[pyewackitt]

The Social Disconnect

Watching the recent spate of bear food news and feeling engorged on so much and so often makes me consider deeper the reality of where this all leads and poses the question;

'What are the social consequences in the coming economic meltdown?'

There is no doubt the debt saddled UK is standing amidst a deteriorating global ecomonomy. Many new and varied issues and themes re-appear as we assess the heading of this current tradjectory.

The recent boom seems to have been continued dot.com bubble reinforced with a debt spiral of a scale never seen before in human history. Levels of indebtedness within the UK are higher than in any other nation and our level of house price inflation has equally been more significant than in any other developed nation.


===

Internation Issues

1) Credit Crunch

- So those of us who haven't heard this phrase are perhaps using the internet for the first time or have just come back from a year long expedition to deepest space. We are in the early phase of the destabilisation of the biggest credit bubble in history. HPI has been the symptom of the uninhibited lending by every major financial entity, between themselves, between them and big business, between them and a vast number of people in the UK. This is not just about the people you know, but major business re-assessing their assets and true capital values and the realisation that the underlying capital is simply not available to continue lending at the rate seen previous. Since the winding down of the cheap Yen fuelled carry trade we have been facing this crunch and now its biting, anyone who thinks the credit crunch is nearly over should check the figures, the first wave is almost over and like the first splashes before a tidal wave we are far far from over the crunch.

2) Global Inflation and cost of rice

- we all remember the first time we called our local bank or services provider and suddenly found ourselves talking to someone in India, or we marvelled at how cheap these LCD Tv's now costed, and our ipods, our mobile phones, our food... some of us realised this could never last. As 3rd world countries move into the developed world the outsourced costs of our services and manufacturing industries was always going to eventually mean the cost of items could only appear to have a short deflationary impact on the cost of our daily shopping but the powerhouse economies of the BRIC nations is now the driving global force.

The middle classes of these nations are growing, their demand is increasing, their consumption is increasing and whilst they are happy to take business offered from the west the profits will mostly be transferred permanantly into these nations.

Simple staples such as rice have been reaching all time highs and this affects a huge proportion of the world, far more than those impacted by the newest UK tax rise on booze and fags. Some of this is due to natural inflation and some due to the multination agribusiness industries and the desires for high productivity, use of gm crops and the dimishing status of the sole farmer in developing nations. What happens when the worlds main staple diet becomes unaffordable for Billions of people... unrest, civil disobediancy, revolutions, famines, droughts - where will this lead if the inflation continues.

3) Peak Oil

- The Peak Oil theroies have been discussed at length on various threads and sites but to put it bluntly there is only a finite amount of Oil in the world... it won't last forever... period. Whilst the common sentiment is that this is actually unlikely to occur for at least a large number of decades the Oil industry is ultimately controlled by a cartel, OPEC, and is not subject to normal markets forces and influences. Wars will continue to be fought for Oil (you wont be told that of course, but this will be the real reason) and as the prices or Oil rise and the supply commitments of OPEC continue to fail to meet true demand globally the likelihood of millitary action becomes higher. On a more practical level your travel costs are rising, the level of moving goods and products is rising and if this trend continues the end of the 'low-fare air travel' industry may soon be arriving.

4) Energy and Environment

- Energy is not just an oil related issue. coal mining in China is at all time highs as in many parts of the developing world and whilst it may feel to us in the UK that our notions of meeting our targets on global warming and Kyoto are noble these pale into wasted sentiments if the increases in Greenhouse Gases caused by energy generation and industry in the developing nations continue at the current rates. Oh and by the way did anyone remember to check the life expectancy of a large part of our UK nuclear power production network, yes, you probably guessed a lot of sites should either be decommissioning or closed by now and even if we continue to use what we have available our energy demand has only been increasing over the last few decades. Global Energy and Environment issues are very inter-related and the future of our green planet and energy demands is uncertain.


===

UK specific conditions

The above lists some of the key global concerns but in the UK specifically we have our own set of other considerations:

1) National Debt and Deficit

- It's not only perhaps you, or members of you family, or people you know who are in debt... oh no. The whole country is... we spend more than we make and the majority of recent growth in our UK national net worth is tied up in a vary variable rate asset, yes, you guessed it... houses. We havent so much as made great inroads into developing the profitability of our industries or increased productivity as re-valued our assets to allow us to borrow more and live better lifestyles. Unfortunately this isnt a very secure long time economic plan. Yes, a lot of our businesses have made record profits you need to remember that over 50% of all profits of the FTSE 100 businesses is made outside of the UK and that the taxes paid on those internationally made profits is minimal, in some cases they dont even pay tax. The UK has a bank balance that should make our government blush

2) Upcoming Elections

- Not quite UK specific, but we are about to head into the familiar Conservative vs. Labour election fiasco - in case you havent noticed Brown and Cameron are already surveying the battlefield. Expect this to be a huge election fight, nothing rallies the populas in an economic downturn than being fed on the promises of hopeful sounding candidates.

