Freedom works.

A good speech from George Osborne:

We should not be satisfied with turning back the clock to how things were before the crisis, or we risk simply pumping the bubble back up.

That would mean failing to understand a crucial insight that has become increasingly clear – that the model of economic growth pursued over the last ten years is fundamentally broken.

We can no longer rely on cheap borrowing from China and the rest of Asia to fund our standard of living.

The drivers of change we have depended on – housing, banking and rising Government consumption – cannot be relied upon to drive growth in the decades ahead.

In short, you cannot build lasting prosperity on a mountain of debt.

via The Conservative Party | News | Speeches | George Osborne: A New British Economic Model .

Present economic circumstances seem perilously close to those described by scholars of the monetary theory of the trade cycle:

The Bank of England has pledged to pump another £50bn into the economy as it steps up efforts to haul the UK from its worst recession in at least two decades.

via Bank of England to pump another £50bn into economy as it steps up recession fight – Telegraph.

China has given its clearest warning to date that emergency monetary stimulus by Western governments risks setting off worldwide inflation and undermining global bond markets.

via China fears bond crisis as it slams quantitative easing – Telegraph.

Unfortunately:

Continuously injecting additional amounts of money where it creates temporary demand, together with an expectation of continuously rising prices, draws labour and resources into use in areas which will last only as long as the supply of new money.

Read more posts on economics.

Lloyds Banking Group, which is 44 per cent owned by the UK taxpayer, today warned that soaring bad debt from legacy HBOS customers will contribute to a 50 per cent rise in loan book write-offs in 2009 compared to last year.

…

Mr Daniels pointed out that its bad debts would be largely taken on by the taxpayer after Lloyds last month outlined an agreement to join the Government Asset Protection Scheme.

Under the scheme, Lloyds will transfer £260 billion worth of its most high risk loans to the Government. Lloyds will bear the first losses on loans up to £25 billion, with any further writedowns being taken by the taxpayer.

via Lloyds bad debts to soar 50% on HBOS loans – Times Online .

(Update: This post is attracting significant traffic, so I have indicated three Austrian-School primers throughout the text. Please click the images for the publications.)

It seems everyone is talking about swine flu and the financial crisis, but they seem to be most persistently interested in what has gone wrong with the economy. After I explained the key points of this Nobel Prize Lecture by F A Hayek to my hairdresser this morning, she had confirmed in her mind what she always knew: that economists cannot discover all they need to make accurate predictions.

This is something we all need to understand.

What follows is a precis of that 1974 lecture (sometimes quoted verbatim). It explains why and how the economic policies of the time contributed to inflation and unemployment and it points the way out of our present and coming difficulties.

This is its message:

• Physical scientists can observe and measure the things that drive the sytems they are studying.
• Society, and therefore the economy, is not like a physical system: many of the most important factors cannot be seen or measured. Consider the thoughts and intended actions of millions of people at different times, for example.
• Economists and other social scientists, in their attempt to be scientific, ignore what they cannot measure.
• Therefore, many of the most important factors affecting the economy are not considered, while some of those factors which can be measured are deliberately controlled.
• The results are incorrect predictions and actions which positively harm society.

In a sentence: society is not a machine to be controlled, but a garden to be cultivated.

By the way, the remark about making astrologers look good is attributable to the Keynesian economist J K Galbraith:

The only function of economic forecasting is to make astrology look respectable.

The precis:

A Precis of “The Pretence of Knowledge”

The topic of this lecture is the chief practical problem of economists, who must now explain how to stop the accelerating inflation they have caused. In imitating the techniques of the physical sciences, economists have made grave errors of economic policy.

The assertion guided policy that there exists a positive correlation between total employment and the aggregate demand for goods and services. It implies we can permanently ensure full employment by maintaining total expenditure. This is fundamentally false and very harmful.
Read more

Text here.