Debt, Deficits and Interest Rates – Some More Charts

Following on from the last post on debt and deficits, this post will look at interest rates. This will be a somewhat superficial examination of the data as the reality of the link between debt, deficits and interest rates is a complex one, but I hope to show that the Government line on interest rates is at best simplistic, and at worst wildly misleading.

After the release of last week’s GDP figures, a succession of Ministers gave interviews where they mentioned the UK’s low interest rates as a positive outcome from austerity. The reasoning goes that if debt and deficits get too high, the markets will revolt and start demanding high interest rates on government debt. The Government’s argument is that since austerity began, the markets are now reassured that the Government is dealing with its debts (!!?) and so interest rates have remained low.

I think Jonathan Portes did a pretty good job of debunking this argument last year, but we are still hearing that this story that low interest rates indicate the success of austerity, so here are some charts that suggest something different. The data from all these charts comes from Trading Economics and is the latest available.

This first chart shows the debt-GDP ratios of a cross-section of countries (left hand axis) vs the interest rates they have to pay to borrow for 10 years (right hand axis). The Debt-GDP ratio remember, is the  total amount the government owes, expressed as a % of GDP. In this chart, apart from a couple of outliers, in particular Japan, the blue line does trend downwards, i.e the lower a country’s debt, the lower the interest rate it has to pay. Lets show this chart again though, but with the Eurozone countries excluded.This time, something weird has happened. Whereas before it seemed like highly indebted countries had to pay high rates on their debt, now the opposite seems to be true. The country with far and away the highest government debt is Japan, but Japan also has the cheapest borrowing costs. And Australia, with the lowest debts, pay the highest rate. What’s different? All the five countries in the second chart have their own currencies, while the first chart contained countries that do not. But maybe it’s the size of the deficit rather than the debt that makes the market get anxious?

This is a similar chart, but this time the bars show each country’s deficit as a % of GDP. The UK is in the middle. If you squint a bit, you might be able to discern a slight negative relationship between the deficit and bond yields, but it’s pretty weak. So there doesn’t seem to be a clear link between deficit size and the rate governments pay to borrow money. All that’s left then is some sort of vague notion that markets don’t look at the numbers but at the intentions and credibility of each government. Does this sound convincing to you? It doesn’t to me.

Let’s just look at the Debt-GDP chart once more, but only including the Eurozone countries.

This time, it does seem that higher debts lead to higher interest rates. Why would this be true for Eurozone countries, but not other wealthy nations? Well, by joining the Euro, these countries gave up their right to set short term interest rates, devalue their currencies or to print money. This means when a crisis hits, these countries are unable to pull the usual policy levers. The bailouts of certain Eurozone countries have seen rates fall (Greek rates were aroung 35% a year ago), but ultimately, there is a real default risk on these nations debts, so yields are priced accordingly.

Nations with their own currencies do not have this inherent risk of default because they can always make any payment due in their own currencies. Ultimately, they can print money if needs be. So what does determine long term interest rates in these countries (the UK included)? Lets look at one more chart.

Here we have the 5 country’s central bank base rates next to the rate they pay on 10 year bonds. They are quite closely correlated. That’s because as Portes points out in his post I link to above:

“…theory suggests that the low level of long-term interest rates in the UK reflects low expected future short-term rates.”

Short term rates are low today, and market actors expect them to be low tomorrow, so long term rates are low. Central banks can manage expectations by pre-announcing their intentions on rates, as Ben Bernanke has done in the US. The markets are also crying out for safe assets, so there is a rush into bonds and away from more risky investments.

So to conclude then, the take-away messages from this post are:

• The link between high deficits/high debts and high bond yields only applies to countries like those in the Eurozone which do not have full control over their own currencies.
• The Government’s belief that their economic policies have ensured interest rates stayed low is based on magical thinking. The idea does not stand up to scrutiny.
• The real reason long term rates are so low is partly because short term rates (set by supposedly independent central banks) are so low, as are expectations about future rates, and partly because the world economy is so depressed and so the markets are looking to invest in safe assets.

