Beware the rich persons’ savings glut

Since the 1990s, the private share of national wealth has soared while public wealth has shrunk writes Gillian Tett in The FT

This week, as western governments pondered sending aircraft to Ukraine, the Kyiv government embarked on a novel financing step: it launched a website #buymeafighterjet to crowdsource donations for jets from the world’s mega-rich. 

Once that might have seemed a laughably bizarre thing to do. But today it no longer appears quite so odd. Never mind the fact that events in Ukraine show we live in a world where networks, not institutions, wield power; today the ultra wealthy increasingly wield riches and power, with some billionaires controlling budgets comparable to those of small countries. 

And while it is unclear whether #buymeafighterjet will deliver planes, the symbolism is worth noting. It highlights a trend that deserves far more attention from economists and political scientists alike — and in spheres that have nothing to do with war. 

Consider one radically different context: this week’s World Economic Outlook report from the IMF. The message in this tome that grabbed most attention this week was that the world faces rising inflation, high debt and stalling growth — stagflation, in other words, although the IMF tactfully downplays that term. 

But on page 62 of the report there was also an intriguing little sidebar about the “Saving Glut of the Rich”. A decade ago, the concept of a “savings glut” was something usually discussed in relation to China. When market interest rates plunged in the early 21st century, economists argued that rates were being suppressed because emerging market countries were recycling their vast export earnings into the financial system. 

Or, as Ben Bernanke, former Federal Reserve chair, wrote in 2015: “A global excess of desired saving over desired investment, emanating in large part from China and other Asian emerging market economies and oil producers like Saudi Arabia,” had created a “global savings glut”. 

But, this week, the IMF highlighted another, little-noticed contributing issue: the ultra-rich. It pointed out that a “substantial rise in saving at the very top of the income distribution in the United States over the past four decades . . . has coincided with rising household indebtedness concentrated among lower-income households and rising income inequality”. 

And while economists used to look at this through an American lens, “the phenomenon may not be limited to the United States”, the Fund notes. It seems to be global. And since the rich cannot possibly spend all their wealth — unlike the poor, who usually do — this savings glut has almost certainly “contributed to the secular decline of the natural rate of interest”. 

Moreover, while the IMF downplays this, the actions of western central banks have made the pattern worse. Years of quantitative easing have raised the value of assets held by the rich, thus expanding inequality — and with it the rich persons’ savings glut. 

How much has this affected rates? In truth, no one knows, not least because information about this shadowy world of ultra wealth is sparse. Or, as the World Inequality Laboratory notes in its 2022 report: “We live in a data-abundant world and yet we lack basic information about inequality.” 

Furthermore, western central bankers have limited incentive to study these issues too publicly, since many feel privately embarrassed that quantitative easing has made inequality worse. 

But one sign of the trend can be found in the 2022 Wealth Inequality Index report: not only have the richest 1 per cent across the world apparently taken 38 per cent of all wealth gains since the mid 1990s, but also the private share of national wealth has soared, while public wealth has shrunk. 

Another striking clue emanates from reports collated by Campden consultants, experts on the family office ecosystem. In 2019, they calculated that there were 7,300-odd family offices in the world, controlling $6tn in funds, a 38 per cent increase from 2017. Between 2020 and 2021, during the latest wave of QE, funds under management increased on average by 61 per cent. 

It is possible that this trend in inequality will slow if QE — and with it asset inflation — comes to an end in 2022 and beyond. Or maybe not — as the IMF report also points out, a world of stagflation risks and rising rates is one that will hurt the indebted poor far more than it will the rich. 

Either way, the pattern deserves far more debate among economists and political scientists. We need to know, for example, whether ultra-wealthy funds will step in to buy assets like Treasuries as central banks wind down QE. 

The way family offices are contributing to a secular shift from public capital markets to private ones should get more attention — particularly since economists such as Mohamed El-Erian predict that this will accelerate in the wake of Russia’s invasion of Ukraine. 

