The Government and the Bank of England have been under increasing pressure over the crisis at Northern Rock. Bankers and economists have criticised the Bank of England’s hardline stance on not providing support for financial institutions, and opposition MPs have tried to pin the blame on the Prime Minister for his stewardship of the economy as Chancellor.
There was a time when I used to bore even myself with dire economic warnings. It was obvious that the ’strong’ UK economy was built on a flimsy foundation of cheap foreign capital secured on finite assets. Of course no-one wanted to hear it, especially my Labour Party colleagues, but I carried on nonetheless.
From this blog’s archive …
16 May 2007: Essay | Brown the Premier
However, the realities of elections have meant that Gordon’s rules have had to be broken. Generous budgets, with Brown no doubt under pressure from Blair et al, have meant that spending and borrowing have got out of hand.
04 Sep 2006: We should not sleepwalk into a Brown Government
The economy, so long the fulcrum of his challenge, is beginning to cool. Cheap Chinese capital is drying up and consumer debt levels have begun to impinge on spending. Property is also cooling down, meaning people will have limited access to secured loans. We are slowly approaching a recession.
25 Aug 2006: Did you hide or spend?
We had got cocky of course. The world has been going through a long period of economic growth, fuelled by the emerging Asian economies; chief among these was China, that enormous manufacturing powerhouse. These emerging Tigers didn’t have a sophisticated banking system, so huge amounts of capital was used to buy US treasury bonds and pumped into Western Anglo-Saxon economies. This massive capital flow ensured low-interest rates in the US and UK, allowing low-cost lending, which fuelled an insatiable demand for shiny new products, most of which were made in China. Circle closed, economic growth guaranteed. Hmmm.
Last year UK consumer lending (inc. secured lending) smashed through the one trillion pound mark, within 6-months it had risen another 10%. People began to question the enormous levels of consumer debt. In the US too, the balance sheet of household assets and debts became neutral at 0%. Alarm bells began to ring. In both countries the ongoing house price boom has begun to cool, and homes, many of which are underwriting huge loans, suddenly don’t look so secure.
14 Jul 2006: Dollar Crash?
Democrats have been warning of a dollar crash for a while, but that’s been in devilment rather than any divine insight. It’s going to happen. It’s great for holidaymakers going to the US, but not so good for UK businesses.
27 Jun 2006: Feminism in the noughties: The ramblings of a madman
The family unit has had to adapt to our high-expectation capitalist society. The rise of consumerism has increased the pressure on people to ‘have it all’. Magazines exist with the solitary agenda of tempting us to pull out the credit card and purchase that new flat screen TV or Prada handbag. In fact, with consumer debt now at well over a trillion pounds, a homemaking mother is now a luxury only the affluent can afford.
18 May 2006: Are we at the precipice of a recession?
Anyone with a modicum of financial nous, would advise investors to be cautious, and consumers, to drastically limit their level of spending and work to reduce their indebtedness, over the next few years.
11 Apr 2006: The Chav, the minimum wage, and the BNP
Of course most of this affluence is leveraged on huge swathes of consumer credit, and fuelled by a rampant, yet surprisingly robust, housing market. Personal debt now stands at £1,174bn, growing at 10.3% per-annum. The British people are now much more comfortable with debt, and helped by low interest rates (secured by foreign capital) and consistent economic growth, are able to continue to refinance to fuel further spending.
01 Mar 2006: tPod
The problem, as ever, is in the foundation of the argument. As a fiscal policy, it has a fundamental flaw; it relies on the assumption that the economy will grow. Many economists would argue that with our bloated public sector, the chances for continued sustained economic growth are unlikely. By the time Brown has finished racking up billions of pounds of debt, the economy will be due a serious overhaul. So Cameron’s recipe of freezing public spending at Brownian levels sounds rather unhelpful.
01 Feb 2006: The ‘State’ of the Union
As Ashley Seager outlined in yesterdays Guardian; consumer spending and house building represent 90% of the growth in the American Economy. With American household savings nonexistent and the current account deficit at a record 6% of GDP it seems America is determined to spend its way out of trouble. Such short-termism is bound to fail as the emerging Asian economies – who bankroll so much of America’s consumption – own banking systems develop; meaning less investment in ‘secure’ Anglo-Saxon banks, leading to rocketing interest rates with mortgage owners left high and dry.
