of this industrial failure was in our currency. In the world of fixed currencies, Sterling did not move much for decades. Whether linked through gold or the managed system of Bretton Woods, Sterling kept its value. Yet even during that time Sterling devalued substantially. When my Grandfather was at sea in the 1920s, the Dollar exchange rate was $4.85. In 1940, as part of lend-lease the ratio was pegged at $4.03. In 1947, began the first policy of devaluation, with the Labour government re-pegging the currency at $2.80. In 1967 came a further crisis and a further devaluation, this time to $2.40. After Sterling floated, it began a steady fall to near-parity before settling in a trading range of $1.40-$1.60. Each devaluation could have been a breathing space to allow restructuring to improve the productivity and competitiveness of the British economy. Each time, that breathing space was wasted.

I am often asked how countries can stay members of the Eurozone. Lacking the ability to competitively devalue- people suggest- is a fundamental weakness. However, what a fixed currency forces is the discipline to be flexible in every other sphere. Meanwhile, the ability to devalue allows crucial decisions to be put off- exactly as has been done in the UK. The state of health of the British economy is a classic example of why flexibility without discipline equals failure. At every turn the British have taken the soft option of reducing the value of their currency- and this latest crisis is no exception. From roughly €1.40 to the Pound, we have seen the single European currency rise nearly 30% to around €1.10.

Despite that 30% fall in the value of the UK currency, exports have stagnated and imports have actually risen. Industries have continued to contract, inward investment has continued to fall. Even with a 30% fall in the currency and the concomitant improvement in productivity that should represent, our economy has continued to contract.

On top of the fiscal crisis generated by the rescue of the banks we have an industrial crisis. Despite interest rates practically at an all time low, our economy has continued to contract. Only the public sector has continued to boom- and that is a sure way to perdition.

We have devoted all our energy to the property market- but there is no value added in that sector- it is only a rent seeker. The huge allocation of resources to a property market that has been distorted by centralised planning has massively inflated costs across the whole economy- and is a massive competitive disadvantage.

After a half century the decline of Britain as a significant industrial power is now almost complete. Over 80% of British economic activity is services. I feel a little like we are the inhabitants of the Golgafrincham B Ark - the useless third of the economy that the Golgafrichamites chose to blast into space.

I, for one, would not want a child of mine to have as their highest aspiration the ambition to be...

An Estate Agent.

Thursday, December 10, 2009

PBR?!.... RIP!

The Pre-Budget Review in the UK is a fiasco.

The policy measures announced are either pointless- the change in the Bingo levy, for goodness sakes- or dangerous- the increase in National Insurance. There is much rhetoric about cuts, no actual delivery. Even the "Banker's Bonus Tax" will raise nothing, and, by the way, similar measures were abandoned in both France and Germany (neither exactly "the Bankers Friend"), because they were thought to be unconstitutional. Taxes are supposed to be levied on the general population, if you start levying specific taxes, how long can it be before they become arbitrary, populist attacks on the chosen "people's enemy" of the day. Oh, wait a minute...

The real terror of this PBR, however, is in the detailed numbers on the economy.

When the UK stayed unexpectedly in recession last quarter, we were told that this was probably just "technical", and that the economy would be shown to have actually emerged from recession with later revisions of the numbers. What Mr. Darling's announcements show is that despite all of the huge increases in liquidity, the UK is still in recession- and one that is deeper than we had previously thought. Meanwhile, as my friend Mark Bathgate notes in the Spectator Coffee House blog, the debt numbers that were announced were not the complete picture. Mr. Darling suggested that the ultimate cost of the bank bail-out would be only around £10 billion- which looks like pure wishful thinking in the face of the hundreds of billions that have -so far- been required to prop up the system. The announced debt numbers are therefore based on a pinch of fairy dust rather than any realistic assessment of the crisis.

The determination of the government to hand out a few paltry goodies to their core voters is simply contemptible. The crisis is so severe that Draconian cuts across the board are going to have to be made. Of course that is before we take into account the unfunded public sector pension liabilities that already total 50% of GDP. There is no comfort zone, no safety, anywhere in the UK economy.