We also need to pay more attention to governance issues. The expanding private pots are generating innovative forms of philanthropy (which is good). But they can also subvert democracy via dark money donations (which is bad). Either way, #buymeafighterjet is one tiny symbol of an increasingly networked but unequal world. We ignore this at our peril.

Why We Can't Retire

 

What would negative interest rates mean for mortgages and savings?

Hilary Osborne in The Guardian 

 

You will need to dig out your paperwork to see how low your mortgage rate could go. Photograph: Joe Giddens/PA


The governor of the Bank of England, Andrew Bailey, has paved the way for negative interest rates, saying officials are actively considering all options to prop up the economy.

The Bank’s base rate stands at 0.1%, the lowest level on record, so it would not take much to take it into negative territory. The UK would not be the first country to have a negative rate at its central bank – Japan and Sweden are among those that have done so.

What happens to my mortgage?

If it’s a fixed-rate mortgage, nothing. And most households are on this type of deal – in recent years around nine in 10 new mortgages have been taken on a fixed rate.

If it is a variable-rate mortgage – a tracker, or a mortgage on or linked to a lender’s standard variable rate – the rate could fall a little if the base rate is cut. But the drop is likely to be limited by terms and conditions. David Hollingworth, of the mortgage brokers London & Country, says trackers sold very recently have in some cases had a “collar” that prevents the lender from having to cut the rate at all. Skipton building society, for example, has a tracker at 1.29 percentage points above the base rate that can only go up.

Older mortgages often have a minimum rate specified in the small print. Nationwide building society, for example, will never reduce the rate it tracks below 0% – so if your mortgage is at base rate plus 1 percentage points, it will never fall below 1%. Santander specifies in some mortgages that the lowest rate it will ever charge is 0.0001%.

You will need to dig out your paperwork to see how low your mortgage rate could go.

Will new mortgages be free?

In Denmark, mortgages with negative interest rates went on sale last year. Borrowers with Jyske Bank were lent money at a rate of -0.5%, which meant the sum they owed fell each month by more than the sum they had repaid. There is no reason why UK lenders could not follow suit, although so far there is no sign that any will.

In the meantime, fixed-rate mortgages are getting cheaper and may continue to fall in price. Big lenders including HSBC and Barclays have reduced fixed-rates this week and more may follow. Hollingworth says borrowers now have a choice of five-year fixed rates below 1.5%, with HSBC’s deal now at 1.39%.

Tracker mortgages have been pulled and repriced with larger margins, to cushion lenders against falling rates. If rates are cut again, expect more of that, as well as the collars already seen on some deals.

A negative base rate means banks and building societies have to pay to keep money on deposit, and it is designed to discourage them from doing so and make them keen to lend.

Fears over what might happen to property prices mean they are still likely to lend very carefully, but they should not need to restrict the range and number of mortgages on offer. Some lenders that reduced their maximum mortgages while they were unable to do valuations have started to offer loans on smaller deposits, although the choice of 90% loans is very limited. “Lenders do have appetite to lend,” says Hollingworth.

What happens to my savings?

Savings rates have already been hit by the two base rate cuts in March and most easy-access accounts from high street banks are already paying just 0.1% in interest.

Andrew Hagger, the founder of the financial information website Moneycomms, says he thinks it is unlikely banks will start charging people to hold their everyday savings. “Many would just withdraw cash and possibly keep it in the house, thus opening a can of worms around security and break-ins,” he says. “However, if the Bank of England did introduce negative rates, I’m sure we would see even more savings accounts heading towards zero.”

Rachel Springall, from the data firm Moneyfacts, says: “The most flexible savings accounts could face further cuts should base rate move any lower or if savings providers decide they want to deter deposits.”

She is not ruling out a charge for deposits. “Some savings accounts could go down this path – similar to how some banks charge a fee on a current account,” she says.

Wealthy savers are likely to be the first who would face a charge. Last year UBS started charging its ultra-rich clients a fee for cash savings of more than €500,000 (£449,000), starting at 0.6% a year and rising to 0.75% on larger deposits. And at the Danish Jyske Bank, similar charges apply.

