Coffee House

The Brown bubble: the truth emerges

14 December 2012

5:56 PM

14 December 2012

5:56 PM

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.

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Show comments
  • dg

    Fun though it is to slag off Brown and Balls, I don’t think it’s quite right. The reality is they were using the flawed tools still in use today. Anyone who’s ever studied economics knows that certain variables defy measurement. The output gap is one of them. An intellectual framework in which central banks/policy makers override market prices (ie the rate of interest) on the basis of such deeply flawed estimates of unknowable variables is rotten to the core. Until we have a long think about what economists can and can’t deliver, we will continue to fool ourselves into thinking our interventions are warranted before blaming everyone else when subsequent events show they weren’t.

  • kwestion.all

    Yes, but hang on, it wasn’t just Gordon Brown who got it so badly wrong, it was the whole of the finance sector, both here & abroad. They all agreed that unfettered financial markets were the correct way forward, including the Tories, even when in opposition. That said, I agree with the last paragraph, who can we now believe?

  • Jama A Mohammed

    The Osbourne bubble: The truth emerges

    – Shrinking economy

    – Growth downgraded this year and next year

    – More than 1 million young people out of work

    – Higher borrowing

    – Osbourne admitting that he will not meet his target of lowering the overall debt

    I can go on and on

    These are consequnces of the stupid and reckless fiscal decisions taken by the part-time chancellor.

    • Telemachus is an old fool

      So 1 million out of work is just Georges fault! He inherited the mess. The debt was going to up anyway, so he has missed his target, but it was going up because of the structural deficit left by your mates. You labour loonies have such a short memory and can never admit to your mistakes. Your friends do not deserve power for a generation because of he turmoil they have caused.

  • mikewaller

    This really is daft. They just happen to be the poor saps in charge when the effects of decades of relentless “borrow and spend” by all parties have come home to roost with a vengence. Anybody who lacks the wit to see that if C & O show any willingness to back away from austerity, the money markets will shove the rate at which we still have to borrow through the roof and destroy our economy in very short order.. Why cannot everybody grow up and recognise that the party is well and truly over? Now, the issue is just how well we can manage the inevitable drop in living standards. Failure by the wealthy to understand they must very publicly take on a bigger tax burden is equally as stupid.

  • arnoldo87

    “Remember this next time Ed Balls blames the banks —or America — for the crash. It was his bubble.”
    So, Fraser, I think what you are saying here is that the 2008 crash that affected almost all countries in the world was caused entirely by Gordon Brown’s overspending in the U.K.
    I know the days of Empire are over but, by God, when England sneezes the world catches a cold!

  • WilliamOne

    I remember Osborne giving a speech calling for the complete
    de-regulation of the mortgage market…this was a few months after the
    collapse of Northern Rock!
    What do we have now?
    An entire political class devoted to keeping a housing bubble inflated by choking off supply at one end and increasing taxpayer subsidies and guarantees at the other, so millions with no hope of a home are paying for people richer than them to get a leg-up onto the property ladder. How is that any kind of solution? Funny kind of free market.

    And still the obsession with cheap credit. Where do you think interest rates will be in 5 years? I’ll tell you, they’ll be exactly where they are now, and we’ll still be printing money. This will be lauded as a way of ‘keeping the cost of borrowing down for households and businesses’. So while Brown may have got us into this mess I don’t see this lot giving us anything other than more of the same.

  • Global City

    This piece ties in with the turboparalysis article elswhere on this site. Brown has been let of the hook in a remarkable way. Even after the ‘omnishambles’ budget the tories failed to mention that the main reason why Osbourne had to scrabble round for pasties and grannies to tax was that everything else had already been taxed and regulated, licenced and ‘feed’ to the hilt, by the previous government milking and leaching everything dry.
    When the crash came there literally was no money left, or any options to raise further revenues, short term anyway, as it had all ready been grabbed.
    Brown led the biggest piss up in history. He also built up the state massively during the boom, making it impossible even to apply any Keynsian logic when the crash inevitably came. he is not a stupid man, so I can only deduce that he did it all on purpose. Helping to hasten the ‘inevitable crisis of capitalism’ in order to reach those sunlit uplands just that little bit sooner? Student of Adam Smith my arse. Secret admirer of Grimsci, I think!