Over the past four years, this blog has discussed the approaching economic crisis. Now, I fear that over the course of the next six months, London is set to become ground zero of a fundamental, systemic challenge that will blow away any remaining illusions about the staggering decline of the United Kingdom. From the first and largest economy in the world we may well have fallen to somewhere in the teens before this next decade is out.

The chickens are coming home to roost: taking soft options, imposing little or no financial discipline, turning a blind eye to incompetence, the greed of speculators, poor industrial management, Kremlin funded trade unions, civil servants building empires that would make "Sir Humphrey" blush, all have had their part to play in this sorry tale of decline.

The blame, though, will fall upon those who tempted the Gods by declaring "an end to boom and bust", and who by taxing pension savings ensured that prudence was never their real watch word. As Tony Blair collects some further five figure speaking fee, he may reflect that he sowed the wind, but his country is set to reap the whirlwind.

Wednesday, December 09, 2009

Shock News: Telegraph gets it right!

I don't usually agree with Op-Ed pieces in the Daily Telegraph.

This morning, however, there is a very good piece from Philip Johnston.

He points out that the repeated promises -over decades- from politicians of all stripes to make "efficiency savings" are actually impossible to deliver without a radical reform of the system of public expenditure.

The Civil Service is only interested in controlling the costs of expenditure in the current system. They are not interested in whether the system should be changed or even whether much of what government is prescribing is actually necessary at all.

What today's Pre-Budget report is going to show is that the British cupboard- apart from some mouldy crumbs of envy taxes- is totally empty. Unless we tackle the systemic costs of the public sector we are going to face even more rapid economic decline.

Over the long term, the burden of sustaining an extraordinary wasteful state sector is going to fall on a declining number of increasingly impoverished private pension holders. There is no option: in the 19th century, at the height of the British Empire, the state sector represented 10% of GDP, after the First World War it had grown to 20%. After the Second War, it was close to half. In the past year it has grown by 11% to just a shade under 60%, but that does not include a £500 billion unfunded state pension liability. The size of the British public sector is now quite close to that of a Communist state such as East Germany.

It is not sustainable.

We are reaching the end of the road.

Tuesday, December 08, 2009

Time for some tough talking

I joined the Liberal Party in 1979. I have been a Liberal Democrat since the foundation of the party. I have been a passionate and avowed Liberal Democrat and a liberal of a fairly libertarian stripe all my adult life.

My family have been committed to the party not just in recent wilderness years but all through the real darkness of the 1950s and indeed over four generations back to the beginning of the twentieth century. I have stood for innumerable, unwinable, elections and donated, over the years, many thousands of pounds to a cause that I deeply believe in. I have seen seven leaders come and go, some of them I have known quite well and respected, some perhaps less so.

Such devotion to a political party is not unique to the Liberal Democrats, but being a supporter of our party has not usually been a matter of the calculation of political advantage- it has been a stand of principle and not of patronage. Our party devoted attention to ideas. Our policies on such issues as devolution or the environment have been well crafted and fully thought out- and usually well ahead of the sloppy me too-ism that sometimes strikes either the Conservatives or Labour. It was not an accident that the average level of education of Liberal Democrats was above the other two parties- we had an open policy process where all intelligent contributions have been welcome. I have often been proud of the quality of thinking that I have found in our party.

Now, the Liberal Democrats are inching up in the opinion polls- the idea of a hung Parliament is now being discussed, not as a nebulous threat, but as a very real and positive possibility. There is every chance that the Liberal Democrats will gain a higher vote- possibly significantly higher- than the 22.1% we gained in 2005, or even our post-war high of 25.4% in 1983. We could end up with a slew of gains across the country and in a position to press for the constitutional change and political reform that we believe is now critical for the future of the United Kingdom.

Yet, I am now beginning to feel more than a prickle of unease at the prospect. As Mike Smithson suggested on his politicalbetting.com blog yesterday, a hung Parliament could be a catastrophe for the Liberal Democrats and split the party. As it happens I don't share his view, but I am increasingly concerned with what I see as a gimmicky and vapid approach to politics in some quarters of our party. The obsession with candidates who are "local" is not unique to the Liberal Democrats- even if it does occasionally sound like an episode from the League of Gentlemen- but I expect more intelligence from my party. Too many candidates look at politics "through the wrong end of a municipal drain pipe"- and in the meantime, as I say repeatedly on this blog, our country faces an existential crisis. We need intelligence and vision, not tokenism and quota filling in our selection of general election candidates.