“It could be that super-rich clients in the UK get charged a similar fee as the commercial banks may wish to discourage large cash holdings which they are having to pay for,” says Hagger.

What about loans and credit cards?

Personal loan rates are already low and are usually fixed, so you will not see your monthly repayments fall if rates go down. Credit card rates are usually low for new customers, but rise far above the base rate once introductory periods have ended, so will not be anywhere close to falling into negative territory.

Hagger says he does not expect card or loan rates to plummet in the near future, “as I think banks will continue to tighten their credit underwriting – I think they’ll be more concerned about rising bad debt levels due to a surge in unemployment, for the remainder of 2020 at least.”

This month Virgin Money closed the credit card accounts of 32,000 borrowers after carrying out “routine affordability checks”. It later reversed the decision, but this could be a sign that lenders are reviewing their customer bases and trying to reduce their risk.

Ever-lower interest rates have failed. It’s time to raise them

Mary Dejevsky in The Guardian

When the Bank of England reduced the base rate to a record low this month, there was one, tiny consolation for savers. The governor, Mark Carney – almost the only individual to have emerged from the Brexit shambles unscathed – said he was “not a fan” of negative interest rates. He thus seemed to rule out the nightmare – for anyone even just in the black – that we would have to pay the banks for keeping our money, rather than the other way round.

Carney’s effective rejection of negative rates – as already introduced in Japan and Sweden – was welcome. But it does little to help UK savers, who are recommended, in that infuriating phrase, to “shop around” for higher rates. Shop around if you like, but I was recently informed by two banks that rates were being reduced below 0.5%, and short of entrusting your cash to an emerging market, real options are few.

If the next thing is overt, as opposed to covert – charging for current accounts – then we will be in negative territory in fact if not in name. Then what? Despite everything I was brought up to believe, stashing cash under the mattress suddenly looks like sage planning.

The catastrophic fall in returns to savers over the past few years is, of course, a long-term consequence of the financial crisis; but a grievously neglected one. Each time rates have been reduced, the loudest voice has been that of creditors and their advocates. The supposed rationale is that low rates will get us all spending so as to get the economy growing again.

For those acclimatised to living not just with mortgages at absurdly low levels, but with overdrafts and credit-card debt as well – the benefits are evident. The cost of servicing that debt is reduced, and repay-day is again postponed. Small matter that the credit bonanza of the early 2000s was a direct cause of the financial crisis, and that we are also being urged to save for our retirement: ever-cheaper credit remains the economic growth hormone of choice.

For those of us told from childhood not to live beyond our means, who have also done our best to save for retirement, the potential effects are dire. Whenever I hear any mention of a new round of quantitative easing or a cut in interest rates, another dark cloud appears on my financial horizon – and not mine alone. We were led to expect a return on our savings that would supplement our pensions; a half of 1% even on a goodly sum will not do that.

Those now contemplating retirement on private sector, non-final salary, non-index-linked pensions – the majority – will see the rewards for their prudence not just trimmed, but slashed.

With interest rates low, investment funds look attractive



All the talk of intergenerational strife and the “plight of the millennials” omits the betrayal and impoverishment of savers, who are mostly older and have no means of increasing their income. What use is cheap credit to them? You don’t get a 1% tracker mortgage on care home fees.

The focus on house prices as the evil of evils for the young is also misleading. Low interest rates have helped push up housing costs in areas of high demand by making mammoth mortgages affordable. Saving for a deposit is the problem, and low interest rates don’t help.

There are signs, though, that the doctrine of ever-lower interest rates may be starting to run out of road. In the Financial Times last week a fund manager dared to challenge the orthodoxy that low interest rates necessarily stimulate demand. In the same paper, a reader argued that lower rates made him sit on his savings rather than spend. I suspect it has the same effect on others.

There are surely compelling reasons for a rethink. Reducing the cost of borrowing has not, in fact, led to a consumer boom, nor even to more modest growth. Without a perceptible rise in their incomes, it would seem that most people err on the side of caution. Either that, or their credit, however cheap, is maxed out.