Government Debt and Deficits in Charts

The recent exchange on Twitter between Jonathan Portes and Tory Party Deputy Chairman Michael Fabricant suggested something quite worrying. A lot of MPs it seems do not know the difference between the debt and the deficit. If they don’t understand this, how can they come to a view about whether the economic situation warrants the imposition of austerity?

With this in mind I thought I’d do a quick post on debt and deficits to clear up a few misconceptions. To help me I’ll be nicking some charts from the excellent ukpublicspending.co.uk. First the national debt.

This first chart shows public net debt* between 1900 and 2011. This is a scary looking chart. Outstanding debt has seemingly exploded from almost zero in the mid 70s to almost £1 trillion in 2011. You will often hear the national debt discussed in these absolute terms, but obviously this lacks context.

When you hear David Cameron say the Government is “dealing with the debt”, or “paying down the debt”, he doesn’t mean the debt pile will shrink, he’s talking about slowing down the rate of increase, which doesn’t sound quite so impressive. The debt pile will probably keep rising in absolute terms for ever.

A more useful chart though is this one, showing debt as a ratio to GDP. This is quite a famous chart and shows that today’s national debt – despite having increased significantly in recent years – is still well below the levels seen in the past. The chart shows that for the entire period from the end of WWI to the early 60s – more than 40 years – debt as a proportion of GDP was higher than today. After WWII, debt reached almost 250% of GDP – more than two and a half times what it is today. Look how quickly it fell from that peak. How did that happen?

The answer is growth.** From 1948 to 1973, the economy grew almost continuously and at an average of 2.9% per annum. But the governments of the day must also have run balanced budgets or surpluses to “pay down the debt” right? Wrong. Lets now move on and look at the deficit.

In simple terms, a deficit (or surplus) is the difference between what a government collects in taxes, and what it spends. While the national debt is a stock measure of how much money the government owes, the deficit (or surplus) is the amount added to (or subtracted from) the national debt in a given year. So a deficit of £100bn increases the debt by £100bn. The only way to reduce the debt in absolute terms is for the government to run surpluses.

Now you will also often hear that governments should save in the good times and spend in the bad, but have past governments actually done this?

This chart*** is from this IFS report. You can see that of the 55 years between 1946 and 2000, the government ran a surplus in just 11 of those. 8 of those surpluses were 2% or less, while the largest budget deficit over that period was almost 8%. So this idea of balanced budgets over the cycle is a fiction. The average deficit has been around the 2-3% range (also roughly the size of Labour’s deficits prior to the crash). It is true to say though that since the financial crash deficits have been at their highest level since the Second World War. You can see that in this chart from here (the chart serves my purposes, but I don’t recommend the source. The strap-line at the top of the site would be correct without the No- at the front):

In a future post I might talk about whether we should be worried about this, and what conclusions we can draw from  observing the size of the deficit alone, but to re-cap, the take-aways from this post should be:

• The best way to assess the size of the debt is to look at the net debt/GDP ratio;
• This ratio was larger than today for almost half of the last century;
• This ratio is brought down when the economy grows, not by balanced budgets or surpluses
• In the past, budget deficits have been the norm, while surpluses are relatively rare

* Net debt is the total amount of debt owed by the government to its creditors minus the value of financial assets held by the government. This is the measure generally used when discussing government debt.

** The GDP growth chart data comes from here.

*** The first version of this chart I uploaded copied very poorly, but a reader kindly sent me a much clearer version (h/t @sebschmoller)

Debt, Deficits & Unemployment

At the moment, Columbia Law School are holding a series of seminars on the theme of “Modern Money and Public Purpose”. You can go to their website here or follow them on Twitter (@thepublicmoney). I’ve posted up the video from an earlier seminar here, and now I’m posting the video from the latest event in the series.