Concerning the thing that once made my proud- our policies- I now too often find myself thinking "yes, but". We are the inheritors of a proud Liberal tradition and yet we seem to be declining into a mushy mess of contradictory, vaguely left wing ideas. As Charlotte Gore wrote on her blog the other day, she simply can not defend mushy, sloppy and incoherent thinking. Neither can I, and neither should our party. The Leadership- as all leaderships do- has retreated into a bunker- and blasts of empty rhetoric based on pseudo-populist, muddled thinking waft across the political ether. It is just not good enough- if our party does not stand up for tough principles based on intelligent thinking, then the future of this country- let alone this party- is pretty bleak.

I don't want political thinking to simply emote - it has to offer rigorous intellectual coherence. If we are going to be in office after the next election we will be crucified unless we are resolutely focused on our key ideas: constitutional reform, environmental protection and individual freedom- including freedom from state interference and control: core Liberal Democrat values.

Some have tried to convince me that the key is that the populist tone that now emerges from Cowley Street is popular. "First" several of my friends argue "we have to win enough power, and without it all the right policies in the world will not really be relevant". Superficially it is a persuasive argument. Yet to my mind the rage we see in the electorate is the result of too many years of half truths and whole lies being told to them by politicians. I believe that a bracing dose of reality is precisely what the electorate is asking for and which they would vote for- if it were on offer. Vince Cable is our most popular politician- and he has been pretty terse in his description of the problems of the economy.

If we do become part of a coalition in June 2010, we must be braced for a hurricane of awful economic news. Britain is on course for the rocks, and some absolutely agonising political choices are going to have to be made by the next Parliament. Cuts that would have been previously unthinkable will have to be made. The impact of these decisions will have a significance that could last for decades- and either lead to our recovery or our ruin. In the meantime, party members are encouraged to twitter- how apt that word seems- about education, health and even some environmental policies that -at best- need substantial work or even a total rethink. Unlike Charlotte, I expect to have to support some policy positions I do not agree with but I do not expect to be asked to leave my critical faculties at home. The Leadership - you might think- would be consulting policy experts, as they may not have time to do after the election, and developing strategies to face the future possibilities. If this is happening, I see no evidence of it. I see the Leader's Office in full campaign mode- without being sure precisely what they are campaigning for.

I am not a "my party: right or wrong" man, no Liberal is. I can not simply watch Liberal principles being drowned in a mire of muddle headed, faintly do-gooding drivel, which apes the sanctimoniousness of the worst of the politically correct brigade. We could have the opportunity of a generation in six months time. We could achieve power and then in a fit of absent minded waffle, we could blow it. All that long march -over decades- to regain a Liberal voice in government, all the effort, all the hope; all of it could be wasted because at the last we chose to act, behave and -worst of all- even think like the other parties. Defeats, we have had plenty of them over the last 80 years, but to squander a victory- that would be an act of blackest betrayal.

Dear Britain,

I have been thinking about us. Things have not been working out for us for a while now. We have been spending more and more time apart. I find I just can't understand you any more.

You seem embarked on a mission of self destruction. In particular I find it extraordinary that you keep flirting with wholly unsuitable men. A few years ago you fell for the public school charms of Tony Blair. "This time" you said "it is different. We can have a caring, Socialist government and still have a good economy". As we now both know, the reality was rather different. With his dubious friends, led by Peter Mandelson, he let you down. Bloodied and crying you now think of him with tearful rage "He's a war criminal!" you cry. "He led me into an illegal war". Meanwhile his hand picked successor is a humourless, vaguely paranoid figure with none of that dangerous, sexy charisma that first attracted you to Tony Blair. I could warn you about David Cameron, yet another public schoolboy with a veneer of glamour- I'll certainly say you've got a "type"- but as surely as day follows night, if you fall for the shallow charms of Mr Cameron you will come back crying- just like last time.

