Stop Putting Off the Inevitable!

I have a friend, Chris, with whom I correspond on financial matters and he likes to keep me up-to-date with his missives to the Bank of England. He recognized the consumer credit boom as far back as 2002 and said it would all end in tears, as, indeed, it has. His primary concern at the moment is house prices and the need for them to fall in order to increase affordability for first time buyers. The powers-that-be, however, are desperate for this not to happen as it would almost certainly provoke another recession. They prefer to talk about “help” for first-time-buyers to get mortgages, but this is missing the point. Chris is right, keeping the price of an asset artificially high after a boom will just make the pain all the worse when the bust does come. The government is keen to promote the belief that the bust has been and gone with the recession we’ve just had, but the underlying problem of excessive personal and government debt still has yet to be addressed; in fact, government debt is still rising. And houses are not the only asset whose price is being kept artificially inflated – quantitative easing (printing money) has boosted the value of shares and commodities the world over. This is another boom waiting for a bust! Like a massive Ponzi scheme, prices can only be maintained with continuing inflows of new money and that won’t last forever. The US has ended its second round of QE and, though the market still hopes for it, there is no guarantee of any more. It is exactly the same situation as the consumer credit boom of the noughties; low interest rates (which were required to maintain positive inflation while the prices of Chinese imports were falling) encouraged a borrowing binge boosting the price of housing both here and in the US. When the US sub-prime crisis caused the credit crunch, this cut off the supply of new money causing prices to fall here as well and we went into recession. Governments failed to recognize the consumer credit boom then and they have failed to recognize the asset price boom now. When the supply of new QE money is cut off share and commodity prices will fall and we will go back into recession. The story is that the rally in share prices has been caused by “recovery”, but I don’t buy that – shares have risen much more strongly than profits; QE is a much more significant factor.

The Alternative Vote

I think the electorate got the result it wanted at the general election: Labour had lost all credibility, but the Tories weren’t trusted with public services so the LibDems were required to keep them in check. The public perception with Nick Clegg abandoning his principles to become a Tory poodle instead of performing this role really did for the AV vote though. Too many people voted to give him a bloody nose rather than on the issues. I think this was a shame as it clearly isn’t democratic for a party to be able to get a landslide majority on 45% of the vote and, although AV wouldn’t have prevented this, it would have made it much less likely. Prospective MP’s would have had to look beyond the party faithful and appeal to more of their constituents and governments might have been more inclined to show genuine leadership rather than just react to newspaper headlines which offend their core vote. There has been a lot of talk about making “difficult decisions”, but AV might have persuaded a government to look beyond the next election and take the really difficult decisions like raising interest rates and cutting back public borrowing during a consumer credit boom (nobody likes a party-pooper!). Sadly, people tend to vote in their own short-term self-interest and governments reciprocate, so boom and bust lives on.

Andrew Edgington – June 2011

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