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Now there are runs on countries

Robert Peston | 10:11 UK time, Thursday, 23 October 2008

The sickness afflicting the global financial economy has entered a new and worrying phase.

It started last summer with the closing down of big chunks of the wholesale money and securities markets.

Branches of Halifax and LLoyds TSBThen we saw a succession of crises at individual banks, as institutional providers of funds withdrew their cash from banks they perceived as weak (culminating here in the nationalisations of Northern Rock and Bradford & Bingley, and the rescue takeover of HBOS).

In September the entire banking system was on the brink of total meltdown, because of semi-rational fears that almost no bank was safe from collapse.

And now we're seeing a massive flight of capital out of economies perceived to have been living beyond their means - either because they have a substantial reliance on foreign borrowings, or because they are net importers of good and services, or both.

Commercial lenders to these economies - banks, hedge funds, mutual funds and so on - want their money back now. That's driving down their currencies, pushing up the cost of borrowing for their respective governments and undermining the strength of their respective banking systems.

So they need financial help to tide them over - and with the global economy slowing down, those economies perceived as lacking the resources to cope on their own may need support for months and years.

Queuing up for the intensive care ward are Iceland, Hungary, Pakistan, Ukraine and Belarus, all of which are in discussions about accessing special loans from the International Monetary Fund, the emergency medical service for the global economy.

But there has also been a substantial withdrawal of capital from South Africa, Argentina and - most worrying of all - South Korea.

Let's put this into some kind of context.

The annual economic output of Pakistan, Hungary and Ukraine is something over $100bn each - which is not trivial but does not put them near the top of the rankings in terms of the size of their GDP.

However, the output of Argentina is well over $200bn and that of South Korea is around $900bn. In fact, South Korea is the 13th biggest economy in the world.

If you add together the GDPs of all the economies currently diagnosed with toxic BO by international investors you arrive at a sum that's not far off the economic output of the UK.

And the sums of debt involved are also fairly substantial. Hungary has external debt of more than $100bn, Ukraine has foreign borrowings of $50bn, while Pakistan's dependence on overseas funding is nudging $40bn.

As for South Korea, which hasn't requested formal help from the IMF, its foreign debt is nearer $200bn.

Now you may think this is all about remote countries, with no relevance to you. Well, that would be wrong. We're all connected.

It's been very fashionable for pension funds to invest in developing economies in recent years. If you're saving for a pension, you may own a chunk of South Korea or Argentina.

If you're very unlucky, your pension fund may have belatedly put some of your cash into one of the many hedge funds being royally mullered by the way they borrowed vast sums to invest in some of these emerging economies.

And of course the woes of these economies reduce their ability to purchase from abroad, which acts as a further serious drag on global economic growth.

Also the UK is being buffeted directly by international investors' re-awakened distaste for economies perceived to be too dependent on foreign capital or credit from institutions and companies.

What's happening to South Korea - where its currency, the won, has fallen 29% in the past three months, and shares have fallen well over 20% in a week - is particularly worrying for us.

South Korea is a great manufacturing and exporting nation. Its balance of trade is vastly healthier than the UK's.

But like the UK, South Korea's banks are dependent on wholesale funds that are being withdrawn because of fears that those banks face losses on imprudent deals (not lending to homeowners, as is the case in the UK, but currency hedges with local companies - see my note "Crisis is business as normal").

Of course, our banks - and South Korea's - are being shored up by massive financial support from taxpayers.

But if investors no longer think the UK's banks are at risk of collapse, they then look at our other vulnerabilities - such as public sector borrowing which is rising very sharply because of the costs of the bank rescues, dwindling tax revenues and the need to spend our way through the economic downturn.

They also look at our structural trade deficit and our huge reliance on financial flows generated by a City of London and a financial services industry that's shrinking fast.

As I've pointed out in a tediously repetitive way, the sum of all we've borrowed - the aggregate of corporate, personal and public sector debt - is equivalent to three times our annual economic output.

That's a vast amount of debt to repay - and it's all the harder to do so at a time when our most successful industry, financial services, is in some difficulty and the global economy is slowing down.

If international investors fear our credit isn't what it was and are selling pounds, we should hardly be surprised.

Comments

Page 1 of 4

  • Comment number 1.

    So, we are reaching the devaluation of the currencies stage. Any estimates on when we might get forced into joining the Euro? (Strength in numbers and all that)

  • Comment number 2.

    More like "Misery shared is misery halved". It won't actually improve the situation, but (1) it will be a distraction and (2) it will give us someone else to blame when things don't work out.

  • Comment number 3.

    Robert what has Peter Mandelson have to say on these matters?

    We the public need to know!

  • Comment number 4.

    I'd like to see the governments financial behaviour compared to that of the 'worst' indiviudal borrowers.

    Bad borrowers borrow massive mulitples of their income; the Government borrows massive multiples of their income (tax raised).

    Bad borrowers refuse to cut their spending; the Government refuse to cut their spending.

    Bad borrowers anticipate that their houses will rise in value to cover their debt; the government anticipate that they can raise more taxes to cover tax.

    Bad borrowers cover up shortfalls by borrowing yet more based on poor estimates of future income so putting off a solution and compounding the eventual problem; the government cover up shortfalls by increasing borrowing based on poor estimates of future income so putting off a solution and compounding the eventual problem.

    When property prices fall, bad borrowers are found out; when the economic cycle starts a downward leg the government are found out.

    Just as everything is about to go belly up bad borrowers consolidate their loans, get one final big cash loan blow it on indulgences to make themselves appear and feel better and pretend everything will be fine; as before... just like the governent does...

    I don't think the government are in any position to lecture anyone, and have no hope of finding a solution untill they admit that they have had it all wrong all along.

    The situation can be discussed by the 'little people' - most of whom have probably been far more prudent than the government - but untill the bad borrowers (and government) admit that they have a fundamental problem and get the 'help' that is needed we 'little people' are just whisteling in the wind.

    As long as individuals have food, shelter and a bit of entertainment the 'world financial system' can go bust or into melt down, who cares?

  • Comment number 5.

    Robert.

    OMG.

    This really is the END.

    The Great Reckoning is here.

    There is no hope for Human Kind from the onslaught of the coming financial tsunami.

    We’re all going to be living in caves and running round in animal skins.