It is not just the company that you keep, Britain, that is cooling what we once had. I don't mean to be tactless about your addictions, but your house price dependency is now almost out of control. Even as the housing markets of the rest of the world have cooled, and in the US practically collapsed, you have continued to make property the centre of your world. I had hoped that the credit crunch would wean you off this poison, but I underestimated the hold that estate agents- your pushers- had over you. Even now, as mortgage offers return to 5x joint earnings, I see you sneaking out to catch a Grand Designs roadshow or an episode of Location, Location, Location- you know the harm it does to your children, but you just can't help yourself. From a Nation of Traders you have become a nation of Estate Agents- adding no value, with an inane vapidness masked by a large measure of bullshit. Worse, you have exported your addiction to other countries. Bulgaria complains that the real estate boom that you engendered has forced her children, either to stay living at home, while some guy from Bracknell buys a tourist house off-plan which, despite his hopes of instant wealth, has still not yet got electricity or water plumbed in, or to leave the country.

Which brings me to another matter of your behaviour. Bringing home the Daily Mail and the Daily Express, with their potty mouths and appalling manners is just not on. The Guardian's learning difficulties are notorious- it is so backward it cannot even spell. As for the other newspapers whose company you keep, from the Sun to the Times- well you know that they come from a broken home. Mr. Murdoch sold his Australian birthright in order to kow-tow to the thugs in China- you do not need to follow his example. You were educated to be fair minded and tolerant, you know that you yourself are responsible for much of the immigration that your "friends" complain about- you despoiled continents and ruled the waves- you cannot pretend that this is something you can just ignore when dealing with other countries or their people who want to visit you.

And yet of course you do pretend this, just as you pretend that actions do not have consequences, that bills do not have to be paid, that everyone should win prizes and eat jelly and ice cream and go to University. You pretend that you can afford to pay people to be unemployed, you pretend that the blizzard of blank cheques that you are writing for pensions and the public sector will never need to be cashed. Yet the Bank manager already has a gleam in his eye- your AAA credit rating will not survive 2010. The price of your politically correct blindness is beyond your means. I can not afford to stay living with you.

So I've been thinking.

I need to spend time apart. I will always love you, but I can not stand by and watch your willful slide into oblivion. You need a dose of tough love and I need to find out who I really am. I will come back for Christmas- for the sake of the kids- but after January I won't be around to watch the beautiful land with its kindly and decent people, fall prey to your addictions to fraudulent politics, poisonous money and disgusting attitudes.

I'm sorry, but unless you start to help yourself, I can not do it for you.

Cicero

Monday, December 07, 2009

Where does Britain go from here?

Britain invented industry and the modern capitalist economy. Our inventions include: smelting iron with coke, the metal lathe, steel, steam power, the railways, modern textile production, bicycles, television, telephone, the jet engine, the submarine, the hovercraft, toilet paper, the world wide web and even this list barely scratches the surface.

In "soft power", our philosophers include John Locke, the apostle of Liberalism, John Stuart Mill, Sir Karl Popper and Sir Isiah Berlin. The cultural impact of our country is extraordinary: our language is universal and most of the last four decades has been dominated by music from the Beatles to Pink Floyd that is British.

Yet Britain now faces an existential crisis. We are told that whereas our economy was the fourth largest in 2005, by 2015- on current trends- it will no longer be in the top ten. Our industrial base has shrunk dramatically. we no longer produce cars or bicycles or pianos or many other things that our country was once famous for. We no longer produce commercial jet airliners without collaboration. We can not produce many products vital for our national defence.

Is Britain doomed to decline?

There are certainly many who think so- and not just the defeatists that seem to populate so much of our commentariat. Many Americans have publicly written off Britain as a credible global partner. They have viewed with dismay our failure to tackle military equipment shortages in Afghanistan. They have viewed with contempt the venal imbroglio of the Parliamentary expenses scandal.

Liberal Democrats believe that there is a clear need for a root and branch constitutional reform of the UK. yet that alone cannot transform our sense of defeat and failure. That is a project that will require the British people to take responsibility into their own hands. The removal of this discredited government is merely the first step towards a policy of national renewal.

That could be a very long journey. However without it, we will continue our blind drift into failure and powerlessness.

Friday, December 04, 2009

A Constitution for Liberty

The British press have been raising the subject of the number of innocent people who have been taking photographs who have been questioned by Police. On the face of it, it is wholly appropriate for the Police to be vigilant against the threat of terrorism, however the framing of the anti-terror legislation has been sloppy and open ended. In fact this is the defining characteristic of Nu Labour legislation across the board. The determination to pass legislation with minimum scrutiny has led to a huge amount of badly drafted bills being signed into law, and has required repeated repair to unworkable or prohibitively expensive measures.

