Friday, 23 September 2011

Britain is swimming against the tide

The feared double-dip recession is almost upon us. For weeks, stock markets around the world have signalled the impending downturn. 

Is it just me, but I feel as if I missed the recovery. Unemployment remains high, real living standards are falling, and inflation is running at around 5 percent a year.  If there has been any growth,  I haven't noticed it.

US GDP data helps explain why so many of us feel as if this crisis continues to weigh so heavily upon us. The 2008 recession was deep, and despite a return to growth in 2009, the level of GDP has yet to attain the peak is achieved prior to the crisis. In other words, the US economy has not grown in real terms for over four years. The GDP numbers in Europe tell the same story; a steep decline in activity followed by an anaemic recovery.  In real terms, European economies have stagnated.

Whereas the source of the last crisis was in North America, We have Europe to thank for the coming slowdown. The sovereign debt crisis has been profoundly destabilising. It has sent a shock wave of uncertainty around the world that now threatens both North America and Asia. Instability and vulnerability are stalking us.  Firms fear to invest, and households are afraid to consume. 

Unfortunately, we have learned little from the previous crisis. Banks, particularly the ones in Europe, continue to be the weak link in the global economy. They are poorly supervised, under capitalised and vulnerable to a sovereign debt default.

It is not just Eurozone debt and Frenchified banking practices that will drag the world down into another recession.  Exchange rate misalignment continue to exacerbate global macroeconomic imbalances. China is still running huge current-account surplus. The US economy remains deeply uncompetitive.

Within Europe we have the same unequal relationship between Germany and the GIIPS. Germany produces exports and extends loans to southern Europeans through their banks in order to have the output sold. Germany accumulates assets that are unlikely to be fully repaid, while southern Europe drives around in Mercedes.   In some capitals, there is renewed talk of fiscal stimulus. It is as if the crippling accumulation public debt was happening in a parallel universe and therefore have no implications for fiscal policy here on planet earth.

There is no learning curve at work here.  Politicians are trundling out the same old failed policy options. Both the Bank of England and the Federal reserve are considering another round of quantitative easing. Greece remains on the edge of a catastrophic default, sucking up ever mounting loans from its European partners. The rest of Southern Europe threatens to follow Greece towards the abyss.

The coalition government is swimming against the tide. It has begun to seriously tackle the fiscal crisis. The coalition has already hiked taxes and has begun to pare back government expenditure. Unfortunately, we are encumbered with an inflationary central bank that threatens to derail the only viable strategy that can take us out of this mess.

The UK's fragile recovery strategy depends on reining in the inflationists that now occupy the Bank of England.  If the Coalition needs to re-establish control over monetary policy.  Otherwise, the economy will continue to stagnate and that overwhelming sense of gloom will haunt us for another four years.


Vodka drinker said...

It is starting to look like a rerun of the great depression.

davidb said...

I don't vote for the Cons. The best primeminister in my lifetime famously said "you can't buck the market".

Greece is bust. Get it over with.

And this time, liquidate the bust banks. The state guarantees on banks are as big a problem as the overspend of governments. Guarantee the deposits alone - which would anyway be a fraction of the loanbooks due to fractional lending. Let the banks go bust this time.

We lack leadership. Where is our new Mrs Thatcher?

Electro-Kevin said...

Not all bad news.

What about Cuadrilla's discovery of massive amounts of shale gas in the north west.

Jim said...

@Electro-Kevin: if you think the water melons (green on the outside, red on the inside) will allow the exploitation of that gas you'd better think again. Cheap energy will kill the eco-loons power over everyone, so they won't want it to ever get to the surface. The first signs have already started. Just you watch the campaigns grow. 'Fracking causes earthquakes', 'Fracking pollutes the water supply', 'Fracking will make the earth open up and swallow your house' etc etc.

We have all that to come.

Electro-Kevin said...

Jim - There are already 4000 holes in Blackburn Lancs. I hardly think a few more in that county will make a difference.

Jim said...

EK: some might say that a few good earthquakes in the NW of England might improve the place. I couldn't possibly comment......

Electro-Kevin said...

Jim - Judging by the fat, immobile bastards I've seen on my rare visits NW a few earthquakes would treble the birth rate.

The benefits to Britain could be marginal.

craigs clock said...

EK im surprised at that comment. It's unlike you to lose yourself, I enjoy your comments as much as Alice's topics. Keep the respect there.

AgainsTTheWall said...

The coalition government....has begun to seriously tackle the fiscal crisis

Delusional. Govt expenditure will rise each year of this parliament to around £740b or so. Last month HMG borrowed a record £15b - more than August 2010. I make it that my share of that is about £250. Frankly this bunch of spivs has done nothing meaningful (in the economic or any other sphere)

Electro-Kevin said...

Craig - I'm sorry. Only joking you know !

Electro-Kevin said...

I say we give the greenies exactly what they want.

A cold, austere island with sod all on it that they can walk around in a day.

Have I suggested that already ?

Alice Cook said...


We are well on our way to a cold austere island.