Deflation or inflation?
The US Federal Reserve and the Bank of England regard the great threat right now as deflation.
If they're right, deflation would be a disaster for our economies, for the reason set out in typically elegant fashion this morning by Martin Wolf in the Financial Times.
As I've been boring you rigid with for months and months now, the cause of our economic woes is that we borrowed too much - or financial institutions lent us too much (to digress for a second: there's a resonant unresolved issue of accountability and responsibility in these two ways of seeing the debt binge).
The sum of consumer and corporate borrowing in the UK is equivalent to something like 240% of our annual economic output in the UK, while US household and business debt is closer to 300% of that country's GDP. In cash money, that's about $45,000bn - or one of those big numbers that induces vertigo.
Which is quite a burden, and - as far as I can tell - a record-breaking mountain of debt for us to pay off.
The alarming and important point is that if deflation were to set in, if prices were to fall, the real burden of that debt would increase - thus prolonging and exacerbating the severe recessions that appear to be taking hold in both the US and the UK.
That's why the US Federal Reserve has set its policy interest rate as so close to bupkes or zero as makes no difference.
But, of course, the interest rates that businesses and consumers actually pay is much higher. So the Fed has embarked on a mission to bring the interest rates that participants in the real economy pay to as close to zero as it possibly can.
The Fed is doing this by spending hundreds of billions of dollars buying up US government debt and also loans to companies and householders - which has the effect of forcing down yields or interest rates.
By the time the US central bank is finished, it will have pumped trillions of dollars into the US economy in this way.
Over here, the Bank of England is preparing to do something similar, for the moment when its Bank Rate falls to nil (which may never come - but it would be foolish of the Bank of England to assume the zero hour will not arrive).
This process has the ghastly name of "quantitative easing". And it's not dissimilar to running the money printing presses at quadruple speed, filling up choppers with cash and then showering the population with greenbacks.
It's supposed to encourage businesses and consumers to spend rather than save, so that economic activity revives.
And it exposes the shocking paradox of our age: debt got us into this mess, but paying down that debt too quickly will only make the mess worse (or so the Federal Reserve and Bank of England believe - though I should point out that a growing number of economists are beginning to express fears that what the central banks are doing will prolong and exacerbate the crisis).
What is profoundly unsettling to central banks and governments is that growing numbers of businesses and consumers are opting to save rather than spend even as interest rates fall to these record lows.
Which is why those central banks and governments are taking ever more desperate steps to stimulate growth through increases in public spending and to make money as cheap as possible.
And that of course raises the question about whether the worst threat we currently face is deflation or inflation.
At the moment our economies turn, there's a genuine risk that central banks won't be able to drain all this cheap money from the system quickly enough to avert quite a surge in the inflation rate.
Against that background, I conducted an unscientific poll of leaders of some of our biggest multinational businesses at a lunch a few days ago.
I asked them to think about 2010, and whether they were planning for that to be a year of deflation or inflation.
To a man (this isn't me being sexist, it's that world: they were all men), they said they expected a sharp rise in the inflation rate.
They said this in a resigned way, as though it was the bill for a party that had been far too expensive and had gone on far too long.
UPDATE, 09:44 AM:
The Bank of England's monthly agents' survey of business conditions contains disturbing evidence of businesses turning down profitable orders because they're unable to obtain either loans from banks to finance the increase in working capital or insurance from specialist insurers to cover the risk of non payment.
There's also an alarming trend of businesses conserving cash and deferring or cancelling capital expenditure.
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Robert
I work in for a global supplier to the energy industry, we have slashed capital spending by 80% !!!
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It's not alraming - it is just the end of the daftness that has gone before.
Having gourged on debt for decades people are now gourging on thrift. And no matter how much money we give to banks and how cheap we make it this will not alter.
Unfortunately the central banks, economists and commentators are in a closed circle where only their experiences matter.
There are only 2 questions that matter:
Why are the authorities making the same mistakes that they made in the 1930s?
Why are so many people congratulating the authorities for not making the same mistakes that they made in the 1930s?
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Why does anyone think that buying government debt will reduce yields? 3 month notes are already negative or as near as makes no difference. Buying corporate debt isn't an option for anyone that wants to see their money back, or at least that's what the insurers of such debt are saying. I appreciate that the authorities want to increase oney supply, but they ought to be looking at the velocity of the money that they already have. Money supply has grown hugely in the last 15 years, whilst velocity has decreased, largely because much of the money created sat in the one place in the form of loan of some sort. To grow supply further without at least attempting to improve velocity is short sighted.
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Deflation is (or was) for centuries a cycle of economies like every other. It has been not seen by anyone who is younger than 80 (except if you live in Japan).
No wonder Roberts survey suggested everyone said 'inflation' for 2010.
A problem I have trouble with is what inflation one is talking about. Consumer prices as per the ridiculous Government basket of goods - or one which includes some asset prices (that are part of living too). Asset price deflation is, it seems to me, the main problem at the moments, and that is going to take some working through unless sellers accept very quickly 50% upward falls in the value of every asset they own. We could see asset price deflation set in for more than just 2009..........
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It is understood I hope, that Capitalism as it has been known during the last 30 years is all but dead. An immensely painful transition is about to get underway in the western economies. As a nation we can embrace the changes and help it along, or we can resist, thereby making the transition even more painful than it needs to be. At the moment, and I fear for the next few years, it looks like we are going to resist. We will keep borrowing, keep pumping money into a dead economy, and we will keep digging this hole deeper and deeper.
An enlightened government however would see the crass stupidity in this action and take a look to 10 or 20 years ahead and see where all this is leading and start planning for it now. For that is really what governments are for, the long term and not the short term, as unfortunately they all seem to be these days.
In 10 or 20 years the market economy must cease to exist. If we artificially keep it alive, then as a nation, and as well as a race, we will plunge headlong into total economic and social collapse as the accelerating environmental changes take hold and demand impossible resources to deal with them, especially if we want to keep our present day levels of consumption and living standards. The eco system can no longer support us.
So the future is a known quantity. It is a hot, hungry, dry and hard place to be. If the present way of life is to change, as it must, then it must change in a controlled way to meet the future we see coming. Economies, production methods, social systems and personal needs all have to be directed to a way of life that can be sustained.
Money as King is a corpse. Profit as prince is dead. What we are seeing at the moment with the tax payer directly and visibly supporting the economy and thereby our society. This will continue and become the norm, expanding into all areas of money and material production. It will not be called Communism, but rather Socialised Capitalism.
The trick will be to stop the taxpayer realising his power and keeping it in the hands of those who currently weld it. Until that trick is achieved, then the current pain will continue and deepen because the power welders will be scared of letting go and scared of change to the status quo.
When the transition is completed, then accelerating competition can ease and our focus can be turned to the real issues. Our very survival.
A tip for Christmas. Don’t wait any longer for more reductions in shop prices. There will not be any. The retail sector is calling your bluff and will increase all their prices before this weekend starts. They know you have been waiting and they know that this will be your last chance to get out there. So be warned. Most things will increase by several pounds.
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This is like one of those old films where they keep flashing up newspaper headlines showing the progress of something, invariably the hero making progress to the top of his achievement, (it's not me being sexist).
So when hollywood makes a film of all this I wonder which headlines will make it, any suggestions?
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This is getting really scary. I just don't see any point in these actions (both pump-priming and cutting interest rates) except as a short term expedient, which will cost more in the long run.
They all seem like more financial tricks to me without addressing the basic fact that we have spent beyond our means and will have to correct that.
The choice seems to be stagnation for ten-twenty years a la Japan or a quick hosing of money to stave it off for a year or two followed by thirty years of paying it off.
In this context, does anyone believe that the VAT cut (at a cost of £20 billion in one year) has made or will make any difference at all?
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If anyone remembers the articles that Samuel Brittan wrote for the FT in the late 90s, then they will realise that not everyone thinks that a year or two of deflation is really the scary monster that we are currently encouraged to believe.
Ultimately the only people that inflation helps is the foolishly profligate. (Such as our friend, 'Flash').
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To see what deflation does - all you have to do is look at the housing market.
However as the 1st rule people are taught in economics is the price-supply-demand curve I assume that eventually people will regard the utility of owning a property as greater than the utility of waiting to buy the property cheaper - and then start buying.
The only problem is: when and at what level will this occur? Current forecasts are for another 15% fall in the housing market so we can expect a gradual reduction in the rate of price decline.
However I would NOT expect rapid growth in house prices once people start buying - many will be too cautious having seen what has happened in the last year or so. This means that borrowing against appreciating assets (price bubble) will remain low.
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oh great we got the mpc minutes out....they did not want to hurt the pound so they left it at 2%...fantastic....so that didnt work either...why do we have to deal with these useless people at the bank of england.....so we have the pound sliding ...and yes hints of more interest rate cuts......great.....in the meantime what sort of bonus does king get? i bet its not peanuts.......just like the goldman sachs crowd 143000 each for failure. we really are getting ripped off in the uk...and more bad news(no not unemployment) the fact that brown is closing in the opinion polls...oh god help us....also wen the economy turns i bet brown then says its not the global economy its the british economy...
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6.So when hollywood makes a film of all this
When was the last time you saw an economic disaster film?
Yeh, my point exactly.
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At last we see the truth.
Quantative easing forgets the basic fundamentals of economics, the habits of real people.
Real peole who make decisions will now be risk averse and will save.
This means that the printing presses will roll and the BOE and Feds will keep lowering interest rates so to force us to spend spend spend, which we will NOT
Thus, inflation by 2010 will be almost a certainty, after a deflationary blip or drop off next Year.
The only way out for Savers therefore, is reluctantly go into Gold or back into blue chip equity markets. stocks and shares. Cash in Banks will be worth less in 2011 onwards if inflation takes hold and the oil price plus commodity prices surge again.
Warren Buffet is possibly right once again, buy stocks for the longer term
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Confused? Anxious? Forgetful?
Don't get anything constructive done?
Always making a mess of things?
Paranoid and worried about what other people think of you?
Constantly spouting meaningless rubbish in a loud voice?
Repeatedly making contradictory statements?
Always writing lists of things to do - and then not doing them?
Not sure where you've come from or where you're going - or where you are right now ?
Well, these are all symptons of ... er ... a government carrying out 'business as usual'.
Well wake up! It's time to get tough on government and tough on the causes of government.
I notice ever increasing use in this blog (and generally) of the terms 'statistics' and 'average' - as in 'average wage',
'average house-price' etc. They seem to be used to support arguments or to prove a point. Governments, of course, use
(and abuse) them all the time.
As any fule kno 38.6% of all statistics are made up on the spot, 15.4% are added as an afterthought and the remaining 6%
are added on for good will.
As far as averages are concerned. "Things are worse today than they were yesterday, but better than they will be tomorrow
- so on average there's no change." Hmmm...
Neither banks nor governments have any money. Banks have, up till now, created the appearance of having money by
inventing it - and taking obscene salaries and bonuses in the process. Every time a loan is made, money is magically
created into existance - mortgages, business and personal loans, overdrafts, credit-card spending etc. etc. But
fundamentally a bank note is merely a piece of paper; it has no value in itself nor is it supported by anything of value.
Well that 'little' scam is now well and truely out in the open - that's why banks won't lend to each other any more.
Governments are less subtle; they merely impose taxes. If you spend money it is taxed; if you earn money it is taxed;
even when you die anything you leave behind is taxed. But why should members of government care? they're only in office
for a few years - often only for a few months - then off to a bank or big Plc. directorship where they can get their
snouts into the trough along with all the other greedy piggies and benefit directly from the policies they've just
implemented.
The present governments here and in the USA have now mortgaged future generations to the tune of TRILLIONS and will have
to either claw it back from our children and grand-children or will write it off. Why the hell should future generations
pay for our debts and profligacy? What on earth would they be able to pay with - even if they wanted to? What resources
will they be able to draw upon to enable them to do anything at all? Oil? gas? coal? uranium? wood? fish? Hmmm...not much
left. Maybe they too will be able to issue IOUs.
All the talk I hear on these bolgs and generally in the press, of the 'housing market' and 'bottoming out', or a return
to 'market normality' or 'business cycles' or the need to 'generate growth' is simply self-deluding hot air and
meaningless twaddle.
The current economic and finacial crisis is a not a problem that can be corrected. In fact it is not a 'problem' at all -
'problems' can usually be 'fixed' if there is sufficient will and ingenuity. We have been blindly marching towards the
current state of affairs for generations. The current 'crisis' is a symptom of a much deeper problem - and you can't fix
symptoms. The problem is one of human greed coupled with the FACT that we have used up and are continuing to use up most
of the world's non-renewable resources - oil, coal, minerals etc. That which remains still burried underground is
becomming increasingly, in some cases, prohibitivly expensive to extract (why else would RTZ dump 14,000 jobs last week -
'cos it costs too much to get it out), why else would the USA/UK have invaded Iraq? ('cos 60% of mid-East oil reserves
lies safely burried underground...in Iraq).
Ponder for a moment that in the 1780s the building of a single 74-gun 3-deck, battle-ship consumed 2,000 (two thousand)
oak trees (HMS Victory, a 100-gun ship consumed even more). All those ships have long gone - the oak trees were not
replaced; we turned to coal and produced iron and steel with which we created the horror and destruction of the First
World War. Hitler's march through Europe was made possible 'cos of oil; the USA in Vietnam likewise depended on oil.
Nothing usefull was created - nothing at all - just a continuous squandering of un-replaced or irreplaceable natural
resources.
A return to 'business as usual' (whatever that means) is neither possible nor justifiable.
Population in India and China over 1 billion each and growing EXPOENTIALLY - not sustainable.
The failure of successive governments to recognise the impossibility of continual 'growth' and the danger of exponential
growth is a shocking and morally criminal dereliction of their duty. Their current mantra that 'growth should be
stimulated' is even worse and must stop.
Those on these blogs who don't yet understand where money comes from (and all those who keep asking where it's gone)
should watch the Paul Grignon video 'Money As Debt' on GoogleVideo
Money As Debt
Then take it further and watch the 'Crash Course' on Chris Martenson's excellent web site:
http://www.ChrisMartenson.com
While it is great that this site (Peston's blog) exists and that the BBC is still prepared to allow it - so far; it is
suspiciously worrying that Peston has yet to discuss Fractional Reserve Banking, the dangers of the Exponential Curve or
Peak Oil - all three of which have been fundamental to 20-century business and banking. Discussed them - he hasn't even
mentioned them. Either he doesn't know about them, which is hard to believe of a highly educated Business Editor of an
international media outlet; or he is not prepared, or is forbiden from talking about them - which is extremely worrying.
Old Groucho
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We are beyond medium term forecasting. We are stuck in the middle of a minefield with only a stick to help us get out unscathed.
I haven't a clue what is going to happen and neither does anyone else. I am saving my spare cash even though I get nothing in return from the banks in which I store it. It is the rainy day syndrome.
Commercially, we are doing the same thing as well: batten down the hatches and if we can stay where we are then all well and good.
We are into survivor economics and forget the big picture. It is hunkering down time.
I am scared that after a very brief spasm of deflation, inflation will kick in and destroy the value of all that has been saved. None of us have any real clue that this will happen. It might; but we could be so broke by then that it won't matter.
Even the time-scales are uncertain. It took inflation about five years to kick in after the Wilson devaluation in 1967 but that was only after the Heath government started what later became known as the Barber boom.
If that scenario repeats there will have to be very serious cuts in public spending to prevent inflation becoming institutionalised.
There is no quick fix, it is going to be uncertain for a very long time and the government should stop pretending otherwise.
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Re 11 'When was the last time you saw an economic idssater movie'
There was plenty about the 19030's depression and the war that got us out of it.
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#9 1st rule in economics!!!! i didnt know there was any rules...i thought it was think of a number and double it. if king and his crowd were engineers would really would be in trouble. scrap all these useless economists and get some proper experienced business men and engineers in, then we may have a chance.
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Dear Robert
" Will some one tell me why Gordon Brown is obssessed with raids on Pension schemes, Why is he ripping people off Pensions must be Ring fenced to keep the tax man away and GOVERNEMNTS from wrecking peoples retirements. "
Delation is now certain in the USA, whose economy is at breaking point, what happens so they happens here, but that is political propaganda, Brown could stop it if he wanted to, there is absolutely no reason what so ever, for Bristish Domestic policy to follow the rest of the world.
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The worst threat we face is that the same incompetents remain in charge of the banking system.
The more Mr Peston and his cronies hype the crisis, the closer to their chests people will keep their hard-earned cash.
The upside of this story is that a recession wil reduce our carbon footprint.
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It seems that the central banks believe that the best cure for a hangover is "hair of the dog". The party is over, so they are trying to pursuade us to go straight back to the pub and get drunk again. That might work in the short term but, as we all now, it just puts off the inevitable and the next day we'll end up with an even bigger headache.
It certainly seems that people in the real economy realise this and are refusing to go on another spending spree. I'm using the hundreds of pounds a month that the rate cuts have saved me to pay capital off my mortgage instead of getting a new car. To continue the analogy, my hangover cure will be to go back to bed and sleep it off. I don't think there will be many other prople in the pub anyway!
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Quoting Robert
"They said this in a resigned way, as though it was the bill for a party that had been far too expensive and had gone on far too long."
Since the Labour party seem to like to call the Conservatives the "do nothing" party would now be an appropriate time to sum up New Labour's stewardship of Great Britain over the last 11 years as
"Do nothing but party"
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#2
The authorities are making the same mistake because they are being advised by the same people who got us into this mess - and those people have huge vested interests.
For the present they have persuaded the authorities that those interests have to be protected for the common good.
This is also why it won't work. Far from freeing people from debt, and empowering them to spend, the current "solution"is only adding to the collective debt burden - pumping air into a burst bubble.
I am struck by the fact that the Government is now spending, in one way or another, more money than the total sum of outstanding mortgage debt in the UK.
What might have happened if, instead of chucking huge sums at the banks, on a promise (unfulfilled) that they will lend, the billions had been used to pay off the grossly inflated mortgages. Ther banks would have got the money to pay off their debts; the people would have been freed of the largest item in their debt burden (and might have felt able to spend a bit more); and the money could have been recovered in taxation (perhaps a property tax directed towards those same mortgagees) at our convenience.
As it is, the punters still have their grossly inflated mortgages; they will sonn have agrossly inflated tax burden; and the only beneficiaries are the bankers who win both ways.
This is no remedy, it's part of the same illness and can only make matters worse.
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I think this is a turning point. With inflation properly under control and interest rates at record lows, credit will become cheap. We should see a return of the credit card wars in which 0% 12-month rates etc are commonplace - this will allow people to borrow the deposit they need for a house, and house prices will rise again and we'll all be ok.
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Maybe I'm naive,but are the central banks telling us that the only solution is to spend our way out of this crisis? Won't that simply make the mountain of debt that much higher? If they do want higher consumer spending then rather than give interest relief to the high street bank who is obviously rather parsimonious in its desire to pass it on to the consumer,why not simply provide direct,risk free cash to the public that they can spend without fear of incurring debt? This would take the form of propping up employers wont to shed jobs,guaranteeing pay hikes,revamping public services such as the NHS into totally free institutions that they once were,slashing VAT and fuel taxes,ending tragically expensive overseas military ventures,reducing the Armed Forces even,massive infrastructure spending and the creation of employment rather than allowing its reduction. In other words a return to the softer,fairer Britain that we all remember as a distant past. The time is nigh for a paradigm shift in thought .Traditional ,stodgy modes of thinking will only lead us into an abyss from which there may be no escape.
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#13 OldGroucho Many good points, especially this one: "The failure of successive governments to recognise the impossibility of continual 'growth' and the danger of exponential growth is a shocking and morally criminal dereliction of their duty. Their current mantra that 'growth should be stimulated' is even worse and must stop."
As for statisticians, I have taught statistics, and I always give the following advice. The first question anyone should ask when reading a statistical analysis is "Who's paying the statistician's salary?"* This will determine the nature of the questions asked, and where the burden of proof is placed. At the heart of any statistical analysis, there is always a set of assumptions like "Guilty 'til proved innocent" or vice versa. This is true with other scientists too sometimes. I'm afraid there are many forms of prostitution, and selling one's body is far less dishonourable (if at all) than selling one's soul.
*The same question should be asked of economists too actually
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For the majority of the periods of recession/depression before 1970, deflation was in fact the prime characteristic of the downturn. Governments (largely influenced by the crude monetarism of the 1970s on the one hand and a conservative polemic on the other) regarded the stagflation of the 1980s as the ultimate curse. Since then, any government (even a Labour one, or perhaps especially a Labour one...) has thought it prudent to target inflation first. Remember the Conservative mantra that unemployment was ' a price well worth paying' for lower inflation? Labour, if not entirely convinced that this is the right language, is convinced that the 'curse of Callaghan' would return to shake them from office if inflation reached dizzying heights.
Well, that political obsession with inflation management as a supposed alternative to demand management has just come to a shuddering end. Also going down the tubes with it is the comfortable - but stunningly stupid - notion that macroeconomic policy can be, very simply, interest rate policy alone. If the Fed reduces rates to 0.25% and there is still no effect on aggregate demand and output, will anyone be daft enough to maintain that a sophisticated economy like that of the UK can continue to rely on the MPC steering interest rates as the main (or only) plank of macroeconomic policy?
What is now happening (through 'easing', efforts to 'loosen the corset' in all but name, fiscal stimuli, recapitalisation, nationalisation and the rest) is a belated recognition that inflation management has failed as the instrument for macroeconomic policy. We are returning to the kind of interventionism that was common before 1974, but in a much exaggerated form.
Economists now have to start thinking well outside the box. What will an economy with 15% unemployment, 0% interest rates, asset values at 30% of their pre-bust value and investment at 50% of pre-bust values look like? How will it operate? What stimuli will work in that environment? Will export stimulus measures help enough? How can a near enough 50% government share of GDP be financed? All of this against a background of failing real prices and, for those in work, static or rising real wages, but with a lower propensity to consume.
We need ideas here. Come on, HMT. Think radically.
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#13 OldGroucho
Many good points, especially this one: "The failure of successive governments to recognise the impossibility of continual 'growth' and the danger of exponential growth is a shocking and morally criminal dereliction of their duty. Their current mantra that 'growth should be stimulated' is even worse and must stop."
As for statisticians, I have taught statistics, and I always give the following advice. The first question anyone should ask when reading a statistical analysis is "Who's paying the statistician's salary?"* This will determine the nature of the questions asked, and where the burden of proof is placed. At the heart of any statistical analysis, there is always a set of assumptions like "Guilty 'til proved innocent" or vice versa. This is true with other scientists too sometimes. I'm afraid there are many forms of prostitution, and selling one's body is far less dishonourable (if at all) than selling one's soul.
*The same question should be asked of economists too actually
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I can't quite grasp why Deflation increases Debt despite reading the FT article and would really appreciate an explanation from the consumer / layman perspective.
Regarding consumer reluctance to spend I can't see why anyone is surprised by this.
As Robert points out there are huge levels of debt and people either can't or won't take on any more.
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Robert
On the inflation/deflation debate, I'm fairly certain that it will be the latter. The weak pound will contribute to this as the real cost of our imports increase. Interestingly, the inflation figures published yesterday showed that food inflation had increased. The fact that we import so much of (and produce so little of) the essentials such as food will exacerbate the problem.
On your update, the banking crisis is causing all sorts of problems over and above the simple shortage of credit. For example, in the oil and gas industry, operators in the North Sea have to provide letters of credit or bonds to cover the potential liabilities for the abandonment of wells. These need to be provided by institutions with triple A ratings. These are not do easy to find at the moment and many existing letters of credit which, at the point they were issued, were given by triple A institutions, no longer meet this requirement.
My feeling is that there are going to lots of insolvencies and "fire sales" in the New Year as companies fail to meet their banking covenants at the year end and the banks are unwilling to support them. This will of course lead to even more job losses. The admintration of Woolies is just the tip of the iceberg.
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Robert,
Your choice of alternatives is incorrect
i.e. incomplete in the choice of alternatives
The question is not should the Government go for Inflation as opposed to Deflation
but the question should be
Should the Government go for Stability (or sound economic management policy) as opposed to your alternatives of Inflation or Deflation.
There are more losers under Inflation or Deflation as opposed to Stability, so what would your choice be ?
Stability or an unplanned economic Madness unleashed on the Population for years and years to come?
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#22 what happens wen interest rates go thro the roof in a few years time? you thought that 1 out?
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Dear Robert
The truth is that America has the ability to bring the world to the point of no return.
For some inexplicable reason they can and will conjur up some plot to involve the rest of the world, in their woes,
When America has an Interest rate at POINT 25% --- like Britain, Now, no one wants the pound which is in free fall, the Dollar has be ex communicated as the must have Currency, for the Euro. with that in mind there will be an event probably in ASia, that takes owr minds off the Monetary Problems, and focuses the Wests minds on a totally different threat.
That threat will be Military.
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#6
They did make that movie out of whatshisname at Barings.
Mind you, the odd £800 million here and there is pretty small change now, eh?
Any suggestions for a movie title (apart from 'Crash Gordon' obviously).
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Unfortunately it is not the end of capitalism - climate change will see to that.
It is goodbye to monetarism at least as an economic tool. And what relevance now is the independence of the mpc and economic geeks fiddling with the central interest rate.
As excess credit is now seen universally as what brought the world economy down so now the government wants to create more of it but not in a planned and controlled way.
Surely there must now be draconian controls on the way banks and others (store cards) create credit.
Perhaps as it is christmas some cold turkey is appropriate while economies recover from the hang over but where the vulnerable are protected - small businesses, pensioners, unemployed, poor etc.
Finally does anyone really know where this is all leading us?
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Robert says "we borrowed too much "
Come on Robert - not once have you stated that the "We" includes this current Government who have led the charge towards the precipice we are now at !!
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13. At 10:21am on 17 Dec 2008, oldgroucho wrote:
"As any fule kno 38.6% of all statistics are made up on the spot, 15.4% are added as an afterthought and the remaining 6%
are added on for good will."
I am now confused - where is the other 40% ????!!!!!!!
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Deflation, inflation ?
A more accurate of what we've got and are going to continue to have is instability...
I'm expecting inflation to rocket back upwards at some stage, when interest rates rise again (as they will) and the oil prces rise again (as they will) when the recovery eventually gets under way.
We're moaning about deflation now, but soon it'll be hyper-inflation that's the problem...
Instability and uncertainty is the biggest of curse at the moment. Its very difficult to plan long-term for anything...
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On your last point, one of my firm's biggest customers has exactly that problem. They can now only get credit for a sale for 3 yrs, not the 7-8 previously, and they have to gurantee to pay up if their customer defaults on the loan. So the risk is all the suppliers and the profit goes to the finance house on its risk free lending. This is the situation a solvent and well established company now finds itself in- got the goods, got the customers but can't get the finance. Guess what- now they are not ordering fresh parts from their suppliers (like us). Result- bank induced hardship for other good businesses.
