Albert Einstein once said: “Only two things in life are certain, the universe is infinite and human stupidity, and I’m not sure about the former”.
It would be more than easy to be cynical about the current state of the economy. We all know the Bank of England can control rates and in turn have more than an immediate impact on the economy.
In 2005 it was so obvious to all but the sleeping, that house prices had gone too far. A little blip of a rise in rates slowed the market for a second and off it went again.
The bank did not react with the necessary rate rises. Instead, house prices carried on well past where they were reasonable. The result is a massive demand for cash as consumers believed they were rich, and borrowed with the bank’s confidence.
This expansion means they all need more income to service the debt, and with the demand for resources soaring, inflation has taken everything out of control.
The recent (far too late) increase in interest rates has meant that people have less to spend, with record debt, and the banks’ poor lending processes (blamed on a person called credit crunch) have now dried up money supply. The money supply has led to many people not being able to borrow, and as such has dried up demand for property. This, along with the increased supply has meant that you have falling house prices.
This has been coming for some time as we reported twelve months ago that completions were plummeting. Falling house prices, added to heavy debt means that people no longer have the ‘fantasised’ wealth in their properties. If they don’t they don’t spend anymore. If they don’t spend anymore, prices on the high street fall. 67% of the UK’s GDP comes from spending on the high street.1 If that GDP takes a hiding, the government won’t get the taxes it needs to spend. What are the potential solutions there? Higher taxes are one of them. In the meantime the pretty-much uncontrollable inflation caused by soaring food and oil prices takes its toll on downward spiralling spending.
On the high street things are taking their toll.
Many suggest that the UK is safer from recession than the US because of our high employment rate. Nice story. If people are not buying goods and building homes, there is no need to make them or sell them, and there is no need to keep the people to do the jobs. The building industry is braced for thousands of job losses after Persimmon, the country’s largest house builder said it would stop building on new sites until conditions improved.
In the meantime, on one hand oil and costs are driving industry’s expenses up, whilst on the other, retailers were being forced to cut costs aggressively due to weakening demand.
None of this has been helped by the arrogance of lenders. They are choosing, (after irresponsible lending and poor decisions regarding their investments into disastrous collaterised debt obligations) to pass on the savings to borrowers. Perhaps, when they are dumped with thousands of properties with negative equity they may rue this opportunity.
It is generally believed that the £50 billion offered by Alastair Darling will assist, but in fairness the market has not responded and that tells a story. They know there is more news to come out. If the banks don’t pass the savings on, the momentum will only lead to negative sentiment, leading in turn to negative momentum. Given how far out of kilter the housing market is, it may soon be like stopping a runaway bull with five week old cucumber. But then we all have the ability to make great decisions and let’s hope Gordon can get the rabbit out. Speaking of great decisions Gordon will probably have forgotten he sold 400 tonne of gold reserves back in 1999 for an average price of $275. It is priced today at $890. That means Gordon has missed out on 223% or in monetary terms a loss of $8,677,158,000.2 Wonder what Albert thinks.
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