  • Richard McCarthy

    Estimates, says the graph. Well that’s really trustworthy isn’t it, pseudo-crap-economist Fraser Nelson.

  • Richard McCarthy

    Neither is an amateur tabloidesque economist fit for serious analytical purpose. Go back to doing book at bedtime, Fraser

  • Watcher

    Brown was all prudence, ‘following Tory spending plans ‘ when he believed he was inheritng the premiership. His rage, when realising the double cross, caused him to throw money he did not have at welfare and public sector unions. The simple purpose was to win elections and gain support of public Sector Unions in Labour’s NEC to oust Blair. It has little to do with monetary theory or economics, just blind manic hatred of Blair and the taxpayer. Your grandchildren will for his demented ambition.

    • wobble

      top post @watcher

      His last act was to reduce the prime minister’s salary arbitrarily by £50k …
      is this the act of an elder statesman ?….. or an utter partisan vindictive bastard ?

      .We have never seen his like before , neither has the country !

  • BoiledCabbage

    Brown had an election to win – vital for him because he knew he would become PM – so he opted for the old strategy, namely an old-fashioned house-price boom. His vanity was the driving force.

  • Boudicca_Icenii

    I’m no economist, but I’ve lived through several booms and busts.
    I distinctly saying to my elderly father (who had lived through several more) in about 2004/5 that Brown’s boom was going to end in a spectatular bust.
    You only had to look at the massive inflation in the housing market to know what was going to happen.

  • jazz6o6

    I read somewhere that Brown was earning circa £2m a year in lecture fees. He’s obviously not that stupid.

    • Wessex Man

      I dunno, what do you think about the mad fools who are hiring the********* *** ****

  • The Laughing Cavalier

    It is incorrect to say that no one was complaining, this old dog was calling him the Potemkin chancellor from the start.

    One has only to consider the asset price bubble to see how disastrous Brown was. House prices almost trebled during the NuLabour years. The real inflation rate, by the way, was never 2.5% but somewhere in the 5-7% range as a long term average. The first thing Brown did when he achieved office was to fiddle and debauch the figures and the office of national statistics.

    The result is what we see now, an economy brought to ruin by a madman.

  • Bob Dixon

    Fraser you should ask both Gordon Brown & Mervyn King for their comments?

  • Marcus

    ‘What makes us think they’ve got it right now’?
    Nothing Fraser, I will however make an accurate prediction of my own:
    Wrong or not, financially these people will all be fine when it all kicks off.

  • Chris

    The tragedy of the UK is that this utterly flawed individual, is still one of our law makers.

    The Labour party knows this. They have done nothing

    • wobble

      Fortunately neither has he……….he’s never there……….

      An excellent example of Eds leadership skills if ever there was one , has a guy under his charge only turning up for work 3 times in over 2 years and he hasn’t even mentioned it, let alone take action

  • Tom Paine

    Haven’t we just appointed a Bank Governor whose remedy for everything is
    .. cheap debt? Have we really learned nothing? (and is Osborne any
    different to Brown spouting nonsense about asterity while the debt
    doubles in this Parliament?)

    • HooksLaw

      Stop confusing structural with cyclical debt. How much do do want to see government expenditure cut by?
      The govt inherited a deficit of 160 billion. Tell us how to cut that overnight. A large part of that debt cannot be eliminated by growth, its what the economy cannot sustain.
      Assuming nothing is possible in year 1 and you cut by 50% each year thereafter you add £310 billion to the debt. And this is ignoring the economic cycle and the Euro crisis.

  • Derek

    Pretty much everything that has felt like economic growth has been illusory. We have run a deficit of trade most years. How is the excess consumption funded? Through the money markets lending to the UK consumer. When the money markets lost their appetite the Government manipulated money to try to reflate the busted flush. A friend of mine works at the BOE, I said how QE and funding for lending are distorting the price of risk and entrenching bad practices that the early nineties bond markets punished. He said we need to get consumption up. They’re mad. The OBRs latest forecasts rely on an increase in household debt. You ask if they know any better now, they don’t.

    • TomTom

      Yen Carry Trade

      • TomTom

        Remember Tel Ramsden ?

  • Bluesman

    Who else remembers the concept of “sound money”?

