Tuesday, Sep 10, 2013

Debt and economic performance

Financial Times: UK gets wrong kind of economic recovery

Because this is from the FT, you will have to register with their website to read the article. Columnist John Plender writes about the relationship between the UK economic improvements and the housing market. Plender's thesis is that UK economy is beholden to property price inflation. Consumers are more willing to spend when prices rise and banks are more willing to lend against property collateral to small businesses. Also, Plender asserts that consumer spending due to property price rises tends to steer economic activity away from the tradable sector which has less scope for efficiency and innovation improvements i.e. the wrong kind of economic recovery.

Posted by quiet guy @ 02:34 PM (2681 views)
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1. flashman said...

and yet we keep hearing about new inward investment (see for example mountaingoat’s article and the news about Jaguar’s 1.5 billion investment today).

This kind of article always seen to criticise the economy because it is not perfect already. It’s as if the need for instant gratification has seeped into economic journalism. It’s a bit like criticising Andy Murray in the first set of Wimbledon because he hadn’t already won. Everything takes time (especially after the crisis we had) and it is therefore the trend we should be concerned with rather than this sort of snap shot picture.

This article also (mostly) focuses on the 11% of the economy that is manufacturing. What about the dominant service sector that is doing very well? That sector has attracted plenty of investment from domestic/international sources and the indications are that these investments will accelerate. Do we really think that these investors or TATA’s Jaguar investors give a rats ar*e about the housing market in Basingstoke or Help-to-buy?

Another criticism I have is the negative comment about household savings (as a % of disposable income) falling. That’s probably a good thing. In the aftermath of the crisis it shot up from less than 1% to over 8% (quarterly figures, not annual). Most economists had started to think that household deleveraging and saving had gone too far. This rate going down shows that people are finally confident in the recovery and that they are prepared to spend. We are nothing like Japan but we'd soon be on our way if saving rates had gone much higher

This article also presents some slightly out of date information i.e. “The external environment is dismal, with the Eurozone struggling and emerging markets slowing down sharply”. The very latest numbers actually show that the Eurozone has finally emerged from recession and that the most of the emerging economies are starting to pick up again. Again it is the trend that matters.

Things are far from perfect but there's no point in calling a 5-year old a midget

Tuesday, September 10, 2013 04:13PM Report Comment

2. quiet guy said...

"This article also (mostly) focuses on the 11% of the economy that is manufacturing."

Isn't that the point of the article? As Plender puts it "After the credit-fuelled boom and bust in property there was a clear need to rebalance the economy away from consumption towards exports and investment. Very little rebalancing has actually happened."

Sure, it's good that we're improving and something is better than nothing but the reason that I posted this is Plender's idea that the UK is still heavily influenced by the property market which naturally leads to another question: are we going to do the boom and bust again?

Tuesday, September 10, 2013 07:34PM Report Comment

3. flashman said...

quiet guy, I actually question this notion that we are so heavily influenced by the property market. What does that even mean? Manufacturing makes up 11 percent of the economy (which is quite big if you think about it) and that has almost nothing to do with property. Large swathes of the dominant service sector also have very little to do with the property market. I personally work in the service sector and I have no connection to the property market. Do any of you have anything to do with it?

To answer your question; Pleader says that we have to rebalance the economy towards exports and investments. My point was that why therefore just concentrate on manufacturing? The service industry exports heavily and attracts investment.

Tuesday, September 10, 2013 09:01PM Report Comment

4. libertas said...

Well, small businesses are dependent on homes for collateral because savings are low, because interest rates are low. Is it really good that to run a business, one must risk their home?! To me, that is the definition of poverty and a country in decline. Now, technology is counteracting some of that decline, and we may not be declining as fast as others, but the decline is expressed by the general public benefiting from technology by a lower factor than should be the case. For example, much of the new technology is in military spending, like how Orwell predicted. It could have liberated us from five day weeks, but instead, is used to kill brown people for oil. Most barbaric, when we could be reaching for the stars.

Tuesday, September 10, 2013 09:36PM Report Comment

5. bellwether said...

A strong service sector (one way of expressing a high quality of life) will obviously attract inward investment.

Of course property prices are still too high, and of course the schemes and wheezes to keep that going are just unproductive meddling, which have, if anything, held the recovery back. But there reaches a point you have to move on from that, or otherwise engage in a process toward some sort of productive reform.

Tuesday, September 10, 2013 10:31PM Report Comment

6. flashman said...

'One way of expressing a high quality of life'. That's quite an old fashioned thing to say but it's also true. The attitude we have to the service industry is uniquely British. It's world class so we knock it. The Chinese with their dead rivers and face masks must be very envious

The simplest/only way to cure our housing ills is to build a few million houses. Prices would tumble and the economy would grow. Specially designed taxation/legislation would not get to the root of the problem and they would cause more distortion and complication. Maybe it's another British thing but even here we see some quite stiff opposition to mass building. I don't imagine the HPC objectors are tweed wearing objectors, so they are probably 'green'

Wednesday, September 11, 2013 07:33AM Report Comment

7. pete green said...

Spain, Ireland and USA built millions of houses yet they suffered boom and bust, we just had boom and our lack of supply has allowed government supported values, so no bust (as of yet).