We savers, meanwhile, are hanging on to what we have, for fear of even worse returns, and perhaps higher inflation, to come. Nor are negative rates likely to change this. The Japanese have not gone out to spend, even though this might seem a logical response; the result has rather been less money in banks and more, it is assumed, under beds.

So if ultra-low interest rates are not stimulating growth, and if they are simultaneously undermining messages about sound money and saving for retirement, how about trying the opposite? A rise in rates, perhaps?

The very idea would, of course, be greeted by warnings about mortgage defaults, repossessions, and hitting the poor disproportionately. But low rates tend not to benefit those on the brink; and an initially modest rise would offer a salutary reminder that borrowing has a cost. It could also exert downward pressure on house prices.

More immediately, it could encourage those of us in the black to indulge in a spot of so-called discretionary spending. In all, we could be reaching a point where the pluses of a rate increase outweigh the minuses. For savers, that point can’t come soon enough.

Low interest rates revived the economy, but now we're all suffering for it

A 35-year-old needs to invest £125,000 to earn a pension of £35,000 when the interest rate is 5 per cent. If it's 2 per cent, they'll need to save £400,000.

Andreas Whittam Smith in The Independent

I could hardly believe that a politician would blame low interest rates for the success of a far right political party. Least of all that it would be the eminently sensible Wolfgang Schäuble, Germany’s minister of finance, who has held office since 2009. Yet earlier this month he publically blamed the cheap money policy of the European Central Bank (ECB) for contributing to the rise of the country's right-wing anti-immigration party, Alternative for Germany (AfD).

“I told Mario Draghi (president of the ECB),” said Mr. Schäuble, “be very proud: you can attribute 50 per cent of the results of a party that seems to be new and successful in Germany to the design of this policy.”

Founded only in 2013, the AfD has recently gained representation in eight German state parliaments.

In explanation, the transport minister, Alexander Dobrindt, toldDie Welt newspaper: “The ECB is following a very risky course. The disappearance of interest rates creates a gaping hole in citizens’ old age preparations.”

There is the connection. The older generations, who often dislike immigration, have also found that a lifetime of careful saving has brought them little reward. No wonder they make their protest by voting for an anti-immigration party.

Note that Mr. Dobrindt referred to “the disappearance of interest rates”. That hasn’t yet happened here. But it is still a shock, however, to discover how meagre they are. Go into Barclays, for example, and you will find that the bank will give you 0.25 per cent per annum on sums of less than £25,000. So you place £20,000 for a year and you earn – £50 in interest.

At least this is a positive rate. But if you are a citizen of the Eurozone, or of Japan, or of Sweden, or of Switzerland or Denmark, a group of countries that account for one quarter of the world economy, the situation is even worse. There the banks are actually charging customers for the privilege of depositing money with them. In other words, interest rates are negative. You don’t get your £20,000 back, but a mere £19,950.

It isn’t only German politicians who are concerned about low or negative interest rates. This week Larry Fink, the chief executive of the investment managers Blackrock, which looks after more funds than any other firm, revealed his disquiet in an annual letter to shareholders.

Fink said that the adoption of negative interest rates was “particularly worrying”. He commented that investors were being forced to take on more risk in order to obtain higher returns. And this often meant that they had to sacrifice the certainty that they could find buyers when they wanted to sell their assets. Fink rightly calls this ‘a potentially dangerous combination for retirement savers’.

But what about people, for instance, in their thirties and saving up for retirement. Fink gives this chilling calculation. A 35-year-old looking to generate an income of £35,000 per year for a retirement beginning at age 65 would need to invest £125,000 today in a 5 per cent interest rate environment. In a 2 per cent interest rate environment, however, that individual would need to invest £400,000 (3.2 times as much) to achieve the same outcome when he or she stops working.


If the disadvantages of low interest rates are so daunting, what then are the supposed advantages? That is matter that will be debated at the IMF’s annual spring meetings this week in Washington.