The topic of this video is debt, deficits and unemployment. The two speakers are John T Harvey and Jan Kregel. John T Harvey has an economics blog at Forbes here and I think he does a great job of explaining economics in terms the layman can understand. The video is 2 hours long(!), but John’s slot is for the first 25 minutes and is well worth a watch. Jan Kregel then expands on the theme and the session ends with a Q & A. For the more wonkish, the reward for persevering to the end is a good discussion of the Mexican Peso crisis 🙂

More arguments to counter myths about austerity

This post follows on from part 1 here. Here’s three more commonly heard arguments made to justify austerity or policies associated with it.

1) Gordon Brown spent all the money and now there’s none left. Just ask Liam Byrne

This line of argument conjures up a couple of misleading images. The first is that somehow there was a bank vault somewhere full of money which Gordon Brown kept dipping his fingers into and spent without putting any aside for a rainy day. He didn’t “fix the roof while the sun was shining” as right wing buffoons are fond of saying.

This is quite easy to counter. The next time someone says we’ve run out of money, just ask them how that is possible when the government can print money? They’ll probably look at you like you’re mad, and then say something about hyperinflation, but they will have to concede that we can’t actually run out of money.

This moves the conversation onto inflation. Won’t printing money cause inflation? Printing money cannot and does not cause inflation. If the government printed £100bn and just left it in an account at the BoE, how could that be inflationary? It’s the spending of money that can generate inflation, but government money creation is no more inflationary that private money creation by the banks. The inflation comes from too much money chasing too few goods i.e. the constraints are real – the ability to produce goods and services – not financial. Money can and should be created up to the point where the economy is at full employment. If the private sector does not create sufficient money to get us there, the government should make up the shortfall.

The other part of point 1 above I object to is the oft repeated line about Liam Byrne’s famous “no money left” note. If anyone drops this into the conversation, it’s your turn to look at them like their crazy and say i) the note was a joke; and ii) Liam Byrne is a joke.

2) Cutting x will save £y

This is a very common argument we hear, often in relation to welfare cuts e.g. uprating benefits by 1% will save £3bn and this will reduce the deficit by £3bn. That is the gross saving only though. The government may pay out £3bn less to benefit claimants, but this in turn means they have £3bn less income and £3bn less to spend on goods and services in the private economy. Those business then have less sales which means they pay less tax. Because of lower sales, they may need to let staff go. Those staff in turn then may claim benefits, so it’s easy to see that cutting payments to benefit claimants may actually end up increasing the deficit rather than decreasing it.

This is why you hear a lot of right-wingers say that there have been no cuts. They see the deficit rising and think its because the government is not cutting enough, when in fact it’s the cuts themselves that are increasing the deficit, and outcome predicted by many Keynesians.

3) What would you cut?

This is a common response by those in favour of austerity to those arguing against the cuts. There are a couple of unspoken assumptions behind this statement: i) deficit reduction must be a specifically targeted policy and is an end in itself; ii) the only way to achieve this goal is to cut spending and/or increase taxes.

The first assumption is false because it misunderstands what a deficit is and what it tells you. I explained this a bit in part 1. What the government should actually target is unemployment, poverty, living standards etc i.e. things that actually impact upon people’s lives.

The second assumption is also wrong. In fact the opposite is true. I would argue that cutting spending and raising taxes will increase. not decrease the deficit, and any attempt to cut the deficit through austerity will ultimately fail.

With these two things in mind, the question “so what would you cut” should be rejected out of hand. The question we should be asking is how best to reach full employment, how to reduce poverty, increase living standards. Only when we start asking these questions will we start to find solutions which actually bring about economic recovery and reduce the deficit to boot.

Countering myths about the reasons for austerity

The idea for this post came to me while watching Question Time last night and seeing the bizarre sight of Lib Dem Ed Davey and ‘celebrity’ MP Nadine Dorries teaming up to roll out the usual reasons why austerity was and is the only course of action available.

