Uncharted Territory

October 25, 2008

We’re Right Stuffed… Or Are We?

Filed under: Credit crisis, Economics — Tim Joslin @ 5:10 pm

The writer who comes to mind this weekend is the peerless Tom Wolfe.  Bo-oring, I hear you say, another reference to his 1987 classic, The Bonfire of the Vanities.  Not so fast!  Admittedly Bonfire is as appropriate to the Noughties as it was to the Eighties.  And a great read.  But the work that I’m thinking of is The Right Stuff. A book so memorable that, after investing 6 hours of video tape in recording the film, I was unable to watch more than the first few minutes because the opening scenes differed from Wolfe’s account of Chuck Yaeger’s parachute escape.

Now, in The Right Stuff there’s a memorable account of one test flight that went wrong.  I don’t have a copy of the book to hand, but it might have been Chuck Yaeger in an X-1A.  The plane became unstable.  It was tumbling towards the ground totally out of control.  Somehow the pilot managed to get it into a tailspin.  The aircraft was still plummeting downwards.  But the pilot was no longer so worried.  He knew how to get out of a tailspin.

Right now, the economy, in the UK and globally, is in a tailspin.

But we know how to get out of a tailspin.

Reading some of the headlines in today’s newspapers, you’d be forgiven for thinking that we’ll all be living on rationed leaves and acorns by the end of the year.  Perhaps each family might be permitted a fieldmouse for Christmas dinner.  According to Charlie Bean we’re in the throes of “the worst financial crisis in human history”.  I know that, in the UK, “history” started in 1945, and, in the US, 1929, so clearly Charlie Bean considers any comparison with, say, 1848 or 1870 to be entirely meaningless.  19th century thinkers were deeply troubled by recurrent “crises of capitalism”.  Marx thought such events would lead to an entirely different economic system.

Sure, there’s been a bit of a screw-up.  But is it worse than other crises, even relatively recent ones?  Specifically, why are so many economists pronouncing with such certainty that the UK faces 4 quarters of negative growth through 2009?  The justification seems to be that other post-war recessions have typically lasted 18 months to 2 years.  Why should this one be any different?  Well, I’ll tell you.

The key factor, in short, is inflation, or, to be more precise, the ability to reflate the economy.  One period I remember well is the early 1990s, because I bought a house in the middle of the recession (and David Cameron would be wise not to think I’ve forgiven the Tories for the sleepless nights just because 16 years has gone by).  The 1990s recession was prolonged because, in order to maintain the ERM peg (I suggest readers in the Baltics pay particular attention at this point), the UK was forced to keep interest rates high.  On “Black” Wednesday emergency interest rate increases brought, I recollect, grown men with mortgages to the point of tears, and yet failed to defend the pound.

Going back in our time machine, the early 1980s recession was due to Margaret Thatcher’s monetarist programme to drive inflation from the British economy.

And I can just about remember the 1970s.  The economy was in and out of recession for the entire decade.  Inflation continually reared its ugly head, beggar thy neighbour trade unionism was rampant and government policy was all over the place.  It may be an exaggeration – though not an enormous one – to say growing up during that period gives some insight into more recent economic disasters such as those resulting from the fall of the Soviet Union or France in… well, France.

So, I don’t really see why 2009-10 should be at all like the recent UK recessions.  Sure, we’re going into a steep decline, but not necessarily a long one.  Interest rates, all are agreed, are about to drop like a stone.  I doubt any members of the MPC want to be lynched.  Talk about peer pressure!

And the PM, in unholy alliance with Lord Voldemort, is going to fight like a frighteningly large Harry Potter to get the economy moving again.  Gordo the Great will stop at nothing in his efforts to win in 2010.  Capello will try to do it for Britain, well, England, that year as well, but will look like a hesitant, stammering 5 year old girl compared to the big Scot.  Expect Broon to ventriloquise Darling to bring forward spending programmes from 2011, 2012, hell, 2025 if he has to.  And there’ll be more that’s not even planned.  Infrastructure for not just 2012 but the 2018 World Cup…  My bet’s on simply giving the housebuilders some money via councils or housing associations to recruit the guys they just laid off and get them working again.  [Notes: a) This may be good news for shares in the sector – this does not constitute financial advice; and b) This is notwithstanding the fact that mass provision of social housing is an outmoded and unfair policy, as well as economically sub-optimal in numerous ways.]. And all this will be difficult to criticise.  The conditions are right for Keynesian policies.

Even without the likelihood of concerted government action around the world, it seems to me this whole financial Armageddon thing is a tad overdone.  That’s the media for you.  The BBC was out yesterday asking shoppers how the financial crisis had affected them.  Most people said “not a lot”, they were just carrying on as normal.  Then the BBC reporter (almost old enough to buy alcohol legally) squealed: “They’re not carrying shopping bags!”, suggesting this meant people were just window-shopping.  My confident prediction is that in 2008, as in every previous year, the average Brit will charge headlong into the Christmas spending ritual with a zeal that can only be described as religious.  We always try to spend less but end up just waving a piece of plastic and not worrying about the little pieces of paper with numbers on that are shoved into free coloured bags with the goods we’ve just bought until Mr Visa or Mrs Mastercard kindly add them up for us in the middle of January.

But what about all these dire forecasts?, I hear you ask.  Well, on Thursday I was going to title a piece “Utterly Amazoning” as the online retailer forecast that this year we’d all be giving each other 10 shilling postal orders.  By Friday I had “Utterly Amazoning Son(n)y” as the consumer electronics manufacturer forecast we’d all go camping this winter.  Look, these are forecasts.  At present the state of the economy in 5 minutes is entirely unpredictable.  Let alone next quarter.  You do not get to the top of multinational businesses by being the sort of wally who says “I think it’ll be quite mild actually” when everyone else is predicting an Arctic blizzard.  No, you go with the herd.  And what’s more, you err on the side of making predictions that allow you to say “It was tough, but we beat the figures”, not “We lowered our forecast and still missed the target”, a phrase one might translate as “I resign, I want to play a lot more golf before I reach 60”.

So my prediction, for what it’s worth – this does not constitute financial advice – is that the current quarter to end 2008 is going to be grim, grim, grim.  Lots of layoffs (but most people won’t be fired).  Government policy announcements and rate cuts that appear to have little effect.

Then, in about January, and certainly (I predict – this does not constitute financial advice) by April, people will be saying “that wasn’t so bad”.  Interest rates will be so low by then that a lot of money is being put into people’s pockets as it becomes less expensive to service mortgages (house prices may continue to decline for a year or two, though – the fact that people can pay their mortgages more easily isn’t going to prevent the banks from being very cagey about lending more money).  And the extra government spending will be feeding through.

The economy may be in a tailspin.

But we know how to get out of a tailspin.

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1 Comment »

  1. […] sort of inflation that turned the 1970s into a Lost Decade for the UK and many other economies.  I said it before, and again I see no need to fundamentally revise my position: there’s no reason why we […]

    Pingback by Ice, Fire and the MPC « Uncharted Territory — February 11, 2009 @ 4:03 pm


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