What fascinates me about this piece is it's framing. As Foroohar goes on to note:
Currency Research Associates says investors would be wise to look at what happened in another period of declining income and production growth, between September 1937 and June 1938. Back then, after hitting a couple of peaks, equity prices plunged by 40 per cent in three months.
This typifies the piece. That fact that people are in poverty, or that they cannot feed their children is nit if apparent concern. What matters is the impact on share prices.
It so happens that I agree that a stock market downturn is very likely as result of the recession I see coming. I should have thought that obvious. As Danny Blanchflower and I explained in The Mirror on Saturday, if people stop spending then other people lose their jobs, and a vicious downward spiral in incomes results. Of course that will impact share prices, just as it can also create a banking crisis due to bad debts.
But stock market and banking crises are the consequences of people not being able to meet their basis needs. Those crises are in that case not the issue of primary concern. And nor is there a ‘buyer's strike'. This is not voluntary. People are only spending on essential items out of necessity. And that suggests we are heading for recession.
Sure, share prices might fall in a recession. But the FT really should be talking about how people can make ends meet, and not the consequences for the wealthy of the inability of so many to now do so through no fault of their own.
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inflation is the potential cause of recession..controlling inflation is therefore a priority. Inflation comes from both sides, supply shocks and excess liquidity. To throw more liquidity through printing money is not a solution. It will make inflation worse. In the labour market incidentally there are enormous skill shortages is many areas especially IT, technology and construction and related skills and a surplus of humanities graduates leaving university with no vocational skills but an expectation to walk into highly paid jobs.. i know it is a broader discussion but the education system is not helping.
Sorry – but you ere wrong here
And I am working on explaining why…
I would add that I work in the building industry and have done for 35yrs and employ 12 people. As a general rule I would say our raw materials are 40% higher than 18m ago..It makes giving fixed quotes nigh impossible leaving many customers in a state of flux as to what to do. We remain busy but there is no doubt that many will defer refurbishing their properties and eventually new builds will slow as there is no way build costs will be able to be passed on through higher house prices . The cause of the supply shortages are complicated and I hope they will unwind. For my business it would be great if interest rates were zero and credit was easy as people are more likely to just take inflation in their stride. But deep down I know that is a dangerous game.
As I said, le t me get to this….it will take a bit of work
Just a little vignette here from the world of amateur rugby………………………
We had our annual mini rugby festival here yesterday which we do as a fund raiser for our rugby club.
Numbers were down, as was spend (and therefore money raised). It was great seeing the kids having fun but the drop in attendance and spend (all ‘discretionary spending’ BTW thought to be at risk) was palpable.
It was also interesting to see the difference between clubs from well-heeled urban areas to those from say ex-mining communities we have here.
Rugby subs (where you pay for you insurance and other costs as a member) are all down at the local lower league level with many clubs unable to raise a first team, let alone a second.
We all agreed that it’s going to be really interesting next couple of years. But I just posted this to illustrate how these issues affect everything and why addressing them should be a top priority for any decent Government.
Thanks
Worrying…
A couple of weeks ago, I watched Rachel Reeves being interviewed. The reporter kept asking “Where will the money a Labour Government spends come from?”. I felt like shouting, the right question is “What will happen to that money after the Government spends it?”. If Government-created £s are IOUs, there will be a problem if too many of the IOUs that the Government creates are presented. But will all those IOUs be presented? I think far more £ IOUs are locked away or destroyed than even Richard imagines. If most of the £ IOUs that monetarists agonise over are not available, then the economy cannot function efficiently and you will get a recession
Most pounds don’t come from government spending. I can’t quite see all the monetarist types ignore this.
As Steve keen points out “we don’t live in a fiat-money system, but in a credit-money system which has had a relatively small and subservient fiat money system tacked onto it.”:
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
There is huge scope for non inflationary money creation.
There is
Especially if bank credit declines, as it will
I think the chickens are coming home to roost on so many fronts now.
Two pieces of news today on things we need.
Supermarket groups Asda and Morrisons have announced efforts to help struggling shoppers during the cost of living crisis.
https://news.sky.com/story/asda-and-morrisons-drop-prices-to-help-struggling-shoppers-12598524
But then there is housing. The fantasy of increasing prices goes on.
The average asking price of a house in Britain has hit a new record, pushing over the £360,000 mark, according to website Rightmove.
https://news.sky.com/story/average-house-price-hits-a-new-record-according-to-rightmove-12598515
I do wonder. At least with share prices there is a tendency for them to go up and down reflecting fear and greed. With housing it is all greed, supported by irrational fantasies that prices only go one way. The Tories have a long running habit of supporting this, but Labour under Blair and Brown were basically the same.