Three officials have written a blog that seeks to balance the pros and cons. They “tentatively” conclude that, overall, negative interest rates help deliver additional monetary stimulus and easier financial conditions, which support demand and price stability. But, they add, “there are limits on how far and for how long negative policy rates can go.” I call that lukewarm support.

In fact, taking together the reservations expressed above and the analysis presented by the IMF paper, the drawbacks of low or negative interest rates fall into three groups.

First, savers may prefer physical cash to bank deposits, which is bad for economic activity. The IMF paper discusses using bank vaults or non-bank vaults for holding cash safely. Second, the policy may encourage excessive risk taking both by banks and by individuals. And third, as the IMF comments, if low or negative rates persist they could undermine the viability of life insurance, pensions and other savings vehicles.

The truth is that governments no longer have the means to revive economic activity. Gimmicks such as negative interest rates could easily do as much harm as good.

Osborne economics is not an invincible force of nature

Although many appear resigned to life under this dysfunctional capitalism, there is a way to make the system less inhuman

• 
• • John Harris
  • The Guardian, Friday 16 August 2013 20.30 BST

'As the followers of Thatcher and Reagan intended, everything has become individualised.' Photograph: AP

Britain is on the move, says George Osborne, from "rescue to recovery". But not if you're young: this week's unemployment figures showed joblessness among the 16-24s rising to 973,000. Not if you're the north-east, the north-west or Wales, where the out-of-work numbers have also risen. And if you've been on the dole for more than two years, heaven help you: despite the millions blown on the work programme and Osborne's alleged green shoots, the numbers of people suffering long-term unemployment jumped by 10,000 to 474,000, the highest figure in 16 years.

Some recovery, then. At the same time there are even more signs of the ongoing pinch affecting those people once thought to be safe, in the aspirational middle. In the Economist this week there is a very incisive graph plotting median real earnings and the retail price index. It shows the former keeping pace with the latter until 2005, when they began to split. From 2009, moreover, the earnings line began to drop, while prices carried on rising: the UK, we now know, has one of the worst recent records on real wages of any country in Europe (worse even than Spain, which is saying something).

"The plate tectonics of the labour market offer the best explanation for this," said the accompanying text. "With a declining industrial base, the British economy needs fewer mid-level skilled workers. Most new posts are low- or high-paying ones … Many in the middle lack the skills to move up and are pushed towards the low-wage end of the economy. Machinists and tradesmen become cashiers and call-centre workers." They do, and when that happens, they are ushered into that fragile part of the labour force we now know as the Precariat, where zero-hours contracts are becoming the norm, and a return visit to the jobcentre is never far away.

Meanwhile, the cost of living continues to soar, not least in the parts of the country held up to be the recovery's heartlands. In the last year, food prices have risen four times as fast as average pay. There are now plans to make water meters compulsory for people served by nine of the UK's water companies, which could lead to some family bills doubling. This week also brought news of more increases to train fares, some of which could go up by as much as 9%.

And who will that hit? Among others, commuters who have often fled from London's impossible house prices – which, according to this week's headlines, have lately risen by 8.1%, the biggest jump in two-and-a-half years. Entirely unsurprisingly, the share of Londoners renting on the private market is up from 18% in 2011 to 25% today. And an increase in demand colliding with flatlining supply means only one thing: the average share of income devoted to rental costs is now a jaw-dropping 27%, up from 21% a decade ago.

This is what a completely dysfunctional version of capitalism looks like. The crudest, most stupid, completely self-destructive formula for maximising profits – cutting wages while pushing up prices – is extended over the entire economy. An ever-increasing dependence on the service sector drives out skilled jobs in the middle, and offers no hope to those places which are still a byword for the end of heavy industry and manufacturing. The nation's capital becomes the playground of the people at the very top, serviced by young people who can live cheaply(ish), and people from overseas who are just about able to cope, on the basis that they might eventually go home. Housing, surely any worker's most basic need, is in permanent crisis. And for a lot of people trying to keep pace with forces that are out of anyone's control, there is only one option: residence in what the economist Ann Pettifor this week called Wongaland, where people borrow unsustainably while saving absolutely nothing (see right).