A lot of people on the left seem to concede that the economic crisis did mean that urgent action was required to reduce the deficit, and their policy proposals operate within those parameters. Alternative policies generally include raising taxes on the rich and cracking down on tax avoidance. Some even agree that we should get rid of universal benefits to save money. Every proposal seems to be of the form that “we will cut this or raise taxes on that to pay for this.”

This is a very unsuccessful strategy in my view because it implicitly accepts a lot of the myths that have grown up around how the economy works. These myths are repeated ad nauseum by politicians to the point now that they have almost become received wisdom. Unless the counter argument to austerity is altered to reflect the reality of the way the economy actually works, the deficit hawks will win every time.

I’m going to split this post into two parts. Here’s the first three (of six) common talking points you will have heard from those in favour of austerity and how you can counter them.

1) The UK could end up like Greece

On the face of it, this is a scary thought. Greece had a large deficit and the interest rates on its debts soared to the point where it became – to all intents and purposes – bankrupt. In reality though there is zero prospect of the UK ever becoming like Greece. If someone says there is, the appropriate response is to laugh in their face.

Greece joined a currency union with significantly wealthier nations which led to them using an overvalued (for them) currency over which they had no control leading to them having a massive competitive disadvantage. This led to ever increasing deficits and meant when the financial crisis struck, they were unable to pull any of the policy levers available to countries with their own currency like the UK. They couldn’t devalue, couldn’t change interest rates and most importantly couldn’t issue money. The lack of these tools means the ability of Greece to borrow on international markets very much depends upon the markets assessment of their ability to repay, and so bankruptcy becomes a very real risk.

The mere fact that the UK does issue its own currency, doesn’t borrow in others and its exchange rate floats means it could never end up like Greece.

2) The Coalition inherited the worst deficit in the Western world

Answer: No it didn’t. It inherited the largest deficit*. This is not the same thing at all. A deficit, whether large or small is neither a good or a bad thing. It could be either, but at the end of the day, all the deficit is, is an outcome, and all it tells you is that the non-government sector (the private sector here, plus the trade deficit) is running a surplus. The government’s deficit is the mirror image of the non-government surplus. A graphical representation of this can be found here. To a large extent the government has no control over its budget outcome. It depends upon the saving preferences of the private sector.

The appropriate response for the government to take when faced with excess private sector savings would be to either accommodate them by maintaining an expansionary fiscal stance, or to seek to confiscate some of the surplus through taxation (more difficult). Seeking to reduce the Government’s deficit while the private sector are still paying down debt, simply undermines those efforts and prolongs the slump unnecessarily. This is what we see now.

3) If we hadn’t implemented austerity, the markets would have panicked, interest rates would have gone up.

The underlying assumption here is that markets alone set bond rates based upon their view of the ‘credibility’ of the government’s fiscal stance. To a degree this is true for countries in the Eurozone for the reasons cited at point 1, but for a country like the UK, it’s just nonsense. For a start, countries that issue their own currencies like the UK present no involuntary default risk. Zero.

Secondly, even mainstream economic theory doesn’t say that markets set interest rates in the way politicians want us to believe. Jonathan Portes wrote a very good blog post on this topic in September here. Basically, long term interest rates are thought to be based on expectations about future short term rates. Short term rates are set by the Bank of England, and the Bank can make it clear what their thinking on future rates will be. The markets expect future rates to be low, so long term rates now are low. Nothing to do with the markets having ‘confidence’ in the government’s economic policies. Because markets don’t behave the way politicians suggest, there is no reason to believe alternative fiscal policies would place upward pressure on interest rates.

Part 2 will discuss these further common points we often hear related to austerity:

• Gordon Brown spent all the money and now there’s none left. Just ask Liam Byrne
• Cutting x will save £y
• What would you cut?