Seems that there's cash for some in the banking business though, like Goldmans!
Heads the banks win, tails we lose.
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Please don't include me in the "we" that is alleged to have borrowed too much.
As a saver, I'm not responsible for this crisis.
I'm just being ruined by it...
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I think this is a turning point. With inflation properly under control and interest rates at record lows, credit will become cheap. We should see a return of the credit card wars in which 0% 12-month rates etc are commonplace - this will allow people to borrow the deposit they need for a house, and house prices will rise again and we'll all be ok.............
Sorry to burst your bubble Bob, but credit card companies are not making any money so are racking up their interest charges to offset their lossess. The credit card is now a broken toy.
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There was a famous investor in the 20's - maybe Jesse Livermore? who said that he knew it was time to sell the markets when the shoe-shine boys were giving share tips.
Now we seem to have the reverse - with all and sundry predicting the end of the world as we know it. Witness Jeremy Clarkson on this site talking of "an economic end of days".
To quote Rothschild, "Buy when there's blood in the streets, even if the blood is your own."
The streets look to be getting bloodier by the day. Who's going to call the bottom - or was it FTSE at 3666 odd back in October?
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Robert,
Are you saying certain chickens are coming home to roost?
Except these chickens won't be laying eggs to help offset some of the problems.
Or are we just in the hands of economic speculators?
Maybe you should be asking those people who are furiously pulling unlabelled levers to see what happens.
Then hopefully we can get someone with the vision to hold someone accountable.
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The reason financiers fear deflation is because there is no opportunity to make money when prices are reducing. As for the rest of us, it makes sense to reduce debt while the interest is low, against the day we know is coming when rates will rise again. That will be the time when the finance industry feels able to turn the screw once more. It is common sense to delay buying when prices are falling. Some things cannot be delayed, however, like food and fuel. I still have to buy the same amount of diesel every week to put in my car, but I love the fact its now less than a pound. So lets be honest, deflation is already here. Those who have most to fear don't want to recognise it, but its been going on for the last couple of months. It will continue until the true base level of consumption is reached.
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It’s now as clear as day that the folk who advocated against re inflating the burst DOTCOM bubble with low interest rates were right. Gordon Brown and BofE exacerbated the problem this side of the atlantic by firstly, keeping rates too low for too long, then keeping rates too high for too long. It was obvious to me from the very start (a non financial person) that LIBOR should have been killed off. We are in serious trouble, the only question is ‘How long will it last’?
Judging by the actions taken by our respective incompetent leaders, quite some time methinks……….
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How's this for an ingenious solution? Take all non-delinquent mortgages/loans with say less than five to ten years left on them and simply pay them off on behalf of the mortgagee/borrower. No strings attached obviously. This would be cheaper than subsidising bad debt or painfully absorbing it when it does become delinquent It rewards people who are sound credit risks back into the market,releases billions in capital,doesn't rely on the slashing of interest rates ,(which is simply not working anyway ),to stimulate consumer spending because it provides instant disposable income to individuals proven to use it wisely. Then induce them to spend it rather than hoarding it by offering financial incentives to do so e.g. interest free home improvement loans etc. This would offset to a large degree the effects of bad and unrecoverable debt as it arises.Desperate times require desperate measures,I see no sense in waiting for disaster before dealing with it when the moment can be averted by some avant garde thinking.
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The real risk is neither inflation or deflation but a lack of momentum to the structural changes in the global business environment needed to provide a new focus to economic direction and recovery. There is still a huge inquest and, dare I say, holding to account that needs to take place over the coming months and years but this is secondary to the need to re-profile and accelerate a new and dynamic growth direction for the worlds economies. This will inevitably be different from what was in place before and will follow different goals and agendas. Banking and finance will still play a key part but will be servants of the process not the master - being beholden to the taxpayer has fundamentally changed the relationship,perhaps permanently. What is needed is global vision and leadership to align direction and expectation and to provide co-operative and collaborative efforts to inject momentum into the process. I fear that such leadership is still lacking as current efforts steer us in totally the wrong direction at present.
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Re: #22
Apologies, but I can't decide between 'wrong' or 'sarcastic'.
Truth is no one has a ladder big enough to get out of this hole, and even more apparent is that no one knows how to construct one large enough.
We might as well have Monster Raving Loony Party monetary policy in place (if such a thing exists).
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@11
Keep watching TV this Christmas you will see a delightful movie entitled "Its a wonderful life"
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So they will just print money!
I thought when they rescued the banks that the politicians had saved us from total economic meltdown but now I am not too sure. I think this mess is bigger than them and they are actually floundering.
I am spending money. I am trying to reduce my future liabilities as much as possible and make sure I can live on very little. The Solar Heating man is coming this morning. When real interest rates are negative one is better off spending it now. I will keep a bit to put back into the stock market when it dips below 3200.
I still regret not buying a vast quantity of decent claret when the Euro was only worth 60p.
Keep keeping us informed Robert. Your daily update brightens my day. But then I have been saying this was going to happen for a very long time. Must go and feed the pigs!
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Dear Robert
ALL*
Its not BRITAIN------- THAT THE PROBLEM, ------
NOR IS IT THE AMERICAN PEOPLE, -------
ITS THE BANKERS AND THE POLITICIANS, ---- who are now fighting for survival,
Domocracy is under direct threat, because of these two organsiations both want the power of Globalisation, and its now a fight ot the death one group will loose.
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"The government is to unveil a new training scheme for the unemployed. It has allocated £158m to help those who have been made redundant develop new skills. .."
Yeah, for all those great jobs in all those thriving companies. Yo ho ho and a bottle of rum. A new skill presumably being actually an old one where the guy - doing that job before - lost it.
Half* these people are going to end up picking sugar beet with their bare hands to scrape a living.
GC
*generalisation, I know.
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Well I am glad that these business leaders have more sense than the government and economists, since it is hyper-inflation Zimbabwe/Weimar style that will hit us in this spiral path to bankrupcy that our governments have created.
The fact is that governments are borrowing even more than the interest payments on their current loans and are spending too much on the public sector in order to bribe votes and to remain elected. Instead of making painful cutbacks they are now printing money to pay for most of these non-jobs and workless.
This is a path to our destruction and inflation destroys wealth and savings that would otherwise be deposited in banks nor relying of government borrowed money loans, whereas deflation is the lesser evil to correct the past inflationary mistakes.
See http://www.marketoracle.co.uk/Article7526.html
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It seems to me that the notion of critical dampening is lost on our lords and masters.
Crude and excessive measures are being used in an attempt to control an ever-worsening situation; this results in overshoot and more pain.
Personally, I believe the threat of deflation is being used as a tool to justify measures that will eventually lead to hyperinflation (as the pound weakens / fails), which will in turn reduce the impact of the country's debt, facilitate the return to high asset prices, and return us to a debt based economy.
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I resell computer equipment, most of which I get from European distributors in Germany. My latest quotes for new stock are 10% up on what I got a month or two ago, purely from the weak pound. This will have to be passed on to customers.
So although there may be asset (house) price deflation, the inflation most of us feel, what we consume, will continue to be high if it is sourced from Europe.
Because trading is already hard before putting up prices 10%, I am having to conserve cash, stop capital investment, and even consider changing job altogether as next year is already looking very gloomy.
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you forgot to mention the exchange rate. rate cuts (actual and expected) will trash the pound against other currencies, esp the euro where the ecb does not seem too concerned about deflation at all (at least for now). given the reliance of our economy on imports, devaluing the pound will be the quickest way of stimulating inflation and heading off the spending slump.
the usa is following the same policy (hence e.g. the unlimited cross currency swaps agreed with other major central banks), although it has to deal with impediments that the uk does not face, namely the countervailing interventions by mercantilist powers like china, and the fact that the us economy is relatively less sensitive to the terms of trade.
obviously the trick for the central banks is to prevent a sustained depreciation turning into a rout (which could massively increase the cost of capital in this country). the fact that gilts continue to rally shows the boe is doing a good job so far.
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Of course savers are not spending. They are losing income monthly as rates fall. Why increase the rate of loss by dissipating the little money you may have put aside.
Of course your straw poll looks to inflation, sterling is in freefall and we import far more than we export.
Of course sterling is in freefall, all those migrant workers are shipping money home and out of sterling as fast as they possibly can and foreign investors are getting out as fast as they can.
The unemployment figures are fabricated, for anyone with a pension equal to the job seekers allowance there is NO point in going through the hassle of registering.
If there is one lesson coming out of this debacle it is that saving for the future is totally pointless.
Batten down the hatches, make do and mend, dig for victory but for heavens sake do not trust politicians or economists.
May history tell the truth about Gordon Brown.
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2008/2009
Govt: pump it in, pump it in.
People: horde it, horde it.
2010
Govt: keep pumping it in. It is not working.
People: stuff this. Let's spend it all.
The dam then bursts and Britain goes Weimar.
Great. I cannot wait to see what other ingenious ideas these great financiers will have.
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Deflation is the main danger in the short and medium term.
One of the big problems we have here is that the natural response to this crisis is to feel we deserve to suffer as a result of our previous profligacy, and that that suffering will somehow get us out of this mess. But if that suffering means "deferring or cancelling capital expenditure" on a massive scale then it won't help at all.
What we really need to be doing is cutting back current expenditure in order to increase investment (capital programs infrastructure, training etc) so we can afford to pay off our international debts. Just cutting back current spending and sitting on the money, or worse still cutting back capital spending at this point will just cause deflation.
US inflation has dropped from 4% to 1% in 2 months. Deflation is coming fast and presumably will arrive here shortly after. In response to this the government needs to print money - the whole point is to inflate the money supply to counter the deflation (the tricky part is to know when to stop). That money should then be used in the most efficient way, public infrastructure investment, subsidising capital investment by companies, or simply putting it into the hands of those most likely to spend it on British goods and services.
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I'm betting on inflation.
Why?
Remember that exchange rates do matter.
(i) The weak pound means that everything we import into Briatin is now 30% more expensive than a year ago. We import food, energy, and manufactured goods. All these items are subject to upward price pressure from the pound's fall against the euro, dollar and the yen.
Since 2001, our banks have borrowed money on the wholesale markets. These debts are denominated in foreign currencies, which mean the value of our banks' liabilities is increasing every time the pound falls.
(ii) Monetarists, and history, teach us that increased government debt generally causes inflation. Think about Britain in the 1970s and Argentina in the 1980s.
The UK governement is planning to borrow large amounts of money. The lenders will be foreign governments and foreign investors. These foreign investors won't want to put their money into sterling based assets, due the fall in value of sterling. This means the government will struggle to raise the money, unless it borrows it in dollars, the euro or the yen. It is also competing against America to attract foreign investors, as both our countries are having to borrow huge amounts of debt to bail out the banks. This competition for investors will eventually bid up UK interest rates.
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Thank you Robert for keeping us up to date. I can't be doing with those who accuse you of talking us into the downturn. What planet are they on?
Lets cut to the chase- the root of the current financial crisis is the assumption that cheap energy and the rampant consumer society that is based on it will continue for ever.This is simply not going to be the case. 'Economic growth' cannot continue year on year. Peak Oil is upon us, and we all need to be aware of this, think about it, and consider how the future will be without oil.
I highly recommend 'The Crash Course' on www.chrismartenson.com. He tells it how it is!
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By what method are they going to destroy all of this money and at what point in the future?
At what stage before growth begings will they turn the taps off?
This is fraud. At some point you have to stand up and pay back what you owe. Not just keep printing more.
This is Fiat currency cancer and the tumor is grown faster and faster.
These people are spending my grandchildren’s hard earned money and they are not even been born yet.
Immoral hazard.
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Robert.
Today you are telling us that Martin Wolf and various other irrelevent windbags including Anatole Kaletsky, David Smith and hundreds more, not one of which had a clue this storm was coming and consistantly denied we had any real problem, are now screaming about the terrors of deflation.
Let me get this straight a bag of rice which is now 90% more expensive than 1 year ago needs to be kept at this price because price falls are really bad. Our food & fuel bills that have stopped rising but are still way up on this time last year need to be fixed at this horrible level and paid for with a depreciating currency.
Hello Mr Wolf - wake up - your not writing for idiots reading a student rag mag.
Day after day he produces articles of breathtaking contradiction and banality devoid of any balance. No one knows what tomorrow will bring but millions of sane people who can pay of their debts will, millions more have already cut their spending to build a safety cushion. They know the end of the road is ruin so have made a u-turn. They know that our government lied about everything and predicted nothing. They know high taxes and inflation are just around the corner. They want to stay in their home and protect themselves against the possibility of unemployment. They suspect that printing money does not create jobs it destroys them and creates further instability. Most of all i suspect, like me, we are sick to the back teeth of the pundits turning common sense upside down, predicting the opposite to every outcome and yet maintaining with utter conviction academic concepts that never work in the real world becasue they all ignore human nature.
90% of my cash is now in Euro's. It had been 50% until last week. It is clear that our currency is going to crash much further as well as the $US. Any further cash i get will go to rock solid defensive company bonds. Tesco etc. They are yielding 7% + and represent excellent value. I put my money into Euros not to speculate and make 10% in a month because i did not want to be forced to embrace further risk but have been forced to because our government is attempting to inflate away our savings so they can inflate away others debts including their own.
Well it wont work Wolf.
Most of these pundits have reputations that are already in tatters to say nothing of their personal over exposure to property investment. They only care about being right to save their own slippery skins.
Ignore them.
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Are we now going to put Keynesianism to bed where it belongs.
The thought that in some way 2006/7 were the norm and that a cash injection will stimulate not only growth but the deluded expectations of the general public are insulting to what, at the time, was a great piece of economic thinking.
We have, unless you missed it, just lived through Keynesianism - although you need to replace Government with Banking as the source of the stimulus. And have built an economy it is impossible for us to support.
(in the 1930's only at State level could money be used to affect the economy to such a level - now we know better, as we see banks losses running at almost National Debt levels)
The solution isn't giving our Junkie Economy another syringe of heroin as the effects of the first are wearing off!
It's cold turkey time..... or Methadone if you want drag it out longer!
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I highly recommend 'The Crash Course' on www.chrismartenson.com. He tells it how it is!
Dito
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18 - That would only hold true if the majority of the population read this blog and the majority of the population follow economics and politics.
The reverse is true. The overwhelming number of people who read this blog and follow this sort of thing are in the main reasonably educated and won't behave that way.
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#13
A long but very good blog. Chris Martenson essential reading as stated.
1) I would add repeal of the Federal Reserve Act and the assumption of the 'Fed' into the US Treasury as absolutely vital. Otherwise the Fed continues to have its vested interest in printing money. Educated US comment is very much aware that the Fed is a group of bankers, not some responsible US Government body. It must be reined in after 95 years of self interested non-accountable greed.
2) Scale down the Offcial Secrets Act as a first step in a a return to accountability. There is a real culture change needed in UK attitudes to accountability which has been mentioned in earlier blogs. Whether it began with Blair or not is a moot point, but it clearly exists and rots the system from top leadership downwards. We won't climb back until there is some return to honesty and decency in public affairs.
A typical recent example of unfairness... A few years ago the UK government was fined heavily for failing to give out farmer support in time. Pretty much alone in the EU it failed to allocate funds, and we paid over £100 million. Woops but swiftly forgotten.
In the last few days it has been discovered that some farmers have subsequently been overpaid (generally around £1,300). In typical fashion the sum has been demanded back in 30 days, or over six equal payments.
Many of us in public service over a lengthy period are only too aware that key sectors of the economy are subject to blundering, arrogant non-accountable bodies - and that it is getting worse.
3) Build up genuinely elite education. This means a much improved curriculum which is much more demanding but also more educational. Comprehensives are often very good, but level of expectation, fuelled by outdated class concepts mean that we are just not demanding enough of our often very decent and capable young people. Otherwise we will go down the US route of creating an impoverished sub class - the young. And that would be truly irreparable for the future.
And remember that we are talking culture change when it comes to banks. This only occurs when it is forced by circumstances. The status quo comfort zone won't have changed much at Goldman etc. and turning round that type of culture is far more difficult than turning round a super tanker.
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#13
Spot on! Where is the media discussion on:
1) Peak Oil
2) Fractional Reserve Banking (Pyramid banking system)
3) Global Food Crisis (trying farming without oil and oil based fertilizer)
If you call for a discussion on the subjects you are labelled at best pessimistic or at worse apocoleptic.
I believe we are in the final throws of the Industrial Age (made possible by cheap oil), we need to starting getting to grips with this as soon as possible and collectively get our heads out of the sand!
That's my belief, I'm not saying I'm right but would appreciate the debate...
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My winternet is now in your internet. My winternet is my autumn and my summer and my winter and my springnet. My four season net are now in your internet.
If you have something and they want, leave them take it, because they won't have it for long. So instead we should be creating love between the black and white so we can have a better nation. Because when black is working together, we are too greedy, and when white is working together, they are too greedy. But when we have black and white mix, then we all understand and have control and say "look, you are being too greedy, you are taking too much of mine, let's talk about it before we have a fight". So we can create a black and white nation in unity
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I have always wondered what it was like to live in the days of the Great Plague. When people stopped behaving rationally and were in total self fright. When trust was lost in the establishment because they promised to deliver an easy fix and couldnt. When the flagallists roamed wanting to whip themselves and anybody else thay came across, and hell fire and damnation was preached. When some people actually seemed to want the worst. When ethnic groups and migrants were targeted. Of course people were unsophisticated and superstitious in those days.
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22 - Do you not think that that is what got us into this mess in the first place?
If you have to borrow the deposit for a house then you really shouldn't be buying one.
You should SAVE the deposit for a house, not borrow it on a credit card.
We should be like France where certain things like TVs can't be bought with credit cards or like Germany where only 1 adult in 20 has a credit card and their use is socially frowned on.
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The old addage used to be when your in a hole stop digging.........
But NO
Too much debt was the problem so lets lower interest rates, borrow more at less cost and spend like there is no tomorrow.
When will we wake up and smell the roses
but then again there is an election looming so get the feelgood factor at any cost.
Short term thinking
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A manifestation of decadence. The addict can't survive without his fix. An elected government will not enforce discipline. Thatcher's legacy sqaundered.
Managers no longer manage - they pay bonuses to all and sundry and help themselves for good measure; the shareholders acquiesce. Public sector employees also want bonuses and big salaries, regardless of results and their gold-plated pensions; the government acquiesces. MPs blatantly help themselves to public funds and to get re-elected bribe us with our own money. Hey ho - we take our lead from the top.
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"As I've been boring you rigid with for months and months now, the cause of our economic woes is that we borrowed too much"
Has anybody told Gordon Brown this?
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Is deflation really bad for me or anyone on fixed income ? I have savings and things will get cheaper. I expect to buy a house at then end of next year for 30% less than i would have paid a year ago. I will pay cash.
If huge debt generated this problem then the only way out is to pay down that debt with deflation or reward the debtors and have hyper inflation and devalue the debt to the point where those with variable incomes are earning so much dont care anymore and start running up new debt to pay for things..
If the majority of voters are in debt I can see which way democracy will take us but are we really trying to discourage people from saving to the point of destroying the economy ?
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#46
"We might as well have Monster Raving Loony Party monetary policy in place (if such a thing exists)."
Oh, it exists allright.
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I hope all these printed banknotes are coming from trees from sustainable managed forests.
GC
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Robert unless you have not noticed, the world is in a period of de-leveraging.
It’s a return to thrift and prudent banking – a very good trend.
And it makes no difference if yield on government bonds are falling towards zero as most people are concerned about a return of their capital rather than a return on their investment.
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There are 2 disaster movies playing in my head.
The first is the prosaic one that comes from having lost a large proportion of the savings that were intended to make retirement comfortable and interesting.
The second is a real nightmare in which the conjunction of peak oil and runaway climate change makes modern civilisation (oxymoron?) a treasured memory. Within 2 decades we are likely to face sharply declining availability of oil. In all probablility, desperate governments will seek to make up the energy shortfall by burning more coal, probably without carbon capture, and the upshot will be a rapid rise in carbon dioxide emissions and an acceleration of climate change with an attendant increase in frequency of extreme weather events, droughts, floods, food shortages and global misery.
It needn't be like this, but for 20 years governments have been putting off to tomorrow the prophylactic action that should have been taken yesterday. The UK government talks a good talk on climate change, but instead of fiddling about with barely noticeable cuts in VAT, it needs to embark on a massive redirection of national effort toward energy conservation and the construction of the new energy (renewables, nuclear) and transport infrastructure that will be necessary to give the UK some resilience in the dark days to come. Anything less is dereliction of duty.
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#76
"
"We might as well have Monster Raving Loony Party monetary policy in place (if such a thing exists)."
Oh, it exists allright."
I think it was something brilliant like:
"Climb the butter mountain and ski down the debt mountain!"
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Deflation occurs where people wait for things to get cheaper for buying them, therefore stagnating the economy... Yes I can see this is a problem. I personally am putting off buying food for my family until the price comes down, and no one is allowed to use the car until petrol is cheap again.
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#74 it certainly exists.........another point here,how long will it take for the economists and the government to realise that what they are doing wont work?. 2 years ago everybody and i mean everybody knew that the credit bubble was going to burst!!! except for king the mpc the fsa and the treasury.does that say something about who should be getting the uk out of the mess were in.
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We have become embroiled deeper in this mess than many other developed economies because we have followed the American model so slavishly.
It does not appear likely that following their ideas for a solution to these woes is likely to result in deliverance either.
The admiration of America and its ways by Gordon Brown and other Labour politicians, like Jack Straw, seems a little unwarranted.
Further cuts in interest rates are unlikely to have any significant stimulating effect on growth with existing personal and household debt so high. Furthermore deflation is inevitable in the short term as the carcases of failed businesses are picked over in 2009.
The real price of many goods is set to plummet. I expect to see rich pickings in the vast halls devoted to buy-out stock at the NEC spring retail fair in February. Hang on to your money - get it all much cheaper soon!
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The problem with the US and UK is not too little demand, but too much. The present policy of pushing interest rates to nil is suicidal. It will cause hyperinflation and the collapse of the economy. The only alternatives that would work are politically unacceptable. Produce more, export more, consume less (ie lower wages / higher taxes), that's the real way out. Now try to sell that to spoiled Americans and Britons who kept consuming more than they produced for more than 20 years.
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"There's also an alarming trend of businesses conserving cash"
Not businesses saving??!?! Ahh...lock them up and throw away the key!
It's their duty don't they know to spend, spend, spend. There is no tomorrow so best get on with it!
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When the professionals at the coal face (estate agents stock brockers money dealers retailers car dealers etc...)and then the economists and the bank of england (not the government as their word is untrusted"spundle" ) and then the media and then the public think that we have just about hit the capital deflationary bottom with an increasde money supply via the so called quantative easing then watch out as the inflation muck hits the fan again. It will be like trying to ride a bucking bronco.
This will start in the housing market with a pent up first time buyer demand and undersupplied house bank(all development has stopped dead) then with very low interest rates and some debt paid back and deposits saved even with another 1M extra unemployed it will rip and retailing will follow.
This quantive easing formula is made and promoted by politicians who are desperate to try anything to get them out of the crass borrowing seriously bust deflationary dooda.
Instead of walking and talking "Prudence"and getting a sound base to rebuild the economy, with of course economic pain, they want the magic wand option which will end in economic tears.
They have no real perception of risk and are happy to gamble on the long shot outsider and we all know (perhaps not so the hedge fund industry and the banking industry) that it is likely that the outsider will fall second or third fence out.
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The way I see prices going is as follows:
The prices for things people don't really need to buy, like cars and duvets, will continue to drop for now, until the mountain of unsold stock has been got rid of at distressed prices.
Once all the stock has gone prices will rise, basically because no one will be making them any more and the imported materials to make them will become more expensive.
Basic items (e.g food) which people need, especially those which are imported, will soon start to rise, and keep going up while the pound continues to drop.
Oil will go down to around $30 and remain there until the deferment of new projects causes a supply squeeze, at which point it will rise sharply in sterling terms and keep on going up. This is probably 2 years away.
As the Govt continue to print money it is inevitable that inflation will rise. This will continue until the pound becomes worthless. People will switch to either using euros, or go back to barter/gold.
Those with sterling savings/pensions will be ruined, and those with debts will see their net worth return to zero. The only ones to benefit will be those with foreign currency or gold reserves.
Perhaps it won't be too long before we get the updated remake of 'the Grapes of Wrath'.
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First Off:
Have really found the blog and comments useful in understanding some of what's going on in the economic world from my non economist's viewpoint.
Thanks to Robert and those generally commenting.
I just wanted to offer an observation based on my own spending circumstances.
Before the crisis I spent X pounds per month of diposable income.
During the crisis I have been spending X pounds per month of disposable income.
After the crisis (whenever that will be) I will be spending X pounds of disposable income.
What I can't fathom is what there is out there that's wirth spending any money on anyway? What are people spending on and why?
Interest rate reductions have freed up my mortgage payments by around £250 per month. VAT reductions make a comparatively tiny tiny incentive to spend compared the interest reductions on what is a modest an magageable debt.
I used to enjoy internet poker. I got very much into the mathematics of the game and the various earnings expectation of different scenarios.
The similarity between that game theory and what we are seeing now is that (in my opinion) the margins of expectation for any given scenario are insufficient to provide adequate returns in monetary terms unless sufficient capital is at risk.
On a long enough timeline the expectation of facing ruin will become certain - whether you can then recapitalise and start playing agin or indeed whtehr you'd even want to play the same game is debateable.
At the moment risk is higher, margins are lower and we're all expected to alter our spending habits to keep institutions playing a high risk low margin losing game.
Personally I (am doubtless many people like me) have enough pending landfill in my home. I don't need any more I don't want any more and shifting VAT or interest rates won't encourage me to get any more.
However if the government were to increase my tax rate by 5% and then give it back to me as a 5% rebate in the form of vouchers with an expiry date an a limited number of things I could spend it on you can bet your ass it would get spent.
After all, nothing motivates me more than the prospect of someone taking physical money out of my hand.
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chriss-w is correct in comment 21. I said it in here several times and it still holds true. people will not spend while their house is at risk.
The money should have been redirected at repaying mortgages, and putting money into the hands of the people so they could spend it.
Next on the list is job security. The dutch are subsidising firms to keep them going and we need to do likewise if a firm has long term viability.
Finally we need income security. For years the level of benefits have been way below what is required to live an acceptable quality of life in a developed country. This has, i think, been deliberate government policy to encourage the black economy and reduce labour costs.
What we need is benefits and a national minimum wage set at a realistic level, not just paying lipsrevice to the idea. Once people know there house is secure and they will be able to live rather than barely exist if they lose their jobs then they will spend.