I have a question. Is there any reason why there could not be a separate interest rate set by the BoE for control of house price inflation – specifically for when house price inflation runs way ahead of official inflation where it is not included? When house prices start to heat up the IR would go up killing stone dead speculation as Mortgage lenders would be required to not offer loans at less then the BoE IR for house prices. Take house prices out of the general IR environment. Tories would hate this, so I know it will never happen, but I am wondering could it work? (I’m not an economist, so it’s possible my suggestion is rubbish and unworkable. Would just like to know if it could work.)
The answer is that there are different rates….but mortgages are the cheapest
And the problem is that those who do not have mortgages and who do not borrow push up prices most
So the answer is much more tax on high value residential property
That does rather return us to land taxation (really land rental); which eventually the landed aristocracy and gentry managed to transfer the tax burden from land (power, representation, wealth and tax hitherto had followed land), to ‘commercial society’, and to ordinary people. The final decisive transfer came in the House of Lords, which accepted the Parliament Act 1911 (the Lords would not reject Finance Bills), in return for the transfer of tax from land (the landed interest dominated the House of Lords). In the last forty years corporatised commercial society has successfully transferred the taxation burden from the cocorporate, commercial world onto ordinary people to carry most of the burden (PAYE, VAT, National Insurance – the direct and most effective taxes) . I can say I have ploughed this furrow since I began commenting here; for what that gratuitous observation is worth.
There is no harm in persistence
I had to take our youngest back to Uni yesterday up the M5/M42/M40 and, apart from returning holiday traffic heading north on my return, the roads were far less busy than expected. Little surprise there, I suppose, but what was ‘interesting’ was when I stopped mid afternoon heading back down the M5 at Strensham Services. It’s normally heaving with big queues for the various food outlets. I was in a queue of precisely 1 at the Leon outlet and got chatting to the charming lady on the counter. She told me that ‘it’s the quietest I have ever known and sales are way down to what they were at the turn of the year’. Perhaps not a surprise, as such, but I also noticed far more people than usual sitting in their cars (presumably after using the facilities) eating home-made sandwiches. We just have to look around us to see that big trouble is here/coming. And, ‘yes’, this could well lead to a slump in financial asset prices, which is worrying for those in ‘defined contribution’ pension funds. Right now I’m in the middle of helping a client withdraw £40,000 from a personal pension at the age of 57 to pay for property improvements/repairs. Consuming future income streams for today’s ‘satisfaction’ hardly seems sensible and I foresee a lot of people ‘raiding’ pension pots now and bitterly regretting it in a few year’s time.
Re the first point – my wife and I noticed how quiet out town was on Saturday…just not normal
And re the second – you are right – there will be a great deal of regret later
It’s often forgotten that the ONLY guaranteed source of lifetime income is an annuity; all other sources of income can evaporate. 99% of annuities arranged in the UK are funded from ‘defined contribution’ pensions pots and, I believe I’m right in saying, 97% of those are fixed in payment, something that will rapidly become a big problem in these inflationary times. Sure, that choice has to be seen in the context of the individual’s other retirement income (occupational & state pension, for instance), but clearly demonstrates the inability of most people to differentiate between ‘real’ and ‘nominal’ returns. Pension drawdown is fast becoming a big worry, but still people decide to ignore the “Pensionizing” option in the hope that ‘something will turn up’ (which almost never happens). The dozen or so years of the ‘financialization’ of pretty much everything seems to be in the process of unwinding, which will cause untold pain to millions of us.
Agreed
It does seem that we are entering the dance macabre of ringa-ring-o-roses.
If people aren’t seeing what is happening with the Yen and still believe everything is going exactly to plan in our daily blinkered certitudes – what more can be said to get them to take cover?
The EU could still survive if it cared just for its own but the rest of the traditional western economies and all who are linked directly to it will all suffer the same illness. I have just about cleared my mortgage and am looking towards a subsistence existence due to the failure of investments and living of the cash as it losses its purchasing power fast through hyper-inflation.
Pensions and annuities are a gamble as much as anything else.
If my husband had put his pension pot into an annuity when he was 65, I would have had only half the money for the last ten years, as he died six months after pension age. Putting it into drawdown meant that I had the whole of it instead of just half.
I think someone who is using part of his pension pot to repair his house is being sensible, because in ten years time his house would be in a far worse state.