I would welcome more house building and the subsequent housing crash, but in no way is it a simple catch all 'solution' and we would be just as prone to future boom and busts due to the inherent problem on speculation of land values which has plagued economies for centuries. We need to restrict lending going to land value or better still tax that monopoly away.

We must also look at the effects of lending to land prices and its effects on money supply,

When it comes to 'quality of life' the problem, as postulated by classical economists, is that much of our surplus production ends up inflating the monopolies we need for a 'quality life' access to land and natural resources being chief amongst them.

Wednesday, September 11, 2013 02:23PM Report Comment

8. nickb said...

dependence on the housing market. one thing it means is that most of the money supply is constituted by mortgage debt. I remember looking at a time series of this from 1960s to 2011 and it varied from 55% - 65% over the period. Re the service economy, how much of this is tied to "servicing" existing assets rather than new production? I also remember seeing interesting some comparisons of manufacturing jobs verses various services in terms of how efficient they are at circulating money back into the economy e.g. through wages. I will see if I can dig that out.

Wednesday, September 11, 2013 02:27PM Report Comment

9. flashman said...

nickb, in my job, I provide a service and I get paid for it. In common with many service sector workers, the bulk of my clients are overseas. I’m not servicing any existing assets. I really don’t know how much of the service sector could be said to be directly servicing existing assets? A quick scan of a census definition of service sector jobs suggests not that many (see below)

“truck transportation, messenger services and warehousing; information sector services; securities, commodities and other financial investment services; rental and leasing services; professional, scientific and technical services; administrative and support services; waste management and remediation; health care and social assistance; and arts, entertainment and recreation services”.

By the way first estimates are that the service sector grew by almost 2% in Q3. That’s a barnstorming performance and it might mean that overall Q3 growth was about 1%

To what extent the money supply (I assume you mean M4 or broad money?) is constituted by mortgage debt is actually not that clear. Economists can’t even agree on who or what controls money supply (heterodox vs. conventional). One group suggests the central bank and the other group disagrees and says it’s the economy itself that controls money supply. I don't doubt that the property market has some sort of big influence on our economy but no one can conclusively quantify it and we don’t know if it really matters. There are so many more factors involved once a pound gets into the economy, than where it came from

That’s why I took a step back and asked who actually works in the property market? I personally can't actually think of anyone I know whose job is directly linked. I think most of us do something else and it’s probably more valid to say that it’s ‘the most of us’ that control the economy

Regarding, the efficiency of service sector jobs vs. manufacturing jobs (re recirculating money back into the economy); I think that once a pound is out there it has no idea where it comes from and the multiplier effect is the same. If the first pound is somehow different it really wont mathematically matter once its starts changing hands over and over. I'd like to see that stuff though. Sounds interesting.

I think that when people talk about the need for rebalancing they tend to be thinking about more manufacturing. That's fine but they should actually be talking more about the general need to export and that can be in the form of goods or services. Many of our services are actually in connection with overseas manufacturing. Should we be doing this manufacturing here? Perhaps but if I was a 'worker' I'd far rather work in the service sector. I think management jobs are probably similar no matter what the industry. If you think about it we are quite privileged to have such a large service sector. Ask an oriental factory worker what sort of job he's rather have.

Wednesday, September 11, 2013 06:06PM Report Comment

10. nickb said...

"securities, commodities and other financial investment services" a lot of this is to do with trading existing assets, not new productive activity. Perhaps also "information sector services" involves a lot of that too.
I think it does matter for which purpose money is loaned into existence, because loans taken out to fund activities based on existing assets, like speculation or a mortgage for a house, are not self amortising. So if too little is loaned out to fund new economic activity this is a sign of over financialisation. And many people over the years have complained that the UK economy indeed provides too little credit to productive business and relatively too much for trading existing assets / speculation (compared to, say, Germany).
On my way to work in Reading I sometimes count the businesses that are either financial services or property. At least one in three. And if you look at the growth of those sectors over time as share of GDP it is striking or disturbing depending on your point of view.

Wednesday, September 11, 2013 11:38PM Report Comment

11. flashman said...

nick, another way of expressing your observation is that two thirds aren't. I'd also like to point out that you only really identified one group from the list of service sector jobs. Even that group do a lot more besides servicing existing assets. I know because I'm one of them. The above sounds more argumentative than I mean it to be. The UK might well be a little too financialised but I'm just pointing out that it's only a 'might', no one knows what it really means and they couldn't quantify it if they could

Thursday, September 12, 2013 07:12AM Report Comment

12. flashman said...

Nick, a very small point has just occurred to me. My company doesn't even have a sign on the outside of the building. You wouldn't notice us on your way to work. There are several other service industry outfits in our large building and they also don't have a sign on the outside of the building.

Thursday, September 12, 2013 07:42AM Report Comment

13. nickb said...

Flash, it was just a casual observation! Lack of signs on buildings wouldn't seem to bias things one way or the other though.

Thursday, September 12, 2013 11:09AM Report Comment

14. flashman said...

nick, I don't want to be difficult but it probably would bias things. Estate agents and their like nearly always use their signs as a form of advertisement, to shout out their services. The fact that other types of service business often don't even have an apparent sign, suggests that your casual observation understates your 65% guesstimate of the number of businesses that are not involved in property etc. It's no big deal

Thursday, September 12, 2013 12:49PM Report Comment

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