Remember the Lawson boom? Gordon Brown did not let you forget it. His phrase to describe the Lawson-Major-Lamont era, ‘boom and bust’, was hammered relentlessly into voters’ minds. But only now, five years after the crash, is the full extent of the Brown bubble becoming clear. A note from Citi today throws this into focus – with obvious implications about the future. If the past ‘prosperity’ was a debt-fuelled illusion, then what’s to say we will ‘recover’?
The below is an ‘output gap’ graph that shows the size of the UK economy, relative to its potential. The Lawson boom is there, in blue. But the Brown bubble has only recently been discovered. It’s a hell of a thing to miss.
In pink is what those muppets at the IMF told us at the time. That is to say: they completely missed it — all of it — in their haughty ‘Article IV’ reviews of the UK economy. ‘The near- and medium-term outlook is for continued strong and stable growth,’ they opined. Now, they admit that this ‘stability’ was the most egregious economic overheating in Britain’s modern economic history.
Remember this next time Ed Balls blames the banks —or America — for the crash. It was his bubble. He was chief bartender at the most out-of-control cheap debt party in living memory. Not only did the Brown/Balls regulatory system fail, but their cheap debt policy (aided and abetted by Sir Mervyn King) led the whole UK economy into a bubble.
If the IMF got it so wrong (the Bank of England too) then what makes us think they have got it right now? The economy has evolved faster than economics. The old tools are not fit for purpose, especially in this era of globalisation and QE. We really are flying blind.