This is one story that I will be watching closely because it fits in with my own theory about economics :). The BBC news reports that government borrowings in the UK have dropped dramatically.
As you will be aware, I actually think that we are either approaching a period of stagflation, or that we are in fact in the middle of a period of stagflation. Since I graduated from university in the middle of the worst period of stagflation in the 1970s, and could not find employment, the issue has always had an impact. More than that, it was at university that I first heard the term stagflation, and it was the first time that any economics lecturers actually came out and hinted that Keynesian economics did not work. However, no one really followed up on the 1970s to discover why we had the stagflation.
As I have watched the world head towards a severe recession, and towards stagflation again, the one phrase that I keep repeating is “it is the 1970s redux”. There is some commonality between what is happening now and what happened in the 1960s and the 1970s. From what I understand, the middle to late 1960s in the USA was the period of the LBJ experiment. It was a big spending era. Richard Nixon had to reign in the spending whilst the Vietnam War was still raging. Please note: Keynes actually wrote that in times of war taxes should be higher but at other times taxes should be lowered. Please keep that in mind, and then research whether or not each successive Congress has stuck to that formula. The mid 1970s was of course the beginning of the Carter disaster. It is also the reason why, on the global level there is that feel of 1970s redux.
Here in Australia, there was a similar pattern to the one in the USA, although the big spending occurred after 1972, and it is my belief that the big spending by the Whitlam Government and the resultant deficit blowout was the cause of the prolongation of that stagflation. Please keep in mind that my belief is just theory, it has to be tested. We have noticed over here that when the ALP is in charge of the government there is a blow-out in spending and in the budget deficit. This time around, when John Howard lost, there was a budget surplus, which was frittered away in less than 12 months by KRUDD, and a massive deficit has occurred under Juliar Dullard (Julia-the Marxist – Gillard). The Gillard government has no legitimacy (watch this space for news on the convoy moving towards Canberra for a big protest next week).
This brings me to the UK where there had been a Labor government under Tony Blair and Gordon Brown. The deficit was also very high when the minority Conservative government (with the help of the LDP) took over. The task of the minority government has been to introduce austerity measures that would bring the deficit under control. This is why the news that government borrowings have been significantly slashed is all important. What we need to watch in the UK is whether or not the slashing of the government borrowings impacts the community in one of two ways: (1) more investment dollars being available for the expansion of business or (2) a worsening of the situation in the UK. I am actually expecting that there will be a rise in private sector borrowing because more money is available for private sector investment as a result of the reduction in government borrowings. I am expecting that any rise in private sector borrowings will lead to an increase in employment opportunities which will have a flow on effect throughout the economy.