The Sun blames Brown for coming economic recession

economic

Wasn't the Daily Star telling people to vote Conservative? And thats even more of a comic than The Sun is.

Seriously, does ANYONE pay attention to what the red tops tell people to do?

Ian

In many areas its likely merely a fall back to where prices were 6 months before that. It could be the beginning of a crash, or it could be a move back to prices of a year or two ago and a stagnation (as shown by fewer houses being sold). What percentage of the population is affected by a reversion of prices to those of a year or two previously? Very low I would think.

My dad takes the racing tips fairly seriously.

FoFP

I read recently that mortgage equity withdrawal at its feverish height equated to around 8% of consumer spending. A significant fall back in prices - even if it's not a crash - could easily choke this off , either because credit is tighter or because there's little appetite to tap off any equity when values are falling. Take that out of the economy and the effect is widespread.... as it was evidently in the last crash.

There's something distinctly circular and vicious about it.

Federal Reserve archive I guess. Titled something like "Fighting Deflation: Lessons learned From Japan" IIRC.

Well 1% is emergency levels if there's any inflation left at all. Money is *still* at a negative real interest rate in the US two years later.

When was the last time prior to this we had 3% base rates?

Have they declared the national economy closed then? Seems to me that things are running pretty heavily towards the bear camp. Instead of being voices in the wilderness we can now claim folks like Warren Buffet and Sir John Templeton to be onside.

If you have a consumer debt bubble then when the consumer gets tired, you need to have the money flowing elsewhere, othwerwise the fall in demand, and velocity of money, is deflationary for the economy. The options are clearly to increase private investment by business or to increase government spending contracyclically (Keynesianism or neo-Keynesianism). Clearly increased government spending both here and in the US were used as part of the fight against the deflationary fallout from the Dotcom crash. Thus neither government can really increase government spending at a greater rate, lest the bond vigilantes tank their debt, raising interest rates and bringing on the very thing they're trying to avoid (note that usually after a bubble, government funds are in surplus as in 2000 and so this is easy). That leaves a pass to private sector investment as the remaining option and that's what both sides of the Atlantic are hoping for. If companies invest in expansion, then that can offset the fall in spending by consumers as they retrench.

The problem is that this is often the point that the "recovery" fails and becomes a "Dead Cat Bounce". Stephen Roach and a couple of others have written some good stuff over on Prudentbear about this. One has analysed the past 5 great bubbles (the K-wave ones) and claims to have found a mini-boom after the initial phase of each bust (e.g. the US economy pulling out for a time from 1932).

Leaving all the theory aside though, a simple look at our economy indicates that if consumers quit borrowing to spend, and raise the savings rate towards anything approaching normal, then the economy will take a large hit unless some other part of the economy can compensate. That housing is obviously peaking is just another thing to worry about.

Loads of the jobs that have been created here i the past decade have bee in retail as folks ramped up borrowing against housing to spend, and in housing itself as the bubble built up steam. A side effect was growth in finance jobs as we paid bean-counters to move all that debt around.

The signs that this view is correct will be redundancies at banks, estate agents and retailers. Further evidence would be increased personal bankruptcies and reposessions and people borrowing less and paying off their debts.

It seems to me that there's a possibility, though as yet no more than that, that we're reaching that point.

FoFP

It's not the fall in prices that's the current problem, it's the failure to continue to rise.

if prices don't rise then people can't remortgage against a rise and get money they didn't earn to continue splurging on the High Street. If they don't do that then the droids at B&Q get sacked and can't pay their mortgages.

Bubbles *must* continue to rise, or they bust. The dynamic doesn't allow for a stable state.

FoFP

Yes, Tony Bliar does. Why else do you think he spends time on sucking up to Rupert "The Dirty Digger" Murdoch if not to keep his papers (particularly the Sun) onside ?

When was the last time you successfully sustained an ever expanding bubble in your bath?

l

I will try and find it.

You can call it emergency levels, others could call it levels for the economic climate.

When did we have interest rates at 3%? We have had then down to 3.5% around Sept 03, the move since then has been upwards with levels staying at 4.75% I don't get the feeling that these are panic or emergency levels.

Well I guess at some point you may be right, and this seems to be how these people will claim their position to be true when eventually it happens, however as I have pointed out these claims have been being made since 2000 and their claims point to the following year or two years, always they have been wrong, but I guess there is always a first time eh?

Yes, I understand that.

I don't see how private investment by business would directly effect high street spending I do see how spending on public services would.

Your connection between the dotcom crash and the large amounts of public spending here are in my view unconnected.

Well that is obvious, all that your saying is increasing interest rates will have a deflationary effect. What would you say about current predictions that the next move in rates will be down?

These all seem worse case scenarios which I don't disagree with, my argument is that the very people who say the above are the ones who over 5 years ago claimed this would happen within the year or two, it did not. House prices at the moment are static, and it is no bad thing if debt is started to be paid, this may lead to a slow down but not a burst, no one seems to talk a bout a slow down as opposed to a burst. If anything the slow down we see above is good as it means people are aware of the problems that could happen.

No, however they don't effect my eyes in regard to seeing houses being put up for sale then seeing them being sold, nor does it effect me seeing reports that indicted prices are not falling. Do you happen to live in the SE, maybe that is the problem, there is a whole country outside of it.