  • anyfool

    It did not need any of the official groups like the IMF or the BoE to tell you things were out of sync, you only had to look at terraced slums in northern cites selling for over a hundred thousand pounds, the self same houses which 15 years previous were selling for buttons or were pulled down as you could not give them away, some are now back to buttons and still not selling leaving tens of thousands of people penniless and without hope, that is what Brown and Balls are responsible for, i guess the people in the north have not twigged yet, they are still blaming Thatcher.

    • HooksLaw

      Brown ruined pensions and turned everyone into Landlords.

  • Max Wright

    Yet more evidence that this seriously flawed individual was indeed the worst Chancellor and the worst PM in modern history, probably not just in the UK but throughout Europe.

    • Russell

      Not just Europe, but the world.

      • HooksLaw


      • telemachus

        He saved the world’s banks

        • TomTom

          No – he saved the global banking elite by screwing taxpayers……Gordon Brown the Bankers’ Patsy

        • Dicky14


        • Matthew Whitehouse

          Yeah, by selling them our gold!

    • telemachus

      It is easy to kick Gordon.
      Why not kick Lawson
      I heard none of you moaning during the good times of Lawson and Brown.
      Lawson terminated his own but Gordons would have gone on were it not for Lehman etc outwith his control
      What I do know is that he saved all Western Banks by his grasp and foresight while others floundered.

      • telemachus

        And while we are at it this comment is totally out of order

        “chief bartender at the most out-of-control cheap debt party in living memory”

        This bartender has the wit guile and cunning to get us out of the looming triple dip recession

        • Chris lancashire

          Desperation setting in Tele old boy?

          • HooksLaw

            Tele sadly has a point about Lawson. He was a very good chancellor but chose to shadow the Deutschmark.


            • TomTom

              He had to as it was the only way to get interest rates down from 15%….because Thatcher had abolished all Quantitative Controls on Banks and used Overfunding

        • salieri

          That comment was bloody brilliant.
          Drinks all round at the Last Chance Saloon, all you freeloaders, wannabees and spendthrifts – we’ll just put it on the regulars’ tab; they won’t even notice till the hangover wears off, and then their grandchildren can cough up. One for the road, gents?

          • telemachus

            Yvette is getting a little upset at all this bile

        • David B

          The bar tender at the local pub has a far better idea than Balls.

          U have an ability to recycle the same old post without facts or reality touching the sides. The Balls strategy is the same as the Brown strategy – tax borrow spend. It failed when the money dried up. And it will fall in a heap again.

          The bank bailout was about saving Brown and his debt brothers skin. They were not prepared to take the same root as Lamont and admit they got it wrong. Instead the country has to pay for their ego

      • McRobbie

        Brown did the only thing he knew how to do with the economy, spend, so he continued to spend on “saving” the banks. He showed no great grasp or foresight, just continued with his own dogma. There are good arguments for believing the banks should have been allowed to fail and then pick up the pieces. A few months of turmoil and the bankers would learn to manage their business better at less cost to us. Ref Iceland.

        • telemachus

          Were the banks have been allowed to fail a good few folks would have starved

          • TomTom

            100 million people worldwide have been forced into poverty to save the Banks……greeks aree being destroyed so the banks get their pound of flesh. John Paulson and Lloyd Blankfein reportedly paid Papandreou $500 million

          • Matthew Whitehouse

            Banks should be allowed to fail – The government should use it’s cash to guarantee savers money – Not the banks money!

        • Roland Butter

          He showed no great grasp or foresight. But he did show a great grasp of foreskin…

        • Wessex Man

          Well said now listen here telemachus I’ve zzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzz

          • telemachus

            I find the truth a little soporific too

            • Ostrich (occasionally)

              How do you recognise it?

      • HJ777

        Lawson certainly got it wrong during the ‘Lawson boom’.

        However, at least he was one of the great tax reformers and simplifiers and had the sense to run a surplus during a boom. These, at least, set us up well for the subsequent recovery.

        Brown was a disaster – making the tax system much more complex and he ran an increasing deficit during a boom. These made a subsequent recovery much, much, more difficult.

    • HellforLeather

      Claimed to have abolished “boom and bust” while consigning the economy to “doom and dust”. MP expense fraud seems quite innocent compared with what that pair did to taxpayers.

