Another Tipping Point For The Economy?

[Mikhail Liebenstein]

There has been an interesting shift in a lot of the press reporting recently, with a slightly more optimistic tone being sounded even if on the ground the population is feeling beaten up by the recession.

A few observations of my own:

1) The catastrophic slide appears to have been halted, but is this a dead cat bounce or a continuation of the unsustainable being supported by ultra low interest rates?

2) Bankruptcies, difficultly in getting credit and job losses still look to be a major feature of the economy so it is not clear how this can bode for recovery, other than perhaps companies managing to reduce their cost bases thereby increasing profit.

3) There does seem to be a perception that whilst Queasing isn't currently working (ie most of the cash went abroad), that there will be more queasing and that ultimately there will be inflation.

4) Given the risk of inflation mentioned in 3 there is an expectation that interest rates may need to rise.

5) Given the expectation that Government borrowing will get increasingly difficult, there is also a likelihood that interest rates will rise especially if the UK's credit rating is downgraded.

So in summary we appear to be at a fork between two possible paths, either:

a. a very slow and fragile recovery that could easily go off course, but which may be largely artificial being supported purely by low interest rates. This scenario would in my mind in fact represent a period of stagflation, ie low growth with relatively high inflation.

or

b. the fundamental imbalances remain and the market will eventually lay them out for all to see. In this case the bond market will clobber the UK and interest rates will shoot up revealing all the zombies, banks, firms and individuals in all their decomposing glory.

Which of these options to HPCers think is most likely? Or have I missed an outcome out.

Edited May 4, 2009 by mikelivingstone

[Guest KingCharles1st]

There has been an interesting shift in a lot of the press reporting recently, with a slightly more optimistic tone being sounded even if on the ground the population is feeling beaten up by the recession.

A few observations of my own:

1) The catastrophic slide appears to have been halted, but is this a dead cat bounce or a continuation of the unsustainable being supported by ultra low interest rates?

2) Bankruptcies, difficultly in getting credit and job losses still look to be a major feature of the economy so it is not clear how this can bode for recovery, other than perhaps companies managing to reduce their cost bases thereby increasing profit.

3) There does seem to be a perception that whilst Queasing isn't currently working (ie most of the cash went abroad), that there will be more queasing and that ultimately there will be inflation.

4) Given the risk of inflation mentioned in 3 there is an expectation that interest rates may need to rise.

5) Given the expectation that Government borrowing will get increasingly difficult, there is also a likelihood that interest rates will rise especially if the UK's credit rating is downgraded.

So in summary we appear to be a a fork between two possible paths, either:

a. a very slow and fragile recovery that could easily go off course, but which may be largely artificial being supported purely by low interest rates. This scenario would in my mind in fact represent a period of stagflation, ie low growth with relatively high inflation.

or

b. the fundamental imbalances remain and the market will eventually lay them out for all to see. In this case the bond market will clobber the UK and interest rates will shoot up revealing all the zombies, banks, firms and individuals in all their decomposing glory.

Which of these options to HPCers think is most likely? Or have I missed an outcome out.

I think it's B with a touch of total destruction of the current UK "mindset," this being rebuild on new thinking and a new understanding of global forces. At some point the UK may just wake up to border control, high tech engineering with low cost outputs, "made for us, by us" low cost energy alternatives, and cheap good quality housing, so the poeople who work in this new environment are at least fairly happy.

[Frank Hovis]

I sign up to B. Whatever they may wish I do not see that the government will have the option of keeping interest rates low for long give the level of public borrowing that their plans require and the fact that a gilt auction has already failed (your point (5)).

Edit, b in brackets giving that sun glasses smiley. What numpty encoded it that way?

Edited May 4, 2009 by Frank Hovis

[aa3]

What I'm seeing is the rate of deterioration isn't accelerating now. So in April when the numbers come out we'll probably have lost another 130k jobs. Same as the last 3 months. But on this theory at least it won't have accelerated to more than 130k a month lost.

I haven't yet heard the powers that be say they are willing to QE to whatever level is neccessary to hit the 2% inflation target. That would restore a lot of confidence especially if it was through increases in the fiscal deficit.

My estimates are they will need to QE around £300 billion a year to hit 2% inflation. So far they are talking of £150 billion a year which is a very large increase from 0 in the years prior.

[Bloo Loo]

It will all be over by Christmas!

[Mixle]

It will all be over by Christmas 2020!

Fixed.

[Kazuya]

I go for B.

Why? Because the current government is like a baby who doesn't want to take the bitter medicine to feel better.

So, what do you do? You FORCE FEED!

The government will be smashed in the face with high interest rates and implosions all over. 2010 is going to be very nasty indeed.