Friday, August 22, 2008

It's Official Now - Recession - but it will be a depression

The headlines today tell of the final acceptance that the UK economy is in trouble. The Times reports the following:
'Britain's economy is teetering on the brink of recession as official figures showed that output ground to a halt between April and the end of June. This is the weakest performance since 1992, the tail-end of the last recession, and will increase pressure on the Bank of England to cut interest rates to prevent a full-blown economic slump.

Official figures released this morning showed that output failed to grow at all in the second quarter, contrary to initial estimates showing that the economy grew by 0.2 per cent between April and June 30.'

The really odd part of this is that the UK economy has likely been in recession for many years, just not by the way that economists have been measuring the economy. Once growth in debt is stripped out of the 'growth' in the UK economy, it is very probable that the UK economy has been shrinking for some time. It is for this reason that I have been predicting the current state of the economy and that there will be a depression, rather than a recession (for first time visitors to the blog you can find the prediction/s - which have been proved almost exactly right so far - and why I made the predictions here). Once the debt pyramid collapses, it is inevitable that it will take the whole economy with it.

Regular readers will also know that I have been predicting a meltdown of both the government financial position (the government is still predicting growth in the economy!), and have also predicted the onset of bank failures in about 3-5 months time. An interesting article has appeared regarding the two U.S. mortgage giants, Fannie and Freddie Mac, in which Warren Buffett suggests that they would go bankrupt without government support. Whilst the story in the UK is that we do not have the same problems as the US sub-prime mess, the reality is that the situation in the UK is very similar, with for example self certification mortgages. Furthermore, the UK housing downturn is likely to be even more severe than the US for the simple reason that the bubble was bigger. As the UK economy turns down ever faster, the losses at the major banks will accelerate. However, I do need some caution here, as repossessions will lag the economy by some margin (notwithstanding the more aggressive stance of lenders that was reported recently), and the repossessions will be one of the triggers for bank collapses.

More immediate will be the souring of personal debt, which will already be hitting the balance sheets of the banks. Even as I write, there will be mounting panic in many financial institutions as they see a sea of red appearing on their balance sheets. On top of this there is the souring of business debt, as many businesses start to collapse.

In light of the above, I once again strongly recommend that the readers here spread their assets over several financial institutions, with instant Internet access, and be prepared to move your money at the first hint of trouble in any of the banks. When things go wrong, they go wrong quickly, so have transfers from one bank to another set up, so that you do not lose any time and can make immediate transfers.

On a related subject I have been reading about a new film about the US debt crisis, call 'I.O.U.S.A'. Apparently it points out the very bad (horrendous) state of US debt, and is causing quite a stir. When considering this, you may wish to bear in mind that the situation in the UK is far, far worse The US owes $13,773,135,000,000, and the UK owes $11,502,800,000,000 in external debt (this means owed to people outside of the country - original statistics here). You will note the astounding figures. I have not written this in trillions, as I feel this makes the numbers too abstract. You will also note that the level of debt in the UK is nearly as high as the US, but the UK economy is just a fraction of the size of the US economy. I have previously suggested that the UK is actually bankrupt and will be going to the IMF for a bailout at some point in the coming months, and looking at these figures it is plainly apparent why I argue this.

Aside from warning about spreading money over institutions, I have been very cautious about giving advice. However, in light of the fact that I am (depressingly) proven to be correct so far I feel slightly more confident to do so now. I have long predicted that the £GB would fall through the floor, and it is now going through that process. As such I suggest get you assets out of £GB and into other currencies. I hesitate to recommend a particular currency, but the prospects for the £GB are particularly poor, so you are unlikely to do much worse. However, as a general note all the OECD currencies are going to be devalued over the coming couple of years, with the possible exception of the Japanese Yen (note the word possible). An explanation of why can be found here. However, a word of caution - just because I have been right so far does not mean that this means I will continue to be right.

On a more positive note, at least now the reality the severity of the situation is starting to sink in. In particular, I have high hopes for the new film on debt to be a wake up call not only for the U.S. but also for the U.K. Now that it is accepted that the UK economy is not in good shape, there is opportunity for the U.K. to start to commence the process of reform. My only worry at this stage is that nobody is on the horizon willing to take the tough measures that are necessary. I also worry about the fact that the psychology of the people of the U.K. is such that they will not accept/face reality and contemplate such measures. I have outlined some structural measures over three previous posts, in an ongoing project, and so far have covered education, health and the benefits systems.

The simple fact is that the U.K. has been living beyond its means, and only serious structural reform can restore the U.K economy long term. In an age of global competition there is no choice, but the sooner the process of reform starts, the sooner the U.K. will be able to pull itself out of the mess that it has fallen into.


  1. Mark,

    I think you are several steps behind this guy:


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