23 Dec 2005: tyger’s Christmas thought
In July of last year UK personal debt broke through the £1 trillion barrier, in little over 11 months it had increased by 10%. According to CreditAction, a UK organisation that publishes consumer debt statistics and seeks to raise awareness of the dangers high consumer indebtedness, the average UK adult owes £24,420 (inc. mortgages) a figure which grows by £180 per month (0.7%). This figure suggests we are spending £180 per-person per-month too much; this would be an over-simplistic conclusion, as consumers would expect the return on investments (chiefly mortgages, but also pensions) to match this increased outlay meaning indebtedness in real terms would be much lower or zero. This stipulation of course is dependent on rising house prices and sound economic growth (which increases the value of pensions investments).
If economic growth is at only 0.6% and slowing, many consumers may find themselves in a precarious position - as many were in the early 1990’s - with the experience of negative equity, which can in severe circumstances lead to the repossession of homes.
Much of the growth since 1997 has been a result of increased public spending, which can – at least in the short term – stimulate the economy. Equally there is no doubt that following the economic liberalisation of Thatcherism, the UK benefited from a comparatively more deregulated economy, meaning that while in Western Europe unemployment was creeping up, the UK enjoyed a fairly stable rate of about 5%. When unemployment is relatively low consumer confidence is usually high.
The buoyant UK economy led to an increase in social mobility and many people traded-up their homes. The relatively high population density of the UK meant that as people looked to move, inevitably house prices rose. This rise was compounded as young professionals saw the returns on property investment and joined the marketplace. Seemingly overnight people saw the value of their homes – and therefore their equity – rise; lenders keen to tap into this new wealth offered homeowners ever-larger secured loans. Secured lending on homes in October 2005 was £946.9bn, or 83% of the total UK personal debt (£1,138bn).
As the escalation of house prices slows down (or worse, house values decrease) people will be unable to tap into more equity and consumer spending – so much of which is on credit – will decelerate. A significant drop in consumer spending will halt retail growth, a major driver of our increasingly service-based economy, and leave retailers who have enjoyed the fruits of impressive growth, looking to consolidate their market position. Shareholder pressure will mean cost-cutting exercises and inevitably jobs will be sacrificed.
As jobs go the pressure on highly indebted citizens will become critical, yet again reducing general consumption, feeding a downward economic trend.
03 Oct 2005: New Labour or Neo-Labour?
Thatcherism fundamentally changed British Politics. Thatcher began the dissolution of council housing with the Housing Act of 1980 (Right to Buy), which meant that more working class people were buying their own homes. Home ownership created a society where individuals have assets, which ultimately contributed to our high-debt society; families are now increasingly subjective to market conditions as they now have a stake in the economy.
06 Sep 2005: Are we heading for an economic meltdown?
American household savings recently dipped to the symbolically low level of 0.0%. This represents the nadir in the safety of the US economy as credit has reached unsustainable levels; with interest rates kept artificially low by massive inflows of foreign capital the irreversibility of recession is inevitable.
As the worlds biggest debtor the US will not be able to rely on household savings to soften the economic meltdown. It was the Japanese household’s proclivity to save that enabled it to re-emerge from its recent recession relatively unharmed; the US has no such reserve on which to draw.
12 Jun 2005: George Bush II – George the Inept
And what of the economy? Ford and General Motors’ stock is declared junk and American manufacturing has suffered its worse period for decades. The Chinese support the treasury with an endless supply off bond purchases creating a legacy of debt that future generation will have too reconcile. Bush will be safely retired to his Austin ranch in time to miss the debts being called in. Only the stuttering early performance of the Euro has stopped the dollar from loosing its privileged position as the global default currency. This is deeply symbolic and creates vast wealth for US government as it enjoys the benefits from all US Dollar exchanges.
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even without reading this blog entry, my feeling is that it is awesome.
The Bank of England’s role in the Northern Rock debacle will come under intense parliamentary scrutiny on Thursday when Mervyn King gives evidence to the Treasury select committee.