    Our only hope is an interplanetary rescue.

    This is the World calling Mars Pluto and Jupiter.

    We need you’re help!

    I urge you to put out the call before we get some real scare mongering babded about.

    Heaven forbid we get a reality check anytime soon.

    This is ground control to the Universe HELPPPPPPP

  • Comment number 6.

    This is a good article Robert pointing out the fallacy that was de-coupling. Also it shows the US is still dominant, depsite its seeming messy circumstances. The dollar conquers all.

    In addition to this though, it is important to think about what happens next in order to make any investment decisions going forward.

  • Comment number 7.

    1 spur22
    It's not when we are forced into the Euro, it's how long will the Euro hold together with the Mediterranean basket-cases.

  • Comment number 8.

    you're da man robert - how do you sleep at night?

    where is giddy osborne when you need him

  • Comment number 9.

    if this government drops this country into the euro without a refferendum it will proove there intent from the start and have been missleading the good people of this country for there own gains.
    the pound is and was a respected currency globaly for this country to give that up in favour of an untested unfriendly currency would be a poor choice and the beguining of the end of this country.
    if this global down turn continues there will be no strength in numbers independance may well aid survival.

  • Comment number 10.

    Well Robert!

    So what's the next step?

    Should governemnts now freeze the deposits they have just guaranteed, as in many cases majority shareholders of banks they have just nationalised, or partly nationalised, in order to stem the flight of capital out of our economies perceived to have been living beyond their means?

    Thomas M. Disch couldn't have written a more futurist novel!

  • Comment number 11.

    Robert

    Its why I maintain that we are not just entering recession, but more like a depression on the scale of the late 1929/1930s.

    Your own words "As I've pointed out in a tediously repetitive way, the sum of all we've borrowed - the aggregate of corporate, personal and public sector debt - is equivalent to three times our annual economic output."

    Liquidity may be returning to the banks sloooowly, but is that the real fix? NO. The reason for our troubles is, exactly as you have stated, from the ground up, we all borrowed too much. International shipping is decline at a rate not seen before, that means no one wants each others products and goods, purely because we cant afford it any more. I'm afraid the light at the end of the tunnel is a train coming the other way.

    Unemployment will rise, so will tax. Death rates in poorer countries will rise due starvation and declining health care. Political unrest will come later, but it will happen. We may not have to look very far for that either when the real impact hits the streets. All we are seeing is some bad numbers in the newspapers. When factories start closing and unemployment puts real stain on an overburdened economy, that's when it'll happen big time.

  • Comment number 12.

    great blog , thats what we want to hear the truth. so we will be much worse of, not by a little but by a hugh amount. glad i am not one of the mega or super rich. robin hood and his men with soon be on the march.

  • Comment number 13.

    Come on, lets stop messing around and extending the pain process, raise the rates, keep the currency strong, bring the house prices into correction quicker..

    Besides, I need a strong pound as I need to go on holiday and would like a bigger home..

  • Comment number 14.

    Robert's comments show why the government needs to put a big emphasis, backed with the necessary cash, on import reduction/substitution.

    In particular it could start with big energy efficiency measures (we are now net importers of the stuff) including more encouragement of energy efficient cars (by more taxation of the inefficient ones if need be). We waste masses of energy unnecessarily.

    We also eat more food than we produce. While many of us might benefit from eating less I was thinking we should produce more.

  • Comment number 15.

    There seems to be a lot of political skirting around the problem(s) with fingers in ears going 'la la la la'.

    There are two problems here:
    1) There was no growth in the financial sector over the last decade or so - we have to accept a much smaller market.

    There is no magic solution - we just have to let things settle down. However there are those out there who know how to make money out of instability and they will endevour to make things unstable for as long as they can. They are more commonly known here as 'The City'.
    Thats the second problem: we've left the dealer in charge of controlling the drugs.

  • Comment number 16.

    Two points:

    1)

    Joining the EUR seems quite plausible now, and it'll seem 'natural' when the exchange rate is GBP-EUR 1:1. This of course will also bring about the required house price correction.

    2)

    I have been saying for some time that given the UK's overall indebtedness (fuelled by a house price bubble that has been enormously harmful to this country) I would not be surprised by a massive devaluation of GBP. Also, just think about all the young people who have wasted the best part of their lives becoming 'estate agents' when they could have trained in something useful.

  • Comment number 17.

    So what if there is a lot of personal debt? I assume this must be repaid eventually. A good investment for the lender I'd say unless someone stupid decides not to demand repayment. Please someone explain this is not the case.
    Most personal debt is for house purchases spread over many decades - not a few years.
    Another point, it's still cheaper over the life of a typical mortgage to buy than rent.
    So really I think most people are prudent with money

  • Comment number 18.

    so we have a run on the pound to look forward to- brilliant.

    It really is shameful the way this country has been managed over the last 10-15 years. Of course Brown, full of deceit, will blame anyone except himself, but even simple souls such as myself know that while the experts were telling us how brilliant he is his apparent success was based on cheap and easy loans and a consumer boom. Journalists, I'm thinking of Evan Davies the BBC economis editor as was, forever telling us how well things were going and the likes of Osbourne and Cameron, not up to the job, no-one willing or able to bring Brown to book.

    what have we to look forward to but years of grief.

  • Comment number 19.

    #7

    Don't you mean the Adriatic, the economies of the Med are actually stronger in all this that the UK is, both Spain and Italy can hold their own (having both a strong agriculture and industrial base) - I think the real question is, will the Euro block have us and if they do what strings will be attached - Schengen agreement anyone...

  • Comment number 20.

    In any case, if GBP goes down the swanee, it simply becomes easier to repay the debt, that's the beauty of the mechanism. In fact, the entire FX market should be in search of exactly that target, as the Chinese so amply demonstrated in getting into the position they managed.
    It's time to stop using passive tense. WHO exactly is big enough to take on a national economy and win, even in cartel (which would certainly break US Trust law)? An amorphous "the markets" doesn't cut it, someone's leading them, or at least pointing them in a particular direction, and at that level, you really don't want to be that person, the revenge extracted might be painful.
    And those of us who are long in all respects might get miffed at seeing our credit rating smashed because of others' imprudence, I'm already dismissing banks for rudeness.