The labour party can be 100% guarenteed to do everything within their power to try and hold off the worst of any coming pain to voters for as long as possible, even if that means a worse downturn after.
Its hard to guess what proposals are going to be presented soon that will skew the economy still futher but I am confident these will not be miracle recoveries - we're are in far too deeply for that.

3) BTL Investers and no more FTB's

- Its worth revisiting the fact that our nation is almost dry of FTB's and that a large amount of people are invested in property portfolios. As the credit crunch unwinds we have an every increasingly precarious property market where new buyers find it very hard to get onto the ladder and the current homeowners find it equally as hard to get off. What happens to the people starting families who cant afford to get a bigger house due to their negative equity or the BTL investors finding they cant cover the repayments in a higher interest environment. And at the bottom rung those who want desperate to buy cant get a mortgage loan without 25% or more deposit. The squeeze will be futher put on the property market and peoples personal finances by all these factors.

4) The new Student reality

- I was lucky, I was one of the last people to get a grant at university and I've watching as my family members experienced the transition from grants and free higher eduaction to a world of loans and fees. In the new financial reality as costs increase the reality of going to university is about to because a prohibitively expensive experience. How many people will study further when there are business only laying off staff and not recruiting and the costs of going to university and borrowing have increased significantly. Personally I feel we are heading towards USA style costs of lifetime saving and higher education and I dont think this will help the economy to any new heights as our young profession classes diminish.

5) Baby Boom and the age demographic

- Once upon a time the majority of people died a lot earlier, this meant that for every retired person there were 7-10 working people to support them through their lack economic productivity. As the baby boomers retire those working forces supporting retiries is hit by a double whammy. Firstly the number of people retiring increases and secondly as the numbers increase the amount of people left working becomes a smaller percentqage of the population... imagine a world where the ratio of working to retired is 5-1 or 3-1... needless to say there are countless ways in which this will have knock on economic impact from NHS spending to national pensions payments.

===

So what can we sumise will happen...

1) First Industries affected

As the above factors begin to take further advanced positions it should be easy to postulate that the first industries affected will be the following:

A ) Construction & Building Related
B ) Banking
C ) Retail
D ) Manufacturing
E ) Haulage and Transport

2) Symptoms of the declining ecomony

As the problems caused within an environment suffering inflation of products and devaluation of assets progresses we can expect that all the following recession economic indicators will rise:

A ) Defaults and Repossessions
B ) Bankruptcy and IVA
C ) Rising unemployment

3) Social disconnect

1) Baby boom retiries

- The demographic timebomb is a very serious issue and one which few can appreciate without actually looking at the stats. There are a lot of places to find details but i suggest you do some research here because a lot of our current working population are about to find there working life may need to stretch out lot longer.

2) Poor growth on pensions

- Low interest rates are great for borrowers, but not so great for savers and those with pensions. We've watched as our pension funds have been decimated and then company after company has shut final salary pensions funds... the impact of these events hasn't realy been felt yet... give it a little time before an impoverished older generation become common.

3) Welfare state in bad times

- How will social agencies such as the NHS last under these pressures? How can support benifits for the unemployed if we faced a level of unemployment at 20% or higher of the population. Personally I dont know where the breaking point is for such social infrastructure, but i do know we should be worried.

4) Lack of social housing

- It was a bold and generous move to allow people to purchase their council housing at market rates. It is one which was taken up by many in a time of affordable credit. But as these homes are removed from social housing and the number of new homes being brought into the social housing availability has not grown to facilitate demand where will this put the UK population. How many families will find they have simply run out of options...


===


This isn't an essay, its just a summary of some of the influences in the current economy and some of the directions we need to start looking at and pre-empting as the downspiral begins to accelerate.

I'm not presenting all the arguments and all the discussions on these subjects (many HPC threads and websites will inform you further on any of these subjects), only trying to get everyone who reads this to join up the dots and think a little deeper about the wider influences and interests presently at work. After all what exactly happens in a global recession, we've never really had one before.

It is my opinion we are at the culmination of a confluence of factors which can potentially combine into a recession that is truly global in scale and will be particularly hard felt within the UK.

What do you think?