      • telemachus

        What about Osborne
        Except of course if you are filthy rich

        • Invigilator

          Legal test comment

        • wobble

          The rich got far richer under brown, while the poor got poorer, social inequality increased under labour ……….as planned

          More and more state dependency ,bigger and bigger state ,until the state becomes all the people and the people are the state ,one nation ,one party,one people , the peoples people, and it needs a man of iron to lead, an iron Chancellor , a man with a moral compass who can lead us the way …..a man of vision……a man who saved the world,……….

          All seems so familiar
          Pretty sure a socialist came up with this stuff before, from a national socialist worker’s party, can’t think who though ?

          • BoiledCabbage

            And Class War was given the green light. Notice how the wealthy are not ‘investors’ or ‘business owners’ but “The Rich” – as a term of abuse. Neo-Maoist?

        • David B

          Just like Blair, Brown, Mr & Mrs Balls, both Millabend brothers, Mrs Hodge, etc and most of the rest of the Labour Party.

          I believe Ed still has questions to answer on his inherited wealth.

          • telemachus

            I have always regarded that argument as specious
            We should congratulate any wealthy politician who thinks of others

            • David B

              Could not agree more, politicians who have real life experience is vital. But why do u and many in the Labour Party make reference to Cameron and Osburne is it do as I say not as I do politics again

              • telemachus

                Point about those two is that they behave and act like a brace of spoiled rich kids who do not care
                And of course they do not as evidenced by the progressive poverty at the bottom of society since 2010

                • David B

                  And that is the politics of Alistar Campbell, play the man not the ball.

                  For your information the poverty figures are varied with some parts up and others down. If you are interested in the facts please read this report But overall there appears to be a slight fall.

                  Unfortunately i suspect your dogma will not let facts get in the way which is a consistent element of your post here.

                • telemachus

                  The link seems broken
                  Perceptions in politics are usually more powerful than facts

                • David B

                  That is called prejudice when you attack someone not for the facts but for a perception of who they are.

                  Well now we have establish you work on prejudice why not do some research on the banking collapse and you will see our problems started in the UK, Brown did not save the world and the Balls Plan B is a rerun of what Brown did in 2000 to 2010 and lead us to where we are now. Going down the same blind ally is not a solution

                • Wessex Man

                  My perception of telemachuas is that he is Gordon Brown in disguise, hence Gordy can’t get to Parliament so much, he’s on all the blogs reinventing the last 15 years.

                • David B

                  I think u may be right!

                • telemachus

                  No no no
                  The crisis started in the securitisation of bad mortgages by unregulated US banks
                  When the banks tumbled Gordon saved them
                  Balls knows how to stoke the economy get full production and employment get taxes rolling in and then begin to fully address deficit and debt

                • David B

                  More prejudice. Just answer one question why, if this all started in the US, why are their banks fixed and our are not. As for “saving the world”, if u believe in that u must still believe in Santa because it is the same myth.

                • Matthew Whitehouse

                  How can americans not paying their mortgage wipe TRILLIONS off the world economy? Truth is that’s only part of it. Did you know that from all the trillions that have been wiped off bank sheets as “Bad Debt” that the banks are not obliged to say who owed the bad debt in the first place – Not saying they are corrupt – just saying there’s plenty of room for it!

                • David B


                  Sorry for broken link try this but it is on

                • Matthew Whitehouse

                  If Telemachus were to learn anything, and go on to achieve great things… How would he describe himself… Successful or Rich?

            • Telemachus the teletubby

              Why should we congratulate them. It makes them sound like hypocrites, and do you think they are thinking of others or just themselves! The oursuit of power is all they want amd the wealth that comes from it. if they thought about others then they wouldn’t lie through their teeth every time they opened their mouths nd would certainly apologise about ast mstakes. Another thing, their wealth has given them an advantage that they openly denign others, all hypocrites

      • Andy

        Spot on. That’s what Brown and Blair gave us: ‘doom and dust’.

        Brown was totally and utterly incompetent and in this he was aided by Ed Balls and Miliband. The damage this lot have done to our country is so great many of us will never live to see it repaired.

    • Aardvark

      Top comment.

    • HellforLeather

      Is it just me (or my rusty typewriter)?

