Sunday, January 16, 2011

As requested by STR 2007

Could Britain be heading for a crash?

Simon Heffer being surprisingly muted, non-committal and non-judgmental: "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."

Posted by mark wadsworth @ 10:06 AM (3513 views)
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12 thoughts on “As requested by STR 2007

  • A later paragraph reads:

    “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.”

    I cannot help recalling a recent posting by Bellwhether that, essentially, said that sovereign governments do not ‘live within their means’ because of their ability to issue new debt/currency.
    There is zero issue with the solvency of the us and uk

    I don’t really understand the TPC article but have to admit that our country has been running up a deficit for a long time. Is Heffer’s doommonger economist correct about deficit spending?

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  • I have come to accept that this country and the US will never live within their means.

    All fatuous talk of fiscal and budgetary responsibility aside, it would be impossible to get to a situation where we weren’t in some way spending our future, mostly because the those in charge of our future are silent and unborn but those in charge of the present are vocal and needy.

    Once you accept this, it becomes obvious that soft default (via the printing presses) will always be chosen over hard stops on spending. Another thing about the article – the author talks of a crash in the stock market but that’s only one aspect of the economy and not a hugely important one unless you are a banker (or ahem .. a journalist with banker friends).

    What Heffer does underline is that interest rates are going nowhere quickly because of the baked in vulnerability of the economy to outside shocks or downturns. The Bank of England has not considered inflation for at least half a decade when setting interest rates. The outside shock trigger therefore could well be a rise in interest rates, so the Bank of England will not take the risk. The problem with this strategy is that they have to keep it quiet in order for it to work.

    So in summary, although long term economic sustainability it is a nice thought, it won’t happen.

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  • Thanks MW for posting this up for me, I thought some of the wording would generate some interest here.

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  • Paul @ 2, isn’t what Heffer (or his “economist friend”) saying is that interest rates MUST rise, external shock or not? I’d disagree with him and agree with you… that this is the last thing the BoE want to do. Even when rates do rise, I suspect any increases will be in .25 increments and spread out over at least six monthly periods to be as gentle as possible, and the increase in mortgage costs will be seen by those in jobs as part of the overall increase in the cost of living (generated by the trashing of the pound and imported inflation on commodities / virtually every essential) until wages can, in time, be negotiated upwards to cover these increases. Classic no growth stagflation. Anything other than leaving rates pretty much alone is pulling the trigger on the loaded debt gun pointing at the nuts of the UK economy.
    Being thick and wilfully left in political orientation, I can’t quite see how lowering taxes is a panacea given the likely increases in unemployment already anticipated from reduced public spending…unless you subscribe to the view that those extra pounds kept in the pockets of all those forward thinking businessmen will really generate worthwhile jobs and export driven economic growth. I thought we’d had that trickle down laissez faire thing since Thatch…rip-roaring success that it was.

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  • I think the lowering of taxes comes from the hong kong model where no-one pays more than 15% tax….their revenues increased as peopl e ceased to be bothered to look for loop holes and spent more

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  • mark wadsworth says:

    Taff, HK was/is run along more Georgist lines, i.e. income tax is very low by international standards and there’s no sales tax or VAT (and small-ish government), BUT… there is no need for high taxes on incomes as the government gets a lot of revenue from leases of land. Raising money by granting long leases 30 to 100 years is nowhere near as good as proper LVT because you still get land price bubbles, but at least they don’t really need income tax.

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  • I thought the discussion on here had been along the lines of mortgage rates having to go up because the yield on bonds was increasing (ie price of bonds was dropping) and therefore a better return would need to be offered to fresh bond purchasers to gain the money required for mortgages.

    Maybe I’m getting my wires crossed, but can mortgage rates, for the reason above rise whether or not the BoE raise base rates ?

    So dor those on an existing deal of 0.5% above base svr wouldn’t be effected, but for any new mortgages taken out the rates could be higher because of the higher offerings made on the bond markets, not what the BoE are doing?

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  • I agree we should be able to live within our means and build a surplous for times such as these.

    However, given these recent ‘severe’ cut backs have resulted in us simply slipping into even more debt on a monthly basis (just not quite as fast as we were) then I don’t see how we’d ever get on an even keel again.

    Unless for example gold triples in price and we suddenly discover the UK is built on a foot thick blanket of the stuff.

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  • as I see it banks can borrow from boe using base rate.Their margins have never ever been higher in history…they are already getting 5-6% on mortgages,almost 10% on loans ans up to 30% on credit cards

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  • mark wadsworth says:

    Taff, the high st banks CANNOT borrow from the BoE at base rate – there’s a separate name for that rate and it is 1% higher than the base rate.

    In any event, as at today’s date, high st banks have DEPOSITED about £200 billion (all the QE money) with the BoE, in other words, they no longer hold £200 billion in UK government longer bonds, they hold it (just as securely) with BoE/government only at a lower interest rate.

    The high st banks are paying rather high interest rates on all the £400 billion or £800 billion soft loans and other bail outs.

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  • 2. paul

    Get rid of private central banks and their wars on everything. SORTED.

    It is that simple.

    “I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

    – Thomas Jefferson.

    There’s a man who knew what he was talking about.

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  • ontheotherhand says:

    Paul @2. No we will never live within our means. For any present govenment to struggle to do so means leaving a lovely pot of ‘catch up’ deficit spending for the next government who can buy their votes. To do so means only the entrepreneurial and hard working will prosper, leading to higher inequality headlines.

    I was suprised that the Republicans under Bush continued to spend so much money instead of saving in the boom times (Brown I can understand). Perhaps right wing parties have learned that the only way to keep their share of power is to leave the cupboard bare for the next lot.

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