Skip to main content

Waiting on the down cycle

In theory, the impact of the global credit crunch of 2008 is supposed to be dissipating. The global economy is growing and the banks are back making money. Political and business leaders are speaking about a return to normality.

Yet conditions are still very far from "normal".

Bank of England interest rates are nominally 0.5%. Yet the historic average interest rate since the Bank of England was founded in 1694 is 5%. Monetary authorities around the world are not only setting negative real interest rates, but also seeking to fill the economic hole left by the credit collapse with new money: the so-called "quantative easing". These are very extreme monetary positions.

Although the US policy makers remain concerned about deflation in the Dollar, the UK faces different problems: British inflation is quite high. The general inflation number remains consistently higher than in global competitors, and more to the point, the UK housing market has continued to boom. Whereas in the US we have seen house price falls of as much as 40%; in the UK, nominal prices have continued to rise. Despite the slowing of the economy, and the prospect of significant action to cut the unsustainably high deficit, house prices have continued to rise. Some point to unexpectedly strong GDP growth numbers, but the fact remains that the sustainability of UK growth is a huge question while interest rates remain so low, and the deficit remains high. Growth rests upon these two highly unstable foundations, and now both the government and the Bank of England must address their problems and try to return the British economy to more normal conditions. Yet the conditions that obtained before the credit crunch set in were not normal either: the longest boom in history was funded by the largest credit expansion in history, followed by the bankruptcy of the banking system, which required the largest bank rescue in history.

The UK has used the global credit expansion to fund house prices, and not investment: hence Britain has both a weak physical infrastructure and inadequate investment in business. It is not surprising that the country has created a structurally high rate of inflation. The question is now what happens to house prices when the government cuts expenditure and interest rates go up?

This is not an academic discussion: the BAnk of England is already moving towards a more hawkish stance, while the Osborne budget suggested that the cuts in government expenditure would be of the order of an across the board cut of 20%, and in certain areas, much higher. Indeed the Russian drought and Canadian floods that are conspiring to increase the price of wheat, may mean that the inflationary ogre will be at the door much sooner than previously forecast.

So, the gloomy profits warnings from the likes of Next may indeed be quite justified. The British economy still has a very long way to go before we can speak of sustainable conditions for growth. Gordon Brown, who foolishly decreed an "end to boom and bust" without understanding that his own policies were themselves distorting the business cycle, has left a poisonous legacy.

The gloom of autumn will soon be upon us, although confidence in the coalition will probably protect Sterling somewhat- though it will be the inevitable hike in rates that will protect it more.

The price will be higher unemployment and -finally- an inevitable correction in the housing market.

Comments

Pat said…
The speculated time of recovery is 2020. We still have a lot to go through then. Thanks for the insights and facts. By the way, if you think it's time to have your own place in Nottingham, why not try this great option of rent to own homes. It's the best option you have these days. Good luck in everything!

Popular posts from this blog

Post Truth and Justice

The past decade has seen the rise of so-called "post truth" politics.  Instead of mere misrepresentation of facts to serve an argument, political figures began to put forward arguments which denied easily provable facts, and then blustered and browbeat those who pointed out the lie.  The political class was able to get away with "post truth" positions because the infrastructure that reported their activity has been suborned directly into the process. In short, the media abandoned long-cherished traditions of objectivity and began a slow slide into undeclared bias and partisanship.  The "fourth estate" was always a key piece of how democratic societies worked, since the press, and later the broadcast media could shape opinion by the way they reported on the political process. As a result there has never been a golden age of objective media, but nevertheless individual reporters acquired better or worse reputations for the quality of their reporting and ...

Liberal Democrats v Conservatives: the battle in the blogosphere

It is probably fair to say that the advent of Nick Clegg, the new leader of the Liberal Democrats, has not been greeted with unalloyed joy by our Conservative opponents. Indeed, it would hardly be wrong to say that the past few weeks has seen some "pretty robust" debate between Conservative and Liberal Democrat bloggers. Even the Queen Mum of blogging, the generally genial Iain Dale seems to have been featuring as many stories as he can to try to show Liberal Democrats in as poor a light as possible. Neither, to be fair, has the traffic been all one way: I have "fisked' Mr. Cameron's rather half-baked proposals on health, and attacked several of the Conservative positions that have emerged from the fog of their policy making process. Most Liberal Democrats have attacked the Conservatives probably with more vigour even than the distrusted, discredited Labour government. So what lies behind this sharper debate, this emerging war in the blogosphere? Partly- in my ...

One Year On

  Head vabariigi iseseisvuspäeva! Happy Estonian Independence Day! It is one year since I stood outside the Estonian Parliament for the traditional raising of the national flag from Tall Hermann tower. Looking at the young fraternities gathered with their flags, I was very sure that Estonia too would soon be facing the aggression of the criminal Russian regime. A tragic and dark day. 5 eyes intelligence had been clear: an all out invasion was going to happen, and Putin´s goals included- and still include- "restoration" of Russian imperial power across Europe, even to the Atlantic. Yet there was one Western intelligence failure: we all underestimated the guts of the Ukrainian armed forces, the ZSU, and its President and people. One year on, Estonia, and indeed all the front line states against Russia, knows that Ukraine saved us. Estonia used that time to prepare itself, should that "delayed" onslaught ever be unleashed, but equally the determination of Kaja Kallas, ...