EDIT: Spelling and format

This post has been edited by pyewackitt: 12 June 2008 - 10:40 PM

[mrcutegurlzz]

woah!!!! wheres the pictures???... all those words. looks very important. i agree totally.

[Nicholas Cage]

Quote

1) First Industries affected

As the above factors begin to take further advanced positions it should be easy to postulate that the first industries affected will be the following:

A ) Construction & Building Related
B ) Banking
C ) Retail
D ) Manufacturing
E ) Haulage and Transport

Thats exactly what is happening in the USA, according to detailed unemployment figures. http://www.bls.gov/

Healthcare, hospitality and government doing very well though. Manufacturing & Manufacturing Durable Goods should be seperated in the losers as they are both suffering.

Banking represents a huge range of people in finance, that's the only query I have, they don't seem to be doing that badly at any point in time.

Edit: spelling

This post has been edited by maxwell: 12 June 2008 - 10:46 PM

[2low]

pyewackitt, on Jun 12 2008, 11:16 PM, said:

What do you think?

Time to become a hippy and live off rock 'n' roll... find me a small island in Thailand and hedonism here we come.

[wonderpup]

Thanks for a well thought out post. One question that does occur to me is where did all the money go? There was a lot of talk of huge profits over the last decade, but all the cash seems to have evaporated. Did we all suddenly become poor, or did another group suddenly become very rich?

[2low]

it was cash that never existed in the first place.

[South Lorne]

...the myth the UK is 'rich' will soon melt as the financially unaware realise the truth ....

[The Spaniard]

wonderpup, on Jun 13 2008, 12:29 AM, said:

Thanks for a well thought out post. One question that does occur to me is where did all the money go? There was a lot of talk of huge profits over the last decade, but all the cash seems to have evaporated. Did we all suddenly become poor, or did another group suddenly become very rich?

The money supply (US M3, UK M4 etc. before anyone starts) that was borrowed into existence during the years of the property boom is almost all still out there somewhere. Only a small part of it has been used to repay debt.

The question is: In whose bank accounts is it now?

Personally I am intrigued by the logical (but perhaps not legal) possibility that there exist private repositories of electronic money outwith the audited banking system. Could there be, somewhere in cyberspace, huge stashes of unaccounted electronic dollars, pounds etc? Conventionally undetectable, but nevertheless connectable back into the banking system at any time, with devastating inflationary consequences?

With Donald Rumsfeld reporting on 10 September 2001 that $2,300,000,000,000 of Pentagon money had gone missing, with the EU accounts not having been audited for eleven years, with ultimate control of the FED being hidden behind inscrutable private partnerships, it makes you wonder.

[Minderbinder]

The Spaniard, on Jun 13 2008, 12:31 AM, said:

The money supply (US M3, UK M4 etc. before anyone starts) that was borrowed into existence during the years of the property boom is almost all still out there somewhere. Only a small part of it has been used to repay debt.

The question is: In whose bank accounts is it now?

Personally I am intrigued by the logical (but perhaps not legal) possibility that there exist private repositories of electronic money outwith the audited banking system. Could there be, somewhere in cyberspace, huge stashes of unaccounted electronic dollars, pounds etc? Conventionally undetectable, but nevertheless connectable back into the banking system at any time, with devastating inflationary consequences?

With Donald Rumsfeld reporting on 10 September 2001 that $2,300,000,000,000 of Pentagon money had gone missing, with the EU accounts not having been audited for eleven years, with ultimate control of the FED being hidden behind inscrutable private partnerships, it makes you wonder.

Hasn't the majority of money borrowed into existance gone on buying houses?

If a typical chain went something like:
a borrws 90k to buy flat from b for 100k
b borrows 120k, to add to 30k equity to buy 3 bed semi from c for 150k
c borrows 200k, to add to 120k equity to buy 4 bed detached from d for 320k
d retired, traded down to a 2 bed cottage in the country for 120k, freeing up 200k to live on for the next 20 years

No idea how typical this might be, or how many variations there are on the theme. But here, 410k has been borrowed into existance and 200k has been released to be gradually disseminated into the real economy.

[The Spaniard]

Minderbinder, on Jun 13 2008, 03:11 AM, said:

Hasn't the majority of money borrowed into existance gone on buying houses?

If a typical chain went something like:
a borrws 90k to buy flat from b for 100k
b borrows 120k, to add to 30k equity to buy 3 bed semi from c for 150k
c borrows 200k, to add to 120k equity to buy 4 bed detached from d for 320k
d retired, traded down to a 2 bed cottage in the country for 120k, freeing up 200k to live on for the next 20 years

No idea how typical this might be, or how many variations there are on the theme. But here, 410k has been borrowed into existance and 200k has been released to be gradually disseminated into the real economy.