And so to an interesting question: what are the politics of all this? On my office shelves, there are two books whose titles – both of which include the word "great"– neatly encapsulate the most important developments of the last 30 years. One, titled The Great Divestiture, is by Italian economist Massimo Florio. It chronicles the revolution that took industries and services once delivered by the state into the private sector, and thereby relieved politicians of accountability for their machinations, not least when the monopoly capitalists in charge started to endlessly push up prices. The other is The Great Risk Shift, by US academic Jacob S Hacker, a very prescient look at how employers, with the complicity of governments, have spent the past few decades shoveling responsibilities on to the narrow shoulders of their workers.

From the perspective of the individual the consequences look bleak. The government cannot much help people; and the companies and corporations that depend on their employees' labour offer increasingly little in return. As the followers of Thatcher and Reagan intended, everything has become individualised, to the point that even the pump-priming of a dormant economy is now a matter of debt-driven consumption, as the summer's unexpected surge in spending suggests. Political discourse has inevitably shrunk: we mostly hear politicians talking about "welfare" and immigration not just because of the political dividends they are said to produce, but because they represent some of the only things related to economic wellbeing that they think they can actually affect (and in the case of immigration, that's a fantasy anyway). Talk to the young people who are at the sharp end of the modern economy, and where we might be headed becomes clear: to a lot of them, the most basic features of the economy are like the weather: thoroughly depoliticised, and to be fatalistically accepted.

Yet perhaps something is stirring. This week's big thing has been the carpeting – and egging – of Ed Miliband. Certainly, Labour should be doing much better. But its people have been talking for quite a while about a cost of living crisis. Their proposed solutions still look flimsy, but that is perhaps down to the fact that when faced with a hegemonic economic model – one, moreover, in which they have long acquiesced – most Labour people understandably do not even know where to start. Not that long ago, it looked like their leader might: he was at least talking about the squeezed middle, responsible capitalism and Hacker's ideas about "pre-distribution". If it's not too late, they are themes worth reprising – though whether people might be perplexed by the spectacle of a politician taking issue with things they see as invincible forces of nature is a very interesting question.

As we move into the succession of zombie jamborees that is conference season, one other thought occurs. Humankind long ago invented things that could at least retilt the balance between capital and labour, and ease some of modern life's most inhuman aspects. We called them trade unions. Most Tories would rather they did not exist: now, even people in the Labour party want to push them even further to the margins. If they do, they will be adding to the problem, when the increasingly poor, huddled masses they represent could really do with some solutions. To turn Osborne on his head, recovery alone is not the issue: rescue is what people need.

Ignore the hype: Britain's 'recovery' is a fantasy that hides our weakness

A tiny rise in GDP is nothing to celebrate while the UK economy is as dysfunctional as ever

• 
• • Will Hutton
  • The Observer, Sunday 21 July 2013

A rise in GDP will be celebrated as proof of George Osborne's wisdom – but the dysfunctions of the UK economy are still firmly in place. Photograph: Rex Features

Next Thursday we will get a further taste of what it is like living in an one-party state. The estimate for GDP growth in the second quarter will be published – predicted to rise between 0.2% and 0.3%, confirmation that a triple dip recession has been avoided and the economy is on the mend. Expect an over-the-top reaction from our centre-right media.

George Osborne's sagacity will be lauded to the skies, and scorn poured on all those who have criticised economic policy or worried about Britain's economic structures. It will be another chance to swing opinion behind the Conservative party – all the more effective because the coverage will reproduce the co-ordination of a government propaganda machine without any formal instruction being given.

Economies are like corks. They have inbuilt upward momentum driven by productivity and population growth. That momentum can be reversed for 18 months or two years in a typical recession when investment and consumption have run ahead of themselves, and of necessity fall back. But like a cork the economy will eventually bounce back to the surface – where it would have been had the recession not happened.