  • Comment number 21.

    #9

    Perhaps if Thatcher had held a referendum on the pit, steel and car industry closures etc. all this right wing anti EU bleating would have more weight...

  • Comment number 22.

    Does this not help us because the devaluation of other far eastern currencies against the pound will help to reduce our inflation because of cheaper imported goods (despite the pound falling against the dollar and some related oil price inflation), so enabling further interest rate reductions?

    In addition will we not be seen as less of a basket case and some of the capital may flow here, so helping the liquidity situation in the UK?

    Mind you will HSBC start to rock in the heavy weather?

  • Comment number 23.

    Who do governments borrow from? Surely it's ultimately its own people? Do they publish who the lenders are? What sort of contract is made? Where are these answers? Why isn't this made more obvious?

  • Comment number 24.

    The run on the pound was highly predictable; which I did to Larry Elliott of the Gunriad.
    Basically, making loans is now more risky. Consequently, interests rates are required to go up. Merv King and Gordo are our two king Canutes we await their drowning.
    We are all under the misapprehension they know what they're doing. Wrong.
    Pain now or pain later? Well we know that Gordo will do anything to remain in power. So pity the poor children

  • Comment number 25.

    This really is bigger than 'bird flu' isn't it.

    Time to invoke UK Resilience?

    Hope someone's working on that..

    GC

  • Comment number 26.

    RP says, "That's a vast amount of debt to repay - and it's all the harder to do so at a time when our most successful industry, financial services, is in some difficulty and the global economy is slowing down."

    Focussing on one line, "our most successful industry" - surely this is incorrect? This is like saying that SUV's (off-roaders) are the American Auto industry's top performers. They are, but only because they are rubbish at making anything else and have been swept out of the market by better imports.

    The Banks profits and their employee bonus pools have been paid from inflating asset values not commercial trade. I am upset that we still think they are doing work of any real value - they are not.

    They are not a success, they have failed.

  • Comment number 27.

    Robert where in real trouble!!!!!

    Our so called leaders have lots of brains, but sadly no common sense. they always work on numbers and figures. thing is the numbers are to big for them to work out what is going of.

    We need to open our mines and plant more food now, and put millions of our homes back into the social sector.

    the green house gases will have to be put on hold for now

  • Comment number 28.

    I shall take seriously Mr Peston's views of pending doom when there is a call for a National Government.

  • Comment number 29.

    Markets are sensitive to small movements of money, the supply and demand curve is not linear. The flow of money as a spin off of the UK housing market into previously unattractive countires like Albania and Romania and Bulgaria has caused massive community problems in those countries, nationals from those countries tell me that back home unemployment is high, wages are very low, and houses unaffordable, and business pushes through things that the locals do not want. Take the inflow of money to those countries away and the situation collapses back nearer to what it was before. The illusion has been removed that is all. The situation is unhealthy but what was there due to an illusion was also unhealthy. It comes back to sustainable development. Brown has always made a big beef about how much he wants to help the world but it can be argued by helping create a financial shock waves he has in all probability done harm not good, how much will not be know for some time. It is a great deal easier to demolish a structure than to errect it in the first place. It is all about sustainable development and respect for the environment both of which are needed. These have historically been alien concepts in the American Dream which has been marketed worldwide as the solution. Countries that have engaged in the bubble effects willingly or unwillingly are bound to be affected, it is hardly unpredictable. Countries with large natural resources will win in the long term. They are not hard to identify.

  • Comment number 30.

    Can we sponsor Osborne to cadge some money for us.

  • Comment number 31.

    Now then, now then!
    When I borrowed 3-4 times my annual income, it was called a mortgage, and no one was concerned about my ability to pay, or that of millions of others. So with G.B plc.
    I get the feeling that if the "markets" can't "fear" this, then they'll look for "that" in the present febrile state of things. It's like trying to put your finger on a blob of mercury. Why don't we all calm down, hacks stop preaching doom and gloom, and think more realistically.
    There is no lack of demand for goods and services, only the ephemeral thing called "cash" to pay for them. Peoples hopes and aspirations remain the same and the sun will rise tomorrow!
    What WOULD you have done in WW2!!!-now there was a crisis.

  • Comment number 32.

    Do you not think that this "global" meltdown in the financial markets was bound to happen, surely if you are at the top of your game the only way is down, you cannot stay at the top for ever, no one thought for a minute about all the normal workers out there that could not get on the housing ladder because of the crippling cost of houses, it is like every thing else, bound to adjust in time, so i dont really see why everyone is so surprised that there is meltdown in the banks.
    It was written on the wall, the banks got greedy forced up the house prices and then screamed when the whole thing crashed around them

  • Comment number 33.

    I'm wondering how far this wil take us.

    Option 1) 'can everyone suddenly start making things and exporting them so we can get some revenue in to the UK?'

    Option 2) We kindof shut the borders and start surviving on our own 'two feet' like wartime. Oh, we can depend on our former Commonwealth friends to provide the raw material we don't have (or have lost the means to mine) - shurely??

    Option 3) Write off all debts national and international, private and corporate and see what happens

    Option 4) play it by ear till it's too late to do anything, fall back on martial law.

    In these radical times it woudn't 'arf be nice to hear something majorly radical from Parliament, I mean how many times in a lifetime does a headline grabbing MP get a chance to be visionary and fantastically outspoken at the same time?

    Now, where's George Galloway?



    GC

  • Comment number 34.

    Why does Robert not accept that the UK is far more vulnerable to this than South Korea who at least pay their way by running a surplus? Is that too politically controversial for him? The Pound in our pockets is falling and we are getting poorer. There will come a point when GB will either have to let inflation rip by letting the pound collapse or put up interest rates to protect the currency. Either way projections of a shallow short recession will have to be rewritten. A Labour Govt without a sterling crisis? Impossible.

  • Comment number 35.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 36.

    So then, what do we have?
    1. We have the banks now flush with money.
    2. But the banks which still don't want to lend, because they fear that the borrowers may not be able to repay.
    3. We have a pound whose value is dropping like a stone.

    Ok, so what's the solution?

    It is to raise interest rates (to 6% perhaps?).
    This will make the banks more willing to lend some of the money that HMG have thrown at them, and will also boost the value of the pound.

    Come on, use 'Austrian School' economics now, before it's too late.