From your information, the initial state of affairs is that, in £000’s:

a has 10 in cash

b owns a flat worth 100 on which 70 is owed, so equity of 30

c owns a house worth 150 on which 30 is owed, so equity of 120


Here is the sequence of events you describe, 8 entries per line including the transaction in ():

time, 5 bank balances for players a,b,c,d,e,total debt (transaction)


T0: 10, 0, 0, 0, 0, 100 (b’s initial debt of 70 plus c’s initial debt of 30, total 100)

T1: 100, 0, 0, 0, 0, 190 (a borrows 90)

T3: 0, 30, 0, 0, 0, 120 (a pays b 100, b redeems 70)

T4: 0, 150, 0, 0, 0, 240 (b borrows 120)

T5: 0, 0, 120, 0, 0, 210 (b pays c 150, c redeems 30)

T6: 0, 0, 320, 0, 0, 410 (c borrows 200)

T7: 0, 0, 0, 320, 0, 410 (c pays d 320)

T8: 0, 0, 0, 200, 120, 410 (d pays e 120)


So, in total, the money supply has risen from 10 to 320, reflecting the 410 that has been newly borrowed into existence and the 100 old debt paid off.

Money supply and debt have each increased equally by 310.

Note: the table looked a lot better with tabs, but the tabs did not carry through to this actual post. Anyone know why?

Note that money does not dissappear when a house (or anything) is bought.

In general, money goes through markets, not just into them.

This post has been edited by The Spaniard: 13 June 2008 - 04:04 AM

[Fraccy]

The Spaniard, on Jun 13 2008, 01:31 AM, said:

The question is: In whose bank accounts is it now?

Haha this conjures up images of the economy boom as one big game of musical chairs.

And maybe thats not that far wrong.

Needless to say, the music just stopped.

[Mikhail Liebenstein]

pyewackitt, on Jun 12 2008, 11:16 PM, said:

The Social Disconnect

5) Baby Boom and the age demographic

- Once upon a time the majority of people died a lot earlier, this meant that for every retired person there were 7-10 working people to support them through their lack economic productivity. As the baby boomers retire those working forces supporting retiries is hit by a double whammy. Firstly the number of people retiring increases and secondly as the numbers increase the amount of people left working becomes a smaller percentqage of the population... imagine a world where the ratio of working to retired is 5-1 or 3-1... needless to say there are countless ways in which this will have knock on economic impact from NHS spending to national pensions payments.

1) Baby boom retiries

- The demographic timebomb is a very serious issue and one which few can appreciate without actually looking at the stats. There are a lot of places to find details but i suggest you do some research here because a lot of our current working population are about to find there working life may need to stretch out lot longer.

This I believe is the main internally generated disruption for the UK. Right now our politics is still steered by the boomers who have more votes and this won't change for a while. I am already disgusted at the provision of free bus passes for those over 60 and now it appears free swimming lessons. Expect more and more "free" stuff and socialised support for their over generous pensions which then fail. Frankly most people in their 60s have more net income than most in their 20s even if they are retired.

Even with all the above, I haven't even mention the huge unfunded health obligations.

[roman holiday]

wonderpup, on Jun 12 2008, 11:29 PM, said:

Thanks for a well thought out post. One question that does occur to me is where did all the money go? There was a lot of talk of huge profits over the last decade, but all the cash seems to have evaporated. Did we all suddenly become poor, or did another group suddenly become very rich?

Thing is it is not just wealth, but the value of cash that is evaporating today. The rats know this and are swapping their cash for real stuff, the smug fat cats will go down with the ship.

This post has been edited by roman holiday: 13 June 2008 - 06:58 AM

[roman holiday]

The Spaniard, on Jun 13 2008, 12:31 AM, said:

Personally I am intrigued by the logical (but perhaps not legal) possibility that there exist private repositories of electronic money outwith the audited banking system. Could there be, somewhere in cyberspace, huge stashes of unaccounted electronic dollars, pounds etc? Conventionally undetectable, but nevertheless connectable back into the banking system at any time, with devastating inflationary consequences?

Possibly... but there is definitely real dollars/pounds coming back to roost from China space with real devastating inflationary consequences.

This post has been edited by roman holiday: 13 June 2008 - 07:05 AM

[Furby]

The Spaniard, on Jun 13 2008, 01:31 AM, said:

The question is: In whose bank accounts is it now?

It inevitably gets sucked to the top - might go round and round for a few times before that happening. Billionaires, sovereign funds and dare i say it... banks...

F