All the money thrown at the banks is doing nothing. Cutting interest rates is doing nothing because we all know they will go up again rapidly when the recovery begins so you would be foolish to borrow £50,000 at 2% knowing it will be at 10% within 5 years. The government is guilty of gross hypocrisy telling banks to reduce their interest rates while still charging 8% on legal aid bills and no doubt other debts to the government. They should lead by example and cut their own criminally high rates.
The money needs to be directed at those who have not been racking up huge debts. The often mocked working classes who struggles to make ends meet on a daily basis. It does not need to be directed at fatcat bankers and governemtn officials.
If companies are asking their employees to take pay cuts to preverve jobs, then perhaps the Houses of parliament should follow suit. They set themselves up with some very nice high pay rises in the bubble years and are vey bit as fat a cat as any banker.
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This comment was removed because the moderators found it broke the House Rules.
here in splendid essex all the manufacturing has gone.....we are left with all the big stores selling gear thats made overseas.....we need to educate people to make things..and produce things. education is the key here..the message sent out by brown is its fine to borrow buy what you like dont worry about the bills......all completely alien to most decent british people...sort out the education in the uk....thats the start......nothings going to be solved here overnight.
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@77 Chazz
wrote "The second is a real nightmare in which the conjunction of peak oil and runaway climate change makes modern civilisation (oxymoron?) a treasured memory. Within 2 decades we are likely to face sharply declining availability of oil. In all probablility, desperate governments will seek to make up the energy shortfall by burning more coal, probably without carbon capture, and the upshot will be a rapid rise in carbon dioxide emissions and an acceleration of climate change with an attendant increase in frequency of extreme weather events, droughts, floods, food shortages and global misery."
Sounds like a remake of Mad Max, Mel Gibson will be pleased
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#35. Antonio59
" I am now confused - where is the other 40% ????!!!!!!! "
You're confused ? You are not alone. So is the Government, and everyone else in the finance sector - except the fat-cats at the top. Joe Public is too stupid to be confused (lucky him); but he's been feeling the pinch for the past year and knows that it's cold outside.
The missing 40% is of course a 'one-off statistical anomaly' that has not yet been 'seasonally adjusted' to give the real picture - which should emerge towards the fourth-quarter of a non-specific date sometime in the not too distant future when those charged with leadership will be well clear of the fireing line.
Wake Up. The game of musical chairs is well and truely over. The music stopped over a year ago. Northern Wreck was a clear indication that the music had stopped. If you have a chair to sit on be thankfull and pray that the legs don't have wood-worm. The fools are still trying to dance, but they'll never find a seat; the record is broken, the needle is blunt and it won't be long before the plug is pulled out of the socket.
Brown, Darling, Paulson, Bernanke et.al. are desperately trying to pump air into a baloon that has burst - can't you hear the air gushing out?
The only people who have secure 'jobs' are probably the police - they'll be needed to control the rioting masses.
Note today's news that troops will be pulled out of Iraq next year (bet it happens sooner than we expect), they too will be used to back up the police. They've had very usefull 'training' in dealing with civil innsurection.
Look at Zimbabwe, look at Greece.
If you want more coherent explanation see the links at bottom of my post #13
Post #5 PeterBaldwin is absolutely right in all he says.
Old Groucho.
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Here’s an idea if we think negative inflation is coming and banks and people are hoarding cash:
Make and distribute 500£ worth of shopping voucher per person. The voucher can be valid in any shop/business, and valid until 1 April 2009 to force people to use it now (unlike cash!)
Use the electoral voting system/councils or something to distribute fairly.
Surely this will make people buy laptops, food, insurance, electricity etc! no?
Maybe I'm wrong and they probably did this is the 30s which caused disaster!
I want to buy a cheap new, UK made Vauxhall, but my survival instinct says wait a few more months/years!
Support Tax-payers instead of giving banks our money to lend to Tax-payers!
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#86 you sum up whats wrong with the uk....Iam all right jack...why should people have to give you an extra 250 a month, when ,with due respect, you borrowed to much in the first place. but its ok the people that have saved and been sensible are subsidising people like you who probobly have a few quid anyway.
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69 red lenin
The deposit for a house is mainly due to the bank wanting a buffer to cover the cost of repo if things go wrong. That is the reason it is there and that is the reason in a declining market that the requested deposit has grown in size. There is a case that people who have equity try to make a bad situation work to avoid the loss of capital but a deposit has little to do with affordability. First time buyers are still finding it difficult to save enough deposit and are also finding a lack of suitable property on the market as those owners who can, decide not to sell but sit tight. You are right there is a cultural problem - Thatcher was the first major British politician to adulate and glorify using the small print of a deal to avoid a moral business obligation as being smart. That mentality has never gone away, and has been extended. Unfortunately a return to reality is painful for some. Some of the basic problems that encouraged the use of complex credit packages will not go away though. When the property market bottoms out then the deposit size requested will shrink as a percent, mortgage money will flow and despite mortgage availibility or criteria being tight there will inevitably be upward pressure and a huge danger of a return to the cycle. I am afraid people quickly forget, that is the evidence. Even with limited mortgage supply and low LTV ratios booms have occurred inthe past, usually after a drought of some sort.
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Wavering between hysterical laughter at the humour in some of the comments and morbid depression at some of the pessimistic views and predictions.
I'm wondering who has got the answer to the economic woes- if there is one.
Perhaps Dickens got it right with Mr. McCawber. If so, current plans are way off the mark.
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Quantitative Easing success relies on certain assumptions about individuals and companies which may not be true. The basic assumption is that if you can reduce debt costs and reduce the costs of credit people will take on more debt. It is not an unreasonable assumption on the face of it especially considering the consumers behaviour up to now. By using quantitative easing the government assumes that the economy is made up of greedy selfish people who will ignore all risks and are incapable of change.
Let me ask you though what you view of the economy and your bank is if you see big loans being given to Johnny no income no job. If everyone has access to easy credit and bailout money from the government how do you know which companies and individuals are really solvent. What you get is a version of the Japanese experience where things go nowhere because nobody really can tell what is viable and what is not. Lets remember that actually Japanese society and economy started from a much better position than the UK before they went down this route and all it did was postpone the inevitable till now.
Your government has taken the choice for you and has decided to coddle and nanny us. Rather than a quick very deep recession where lots of companies fail to be quickly replaced, we get a lingering recession where zombie companies survive on drip feeds from the tax payer. This rather like everything else the government does where everything has a safety net and is protected but we remove all accountability and expectation at the same time. Whether it is bankers who keep their jobs or youths who were never expected to pass exams or get a job, a silent part of the electorate up to now will have their say eventually. Whether it is the hard working tax payer of foreign investor somebody is going to demand rather more for there money than they get now.
I still think it is a moot consideration for the UK because the government will at some point will find no takers for its debt and currency depreciation will force a change of attitude. In retrospect this might be looked on as fortunate when the US’s plight is fully understood in the future (hyper inflation eventaully). 1 in 10 mortgages are behind in the US and 1 in 5 people are behind with either there utility bills or car payments which shows how much worse it is over there. Rebalancing our economy for the future should be our objective and the reality is that we are not in a bad position to achieve that providing the government does not interfere with the likes of quantitative easing.
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Wow....this is crazy.
It really is time to step back and to do some thinking....the whole notion of "we have to do something" is in my miniscule opinion WRONG HEADED.
The world is in trouble...but IT IS NOT IN MORTAL DANGER....we are NOT looking at the 1943/44 siege of Stalingrad or anything remotely approaching that.
The UK is a resourceful country and will get through this.....people must help out where they can...that might mean the "haves" needing to help the "no-longer-haves" It might also mean reducing the country's support of the unproductive part of our adult population.
At the end of this grim episode however we are still going to need money.....not confetti, but money.
PLEASE CENTRAL BANKERS IF YOU ARE LISTENING, STOP THE CONFETTI-FICATION OF MONEY
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#68
Good point but it's 'flagellants'. . Main point about the great Plague was its recurrence 1348, 1361 > 1665 + etc etc., until it burnt itself out / rational scientific investigation then isolated the cause.
Still - most of this is all about misuse of world resources not rats and fleas
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Come on.
I cant be the only one that has more than one property on a tracker who is laughing all the way to the bank each month.
Rental margins are fantastic now if you have your mortgage(s) on an interest only tracker.
I'm not the only one I know. Its just not the done thing to admit to being in a position where your debt is nicely under control and also not be losing out by being a saver.
There is a comfortable position in the middle ground (The third way). And to those who will come back saying "you're making a loss as the property values are dropping" I say to you "you're thinking too short term as did most buy to letters".
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My impression of the city is it is based on the suit you wear and how your hair is groomed. There is too much emphasis on designer gear.
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99 Pot Kettle
It is the new crime to talk of anything other than gloom n doom
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The whole economic problems relate to a massive excess in borrowing/lending and a massive absence of savings.
Over the last 10 years all fiscal policy has been driving this mania to this end.
So the answer is to wipe out any savers left and continue to pump prime the money market to encourage yet more excess borrowing?
I thought the guys who ran these institutions had an education? It ain't rocket science, that's for sure.
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Thing are really BAD.
However GITs like me see all this MESS as
an oppourtunity.
CASH is KING.
An excellent time to re equip our factories
equipment discounts are AMAZING.
An excellent time to take over businesses
we are all out for verticle integration at
prices i could only have dreamed of.
THE CHAFF WILL FALL TO THE WIND.
OUR POLITICIANS ARE CHAFF!
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The New World awaits, as foretold by the Maya Calendar thousands of years ago, as foretold in the Book of Revelations, as foretold in ancient Jewish Scriptures.
Hold on to your hats, it is going to be a bumpy ride right through till 2012
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I think a key point some respondents may have missed, is that whatever one's ethical views about debt are, in economic terms debt counts as money, at least in the current regime where debt is treated as a commodity that can be baught and sold.
It is the issuance of debt which has become the main gearbox of the money supply, which is why governments have in the last few years relied on the setting of interest rates to control it, rather than simply printing money.
The debts created are mostly fixed-term and have to be repaid at a specific date. This is often done by creating new debt to replace it (rolling over the debt), thus maintaining the money supply.
When the creation of debt suddenly stops and the regular cancellation of debt continues (as has happened now), then this does amount to a reduction in the money supply, and deflation is the usual consequence of this.
Therefore, to suggest that debt is the 'cause' of the trouble and that stopping the issuance of it is a 'solution' is somewhat wide of the mark. With the destruction of the investment industry and the sudden reluctance of people with money to lend it out, the conventional mechanisms for monety/debt generation have stopped working. This is what people mean when they say that the interest rate 'lever' has broken. and is the reason why the US and UK governemnts are now considering going back to what one might call old-fashioned pump-priming, though perhaps in novel variations. Printing money, you could call it, though since the vast percentage of money no longer exists in any real form (even as promisory notes) but exists only on computerised accounts, it isn't quite accurate.
Among the fascinating questions this raises are the following:
1) Does anyone know how much money is in circulation? (And yes, you have to define what you mean by money which isn't as easy as you might supose, and then decide which measure is the most relevant one which is even more difficult)
2) Does anyone know at what rate it is increasing or reducing?
3) What are the response times and lags in the system? (These will affect how much time we have to think what we're going to do before we really need to do it)
4) Do the people who have the responsibility for controlling the money supply (and as I have suggested, in recent years this is not the people who actually do create money) know the answers to these questions? (Do they even think they do?)
5) In the huge multi-variable feedback system that is the modern global economy, do our responses to these crises amount to negative or positive feedback? Do government interventions damp out oscillations or amplify them?
Scope for a Nobel prize or two in answering that lot, methinks . . .
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The TRASHING of STERLING will bring
INFLATION home to most households.
Asset prices will BOMB but food clothing
footwear etc will keep on an upward cycle.
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It seems to me that the present reflationary policy is being driven by bankers, their friends in the Labour party (Mandelson) and fellow travellers in the media (Kalesky, etc) and is aimed above all at reflating bankers' bonuses back to 2007 levels. In the last slump such manipulation was called a banker's ramp. Eventually, attacking the banker's ramp was used as cover for the rather unsavoury attacks on minorities that followed.
Huge levels of debt, pedalled by an obscene bonus-driven culture have got us into this mess. Surely, the only sensible policy is to detox with less debt, and with debt and savings properly priced. We're being fed a notion that deflation is to be avoided at all costs, but I think that this view is coming from people with huge vested interests.
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98 mouzel1
Heavens to murgatroyd. I would never compare bankers to rats n fleas. No you only have to change one letter in bankers to know what you are dealing with. Total Bunkers, bar the odd exception, the exceptions who will probably be made redundant as rebels and a bad influence, they are connected to a computer and cannot think for themselves. Fisrt step towards the android.
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The truth is that free market capitalism is unstable. Central banks and governments try to keep their economies balanced, but it is rather like balancing a pencil on the tip of a finger. The finger has to be moved first one way and then in entirely the opposite direction. Similarly at one time we are urged to save, be frugal and not to borrow, and at another time to run up debts and spend as if there were no tomorrow, with the government setting an example.
The great danger is that the corrections applied get out of phase with the symptoms, so that the intended feedback becomes positive instead of negative. The MPC's failure to reduce interest rates, when they should have anticipated the slowdown, is an example of this.
The risk is not as the opposition claims that the increased taxation necessary pay back the government's debts will restrict future growth. Increased taxes will be a necessary correction when the time comes. The risk is that this correction will not be applied soon or strongly enough, because of the natural reluctance of governments to increase taxes, knowing that it might well cause the voters to remove them from office. As in the past they will probably choose the easier option of punitive interest rates.
High taxes are bad for the rich, while high interest rates are bad for poor who have to borrow.
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If we could see past the "need" for ever more mass produced consumer tat deflation doesn't have to be a problem.
Unfortunately for as long as we regard it as economically essential that consumers borrow money they don' t have to buy things they don't need we will never get over this.
For all the bleating about being environmentally friendly, what could be more environmentally friendly than NOT shipping plastic tat around the world, NOT driving for miles to buy said plastic tat, and NOT dumping plastic tat in landfill sites when we are bored with it.
Deflation is only a scary thought because the masses have been suckered into a consumerist model that only works for the people at the top.
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Lets put this matter into a historical economic perceptive. Inflation is a symptom of too much money chasing too few goods. Likewise deflation is a symptom of too little money chasing too many goods. Therefore static prices or zero inflation is sufficient money purchasing sufficient goods. The differential between having too much money and too little money being monetary velocity.
The problem the United Kingdom has had over the twentieth century is that it has been a reserve currency and thus sterling has always punched above its weight, resulting in the UK printing too much money than the UK economy has needed to compete at the same inflation levels as the other developed economies.
Therefore in order try and keep the level of monetary velocity under control, the Bank of England has always been more volatile in its interest rate setting policy. As interest rates increase or decrease the rate of monetary velocity within the economy and thus control the money supply. So high interest rates slow down the level of monetary velocity within the economy and low interest rates increase the level of monetary velocity. However that assumes that you have sufficient money in the economy to finance its level of economic activity in the first place.
Now the maximum amount of monetary velocity that a central bank should allow a bank to generate is six to seven times its capital ratio. For if a bank generates money above that level then it actually does not have enough money to finance its activities and thus becomes insolvent.
Now the UK banks over the twenty first century have printed money in the UK through the derivative market in the search of profit at too high a level of capital ratio. Worse still they have used this money to finance highly leveraged US debt that the beneficiaries of this debt could not service or repay, because of a general economic belief that the U.S. economy is to too big to fail and will always drive the world economy.
So whilst the US gave the impression that it will always repay its debts, derivative prices tended to grow and generate profits which could be pumped into the bank capital ratio. However the banks were wrong as the poorest levels of U.S. Society did not see their salaries rise over the twenty first century and thus found their debt burden unmanageable. So they defaulted on it in large numbers. However the derivatives financing that debt had become so complex that it was found impossible to separate these loans from the derivatives that financed them.
Therefore the banks stopped printing money and the buying of these derivatives, which caused the value of these derivatives to collapse, which in turn ate into to the banks capital, slowed down the rate of monetary velocity and reduced the worlds money supply at the same time.
This meant that from a sustained period of having too much money chasing too little goods (i.e. inflation), we are now entering a period of having too little money chasing too many goods (i.e. deflation). So even though the UK government and central bank is the process of restoring the capital Ratio of the banks to 2000 levels (i.e. before they were using derivatives to boost the money supply), Seven years of money supply growth has been destroyed by US Bad debt and that is too much to make up in one go.
Consequently we are entering a recession caused by a need to rebalance the money supply and the level of monetary velocity on the economy. For we are, at the moment, have too high a level of economic activity for the newly reduced money supply to adequately finance.
Thus asset prices, internal demand, commodity prices and equity ratios are falling as they all compete for an adequate sustainable share of the reduced money supply. Thus Interest are also plummeting as the central banks try to increase the level of monetary velocity within the economy to provide the maximum finance for these prices, internal demand, commodity prices and equity ratios.
The government is also borrowing money in an attempt to increase the money supply and shorten the period that it will take financial equilibrium. However reducing the VAT rate at this stage of the game was a serious mistake because there is not the money around to finance a sustainable level of increased demand.
So the financial theory behind the borrowing (i.e. increasing the money supply) was right but the implementation is has been wrong. For the VAT cut should have initiated when the economy had reached financial equilibrium, as income tax cuts would have been a better vehicle for this borrowed money.
So instead of having Consumer debt levels chase the falling equity, commodity and asset prices downwards and achieve its sustainable level, the government is trying to sell itself out of it economic woes, by grabbing a bigger share of the world economy financed by a fall in the value of sterling. However the problem is that we do not know what the new level of money supply will be in the world economy and what the value of that market share will be when we grab it.
For the world is rebalancing itself and it is the speed at which it achieves this, which will determine Gordon Browns and Alistair Darlings success with their economic policy drives. However I am pessimistic on this point because the chances are that things will not go in the governments favour, which is Britain’s biggest current danger - Not the current UK government debt levels.
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Deflation isn't bad for everyone. People on fixed incomes and people with savings rather than debts all benefit - and there are lots of people like that. Companies that do not rely on borrowed money and which increase their productivity can also succeed.
Inflation robs savers and owners of assets.
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rob said
..., the cause of our economic
woes is that we borrowed too
much - or financial institutions
lent us too much (to digress for
a second: there's a resonant
unresolved issue of
accountability and responsibility in these two ways of seeing the
debt binge).
++
no uk banks started borrowing billions to make bad investments
we bought too many cd's
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Sorry for being away, but the Feds thought from my handle that I might be involved in a 'Made-off' type scam! I had to explain the choice of name was a coincidence (though prescient) and came through my general impression of what had been going on in the markets for many years: attempts by bankers to evade capital requirements by creating SIVs stuffed with dodgy 'AAA' rated CDOs etc, struck me, though not a Ponzi scheme per se, as being very much in the spirit of the original.
By the way, the unwinding of the positions created during the boom is still very much in play. Many more 'write-downs' and 'write-offs' are in the pipeline.
The actual purpose of the clearing banks is no longer clear: minimal return on deposits, lack of confidence in their future solvency etc. Maybe the UK government could create a entity that accepts payroll accounts and then either pays out, or distributes the money to customer/citizens, or to other financial institutions by pre-order. After all, payroll processing is niow the only thing the retail banks are useful for. This would save millions in useless bonuses and inflated wages now going to bankers who no longer have any real function.
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If we define inflation as "too much money chasing too few goods" we can see that we are heading for disastrous levels of inflation.
As people stop spending so manufacturing declines because people aren't buying the "stuff" they are making.
At the same time the money supply is being flooded. So when that extra money does finally make its way into the market at large there is a vast tidal wave of money chasing a reduced supply of things to buy with it. Result - huge price inflation.
Let's not kid ourselves with the politically convenient CPI measures, which bears so little relation to what real people living real lives experience it might as well not be quoted at all.
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Yeah Capitalism!
We swallow it all hook line & sinker.
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"Businesses turning down profitable orders because they're unable to obtain either loans from banks to finance the increase in working capital..."
Yet more evidence then that the problem right now is SUPPLY of credit not demand for it. The "quantitative easing" operations are designed to help with this and they are AT DIRECT ODDS WITH THE POLICY OF LOW INTEREST RATES!! Quantitative easing increases the available supply of credit in the economy. Lower interest rates reduce the supply of credit.
In past recessions, the supply of credit wasn't a problem - it was all about demand. So in those days lower rates stimulated the economy. Now it's all about supply (as the Fed has accepted with its "quantitive easing" operations) and therefore lower rates will make the recession worse.
Similarly, higher government borrowing will reduce the credit available to businesses and individuals and make the problem worse.
This is the New Recession Paradigm if you like - it's different this time. And what kind of idiot looks at a policy that's not working and responds by doing more of it (as the US and UK authorities are doing)?
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Who says, and on what basis, that there is a "resonant unresolved issue of accountablity and responsibility..."?
Who sets interest rates? Who is consulted on interest rate levels? Who designs, develops, implements, approves, and markets leveraged financial products? Who sponsors the particular model of globalisation that we have? Who decides all aspects of monetary and fiscal policy?
It certainly is not the average man in the street - responsibility for this mess is clear - the Government, senior "expert" functionaries/regulators, and business leaders. It is true that this small clique are desperate to muddy the waters so as to cloud the issue of accountability, and in this endeavour they would seem to be ably assisted by the BBC.
As the old saying goes the poor will endure what they must and the powerful will do as they will.
Do you know no shame? How dare you disseminate this vast fraud that there is uncertainty as to how to allocate responsibility and accountability?
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Asset price deflation is necessary because assets are grossly overvalued with respect to the cost of labour. To which the only solutions are wage inflation or asset price deflation. The problem we have is not deflation, it is people's resistance towards it.
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Deflation is better for poorer people and those with savings. Inflation steals people's wealth and devalues existing money. Much better to let asset prices fall to their natural level. Inflation rewards the profligate, lenders and debtors and is not a good way to run an economy, look at Germany in the 1920s, UK in the 1970s and Zimbabwe now.
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Addendum to my previous post:
The reason my question about delays is critical, is that as any control engineer will understand, negative feedback that is delayed sufficiently becomes positive feedback. In other words, if the 'right' corective action is applied too slowly, or too late, it makes the system more oscillatory (overshoots) rather than less. Sometimes the Nike philosophy (Just do it) is appropriate.
Of course, sometimes it isn't . . .
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Here is another EU level solution:
cut VAT several percent and make up the loss in revenue by import duties on products from China.
Result: some increase in inflation, boost to industry in the EU as production gets brought back from Asia, EU environmental laws actually having an effect rather than just displacing production, increase in value of intellectual property, strategic rebalancing back towards US/EU dominance.
A more subtle approach would be to target duties on specific high-value sectors where the EU wants to protect its capability e.g. electronics while not applying duty in low-value sectors e.g. toys.
Globalisation is a great idea but maybe it is time for a little hardball rather than 'example setting' to make sure trade is not one-sided. One sided trade creating cash hordes which are then lent back rather than spent is a cause of the debt crisis.
Tariffs did not work for the US during the 1930s depression but at that point the US was a massive net exporter: almost like China is today.
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Our problem is that our political parties are fundamentally too scared to be bold and radically alter our consumption patterns.
In these times we need radical new approaches to the problems vexing us.
Gordon & Alastair are desperately trying to maintain the status quo, Cameron and George are having the odd rant over there morning cup of tea whilst reading the times and Nick Clegg is wandering what shirt to put on today.
There are NO NEW ideas.
No new solutions.
No one dares to think outside the box.
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The vertigo inducing figure of $45,000bn. That wouldn't by any chance also broadly correspond with how much more they've imported than exported.
I don't care what economists say. In the long term you can't spend more than you earn. As the long term also includes the fact that every asset bubble will burst and rates of return will even out to trend.
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Do not Invest
It is a Mug's Game
Face it Robert
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It's interesting to see whether the approaches taken by central banks would work in any other situation.
I'm minded of the cartoon showing two down-and-outs counting their pennies and commenting "we should spend our way out of this".
Economically speaking the problems caused by credit being too cheap and too available are not going to be caused by making credit cheaper and widely available. Economically speaking the solution is to INCREASE the price of credit, thereby rationing it. But politically speaking that means voters might suffer financially so those in charge won't do the right thing.
This leads into a question. Myself and many of my associates saw a collapse coming as far back as 2004. Our leaders apparently did not. So does this mean they genuinely didn't see it (i.e. they are inept) or they saw it and chose not to do anything about it (i.e. they are malicious)? Either way, it does raise some serious questions about how we are governed.
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Re #5 Peter Baldwin's comments
Perhaps what Gordo and his chums at the Bank of England are really trying to do is actually save the planet by causing the total economic meltdown of the world economy by screwing everything up so badly. This is in fact a very long term policy and rather well thought out on Mr Brown's part. Any politician pursuing the policies required to save the planet would be turfed out post-haste by the electorate and all other politicians, so what you do is, whilst you are in power you manipulate things to destroy the economy and save the planet. Mr Brown really needs to be complemented on his long-term strategy of saving the planet which he started way back when he first became Chancellor of the Exchequer and initiated the Credit Buble. Bravo Gordon!
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Robert,
Someone had a similar cash injection idea as mine (@92) 11 minutes before me. Wonder if people in BoE or Treasury have these ideas? Maybe you can ask them Robert?
@13, you are spot on.
The things u say are usually not discussed on BBC type sites.
BBC will either ban @13, or ban Peston's blog "or change the format".
I have another idea:
I think Obama could be the saviour by using a pyramid scheme where US would take from the Indian and Chinese savings, and create a big consumption growth.
Oh no, wait, didn't Bush-Clinton-Bush already do something like that?
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when are the "experts" (governments, bankers, financiers, economists) going to admit that not one , yes not one of their so called remedies to the present situation has actually worked!! When are they going to admit that they haven't a clue what to do next,. they have tried bailouts recapitalisation, interest rate cuts, now its "quantitative easing" (printing money to you and me!) all failed to reverse the inevitable........ lets think outside the box and put interest rates up to 10%, the banks will be flooded with money, houses become affordable and places to live instead of get rich quick schemes and the high street wiil start to buzz again... and all those people who tell me it wont work and lower interest rates are the way to go, i say rubbish, japan had 0% interest rates for years and it didnt help at all!
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A daily blog on what could or could not be good or bad for our Economy, it's getting a bit monotonous now.
We are in danger of talking ourselves down a big black hole....
Every minute seems to be filled with 'Expert' Analysis of this crisis, doom and gloom round every corner. Can we please just have a bit of good news for once, we're in this situation now, let's just get on and deal with it.
Bbbbbooooorrrriiiinnnnngggggg!
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All this doom and gloom, so what if money is a bit tight, oh! dear cheap money was to blame, just like cheap alcohol for binge drinking. I don't think so! Personal and social responsibility reside with the individual.