  • Comment number 37.

    If this true, the situation getting farcical,some spivs are acting in concert to reap many fortunes at ordinary people's andGovernments expense. The right thing to do, and leave them exposed is shut down all financial markets until after November. They'll be caught with their pants down with no way out!
    PS:Sovereign Wealth funds, isn't that just being Nationalised by a Foreign power?

  • Comment number 38.

    In recent years the pound has been massively overvalued. Exports from the UK are not enough to sustain the level of overvaluation. The UK has had to take on a massive amounts of debt to subsidisise internal spending. We are living beyond our means.

    A devaluation is inevitable and is needed to increase manufacturing exports. This is the only way out of the crisis and is similar to what Britain had to do after WWII.

    In the long run, a better system is needed for controlling exchange rates, to ensure we remain competitive.

  • Comment number 39.

    Great report as usual Robert, but let's bear in mind that Prof Nouriel Roubini has been highlighting this potential nightmare for some weeks (if not months) now.

    As usual, our mainstream media is not terribly interested unless/until a potential crisis becomes an in-your-face-crisis. I think it's called "dumbing down".

    If we thought the recent "global financial crisis (not)" was hairy, then the forthcoming collapse of countries will shake us like an earthquake. I maintain that our political elite got us into this mess and have not got the faintest idea how to get us out of it.

    Like I've said before, I'm not a survivalist fruitcake, but it really is time to think long and hard about how prepared your are to weather the perfect storm that is approaching.

    Self-reliance will be the 21st Century watchword.

  • Comment number 40.

    The 1929 depression was marked by several 'false dawns' as pundits 'discovered' that the market had 'reached a trough' only to find that the crest of the 'upturn' broke and a new trough was encountered...

    In 1929 it took a long time (several years?) for the quill pens and native runners to do their stuff. Despite better (?) technology, this 'squeeze' is all about *international* confidence and lending and the willingness of banks to own up to their 'off balance sheet' gambling with the money conned from foreigh governments.

    The next step will be the raising of national frontiers to stop flows of money (like we have done with Iceland). Doomed to failure though such attempts will be (that was one lesson from 1929) they will, no doubt, be tried.

  • Comment number 41.

    #28

    "I shall take seriously Mr Peston's views of pending doom when there is a call for a National Government."

    That reminds me of Chamberlain vs. Churchill (and others, such as R.J.Mitchell) in the late 1930s...

  • Comment number 42.

    Join the Euro! Great idea. Not. Can you imagine how much bigger the property bubble might have got if we'd been in the Euro and interest rates had been even lower?!

    The fundamental weakness of the Euro is that it attempts to control diverse economies with a single interest rate.

    One interest rate has arguably been too few to respond to issues within the UK economy as it is. To enter the Euro would be to enter an even less responsive system.

  • Comment number 43.

    $1=£1 by end 2009 anyone? By that time, Obama should have taken steps to reduce the public deficit while US imports will fall dramatically while in the UK we take the opposite course putting huge downward pressure on sterling.

  • Comment number 44.

    Robert, current crisis hit all the countries whether they are net importers or net exporters. For example, China is a huge exporter, growing fast as economy. However, its stock market has lost more than a half in the last half of year or so. The same is applicable to many countries. World is developing and people live better and better.

    Please do not spread panic unnecessarily.

    Yes, after years of growth western economies will have 1-2 years of standstill or recession. So what?! Is it now the end of the world?!

    In the last month there was the following there was a lot of fears and irrationality. Would media please start to be more responsible and stop creating panic.

  • Comment number 45.

    Maybe this is the start of the secret 'new world order' that the Internet conspiracy nuts are always harping on about.

    The group of evil financiers who are going to take over the world and have one world bank and one world currency......maybe 'young Peston' is part of this elite group of fiendish villains !

  • Comment number 46.

    Surprising Italy isn't in the list of potential failures, after years of cooking the books they're running out of rugs to brush their economic problems under.

  • Comment number 47.

    Any update on the situation in Ireland? They're quite a few steps ahead of us...

  • Comment number 48.

    I just don't understand why you can't understand why the headline you just made is ENTIRELY logical.

    If there is one thing that characterises this sharp recession turning now into a global L shaped depression, is just how this is perfectly but brutally logical.

    As in the last depression, flights of government fancy, each claiming to have found the "magic fix", were followed by large falls on the stock market a short time after, only to be followed by more of the same, each time costing the lifetime earnings of the next unborn generation.

    Finally the governements then have to give in,- realise they lost control over what they had always claimed was what freedom entailed...."market forces".

    I'm afraid, like it or not, governments will now have to live with it.

    Market forces will now determine whether a country is solvent or not.
    The UK is one that is NOT.

  • Comment number 49.

    #31 - well said!

    You're right on the money there, cue what I wrote on Declan Curry's blog today..

    G

  • Comment number 50.

    #34

    "A Labour Govt without a sterling crisis? Impossible."

    Likewise, a Tory government without 3 recessions within 11 years, all of their own making! The point is, this crisis has not been home grown, as you point out yourself S. Korea is also having problems to, just like many other countries.

  • Comment number 51.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 52.

    16,

    Surely point 2 contradicts point 1?

    For the record I think we will join the Euro and that the devaulation in the currecy currently under way has been a plan for some time.

    The correction will happen prior to us jopining the euro IMO.

  • Comment number 53.

    #36

    The mistake is to agree with the assumption that we "need" banks. We don't, we need a means of transferring and retaining money (outside of cash in hand and under the bed, respectively) and of borrowing (within reason).

    I thought the banks were only bailed out in order to have them loan again. I don't remember them saying they'd suddenly start being so prudent as they snatched my childrens future hospital / school / etc funds away? They were all sweetness and light BEFORE they got the money!

    Its looking more and more like the bail out wasnt to help the wider economy or the "man in the street", but purely to keep these banking behemoths solvent. Why we would want to, now that they appear to still not be lending is beyond me. I'd like my share of the bail out back now please. With interest!

    I'll then put it in a nice building society and wait for the inevitable "real crash", where HSBC buys up whats left of the High St and we all get back to normal - Albeit a different normal than before.

  • Comment number 54.