The problem that the British parliament has is that there are few if any guiding principles that can help create consistency of legislation. The result is a large mass of conflicting statutes that create enormous complications. As technology has developed, much in law has failed to match these developments. Whereas privacy was the assumed fundamental position, the ability of the Internet to cross the previous boundaries of privacy is creating a threat that citizens might be maliciously targeted by thieves, blackmailers or the government. The repeated loss of government data does not give confidence that the state respects individual privacy.

The scale of information that is now held by the state is expanding dramatically. Whereas once only speeding cars would have their number plates registered by roadside cameras, the advent of average speed cameras means that every car numberplate is registered- and that data can be held for at least two years. The gigantic level of public surveillance is usually noted as being 14 million CCTV cameras in the UK- but that is a number that is already several years out of date.

The terms of the debate are now very far ranging- and at every stage the government deems yet more information must be given by the individual to the state.

The roots of this problem lies, I believe, in the fact that we do not have an explicit contract between citizen and state, in other words a constitution that sets the limits of state power and control. Many, especially Conservatives argue that a constitution is unnecessary and that the unwritten conventions of the nineteenth century are still adequate for the purpose of twenty-first century administration. Th idea of common sense, they argue, will see us through. The response to that is that so little legislation, from education to health and safety is actually drafted with common sense principles. The urge to meddle, amongst so many politicians, is so strong that legislation now states most of its first principles up front, rather than assuming that constitutional principles are implicit. The result is that many constitutional first principles: such as the Police not being able to question without due suspicions, have been lost.

An explicit, written constitution is now necessary to define the relationships between citizen and government and indeed between the new governments of Wales, Northern Ireland and Scotland and the central government of the United Kingdom.

The key principles behind such a document must be to incorporate the Universal declaration of Human rights. In my view there should also be added an explicit right to privacy, and the handling of government information about the individual should be controlled by legislation that admits this right.

Even David Cameron admits that a new British Bill of Rights should be the subject of debate- primarily in order to repeal the European Human Rights legislation now in force- and Labour, for cynical electoral reasons has introduced the idea of electoral reform so it is clear that across the political spectrum, a debate is already taking place.

This is a constitutional debate that is long overdue. However, it is the Liberal Democrats who can best take this debate to the the people. We, as a party, have made the issue of constitutional reform a major part of our policy platform. Our ideas are rooted in long debate and not short term political advantage. It is time to bring forward one of the central planks of our party platform. As the public views with increasing anger the antics of the political establishment, it is time for us to explain why our ideas can bring the executive to account and give citizens more control.

These are ideas whose time has come. It is time to put forward the Constitution for Liberty.

Wednesday, December 02, 2009

Tea on Today

Perhaps because Central & Eastern Europe is a relatively obscure topic, I often find myself asked to comment on events by different television channels. It is an interesting contrast. For example, Bloomberg television is very high-tech, CNN far less so, while BBC Television is positively spartan, not even having a "green room" where one can wait before being interviewed. Over the past few days the events in Dubai have caused the global markets to examine the finances of Greece and Hungary. As a result I have been called by several media outlets. Yesterday I did the early morning slot for BBC TV news. This morning I was called in to talk to the Today Programme on BBC Radio 4.

"Today" does have a green room, and given that it is radio, one can take notes into the studio- as a couple of fellow guests did. The green room even has breakfast, including yogurt and toast- a distinct improvement on the simple dab of make up powder that television provided yesterday. It was obvious which of the two media has the better budget: clearly radio. More importantly, the response to events from radio was much more immediate: running orders were changing and new guests were being organised even as the programme was on air. The more cumbersome television shows are much slower to respond to events than the immediacy of radio allows.

As I nursed my first cup of tea of the day, I was quizzed by Adam Shaw on the subject of how the crisis in Dubai might pan out for other countries, in particular Greece. The interrogation was sharper than I usually get on television, and one got the impression that the radio programme was more on top of its brief. I am usually discouraged from using business expressions - even simple ones like basis point or yield- with Today, my impression was that such simplification was not part of their brief. It was, frankly, a relief. Although I listen to the programme regularly, going live to the studio one notices much more strongly some verbal ticks in the programme: in particular how the presenters end each segment by thanking the contributor- it is polite, but it is not in accord with the rather abrasive image of the programme. One also noticed the long gaps where each presenter is not contributing: Justin Webb barely spoke while I was in the studio, while Sarah Montague was even able to leave the studio. So, the power of each voice is rationed quite sparingly.

