The UK Economy in Crisis

Guest Article:

Mr Micawber for Prime Minister

What the Dickens

So the world economy has plunged into recession or depression as a result of over borrowing, toxic debt, unsustainable mortgages and blind panic. So what is Gordon Browns chosen route for the next 3 years a great spending splurge by reducing taxes and glad handing more give-aways than Father Christmas.

Give Aways

• The British gold reserves were sold (almost given way) at the bottom of the market. Gold rocketed in price after Gordon’s munificence.
• Off the balance sheet borrowing, of the sort that brought down Enron and others, has been a staple ploy of Gordon. PFI must mean potentially flaky investments and taxes for years to come.
• ‘Selling’ Inland Revenue buildings to a tax have based company mmm makes sense to Gordon!
• Northern Rock was baled out at a cost of unknown amounts
• Banks guarantees were given to all in sundry and reinvestment capital has been provided.

With this sort of liabilities to fund the national debt was going to grow exponentially and no one can put a total value on the exposure. Great protection of the nations wealth that seems to be. Perhaps large companies were right when they started leaving these shores for lower tax economies.

Toxic Politic

What solutions did we get yesterday.

• A cut in VAT when Ireland increased there rates of VAT perhaps that was to reduce the value of frauds as only 15% will now be creamed off by the fraudsters.
• A shuffle of the chairs on the deck, currying short term favour by putting money in the pockets of those struggling to repay credit card debts built up over the last few years.
• Gordon fails to recognise the party is over – we are over spent – he is over spent – his political future is spent and Charles Dickens spent his time on a futile story of Mr Micawber.

Conclusion

Do not vote conservative at the next election – I wouldn’t wish this can of worms on anyone

UK in Exchange Rate Mechanism - ERM

Example of

• In the late 80s, inflation in the UK was a problem; it was increasing above 10% following the Lawson Boom.
• Therefore, the government decided to join the ERM, a semi fixed exchange rate between UK and German D Mark.
• However, many now feel the UK entered at a rate which is too high.
• The high inflation made the UK less competitive reducing demand for sterling. Also as the economy was going into recession, Sterling became weaker. Investors were selling Pounds; Therefore, the government had to keep intervening to protect the value of the exchange rate. This involved buying pounds on the foreign exchange markets and increasing interest rates.
  
• However, because the economy was in recession, high interest rates made it worse. It led to record levels of home repossessions and house prices collapsed. On of 16 September 1992, the government tried raising interest rates to 15% in a last ditch attempt to save the value of the pound.
  
• But, the market correctly predicted the government was bluffing and could not keep interest rates that high. Speculators like George Soros made over £1 billion, selling pounds to the UK Government. People kept selling and at the end of the day the government gave into the inevitable and devalued the pound. This allowed interest rates to come down and the economy recovered.

• ERM at BBC

Economic Downturn definition

An economic downturn suggest the economy is entering into recession. A recession is a period of negative economic growth with falling output and rising unemployment. The official definition of a recession is - negative economic growth for 2 consecutive quarters.

The definition of an economic downturn is less strict. For example, many felt we were in an economic downturn even with positive growth. This was because the growth rate was slowing down, house prices were falling and people could see the economic cycle and shifted from a boom period and we were heading towards bust.

To define an economic downturn it is useful to mention some of the main features of an economic downturn:

• Negative or very low economic growth
• Rising unemployment
• Falling asset prices - shares and house prices
• Low confidence and falling investment
• Rising spare capacity
• Increasing government borrowing

Economic Meltdown 2009?

The events of 2008 have proved worse than the predictions of most economists. The near paralysis in the banking system has paralysed consumer and financial confidence leading to a sharp slowdown in growth and rising unemployment.

The prospects of a meltdown in economic fortunes for 2009 depend upon.

• How many more bad debts are there to write off? With house prices falling and rising unemployment pushing more into mortgage default, banks are still having to write off bad debts. Falling house prices only compound these problems.
• Unwinding of credit default swaps and other derivatives markets. There is over $60 trillion worth of credit default swaps. There is a concern that this unregulated financial instrument could cause problems as those who bought the default swaps are unable to actually repay them creating a ripple throughout the global economy
• Will Monetary Policy actually work? Central banks are rushing to cut interest rates. US rates are already 1%, they could go to zero. But, the experience of the Japanese is that 0% interest rates don't necessarily work in boosting growth when there is very low confidence and deflation
• Dollar Collapse? The dollar has held up well in recent months as investors flee emerging markets and seek the relative safety of the US economy. But, with US national debt increasing towards 70% of GDP, the Federal reserve is effectively printing more money. This could lead to inflationary pressures and a devaluation of the dollar. A devaluation of the dollar would effect the global economy as American spending falls even more.

There is hope that the recession will prove relatively shortlived. House prices in the US may be reaching near to the bottom. Cuts in rates should help homeowners. As long as the banking sector can regain its liquidity and willingness to lend we should avoid an economic meltdown. But if the financial crisis worsens and governments are unable to bail out the banks then we could see a serious depression.

• Economic crisis explained

Outlook for UK Economy

The UK economy enters 2009, with its worst economic outlook since the early 1980s.

The economy is in recession, with growth falling 0.5% in the last quarter

• Unemployment is on the rise and is forecast to keep rising well into 2010
• Government borrowing and National debt is increasing as the effects of the recession lead to lower tax revenues. This could lead to higher tax rates in the future.
• Pound Sterling is falling as the prospect of significantly lower interest rates cause investors to leave the pound.
• Housing Market still in decline as lack of mortgages causes very low level of property transactions.
• Saving ratios likely to rise as low consumer confidence encourages people to save rather than spend.
  

• The case for lower interest rates in UK
  

Yen Carry Trade Over

• The Yen Carry trade refers to how investors have been borrowing in Japanese currency (at very low interest rates) and then using this money to invest oversees e.g. in US, Europe and emerging economies.
• This enabled investors to benefit from the difference between Japanese interest rates and other interest rates.
• As well as the Yen Carry Trade, Japanese savers used their extensive domestic savings to invest oversees and benefit from higher interest rates oversees.

However, the Yen Carry Trade is coming to an end with devasting effects for the global economy. The Yen Carry Trade is over because:

1. Global recession causing slower growth in Europe and US
2. Lower growth leads to lower interest rates, reducing the difference between Japanese and American rates.
3. Appreciation in the Yen. Appreciation in the Yen means it is risky to borrow in Japan and invest oversees as the appreciating Yen, will make it difficult to pay back your Yen Loans.
4. Currency uncertainty. The Yen Carry Trade requires stable exchange rates, but, this is not occuring with the financial crisis.
5. People want to sell their foreign assets and pay back their Japanese loans.
6. Japanese savers are returning their money to Japan.

The forecast for the Yen is for the Yen to keep appreciating.

• Effects of Yen Carry Trade being over