I had meant to type a lot today but I feel like I've got a slight chill, so I'm not going to do as much as I'd hoped. However, I will give you something to chew on about the current economic situation. We may have averted a total collapse of the global financial system (courtesy of obscene amounts of money donated by taxpayers, which never seems to be available for help pay for schools, hospitals, pensions, renewable energy, anti-crime initiatives etc) but it doesn't look we're going to avoid a recession here in the UK. At least we'll be spared the expression "No return to boom and bust" for a while...
The markets are clear: Britain is mutton dressed up as lamb
Labour has failed over 11 years to build an economy fit for the 21st century. And it seems no one has learned the lessons
Larry Elliott, The Guardian, Wednesday October 29 2008
Repossessions up 71%. Activity in the high street down for the seventh month in a row. Short-term working at Honda's Swindon plant. An estimate by the Bank of England that losses from the financial turmoil now stand at $2.8 trillion. Just another normal day in the economy.
For most people, $2.8 trillion is a meaningless number, as is the news of BP's £10bn profit. What they want to know is how bad is it going to get, who is to blame and whether life will be any better when the economy emerges, as it eventually will, from its problems.
The answer to the first question is simple: for the UK this is going to be a painful reality check after all the years of living on tick. As things stand, the economy could contract for at least four of five quarters, leading to rapidly rising unemployment. Falling house prices will expose more and more families who bought homes from 2005 to 2007 to the perils of negative equity. After 15 years of growth, prolonged austerity will come as an almighty shock.
Gordon Brown has no doubt who is to blame for all this: the irresponsible bankers who invested unwisely in all those US sub-prime mortgages during the boom years. Britain, he insists, is being sucked down by global forces beyond the control of a government doing its level best to help. Not all of this is piffle - although much of it is.
Clearly, Britain is not alone in going through tough times: the fact that there are daily bulletins on the economic health of Iceland, Hungary, Ukraine, Argentina and Turkey, in addition to the usual diet of gloomy news from the G7, is evidence that this is a global downturn of some severity. Yet, as Warren Buffett once put it, when the tide goes out you learn who's been swimming naked - and as the water has receded rapidly down the beach, it has been possible for the first time in many years to see the UK economy as nature intended. And it is clear we are not getting a glimpse here of Botticelli's Venus.
The markets have certainly come to the belated conclusion that the UK is mutton dressed up as lamb. Shares have bombed in London over the past month because of the recognition that the UK corporate sector is about to endure a long and painful recession, which will lead to a sharp reduction in profits. Sterling fell against the dollar last week by more than it did in the immediate aftermath of Black Wednesday in September 1992. Why? Because the UK has papered over the cracks of a hollowed-out industrial base by taking risky bets in the global financial markets. The epic scale of the UK's trade deficit has been disguised, up to a point, by the willingness of the City to act like a hedge fund - borrowing for short periods and lending for long periods. Hedge funds are risky businesses; they thrive in the good times but can go bust when the weather changes, as it has over the past year. In those circumstances, the foreign holders of sterling seem resolutely unconvinced by Brown's claim that Britain is better placed than before to ride out the storm. They have had a quick squint at the 6% of GDP trade deficit, the debt-sodden consumer, the crashing housing market - and headed straight for the exit.
Again, it would be fatuous to make Brown the scapegoat for structural problems that have been long gestating. The brutal fact, though, is that the economy is more unbalanced after 11 years of Labour government; this is not, despite the hype, a knowledge economy fit to meet the challenges of the 21st century, it is a debt-dependent economy once again about to go into rehab.
The cold turkey will be all the more painful because of the mess the Bank of England has made of setting interest rates. Monetary policy was kept far too tight for far too long: something only one member of the MPC appeared to realise as the economy headed unerringly towards the rocks over the past six months. While the Federal Reserve in the US was cutting interest rates aggressively to cushion the impact of recession, the MPC here was twittering away about inflation. The bank normally moves rates in quarter-point moves: it is now under pressure from the markets to reduce borrowing costs by a full point next week in order to make up for lost time. That's how far behind the curve it now is. If Mervyn King had been managing his beloved Aston Villa rather than a central bank, he would have been fired by now.
And after the deluge, what then? It would be nice to report that lessons have been learned and that the future promises tougher controls on credit creation, the renaissance of the industrial base to meet the environmental challenge, the permanent cageing of the City. But do you honestly believe that is going to happen, whoever is in charge? No, me neither.
Larry Elliott is the Guardian's economics editor
larry.elliott@guardian.co.uk
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