Even still, it is next to impossible to explain complicated issues in less than two minutes. Although Adam Shaw understood that the situation is perhaps more a function of journalistic speculation rather than market fundamentals, the key point was to underline that countries outside the Eurozone- including the United Kingdom- are more exposed to the gyrations of the global markets even than Greece is. So, perhaps the only point that I could make was that if you are not scared about the position of Britain, then you probably do not understand the mathematics of the situation. Perhaps at 6.20 in the morning it was the best that I could manage.

Tuesday, December 01, 2009

Credit Crunch 2.0

Over the course of the third quarter of this year, the impact of the financial tsunami which hit the global economy in 2008 has appeared to stabilise. Banks whose balance sheets have been severely damaged by the crisis have been forcibly merged, restructured or taken into public ownership. The single major player- Lehman- that went under caused so much damage that policy makers have vowed not to repeat that mistake. As banks struggled to retrench without increasing the global problems, the monetary authorities released huge amounts of liquidity. The result has been a rally in asset prices as the availability of credit, while not at the levels of 2007, is at least more predictable.

However, by taking on so much extra debt onto government books, the problem has not been diminished, but only moved around. Whereas the shareholders of banks had been looking at taking the impact of large loan losses, their place has been taken by tax payers. In some cases, this has been a great success: tax payers have even made a profit from the disposal of their interests in such firms as Goldman Sachs, for example. However, there is still a huge amount of work to do before the work-out of the damaged banks can be completed.

Unfortunately, governments are now facing a new pressure: there is a limit to the scale of borrowing that they can undertake before the market will demand a higher price to reflect the increasing risks, or even cease to supply credit to a risk that it considers unacceptable. Historically banking crises do lead to sovereign debt crises and we now appear to be seeing the global credit crisis about to take on a new character. The emergency credit standstill demanded by the state corporations of Dubai does not in itself cover a particularly large amount of money. However, it is a signal that the crisis is now moving into a new phase where government action is coming under considerable scrutiny from the markets.

As I discussed on BBC news this morning, questions are now being asked of countries like Greece which has a stubbornly high government deficit and seems to lack the political will to deal with its problems. That Greece is also exposed to the property markets of Bulgaria, through the lending of its major banks, is simply another point of concern. Greek government debt is high and its deficit is unsustainable in the long term. Nevertheless the country has the breathing space provided by its membership of the Eurozone, which is why the country has not had the same mark down as, for example Hungary, which remains outwith the single currency. However one of the primary moves last week was a significant increase in the risk premium that investors want in order to hold onto Greek government paper. Euro membership can only provide a breathing space, and the newly installed Greek government will not have long to offer a credible programme to bring its finances into line.

However what should appal people in Britain is the inexorable rise in the profile of the problems of the UK. Goldman Sachs continues to publish reassuring research papers on the British economy, but a cynic might ask "cui bono?" given the close relationship between that finance house and the work they are undertaking with the British government. Today's research paper by Morgan Stanley comes as a strong antidote to such reassurance. Indeed it comes as a bucket of cold water in the face to the more rosy scenarios of British recovery.

In short Morgan Stanley suggests that the UK is out of rope in terms of its ability to continue to raise further money in international markets, and the prized AAA credit rating is now at serious risk of downgrade, with the substantial increase in borrowing costs that this would trigger. The near doubling of the national debt over the past 18 months and an unsustainable deficit, which at 14% is 2% higher than Greece, can no longer be regarded as a credible policy mix. The UK is going to have to budget to take a serious hit from write-offs in the banking sector.

2010 is an election year and the fact is increasingly clear that any incoming government is going to have to take emergency action to reduce the government deficit. Not only must tax revenues increase, but government expenditure must be slashed. The choices that will now have to be made are truly agonising.

As the attention of the global markets moves from the failure of banks towards the financial capacity of those that back them, the United Kingdom is coming into the firing line. The next six months could be very uncomfortable indeed.