If we rely on Government to do our thinking, then we are no longer the masters. Thinking for ourselves is our strongest and greatest attribute. The times I have shouted at the TV during BBC Question Time, "Becareful of what you wish for with this Government" or words to that effect, but you get my meaning.
If it is with our grasp to do something then that is what must be done. For the passed 11 years we have been discouraged from saving. The Government has raided our pension funds, it sold gold at a discount. Its welfare policy promotes a secular society dependant on handouts and non-jobs - Do Turkeys vote for Christmas?
So what do I propose should be done: 1. Save and pay off debt. 2. Demand personal tax cuts. 3. Increase interest rates. 4. Reduce the size of the State.
Will the parasites listen and act on items 2 3 and 4 above. I doubt it, so I will do item 1.
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No credit = No investment in future work = No work = Unemployment = Bigger burden on us all. While you , Mr. Peston, continue to put more negative spin on an already bad situation you continue the trend and prove yourself right....how very clever you are. As a licence fee payer I am interested in the facts NOT YOUR always negative views.......
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I second the point of view expressed by 118.
To blame "us" for this mess is ridiculous. It disperses blame so diffusely that nobody can be held responsible, and it points the finger equally at everybody who either borrowed responsibly or didn't borrow at all - probably most of us, in other words. Isn't it fair to say that most of the bad debt is in the hands of a relatively small number of large businesses and buy-to-let mortgage holders?
In any case an individual who borrows money is only responsible for their own solvency, not the solvency of their bank or of the nation.
A banker who lends irresponsibly with whilst holding an implicit government guarantee and despite having years of financial training and being paid handsomely to be both expert and prudent, ought to be held responsible by both the shareholders of the bank and by the taxpayer when the bank has to be rescued.
Why haven't these people appeared before a parliamentary committee yet and been given a public dressing down?
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Thing is this falling inflation/deflation malarky is actually false.
It's consumer goods like iPods and TV's athat are dropping through the floor along with petrol and (hopefully) shortly gas and electric.
The cost of food is still rising around 8-10% and looks like it will remain doing just that.
Unless you fancy eating deep fried plasma TV with a garnish of iPod and 'jus diesel'
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Credit is simply money taken from the future. it makes you wealthy now. If you have previously taken credit and not converted it into asset which can subsequently be made liquid, and then get to the future then you are poorer and the only way to maintain your wealth is to take money from the future again. If you cannot then get credit you remain poorer. That is the process. If you have also wrecked other wealth generators or damaged the environment you are yet more poorer. If there are too many passengers, people not increasing value - in whatever way, then the effect is to make you poorer and things adjust. Why is there such surprise. There will still be winners and losers just in a different framework. It is just some people who thought they were winners have found they are losers. But there is no sure fire thing. It is devil take the hindmost.
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Re: #130
"BUZZ"... repitition (see #46).
Those who have the time to write near 1000 word Novellas of personal opinion of the current climate - I trust this isn't on company time!!
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ThoughtCrime2008 wrote:
"This leads into a question. Myself and many of my associates saw a collapse coming as far back as 2004. Our leaders apparently did not. So does this mean they genuinely didn't see it (i.e. they are inept) or they saw it and chose not to do anything about it (i.e. they are malicious)? Either way, it does raise some serious questions about how we are governed."
The actual answer is that our leaders knew it was coming but to try and do something about it would have been politically unacceptable to the voters. IMPORTANTLY AND FUNDAMENTALLY it would definitely have resulted in a different successor to Blair. Work the rest out for yourselves everybody.
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We need to throw the Jonah overboard now! The UK and US are heading for the rocks with no-one at the wheel and a broken rudder. They are promoting more and more borrowing to an already maxed-out population - just where do they think they are heading?
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#5 Peterbaldwin
It's a shame that such a well written piece was spoilt by trying to scare us with the Global Warming/climate change is all mankind's fault claim.
The environment and how we interact with it is very important and critical to our survival, especially at a local level, however Global Warming and Cooling are all part of a natural cycle that we have no power over.
There is no evidence that CO2 has any discernable impact on climate - sure, computer models say it does, but then computer models said the planet would keep warming with increased CO2 levels - in the last 10 years global temperatures have plateaued and in fact fallen slightly in the last two years.
Parts of the Northern Hemisphere have had some of their coldest weather for a 100 years in recent weeks.
Let's focus on the problems we can identify and fix rather than non-problems which play into the hands of advocacy groups, academics seeking ongoing funding, compnaies that want to exploit the non problem of CO2 and politicians (The UN especially) who see the claim of AGW as an excuse to raise more taxes and control the population
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#1
I also work in the energy industry for an Mid Size Oil and Gas company, we also have slashed our CAPEX, and thisis the same story across the entire industry (and other industries). Some companies are significantly over leveraged, and this will lead to companies going under or having forced fire-sales It will take some time to recover from that position. So despite the goverments own desire, capital expenditure will be severly cut over the next few years. Putting more money in peoples pockets will be offset by the the job losses that are a consequence of cutting CAPEX.
In the long term this lead to a delay in bringing new resources online, which means that when an economic recovery does comes there will a significant and dramatic rise in commodity prices (natural resources). This is because the CAPEX was not spent on bringing project online. This will lead to a squeeze on resources (now required to fuel recovery) and will lead to hyper inflation with oil prices exceeding 150 USD. Some have predicted close to 200 USD
Hence I am not surprised at the results of Roberts straw poll.
Finally, the problem is as we already know is that Hyper Inflation leads to Hyper Crashes.
On the bright side for those few people with money to spend, investing in natural resources may not be a bad choice in the medium to long term. Certainly a better 'bet' than property!
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105
You are right that deflation is about money supply and should be considered separately to pricing mechanism. Your mistake though is to assume that the money supply over the last few years might ever be sustainable. To sustain that level of money supply now would require the government to keep printing vast amounts of money for ever more. There ought to be a happy medium where the money supply is reduced to sustainable levels and this is best achieved by the market. Whether government intervention can speed up that stability is questionable. Your feed back analogy is probably why the US will end up in a particular mess , the UK economy will be tripped up long before that though.
110, 112
Deflation is most scary for government finances hence the avoidance at any cost.
111
UK government debt levels are still a concern because recent gilt auctions have not gone particularly well I would agree about your assertion that rebalancing speed is a big risk though.
117
A business turning down profitable orders because of lack in working capital clearly shows a business has not planned well. Business should not be run on the assumption that credit will be available and management has had over a years worth of warning that credit would be reduced and to take steps. You are right though that higher government borrowing will reduce the credit available to businesses and individuals by crowding out. Just one of the subtleties that is being conveniently forgotten.
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Deflation may not be as bad has everyone seems to think. Our expectations come from very different times, ie the 1930s, when it was a novel concept.
These days we're used to deflation. Everyone buying a PC or a TV knows that waiting a few months would get them the same for less; they buy anyway.
Plenty of expenditure can't be postponed anyway: taxes, food, housing.
I doubt deflation will completely freeze the economy like it did last time. So I consider "printing" money to avoid deflation deeply foolish. The only sensible response to too much debt is: repayment.
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94. I stand by what I said. It is wrong to borrow money for the deposit for a mortgage. You should save the deposit and then borrow the outstanding 90% or whatever.
We need to return to previous times where - like when I bought a house in the early 80's - you had to prove your real income, disclose all your debts, & save the deposit with the building society you wanted the loan from. And if you wanted to borrow against equity, well that was purely for value-adding improvements and you had to show the bills.
If we'd stucjk with that model we would not be in a lot of this jam now.
You cannot 'liberalise' something and then expect a species that is as inherently greedy, manipulative and selfish as Man to behave in a responsible fashion.
Least ways not unless you are totally devoid of common sense which it appears our 'noble' banks/building societies/credit companies definately are.
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#77
The basic point being that consumerism is bad, which is what the Goverment think is the right tonic for our ills.
We have to turn from a consumer economy into a conservation economy. There is value in investing in conservation. Only in this way will we be able to avert absolute catastrophy. For example all goverments should legislate for maximum recovery of natural resources and not for maximum profit. At the moment it is possible to make more by recovering less oil quicker. Increased recovery will lead to higher oil prices. Higeher oil prices will lead to reduced consumption (a drive towards efficency), longer lasting resources will give a greater chance for develoing clean alternatives and will reduce CO2 emmisions (reduced rate of consumption).
Conservation not consumption!
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The lowering of interest rates has been used by central banks before to trick home buyers into a sytem of political manipulation. Boom and bust is the result of Central bank manipulation of interest rates and the current crisis is a direct result of interest rate rises prior to the latest decreases. They supposedly step in as saviours but they are manipulators of the political order.
The current crisis is more planned than accidental. Government should Nationalise the central bank and fix interest rates on new home loans for 20 years if it wants to save the economy instead of assisting the central bank in feeding lambs for slaughter.
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OUR ECONOMIC INDICATORS HAVE BEEN MISUNDERESTIMATED
good posts from #5 #13 #61 !
And that should not be a surprise, given the people who have been running our govts and financial institutions and markets.....
Anyway, inflation vs deflation and how it might impact on us:
Speaking as a Somali pirate, I don't really need to invest in a house of course, but I do understand that some of my illustrious English ancestors had very nice pied a terres along the banks of the Thames in Shadwell and Limehouse, so take an interest in such things
Now if I were to feel like getting myself a nice house in those parts today, or anytime in 2009, I guess there might be some bargains to be had; maybe 30 or 40% down on 2006 prices; but the govt is trying to sucker me into borrowing money at lower interest rates which will only be temporary - we might have deflation in 09 but unless I can find a bank that will give me a 25 year fixed-rate mortgage at a very low rate (apparently some US banks actually did these in 2003) my fear would be that I would be caught out in 2011 or 2012 when hyper-inflation will once again be punishing anybody who has a lot of debt
SO I WON'T BE BORROWING ANY MONEY ANY TIME SOON THANK YOU
Chances are our deflationary period will be quite short. Nobody can know for sure, but I doubt we'll have 'the Japanese problem' of a long period of deflation, due to differences in our national characters, as illustrated by the following:
WHEN THE JAPANESE REALISED THEY HAD A DEFLATION PROBLEM they TRIED TO PUMP MONEY INTO THE ECONOMY. THEY DROPPED MONEY FROM HELICOPTERS AND LEFT BALES OF CASH IN THE STREETS every NIGHT-TIME.
BUT EACH MORNING THE HONEST CITIZENRY HANDED IT ALL back IN AT THEIR NEAREST POLICE STATION. AS A RESULT GOVERNMENT POLICY WAS A FAILURE.
There is no danger that YOU will have the same problem here in the UK or the US, though I fear a lot of the money will go directly to your FRIENDLY neighbourhood drug dealer
PS: NICE TO SEE THAT alexandercurzon is back but I wonder why he thinks that demand for 'footwear' will hold up well
HAS HE BY ANY CHANCE SEEN THE IRAQI JOURNALIST THROWING HIS SHOES AT GEORGE W?
SHOULD WE ALL BY EXTRA PAIRS OF SHOES AND GO DOWN TO WESTMINSTER NOW?
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#143 - oh yeah?
1980's borrowing style with housing at 2008 prices - or your 1980s??
Have a think about that.
GC
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143 red lenin
I am not disagreeing. I am just observing what I have seen.
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All I can see is a policy that will see my children in debt. Borrowing to repair an economy damaged by borrowing is quite frankly absurd. Why has the media called the Central Banks into question. After all they are privately owned institutions. Where is all this money coming from? Why has the concept of regulation only appeared as a few short mutterings in the hubbub of finacial debate. Perhaps more people should do a little research(Journalists included), they may be suprised at what they find. I am not convinced that taking advice from the very institutions that got us here is very intelligent
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The effect of Government cash injections to the banks is being entirely negated by the FSA cash ratio strictures.
The government is pretending to rob Peter while Peter is pretending to pay Paul. Actually the money isn't moving.
What cash is getting through to the banks is in fact being used as ballast not fuel. The recent hedge fund scam that has just exploded in the States presages similar revelation from many other hitherto respectable financial institutions.
Banks are still grossly underpresenting their distance from insolvency..... "£200 billion? Thank's Minister, but actually we're going to need a bit more ..... and a bit more ... and a bit more"
Isn't that why we have the invaluable institution of bankruptcy? To stop throwing good money after bad? To realise the actual value of assets rather than those fantastically imagined in the minds of those responsible for the mess? To draw a line under a bad situation so that it is possible to really resolve it and move on?
What an incredible capacity we all have for self deception and wishful thinking.
As the much bandied metaphor says: you can see who's swimming naked till the tide goes out.
I'm afraid I shall have to inform the Queen.
......... Your Majesty, I have the honour to address you in the matter of the imminent bankruptcy of your realm.
I have to inform your Majesty that the curious Scottish gentleman whom you have engaged as your first minister is, frankly, not up to the job. You may graciously agree with me when I offer my humble opinion that he should be removed forthwith.
I have had a word with the Baker Street Irregulars and '5 and they could depatch him on Sunday evening (best time to soften the effect on the media) - if that meets with your approval?
You will then be free to appoint an insolvency practitioner of your choice as Prime Minister. I think we should also get rid of that Cameron fellow (another damned Scot). He was hopeless as my fag at Eton and and would merely be troublesome in the new setup in the House.
Your Obedient Subject
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146 somali pirate
You have just articulated why the government may well have to provide funds to the banks to supply long term fixed low rate mortgages if the stall continues.
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I’ve come to a conclusion regarding this blog, those who hold the most despair also hold the most debt. Today I paid my last loan and credit card off in full, I feel good. Not only that I’ve told my building society to terminate my credit card agreement, this makes me feel EVEN better.
Slowly but surely, if everyone does this the banks will be back to where they were 30 years ago. And that is where they should be, banks!
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If credit card companies did not charge high interest rates every body would be quids in.
If previous interest elements were introduced as write offs to reduce the debt, everyone could afford to pay back remaining capital, rather than be unable to service debts
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Think it's just time to face up to the fact the world is heading into Depression....Yes the D word, it was only a few months ago that the world accepted that it was in recession even though it was plainly obvious what was coming in the last few months of 07. The speed has taken everybody by surprise no doubt but for the bankers and economists not to be predicting this and preparing in 07 is criminal. Sadly over the last few years they have become blinkered and now disaster has struck they just assume that governments will bail the system out. Well heres the news they can't. If Depression is impossible why are we all now asking the question. The dollar will lose its status and UST bonds will be crushed. Friends laughed when we started shorting stock markets at the end of 07. Complacency is a terrible enemy...
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How much of this UK debt have they offered and actually sold?
Can we have some figures please?
If no one wants it then we are in trouble so can you get the answer?
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Dear Robert
Heres your answer on the money crisis
Banks and brokers could not give a toss about the crisis OR the general Public who have suffered under them. "Why"
Goldman Sachs was bailed out by the American Tax Payer to the tune of £7 billion Dollars, whilst millions of Americans were made Homeless by the banks
On the 1st December 2008, Goldman Sachs employees in Britain, all 5,400 of them in London recieved Bonuses of £142,600- pounds each. yet it posted a record loss of $2'5 billion yesturday. and you wonder why these bankers are nothing but --------
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The last thing we need right now is a boost to demand. If it worked, which it won't, it would suck in imports.
What happened to supply-side economic policy? It's the businesses who need to grow - the ones who can exploit the weaker pound - that must get whatever credit there is. This is the only conceiveable way out of this mess.
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Banking and Credit industries should also come clean about disproportionate bank charges and refund monies accrued since 1st january 2000 forthwith.
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Will the test case against Banks re: excessive overdraft charges be put on perpetual hold to save another potential payout?
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Savers Unite. And Rebel. We need a movement to stop this utter madness.
There's a whole generation - the only generation that actually has any real money - who are old enough now to be savers. Eleven million plus of us! We live off what we can earn - or we will have to pretty soon. (Boy do those job cuts bear down on the 'older worker') So naturally if interest rates are cut WE DO NOT SPEND.
Mervyn, do you not realise, the more you cut the less we are inclined to dip into our pockets. This isn't some thrift binge, some fashion of the moment. This is becoming a desperate situation for many of us.
There is no longer any good reason to keep money in a bank, given how they impose phoney charges out of nowhere and how difficult it is to actually get them to give you back what is yours. Better to buy a big safe and keep the lot at home frankly. That, or move to euros. At least they'll keep their value against the pound.
But if we do either of those things en masse, the system really is screwed. This applies, not just to my generation but to anyone who has money in the bank - young couples saving for a deposit on a house, small businesses ekeing out an existence in tricky times on the interest you get off Treasuries. Even kids with childrens savings accounts.
To say nothing of what this is doing to the national psyche in the long run and to our values. Who on earth, when/if this is ever over, will believe again in thrift? Why save when it can all be taken from you? Why not borrow to excess when you can count on the nanny state to bail you out. Live for the moment. The Protestant work ethic I was brought up on is dead.
I suggest that all of us think about spending some of this Christmas break organising protests. Perhaps a gathering outside the Bank of England before the set the January rates. Thus could be our last chance.
Join me!
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Comment 152
Unfortunately in the current environment it will be those with the most debt that are going to benefit. As conditions worsen it will be impossible for the government to allow institutions to press people on usecured debt and it will no doubt eventually be written off. It is clear that the government cannot afford to let people lose their homes in the numbers expected as in the long run thay will have to re-house them. You can expect the Govt will in time own a huge part of the mortgage market hence creating mass social housing as it used to be.
I know if I was a young person and bought a property in the last 2 years with a 95 or 100% mortgage I would have walked in and handed the company the keys and rented for 5 years.
Sadly its the old saying owe the bank a £1 and you're in trouble, owe them £1m and they are in trouble
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I think the velocity of events is being disregarded.... but only by economists, so as we now know that doesn't matter.
We know that though they looked , sounded and dressed as if they knew what they were talking about they demonstrabely didn't...and that's why now the entire debtae has reached the kind of place where the medieval wrangling over the size and ability of angels to dance on a pin head simultaneously.
I was laughing at the FT's inhouse ad in which Martin Wolff was shown to predicting the whole thing back in 2003.... I am sure because I read them, that he wrote articles where he signally failed to flag up the thing as well...or predicted the exact opposite...if I could be bothered that is......
For what my opinion is worth (which is nothing...ie the value of opinions having been quantatively eased it ranks pari passu with Mr Wolffs and Ben Bernakies for that matter at zero worth) -----------I am with the people on this blog, who feel the authorities are bemused as to why the small tins of varnish they have been chucking on the blazing house hasn't been damping the flames--- but are convinced that this new supply of aircraft fuel they have found will certainly, absolutely ... positively...work!
The interest (morbid) now is when all this "it's the economy, stupid!" stuff leaks out into "It's the politics, stupid!"..like it did in the 30's and 1789 for that matter... THat's going a long way back, but another feature of this disaster is how the commentators are slowly timelining ever further bacward with their "Worst since .... " references...best so far was the BoE's interest rate unmatched since it was founded in the 17th centurey...
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We need to accept that whether we like it or not, what we are getting from the Government is a political response to an economic crisis, with every move pre-tested in terms of the party political impact, and in this respect you have to say that they have done very well. It takes a fair bit of talent to move from being a matter of weeks from losing your job, to closing the gap in the opinion polls from upto 15% to just one or two percent, while at the same time the global economy goes into meltdown.
So to answer the question, inflation or deflation, one needs to ask which is in the better interests of the Labour Party, and of course, what is the timeframe for the next election.
My betting is going short on the election, so the government is only interested in short-term quick fixes to keep enough heads above water to give them a fighting chance to win it. You'd have to say, all government policy to date would appear to be geared towards this goal. That being the case, and since the only way to finance current policies is by increasing government debt, there can be no doubt that this will lead to significantly increasing inflation from the second half of 2009, whether or not Labour cling to power.
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# 151 ... thanks
if HM Govt and US Govt intervene in the market to make long-term fixed interest mortgages available then people like us who have buried treasure could be squids in
I'D BUY MY WHOLE CREW 4-BED GEORGIAN TOWNHOUSES IN LIMEHOUSE IF I CAN GET THEM ON 25-YEAR MORTGAGES AT 3% OR SO
I also have a shipload of slightly damp Marks and Sparks sweaters that are going cheap if anyone's interested............
PS: for all you currency speculators out there, I'd get out of the US$ now if I were you; the Fed has run out of rope and they are now just going to print trillions of dollars........ you can't push a rope (unless it's frozen)
the Can$ looks a reasonable bet though, cause they've got all of that tarsands stuff and oil will be back to a $100 or more soon enough, shiver me timbers
and like # 106 said: buy footwear, or to be precise, Plimsoles; and throw 'em at your great leader if you get the chance
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#21 HAS IT SPOT ON.
TO ASSUME THE SAME PEOPLE WHO CREATED THE MESS ARE CAPABLE OF SORTING IT OUT, IS PURE MADNESS.
We don't need a revoltion to get things right just some honesty about the extent of the damage we are really facing, and a complete overhaul of the way we handle things.
We need to know the full extent of the mess banks and insurance companies are in to appreciate what measures are necessary to sort it out and we ( the people ) need to decide how we approach it , particularly given we will be paying eth cost for generations to come.
To have so much spending going on by so few is not democratic but pure Stalinist. We need the truth and we are not getting it.
Until the truth is made available we should ignore all politicians as they have no more anbility to work this out than anyone in eth street.
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147 - Housing doesn't have a 2008 price, it doesn't even have a 2007 price and shortly won't have a 2006 price either and it won't stop there. If we'd stuck to sensible lending price the market would never have bubbled like it did.
Instead idiots thought housing was an investment. It isn't unless you sell it and even then only on an 'up' and then you need somewhere to live.
There is nothing bad happening in the housing market, just a severe dose of reality.
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Cassandretta21 #105 and 121
Correct me if I am wrong, for I am no economist, but I guess your analysis is applying monetarism, and maybe it works in its own terms.
However, it seems to require a specialist definition of the term "money"; which leaves us looking for a new word to describe what we used to call money - lets call it "wealth" or "value".
Is it true that an economy can grow when money, in these new terms, circulates more and/or faster? And does this does really make the "value of" or "wealth in" an economy bigger?
I seem to see pool of 'capital' being stirred round faster and faster, but not growing. For it to grow you have to add more 'capital'.
At first sight, creating money through more debt looks like an attempt to stir the pot, not to grow it, and I wonder whether there can be any net gain in overall "wealth" or "value".
You have already answered one question for me though. I was wondering when we stopped talking about people having "debts" and start talking about them having "credit". The answer, "with the introduction of monetarism in the 1980's" seems to fit with my recollection.
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Market Incentives
Buy a property and get 50,000 GBP cash back
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#105 + 121
Correct me if I am wrong, for I am no economist, but I guess your analysis is applying monetarism, and maybe it works in its own terms.
However, it seems to require a specialist definition of the term money; which leaves us looking for a new word to describe what we used to call money - lets call it wealth or value.
Is it true that an economy can grow when money, in these new terms, circulates more and/or faster? And does this does really make the value of, or wealth, in an economy bigger?
I seem to see pool of capital being stirred round faster and faster, but not growing. For the pool to get bigger you have to add more capital.
At first sight, creating money through more debt looks like an attempt to stir the pot, not to grow it, and I wonder whether there can be any net gain in overall wealth or value.
You have already answered one question for me though. I was wondering when we stopped talking about people having debts and start talking about them having credit. The answer, with the introduction of monetarism in the 1980's, seems to fit with my recollection.
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72,
LOL, and why does peston refer to ‘we’ ? I didn’t borrow too much and what I did borrow has been repaid (just in time too)
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Correct me if I am wrong, for I am no economist, but I guess Cassandretta's analysis is applying monetarism, and maybe it works in its own terms.
However, it seems to require a specialist definition of the term money; which leaves us looking for a new word to describe what we used to call money - lets call it wealth or value.
Is it true that an economy can grow when money, in these new terms, circulates more and/or faster? And does this does really make the value of, or wealth, in an economy bigger?
I seem to see pool of capital being stirred round faster and faster, but not growing. For the pool to get bigger you have to add more capital.
At first sight, creating money through more debt looks like an attempt to stir the pot, not to grow it, and I wonder whether there can be any net gain in overall wealth or value.
You have already answered one question for me though. I was wondering when we stopped talking about people having debts and start talking about them having credit. The answer, with the introduction of monetarism in the 1980's, seems to fit with my recollection.
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It is interesting to read the views of people. It is difficul to see how our basic cost of living is going to go down, as we import so much. The basics for survival are what we all share and need. Sure the price of washing machines, tvs, cars, and things that we do not buy every day are going down, not to mention houses. Food, fuel, water, travel, and the things we buy on a daily basis will continue to rise, although there may be some minor decreases. It is easy to say that we will then have deflation if cars go down in price, it depends on what you have to buy. It is inconceivable that we will not have inflation return within a short period. We have an inept government that have got us here and have no commercial experience so cannot understand that it does not improve just because they make another announcement. ITs just words.
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Buying up bad assets for cash...thats a clever trick.
"Printing money via the back door" more like.
Still, if it's got to be done...
I see the UK and US governments have been to the Robert Mugabe School of Economics.
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#32
Not a film but how about combining 2 songs
The man who sold the world and way down upon the Swannee River
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Can I suggest that instead of throwing money from helicopters we get in tune with the festive season and ask Santa to dispense it from his sleigh?
I suspect if we go with the helicopters they will end up hovering over government offices and marginal constituencies.
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152. At 2:00pm on 17 Dec 2008, JavaMan1984 wrote:
"I?ve come to a conclusion regarding this blog, those who hold the most despair also hold the most debt."
Spot on !!!
and then read post 153
153. At 2:01pm on 17 Dec 2008, kikidread wrote:
"If credit card companies did not charge high interest rates every body would be quids in.
If previous interest elements were introduced as write offs to reduce the debt, everyone could afford to pay back remaining capital, rather than be unable to service debts"
It sums it up really :-
- JavaMan1984 - sensible person with no debt !!
- kikidread - spouting a loud of rubbish suggesting any one with debt should have no responsibility to pay off their liabilities in full including the interest they were told about in the first place !!
I can understand maybe helping out mortgage holders but NOT credit card debts - that's just money spent on the never never !!
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166 red lenin
Yes but property always has a value, it is not a tulip bulb or a piece of paper. The problem came when we got a Ponzi Minister rather than a Prime Minister.
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Robert wrote:
"To a man (this isn't me being sexist, it's that world: they were all men), they said they expected a sharp rise in the inflation rate."
So the idea is to print money and so diminish the apparent debt - problem is the World's bankers are adopting the Japanese solution of effective negative interest rates. This means not only that holding savings is a very bad thing, but borrowing irresponsibly has no downside.
I just do not understand the logic of continuing to do the very thing that caused the problem in the first place and somehow see this as a long term solution to the problem?