    It's odd but I don't remember Robert 'tediously' pointing out the UK's particular vulnerability. I've heard him only once make passing reference.
    Would that not support the current D Cameron view that in fact the government does have to take part of the blame for the UK's problems at the moment?
    I wonder which of the many spin doctors worked on G Brown's Commons statement yesterday in which he gave us a list of countries which would go into recession and then eventually got to us? Did they think that was clever?

  • Comment number 55.

    #40 - no the next step will be to shut down the stockmarkets.

    I give it 48hrs

    GC

  • Comment number 56.

    #36

    re higher interest rates

    Suely the problem there is, even more people and companies will go bankrupt, the banks will not get their money and there will be even less employment so even more will not be able to repay their loans meaning more bankruptcies, that mean even less employment which means even more loans not being repaid that means even more bankruptcies which means even more.....

  • Comment number 57.

    Oh look - someone mentioned drugs!

    That's my cue!

    OK folks so it's time for a new market and that market is legalised drugs.

    Lets raise tax revenue, cut healthcare costs and improve the wellbeing of the global populace by freeing this highly profitable trade from the clutches of criminals.

    I'm suggesting that all drugs are made legal and are then regulated and are sold by authorised resellers over the counter, and that a portion of the price is tax.

    This will bring this huge black market into the open and under the tax umbrella, while simultaneously reducing crime, reducing prices to consumers, increasing quality, and flushing out all those drug dealers/benefit cheats currently sponging off everyone else.

    It will destroy the monopolies in that market and thus increase the efficiency and effectiveness of the economy as a whole.

  • Comment number 58.

    #13 FiaScape

    Come on, lets stop messing around and extending the pain process, raise the rates, keep the currency strong, bring the house prices into correction quicker..


    Except that a strong currency makes imports cheap for us and exports expensive for those we sell to. Result is cash flowing out of the country and an ever worsening balance of payments.


    Besides, I need a strong pound as I need to go on holiday and would like a bigger home..


    I rest my case.

  • Comment number 59.

    I don't suppose it has occurred to Mr Brown that the lack of demand (spending power) might have some correlation with the amount left in people's pockets after they have paid the Income Tax bills, the Council Tax Bills, the Heating bills, the Fuel bills, the Water bills and all the other escalating charges that he personally bumped up, or allowed to happen, during his tenure.

    Was there a compelling need to charge people for parking when visiting a hospital, or was there a compelling need to have Home Info Packs, or was there a compelling need to buy into charging more for heating so that people will use less and be colder under New Labour ?

    Every tax or increased essential service cost reduces the amount the normal person has to spend

    If he is looking at a Keynsian approach, he might also look at the Say's Law approach.

    Reduce taxes and essential supply costs ( fuel, heating etc) and stimulate greater descretionary spending.

    I could be buying a new TV, a new car, a bit of new double glazing perhaps.

    But the amount left in the pocket after these tax levels, has reduced my desire to commit to any new spends.

    Brown's taxes has choked the cash spending cycle for Mr and Mrs Average.
    And unfortunately at the first sign of downturn, he is reaping what he sowed.

    SME's and Retailers can expect more (ie less) of the same.
    A tax led recession.

  • Comment number 60.

    Robert,
    Isn't it more difficult for banks to serve their debt borrowed from international market as the pounds go weaker and weaker?
    Is this part of the reason banks hold their money tight and will not drop interest and pass on interest cut to loans?

  • Comment number 61.

    I have some other ideas too BTW.

    Those would be:

    cleantech program - govt provides matching funds for R&D projects

    free education for all

    tollways / congestion charges

    a global carbon trading system / climate change treaty

    a few less wars

    global resource security / space exploration treaty

    competition in the .com namespace

    for starters

  • Comment number 62.

    Two questions:

    (1) is the sum of all corporate, personal and public sector debt = 3 times our annual economic output, or is it 4 times? I may have misheard, but I thought you said it was 4 times on that Panorama program recently.

    (2) Where is all the money that is being pulled out of weak countries going? Some countries must presumably be seeing the opposite effect, i,e, their currencies rising in value, if so who are the main beneficiaries?

  • Comment number 63.

    Great to see Peston back at doing what he is good at. The big worry for the UK Government is that it is becoming more expensive for it to borrow at a time when it needs to borrow more than ever. The real achilles heel for Gordon Brown is that he deficit spent throughout the boom years, leaving no cushion for the bust - this is what will eventually lead to his demise.

  • Comment number 64.

    So, not as bad as we thought!

    We are to spend our way through this because financial industry has collapsed and we have no manufacturing base to generate revenue.

    We have no manufacturing base because we cannot compete.

    We cannot compete because our wages are too high.

    Our wages are too high because our living standards are high.

    Our living standards are high because we used to be a world leading manufacturer and exporter.

    Ergo, no factory, no skilled workers, no exports, no financial industry, no high living standards.

    This is going to suck big time

  • Comment number 65.

    After reading your report today which is excellent and extremely informative it is more scary that we have a government in power {not control} that has absolutely no record in handling a downturn.
    Tight fiscal policy is essential but this is something I'm afraid Gordon Brown is running away from.
    Instead the easy answer is to keep borrowing and leave a big mess for someone else to clean up later.
    The big problem is as you say how long and how far will investors go to prop up a failing economy?
    The money will run out somewhere along the line.
    Then what?

  • Comment number 66.

    Would it help if I should only drink tapwater?

  • Comment number 67.

    57 It won't work. It costs more to sell it thorugh a retailer than it does on the blackmarket. All you'd do is legitimise it, increase demand, and encourage more dealers, who in turn come with gangs and guns.

    Go to any pub in the country. There's always a bloke in the corner with a carier bag filled with bootleg fags. But fags can easily be bought in shops but the black market is cheaper.

    Same with drugs.

  • Comment number 68.

    I'll tell you how bad things are - according to other news on the BBC site, it needs the combined brains of two top men - PM and Guvnor of the BOE to warn about the recession (coming/here)

    Reminds me of the old joke 'how many hippies does it take to change a lightbulb?'

    They're warning us, they're warning us, one recession for the all of us...


    GC

  • Comment number 69.

    Yesterday the Fed. Res. effectively lost control of the EFF rate - this is a potentially cataclysmic event for the world's financial system. It is now only a matter of days until draconian measures are taken, or we may even witness the collapse of the financial system. Be prepared.