What we are witnessing is that natural bounce – but very weak, extraordinarily slow and no prospect of any substantive follow-through once the economy returns to 2008 levels of output some time next year. What usually takes no more than two years will have taken six – the slowest recovery for more than a century. Exports are effectively unchanged, even to faster growing non-EU countries, despite a 25% devaluation. Company investment has collapsed by 34%. Real wages are 9% below their peak – they rose in every other postwar recession – and are set to fall further. The profound dysfunctions of the British economy, despite wild claims otherwise, remain firmly in place.

What is so dismaying is that hopes that investment and exports would lead recovery have been completely dashed. Instead the British are returning to what they are best at – running down their savings and borrowing enormous mortgages, partially guaranteed by the state under the Help to Buy scheme, to force up house prices.

I did not join the chorus of criticism of Help to Buy when it was launched: it was a clever, time-limited Keynesian use of the public balance sheet to support a distressed part of the economy, and no recovery is conceivable without some rise in house prices rekindling animal spirits and lifting confidence. What was wrong was: to superimpose it upon a market that privileges buyers who want to let rather than own; the Treasury vetoing an extension to lending to business in general; and not recognising that the same Keynesian thinking is needed across the board.

What takes me aback is the determined way the national conversation is skewed towards the inadequacies of the public sector, however concerning – avoidable deaths in the NHS or extravagant pay-offs for BBC executives – without any parallel focus on the inadequacies of the private. The Coronation festival for the Queen was meant to be a celebration of British innovation. Yet there were only three large company pavilions in the Palace gardens – GSK, Bentley and Jaguar Land Rover (owned by the Indian Tata) – and a host of tiny companies dealing in niche luxury goods. The contrast with the industrial and innovative power that could have been mobilised when she began her reign 60 years ago is painful.

Moreover, back then, economic power would have been drawn more equally across the country. There were certainly regional imbalances in the 1950s but compared with today they were trivial. Outside London and the south-east there was no private sector job creation in the decade to 2008. Today these regions possess little more than what Karel Williams of the Centre for Research on Socio-Cultural Change calls a "foundation economy" – the structures that deliver the likes of electricity, food and hospital care but with virtually no private sector entrepreneurial activity. The average size of a British-owned manufacturing company in the regions, he says, is 14 – subcontracting workshops and downmarket complements to those niche luxury companies.

The problem is too few of either develop into companies of any scale. Their owners are too transactional, unsupported or plain greedy, and the financial system that supports them too fickle, disengaged and commission-hungry. Almost no new major British companies have emerged over the past 20 years while dozens that have taken decades to grow have been assimilated into global multinationals, their strategies dictated outside Britain. Some, of course, make a vital contribution to our economy. But this is no basis on which to launch anything but a fitful recovery and weak investment. Yet no fundamental questions are asked.

Instead the Conservative party, and the commentators who support it, live in Fantasy UK, in which the problem is regulation and the EU. The first initiative of David Cameron's new business team in Downing Street has been to ask British businesses to identify those EU regulations most hindering British growth. I conducted my own straw poll in London's Tech City. Brussels and the EU were simply not on the radar. Instead the list included the financial system's aversion to risk, immigration controls keeping out talented foreigners, and BT's inability to provide high-speed broadband.

The debate has to change. Companies in Britain – domestic or foreign-owned – need the prospect of a sustained growth of demand. The governor of the Bank of England, Mark Carney, hinted at establishing a target for growth and inflation combined – nominal GDP – but was beaten back by the austerity defenders. He should stick to his guns. We have to create ownership and financing structures – scaling up the proposed Business Bank fast — that permit companies to grow and stay owned, as far as possible, in Britain. We have to get fundamentally serious about infrastructure. The LSE growth commission's proposal for an interlocking system of infrastructure strategy board, infrastructure bank and independent planning commission is a good starting point. The housing market needs root and branch reform. Above all, there has to be a sense of mobilisation.

But instead we have nonsense babble about the EU being all that is holding us back; huge prizes for essays on EU exit as a focus for intellectual effort (courtesy of the Institution of Economic Affairs); and endless nostalgic festivals and celebrations about world wars one and two. Welcome to Fantasy UK.