*EDIT: A reader has pointed out that the US actually had the largest deficit in 2010, and the UK only the 2nd largest (h/t Richard Evans via Twitter), but my point still stands. Many politicians continue to claim the UK’s deficit was the worst, including Ed Davey on Question Time this week . So another counter argument is that the US had a higher deficit in 2010, but took a different path. It’s deficit has now shrunk from around 11.4% of GDP in 2010, to about 7% last year. The US economy grew by 3.1% in Q3 of 2012. Although the US lost its AAA credit rating, the interest rate of US government debt has remained very low.

Lerner on Functional Finance

After yesterday’s Keynes quote, I thought I’d follow it up with one from the late economist Abba Lerner. The quote is about ‘functional finance’ that he developed. I’ve blogged about functional finance before here. Here’s the quote:

“The central idea is that government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money and withdrawal of money, shall be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine what is sound and what is unsound …Government should adjust its rates of expenditure and taxation such that total spending is neither more or less than that which is sufficient to purchase the full employment level of output at current prices. If this means there is deficit, greater borrowing, “printing money,” etc., then these things in themselves are neither good or bad, they are simply the means to the desired ends of full employment and price stability.”  (Lerner, 1943. From “Functional Finance and the Federal Debt”, taken from here)

This is kind of what I was referring to in this blog post. It’s the idea that governments today are pursuing all the wrong goals while ignoring the ones that really matter.

Lerner was a contemporary of Keynes and they corresponded in the 40s. There is some evidence that after initially disagreeing with Lerner, Keynes came to accept the logic of functional finance. For an interesting discussion of this, see here. I think we can learn a lot from Lerner’s ideas, and functional finance was built upon by economists from the branch of economics known as Modern Monetary Theory, of which I am a fan. Check out some of the links on the right hand side bar for more about MMT.

Keynes on Full Employment

I came across this quote by Keynes today here and thought I would share it. It’s from a pamphlet written to support Lloyd George in the 1929 general election. It’s message should still resonate today, and serves as a useful reminder that Liberals were not always supporters of junk economics. Their political descendants the Liberal Democrats should take note:

“The Conservative belief that there is some law of nature which prevents men from being employed, that it is “rash” to employ men, and that it is financially ‘sound’ to maintain a tenth of the population in idleness for an indefinite period, is crazily improbable – the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years… Our main task, therefore, will be to confirm the reader’s instinct that what seems sensible is sensible, and what seems nonsense is nonsense. We shall try to show him that the conclusion, that if new forms of employment are offered more men will be employed, is as obvious as it sounds and contains no hidden snags; that to set unemployed men to work on useful tasks does what it appears to do, namely, increases the national wealth; and that the notion, that we shall, for intricate reasons, ruin ourselves financially if we use this means to increase our well-being, is what it looks like – a bogy.”

 

Debt Ceilings and Trillion Dollar Coins

After the farce of the phony ‘fiscal cliff’ crisis at the end of last year, a new debate now rages in the US over the issue of the debt ceiling.

In the US, budgets are approved by congress, but at the same time, the government is constrained by the ‘debt ceiling’. This places a limit on the total amount of government debt that may be issued. If the ceiling is hit, the government cannot continue to issue new debt. This means that although congress has approved a certain level of spending, the government may be unable to carry it out without further approval to raise the debt ceiling.

Previously, the debt ceiling has been raised as and when it was needed without incident, but since Obama became president, the Republicans have used it as a weapon to try to force through savage spending cuts. A previous debt ceiling ‘crisis’ played out in 2011 which led to the fiscal cliff fiasco – automatic spending cuts and tax increases, that last week’s deal only partially put a stop to. Now the issue of the debt ceiling has raised its ugly head again, leading to some to suggest creative ideas to avoid the genuine crisis that would ensue if the debt ceiling is not raised.