  • Comment number 70.

    The striking feature of the international trade situation is the distinction between the woolly-minded western economies and emerging countries such as China, India, Brazil and Russia.

    These countries recognise three things that we've completely forgotten. First, trade should be in balance, and preferably in surplus. Second, manufacturing is vital. Third, the world is competitive.

    In the west, we have a woolly-minded belief that globalization must be good irrespective of whether other countries play by our rules. Countries like China and India operate hefty import tariffs to deter imports, and we are idiotic enough to accept this one-sided version of globalization. We should expect these countries to eliminate tariffs and, if they don't, we should introduce our own.

    Next likely event: return of protectionism, ending of globalization.

  • Comment number 71.

    post 19 is correct 100%

  • Comment number 72.

    #Lordjohunt - 11

    Time to invest in shotguns an canned food. Those of us that live in cities will have a particularly hard time... basic food stocks will not be able to reach the shelves once the oil runs out, and the food riots will begin.... We've got ourselves to the point (overpopulation, debt obligations, dwindling resources etc. etc.) where the slightest economic twitch will ensure that many millions at the lower end will suffer.

    'Short termism, it's long term effects, and why we always slap our heads in realisation in the medium term' should be an economic/psycological case study.

    Will we really learn anything from this?

    Probably not... right... I'm off to switch all those gadgets I own onto standby and get a froppadoppamochachino, might apply for a credit card, apparently I can get a free pen.

  • Comment number 73.

    Its all preparation for cross country runs ,a global paper chase where those collecting the paper can expect to get 7p per kilowatt hour.


    Ihave informed my broker to buy shares at 6p per kilowat hour ,as things pick up we shall soon all have more money to burn .


    Its the stoopid economy stupid !

  • Comment number 74.

    @36

    Sorry but dont you see, they had to save the banks because they had no money. if they had of collapsed you would of had world dissorder. better to let everyone down lightly than with a bang. As robert said we now head for a fairer society


    some people asked where the money as gone, well the answer is it was never there in the first place.

    we greated this money in debt it grow so big that it burst, now we must pay it back



    how much worse of? well 77% of wealth is in the western world and 33% in the rest.

    has most the debt was greated by the west they have to pay most back about 40%
    and 10% for the rest of the countries

    so 77% - 40% = 33% this is how much the west will be worth soon

    33% -10% =23% this is how much they will worth
    so like i say them who have little will have much less. it look very bad for these poeple

  • Comment number 75.

    Aren't currency exchange rate movements a zero sum game?

    I.E. If a currency declines in value, everyone else appreciates in value, they can't all devalue at the same time.

    So yes, bad news for some local economies but not for the global economy, surely at a macro level exchange rate fluctuations are irrlevant (or am I missing something, I'm not an economist?)

    Pulling capital out of share markets however is a different deal altogether as it won't necessarily be reinvested in shares in another country.

  • Comment number 76.

    'Runs on countries', eh? Come on, Robert, you can stoke the fires of global depression better than that. What about claiming that the 'global economy is in an irrecoverable total meltdown'? True, you won't be able to top it with yet more hyperbole, but it's a good move. Then you can stretch to making some more unsubstantiated predictions without evidence such as 'I suspect that we'll have a coupon currency inside a fortnight and government food shops opening in November'.

    I know that these are difficult times, and challenging times, and that a long - but probably not deep - recession is in the offing, but the efforts of the BBC to manipulate not just markets but the perception of whole economies has now become ludicrously extreme.

    Can you and your colleagues please stick to recording the facts and not extrapolating from the stories swirling around just those that suggest economic armageddon is just around the corner? The BBC ought to have a policy on speculation in news comment - the policy being 'don't'!

    But since we deal in speculation on this board, let me add my own predictions:

    - Libor rates will move, slowly, but in demonstrably the right direction by mid-November, and still slowly but positively (but at slightly a faster rate) thereafter
    - inflation will continue to fall, and (along with an interest rate cut of a full 75 basis points in November) this will make capital cheaper if not, paradoxically, more plentiful. (Aggregate private sector saving will fall, but that's another story)
    - public sector spending will fall in total, but more spending will be switched in year to capital spending. There will be no reckless reflation, not least because we have nothing left in reserve...
    - labour markets will become looser, but given the tightness of some labour markets currently that could be a good thing. Watch for first signs of that early next year; it will be the only positive side of rising unemployment.
    - currency devaluation in December or January will follow IMF coordinated talks with major economies in danger of further compromising their currencies. I forecast that countries will be invited to accept nominal relative levels and operationalise them simulataneously through announced devaluations. IMF conditions for countries in severe difficulty will include a first round of devaluations in November or December.

    Now I could be right or wrong about all of that, but frankly nobody listens to my opinion anyway - and that is what it is, opinion. But they listen to the comment of the BBC and are not exactly being helped to distinguish generalised guesses at the future from sober judgement about what events mean.

    I know that you will be tired of reading these sorts of comments, but you need to realise that people care about the quality of the economic journalism provided by our major and best broadcaster, the BBC. Please listen.

  • Comment number 77.

    4. At 10:46am on 23 Oct 2008, the-real-truth

    "As long as individuals have food,"

    Knowingly or not you have just hit the biggest single nail right on the head.

    The food growing, processing and transportation system relies as much on credit as any other aspect of the economy. Don't bank on havnig enough food to eat.

  • Comment number 78.

    The collapse of the whole world economy stavation of millions, wars over resources, rampant disease.

    We have to start thinking about emergency measures. Think about what would happen if the flow of food imports was interruped for day or so, or if Russia decided to ask for lots more money for its gas.

    Looking forward to a merry christmas ?

  • Comment number 79.

    For the UK, this problem carries its own solution. The balance of payments must by definition balance. Sterling has been driven up by capital inflows in the past few years (making up much of the short term £650bn wholesale funding RP has frequently referred to), making much of our economy outside London uncompetitive, this process is now going into reverse, with the government & BoE replacing the wholesale markets, but at a lower volume. The pound will fall until our current and capital trade flows balance again. We should end up with a better balanced economy as a result but I fear it will be a process of adjustment more painful than most most peoople expect, or can remember

  • Comment number 80.