      When I click on the upward arrow when responding to a comment (which I assume signals approval), it often jumps two points. (Or could that be my quivering finger?) When I click on the downward arrow, assuming it means disapproval, nothing happens because I’m not registered.

      It’s a bit like the new marriage bill:. First-lock, second-lock, third-lock..etc.

      Not all have to opt in, but some are expected to.

      May I invite the Spectator to explain how and why they have adopted this system?

      • Malfleur

        Yes, and how to register? Who knows? Dedidor do! You can be registered to comment (voila!); but not registered to “down-post”. The procedure for registration appears to be the secret knowledge of a privileged few – and why?

        Well, trolls like telemachus had been chalking up a very large score of “down-posts”; telemachus is the Old Queen Street cat, not entirely house-trained and who is allowed, or even encouraged, to “drop” by. Can’t have the house cat denigrated; what to do? Arcane system of a lock on the down posts; trolls “disproportionate” vote tabulation brought into a correct balance, with may be a positive spin for troll.

        Cat purrs.

        • telemachus

          Those who court popularity do not move Society forward

          • wobble

            Yep…..just look at Blair… You may have a point there tele….

          • Tarka the Rotter

            Stalin Mao and Pol Pot come to mind, oh yes and the three Kims…

      • Matthew Whitehouse

        It’s always done that for me for some reason

  • MichtyMe

    Aye, the IMF got it wrong and the BoE and the politico’s…….and the jurno’s who didn’t warn us.

    • Harold Angryperson

      With the honourable exception of Jeff Randall of course.

      • Hexhamgeezer

        Which is probably why the Beeb weren’t keen enough on him – too off message.

  • TomTom

    We used to have a system of Quantitative Controls over lending but the Shadow Banking System was allowed to get far too big and outside regulation aided and abetted by the Bank of England whose aim had been to build up Offshore Banking run out of London but regulated NOWHERE. They simply circumvented controls and expanded CREDIt because Fraser as we know PRIVATE BANKS and OFIs CREATE Credit and have their Credit Multiplier. With >50% global banking assets outside regulatory control we have a big problem. Brown was a real dummy and so was Balls and the low-grade Treasury Staff knew zilch about Banking and Credit Creation. I bet Balls had no Monetary Theory in his PPE Course – I bet he knew nothing about Monetary Base Control or Real Balances or how Banks need to be controlled

    • telemachus

      He has no option than to understand monetary base control now that Osborne-King has removed the value of interest rate manipulation
      The key thing
      about Balls is his instinctive understanding of the relation between the well being of the population and bald monetary policy

      • runskip

        working late at Labour HQ tonight old boy? can they afford your double bubble?

      • TomTom

        Interest Rate manipulation was inherently stupid in that raising the price of money increased bankl profits in a society where 29.8% interest was the Dixons norm

      • Wessex Man

        Your dogmatic devotion to Gordy should earn you something, just can’t think what. Banishment to Scotland when fatboy gets his independence maybe? mmmmmmm that would nice you and Gordy could chew the cud and talk about how you saved the world in your dotage!

        Prudence Brown ruined the country for generations to come God help us if Ballsy gets control at the next election, not that Cameron knows what he’s doing.

        • TomTom

          Tel-Boy is hoping Gordo will make an appearance in The Commons and say somethimng for the £2 million he has clocked up as a Roving Ranter

      • David B

        Does this mean something or is it just a collection of words that sounded good at the time.

        Monitory policy is a macro economic tool it cannot be used to micro manage the individual. How do I know this, well just look at the mess made of the abolition of the 10p tax bracket. An “instinctive” decision taken for political reasons that hammered the low paid, and Brown and Balls had to be lead kicking and screening to see it

  • Ed Hall

    Call me daft but I have no idea what an output gap is. I have re-read this twice but the phrase ‘the size of the UK economy relative to its potential’ leaves me blank. What is the measure of our potential? And how is it different to the ‘size’? Is this a measurement afterwards of actuality versus predicted level of GDP (or rather GDP growth)? Expressed as a percentage of what? In 2008 it was 2%. Of what? Of the previous predicted amount? Or 2% less than was predicted? By whom, the IMF? Puzzled… Please elucidate.