One such idea was first raised as a response to debt ceiling crisis part 1, when one blogger pointed out a law which allows the US Treasury Secretary to authorise the minting of platinum coins of any denomination. In theory, the US Treasury could mint a $1 trillion coin and deposit it at the Federal Reserve, which would mean the government could get round the debt ceiling and continue spending as approved by congress. This idea has been gaining some traction in the US recently, and the hashtag started by MMT economist @deficitowl, #mintthecoin even trended on Twitter for a while. While it’s unlikely this idea would ever be acted upon by the President, (and probably unnecessary, as even the Republicans are not actually stupid enough to not raise the ceiling aren’t they?), it does demonstrate further the absurdity of worrying about a government with it’s own currency running out of money or being beholden to the bond markets. We don’t have a debt ceiling or the option of using coin minting in the UK, but we do could sell bonds directly to the central bank rather than to the markets, and run a deficit without incurring more debt.

The debt ceiling debate looks set to run and run. Hopefully along the way, people will learn something about how the monetary system actually works!

When is a Job Guarantee not a Job Guarantee?

The Labour Party’s new ‘job guarantee’ idea is getting a lot of coverage this morning, but is it any good? They are proposing to introduce a guaranteed minimum wage job offer to those aged over 24 who have been claiming Jobseeker’s Allowance (JSA) for more than two years. If the claimant turns down the job offer, they risk losing their benefits. Currently, there around 130,000 people who fall into this category. The jobs will be for a 6 month duration, after which the individual will have to find work elsewhere, or go back on benefits.

First then, the positives. By proposing this, Labour are tacitly accepting that even in the good times, there will always be some people left behind, meaning Government does have an active role to play in the Labour market. Once this principle is established, perhaps we could move to something more ambitious. It also get the issue of long term unemployment back on the map, and puts pressure on the Government to respond given the current failure of the Work Programme.

That’s where I run out of positives though I’m afraid. I think if you set out the design the weakest possible job guarantee scheme that had the least impact upon the economy, this would probably be it. Labour’s proposal is very similar to something the IPPR have been proposing for a while, only even less ambitious. I briefly mentioned that here, although I was probably a little too positive about it. The IPPR want the job offer to be made at 12 months rather than 2 years, but other than that it pretty much the same as what Labour is proposing.

I have a number of issues with this idea and the way it’s being presented. Here are the main ones.

• It only applies to those who have been unemployed for over 2 years. This is less than 10% of those claiming JSA, and an even lower proportion when measured against all those out of work who want a job. So the impact on the economy would be negligible.
• The guaranteed jobs would only be for a 6 month duration – probably not long enough to give someone the skills and experience to make a smooth transition to better paid work.
• The way this is being presented is that there is a need to be tough with those who are long-term unemployed. You need to force people to work on threat of losing their benefits. The evidence just doesn’t bear this out. Research undertaken recently by the Joseph Rowntree Foundation found an almost universal “commitment to conventional values about work”. JSA is already conditional upon the individual actively seeking work. No further sticks are necessary.
• The proposed scheme would apparently cost £1bn and be ‘paid for’ by restricting pension relief for high income pensioners. The tax relief restrictions may be sensible and fair, so may be worth doing on its own merits, but it has nothing to do with paying for anything. This idea that every policy proposal must be ‘fiscally neutral’ is very damaging as it severely limits the effectiveness of any spending programme.

So what would a job guarantee worthy of the name look like? Here’s some features it might have:

• Job offer at 3 months or less
• Jobs last for an indefinite period
• All jobs come with training
• Paid at a living wage
• Genuinely full time work available, but with flexible and part time hours for single mothers, those with health issues etc.
• Optional, i.e. the person can choose to remain on benefits and seek their own job (subject to Jobseeker’s agreements as now)

I’ve expanded on the my preferred type of job guarantee here and here.

To sum up then, while Labour are calling their idea a job guarantee, it is a million miles away from what a true job guarantee would look like. It lacks ambition, scope and retains the nasty undertones of the current climate – not wanting to appear to be soft on ‘scroungers’. To me it represents a step back from Labour’s last foray into job creation schemes – the Future Jobs Fund. That was also quite timid, but remained optional, people had a fair amount of choice about what jobs they applied for and the ethos of ‘community benefit’ was a good one. This new idea junks the first two principles and weakens the third. In short, not great. Another ‘big announcement’ that turns out to be anything but.