That'd be for an economic climate featuring heavy deflationary clouds and floods of debt.

OK, when prior to that did we have 'em at 3.5%?

Well I guess I could die first.

Perhaps, but we're talking about a *70 year* cycle. Hitting it to within

5 years is good enough for government work.

Of course within that it'd always be better to be early than late since the situations of getting one's cash out before and after the crash are not symmetrical. Just ask anyone still invested in tech stocks in 2003 if they'd rather have been out in 1999.

The aim isn't specifically to keep high street spending up (though to an extent business expansion and consequent hiring will do that). The aim is to offset the effects on money supply as people pare back borrowing or pay off debt.

The government has already shot its wad on that one. Business is all that's left. Expect an export drive and calls for protectionism. They follow this part of the cycle like flies on shit.

Folks like Greenspan, Brown et al know that crashed bring deflation in their wake. They decided, at a G7 meeting as I recall, to pursue policies both monetary (cut interest rates drastically worldwide) and fiscal (loosen government spending as much as possible) to try to prevent a deflation. It's obvious enough that interest rates were cut pretty much everywhere. Governments in the UK and US spent like there's no tomorrow (though the US certainly took the Gold). France and Germany broke the Maastricht Limits but couldn't go much further than that (and the US are still at them to do so). Japan has had a zero percent base rate pretty much forever, and still has deflation.

The fact that "more public spending" is what Brown and Blair wanted to hear anyway didn't hurt.

If we or the world look like we're tipping towards deflation again, the next move will certainly be down. However, if oil spikes again, the next move could be up because the remit is to fight inflation. Worse, if the CDO or credit swap markets break, or something similar, the next move might not only be up, but up a great deal. The simple fact is that the Bank of England does not ultimately control interest rates, the bond vigilantes do. If something panic them out of our debt, we have to ramp up our interest rates to make the risk worthwhile for them to hold it.

I guess I don't really need to say that I'm a tad more pessimistic than you are. We have the largest pileup of debt seen in planetary history and that history indicates that even debt mountains much more moderate than this have led to bad consequences. My view is that we should have taken our licks with the 2002 deflation and we'd probably have been coming out of that recession by next year. By piling up the debt even higher just to delay the reckoning for a few years, we've made that reckoning a lot worse.

FoFP

And you assume asking prices are always met?

However it does seem to affect your failing to see reports that prices ARE falling.

In the SE we refer to these areas as regions, not countries.

Asking prices for the most part appear to be static but::-

Asking price are in a continuously variable relationship to final, agreed prices. The market across a good deal of the country (not just the SE) is apparently a buyers market. In a buyers market, asking prices are with very few exceptions, lower than asking prices.

(reminds me of my algebra teacher's puerile proof that 0 = 1)

Of course that should have read:-

In a buyers' market finally agreed prices are - with very few exceptions - lower than asking prices.

God, what a sad pathetic partisan cheerleader you are.

If the Tories where in with similar trends in the housing market, we would all be going deaf with shouts of 'Boom and Bust'. Be unashamed of who you support, shout it from the rooftops, but for gods sake, dont lose perspective.

We have some serious economic issues that are arising, the housing market expansion, combined with a credit expansion make any downturn in the sector a larger problem then it would have been. We have upcoming serious balance of payments issues, with revenues dropping off and spending increasing. Economic growth (which underpins expansions in spending) is under threat. Brown has shown himself to be a better (lucky?) predictor of economic growth then most of the experts. The experts expect the Government to significantly miss growth targets. When you run out of money, you can do two things, you can tax more, or cut spending. If you increase taxes on an economy entering a downturn you can turn a downturn into a recession. If you reduce spending during a downturn you massively increase unemployment, at a time when the private sector is also contracting.

Some serious headaches are on their way, and I am glad i am not the one who is making the decisions.

Gaz

Small corrections can sometimes have massive impacts. When the american Stock Market crashed in 1929, it only crashed to the level it had been in

1928, it then rose back up over the next year, to not far short of the original high before the crash, this precipitated the Great Depression, lasting until the beginning of WW2.

Gaz

In the initial crash yes.

It reached 90% of the October '29 peak, then fell to 11% of the peak by 1932.

That's more debatable. The Monetarists (and Fisherites) say that not cutting interest rates fast enough caused the depression. The Keynesians say that lack of demand was the problem. The Austrians say that it was the reckless lending and speculation between 1926 and 1929 and subsequent government interference (rather than letting the deflation run its course) which caused the depression.

It was almost certainly on the mend in 1938 but government price and wage fixing aborted the nascent recovery.

Recessions and depressions can be bad, but there's no situation that an activist government can't make a lot worse.

FoFP

The Smoot Hawley tarriff act comes to mind as a shining example.

Congress have their own modern version of that waiting in the wings to "Punish China" (1586, Schumer et al).

Of course the wisdom of punishing one's own bankers when one wants to continue borrowing two billion a day extra every day, remains to be seen. Pulling that plug alone would precipitate something much worse than anything I've outlined.

Some interesting stories doing the rounds on some hedge funds blowing out in the CDO markets after the GM downgrade to junk. No names or numbers yet, but the letters "LTCM" have been uttered by the more panicky folks.

FoFP