    • Dimoto

      That is what the Net was invented for, Ed. Don’t be lazy.
      The blog-post begs the question: How has Olivier Blanchard kept his job ?
      Grace ‘n favour, I guess.

      • Ed Hall

        Heavens, it was my Googling and attempt to get to the bottom of the question that led me to post! I guess the IMF (and all its cronies) are hanging on for the day that SDRs become the gold standard… Perhaps the Euro bankers finally got their act together sufficiently today to push that scenario into the long grass for now.

    • Fraser Nelson

      Ed, we’ve just spent five minutes in the office discussing your vg point. Output gap is an ugly and vague phrase: it’s basically an indicator of whether the economy is too hot, too cold or just right. If it’s seen to be too cold, then interest rates are cut to encourage folk to borrow and spend. Too hot, then rates rise. The problem is that, in the old days, inflation was a good indicator of heat. But a benign deflationary shock ended all of that. Mervyn King and his lot thought everything was OK as long as inflation was 2.5pc. The IMF made (as you suggest) nebulous estimates of the UK economy’s ideal size, and (as the pink line indicates) said we were at the ideal size. Turns out everyone was wrong so: pop.

      • Ed Hall

        Thank you for that. I can see the relevance of a measure that achieves this, and that it to some extent replaces inflation as an indicator in a deflationary environment. Like much economic theory though, once you hand the experts a whiteboard marker and ask them to explain what factors were used to create the measure they go the same colour as the whiteboard. Of course I agree with your ‘pop’ point, but without really knowing what was used to create the projection I don’t know if the fact the IMF data supports it is science, or just coincidence. There is a correlation between rainfall and unemployment in the UK that has yet to be adequately explained :o)

      • HooksLaw

        The government tasked the BoE with a 2.5% inflation target. What were CITI’s or anyone else’s forecasts at the time.

        Put simply Brown chose not to be cautious or prudent and allowed borrowing to rise even with growth, when we should have been sensibly paying debt back.
        Brown was not managing the UK economy, he was writing an application form for leader of the Labour Party.

        • TomTom

          Yes but the 2.5% Inflation Target excluded house prices because the Index had been fiddled

          • HooksLaw

            The Guardian ran an article in 2009 pointing out that RPI was below CPI. RPI hit -1.4 in Sept 2009.
            I am not sure anyone is saying indices are perfect. House prices are an elephant in the room and its something which the govt as opposed to the BoE should have addressed.

      • HellforLeather

        So, the Spectator editor admits to writing “ugly and vague” stuff,

        Ie — (from comment above): “Ed, we’ve just spent five minutes in the office discussing your vg point. Output gap is an ugly and vague phrase.”

        Why? Are you an amateurish lot? Do you not understand what you’re writing about? Are you maybe just arrogant? Do you misunderstand an audience?

        A basic rule of journalism is that you write for an audience for whom fact is important, with context and clarity. The Spectator EDITOR does not get that?

        • Maidmarrion

          What do you expect from someone who can write an entire column on how depressing a certain party conference was while not attending said event – accuracy?

    • Nick Reid

      Economies can only grow sustainably for two reasons: population increase and increasing productivity (ie producing more stuff for the same expenditure of time and money).

      What an output gap tries to measure (and like all economics it is a little hit and miss and easier to measure in hindsight) is how much the actual economic growth deviates from what is its sustainable potential.

    • TomTom

      You have commented on the emperor’s birthday suit ! Output Gap is theoretical bullshit based on a trend line of Money GDP which says nothing about how many razor blades would be imported from Gillette factories in Poland if the British credit binge contrinued as 1998-2007…….it is reflective of a CLOSED Economy and is a theoretical construct. The basic fact is that the British economy boosted traditional industries such as textiles and coal and shipbuilding by fighting two world wars on credit. It was therefore weak in Consumer Durables such as small electricals and its families businesses failed to develop scale save for JCB and M&A destroyed the potential SMEs as in Germany so we had no Grundig, Bahlsen, BMW, Bosch, Siemens, Knipex, Bulthaup, SieMatic, Haniel, Kathrein, Vileda etc. Britain has a smaller proportion of Family SMEs than Germany or the USA. The real output gap is the SMEs that have been DESTROYED or STILL BORN because of Government and The City. Don’t forget Permira rejected James Dyson because Hoover was tops – Dyson had to fund himself