A Look Back at some of Nick Clegg’s Economic Clangers

In this post I will be making fun of Nick Clegg for his gross misunderstanding of the way the economy works, but it contains a very serious point.

The Lib Dems, through their coalition with the Conservatives, are facilitating the systematic trashing of the UK economy, including many of the things we had to be proud of about our country like the NHS. This is being done, we are told, because the problems in our economy are so serious, if the Government did not take the action it is taking, the results would be catastrophic.

There are many reasons why this story is false (which I have tried to outline elsewhere), but Nick Clegg seems to have swallowed it whole. When you listen to him talk about the economy though, it quickly becomes clear that he is very confused. He has made a lot of statements that are just flat out wrong, and in another time, the general response to these statements would be ridicule. Clegg’s lack of understanding is a danger to the well-being of the public at large, because as the Lib Dems blunder on in support of the Coalition, more and more long term damage is being done.

Here then are 4 of Clegg’s greatest hits from the last year.

1. “…we must never forget that tackling the deficit is a means to an end and the end we all seek is growth. Our goal isn’t balancing the books for the sake of it, but doing so to meet our real aim: jobs; businesses investing; entrepreneurs getting off the ground.” – Speech on the economy, 8th May 2012

The clanger here is the unspoken assumption that balanced budgets are some sort of panacea – that only then can we get back on our feet. But balanced budgets are not an appropriate economic aim. Find out why here.

2. “Because of our action on the deficit we have kept the markets at bay while our neighbours have been picked off one by one. We’ve kept interest rates at record lows. Because we have stuck to our plan, the UK – the country which had the biggest budget deficit in any advanced economy, bigger than Greece, Portugal, Spain – will, by the end of this Parliament, have a deficit lower than the G7 average.” – Speech to the IoD, 25th April 2012

This is a clanger for a couple of reasons. First, he is comparing the UK’s fortunes to those of the Eurozone countries. This is stupid because the UK has its own currency, while the Eurozone countries gave up theirs to join the Euro. This means the two just can’t be compared. Find out why here. The second reason is that he is claiming the UK’s low interest rates can be attributed to the action taken by the Government. This is highly dubious. Find out why here.

3. “I think we have a moral duty to the next generation, to our children and our grandchildren, to wipe the slate clean for them. We set out a plan, it lasts for about six or seven years, to wipe the slate clean.” – At same event as No. 1 above, 8 May 2012

This is a pretty unforgivable clanger. Clegg is confusing the deficit with the debt here. The Government’s plan is to shrink the deficit, but the overall debt pile will increase year on year. In no sense can this be called wiping the slate clean. The children and grandchildren stuff is bullshit too as I outline here.

4. “So to those who ask, incredulously, what we – the Liberal Democrats – are doing cutting public spending, I simply say this: Who suffers most when governments go bust? When they can no longer pay salaries, benefits and pensions? Not the bankers and the hedge fund managers, that’s for sure. No, it would be the poor, the old, the infirm; those with the least to fall back on.” – Lib Dem Conference speech, 25th September, 2012

Here, Nick Clegg is talking about the possibility of the UK government actually going bankrupt. This is incredibly stupid. He should have been laughed out of the conference for saying this. Here’s a good take-down of Clegg’s conference speech and why it was so idiotic.

You would think after two and a half years in government, Clegg would have picked up some understanding of the economy, but the above suggests he remains dangerously ignorant. I guess Upton Sinclair was right: “It is difficult to get a man to understand something, when his salary depends upon his not understanding it.” This sums up  Clegg and the Lib Dems pretty well. Finally given the chance to be part of government, their political survival now depends upon going along with the very worst policies the Tory Party have to offer, in the vain hope that it will all turn out for the best before 2015. That is looking more and more delusional by the day. Happy New Year everyone!