Could Britain be heading for a crash?

Could Britain be heading for a crash?

Simon Heffer
Telegraph.co.uk
14 Jan 2011

I had a long talk on Tuesday with one of the wisest and cleverest economic thinkers I know, and he was sure of one thing: we are heading for a crash. Is he right? The stock market has started the year strongly. Sterling is up against the dollar and was rising against the doomed single currency as well, until the Chinese – for their own Machiavellian reasons – bought vast quantities of euro debt
this week.

Sadly, other indicators suggest that such good news as we have is an illusion. It mystifies me why the Bank of England didn't raise interest rates this week, with the threat of inflation now blindingly apparent. Think, though, what that would do to a housing market already heading south; or to those people with other, shorter-term debts, the repayments on which could well become suffocating. For many of them, the day of reckoning has been long postponed. Now, it may be just weeks away.

François Fillon, the urbane and rather successful French prime minister, came to London this week and seemed to take for granted our continued support of the euro, arguing that our economic future depended upon it, too. He exaggerated, but did so because of the great fear in France that the game is up for their currency. It is hard to see why there is this fear. If the euro goes under, the French can simply resort to the franc and find themselves able to widen their export markets, because everything would be cheaper.

True, the financial sector, with its exposure to euro debt, would take a thumping – our own included. But these were risks taken by banks, and they would just have to bear them. In the same way that the Government has no business telling banks what they can pay their staff, it has no business continually bailing them out either. What is most important is that the Government should peer over the horizon at these potential problems, and work out how to manage their consequences.

Our rulers have encouraged the thought in the past couple of months that while things are still very difficult, and hardships inevitable, the worst is over. Perhaps it isn't, though; because maybe what they meant was that they had inflicted on us all the pain that they thought was needed, and no more was planned.

What they hadn't taken into account, as so often with this Government, is that factors beyond their control will now start to kick in. If there is some sort of external blow to the economy, whether in the shape of the euro ceasing to defy gravity, or simply more bad news from America, there will have to be a sharp adjustment to policy here. Our taxes remain far too high, and an obstacle to recovery as it is. If the recovery has to start from an even lower base, the obsession with not cutting taxes in case some "rich" person – possibly even an evil banker – becomes richer will have to be jettisoned once and for all.

Where my economist friend is almost certainly right is that, even without external shocks, interest rates must rise. Personal bankruptcies and business failures will rise with them; so will unemployment. House prices will fall, and possibly also many other asset values, including the stock market. We cannot postpone indefinitely the final acceptance that we must live within our means.

If such a downturn comes, then growth is the only way out of it. That requires the Government to stimulate demand. It will be all too easy, if things turn ugly, to act like the rabbit in the headlights. We have seen governments do this before. What our rulers need to remember is that such paralysis is always fatal.

Sooner or later, those with normative economic desires must face positive economic reality. You can only spend more than you make for so long, no matter how altruistic that spending may seem to be.

As an aside, I found the the author's use of the term "our rulers" when referring to their elected officials to be odd. Do the British really refer to their elected officials as their "rulers?"

I'm thinking that the term, ruler, might be a slang of a sort in the UK.

I read this and thought I'd post it to get Matt's take on it... since it's from one of his papers.

TexasBlue wrote:I'm thinking that the term, ruler, might be a slang of a sort in the UK.

I read this and thought I'd post it to get Matt's take on it... since it's from one of his papers.

Yeah, that may be. Or it may be just a traditional reference, one of those things that have been so long ingrained over 100's of years that it just didn't change, even as the form of government has.

dblboggie wrote:As an aside, I found the the author's use of the term "our rulers" when referring to their elected officials to be odd.

Me too, and I live here. I have no explanation, I can't recall ever seeing the government referred to as "our rulers".

This is a strange article in many ways. Though I agree that interest rates needs to rise, and that it is bizarre that they did not, the author is supposing that it will be a long time before they do rise. I'm not so sure that is the case. I think we will see an interest rate rise before long.

But these were risks taken by banks, and they would just have to bear them. In the same way that the Government has no business telling banks what they can pay their staff, it has no business continually bailing them out either.

This is bullshit. The banks and their careless actions led to our downfall and they went cap in hand to the taxpayer expecting handouts. They have no business dishing out enormous bonuses while they steadfastly refuse to do their job of lending money to people and businesses to stimulate the economy. What are they, f*cking boiler room traders now?

The_Amber_Spyglass wrote:

dblboggie wrote:As an aside, I found the the author's use of the term "our rulers" when referring to their elected officials to be odd.

Me too, and I live here. I have no explanation, I can't recall ever seeing the government referred to as "our rulers".

This is a strange article in many ways. Though I agree that interest rates needs to rise, and that it is bizarre that they did not, the author is supposing that it will be a long time before they do rise. I'm not so sure that is the case. I think we will see an interest rate rise before long.

But these were risks taken by banks, and they would just have to bear them. In the same way that the Government has no business telling banks what they can pay their staff, it has no business continually bailing them out either.

This is bullshit. The banks and their careless actions led to our downfall and they went cap in hand to the taxpayer expecting handouts. They have no business dishing out enormous bonuses while they steadfastly refuse to do their job of lending money to people and businesses to stimulate the economy. What are they, f*cking boiler room traders now?

The "our rulers" thing seems pretty straight-forwardly tongue-in-cheek to me. Much of the article is sarcastic, that's why the tone might seem odd - his point about the government not telling the bankers what to do is balanced out by the comment that they should never have bailed them out in the first place.

If you follow the journalists train of thought, the euro is bound to fail, the French will get off scot free because they will return to the franc (haven't got a clue which orifice he pulled that out of), but the British WILL suffer with the collapse of the euro (despite not being IN the eurozone, unlike the French - okayy), Britain should be pushing inflation up - it doesn't matter if businesses fail - even though encouraging business is essential the economic recovery, but hey, makes about as much sense as anything else he's saying. Oh yeah, and somehow the eevil Chinese will profit from it all with their scheming.

Perhaps, I just don't expect sarcasm from the very dry Telegraph. I guess it just sort of blind sided me for a moment.

The_Amber_Spyglass wrote:Perhaps, I just don't expect sarcasm from the very dry Telegraph. I guess it just sort of blind sided me for a moment.

More in line with The Mail, huh?

Well they are both right wing papers but I guess The Telegraph is the serious paper. I just find it quite dry (by that I mean dull and lacking passion). The Mail is largely treated with a degree of derision for its fear mongering.

So you view the Mail much like the left here does with FNC?

That would be a good analogy yes. BecMacFeegle's mother gets the Mail and I steadfast refuse to read anything except their sports pages.

If it isn't "the Muslims are taking over" its "Eastern Europeans are taking over" or "the EU is taking over". Its medical reporting is divided into things that apparently cause cancer and things that apparently are miracle cures for cancer.

There is a "Daily Mail headline generator" page http://www.qwghlm.co.uk/toys/dailymail/ (a new one every time you refresh)

And a facebook list of things that cause cancer (facebook is one of them): https://www.facebook.com/group.php?gid=269512464297

So draw your own conclusions.

And the list of cancer preventives and cures: https://www.facebook.com/group.php?gid=299519692752

Sounds crazy. FNC doesn't say anything about cancer.