    Robert,

    The 1930's showed us what happens. In the 1930's they too were continually surprised by what happened and they too reacted too slowly, although a study of previous slumps in the later part of the nineteenth century history should have alerted them.

    What is surprising is that modern day economic managers still fail to understand and react too late and often in the same wrong way. I guess it is to do with the arrogance of power rather than just plain stupidity.

    We are entering a (possibly prolonged) period of instability of stocks and currencies. This will put severe stain on the convertibility of currencies as well as trade. This is what happens - it is no ones fault, it is how the (capitalist) system works.

    Policy needs to address the support of the poor, and in so far as is possible, to keep the wheels of financial exchange working - but not at the price of maintaining the status-quo. Bankers must be made to, in essence, 'to pay' for the destruction they have caused. It is unlikely that the people will permit everyone except the bankers to suffer - pain must be shared equitably. If this is not done social disruption may well result.

    Exchange between currencies may have to be controlled to facilitate trade but to prevent runs on currencies.

  • Comment number 81.

    There is a certain irony to all this. Hungarian banks were not exposed significantly to the sub-prime fallout because they were not tempted. As a result there was no particular need to offer deposit guarantees. Of course, when those western banks were confronted with these problems, guarantees were provided with the result that there was a huge exodus of deposits to 'safe havens' further west.

    100bn of external debt was sustainable given that Hungary is a net beneficiary of some 26bn annually from the EU providing there were adequate deposits in the banks. If the capital drain ins the direct consequence of policy elsewhere, it is not unreasonable to look to those countries for assistance.

    The risk now is that the national economy will appear to be a bad bet when, in fact, there is still growth albeit sluggish. The ECB have recognised the urgency with a bit under 8bn. It is hoped that the IMF are similarly responsible. The situation in Hungary is entirely different from Iceland and that needs to be understood.

  • Comment number 82.

    OK, what next?
    If you REALLY want to get concerned on a global, ontological, universal timescale, research the Irish Abbot Malachy, who suggested about nine hundred years ago that this is just the run-up to the real Big Bang. The trouble with him is, he's got a great track record for being right. The Mayans agree, their calendar enters a new Aeon in 2012, and their aeons are marked by cataclysm. That's 2 thoroughly independant, supportable, non-interpretative corroborations of something larger yet happening.
    Is your definition of reality large enough to cope with some huge questions? Things are starting to roll and will now accelerate in a direction you've got into the habit of dismissing as the working of over-wrought imaginations. I've got a lot more to add, but not before the cynical.

  • Comment number 83.

    NEWS FLASH!!!!!

    The same advisor, who advised Gordon to sell our Gold Bullion, advised Gordon to borrow all the money to support the banks in sterling with the promise of paying it back in Dollars!!!

    We’re all doomed I tell yer. Dooooooomed.

  • Comment number 84.

    What can the UK and others do now to decrease reliance on financial services?

    The reason why many countries are in this mess is the fallacy that financial services represent a path to endless supernormal profits. This has lead the UK banks and many others to say it is not worth investinging in industry beacuse the rates of return are too low.

    The laissez faire approach to regaulation allows those persisting to seek super normal profits to keep moving their capital around. Perhaps its time to restrict it?

    Malaysia tried this in 1998 or so and was widely condemned even though the advice came from an ex US Treasury official. It seemed to help their economy but of course they had good fundamentals for manufacturing to be expanded. I think Korea might benefit from the same approach

  • Comment number 85.

    This crisis (or is levelling a better term?) is caused by the banks finding ways around regulation and "manufacturing" money through unregulated financial instruments, thereby usurping control of money supply and hence fiscal policy from governments.

    What would be the net effect if certain governments stopped trying to (in?)directly support these instruments through propping up banks and either declared these instruments bets and therefore unenforceable, or forced the banks to net their exposures off against each other...naturally letting the hedge funds and other arbitrage specialists sink?

  • Comment number 86.

    Stop pointing the finger of blame narrowly (Thatcher, Brown, Peston), this whole situation is a consequence of decisions made on trade liberalisation throughout the world over the last 30 years.
    No one has tried to buck the trend and faced up to the rules of the EU, WTO, etc - OK some have more wholeheartedly taken these on board than others (fools).

    Those of us who advocated a little more isolation from the rest of the world via energy security (coal - at one time we lead the world in clean coal technology and were self sufficient in energy), food security and some restoration of exchange control were laughed at. You have to live in the globalised market

    My only regret is that the ones who will really suffer will be the innocent. See you back in the dark ages.



  • Comment number 87.

    #48 Hear Hear

  • Comment number 88.

    Robert has not really suggested that the pound will face the same fate as some emerging market currencies, but rather a re balancing is taking place and we should not be surprised considering wholesale funding usage and our defecits. Perhaps what is more interesting is that the US who are in many respects in a similar state to the UK are not experiencing the same. It appears to me that investors in the US are increasingly pulling money out of funds which invested outside the US, causing a rush of money to flow back to the US as funds sell foreign assets to pay back investors. This vast flow of money into the US will stop eventually and we can only hope that it will drop off gradually. Otherwise there will be a panic in the US Dollar as money flows reverse. China could step up to the plate and start buying assets using there surpluses but considering the losses they have made recently I think they may use their money internally especially as exports tank. The elephant in the room in my view is not the collapse of the pound but what happens to the dollar and US treasuries once returning trade flows slow. The last bubble is yet to burst.

  • Comment number 89.

    "Besides, I need a strong pound as I need to go on holiday and would like a bigger home..


    I rest my case."

    Britain used to do irony really, really well. We were world famous for it. Seems a wasted art now.

  • Comment number 90.

    Comment 44 : VitaliG

    "Yes, after years of growth western economies will have 1-2 years of standstill or recession. So what?! Is it now the end of the world?!"

    I think this sentence summarises, in a nutshell, the misunderstanding that must be overcome if we are to rediscover the path of sustained, gradually-increasing prosperity.

    What we need to get out of our heads is that the historic levels of reported GDP are real, actual, levels of human production, self-contained in their respective time periods. This is mistaken. It misleads us into believing that we have attained a level of economic development some steps beyond that which we have actually achieved.

    I'd suggest that a more appropriate way of looking at the economic performances of the recent past is to view the financial losses, write-downs and re-statements not as contemporary performance, but as corrections to product overstatement in previous years. By doing this we can build a truer picture of where we actually are, in terms of economic development, and we will be able to be more realistic with our expectations for the future.