Further, if by the end of next year all of these 'experts' (who should by the way have been sacked fro causing the problem in the first place) see inflation as a problem, by their own rules should they not be raising interest rates now?
Plainly these men should not be allowed out and still less should we trust them to do anything rational with the levers of the economy.
We have mechanisms to deal with companies and individuals that cannot pay their debts - bankruptcy. The advantage of bankruptcy is that overpriced assets are reintroduced to the market and the losses are taken. This gets the markets readjusted to rational pricing and crystallises the losses. The unwise solution being adopted by the World's bankers is to prolong the agony and prop up unsustainable levels of debt with more debt and as a side product destroy the value of the savings and deposits of the prudent. This is madness. (By the way exactly what the Japanese did at the start of their 'lost decade' with precisely the same arguments.) We have the example and we know what will happen - we will be having this conversation in a decade's time and in the meantime have destroyed the value of savers assets and made unwise borrowing the only thing to do - this is not sane!
1. Borrowers need to to told very firmly that they should be able to pay fro their debt at an interest rate of 7-8 percent and if they cannot fund it at this rate to reduce their debt so that they can.
2. Savers need to be encouraged not punished - if these zero interest rates are employed to bail out the banks then savers must be given at lest 5 or 6 percent in the long run - perhaps defer payment of this interest but they need this incentive to save.
1 - the borrowing rate can be enforced trough the state owned bank (which is what we have!)
2 - savers could be given a bond of deferred interest payable in a decade at the rate of 6 percent compound.
Then the banks can play with interest rates to its hearts content. Why not negative 2 percent in the short term (but securing savers with the deferred bond mechanism I outlined above)
I repeat that the objective must be to return to a situation where borrowers expect to pay a reasonable interest rate (7-8 percent) and savers expect a reasonable return (6-7 percent) then the world's economy will have recovered. What the bankers, who created the problem, are doing is digging the hole deeper!
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Banks will, and indeed should, only lend to people to buy assets if the assets have a true value above the level of the debt. Unless the debtors can come up with other collateral I see no reason why banks should make, renew, or extend such loans, better to call in the debt.
So the quicker the asset price falls happen the better it will be. Stop trying to talk the prices of houses and shares up above their true values.
And their true values? My guess is FTSE around 2500. And house prices about 40% below current, so 60% below peak.
Then we will be back in business. Apart from the debtors of course.
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Does anyone think the deflation thing is a bit of a red herring?
Here’s a thought!
This government is preoccupied with SPIN.
Its entirely feasible the government is using the media to put the idea into folks heads not to spend as things may get cheaper. (The powers of suggestion).
Perhaps deflation is an actual government goal as they can Borrow more @ less cost.
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176. At 2:52pm on 17 Dec 2008, Antonio59 wrote:
- kikidread - spouting a loud of rubbish suggesting any one with debt should have no responsibility to pay off their liabilities in full including the interest they were told about in the first place !!
I can understand maybe helping out mortgage holders but NOT credit card debts - that's just money spent on the never never
+
The credit system is thrashing as banks and individuals can not afford to pay back loans in full. 50p in the pound is better than nothing
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178 John from Hendon,
That’s a mental idea to say the least (2 different rates)
You are so preoccupied with the idea of a return on your savings (which is fine) however, don’t you realise that if you receive 0% during a deflationary period you are ACTUALLY still GAINING on your cash?
Perhaps I’ve missed something here as your posts are normally logical.
JM
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There is a obsession with the provision of credit but when are we going to address the underlying structural problem?
We have been living beyond our means!
Where is the plan to balance our books? How can pumping cheap money in the system help do anything other than drag in more imports and erode even further our balance of payments?
This is not going to be fixed demand side it must be fixed supply side. The fix will be all the harder because the lack of protection from an artificially low yen has all but destroyed our manufacturing base.
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The real question on my mind is whether the goal of the monetary authorities in the US and the UK is to counter deflation or to deliberately engineer a dose of inflation (or possibly even hyperinflation) in order to reduce the value of the vast mountain of debt. Mervyn King used to refer to moral hazard in contemplating whether or to what extent the banks should be bailed out. So what about the moral hazard involved in bailing out those who have overstretched themselves whilst destroying the value of savings for those who have sought to live within their means.
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re No. 160 @ 2.22 Savers Rights
You are right. Us savers are paying for this mess.
A year ago with rates (base rates 5.75%) you would earn £5750 on £100k. Now, at 2% base rate you would earn £2000. A drop in income of £3750 or 65%!!!!!! If this level of income reduction were imposed on say nurses, the unemployed or (heaven forbid) MP's there would be riots!!!
Sure not many have £100k but there are 6 savers for every borrower? Bet most readers of this blog are savers.
The policy of artificially low interest rates has nothing to do with raising aggregate demand and everything to do with Flash Gordon and Mervyn King "saving" not the world but their FRIENDS in the city. Friends they may need in 18 months time.
I have a solution to the financial crisis - savers should strike - have a mass withdrawal. We could lend directly (underwritten by government guarantees?) to businesses etc. And just leave the banks to sink. Can someone suggest a way to establish help establish a bank? At one time mutual organisations called Building Societies did what banks do today but with honesty & intergrity.
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#61 #107 #120
Great posts. Unfortunately, there are so many poor pundits in the press, most of whom are just reflecting their vested interests. The good news coming out of the current crisis is that many of the public have woken up and the level of debate about our future direction is improving. Most of press pundits should be sent away to read the 881 pages of Ludwig von Mises's masterpiece 'Human Action', one of the most important books written in the 20th century.
It's said that religion is the opium of the people, perhaps it's also appropriate to say that inflation is the crack cocaine of Labour governments.
Inflation is the means of the banking/government community to turn citizens into serfs, deflation is the opposite which is why those in power fear it so much.
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178 John from Hendon
You may be right John but I just do not see them doing what you want. We are seeing and have seen over the last few months what looks like wild swings in policy, and interest rates, and the perception of the problems. My bet is continued supply of low cost money via low interest rates, possibly even bigger expansion of that policy until it is clear that it cannot work. There is GE pending. If sterling continues to drop then at some point low interest rates may be taken out of their hands but it is not clear what is going to happen with other currencies or economies. I just do not think it makes a great deal of difference in the short term what interest rates are at.
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Its a flight from fright! Chinese whichever way you say it?
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Deflation or inflation?
Surely, with the pound sinking against the euro and the dollar, and many of our imports being necessities, we're going to see prices rising.
Or is that just being simplistic.
A while ago, we were told oil is priced in dollars and now the pound is sliding, this must increase our raw material costs as well as our general imports.
Or is that being simplistic too?
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#182
During a deflationary period that would be true. But with the pound slipping against virtually every currency and the country so reliant on imports, we're not really going to be experiencing deflation for very long if at all. No, we're headed, logically, for stagflation. And in those circs, savers receiving 0% interest really are screwed
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Wow! Some roller coaster we're all on.
those who celebrated when their mortgage rates dropped will be crying next year when inflation starts rising again and their mortgage rates increase to the unknown.
Difficult to see how inflation will drop dramatically when everyone is saying import costs will rise next year so prices will have to go up again as retailers reduce stocks.
Last thing we need in this debt ridden society is more easy money pumped in.
Zimbabwe should be viewed very seriously at the moment as an extreme example of such folly.
None knew what to do when this all started and they still don't.
Only way to get through is tighten your belts and go with the ride.
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It seems to me that nobody knows the solution to this recession, hindsight is wonderful but nobody really predicted the credit crunch and recession,yes we all know why it happened now, but not early enough to avert it. In the same way, Government plans to stimulate economies have that hint of desperation and haste which will only be judged posthumously . In this state would it not be better to a least take a punt on public works programs, we build and upgrade schools, hospitals, transport and communications. In hindsight at least if it turns out to be the wrong decision we have something to show for it rather than sinking billions into black holes.
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Anyone else getting the sense that governments here, in the US and possibly/probably elsewhere (China, Russia, Greece etc) are losing control?
It seems to me that reality (the workaday economics of supply and demand, including the judicious use of credit) is crunching up against the fantasy world of politicians (do everything possible to make people feel richer than they really are, use fantasy statistics to describe how wonderful society is, capture votes and prevent social unease/unrest at all costs).
Soon the realists will hit pay dirt, but I fear there's going to be some pain next year, and for years beyond as the edifice collapses and we try to figure out how 6-billion-going-on-9-billion human beings are going to live on this small planet, sustainably.
As someone once said "Houston, we have a problem ..."
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I still think that joining the Euro is the UK's only effective escape route from the current economic crisis.
As the process of converting everybodys Sterling to Euro's should pump additional resources into the UK economy, increase monetary velocity and fund the UK's current level of economic activity. Thus taking the UK out of the current slump cycle, avoid ecessive inflation and avoid the deflationlary cycle that this blog is talking about.
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The US and UK economies are screwed: they just haven't realised it yet!
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Can I suggest a partial solution to the banking crisis ? 1. Stop bailing out the fatcats and funding yet more bonuses. Nationalise the banking system in entirety and use the Post Offices as banks. This would restore confidence, stability, regulation adn fluidity - and would be amazingly popular with the public...... A surefire election winner !
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Please remember that it is not just sterling that is falling. International commodity prices based in Dollars and Euro's are fallling fast and deflation is already happening in the US.
So higher Import pricing might not happen because of Currency Hedging and the division of those hedged exchange rates into the spot U.S. dollar based low commodity prices.
A currencys devaluation does not always lead to inflation. It depends on what is going on around it.
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Before the verbal thrashing of people with debt incl credit cards goes to far I'll just point out - for one instance only - that many of those struggling to pay debt accrued in BETTER TIMES happen to be the families of quite junior and relatively-low-paid service personnel serving in Afghanistan and Iraq.
Too much generalised crowing as usual.
So - some R E S P E C T here for those rather less fortunate than your 'prudent' selves PLEASE, for once.
GC
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Robert:
~This is from your opening thesis: "The US Federal Reserve and the Bank of England regard the great threat right now as deflation."~
I think that both the Federal Reserve and the Bank of England are both correct; since deflation is a risk for the economy...And, also, Inflation is also a important thing to worry about in the current economic troubles, the world is facing....
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# 192 airport70
I fear that some (if not most) politicians do know what's needed with foresight rather than with hindsight.
The problem is that the remedies to this crisis hardly bear thinking about. We (that is citizens, businesses, banks, politicians) have, by and large, colluded with each other in a great game of persuading ourselves that we're richer than we really are. Big houses; fancy cars; shopping trips to Prague; TVs followed by new TVs; gadgets followed by more gadgets; 2/3/4 holidays per year.
We've done all of this primarily on two things: ludicrously cheap energy (now running out) and monstrous levels of debt (bubble burst).
The day of reckoning has arrived and we're now so high on our fantasy existences that distance to fall and the speed with which we'll hit the ground is what scares the politicians to death. Such decline will be very difficult to control in terms of the order of society.
Hence, our politicians are frantically doing what they've always done and that is to convey the idea (deception) that they're in control, know what needs to be done and how - and if we just trust them then everything will be alright in the end.
Take a look at the website howitends and in particular the section on the role of politicians and you'll get the general idea.
I hope you and our fellow bloggers here are prepared for what lies ahead and that you're au fait with all aspects of self-reliance.
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The rationale & until now failure to produce results, of the massive monetary stimulus can be summarised in the simple equation below: There is some truth to the theory...
MV = PY
M = Money supply
V = Velocity of Money
P = Price
Y = Output
P*Y = GDP, which is what policy makers are so keen to increase. They have massively increased M, Money supply, but velocity of money, i.e the speed at which cash moves round the system has ground to a shuddering halt. In order to increase GDP, corporate lending, consumer spending, investment flows etc must increase - until this happens GDP/economic actively will continue to fall.
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If Gordon Brown increased Stamp duty because the property market was overheating then when doesn't he drop it or abandon it now and help to get the property market moving? What's the point of the 2.5% reduction in VAT?! It's bonkers. I spent £9.95 on clothing in Marks and Spencer last week and had 20p knocked off. We're dribbling away either £12.4 Bn or £20 Bn (depending on the source) and we're getting absolutely nothing for it. It's plain daft. £12 off a big screen TV and most of the money for that going to China? What is the point? Just looking at the government line up there isn't one of them with a business background and most of them look as if they'd be more suited to working behind the counter at Aldi (with apologies to Aldi). Sadly the quality of the senior staff at the Bank of England aren't that bright either. Surely they should have seen what was going on? If they didn't they're more stupid than they are now exposed to be. I can see no cure to the financial ills other than a stiff dose of seventies style inflation to get rid of everyone's debt - and savings - and then starting again. Put your money into property and watch it increase in value 50% over the next five years. The price of the new dictates the price of the old and building isn't going to get any cheaper. What happened to governments housing targets? 20p VAT off £10 at Marks and Spencer when so much more could have been done with that money?! There should be an election tomorrow so that we can vote on the way in which our money is being spent.
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There are a lot of people who have lost out big time in the last boom. I'm talking about anyone at or below the modal wage, which is below the minimum living wage (as described in a relatively recent bbc article - approx £15,800 after tax).
These people, pensioners, the unemployed and anyone doing a normal job such as cleaning, callcentre work, retail, manufacturing, have been consistently paid far less than they need to survive for well over a decade.
This means that many of them have needed to take out loans and credit cards just to meet their day-to-day bills.
I would argue that spending on cars and computers for example is not profligate, nor is spending on housing. For most, given the dismal state of public transport and the distance of workplaces from housing estates, a car is an absolute necessity. Computers too, since even children's homework is not required to be typed. Many office workers have to carry out administration work at home, so they need computers too.
As for housing, can anyone disagree that shelter is a basic human right? And that it is more prudent to buy a home than rent, since rent money is essentially money lost rather than money invested. Further, anyone who wants a quiet life or a family would surely prefer a home which can't be taken from them at 2 weeks notice, and one that a stranger can't routinely inspect, and can't charge extra for changing the decor, or just on a whim.
These are the reasons most people took on debt, and on most wages, even modest debt is a millstone around the neck. Since debt was so easy to obtain, and was desperately needed, it was taken up.
Now, even these poor working poor are cutting back on even the most basic needs to pay back that debt - no matter how much debt is offered.
From my personal perspective, credit is definitely not being cut off. The last 4 times I have been in the bank (to pay off my student overdraft incrementally), I have been offered a credit card. From the cashier's subsequent pleadings, I can only assume they want more people to take on more debt, contrary to what the news keeps saying.
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Didn't the Japanese try a number of 'stimulus policies' (very similar to what's proposed here) in the 90's and found that they all failed.
Can't the risk of deflation be controlled through VAT - if prices fall 2% just increase VAT by 3% and hey presto inflation is 1%. Use the VAT increase to reduce income tax as an added bonus.
What kind of world are we leaving our children, grandchildren and great grandchildren? They will have to pay for the mistakes of this generation and in particular this Government. Our descendants will inherit a world that is:
i) overpopulated,
ii) has spent all the fossil fuel (oil, coal, gas) resource
iii) is undergoing climate change as the result of ii)
iv) is massively indebted
Our legacy isn't anything to be proud of is it ???
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wealth is relative
e.g to people in the third world
you are rich because you have
a house a car and can fly abroad
but in reality there is always
someone richer than you
and you don't appreciate
what you already have
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Wharfgirl 190 (RB2010),
Thanks for that, apologies to John From Hendon
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#35
I like the idea that 40% of statistics are missing.
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Could someone who has experienced deflation
(perhaps some Japanese banker) and has been living with it in Japan, please tell me how it affects the ordinary "Joe". What did he do with his money in the bank? I'll bet he didn't spend it!
Japan seems to have continued exporting and making better cameras and cars. I have not read of people rioting out on the streets.
Regarding financial advisors and Madoff reminds me of a remark of Woody Allen: "Financial advisors advise on investments until you have nothing to invest".
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I not sure if the most scary thing is that Bobby P gets to spout his general nonsense on a daily basis or that most of you seem to believe him
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War. Was the quotation not by Machiavelli?When all else fails go to war. Go to war with........ anybody.
LIBOR is a fiction to make banks solvent. Once upon a time books were balanced at the close of business. No need for LIBOR. LIBOR was created to enable banks to fulfil a legal obligation to remain solvent at the end of a trading day. So one bank borrowed from another in surplus at a given rate compounded hourly overnight. Now the system has become a travesty since there is no defined end to a trading day.
Finally in barter there is no credit. Things move much more slowly however.
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#202
I see there is a great deal of energy still being spent by people trying to understand Brownian economics. I've thought about it long and hard and I came to the conclusion that 50% of what Gordon has done was necessary, 50% was unnecessary and the remaining 40% (see #207) was highly desirable, but suggested by other parties, so he didn't do them on principle.
Now you can rest easily tonight.
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19 Nov 1967
The government announced last night it was lowering the exchange rate so the pound is now worth $2.40, down from $2.80, a cut of just over 14%.
"It does not mean that the pound here in Britain, in your pocket or purse or in your bank, has been devalued."
Prime Minister Harold Wilson
Since December 17 2007 Euro down from 1.4619 to 1.0778 a cut of just over 26% and probably still further to go.
"It does not mean that the pound here in Britain, in your pocket or purse or in your bank, has been devalued but only if the pound in your pocket is all in pennies to retain its melt value."
Prime Minister Gordon Brown
Well Robert, let us hear your explanation for why sterling is doing so awfully against other currencies and explain how further interest rate cuts will be beneficial in avoiding inflation and getting us savers spending to avoid deflation.
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Robert,
The world and his dog know an unravelling Ponzi scam whenever they see one and whenever a promised transparency is studiously avoided, at all costs. .... http://cryptogon.com/?p=5727
What does Uncle Sam export apart from terror, weapons and dollar bills by the tonne. What has been built for the natives in the lands they have invaded.
When are they going to buy in some Intelligence to save them from another crushing defeat, with this one bringing down the homestead?
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#201 - I was OK with Tribology until they started bringing maths into it. Presumably to er, legitimise it and make it more, er 'scientific. You trying to do that here? You got me foxed with that eqn!
The velocity of the money - a function of pump and injector size? I hear a lot about pumping money and injecting capital. Pumps and injectors- thems I do know about. Ain't never seen a money pump tho..
Your observations please.
GC
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Far too many people are worried about their present circumstances to be daft enough to attempt further debt as a recourse, one of the splendid Saviour plans.
I wonder how many unpressed buttons and unpulled levers Saviour and AD have left to mess with.
The announced rise in unemployment will do little to make folk feel any easier about spending either.
It would be interesting if these inquisitive journo types could actually report the true jobless figures, i e. adding all the over sixtys who have been encouraged to opt for Pension Credit instead of signing every fortnight, it would amounts to a significant rise in the jobless figures, which are of course, hidden from view.
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Seems to me the choice has been both, deflation then inflation.
If this does happen then deflation for a short time will have little bearing on national debt.
I also think it may be a mistake to extrapolate the effects of deflation in Japan to the UK. Western culture of saving is far less than Japanese culture. I also believe we have had years of heavy deflation of "mid spend luxury items" such as plasma tv's etc which did little to constrain consumerism.
If i could suggest that the paradox may actually be that ignoring the long term got us into this mess but to look the long term now is too scary.
Personally i believe the world economy will inevitably be in crisis until national and personal levels of debt are corrected.
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198 GuyC
You really are wasting your time mate. I have to say you have great endurance and you seem a good deal chipper of late, so good going, but the doomfesters do not want to hear anything. The irrationale euphoria of recent years has turned to irrationale depression. I used to get shouted down when I said the bubble was too big, beware. Now I get shouted down for saying the bubble has collapsed but there is still economic activity and some care and support is due to at least some hit. I can only conclude that some posters on this blog are not representative of the population as a whole, or if they are gawd help the vulnerable.
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177. That's true provided when you get old you don't need care in which case it becomes a source income for the council not you or your off-spring.
It's also true provided we remain poitically stable. If we ever descend into the predicted chaos of a post-oil society, then your house will belong to whoever is prepared to kill for it.
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Thanks again for the insights, Mr. Peston, and for the intelligent people who contribute here.
At some point, the huge bulge in money supply will meet pent-up demand along with a diminished capacity to meet demand, and (brass band plays) 'TA-DA!!!' here comes a big, big inflationary push.
Why is it our leadership in government can never, ever, look in the mirror and say 'We created this mess by spending too much of the nation's wealth, and mortgaging the future to buy votes in the present.'??
Even with all the 'stimulus' pushed through, building up the bubble, the REAL spending has yet to begin! Just wait until Jan. 20, 2009--it looks to rival Juan Peron and company. It is sobering to remember that Argentina in 1900 rivaled the US economically!
The first rule of holes is--if you find yourself in one, for crying out loud....stop digging!
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203 is bang on, I paid my CC and only loan off today (also got the card terminated!) in both cases they ‘begged’ me to reconsider – amazingly offering me a larger limit and a new loan. I though ‘What the F……I’m paying it off you imbeciles, I would have pressed 1 instead of 2 for a further advance!’
They want us ALL to take on more debt, they do not want you or me to pay it back!!!
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#201
Woooooow! Gordon - you seen this stuff?
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expenditure should be limited to a bicycle and wholesome food.
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plus heating electricity council tax and other living expenses
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6 months ago we had infaltion caused by inflated assets and commoditiies
the good news is that that problem has been solved
now availability of cash and
confidence to spend it is needed( most traded assests are now cheap)
some inflation is probably what we need to erode the debt
the policy makers tools are crude and they will make mistakes.
We have no realistic alternative.
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Post #21 chriss-w is the best post I've read on here for ages!
The banksters must laughing at all of us all the way to the, er, bank.
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#212 sosraboc
"19 Nov 1967
The government announced last night it was lowering the exchange rate so that the pound is now worth $2.40, down from $2.80, a cut of just over 14%.
"It does not mean that the pound here in Britain, in your pocket or purse or in your bank, has been devalued"
Prime Minister Harold Wilson"
I forget, wasn't it Jim Callaghan who had to resign as chancellor due to the 14% decline?
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#203
Good comment.
One way to fend off debt is to save a little for those harder times. This government has systematically made this harder for people from the outset. GB raided pensions in 1997 and so we saw the demise of really good final salary pensions.
Of course once we all saw pensions as a bad idea the government said "SAVE MORE!" and as a good citizen I actually did. I expect others did too. But a lot of people invested in housing instead, pushing the price of property up. Hence the boom.
The slump in share values has wrecked many peoples' pensions. The low rate of interest makes annuites practically worthless. The slump in property prices has destroyed any profits.
Labour introduced the complex ISAs as a tax free way of helping savers, cash or shares. Recently the amount of cash that can be saved, tax free, in this way has been halved. The low rates of interest make these investments more or less useless. The share ISAs are too risky for most people to use at all.
The handing out of cash to babies is of course also counter productive as it does not encourage saving as a habit, but is simply a rather wasteful gift - the institutions that manage these funds will benefit most from this money, not the babies.
So savers are stuffed from every direction and the only message from the government is "SPEND!". Inflation, caused by the low value of the pound, in the future will stuff savers even more.
A little cash in the bank does keep the wolf from the door during hard times, but this government does not have a clue about how to help people help themselves. Their message and methods is so inconsistent that an average person can't plan for their future; not for hard times, not for retirement. We have heard the word "prudence" associated with GB a lot, I think the correct word is "profligate".
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This comment was removed because the moderators found it broke the House Rules.
Greetings doomsters!
# 217 good post - Greenspan's "irrational exuberance" has now turned into "irrational capitulation". You're of course absolutely right, there is plenty of economic activity out there, it's just unreported by the media.
Having refocused and reorganised twelve months ago when the media first got the bit between their collective teeth, I'm now expanding, taking on more staff and building new buildings.
Anybody looked at their mortgage payments lately - cheap or what?! Let's have more of the same please.
Filled up the car the other morning and it was twenty quid cheaper than what it used to cost in the summer!
Anybody been out buying Christmas presents?? I went out last weekend and all the shops were heaving - having read this blog for the last few months I was expecting tumbleweed to be rolling down the high street.
Get a grip guys - especially you Peston!!!
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The emphasis on the catastrophe effects of prolonged deflation feeds our desire to be frightened or horrified by the media. Deflation over several years might create a mood which is the reverse of the recent house price boom, but two or three years at 1% deflation would actually increase the value of the money in people’s pockets by as much as the VAT cut. Yes it affects mortgages, but compared with the present rate of decline in house prices, not materially; yes, it affects the real value of company gearing by a small amount. Compared with the social evil of setting off inflation again these are minimal.
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Debt, debt and even more debt is peddled to us as the solution to overcome the problems caused by debt.
What does it take to overthrow a totally corrupt political system headed by a dictator? Just a rhetorical question!
And no....I'm not talking about Zimbabwe ;-)
I bet this one gets moderated away.
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#13 oldgroucho
To debate money reform with a city editor is like debating Darwinism with a bishop 60
years ago.But even bishops- so why not City editors?-move in the end.
JOHN MAYNARD KEYNES
Wrote to the times on March 28th 1925
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I have yet to see evidence that deflation actually caused many problems for the majority of people in Japan. Maybe that because in Japan the rationale for providing a good product or service is not profit, it is honor. Maybe we could learn from them.
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I have been reflecting on this quote from:
http://news.bbc.co.uk/1/hi/world/americas/7753033.stm
Mr Jordan is undaunted.
"I'd rather have trickle-down prosperity than trickle-up poverty. ..." he argues.
I think neither trickle-down prosperity nor trickle-up poverty is a likely outcome. It is not that people, in the UK and the USA in particular, will escape up-flowing poverty. It is just that it won't be a trickle. It is going to be a flash-flood.
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Why is every one else so slow at blogging?
Mr. Brown should concentrate on our health and not our wealth next year. Back to a Hands-off type of approach to business management
..."Que Sera, Sera (Whatever Will Be, Will Be)"
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oldgroucho, Wharfgirl, Virtualsilverlady, Moraymint and a fair few others, you are on mostly on the money (or maybe that should be "on the bartered necessities"?)
To all the armchair economists: very interesting, though I prefer to make my investments at establishments such as Mr William Hill's.
203. At 4:43pm on 17 Dec 2008, ProLiberty wrote: "For most, given the dismal state of public transport and the distance of workplaces from housing estates, a car is an absolute necessity"
WRONG - public transport is actually good and a car is NOT a necessity, you just need to structure your life around what works for you and your family and not according to some rubbish TV-fed consumer lifestyle.
105 Cassandretta
" In the huge multi-variable feedback system that is the modern global economy, do our responses to these crises amount to negative or positive feedback? Do government interventions damp out oscillations or amplify them?"
A good question which prompted my conjecture further down below.
152. At 2:00pm on 17 Dec 2008, JavaMan1984 wrote:
I?ve come to a conclusion regarding this blog, those who hold the most despair also hold the most debt. Today I paid my last loan and credit card off in full, I feel good.
