Thursday, July 10, 2008

Time to put on your hard hats...

It is with little satisfaction that I can report a raft of bad news on the economy.

Of particular note is an article in the Telegraph, that reports that the fall in house prices is so fast and extreme that it is the most dramatic drop since the Great Depression. The severity of this situation can be seen in the table below (from the Telegraph):

In the same article, it now seems apparent that the economists are now leaving their bunkers (or is that their bunker mentality), and coming out and facing the reality of what is occurring. One example can be seen below:

'Prof Goodhart, now at the London School of Economics, said: "Output is going to fall, unemployment is going to rise, possibly quite sharply. It's a horrible situation.The British economy is getting into quite a recession. I remember when the Queen had an 'annus horribilis,' and this is the annus horribilis for the MPC."The third quarter will show no growth, maybe even a marginal reduction in output," he said in an interview with Bloomberg Television. "I think it will last rather longer than is going to be comfortable. The situation looks dire."'
Last week's Economist magazine has also be sounding the alarm bells, though still in a relatively moderate way. Even the Guardian is getting in on the act, though inevitably drawing the wrong conclusions (the link is to a typical piece of nonsense).

As it is, I am relieved that finally the severity of the situation is starting to sink in. My ongoing worry is that the economists will start to blame the 'Credit Crunch' (an animistic beastie that serves as an explanation for all woes), rather than face the reality that the structures of the Western economies are now unsupportable. Until they grasp this idea, I worry that policy will carry on down the same road that has already led to this economic dead end.

However, I remain optimistic that the economists may (when confronted with the raw reality) manage to untangle themselves from their charts and discredited theory to actually think about the situation and how it has arisen. One of the first signs is the re-emergence of monetarism, though that of itself will only provide a small part of the answer. Click here for an example of the monetarist debate in the Telegraph.

If I was to summarise the root of the problems that we are seeing, I would have to refer you to my post on the 'Cigarette Lighter Problem'. At some point I hope to expand on this article, as I am still not sure that readers are grasping the magnitude of the problem that it represents (as it is an article that has received no comments).

In the meantime, reach for your hard hats, as the ride is about to get bumpy. As I have said before, the next shock will come in about 6 months when the second tranche of bad loans hit the balance sheets of the banks. As the economy turns down, unemployment goes up, a large amount of the credit that has been dished out irresponsibly will go bad. There will be at least a few bank failures, so spread your risk across institutions.

Note: I will repeat the above warning until everyone is sick of it. However, there is no harm in metaphorically moving your eggs from all being in one basket, so why not do it now?

1 comment:

  1. The author is entirely correct. I have just spent the best part of 2 hours reading his articles and he is the first economist I have come across that truly understands how much trouble we are in.

    For the individual, asset liquidation should be embarked upon as quickly as you can. If you have got things lying around your home that you no longer need then sell them now. Toys, gadgets, antiques and all our detritus is going to be worth much less in the coming months. Sell them now, while there are still people with money to spend.

    You must sell all your real-estate, as quickly as possible. Whatever you get for it is going to look like a very shrewd deal, in a matter of months. Those who do this will have something that has become almost unfashionable - savings. Money in the bank that is actually yours. You are going to need this to survive.

    However, I cannot say which bank you should put the cash into. But you must look at Asian financial institutions as possibly the only life-rafts on an enormous sinking ship.

    One more thing. Get ruthless. Not just in terms of how you conduct yourself in financial situations. This could get physical.



You are more than welcome to comment on the posts, but please try to stay on topic....I will publish all comments, excepting spam and bad language, and my moderation of the comments is just to exclude these.

Please allow up to two days for the comment to appear.

I have had a request for an email address for the site and have created the following:


I have ommitted the @ symbol to avoid spam....

For general purposes I would suggest using the comment form, but will occasionally look at this email account. Please be clear what is for publication and what is not, though I will also not guarantee publishing of email comments, unlike the comments through the form! Thanks.