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Bankers Are Jumping For Joy, But They Don't Live In The Real World

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The theory is that share prices move 12-18 months ahead of the events they are anticipating. Thus the 1,200-point rise (33 per cent) in the FTSE-100 over the past six months is a sure sign that happy days will soon be here again.

That may be true for clever hedge-fund managers, but for those of us who would not know a contract for difference from a hole in the wall, history teaches a more sober lesson. In the Thatcher recession of the 1980s, when unemployment rose from 5.3 per cent of the working population in 1979 to 11.9 per cent (3.3 million people) in 1984, the London stockmarket did not merely rise in every one of those years, it jumped for joy: 4.3 per cent up in 1979, 27.1 per cent in 1980, 7.2 per cent in 1981, 22.1 per cent in 1982, 23.1 per cent in 1983 and 26.0 per cent in 1984.

This, I'm afraid, is the pachyderm in the parlour. Over those six years, while unemployment was more than doubling, the stockmarket followed suit – and with good reason. The massive shakeout of labour enabled management to restructure businesses and slash costs. Profitability was restored at many companies that had been dismissed by investors as industrial dodos. I suspect we may be about to experience something similar.

Asked about his bank's forecast for unemployment, Eric Daniels, the chief executive of Lloyds TSB, said that it would peak in mid-2010 at a level in line with Britain's previous recession (1990-92). If he is right, it means that 10.7 per cent of the workforce will be idle, about 3.4 million people.

This perhaps explains why the Bank of England shocked the City yesterday with its decision to carry on printing money. It appears not to share this week's outburst of airy optimism. In technical terms, the worst of the recession may be over (though I would not bet on it). But measured by the only yardsticks that count with the vast majority of voters – job security and weekly wages – renewed prosperity will be a cruel mirage.

With dole queues lengthening, the recent uptick in the housing market is unlikely to harden into a surge. As Professor David Blanchflower pointed out in The Sunday Telegraph last week, between 1989 and 1995, a six-year period of declining house prices, there were 23 months of increases and 48 months of decreases, while three were flat.

With real wages under pressure, and the burden of historical debts only ameliorated by low interest rates, but not removed, too many British consumers remain hopelessly over-leveraged. Spraying them with yet more cheap money merely delays their day of reckoning. Even a Martian knows that.

Lots of other good points in the article as well

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