    It surely can't make much sense to regard as a failure anything that doesn't represent an improvement on a level of development/prosperity that we are actually some distance short of ever having achieved. Can it?

  • Comment number 91.

    @74

    sorry everyone what was i saying about figures and numbers. oops

    its 23% the rest of the world

    23%- 10% =13% is what the rest will be worth. even worse.


    so why is it we are all worse of?
    maybe its to do with the growth of the population in the world. even though our wealth as grown the amount of people as grown bigger and qiucker

  • Comment number 92.

    HousePricesWillFall wrote:

    "Also, just think about all the young people who have wasted the best part of their lives becoming 'estate agents' when they could have trained in something useful."

    Ahem. It takes about 2 days to learn to become an estate agent.

    And one day of that is learning how to apply hair gel.

  • Comment number 93.

    #65

    But nor have the Tories, remember that their font bench weren't even in politics during the last down turn either, and lets face it they are still in dream land - when Darling was saying that we are in for a bad time, that the worlds economy was going to see a downturn the likes that have not been seen for 60 years the Tories were still saying that all was sweet and light, that Darling was scare mongering, they were still suggesting that there wasn't any real problems just three weeks ago!

  • Comment number 94.

    The FTSE100 down another 100+...

    If it - and the DOW Ind - drop another 100 or so - they will both be at 52 week lows...

    I stand by my previous posts...
    We are heading for...

    FTSE100 less than 1000
    DOWInd less than 5000

    .........

  • Comment number 95.

    Robert

    Would you like to comment on how gordon browns 'master plan' for the banks is impacting this?

    The way I see it, there is no point in a creditor pulling out if there is nothing to be had -- near bankrupt banks are actually quite safe in that position -- pulling the plug would just convert a 'risky debt' into a 'bad debt'.

    However lob a few billion into the banks, and their creditors see there is some money to be had - so withdraw it.

    FTSE below 4000...

    Isn't it lucky that police forces have been miscounting stats... If things get any worse the government will have to leave disk of personal data on a bus somewhere...

  • Comment number 96.

    #58

    What exports? Aren't you aware that we make very little in this country anymore that anyone outside it wants, whatever the level of the pound.

    There are always for and against arguments for a higher or lower value pound, but at the moment I believe the case for a higher-valued pound is uppermost.

  • Comment number 97.

    > our most successful industry, financial services, is
    > in some difficulty

    Does anyone think the financial services industry has been successful? If this is success, how bad would failure be? Most of us can see that the rest of the UK is being dragged down by abysmal losses from London's pariah industry.

  • Comment number 98.

    #67

    But it could also be argued that the price of Drugs is artificially high due to the illegal nature of the product. Drugs are priced high to compensate for the riskiness of the business to the individuals involved.

    Bring them into the mainstream at a reasonable price point and the high level of profits that illegal dealers currently enjoy would be significantly reduced, as they would be unable to maintain high prices and remain competitive, not to mention the basic premise of increased supply reducing price, hence leading to the currently criminalised entrepreneurs would leave the market, or needing to change their current markiting tactics.

  • Comment number 99.

    21 Congratulations you got the T word in by post 21 today.

    Perhaps if Scargill had held a ballot for his members on whether to strike, as opposed to leading proud people into the abyss then maybe things would have been different. After all the NUM had always had ballots before and during the 8 times they were held during Margaret Thatcher's first term the members declined to strike on each occasion.

    Steel - Two plants in Scunthorpe and Port Talbot. Just as in France there are 2 plants in Dunkirk and the South of France. Employment went from 50,000+ to about 19,000 in steel in the UK over the period 88-07. Did production halve in tonnage, or is this mechanisation? You might even notice what happened to tonnage from 97 onwards.

    Year Tonnage (millions)
    88 18.7
    89 18.5
    90 17.6
    91 16.3
    92 16.1
    93 16.5
    94 17.1
    95 17.4
    96 17.8
    97 18.3
    98 17.1
    99 16.2
    00 15.0
    01 13.4
    02 11.5
    03 13.1
    04 13.8
    05 13.2
    06 13.9
    07 14.3

    Car industry - News of its death at the hands of Mrs T seems a little premature.


    Sunderland Nissan - opened 1986
    Burnaston Toyota - opened 1991
    BMW Hams Hall - opened 2001

    Cowley BMW/Mini - operational
    Honda Swindon - operational
    Land Rover Solihull - operational
    Jaguar Castle Bromwich - operational
    Jaguar/Land Rover Halewood - operational
    Honda Swindon - operational
    Vauxhall Ellesmere Port -operational
    Ford Southampton - operational

    Ford Dagenham - closed 2000
    Jaguar Coventry - closed 2004
    Longbridge Rover - closed 2005
    Ryton Peugeot - closed 2007

    Do you mean that is shame the no one wanted to buy a load of unreliable and undesirable tat.






  • Comment number 100.

    Slowly but surely Robert seems to be coming close to explaining the root cause of the UK's problems.
    1: We have very few natural resources - previously we used to invade other countries and take the raw materials or proceeds back home. This it seems is now frowned upon even if we could manage it militarily - arms exports being an area we still seem to be quite good at.
    2: Money is not a product in itself you cannot base an economy on the sales and purchase of it- the illusion that was the success of financial services has been clearly demonstrated this last year ad ifinitum.
    3: Making stuff - food, products, providing a service and knowledge does appear to be a sound basis for an economy and growth - China and India seem to have demonstrated this quite ably.
    4: Having a flexible workforce - which most companies translate as making it easy to sack people encourages first cuts to be made in UK manufacturing (such as remains) which over various cycles results in underinvestment, inefficiency and closure - skills required die out and at some point we can;t reinvigorate these basic industries even if we wanted to.
    5: A house is not just for Christmas - fueling your economy and basing your judgement of how well off you are on it's value at a given point is a pretty stupid thing to do. Putting £10k kitchen in does not increase it's intrinsic value by £20k - it just has a nicer kitchen.
    6: None of the people we pay to monitor and prevent these things is as good as we or they think they are.
    7; Act in haste, repent at leisure - time for that old saying to make a comeback.

 

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