I actually believe the exact opposite to be the more likely scenario. Those of you berating Robert for his fairly cheerless blog and telling us to get into property/shares/the Euro/Singapore/footwear or hoping for higher/lower interest rates, spending/saving, reflation/deflation/inflation or whatever.... you really dont get it, do you? Past performance is no guide to future performance. The apparently simple (but actually reductio ad absurdum) cycles/patterns you have observed in the past are now of interest only to historians. That was then, this is now.
This "now", by the way, is a now of unlimited and near-instant Information, which please do not confuse with Knowledge. When it comes to this information, we seem to think that the more we have and the faster we have it the more certain we can act. Machines churn it and spew it out at us and we act according to some loosely formed new perception or other. Feedback loops are so many and so quick they all but disappear from view. Besides, just how many perfect, enclosed systems are there out there, that can be reduced to a representative set of fixed and variable conditions?? Fake science sucks.
Somewhere in the dark recess of my mind is the germ of a theory about all this; however, as I am not a neuro or behavioural scientist, or trader of any kind, it will have to wait for now.
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207
the 40% of statistics that were missing arrived this afternoon and they are sitting in my kitchen, having a few large ones.
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What individuals believe is good for themselves is not necessarily good for the economy. By buying things or paying someone to dig holes and fill them up again is economic activity which reduces unemployment which reduces the tax burden and we have a virtuous circle. Governments are taking action to try to increase credit - businesses need credit, individuals need credit to buy things like cars and credit oils the wheels of the economy.
Yet individually people concerned about becoming unemployed themselves, seek to reduce the amount of debt they have, and save rather than spend. Deflation is our biggest threat in the short term, because it means less aggregate economic activity.
But in the medium term too much spending can lead to inflation because as we all learnt at schools, inflation is too much money chasing too few goods. For the past 10 years, the balance has been maintainted by BoE setting monetary policy, increasing or reducing interest rates to control inflation. Now this is not enough - the credit crunch means the banks aren't doing their job. Government will have to step in, and has done so already, but the real issue is how far and with what mechanism government intervention takes place.
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Its obvious that we are a nation of borrowers that are in trouble. (Not me personally though, I think I could cope in the short term (1-2 years) with interest rates at 15% as I only have a small mortgage.)
I think a proportion of the blame for the state of Britain today needs to be laid at the door of the governments from 1975 onwards. They chose to spend the North Sea oil and gas money rather than save it in a stabilization fund like virtually every other oil producer has done. Tax cuts today, ultimately spent on frippery.
Imagine what we could have with a trillion pound (or whatever) national investment fund (obviously with the capital and a percentage of growth out of the reach of the grasping politicans) that could for example only be used for capital expenditure.
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Inflation may be a in the pipline but we are now in the midst of an unprecedented reccesion the like of which very few people have lived through. No one knows all the answers but it seems to me that policy makers are on the right track interest rates will have remain very low for some time to stimulate demand, Obama has said he will bring in a huge fiscal stimulus package. I even heard an American senator talking about the possibility of nationalising huge sections of american banking.
The alternatives are mass unemployement wages falling off a cliff and the careers of the generation just starting in work blighted. Savings and pensions evaporating.
I will put any money I have into land based assets the only real basis of wealth.
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Something to ponder:
Argentina's Economic Collapse
http://video.google.com/videoplay?docid=4353655982817317115
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Deflation is what is coming, Robert.
Quantitative easing will not work if banks do not get credit out of the door into consumers' hands and if consumers do not spend it. There is both a lenders' strike and a spenders' strike, which spells liquidity trap. Central banks can print to their hearts' content; the additional liquidity is being sterilised at the moment of creation because the credit market is on strike at both ends - supply and demand.
I am also going to put on a trendy counterculture "boring" affectation and continue to bang on about the fact that not only has the supply of credit dried up, so has demand as people save, most inconveniently for the government as it tries to add a new layer to the inverted pyramid of debt.
The only way the credit market can be unblocked at both ends is for a period of time to be allowed to pass for good debt to be paid down and bad debt to be defaulted, so that overall debt service returns to levels that will allow further expansion of the aggregate principal balance without threatening lenders' and borrowers' solvency. Then and only then will lending and borrowing alike become an economically viable proposition again.
Unfortunately under current policy when that happens, all that sterilised central bank liquidity will create a monetary hydrostatic shock as it attempts to surge through the conduit.
Inflation is what is coming, Robert. After the deflation, instead of a recovery, we will see a currency shock and possibly monetary failure. And it will be entirely the government's fault and 100% foreseeable - because someone just wrote about it on your blog comments page.
By the way - your business leader dining partners are far too early on their timing. That's fine, more for me.
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Come 2010, which is it to be?
Staghyperflation? Hyperstagflation? Or the pedantic stagnation-hyperinflation?
I'm rooting for the team that will put interest rates up to about 4% (still feels low but the effect on the exchange rate could be excessive) and increase direct taxes.
Thought for the day - you CAN live on less than £100 a week: keep hoping you won't have to.
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I'm always too busy to start reading the comments 'til the end of the day; and by then there are too many to read...
Lots of sensible people out there and also a good sprinling of loonies -sign of a healthy, tolerant and independent society I would say. Hope for the future.
A few things come to mind about the politician and economist amateurs who are making these incompetent decisions on interest rates, inflation, remedial measures on our behalf (Brown & Co.) ~
1) They are completely and utterly wrong in everything they are doing just now.....
2) They only listen to other people of their ilk, behemoth corporate clowns, virginal academics who never worked in the real world, and other in-bred politicians who never worked at all... so basically we will take three times as long to get out of this mess than we would do if common-sense objective pragmatists were in charge. A change in the system we are governed might be a few minutes closer, than it once was, but I doubt it. The party system must go one day, but until then we can keep fooling ourselves into thinking this is a meritocratic democracy.....
3) This recession is going to last for years. Until such time as someone produces a graph of what financial business activity would actually have been over the past decade & a half if we factored out the fantasy money that was invented by the banking sector, then we won't have a useful clue about how the next few years (should/would have) looked like. Once we have analysed the true picture, we can make a better guess about how much the pain and punishment is going to distort even these poor figures, and for how long.
4) Small business is the key; we have to bolster employment. Unemployment costs are horrendous and a huge drain on the country. Employment creates disposable income. Big business (apart from Government) only employs a tiny proportion of the workforce. The rest of us work for small companies, and really aren't 'in-directly' connected to big-biz. Since the public sector is going to have to start dumping a huge number of workers when central Govt. realises it is bankrupt, then any measures that can stimulate small business is desperately needed. The banks need to realise that they should start sucking up to their small customers. We pay their wages!
5) VAT has basically no effect on the business economy, it is generally charged but then entirely recovered. (apart from buying cars). The only person who pays the VAT is the end-user public. A 2.5% reduction is meaningless. Now if Mr Darling took VAT off home repairs and extensions (no VAT on new-build residential currently so it is logical to do the same with re-furb.) that would have a big effect on construction jobs, materials, and small business viability. He could put back his silly 2.5% reduction on the rest of VAT and make much more impact with his tax with a 17.5 reduction on a single key sector.
6) Raise the interest rates. You have to make saving worthwhile. Spending is what got us into this mess. and we need as much of the loose international money heading our way as we can get to bolster our banks and government bonds. We can cope with interest rates on loans of 7-8% if we get a decent return on savings.
Whenever Joe public is worried about his job, he stops spending, even if he gets 0% on his depoist account. I would do the same, wouldn't you.
7) A windfall tax should be levied on anyone who mentions the term 'quantitative easing'. What a crap phrase...... The financial gods didnt even have the imagination to come up with a seductive phrase for printing money.... When I hear it it sounds like an-off the shelf laxative, and I don't think that's what they had in mind. My own favourite is 'the (Zimbabwe) de la Rue solution'
8) Long term joined up thinking is going to have to be employed if we want to safegauard our future wealth. If our invisible (financial market) earnings are going down the tubes, and our manufacturing base is to remain unloved by Govt. then we are going to have to get a whole lot better than our foreign competitors if we are to avoid a third-world fate. We need a 20-year plan on world-class education, training, investment & R+D. * We cannot continue the way we are and hope to compete. If you travel to Singapore, Germany, India, just about anywhere, you feel nothing but embarassment about how shoddy the UK does everything, and yet we still the have the best and talented people (by miles)
* The blessed Blair's idea that we should all be entitled to go on to further education is like all his ideas, well-motivated but naive and a complete disaster. It reduces -not raises- standards across the board, and demoralises the professors. We all have different aptitudes and most kids don't need a Philosophy degree or a course in media studies........... Encourage the best students and the rest will be stimiulated by the comparison.
9) Still no word on any criminal charges against the masters of the universe......... Not a good sign Mr Brown, FSA, Crown Prosecution Service, London Met. or whoever.
Regards
Colin MacKenzie
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"As I've been boring you rigid with for months and months now"
You don't bore us, Robert.
Who could be bored with that weird, unique way with words that you have?
Your delivery is the human equivalent of a roller-coaster, rising and swooping without apparent reason, slowing and speeding up regardless of the context.
And all with that amazing, deadpan expression on your face.
One day, just one day, Robert, SMILE for us.
Go on - it won't hurt, I promise you.
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peterbaldwin #5
oldgroucho #13
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Why does the government insist on keep wanting to cut interest rates to try and solve this problem? Can they not understand that people DO NOT WANT TO BORROW ANY MORE MONEY?
I have run my own company in the Audio Visual sector for the past 6 years and asset price deflation has been happening for years. Look at the price of LCD TV`s... 1 year ago you got a 42 inch TV for approx £900.. now they are £450.. thats 50% in 12 months. Its the same for PC`s, laptops, digital cameras etc etc etc.
Batten down the hatches there is a storm coming.....
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What is making me more than cross is Mr Brown's blatant attempt to save his neck at the next election dressed up as "concern for the hard working family". Absloute and utter tosh which, I hope will be inserted somewhere painful when the election finally comes. How anybody can believe that the encouragement of more debt is the solution to having too much in the first place is beyond me. As for other measures, particulalry the VAT cut... simple PR... absolutely useless. Well, worse than useless, a complete waste of taxpayers money. Get interest rates up, encourage and reward saving, support the pound, ride it out - rather than making things worse in a hopefully futile attempt to prolong this inept Government.
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'fractional reserve banking'
Isn't that a Ponzi (pyramid) scheme?
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There should be a first law of economics, and it is this: Since war, natural disaster or economic melt down will occur eventually, each nation must ensure that it protects its agricultural sector from free traders. Then when disaster inevitably arrives, the nation may hope to be able to feed itself while others starve.
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The more I read the more attractive deflation sounds. at bleast we would get more for the devalued pound in our pockets.
It may also make us feel better with alittle extra cash in our pockets, not to mention more affordable to trade up motor or gadgets
Pensioners -fixed income little debt/possibly a little savings - reducing interest rates makes them poorer.
Unemployed -already strapped for cash. Fixed or reducing income - reducing interest rates has no effect.
Those in rented accomodation -fixed outgoings on rent - reducing interest rates has absolutely no effect on disposable income.
Those on fixed rate mortgage -fixed outgoings on debt - reducing interest rates has absolutely no effect on disposable income.
And the winners!!! the lucky few already on a tracker.
And by the way who has 25% as deposit/ collateral to get decent new deal.
Then again only we can dream of a visit of facticious character who is likely to get over this Crunch. Answers on a postcard.
a) Santa Claus
b) Lady luck
c) Effective Chancellor
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Once again, the governments aim appears to be the destruction of the Pound and to cause hyperinflation. That way the people are who are least to blame for the mess are being punished the most. That's not a plan for a better future, that's a violent act of desperation and a declaration of war.
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Just spoke to a guy who is now paying more for after school childminder than £250K mortgage on a £600K house.
Is he spending to re-invigerate the economy.
In a word --------NO
He is reducing debt by overpaying b4 the U-turn in interest rates
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Just a thought about the terrible prospect of deflation..
Apparently Japan has been stuck in an appalling deflationary recession for upwards of a decade, yet it is still the worlds second largest economy and Tokyo is one of the worlds most prosperous (and expensive) cities. Unemployment has not been noticably higher than anywhere else in the developed world and Japanese companies dominate many of the worlds manufacturing markets.
So the downside is..what exactly?
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#226. Sunny Jim went in 1979 as PM
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"As I've been boring you rigid with for months and months now"
so why don't you crack the solution? or would that put you out of your fancy job Rob
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50% sales all over the high street. WHY?
How can retailers afford this.
Does this mean that there was 100% markup b4
The world gone mad.
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A really simple question from an old sea dog.
When the financial world talks of billions are they using the english version of 1 million million or are we being deflated by using the US system of 1 thousand million. Makes a tad of difference, but maybe not to are super intelligent bankers and fund managers
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#254 citygambler wrote: "So the downside is..what exactly?"
Deflation means a return of borrowed wealth to owners of capital. This is anathema to all those in debt, including the government. In warning of the danger of deflation, they are talking their book, or more charitably, speaking on behalf of the indebted.
Similarly I am talking my book when I say deflation would be way cool.
It is just a question of how you are positioned.
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258. At 8:04pm on 17 Dec 2008, realsaltydog
obviously
1 billion is 1,000 million
and 1 trillion is 1,000 billion
i.e. US rules apply for big bucks
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I work for about the 50th biggest company in the world, a french conglomorate and it might interest you to know our treasury boffins in Paris are currently engaged in a debate over our currency hedging strategies for the coming year. Some believe that the pound will weaken further and some are concerned that the Euro will move further into recession and so weaken against the pound. Maybe a thought for all the posters/speculative savers who have recently shifted everything into the euro.
For myself, I have liquidated my position in sterling, gone long on magic beans and put all my potential winnings on Ponzi's Pride in the 4.45 at Lingfield, each way of course. I believe my bases are covered.
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More than a short while's worth of deflation is very bad for the average person, indebted or not.
Why would anyone make a major non-essential purchase, when they thought it would be cheaper next week?
Thus, only essential goods go up in price, while non essentials (which give most people jobs) go down.
End result, mass unemployment and worldwide slump.
Central banks are correct to slash rates and even print money to prevent this now.
But, they must remember this time to take equally speedy measures to halt the recovery in its tracks before it becomes inflationary, big time.
It's not an easy call, that. My guess is that rates will be going back up by this time next year, having been down to 1% in the UK and the Eurozone and 0 in the US.
Refinance your mortgage early next year onto a fixed rate.
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re 258, 260
that was a trick question from money laundering 101
also 1.5 trillion GBP is spent on heroin a year I think
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Clearly the current climate and this column in particular brings out the crackpots such as article 10.
It also brings out opposition to the Bank of England and Mervyn King that is totally missplaced.
Mervyn King should be congratulated for the job he's done in reacting to the global situation as it unfolds. Gordon Brown wasn't the one that saved the world's banking system it would have been Mervyn King. Merv happens to be one of the most respected economists in the country and it was he that came up with the plan to save the banking system (and while that may not be working at all well, at least it was saved).
Contrast BoE actions with the pathetic pleading of the US Treasury secretary, followed by leaderless guessing as to what to do with it, in the end spending it on a car industry in the USA that should have been closed down with British Leyland.
Gordon Brown may take the credit but Mervyn King and the BoE are behind the UK's rescue plan and I for one having worked for him know that he's the right man to have in place to lead the country (and quite possibly world) out of it's current situation.
Moaning is easy. Credit where it's due please.
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226
Sunny Jim went as PM in 1979 and left behind inflation of nearly 14%
All this printing money talk will lead us the same way if not worse. I hear more and more advocating this as the way forward without spelling out the dangers.
Wipes out the value of cash savings bonds and anything else in the way of investments. Unless wage increases keep up with the inflation [unlikely] it makes many essentials less affordable.
Ken Clarke left as Chancellor in 1997 and left us with inflation of just over 2%
Best position we'd been in for 18 years.
It's high time the unsuspecting public were warned of the real dangers from a government that resorts to having to print money.
Initially it looks good but 12 months down the line it could be very very bad.
Spring election anyone?
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#250
Totally agree on future strategic importance of agriculture...probably why the government is going to sell off the Forestry Commission. Look out for some serious vandalism.
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OK, this is making me cross-eyed. I need help and I have a big issue that all of us will have:
1. The bankers don't have a clue and they have patently followed the leader for years.
2. Financial advisers are either commission based or probably follow the leader too.
3. The government has to say things to ensure panic doesn't ensue, but how do we pick out the truth?
4. Vince Cable is the only convincing politician in Westminster right now.
So what do I do? My interest rates have come down, should I pay of my mortgage as fast as I can starting from now?
Or should I turn my lawn into a vegetable plot and start a suburban 3 field system (ok, maybe when it thaws a little).
Confused of up north.
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#13 and many the like minded
I try to keep my comments short, see previous comments.
The numbers of comments to Robert's blogs has given me some inspiration and the faith that peoples' interest in politics does still exist!
Please, please, please (all who read this) do your own research on what's going on and try to join up the dots and get the complete picture.
Visit the crash course at as a start but do your own research too:
www.chrismartenson.com
I haven't a lot of spare time on my hands but would certainly join an offline group (so as not to jam up this space) to discuss how we could mobilise to move the agenda on and begin to engage our politicians and media in a debate. How we do this from a blog site, I dont know???
#13 - Old Groucho, please help me out here :o)
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#267
Buy a polytunnel if you're operating the 3 field system up north. Trust me I know.
And resort to barter - I'm currently thinking of trading my Rocket crop for an annual supply of beer at my excellent local (it's within walking distance so ok there too).
No point in trying to compete with low finance or pick out the truth. The US Fed is now refusing to let anyone know where trillions of dollars of support are going, and what the US does today, the Official Secrets Act may well have done yesterday.
Oh - and please don't come to rely on DEFRA, the Farming News at 0545 is more helpful.
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#264
"Mervyn King should be congratulated for the job he's done in reacting to the global situation as it unfolds."
This is good - I distincly remember Merv saying in Feb 2008 (yes, this year on TV) "The Credit Crunch is more or less over" - I remember it because me and my missus both looked at one another and laughed out loud.
If our Mr SuperBanker was so good at reading the signs how come he said such a ridiculous thing as this? He was as much out of touch as anyone. Our multiplicity of watchdogs were all asleep dreaming of pleasant walkies.
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Common sense always was - and remains - a wonderful thing. At times it can be a deceitful mistress - but vastly preferable to marriage with a spouse who makes us merely comfortable.
We are still adopting quasi-scientific approaches from the past to a situation that is clearly based almost entirely on a lack of confidence in the future.
Observation produces the best information to complement common sense. Look at the markets over the last three days: what is everyone doing? Partying and shopping. What is everyone thinking about? Getting pleasantly tipsy and bloated in the bosom of the family over Christmas.
Result? These three days have been the most stable of the last thirty-four.
My advice is this:
To floor traders: calm down, don't adopt any positions and ignore the news feeds. Go home and dress the tree.
To bankers: learn some humility, learn who now mostly pays your wages, be thankful to those whose tax payments ensured you still have a job, and forget bonuses for a while. Go home and help cook the turkey.
To retailers: shut up shop, turn off the heating, give your staff January off, and tell the shareholders to go hang for a bit. What are they going to do - kill the golden goose? Go home and make some mince pies for Santa.
To consumers: It's going to be the coldest winter for years. Stay indoors, put on three extra layers, turn down the heating, switch off all the tellys and pcs, have a few drinks, and tell the kids (a) stories (b) anecdotes (c) jokes and (d) you love them.
To the G20 leaders: You clearly have no idea what to do about the present, so do nothing - you'll only make it worse. Instead, think about this for the future:
1. Your first duty is to those citizens who put the most in and take the least out.
2. If the only way you can keep your economic system going is with dangerous levels of debt, then you need a new system.
3. Rent a small house and get on some buses without 200 snappers present. Look at the people next to you.Think on why they look miserable. Maybe it's your fault.
4. Fix up to meet your G20 chums in February with a view to a reconciliation of the aggregate national debts globally. Whatever's left owing, tell the creditor nations to print some money between them and then write it all off.
5. If this strikes you as odd, bear in mind that we have blown $7.7 trillion globally, to zero effect.
6. Start again, this time with a view to creating the greatest happiness of the greatest number.
And to everyone: a Merry Christmas, a realistic 2009, and the invitation to visit www.notbornyesterday.org
It'll be something to do on Christamas Day
John Ward
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remember that short period of time when people actually got excited about saving through their pension policy. favourable place to hold up some tax efficient cash for the future. well it was all too good and tempting to last. brown waded in and everybody grabbed at bricks and mortar to take care of their eternal security. resulting in massive property increases and another euphoric time. we then enter a huge borrowing binge against our increased asset worth. not all bad as economies have to develop. the question is. Are we really going to play the game and get this economy moving? or do we take a lead from the points made by peterbaldwin No5. We have to focus on the decisions that will sustain the real quality of human life through expenditure on relevant infrastructure not irrelevant conspicuous indulgence.
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Any one have any good news?
I've heard it on the grapevine that we no longer have a beef or butter mountain or even a wine lake left to ease the misery, now that to me is a real disaster, its much more comfortable watching a disaster unfold with a full stomach and being half piddled!
In the words of America's most gifted man of recent years......DOH!
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#267
My advice (I may be wrong!)
1) Pay down debt as much as you can, especially credit cards! Pay the mortgage but don't worry too much about paying capital off
2) Invest in some home grown veg, chickens, ducks etc.
3) Invest time in researching self suffiency, there is good historical info available from WW2 history sites, dig for victory, crop rotation etc. (We won a war by feeding ourselves!)
4) Research all the issues debated here, follow your intuition!
5) Value family and friends, these are assets the cannot be devalued by others.
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Given how desperately banks need our money to maintain their capital ratios it does seem that those of us who are net positive money are holding all the aces.
If we put money in the bank at effectively 0% interest we get little reward for taking the risk of the bank folding. If we withdraw all our cash and stuff it in a sock under the bed we still get the same 0% interest but don't care if the bank folds.
Admittedly we become vulnerable to the burglar of the striped suit and swag-bag variety, but countermeasures against such visitors are easier to create than countermeasures against corrupt banks and inept governments.
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comment 265 Spring election?
a man who can save the world is surely above the election process - Mugabe rules o.k.
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#255 & #265
Just checked and confirmed that Sunny Jim was indeed Chancellor of the Exchequer from 1964 and resigned from the post over the 14% devaluation of the pound in 1967, being moved to Home Secretary until 1970. He then later bacame PM.
Two conclusions:
1) In those days, even labour politicians resigned when causing economic chaos
2) Despite having to resign from collapsing the pound, he didn't learn his lesson and went on later while PM to create sigificant inflation, which helps confirm the view that inflation is the crack cocaine of Labour governments
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182. JavaMan1984 wrote:
"Perhaps I've missed something here as your posts are normally logical."
JM, we have presently little connection between bank base rate and savings rates, indeed HMG is getting 12 percent for its loans to the banks and Barclays is paying 14 percent.
My idea is to overcome the twin evils of borrowers simply re-inflating the bubble which will be catastrophic and may itself destroy money itself and second to prevent the habit of saving being devalued in the extreme so as to leave us with a World that spends somebody else's money without any intention of paying it back and at the same time as saving is seen as a joke.
The saving incentive would be in the from of a higher rate of interest, not actually being paid but accruing as a deferred bond to be redeemed when normal times re-establish themselves.
Similarly some mechanism, other than interest rates which may in the short term be zero or even negative to ration and control borrowing must be constructed if the printing of money is not to get completely out of control - not just as in the Weimar Republic, but in the whole World.
My biggest fear is the wholesale destruction of money itself. If money is made totally worthless how on earth can any sort of economy be run; how can trade in goods take place - I don't think it can and that is why something must be done. Not just the end of capitalism, but the end of all money itself, and the end of all trade - all devised and arranged by the Bankers and the Regulators. (These men must be fired NOW!)
PS thanks for the Logical bit!
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The end of money?
I recall bartering a ship load of tea for a ship load of shirts early on in my business career - but at lest I could sell the shirts for cash money - but what if there is no money - how can we trade?
Continues my post 278
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Yes -someone said it! Continuous prosperity is a myth - there must have been more than a couple of us looking over our shoulders for the last five years!- We didn't know where the break was coming from to be sure- but the state of the American economy was always the best bet. Coughing and sneezing - it deflates so do we - it cuts rates so do we - it prints money so do we. Whatever happens in the US will lead the way for better or worse- it's a keep your head above the water scenario ahead for a while. You can't blame anyone for tucking a few quid away. Personally I'm watching and listening to Mr Obama. He and Gordon will soon be great pals together in a very tight corner.
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Rorbert...
This remines me of medieval times when people use to pay the executioner, so he would do them a good job by applying a quick and painless death.
What really worries me that so many people in this day and age are queueing up for this. Well if the recent poles are anything to go by that is. Even more worrying is that not until there slow and painful death will they realize that they where wrong. And they will not get there money back .
i can just see GB sat there saying mine all mine, hehehehehe
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Robert
I reckon we will see inflation in 2009 thanks to the Sterling devaluation. Much of what we buy from the Euro zone will cost 20% more soon.
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I was able to predict this drop off in 2002 with the help of Elliott Wave theory and a splash of generalised wisdom. The breakdown in civilisation come next, starting as civil distubances/riots and progressing from there. By the way, the population growth chart looks very similar to the economic growth chart since industrialisation - so take from that what you will...
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is this the start of world war 3? what better excuse is there for governments around the world to spend money than war?
id like to think that we all believe that war is bad, but historically some wars started because of an economic crisis and sometimes ended one.
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#62 Sorry, you are absolutely wrong. I am tired of people abusing Keynes who are not really familiar with his ideas. He would have been appalled at the antics of the banks since the millennium. Here is a quote from chapter 12 of his "General Theory": Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.
.... The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment indissoluble, like marriage, except by reason of death or other grave cause, might be a useful remedy for our contemporary evils. For this would force the investor to direct his mind to the long term prospects and to those only.
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Holy Hotcakes.
Just watched a squirming McNulty on newsnight discussing unemployment. This man has no vision whatsoever.
Erwin Seltzer and the gruff chap from the GEO made some extremely poignant comments on what SHOULD be happening.
Ignore the silly bint on woolworths, trying to defend a dud business!
Seltzer has it right, the 12-18 billion that was wasted on the VAT return should have gone directly into cutting Employers National Insurance contributions. What percentage that tackles I have no idea but if you are adamant on a fiscal stimulus, direct it at the deepest source of economic growth, namely JOB CREATION!
Here is an idea, just like big manufacturing firms and unions are accepting workforce wide salary cuts or shortened working weeks to save jobs, maybe the government could have done the same. 10% Public Sector QUANGO salary cuts (thats being too generous but baby steps and all that) as well as 1 day a week less work would save a cool 5-10 billion a year!
