Here comes the recession

Yesterday was Black Tuesday for job losses. There are going to be many more days like that this winter.

Menwhile, the MPC still driving firmly by looking in the rear view mirror has at last caught sight of the downturn. Its Report is likely to bring us more gloom and doom as it seeks to justify its late lurch from high to lower interest rates. Because it has got it all so hopelessly wrong, it will now have to spread more doom to justify its actions. It is still far from helpful.

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12 Comments

  1. david
    Posted November 12, 2008 at 12:23 pm | Permalink

    So do you agree with your friend and supporter Heffer?

    This is what we need here. An early election – which Mr Brown might as well call, since the Tories have been found out and are slipping back in the polls – would at least get all the lies and idiocies out of the way. One party would then have to confront reality, just as Mr Obama is about to have to do. Then we could end the pretence of a pain-free recession, and get on and take it. So long as our politicians feel they must butter us up and make out that what is to come won't hurt a bit, the only way is down.

  2. Acorn
    Posted November 12, 2008 at 1:28 pm | Permalink

    Err, don't look now guys but this might be a good time to lock the Pound to the Euro. Every forward indicator I can find is saying the Pound is heading for the crapper! Discuss, but make it quick.

    • APL
      Posted November 12, 2008 at 3:02 pm | Permalink

      "Discuss, but make it quick."

      Suppose the pound goes down. Which is not impossible given the state of the banking sector, the government debt and the much too large size of the public sector, not forgetting that unemployment will rise, and as usual the last to be impacted by unemployment are those in the public sector. So the subsized sector of the economy will grow (under Brown, probably) while the productive sector will shrink.

      Incidently, I think that means taxes will rise, so Brown and Darling are not telling the truth. So what is new?

      Brown and Darling say they are going to borrow their way out of recession. So government spending is going to rise (massively).

      Prognosis for the £ not very good. I agree.

      But all those things pretty much apply to the Euro zone too (other than Brown and Darling – the lucky Euro weenies).

      Add to which the Euro zone has fault lines that are highly stressed, those stresses are building as the economic outlook deteriorates.

      So the suggestion is that we abandon one boat that *might* be saved if we were to jetesson the captain and first mate and change course, for another bigger boat that if it disintergrates will have a bigger explosion.

      Difficult choice.

      • Acorn
        Posted November 12, 2008 at 7:56 pm | Permalink

        APL; can't disagree with your post. I based mine on the following.

        It appears from broker websites that foreigners have cashed in 75% of the investments they have made in UK "paper" in last three years. The equivalent for the Euro area is 25%; for the US, 15%.

        I don't know, but I assume this is not a vote of confidence in the UK economy. Hence, I guess that this selling process is depressing the value of the pound. Also, I am guessing that the markets think the Euro is a stronger currency than the Pound. This does not bode well for our government trying to sell loads of IOUs into the market.

    • not an economist
      Posted November 13, 2008 at 1:45 am | Permalink

      The pound may be going down the crapper but I dont think that in itself undermines the argument for the UK to retain control over its own currency so that interst rate and fiscal policy can be set in ways to suit the Britich economy rather than being determined by a Europe wide central bank.

      In essence I am saying that the fact that Brown ballsed up for the las ten year is not reason to assume that every future British PM would balls up.

    • APL
      Posted November 13, 2008 at 10:10 am | Permalink

      http://www.telegraph.co.uk/finance/financetopics/

      "Mr Clarke, who as Chancellor of the Exchequer between 1993 and 1997 led Britain's recovery from Black Wednesday, called for a temporary cut in VAT to boost spending."

      Rich! From the man who has been plotting to destroy the country and have us consumed by the European Union. He wants a cut in VAT. Well Mr Clarke, I have (what shouldn't be news for you) VAT is a European Union Tax, our government has no authority to reduce it.

      Someone else in another thread said the current situation is all down to Thatcher, I disagree, I would go back as far as the end of the second world war and the mass nationalizations of industry.

      But I do gain a sort of sado masochistic pleasure from Clarke's wish to cut VAT, even though everything he has done up until this point will frustrate the idea.

      There is more rejoicing in heaven over one sinner that repents …

      (left out further personal abuse)

      • APL
        Posted November 13, 2008 at 12:25 pm | Permalink

        (left out further personal abuse)

        Factual, and the man deserves it!

  3. Stuart Mark Turner
    Posted November 12, 2008 at 2:19 pm | Permalink

    Mr. Cameron's announcement yesterday that a conservative administration would give a £2500 relief in NI contributions, for any company which employs someone who has been out of work for three months seems flawed.

    Why would a company look to employ staff in the middle of a downturn when it will be looking to cut costs, despite this incentive?

    Won't this make it harder for a motivated person to find a new job after being made redundant as now companies would prefer to take on someone who had been out of work for three months.

    Would it not have been much better as you have suggested on your blog, to stop nationalising banks and use this money to cut taxes? A cut in business rates would be a much more welcome shot in the arm to the economy.

    Would you agree that this proposal will probably be as effective as the stamp duty holiday in the early 1990's?

