The Plot Thickens

A very quick post today, as I am rather pressured for time.

The first thing I would like to do is to recommend an article in The Times, which is called 'The Credit Crisis in Black and White'. It is a very simple and effective explanation of the problems of bad mortgages. However, the problem that this highlights is just one of the problems in the banking system and, as I have pointed out before, a second credit crisis is looming on the horizon. In particular, as unemployment picks up there will be a new wave of defaults which will include a melt-down in the consumer credit markets. There is an awful lot of lending out there that is about to go sour, and the problems will extend well beyond the sub-prime markets.

As predicted in my essay 'A Funny View of Wealth', the unemployment rate is now accelerating fast in the UK, despite the return home of many of the Central European workers (which I also predicted as likely). The Telegraph today reports that there has been the highest monthly rise in unemployment since 1992, and also reports expectations that the rate of rise is likely to accelerate:

'Vicky Redwood, economist at Capital Economics, said: "Expect the labour market to weaken further - we see the unemployment rate rising to 8pc eventually from its current 5.2pc, equating to a rise of 900,000."'

I am afraid that these figures are very conservative. My own personal expectation is that the situation will be far worse than this prediction. My own guess (and it is no more than that) is that, if we ignore the 'make work' schemes that the government will inevitably introduce, the figures over the next two years will climb up to a minimum of 10% and a maximum of 20%. If I were to pluck a figure out of the air, I would settle on 14%. However, such figures would also be ignoring the structural unemployment in the form of those who are allegedly too sick to work.

The other interesting (and worrying) news being reported is that there is increasing nervousness about financing deficits in the US economy. The assumption has been that the Western economies are 'safe', but that illusion is now being shattered. The results of this awakening are going to be very profound. In particular, the Western economies are going to have to start paying a high risk premium for their borrowing. The taps on cheap financing are now going to close, and this will add further impetus to the economic slide. One of the major impacts will be that the flow of inward investment will dry up as I detailed in 'A Funny View of Wealth':

'In particular, the economy of the UK has become ever more dependent on inward investment to act as a counterbalance to the imports of goods and services that have led to consistent balance of payments deficits. As the UK economy slows there is a realistic possibility that such inward investment will also freeze. One of the reasons for the ongoing inward investment has been the apparent robustness of the UK economy, and in particular the perceived stability of the UK economy. As such, one of the other inflows of money into the UK economy might also dry up, further leveraging the UK economy downwards.'

As the illusion of success fades, so will many sources of finance. When considering the future of the UK economy, I sometimes need to remind myself that there is no limit on how bad it might become. As I have said in an earlier post, it is necessary to forget the assumption that the economy of the UK (or US, Europe) have a right to wealth.

It seems that the world is now waking up to this fact, and looking on the Western World with ever more cynicism and, I am very sorry to say, they are right to do so. The situation is going to get very, very bad indeed.