Saturday, July 12, 2008

Random economic thoughts

Yesterday's financial news was that we had officially entered a bear market (a falling Stock Market that has reached the point where it is statistically confirmed) set me to pondering the general state of the economy, and trying to pull various random thoughts into ... an incoherent collection of random thoughts? And where else would I share a collection of random thoughts but here. I tried to think of snappy title for this post but failed. I'm afraid it just isn't a snappy subject. Feel free to move on!

I am old enough to remember three major economic crises. The "three day week" and high inflation of the 1970s; the miners' strike and high unemployment of the early 1980s; and the house price crash of the early 1990s. This time round, I don't think things will get as bad as the 70s and 80s, at least, but there are some new factors that make things unpredictable.

Unemployment seems to be the least worrying issue. If we are heading into an economic recession, at least it is from a strong position of low unemployment. For what anecdotal evidence is worth, I am not hearing people say they are worried about their jobs.

Inflation is biting, but in historic terms it is still at quite manageable levels (in the 70s it got as high as 24%). Higher food prices, higher gas and electricity bills, and petrol prices of over £5 ($10) a gallon and rising, are hurting almost everyone I know. It's definitely feel-bad time ... but for most people so far that feel-bad is more about having to tighten belts and cut back on non-essentials, than about hitting economic crisis point.

The housing market is a mess. We live on a popular estate (neighbourhood?) where houses usually sell quickly. Not now. There is a veritable forest of "for sale" signs. Higher interest rates and restrictions on mortgages mean there simply aren't enough people wanting to buy. With mortgage payments going up and house prices going down, it looks as though we may be heading back to the bad times of the early 1990s, with negative equity and repossessions.

There are new twists to the economic problems we are seeing now. Somehow we have to get through two crises: a crisis of resources and a crisis of capitalism. Rising food and oil prices are at least in part a function of demand. As the economies of the east (China and India) grow, limited resources have to spread a lot further. A BBC News report I found says that the number of car owners in India is expected to double between 2000 and 2010, from 0.5% to 1% of the population. The Indian economy is growing at 8%p.a., so that rise in car ownership isn't going to slow any time soon. Presumably the same is happening in China. Increasing prosperity in the east also means more people have more money to buy more food. Add to that a rising world population, less land suitable for food production (due to global warming?), and the use of food crops to produce biofuels and you get rising food prices. Somehow the western economies are going to have to learn to live in a world where resources are shared more equitably, and where those resources are in any case becoming scarcer.

The other crisis is one of capitalism. Capitalism runs on money ... and on hypothetical money. Capitalist markets are not about real value, but about perceived value. This is probably at least partly responsible for those high petrol prices. The financial markets make assumptions about future oil shortages - that may never happen, or may only happen on a smaller scale - and push up oil prices to levels that bear no relation to the real cost of actually getting it out of the ground and refining it. According to a friend who works for BP the cost of the oil they produce is a small fraction of the value put on it by the market (I think maybe one-fifth, but can't remember for certain). So when you pay through the nose to fill your car, remember this ... you are paying an amount that will give the oil companies huge profits, not because they have decided to charge an excessively high prices but because some financiers in Wall Street or the City of London are betting that oil will become increasingly scarce. You are paying not just because China and India are using more oil now, but because they are expected to use more in the future.

Those same financial markets are also behind the whole credit mess. I struggle to understand the technicalities of the sub-prime debacle, beyond the fact that irresponsible lending came back to bite the banks who thought they could make a profit out of it. Their manipulation of hypothetical money got out of control, until suddenly everyone noticed that the emperor had no clothes. Banks and mortgage lenders are now in free fall. That is very scary. Governments on both sides of the Atlantic are going to have to decide how far they want to bail out banks. Here the government have already done it with Northern Rock. Will they go further? Will any western government allow a bank to go under? Banks are also now petrified of lending money, which means the housing market isn't going to recover any time soon.

Am I leading anywhere with this? Afraid not! Except to say that if I had much money in the bank (which I don't), I would spread it around rather than leave it all in one place, just to be on the safe side. Also, that now is a good time to get used to being more economical in the use of resources, with careful food shopping and trying to drive less. High food and petrol prices aren't going to go away any time soon.

1 comment:

Jennifer said...

This was so interesting to read - I know how things are here, but I was just wondering last night if all of this is international. I try to tune out the economic news because it depresses me, but after yesterday's mortgage news, I spent far too much time reading about it online. Anyway, your view from "over there" is enlightening. Thank you - you answered several questions that I had only asked myself. :)