That plus the £20 billion of the stimulus all into Employers NI contributions, would that be large enough to almost halve employers NI? probably, that's probably around 4% more money available to save/create jobs for business, which in turn reduces the unemployment count, which in turn frees up yet more money otherwise destined to the welfare state to be ploughed back into more job creating actions.
3 years time and we would have significantly reduced unemployment, significantly reduced welfare dependency, higher income tax revenues from higher employment, all POSITIVE effects.
And I have zero economic academic or industry experience/training.
The thought processes of our current crop of politicians, both in power and in opposition is some stifled and orthodox it beggars belief.
VAT giveaway was a galactic waste of taxpayers revenues, the NI hike wil stifle the recovery no end and the PBR is just a sick joke!
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Anybody listen to VICTOR B of LloydsTSB
fame spinning away at lunch time???
Utter CHEEK of the man!!!
A safe pair of hands?? HA HA.
"Wasnt me" routine.
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... And yes we must remind ourselves that the practice of most economists is best likened to that of the policeman laying false finger-prints to get an unjustifiable conviction- how right they must be in court but...
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#273
Yep. My mortgage payments have dropped by 20 quid a month, so my projected budget for next year now balances instead of running into the red from February on.
I'd call that good news.
Of course, losing my job in March could colour my view of the world a little - but for now I'm happy.
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If the government lends recklessly e.g. via fully nationalised banks to no-hope sectors and businesses, with confidence continuing to plummet, we need not worry about deflation - we will have hyperinflation, as international confidence and investment in the UK totally evaporates.
It is a fact that a number of businesses which flourished in a boom will not be viable or will have to contract in a credit conscious society - people will do without those luxuries, latest gadgetry, latest model cars, the gardener, the ironing service, etc.
To prolong over-capacity in whatever sector by reckless lending will only slightly delay the evil day - those resources need to be redeployed in productive areas. Fewer retailers selling imported goods and fewer bankers, and more people producing things. The country for example desperately needs improved infrastructure which will in turn assist growth in other sectors in due course.
The media continues to destroy confidence - for example the BBC's political editor today in a very gossipy fashion on The Politics Show in between the joking quoted his reliable "sources" as saying the government is actively considering full nationalisation of the banks.
Yet I read this evening that the City Minister in an interview with the BBC says it is not under consideration, and Blank believes further capital in Lloyds/HBOS will not be needed despite the large write-offs (and who is better connected with this Labour Government than the former chairman of the Daily Mirror).
Why aren't these stories being given prominence by the BBC?
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Gosh ive only been deleted once in a week.
My re education therapy must have worked.
I THINK GORDY & MANDY WILL SAVE THE
PLANET.
I MUST REPEAT: SAVE THE PLANET 42
TIMES EACH HOUR.
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Sorry, the question was:
Deflation or Inflation?
no thank you, I feel a bit constipated right now, and have lost my appetite for either.
I'll go for emmigration
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Bummer innit, deflation - stuck in again tonight not going to the pub cos I'm waiting for the beer to get cheaper.
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If we follow the examples of relent pursuit of self interests set in politics, finance and commerce, then people who have been prudent over the years and now rely mainly on their savings must welcome deflation, perhaps 50%, to offset the values lost in the current credit crunch.
While the goernments are quick, eager and generous to hand out money to bankers and financiers who had many years of fantastic bonuses, I don't think we will get one cent/penny of handouts to cover our investment losses, borrowings and expenditures.
Perhaps the politicians and those receiving handouts should set personal examples of spend, spend, spend to get us out of this one.
Genuine leaders will do themselves for longer and more diligent what they ask others to do and suffer no less consequences if it did not work. I cannot name any in politics, finance and commerce.
With the continuing weakness of the pound against the euro and US dollar, UK can afford a modest deflation, at least until the euro and dollar weakens. Only in my humble opinion.
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#257
Yes - the largest retailers insist on a 100% markup - they do have to pay large costs of wages etc. I know that as a supplier to one of them.
I am also an insurance broker - being hounded by adverts saying 'cut out the middleman' - carefully omitting the fact that my staff are well trained in advising on insurance and are based in the UK - not India.
My commission - and remember that the big direct companies pay millions in advertising - why not cut them out and save on the advertising costs - on motor insurance is 10% of premium. Out of that 10% I have to pay rates, salaries, compliance costs, stationery, advertising, training costs, in theory if losses occur in the banking sector over a certain amount then I have unlimited liability to reimburse the FSCS for their misdemeanours.
And that is why you won't see any insurance brokers now on the High Street.
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#284
You are waking up!
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I don't see how we can avoid deflation.
Deflation is where money becomes more valuable and Inflation where it becomes less valuable.
A simple supply and demand graph would show that if you reduce the supply of money you increase its value.
The destruction of the value of investment products in the last eighteen months, investments which were effectively used as a money, increases the value of the money that is left.
Because banks have lost the value of these investments, they have to reduce the amount that they lend in credit, as we can see very significantly. Again credit is effectively money by a different name. Again the money that is left increases in value.
I think we are already in a deflationary cycle and that by the time the fiscal and monetary measures start to take effect in several months time, it will be to little to late.
We cannot avoid the disaster.
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I was under the impression that borrowing and spending more than I could afford was what caused this problem in the first place. Yet here we are being told not to save but spend ?. The simple fact that we have all been duped into borrowing more than we can afford, or buying now and pay later. There is only three possible reasons why our government would persist with a policy that has already put us up the stream without a paddle; 1 they know something we dont ; 2 they know even less than we do ; 3 A very large comet is heading our way so number 1 looks like the favorite or I am being to kind in thinking the people that run the country are brighter than me ?.
I have rid myself of credit cards, cheque books, overdraft, debit cards, and as much debt as I can in the last four years, I know what is sensible and spending more than you can afford is WRONG.
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The reality of the situation is if our standard of living slips it will never return again. The poverty trap is a long term or life long problem for each person affected. Statistically though new factories or businesses can recover profits, but it is not the same for discarded people.
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5.
Q.
What is the inflation rate as of this month?
A.
What inflation? We've got deflation, haven't we?
Well, no we haven't. Inflation is 4.1 percent.
The sleight of hand is Mervyn King's, and his alone.
How has he persuaded us to worry about falling prices when they are rising sharply?
It's what I'd call 'IrRational Expectations'
He knows he's got to cut interest rates to make imports expensive so we don't buy them.
But he is only 'allowed' (think anal retentivity) to do so if inflation is fully under control.
He knows he must cut interest rates a huge amount.
Not just to make imports expensive (in fact it's the unemployment that will reduce the import bill).............
.......but to make banks lend again (again clearly sheer nonsense, 'cos interest is the price banks GET for lending. Lower it, they do less of it).......
......and to help those in debt (at last, a good reason, were it not for the fact that, pound for pound, it's only 2/3 effective in reactivating the economy (Peter, the saver, pays Paul, the debtor). The other 1/3 is interest payments to foreigners)
....so he'd better cut them as hard as he can go
(With the other West central bank lemmings cutting theirs, if he didn't, the pound would be so strong we'd be buying China and India themselves. On credit)
So he slashes interest rates. So strongly that the only circumstance in which the policy would make sense is DEFLATION.
So.........if the Bank declares itself worried about deflation, often enough, stridently enough........and we all believe it.....
(and my Q and A sesssion was real world. I asked 10 people today. All gave the same answer)........
.......why, then with this much DEFLATION, we'll have to SLASH interest rates.
Well done, Mervyn, the first IrRational Expectations theorist.
He may not be a banker, but boy, he knows how to tell 'em just like bankers do.
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Poisonous Banks Destroying World Economy
For our Global system of money to work we have depended entirely on all our banks to act responsibly, with honesty, morality and probity.
Because the banking system realised it could get away with being increasingly dishonest, immoral, completely irresponsible and absolutely without the slightest hint of probity or decency, the currency system of the World has been destroyed by their fraud and breathtaking greed.
We have a system whereby nearly all the money is manufactured by the banks issuing loans to their customers. These loans amount to about ninety five percent of all the money in circulation. Nearly all the money we therefore use is created by a bank making a loan to someone else.
A culture of rapacious, greedy dishonesty was created throughout every aspect of the banking system as the banks tried to lend ever increasing amounts of money with a complete disregard of their poisonous behaviour towards borrowers. They wanted to lend as much money as possible because the more they lent the richer the banks themselves could become at the expense of those borrowers.
So, all this had the effect of putting absolutely every business and individual person into more and more unsustainable debt. The currency system is actually called money as debt and a fractional reserve banking system whereby the banks can create unlimited amounts of money out of nothing. If there were no bank loans at all, there would less than ninety percent of money in circulation and no-one would be paying interest to the banks.
This system allows banks to exercise increasing amounts of control over every aspect of business and personal life. Everyone was at their mercy. All of us were really working for the banks - working hard at earning enough to pay the increasingly absurd levels of interest and penalties on all the banks loans.
Businesses were constantly persuaded to borrow more money to expand, individuals were persuaded to borrow impracticably large mortgages to buy homes and consumer goods they really didn’t need. We were all told how silly we were if we didn’t use credit cards to spend money we didn’t actually have.
The banks were in complete control of almost the entire supply of money everyone depended on to enable all trade and personal commerce to exist. All the money in use could be traced backed through debt after debt issued through the dishonest banking system.
The financial well being of every business and individual now depended completely on the banks and how they behaved, and how honest and moral they were.
When the levels of dishonesty exhibited by the banks became so blatant and unsustainable, it became so extreme it had the effect of making the banks themselves too frightened to lend to each other.
They knew better than anyone else how dishonest and fraudulent their system of loans and debt had become and how each bank would try and outsmart other banks by being even more devious with loans to each other.
So the banks stopped lending to each other because they knew they were ripping each other off with dodgy loans which were less and less likely to be paid back.
If the banks weren’t going to lend to each other it interrupted the circular movement of money from bank to borrower and from that borrower’s loan ending up in another bank which, in turn enabled the next bank to issue more loans of many, many times the amounts actually being deposited in the bank. And so on it went around in endless circles.
But once the banks interrupted the entire money supply by being too frightened to lend to each other, it also had the effect of rapidly shrinking the money supply. The behaviour of the banks is making money literally disappear from existence at exponential speed.
This is the reason people have less and less money to pay their debts or to actually buy anything they need. The World economy is being destroyed by all the banks because of their greed and fraud and their fear of lending to each other. They know how dishonest and unreliable other banks can be with lending money and fear their loans to each other may not be paid back because the system they created is so dishonestly fraudulent and unreliable.
Governments around the World thought by lending gigantic amounts of money to all the banks this problem of confidence in the money supply would go away. All the money Governments loaned to banks would enable them to commence lending to each other again and get the circulation of the whole supply of money moving again.
Government were wrong. They were wrong because lending to the banks didn’t make the banks any more honest or improve their morality or common sense in any way at all. So the banks just pocketed any money they could get hold of, held on to it like grim death, carried on paying themselves ridiculous ‘bonuses’ and still refused to lend to each other.
The fact this also meant they had less and less money to lend to anyone else too, didn’t seem to bother them. They didn’t seem to be able to work out their collective behaviour was rapidly destroying the whole World economy and even themselves as they started to go bust one by one.
If something doesn’t change pretty damn quick they will probably all go bust in the end. But they are too pathetic to see that, as they whimper on about how it isn’t their fault at all. It must be someone else’s fault, they say. Meanwhile things will continue to get much, much worse.
They are liars !
Every single single business, and individual wishes to continue to work hard to earn themselves money. Businesses do not wish to sack employees and cease to exist, employees don’t want to sit around jobless and having their lives being destroyed by unemployment. It is being forced upon them by the banks.
We all depend on being in possession of money to trade and prosper as a business, and in turn pay employees’ wages so they can buy things they need from the businesses that are prospering.
Money is simply a token of trust we can use to give to some one else in exchange for goods or services of actual real value we need from them. They can then use that token of money we give them to buy what they need from others.
The banks have manipulated the money system with sheer greed until it has been taken to the brink of complete destruction by their deviousness.
The banks are the only custodians of the money system. No one else at all has control of it. No Government, business or individual has control of the system of money. It is entirely in the hands of the banks. They have abused it, misused it for their own profit and have shown a callous disregard of the damage they do to everybody they deal with. Their behaviour has been, and still is quite simply disgusting.
The banks cannot be trusted. They created the Worldwide financial recession single handedly with no assistance from any one else. They are currently destroying the money supply everywhere with lightning speed. Their self seeking manipulation of the World’s money supply is destroying everyone’s ability to trade, or have a job, or pay back their debts. The entire money system is collapsing exclusively because of the irresponsible, fraudulent behaviour of the banks.
They are utterly callous in turning tens of thousands of people out of their homes, leaving houses empty, vandalised and pointless useless. They are equally callous as they take away the jobs of millions of people by destroying businesses with toxic loans and making it impossible for trade and commerce anywhere to function normally any more .
With this vicious control of money the banks have, allowing them to say who has a business and trades or who has a job and who doesn’t, who starves or who has a home or who is thrown out of their home onto the street by bank bailiffs, to have their entire lives destroyed by being made homeless, is a grotesque condemnation of modern times.
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#287 Hi alexander.
Here is the link for the interview with Victor Blank if anyone wants to listen. It starts about 5 mins into the clip. world at one
One interesting point was VB's revelation that Crosby of the FSA, until recently ceo of HBOS, played a big part in approving the takeover of HBOS by Lloyds.
I do wonder whether Crosby has a pension from HBOS, and what would happen to it if HBOS folded and the merger didn't take place. I expect that, being fine upstanding citizens, it's all been sorted out so that there was no conflict of interest. However, if as VB said, there needs to be more confidence in the system, then, because he was a key player in causing this crisis, the FSA head's head should roll.
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#150 "Isn't that why we have the invaluable institution of bankruptcy? To stop throwing good money after bad? To realise the actual value of assets rather than those fantastically imagined in the minds of those responsible for the mess?"
One of the best points on the blog. I have come round to the view that any bank with huge "funny money" debts should be allowed to fail, rather than that debt becoming sovereign. HBOS could still go under before the merger - the share price has actually declined in recent days as a percentage of the offer price even though everyone has approved it now. These debts are a cancer which threatens the entire body economic. They should be excised, and written off.
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Robert...
would you please comment on the rumour that all new banknotes issued by the Bank of England are to have the wording on them changed to...
I promise to OWE the bearer on demand the sum of X pounds?
Would you also comment on the likely effect of removal of financial shorting restrictions in Jan 2009? Does this mean all the banks get hit from abroad again?
Oh and have a nice day!
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Always remember the Treasury and BoE know more about the conditions of balance sheets and employment intentions than we the great unwashed.
Getting rid of the employers NI contribution looks much morer sensible to us punters than VAT to 15% So why didn't Crash do it. Because business' told him we're all going to be sacked. He put up family credit to enable us all to work part time, sharing out the few jobs left.
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Hi. Always remember that Crashman and Bobbin have access to far more information than we do. The Banks likewise.
So here is a little reminder. Our large companies applied "just in time" to everything from their finances to property use. Many of the largest are little more than a brand name and some intellectual property manipulated by clever clogs executives to maximise their bonus.
It's not the cash point at Tesco's not working that concerns the government, it's tescos, sainsbury's and the rest being empty. When Bobbin talked to the guardian about it being like 1948, we should have been thinking rationing and a marshall plan.
Think of it another way. Our police now have Tasers, which are electric cattle prods. This is where the govt think we are going.
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"The Fed is doing this by spending hundreds of billions of dollars buying up US government debt and also loans to companies and householders - which has the effect of forcing down yields or interest rates."
Oh yeah ?? I would have thought that the first thing that happens is that the major holders of US debt will be selling off their holdings as fast as they can to minimise their risk/exposure to that currency !!
At the moment, these debt-holders are mainly the Middle and Far Eastern economies !! That is why, no matter how much the US government try to "reduce" that debt, it will have little effect on the liquidity situation since the debt holders are converting their debts into cash and hoarding that !!
This policy in the US has less than a snowball's chance in hell of success unless the US plays fair and open up its companies to be bought by foreigners and, thereby, reabsorbing some of the debt that it so merrily dished out to the world !! Otherwise, US protectionism will destroy the US economy faster than anything else and will result in the sale of its companies to foreigners anyway BUT at fire sale prices !!
As for Britain trying the same trick, Britain has *NO* more money !! Borrowing more is just going to exacerbate the situation, not help it !!
On top of all that, there is this massive pair of black holes in the public services pension funds that have to be dealt with - the over-payment of pensions up until recently and the reduction in value of the funds itself !!
After all this, is it any wonder the Sterling dived *AGAIN* !!
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#6 "So when hollywood makes a film of all this I wonder which headlines will make it, any suggestions?"
Flash Gordon saves the world ???
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#153 "If previous interest elements were introduced as write offs to reduce the debt, everyone could afford to pay back remaining capital, rather than be unable to service debts"
And if they had wings, pigs could fly !!
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#301 Having made several good points, you spoilt it be tarring every bank with the same brush !!
If you look around carefully, not *ALL* banks are in the same state/fix. There are still some banks that have *NOT* lent to the ridiculous extent that most of the others have.
In the great shake-up to follow, some banks will survive through their own merit, some will survive by being massively propped up by various governments and many others will go to the wall !!
The ones that go to the wall will be mainly from the developed countries since they have not learnt the hard lessons of the Asian Currency Crisis !! The ones propped up by the various governments will continue to hemorrhage cash as they try to satisfy political rather than commercial operations.
It is the ones that have been or are forced by their governments to keep large reserves, having learnt the bitter lessons of the past, that will prosper in the coming years.
The banks in Lebanon do not seem to be doing badly despite having an economy a fraction the size of the UK !! They, too, operate on the Fractional Reserve System.
And then there's the Garmin (please check spelling) bank of Bangladesh !! The world's first and most successful "micro-bank" !! It's business philosophy is to help the "little" people with micro loans at commercial rates. It is so successful that it has been copied by many banks in the developing countries and has earned its founder a Nobel Prize !! Our bankers will probably earn a similar Nobel Prize when they have blizzards in Hell !!
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The theme now has to be, "Are the politicians losing it?". Take a look at Bloomberg this morning and read about Obama now considering an $850 billion stimulus package. Add that to all the other $billions ($trillions?) being sprayed into the system right now and we're talking cosmic-come-fantasy levels of cash. How the hell does it work?
Here's my take. The politicians and central bankers are now frantically pulling all the levers they have and, er, nothing is happening. Behind closed doors in the corridors of power, I'll wager there's a degree of chaos and panic. The reason being that if this keeps going like it is, the only obvious and single most alarming and significant outcome will be mass unemployment, perhaps on a scale we've not seen before.
I'll leave you to figure out what could happen after that.
I really do hope that my analysis of all this is plain wrong, but I don't see any clever commentators (forget politicians and bankers) telling me how and when this mess gets turned around, who's going to do it and where from.
Answers on a blog post please ...
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I think that the goverment should encourage spending by offering an amnesty say for a year on vat on all building works, many of the properties in this country are afflicted with incomplete works to homes, this would improve those homes, and save money in doing so. 17.5 or 15% to refurbish extend or repair delays works and encourages spending in the black economy, an amnesty would encourage people to use small vat registered builders, who could reclaim all this vat, it would get essential maintenance work carried out, improve the housing stock and improve the enjoyment of peoples houses, these are areas people would be prepared to invest in as they can see the benefit and importance to their own home rather than be encouraged by spurious property programmes to become developers.
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Deflation destroys capital. Inflation destroys debts.
Worrying too long about the latter leaves us now facing the former, which is much harder to control. There is no limit how many times the BoE can raise rates to combat inflation, but right now it only has 200 basis points of ammunition left to "protect" us from deflation.
The country is still not facing upto the fact that we are in for a depression like the 1930's and not like the early 80's or early 90's.
My advice to anyone right now is to get that debt liquidated! Once that is done, anyone still in employment (which is still the vast majority of us) will find their real-term earnings start to increase. The falls in sterling make our manufactured goods much more competetive, so a historic opportunity presents itself now.
The government should introduce a two-speed interest rate structure, where anyone starting up a business that makes things and employs lots of staff gets a more favourable rate for far longer than anyone wishing to borrow to create another wave of "air jobs" which keep us stuck in the boom-bust cycle.
Mortgage payers and rent payers should benefit from falling prices too, but in practice what we see are large numbers of us on fixed-term mortgages, and still paying huge amounts of rent, well over what they should be in this part of the cycle. Once the financial sector has been flushed out, anyone with buy-to-let interests is going to be lined up in the downturn's gunsights next...
The big danger for those still in work is that the government will over-inflate the currency. Sterling has already fallen more in anticipation of this, rather than the prospect of lower interest rates that is being blamed at present. If all this printed money is spent on building a new industrial base (ie creating real jobs for the future) then in the long term, we will emerge from this smelling of roses. However, I for one fear that the government will choose the following array of WRONG/right decisions, and throw the country to the dogs:-
We must not improve Benefits for the long term unemployed, whilst discouraging employers from keeping staff on.
We must not cut taxes for firms not in trouble, instead of taxing heavily firms not actually losing money, that are (ab)using this "opportunity" to lay people off.
Stop massaging the statistics, and instead tell us (the public) like it is. The BBC has been telling it like it is, and yet has been criticised for it!
We should not encourage foreign investors (speculators more like) to build more air jobs, and give them such huge tax breaks that they make money even when closing down after a short period, laying everyone off yet again. We should discourage anything except LONG TERM foreign inward investment in this country. I'm talking 20+ years before you can withdraw profits from that new factory being built. Failure to do this will result in a bevvy of foreign businesses in the vein of hedge funds, ponzi schemes, and any other form of paper-moving designed to enrich the foreign "businessman" at our - the british worker-s - expense.
Finally, some kind of time limit should be imposed for debt collectors to reel the cash in. What we have at present is such people going "dormant" for perhaps upto 15 years (from the date of default) and then suddenly, just as we are making recovery, they pounce and take your now-recovered-in-price house.... I say to the government "Let's remove this sword of damocles from the debt-ridden public right now". If debt collectors are not happy with what assets they can strip within say, a year of default, then they should write-off for good (not to be resurrected later) all debts. Current legislation makes it look like bankruptcy or entering an IVA is a good way of achieving just this, but in practice Bankruptcy opens the debtor to upto 15 years of comeback from creditors, whilst entering an IVA means paying quite large payments for 5 years, and then handing over any equity in your house at the end of it. They are there to help the creditor, not the debtor, yet mis-selling as ever has given the public the opposite idea.
It can be said that this downturn is about too much debt held by too many. That was just the start. It must surely finish with the remaining excesses in society purged. These include overpay for sports and media people, government waste, expense accounts, and even the way "professional bodies" like legal and medical firms don't do a full-days work and yet charge the earth for their consultations.... I for one would like to see the vast majority of jobs being lost starting at the top end.
At present however job losses are across the board. Grab hold of something and hang on - This downturn is not even half-done yet.
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"the cause of our economic woes is that we borrowed too much - or financial institutions lent us too much "
This is because the cost of borrowing ie interest rates was too low. There is one cause, that governments forced the interest rates below the true market rate thus causing a boom.
So the cure is? To set the interest rates even lower to encourage us to borrow more. Anyone else see the flaw in this?
Deflation is good fo rthe saver and the consumer. (Classic example would be computers which have consistantly dropped in price year on year)
Its only bad for people with too much debt and governments (or do I repeat myself), which is why they constantly fight it and try and increase the amount of inflation in the system.
It is this government caused inflation which is the true source of the boom bust cycle and more voodoo Keynsian economics is only goingto make things worse. How much worse? Well, the Austrain Economic view would be that these cuts will introduce hyperinflation into our economies.
"This process has the ghastly name of "quantitative easing". And it's not dissimilar to running the money printing presses at quadruple speed, filling up choppers with cash and then showering the population with greenbacks."
This is what was done in the Wiemer republic and we know what a succes that was.
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309. At 06:54am on 18 Dec 2008, ishkandar wrote:
#153 "If previous interest elements were introduced as write offs to reduce the debt, everyone could afford to pay back remaining capital, rather than be unable to service debts"
And if they had wings, pigs could fly !!
++
good reply funny guy.. you try pay off £30,000 credit card debt from lawyers fees. mbna call you from ireland 10 times a day
anyway thats what an IVA is (pay a reduced settlement amount)
also free debt management companies freeze interest and allow you to pay how much you can afford over several years.
credit card companies are gangster loan sharks like lawyers
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Let's not forget that one person loan is another persons savings and many.pensioners in particular,(and they are a significant spending force) are having their income wiped out altogether by low interests rates.If we had encouraged saving rather than spending none of this would have happened in the first place.Consumers,government and banks need to get back to a situation where they only spend what they receive in income.
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btw
legal aid and family law are gender biased
lawyers drag out cases for years to accrue costs
they target your home
should fathers walk away and not see their children?
best advice stop working and go on the dole an the case will get resolved quick fast
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307. At 05:19am on 18 Dec 2008, ishkandar wrote:
At the moment, these debt-holders are mainly the Middle and Far Eastern economies !! That is why, no matter how much the US government try to "reduce" that debt, it will have little effect on the liquidity situation since the debt holders are converting their debts into cash and hoarding that !!
++
Actually that's only half true if you look at the insolvency website the bankruptcy restrictions are for a mix of middle eastern and english names.
Al queda could be bringing the country down by bad debt
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"As I've been boring you rigid with for months and months now, the cause of our economic woes is that we borrowed too much - or financial institutions lent us too much"
I didn't. Not my fault. Delighted, however, to have my prudent pockets plundered to prop up the New Labour feckless.
If Brown was a dog, you'd have him put down.
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#301
'Government were wrong. They were wrong because lending to the banks didn?t make the banks any more honest or improve their morality or common sense in any way at all. So the banks just pocketed any money they could get hold of, held on to it like grim death, carried on paying themselves ridiculous ?bonuses? and still refused to lend to each other.'
Nice rant.
As previously noted, large institutions have their own, very powerful, internal world which includes behaviour norms and internal morality. Don't expect a culture change in banking unless there's overwhelming pressure (from where?).
It would be tempting to see our governments as stupid and naive in their dealings with the financial institutions. This in turn is naive - the relationship between government and finance is so strong and established that it is an 'internal world' itself, far too busy to deal with our reality.
It would be nice to have a bloggers' vote on the best course for the world; inflation or deflation?
My vote goes with deflation, upskilling and enlightened long term investment. Some hope.
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the insolvency service and insolvency practitioners (such as KPMG) strategy is to take your home and former matrimonial home.
they say you have the legal right to go to court but they like going to court to justify extortionate fees.. courts are useless anyway
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Inflation or Deflation?
I wish the choice had not already been made for us by the government.
