Friday, 11 July 2008

It is dark out there

It is a world of confusion; bank crashes, rising prices, housing shortages, falling sales, and a general lack of money. I can't make any sense of it. Read on and expect no enlightenment.

The Freddie and Fannie show

It is hard to overstate the significance of this story. Freddie and Fannie are central to the US mortgage market. The two quasi-state institutions are collapsing; their shares are plummeting and their borrowing costs are rising. So far this year, the two mortgage giants have run up $11 billion in losses.

The Bush administration is now considering a bailout. The cost will be astronomical.

Primark sales crash

In today's downtown, Primark can not shift their cheap and cheerful crap clothes. It is a watershed moment for me. We are in more trouble than I thought.

Danish Central Bank Bails Out Roskilde Bank

Soon, we will all be tired of these bank bailout headlines. The crisis is beginning to look systemic.

Housing shortage will "worsen" as UK construction collapses

According to the times, the bubble will be back:

Homeowners may be preoccupied with statistics on falling prices but the mothballing of housing schemes could exacerbate the shortage of homes, making another price spiral possible several years hence.

Is this good or bad news for homeowners? For some, the prospect of a renewed "price spiral" must look a lot like salvation.

Sugar prices soar

Should be good for the nation's teeth.

The world is running out of money

I always thought that Ambrose Evans-Pritchard was my friend. Normally, this Telegraph journist is spot-on in terms of his economic analysis. Today, he tells us the world is short of money, which obviously explains why inflation is accelerating. Stop writing this rubbish Ambrose.

17 comments:

Anonymous said...

Alice, I assume you know this nice piece - if not, do watch for the graph options towards the end of Chris Parker's prophetic 2005 video:

http://www.parkerchris.pwp.blueyonder.co.uk/vocationvocationvocation.html

B. in C.

Anonymous said...

last part of that address above is:

vocationvocationvocation.html

Anonymous said...

Ambrose is right. You are wrong. Sorry.

The sooner you define inflation correctly, and then spin that out for its predictive value for the economy the better off your analysis will be.

That said, interesting post. I'd rather see more sustained comment than linking of storied mind.

Nick

sobers said...

A few points: How do we reconcile the obvious pain on the High Street with the 3.5% increase in Retail sales in May? Was that a rogue figure? Anecdotal evidence says bloodbath, figures say not. Who to believe?

Regarding A E-P: I'm beginning to turn towards his position. Being an 80's child I'm a monetarist. Current inflation is the result of loose monetary policy over the last 10-15 years. But if the moneatry aggregates are showing such massive and rapid falls, this must signify something. All those write-offs by banks MUST be having some effect. You can't just "write off" billions of dollars and pretend nothing happened. There will be consequences.

Who knows? The current economic climate is an either or situation. Either we face an inflationary spiral destroying capital (and eroding debt) or we face a deflationary spiral blighting the economy for years (a la Japan). But not both. Which is it to be? If you can call that correctly, Mervyn King might be in touch!

powerman said...

It depends what these sales figures are measuring? increase in number of transactions, or increase in revenue?

Rising prices could generate an increase in revenue simultaneous with a decrease in transaction and/or profitability.

vladimir said...

Japan has not had spiraling deflation, it has been more of a slow drip, drip deflation. If one considers just how much their asset bubbles needed to fall (the emperor's palace being worth more than California for example), then deflation is the least of our fiat currencies' worries.

One day we really might have helicopters dishing out the cash!

aSteve said...

I'm reading a book about the crash in Japan...

An amazing quote is that just before the crash was that their central bank stated that if average house prices in Japan exceeded 7 x average income, then a crash was inevitable.

The UK is somewhat beyond that point.

Anonymous said...

Deflation is not a bad thing: it only means that the industrial process becomes more efficient, ever more good products being produced efficiently with improving machines, design and processes.

Those valuable products allow industrialised nations to import commodities, whether cheap or expensive.

Deflation knocks on our door from Japan. If we do not accept deflation, we are saying: we don't want to work as efficiently as the Japanese.

That route means in the end our only real inflow will be foreign capital nesting in the city, while an elite of bankers and senior bureaucrats lord it over a nation of low-paid shop-keepers and servants.

That's back to the pre-industrial world the industrial revolution saved us from.

There is no other way than to accept that we must have more efficient industry, able to export quality products in volume.

The lie has been that we can have a largely service economy and maintain our standard of living. We cannot, as the two bubbles since the abandonment of monetarism have shown; largely service economies have only been able to survive with excessive credit.

Now we have to pay the piper, and allow deflation to drive up efficiency, i.e. only allow people only to charge what goods and services are worth on an international scale of values, not within a nation state swimming in unsustainably massive credit in its own currency.