    • mikestallard
      Posted November 12, 2008 at 9:28 pm | Permalink

      Meanwhile, back in Brussels, two new initiatives are being planned.
      First of all, working hours will be vigorously restricted. Secondly, there will be a new drive for gender equality in the workplace.
      Just what small businesses need, I am sure.

  4. Blank Xavier
    Posted November 12, 2008 at 2:20 pm | Permalink

    Not just in the UK. Last week I got back in touch with an old Icelandic friend – was worried about her. We've been catching up. End of last month, payday, several thousand people were fired, including her husband. Iceland has a population of 304,000, of which 67% (203,000) are between 15 and 64 (e.g. working age). Iceland saw on the last Friday of October something like 2.5% (and that assumes full employment for males and females – if you assume a reasonable number of females are at-home mothers, it's more like 3.5%) of their working population become unemployed. This rate of job loss is expected to continue, month on month, for the immediate future.

    However, in the longer term, if they (my friends) can survive, they will do very well out of this whole thing. The krona is going to go to zero – collapse utterly.

    (I mean, it has already, but the Central Bank is maintaining an exchange rate of 130 to the dollar. This is a fictious rate, because the krona cannot be freely traded. Only companies who are permitted to do so can swap krona for dollars at the Central Bank (no one else is allowed to deal in hard currency) and import (e.g. companies importing food, medicine, gasoline). The real value of the krona is probably something more like 500 to the dollar. As such, the Central Bank is pouring its hard currency reserve away to keep the basics of life going for the population (it receives krona for dollars, but the krona are worthless – it can do nothing with them). This cannot last.)

    The problem is that the Government has guaranteed the deposits of all investors in the Icelandic banks up to a couple of hundred thousand krona. The Bank either abrogates that guarantee (and everyone looses all their savings, pensions, etc) or it will have to print money to meet that guarantee. This will destroy the value of the krona, pure and simple. However, of course, the face value of the assets and loans denominated in krona do not change. So anyone with a mortgage is laughing – they can get 10 euros from a buddy in Europe and pay their mortgage off. But anyone who's already bought their house and is living off their savings, they are completely shafted – they have lost everything.

    What has happened is a vast transfer of wealth from those who have saved, to those who have borrowed.

    Basically, when your currency collapses, everything denominated in that currency goes to zero – all debt, all assets. Everyone loses everything; the krona slate is wiped clean. So the people who borrowed most – and so bought the most, e.g. non-krona denominated assets – do best. They have houses and cars and boats and whatever. Everyone else paid for them.

  5. mikestallard
    Posted November 12, 2008 at 9:39 pm | Permalink

    Fascinating piece about Iceland. Iceland, of course, is a country which is small, successful, full of educated people, with a firm, steady government and no instability.
    Rhodesia/Zim, Argentina and Russia under Communism all went bankrupt and the value of their money disappeared. There are various causes for this. But each of these countries had a reason for their crash.
    We have got PLENTY of reasons: a huge public sector with pensions (at trillions of pounds), lots of Banks to pay for (in trillions of pounds), a vast and growing debt just to keep on the road at a time of fighting two wars, and State expenditure which seems to be totally out of control and growing fast.
    My wife visited Russia in Perestroika. She paid the rent for the next half year to her hostess when she saw her in hopeless tears. It cost her a fiver. Meanwhile, the spivs (good old word that) were taking over. Good people were dying on the streets. But – hey! – that's Russia!
    It couldn't happen here!

  6. Matthew Reynolds
    Posted November 12, 2008 at 10:34 pm | Permalink

    A silly , complex NI gimmick will not save the UK from disaster ! Talk about a damp squib ! Freezing the Council Tax for three years & funding it via minute cuts in local QUNAGO's really is chicken feed . With the so called Fair Fuel idea the excise duty would now be going up and we have no idea how the IHT idea will be funded now Labor are taxing Non Doms . How will the Tories fund ending stamp duty on shares and the reduction for first time buyers now Labor have adapted that idea ? Will reduced welfare rolls fund either the end of the married couples penalty on tax credits or the NI fiddle for employers or both ?

    Rather than moaning about an 80% CGT hike & the end of the 10p band while offering nothing positive as a solution why not just pledge to 1) Axe CGT & tax capital gains as income for the first two years and 2) Raise the basic personal allowance so only incomes exceeding £10,000 p/a are liable for tax ?

    With £100 billion p/a on QUANGO's surely we can help the economy by cutting taxes & public spending rather than just offering ideas that are ill thought through ?

    As much as I hate to say it under Major & Lamont at least the 20p basic rate pledge was clear for the voters – now Nick Clegg has stolen a march on us with his 16p tax promise ? Just as Lib Dem ideas on tax & spend foreshadowed New Labor's policies – one has to hope that a right turn by the Third Party is a prediction of a tax cutting Tory government ! Their direction is dictated by political advantage not principle and so Liberal Democrats are a weather Vane that alert the commentators as to which way the political winds are blowing !

    In short if the Liberals are calling for tax cuts then the Conservatives can assume that such a policy means extra votes can be gained from making us all better off ! Come on Cameron & Osborne what are you waiting for ?

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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