It is going to be massive inflation following the 'phoney war' period of deflation for a few months at most.
If we are honest with ourselves we are already beginning to see the first signs of inflation, partially obscured by the temporary falls in crude oil prices. However, price of food is up again on last month and energy bills have not budged. Why, because much of what we eat and use is imported and even where it is home grown many of the component parts or raw materials still needs to be imported. As our currency falls prices much higher.
So new loans that the banks will soon be forced to make to people who should not be lent to at rates that do not reflect commercial risk will be covered by further money printing.
How is this good for the country? I just don't see how soaring food prices and currency instablility, along with everything else will help the unemployed or low paid taking to the streets.
Its a mess
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#311 -I read your post with interest.
Panic and chaos behind the scenes - I wouldn't know because politicians and ministers are pretty tight-lipped about everything. Each day brings some new domestic initiative from Govt suggesting they have much more important things to do than worry about the economy. Now and again some nonentity from a previous and equally hopeless regime, like Sir John of Family Values, or Lord Clarke of Brown Shoes pipes up and tells us it's all being grossly overplayed. And dozens of posters here chime in and agree wholeheartedly. So a large sector of the population and the whole of the Govt seem to think everything is just, well, fine really. And another, equally large sector of population - as ever - will take whatever they can get for themselves, never read the news and not care in the least.
And then there is the sector who do their best to read the signals because we're trying to look slightly farther ahead in business than, say, just tomorrow, which is where, I guess, you and I come in. In this sense I agree with your conclusions. There is another bubble coming and this one won't be containable by injecting and pumping money around the place and making pledges and promises. That bubble is the fast growing one of firms who know their livelihood is balanced on a knife edge, firms of all kinds, retail, wholesale, import, export, manufacturing, farming - the whole cross section. Plus all the folk who are being done out of their personal livelihoods and futures and losing everything - not the least of which is their hope and dignity and everything that was precious to them especially a bright future for their children.
I fully expect this bubble to burst in the early part of the coming year and it will bring a great levelling and an end to the rotten systems and party& government methods and lies and broken pledges and mistaken beliefs that have put us in this mess. The seeds were sown many years ago of course and the great tragedy (in effect) is that no government since WW2 has actually understood that to have a vibrant country with equality and opportunity you have to have a country capable of bring wealth into the nation by using home-grown manufacturing and intellectual assets to the extreme limit for the benefit of all. The resources available to a govt (and thus a nation) which does not mebrace this are very finite and now they are stretched to the limit, which makes recovery and diversification almost impossible.
This is a very dangerous position to be in because sooner or later a group of RealPolitikers with real appeal across a very broad spectrum and the full support of the disposessed will realise that all that's left after this trainwreck is a fragmented shell - a shadow of a formerly proud and prosperous country - whose only remaining assets are limited resources and the population itself and take matters into their own hands. There are plenty of precedents in history, even in Britain. Brown has gone to extraordinary lengths to contain this country - the most watched country on earth - but all the police and cameras in the world won't prevent the final fall from grace of the old guard. Their days are over really, they're firefighting and trying to hang on to something that ended abrubtly months ago, only they themselves cannot bring themselves to accept this.
GC
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Dear Robert
""There is now yet another crisis to report Endowment policies failing to deliver.""
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I have just listened to John Humphrys' interview with the Archbishop of Canterbury. I thought the Archbishop was impressive and right, except about volunteer work - I think countless retired people prop up the British economy already with volunteer work that the government probably should be paying for. Robert Peston's point about accountability and responsibility was the same as his. I was not sure what to make of John Humphrys' reiteration of what he calls the Government's wish that we should all spend, rather than save: a) is that true? and b) does John Humphrys agree with it? If it is true, it should not be. There is the myth that money saved is not in circulation. Yes, it is.
In an Economics class at school in 1965, our teacher told us that we may be amazed to learn that banks lend out about 97 - 98% of their/our deposits. On our 2s 6d a week pocket money, we were, indeed, amazed. In the last fifteen years, that has become about 2,000%: that is what is wrong. 'Banks' became driven by targets, and became largely bankers of debt.
If we were to go out and spend all our savings on imported electronic gadgets and clothes, it would have a negative effect on the British economy. Whereas if we save, there is some chance that some of our money could be invested in British firms.
There is a morality in economics. If you buy what you want when you want it, rather than when you can afford it, you are squandering your hard-earned salary.
There were two very good series on television: one was Alvin Hall's financial health check series, and the other was How to pay off your mortgage in two years. Of course, we all need loans, and thus some debt; but it is wrong and foolish to prolong debt any longer than necessary: pay it off asap.
It is quite wrong to believe that debt is essential to our economy other than as a short-term, or proportionally small, expedient.
The trouble is that good economics is boring and mundane - quite out of kilter with the modern need for thrills.
The main victims now are those who are losing their jobs. This is happening because businesses lost touch with the correct over-balance of assets to debt, and instead tried to service the maximum possible debt. That meant both that the tiniest wobble would unseat the business and, more importantly, that failure was inevitable because interest rates on loans were bound to eat up money faster than inflation and profits - partly because profits are always taxed, and partly because inflationary economics is bubble economics: it is bound to burst.
There is no way in the world that trillions of pounds of debt will ever be paid off - ever. That is propaganda. Neither do I think that the government has any intention of reducing public spending: on the contrary, it seems bound to rise: on the NHS, welfare etc.
Could a managed, careful, humane deflation work? Could we all pay ourselves a little bit less, but keep our jobs?
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http://blip.tv/play/Ad3iNI+MAQ
Oh dear....
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#325 "There is the myth that money saved is not in circulation. Yes, it is"
Not entirely - The banking system enables - and indeed encourages - (at least) two people to spend the same money at the same time. The economy has relied on this happening for at least 100 years.
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The elephant in the room is ' public spending' and this is not being addressed by our political masters or indeed the Media.
The spending by Government, both local and national, on our behalf is enormous and must be addressed if we are serious about resolving the economic problems that are besetting us.
Unfortunately I fear that the calibre of our political class is such that they will not have the courage to face up to this huge problem and explain it to the electorate.
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#325 - I listened too, interesting - but pretty lightweight all in all.
When he was talking about volunteer I couldn't make any constructive sense out of it. I think Humphries read it the same way. I waited for Canterbury to say the magic words that manufacturing was the thing that could save the economy, simple enough thing to say but when limply said he didn't have the tools around him to comment on that line and was 'no economist' I just switched it off.
This a man of great potential influence who can capture the headlines when he tries but rarely says anything practically useful in my view. I wrote to him about fighting things like repossessions and foreclosures etc but he didn't respond - he easily could have picked that one up and it would have marked him out as a man of real practical common sense and social conscience. Bit if a dreamer really.
GC
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A must see, awesome stuff!
http://www.chrismartenson.com/crashcourse
Interested in what’s going to happen next (post credit crunch)? This is a MUST see
The course is in about 24 parts (don’t panic some are as short as 1 minute), you will come out the other end with an entirely different perspective on our economy and how it needs to adapt going forward.
It’s a video btw, you don’t sit a test.
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The pound 1.05 and looks like its falling off the proverbial cliff: what next, 90 cents, 70, 65?
Old statistics but the only ones I could track down quickly: 90% of fruit and 50% of vegetables are imported. What does that say about the price of food tomorrow?
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325. At 09:31am on 18 Dec 2008, HCPhillips wrote:
There is a morality in economics. If you buy what you want when you want it, rather than when you can afford it, you are squandering your hard-earned salary.
I agree unfortunately there are many who have no morals yet seek protection from the state when it all goes wrong, some say it is right or moral that we should support those who in your words have squandered their hard- earned ? salary. I say everyone has a choice why should those who have morals and make the right choices be made to pay for those with no morals?
So many here do nothing but run this country down, yet many are content to make their money here and then fly off elsewhere to spend their gains only to come running back when they need something.
Fine if you think things are so bad go elsewhere but go now, don’t milk what you can here before taking it elsewhere and please don’t come running back when your health or your finances need another boost.
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#327 I did not know that. Can that be made to change?
#329 I agree - he is too mild - and he does understand economics enough to have such influence. He says that he wants the church to remain established, so why not wield that influence while it is?
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If only, Robert, we were showered with Greenbacks our troubles would be over. Greenbacks represented wealth already created and not the credit ladened confetti Central Banks are issuing
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#331 Cheerup-things
The pound 1.05 and looks like its falling off the proverbial cliff: what next, 90 cents, 70, 65?
Old statistics but the only ones I could track down quickly: 90% of fruit and 50% of vegetables are imported. What does that say about the price of food tomorrow?
It looks like we are going to have to grow our own, buy local, and only buy UK fruit and veg that is in season. This could be a good thing.
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Why are Governments trying to fight the markets.
The more they fight, the more it convinces the market that it is right.
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When you posted this blog yesterday, I was on the phone, just discussing how the government might just need to "print money" to complete much-needed infrastructure projects.
We went ahead with a post focussed on the construction issues: surely now is a chance, not necessarilty to build out of a recssion, but to build now and so be better placed as a society and an economy after one: http://construction.practicallaw.com/blog/construction/pinsents/?p=23.
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Large numbers of big businesses far from reducing prices as you may expect in a recession are actually increasing their prices.
The theory being, they know we are in recession and they are going to sell less,so they need to make more on each item they sell.
Deflation is not coming Inflation is. and thanks to the goverment planning for deflation that inflation is going to be hyper.
So with that in mind has anyone got any theories on how best to insulate yourself against hyper inflation?
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#333 - the failure to be outspoken on socio-economic and, yes, even political issues is in my humble opinion one of the great failings of either main churches in the last two decades.
And naturally there is nothing eminent public figures (incl MPs) hate more than being told their job by a layman like me.
GC
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You said debt in cash terms that we owe is £45 trillion....
and its 300% of the country's gdp.
how can you get something so simple, so wrong?
gdp in the uk is £2tr (google it, it says 1.93 actually). 300% of that would be £8tr.
You must know that the Usa has gone past the $10tr mark a short while ago.
you've done this a few times.. but you'll learn from your mistakes...........
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May I put a word in for Haywards Heath in West Sussex?
When Gordon Brown sends out the helicopters to toss handfuls of money down to the peasantry below to encourage us to spend, could he please not forget our small town?
A little advance warning would be nice too.
I'll be waiting up near the roundabout near the Princess Royal Hospital.
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#326
A complete classic. Torn between weeping with laughter and then just weeping at the calibre of the present set of 'solutions' being inflicted upon us by those desperately hanging on to power. Help!
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Nordic Agenda:
Putting my cynics hat on I think it's clear that the current Labour government has siezed on the world financial and economic crises to push forward its agenda to move the UK towards a Nordic style planned socialist economy. Don't get me wrong, I like Norway, Sweden, and Denmark. But, I don't think that their economic / social systems are the best in the world.
Of course, no normal person would, after all, refuse government aid when faced with the personal misfortune of losing all one's life savings in a failed bank or industry. Some of the measures taken so far: increasing the money supply and reducing interest rates, appear to be purely monetarist... They are certainly aimed at increasing the flow of cash in the economny and would be normal in any crisis. However, the current underwriting of the banks is a pure land grab and the same can be expected of any similar industrial bail outs (of the auto industry or elsewhere). They simply will not work in the long run which is why all of these institutions' first and foremost aim will be to get out from under the government cosh as quickly as possible. I.e. they wont lend money on to customers until their balance sheets are in better shape.
Meanwhile, the cut in VAT is pure fluff especially when there is a serious increase in Employers NI contributions on the horizon. It is perverse that with an ever increasing number of unemployed any government would, at one stroke, greatly increase the cost of employment as the Labour government is proposing. Clearly, the Labour government want to take further control the labour markets too as, come next year, they'll be the only ones who can actually afford to take on new staff once any form of growth returns to the economy...!
So what are we faced with..? If nothing changes by the end of 2010 we'll have a public sector making up >60% of the UK economy. A pure Keynsian would say this is fine...but I think it is pure opportunism on the part of Labour and that it will be a disaster similar to Labour attempts to save British heavy industrial sectors in the 1970's. The £ will continue to disappear down a plughole; growth will stagnate; and inflation will be the only way to pay off the huge new government debts.
I am not 'anti-public sector' as I have worked both in the pulic and private sectors. Nor am I a slave to the 'growth is good' mantra nor to unfettered free market capitalism. Some of the practices in recent years have clearly been unethical and, in some instances, illegal. However, that does not mean that we should nationalise an economic sector that has been innovative and resilient and has the potential to benefit the UK in the future.
What the markets need is clear guidance about what practices are and are not appropriate and there needs to be real oversight and sanctions for those who break the rules. My view is that complex regulation normally does not work...e.g. Basel 2 was aimed at helping banks determine their open credit risks and to have appropriate controls and assets available to manage their balance sheets effectively. The 'credit crisis' has clearly put this to the test in the most dramatic fashion. Complex rules and laws normally lead to complex responses...thus the growth in exotic credit products that no one, in the end, knows how to value or trade effetively. My own preference is for a simpler set of rules focused on transparency...i.e. if you don't understand it and can't explain it you should not be trading it yourself or selling it to any of your customers no matter how sophisticated they are...
Clearly, there is a place for the public and private sectors in every economy. However, over investment in the public sector has never driven an economy forward for an extended period and will, inevitably, get bogged down in political infighting and bureaucracy. We'll also end up with a lot of jingoistic nonsense introduing trade restrictions to protect 'our industries...'
We do need to help the banks rebuild their balance sheets. But, rather than the current loan and grab we should be structuring tax and rebates for losses so that they can manage their own business - they have, to this point, been quite good at running banks. This does not have to be permanent (simply for the duration of the crisis) and there could surely be a right to claim windfall taxes once profits return but we should not be telling them to loan money at lower rates. That's a nonsense.
We need to improve regulation and oversight of the markets. This does not mean 'increase' regulation and oversight. I.e. we should resist the 'more is good' approach normally taken by governments and regulators when faced with public crises.
We need to reduce the pressures on business by reducing the costs of employment.
And, as an addition, we should increase the amount of money in everyones' pockets. This could take the form of personal tax cuts. However, I prefer a different approach by allowing an increase amongst taxpayers to claim allowances before tax. For example, commuting costs (i.e. 100% of a season ticket or 50% of a car used for commuting purposes). As well as making travel more affordable this would have the additional impact of allowing the government to reduce rail subsidies. We can also be much more inventive on tax benefits for pensions etc. The list is extensive....and includes a new national health insurance scheme coupled with abandoning the over priced lowest common denominator NHS that currently costs us so dearly.
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There are two different issues really.
The first one is: Do we have the resources to feed and clothe ourselves, and ensure that a civilised society can function?
The second is: Does the banking and finance system help this or hinder this?
The answer to the first is potentially perhaps, but at the moment no. In the "good" days the financial services industry filled the gap, albeit at a very high price.
The answer to the second question is definitely that the banking and finance system is part of the problem. In the good days, the apparently high returns divert important investment away from the real economy. Britain escaped from the worst consequence of this, because the high pound enabled us to loot the third world. However, bubble and bust are features not of free enterprise, but of banking and casino-like financial, stock and commodity markets. So, when things go bad, the system destroys real wealth. It's actually a lose lose situation.
A sustainable future must have free enterprise, but must also distinguish between real capital investment and speculation. The current system never worked efficiently, and now it is broken. However, I am very afraid that the governments of the G8 etc will spend considerable time trying to put Humpty-Dumpty back together again. While they are fiddling, Rome will burn, and more innocent people will be ruined.
There is a third issue too. The culture of conspicuous consumption and the throwaway society is wasteful and unsustainable. As well as manufacturing more for ourselves, we should be repairing, recycling and renewing more. That will help employment and the planet.
One final point, I must respectfully disagree with those bloggers who think that there is an automatic right to get interest on money. If no-one borrowed, there might be savings, but there would be no interest on savings. Many OAPs rely on savings, but as we have seen, neither the value or income from these savings is any more secure than anything else in capitalism. In a sustainable economy, there will always be the need for capital investment. Keynes' view was that contributing to this, rather than lending money at interest is what should be the basis of long term reward.
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#333 "#327 I did not know that. Can that be made to change?"
Not without dismantling our entire banking system and starting again from scratch. Galbraith describes this in great detail in "Money - Whence It Came, Where It Went" His comment was: The process by which banks create money is so simple that the mind is repelled. He wasn't actually criticising the process, just describing the way the real world works, as opposed to the way most people think it does.
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# 323 guycroft
Yep, I can see how we'd get along fine over a beer. I own a business. We can't see anything after March 2009; nothing. It's scary.
My business partner and I intend to enjoy Christmas with our families. In the new year we go back to the office to slash costs (you know what that means) and figure out how we're going to survive the year (let alone the next 5 years).
It's quite staggering the extent to which our political elite have fouled this up. However, one must accept that we live in a reasonably functioning democracy (just) and that we, the people, chose the politicians that created the economic and social framework that is now collapsing around our ears. And they know it.
My own view is that 90% or more of those commentating on this crisis are failing to grasp the enormity of the problems we face, or they choose to equivocate in their commentaries for whatever reason (mustn't frighten the horses).
Back to the politicians again. It would be good if one or more of them would step forward, tell it as it is and start galvanising opinion and support for some heavy duty action to fix the crisis before it becomes an unprecedented drama.
No politician currently comes to mind.
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Robert's got it right again, but isn't it time we started talking solutions rather than problems.
The Commons Business and Enterprise session on Tuesday was all about funding for SME's. The whole thing focused on debt, debt, debt - with the banks adopting the stance that they alone are the source of funding for what amounts to half the economy. Over two decades they have made themselves the arbiters of which SME's shall survive and which shall not.
We must rebuild our economy from the ground up, with real risk capital driving into real wealth-creating SME's, reducing their reliance on debt (a direct inhibitor on growth) and neutralising the banks' undue influence over this sector of the economy.
250,000 wealthy successful entrepreneurs would invest in 50,000 SME's in the UK if it was easy to find the deals - and they can at growthwire.com. See you there!
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Moraymint HBOS problem??
To sum up 11 tears of Brown
TRASH THE POOR
TRASH THE LOW PAID
TRASH STERLING
TRASH THE ECONOMY
TRASH CIVIL RIGHTS
ETC ETC ETC :THE LIST IS VERY LONG
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hedonistic consumerism is required for consumption
watch the subliminal marketing
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#334 "The culture of conspicuous consumption and the throwaway society is wasteful and unsustainable."
I've often wondered what were the driving forces behind the emergence of such a culture, but I'm coming to the realization that it's now utterly essential for the exponential growth in economies that is demanded by the banks in order for them to create money in the fractional reserve system.
Without monetary reform our societies will continue to end up here again and again until the lights start going out.
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Even our halfhearted recycling system is on
the BRINK of collapse most of it is now going
to landfill since the market collapsed in the
summer.
NEW LABOUR CANT EVEN DEAL WITH THE
RUBBISH.
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Any talk of inflation or deflation is meaningless unless it includes the cost of housing.
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I'll keep this short - others explain it better than me.
Any of you who have not yet done so should look at and consider the points made, and conclusions to be drawn from, the contents of any one of these sites:
How it Ends
http://www.howitends.co.uk
'Money As Debt' on GoogleVideo
Money As Debt
The 'Crash Course' on Chris Martenson's excellent web site:
http://www.ChrisMartenson.com
www.notbornyesterday.org
http://www.notbornyesterday.org
There are many other sites that address these issues - but you have to wade through a morass of junk to find them.
Ignore everything that politicians say - they are either mis-informed or lying. They are all venal self-seekers and will only say what they think voters want to hear.
Virtually all pundits in the mainstream media - likewise. They are either conscious or unconscious mouth-pieces of politicians - who are themselves only doing the bidding of bigger beasts.
Any journalist who attempts to address the real truth is muzzled before they open their mouths. They know this and prefer to shut up and keep their jobs.
John Pilger, one of the best, hasn't been aired for years in the West because of the uncomfortable truths he tells - but you'll find him on the internet and on book-shelves.
The following contributers on thses blogs seem to have the right idea:
(In no particular order)
WakeUpBritain
ForedeckDave
Moraymint
Mouzel1
NorrieC (not been around for a while)
WharfGirl
PeterBaldwin
KikiDread
SashaClarkson
nbyesterday
And others I've missed....
Don't expect Peston to address any of these fundamental underlying causes - he has probabably come as close as he dares without losing his job. If he gets any closer he too will dissapear...
#326 JeremyP - Indeed "Oh dear..."
Old Groucho
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Moraymint 346 and previous
Being a belligerent type i could sort this
mess out over about 10 to 15 years.
But the vested interests would do their
best to finish me off.
I have NO political agenda, but i have plans
to set UK plc on a sound footing for the
century ahead.
And NO i dont Smoke anything!!!
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With i understand 508K 18 to 24 year olds
on the DOLE.
A further 450K out of work but not claiming
18 to 24 year olds.
NEW LABOUR HAS TRASHED ANOTHER
GENERATION.
EMA payments system for 16 to 19 year olds
is in total collapse,another NEW LABOUR
Mess.The colleges could have easliy paid
the students directly on attendance each
week.
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i think people will keep from spending untill we see a reason to spend..also i notice the beeb has been fined for 13 instances of phone competition deception.. ok so who pays the fine? the bbc.....ok ...so who pays the bbc? we do.... so if i integrate the 2nd equation into the first equation...then........ we all pay the fine.....great......maybe thats a reason why some people wont spend out....we are already spending out!!!and also i think theres an element of doom and gloom from the media...i reckon if there was a news black out from the credit crunch for 6 months...people will spend again. the media cause much of the problems, they go over the top when things are going well and over the top when things are going not so well.in everyday life people dont go around thinking"wow the mpc are setting inflation targets and interest rates i better check my savings and spending "whether we like it or not people are better off now than they have ever been.......not excusing brown..i hope he gets dumped at the election..but peoples expectations are higher because of the media...without doubt.
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One World Currency for the New World Order?
- Dollar and sterling slide further -
http://news.bbc.co.uk/1/hi/business/7789354.stm
Looks like the old Problem Reaction Solution plan is shaping up as the major currencies converge!
The Problem - Reaction - Solution Paradigm
1) The Government creates or exploits a problem blaming it on others
2) The people react by asking the Government for help willing to give up their rights
3) The Government offers the solution that was planned long before the crisis
Part of the solution for the UK will be Mandy’s scheme for the UK to join the Euro as our only saving option.
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The truth is Capitalism is one big 'Ponzi' scheme run by the elites to screw us the proletariat out of all our energy (ie money) so they can live a life of luxury. Marx knew instinctively that it was not sustainable (but probably not why at the time he said it) We need a new paradigm of how to live life on earth, and fast, to save ourselves from extinction!
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Inflation,deflationor stagflation we have clear and moral choice to make as the current tenants of this country.
Do we act like grown-ups and take as much pain as is bearable now or simply leave it all as an intolerable legacy for the future generations .
We really have spent the kids inheritance!
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We must follow USA they represent the future of our own evolution.
They exist ahead of us in genetic time. "They" are "us" in the future.
A society based on Conditioning Behavior Must Rely on continued Control and Secrecy. So People get ready.
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This country needs to end its reliance on foreign food and energy as well as foreign raw materials.
China has a strong growing economy precisely because it exports more than it imports overall, every pound spent on imports is a pound leaving the British economy!
As others have said, more home grown food, more british sustainable energy, more british engineering and manufacturing (new tech based) and less imports.
Also I detest te fact that the US can simply print billions if no trillions of money at the Federal Reserve without the risk of significant hyperinflation due to the dollar being the international reserve currency.
Global monetary systems are biased towards the US in an insane manner. They will NOT hve a worse recession than the UK, just you watch!
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The trust between people has been shattered, the Earths resources are being used and cannot be replaced, but as usual the world is led by Narcissic men, who are incapable of putting others first (whatever they imply otherwise). With such selfish people contolling major businesses throughout the world, it seems that unless a miracle happens we are heading for a disaster much greater than the credit crunch.
Do we trust our government in the UK to get us out of this mess?
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I find this business blog wholely disproportionate. There is endless talk of systematic collapse when there is no evidence of anything other than partial collapse, limited mainly to some sectors. There will be an impact spread throughout the ecomony but it will be disapiated in its effect. The processes in play are entirely effective. Businesses, usually large, that should not be in exisitence in their form to date are changing. Alongside that other smaller businesses are in trouble thru no fault of their own and they deserve sympathy and transitional support on the basis that they can recover, but they have to be able to reasonably recover. Businesses that have been riding on the bubble and are inflexible in their structure cannot be subsidised endlessly and it is very doubtful their business will return to the former volume, they have to downsize. Subsidies them if you want, it will have no effect in the long term. They are not viable in current format. The desire to somehow return to the mirage and endlessly pump goods and services that are not wanted is bizarre to say the least. Jobs will go because they were only there because of the bubble. They have actually had an artifically extended life. It is noticeable that a number of small(er) businesses run on traditional lines, conservatively financed are having no problem, but that does not make for good headline copy. The economic growth in this country was flat for years whilst the bubble was being inflated. Take the bubble away and you have decline and a lower economic activity. That is the reality. There are a great many good things will result. A more robust sustainable economy. Better values in supply and consumption. A reduction in imported low grade products with a low service life. Less of a belief in the easy buck. Lower levels of consumption and better consideration of product durability will have positive impacts on the climate issue. A lot of the current noise is to try and deflect responsibility for crass management, or to provide cover for cutting costs in a way which would not normally be easy to get away with, or to pretend the problem is bigger than it is so the survivors can say how much bigger a saviour they are, or the refusal to want to accept that decisions giving the promise of a higher return involve higher risk and there are consequences. It would seem the nearer somebody is to being a loser in this the greater the noise. Funny how little noise and social and economic concern was generated by the same parties when times were good. Live with it.
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#229 daytrader
So things are great because you like most people saved £20 on petrol and another £50 on your mortgage compared to the summer.
You must be in a pathetic financial state to spin like this on the day when we learn that unemployment has soared by 137,000 with much worse to come, the CML tell us that next year 500,000 will be in mortgage arrears with repossessions at 75,000 and even the bullish are talking about a further 10% fall in house prices and half of all estate agents closing.
You claim to have refocused & reorganised. I do not believe you. I suspect that you have a huge amount to lose and are saying what all estate agents are telling us.
This is a great time to buy.
Well if it is all the same to you i will not be buying anything you claim to be building. It will be way overpriced and i do not need a second property. I am more than happy to keep my cash in Euros for now. Besides there are now thousands of empty new builds all over the country that no one in their right mind would buy. Thousands of builders will go to the wall in the next year or two.
So please, we do not need any self interested lamb, ready for slaughter, masquerading as a voice of cheer.
Others have already told you this.
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RE TATA Landrover/Jaguar
State funding subsidy ONLY for equity share.
No dodgy deals please MANDY.
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