For an island economy like ours, and densely populated mainland Europe, neither of which now have sufficient internal commodities to survive, the Japanese way is the only way. We must have lots of high value industrial exports to pay for the imports we need. Services cannot make up the difference. Two bubbles show that.

If we don't accept the need to match Japan and accept parallel deflation (and worse, since we have a lot of catching up to do), the inflationary alternative is really, really much worse, except for those whose assets are not in an inflating currency.

Sorry if my tone is too apodeictic!

B. in C.

Anonymous said...

asteve,

Which book? Let me know if its a goodie please cos that's a topic I've only explored through blogs so far. (oh, and I also lived in Japan through it's 2000-2004 slump)

Nick

Anonymous said...

B in C,

Agreed deflation is not a disaster to be avoided at all costs (not that it can be avoided now). I'm interested in sustainability. For decades we've had a growth for growth's sake policy. That's the logic of bacteria.

What we need is a shrinking economy until we get to a level where the quality of life (as opposed to "standard of living") is good and stable. Many periods in history have done that (for example most of the feudal era). The challenge is to set the stable level reasonably high.

Building the whole economy so it needs to grow every year just guarantees the eventual extinction of humanity.

Nick

aSteve said...

The book is "The bubble economy: Japan's extraordinary speculative boom of the 80s and the dramatic bust of the 90s" - by Christopher Wood.

Literary quality leaves an awful lot to be desired - grammatical errors and spelling mistakes - including one on the back-cover blurb - and a prose style that I won't commend... but it is interesting. I'm genuinely shocked by the number of similarities between the Japanese experience and what has happened in the last few years in the West. Written in 1993, it does a remarkable job of reading as if it is a strategy (with the names of companies changed) for what has happened in the West post 2001.

Mark Wadsworth said...

Primark stuff is brilliant!

3 office shirts for a tenner, last for years (obviously you buy four packs so that you only need to wash the whole lot once a fortnight)

Anonymous said...

NIck,

What you write raises the question of what we can do without; I can live without throwaway fashion, as I am sure you can.

But would you want all to be able to have children, and children who have access to high quality medical care?

We have to be very competitive in world terms to afford highly trained doctors and the best medicines. Doctors are a mobile commodity, and they may want things you and I can live without. Medicine does not come cheap.

The feudal economy worked by taking a large number of people out of the situation of family life. Monks and nuns contributed to production but did not enjoy the pleasures of family life, though they often raised the (intended for celibate life) children of others, and freely gave themselves as the medical carers of others. In return, they got enough food, shelter, clothing and high status - but not families or property of their own.

That helped to stabilise population and keep it close to what resources affowed; disease, infant mortality and war culled the population occasionally.

Some had a good quality of life in feudal times, but by no means all.

What of good quality of life Iincluding children who can get the best medical care if required) for all? Do we just rely on trickel-down charity to supply that, as some argue in the US?

It would be good to be able to sustain that good kind of life for all, not just for some, as at present. How does that work?

B. in C. (being deliberately provocative)

Anonymous said...

B in C,

I probably wasn't clear. I don't want a return to feudalism or neo-feudalism. All I meant is that for large periods of history, often several hundred year stretches, nothing much changed. This modern idea of constant change, innovation and growth is an historical oddity. It's had many many great effects, but it's also fostered a blind allegience to growth for it's own sake, which is unsustainable.

Actually, I think high quality healthcare doesn't need to be expensive because it is primarily a service delivered one on one. Doctors and nurses get paid as much as the economy can support. There will be occasional brain drains if we are uncompetitive but because the demand is always there the supply will always adjust.

The big problems in medicine come through (i) government meddling (ii) trade unionism and (iii) socialism. Healthcare will never come down in price so long as governments can't let doctors strikes and can't let hospitals go bankrupt. A state-guaranteed market increases prices and kills service.

It's entirely reasonable to suppose all in the UK can have good healthcare under a well managed economy without relying on persistent growth as measured by GDP.

But on a general level, the UK has been living beyond its means for decades. We have been like the philandering playboy who squanders in one generation an inheritance it took hundreds of years to build. You live the high life for a while but then it comes crashing down.

People need to drop this sense of entitlement and realise the full-employment-free-healthcare-defined-benefit-pension-free-council-house period was an unsustainable aberation that relied entirely on squandering the country's accumulated wealth.

The future is going to be shit for a lot of people. Some did nothing to deserve it. Many totally deserve it, and many should've paid attention and protected themselves better.

Nick

Anonymous said...

asteve,

Recently I read the 1932 book "the bubble that broke the world" by Garet Garett. Now that is seriously Twighlight Zone in describing the past ten years seventy years before they happened.

Nick

Anonymous said...

Nick: Thanks - food for thought - thanks...

B. in C.

CityUnslicker said...

Where will this lead...I have some thoughts

To answer an earlier post about retail sails - the floods last year make for poor comparatives over this summer.

here