Keynesian Fiscal Stimulus Goes Through The Bathroom

A pal of mine lives in a council house. He was moaning last night that his place is going to be virtually uninhabitable over Christmas.

"How come?" I asked.

"The council are doing a load of work," he said. "They’re putting in new radiators, a new boiler system, shower, toilet, bathroom... I forget what else."

"Are you having to pay for that?" I asked.

"No."

Turns out my friend is also eligible for £25 per room to redecorate. What’s going on?

We joked that it’s an example of Keynesianism through the back door — or, in his case, through the radiator, the central heating and his bathroom. I say we joked, but I think we were on to something...

Think about it. His is but one house on an estate full of properties due to have work done. That’ll keep a team of men gainfully employed for at least a few months, not to mention the boost it will give to local businesses that will supply them with materials.

Then you’ve got the paint and wallpaper sellers who will be more than happy to take £25 for each room being decorated (in fact they’ll probably get more than that — if you’re being subsidised, you often feel inclined to top it up with your own funds to make the most of the windfall).

I expect we’ll see more of this sort of thing as the government attempts to fight the downturn. It knows announcing an old-fashioned fiscal boost would draw attention to the dire state of the public finances, and to the borrowing that would be necessary to pay for such a Keynesian measure. Indeed, that’s exactly what happened last month when Darling made the move.

But the state can and does disguise some of its benefaction. The improvements to my friend’s house are just one example. I expect there’ll be many other examples of spending undertaken to boost the economy, but explained by another motive.

How about defence spending? British troops regularly complain of being inadequately equipped for the two wars they’re fighting. It wouldn’t surprise me if, some time soon, the money were somehow found to, belatedly, address this.

The wars may be unpopular with some parts of society, but few want to see British personnel dying needlessly. This spending option would be especially attractive to a Conservative government, should we see one during the recession. No Tory wants to be seen as a spendthrift, but defence spending when the country’s at war is another matter. And after all, it was the build up to World War Two that finally dragged the western economies out of the Great Depression.

The current government is doing all it can to forestall the downturn. It has taken a £37 billion stake in three major banks — Lloyds, HBOS and RBS. Ostensibly this was to ease the financial crisis. But there are clear signs now that the government intends to use its new position to achieve real economy goals.

"The important thing is to get the banks now lending to businesses and to families," said Gordon Brown on Sunday.

This is worryingly at odds with the assertion that the banks will be run at arms length and on commercial lines. What if those businesses go bust? What if those families can’t pay the money back?

Many of those in direst need of credit are also the riskiest to lend to. A bank run solely for profit would simply refuse them. But — and call me a cynic if you will — I’ve a sneaky feeling that to do so wouldn’t chime well with what the government expects.

But the state has got itself into a fix. If it leans too hard on its banks, it’ll be accused of harming their profitability. Not a good thing when you consider they’ve told the taxpayer he’ll get his money back.

On the other hand, if banks remain stingy, the government will be criticised for not taking them to task.

Monetary policy is of limited use too. The Bank of England is expected to cut rates again this Thursday (the consensus is half a percentage point). But mortgage holders are unlikely to feel the full benefit. HSBC has said it won’t pass a cut on, and Abbey has actually raised its tracker rates.

So I can’t see how the politicians will get round it. Other, that is, than to borrow and spend as much as they can get away with.

Expect to see plenty of disguised Keynesianism over the next two to three years. And then to pay for it for some time after...

Until next time

Ben Traynor
Editor
Fleet Street Daily

PS Needless to say, increased borrowing by the state will place an intolerable strain on the already overburdened public finances. Find out how you can prepare yourself for Bankrupt Britain.

The Daily Reckoning — Mr Market’s Blitzkrieg is over... for now...

By Bill Bonner

Election Day. Pity the poor fellow who wins.

A Swiss banker wrote to tell us that according to his proprietary indicator of World Economic Health "conditions are now are shown to be some 2.5 times worse" than the last recession which occurred in the 1990s.

We would say that they are worse than any we can recall. First, we have never seen such a violent, worldwide correction. Second, we have never seen such a foolhardy effort on the part of the world’s governments to prevent a correction.

It’s a war. It’s worldwide. It’s going to catch almost everyone in the crossfire — business, investors, consumers, retirees. And it’s going to end in a worldwide depression. (We’re going to change our designation of this coming depression to WDI — Worldwide Depression I to make it easier to remember.)

You can read the Daily Reckoning in full here.

P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.

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Keynesian Fiscal Stimulus Goes Through The Bathroom - Big Government Spending Is Back

Keynesianism through the bathroom