The “R” word
I just want to say something else about the economy, then I’ll shut up about it all.
The “R” word – recession – it happens. It happens in cycles every 10-20 or so years.
There’s a lot been made of the “boom and bust” cycle that Gordon Brown promised to eradicate. That was irresponsble of him to promise that. He probably thought that we would hit the “bust” part as the Labour government got replaced by the Conservatives. It might well have been true if he hadn’t bottled taking on a general election just after becoming Prime Minister (and becoming a completely unelected leader in the process). I guess that finally getting to sit in Tony’s big chair went to his head and his ego took over. He is left with the mess that he originally hoped to bequeath to the Tories, albeit by the process of a natural economic cycle and not a deliberate ploy. Don’t be fooled by “Gordon the Saviour” – him chucking money at the problem will only make the problem last longer as taxes are pushed up to cope. He was a political dead man walking and this was a desperate act of a desperate man. He was also an advocate of a nationalised banking system in his strong socialist past, which would stiffle London’s edge as a top financial centre. It’s his legacy and will hang around our necks for years to come.
Boom and bust is normal. The economy grows, and then grows faster as people naturally try to expand themselves (and their earnings) – that’s why interest rates go up to try to stop it. People form companies in good times and borrow money to do so – the banks are happy to lend more and more to maximise their own profits and increase the returns to shareholders. Unemployment sinks (as there are more companies and jobs) and everyone is happy. The banks made more this time by packaging up these loans and selling them as investments (fixed income returns on debt repayments). Then, as always, all of a sudden everyone stops, says “sh*t!” and the confidence drains from the economy instantly as they realise the money isn’t real. Everyone withdraws their investments for safety – and stocks plunge, making a bad problem worse – and everything plummets. The businesses struggle – customers disappear as they have little or no money. The companies go bust. “Correction” is the word. Then we hit the bottom – which is a great buying opportunity for investors and then there are huge opportunities for business to grow into the space that the now expanding economy offers. The governments then want to encourage lending again to get the economy moving. Thus, the cycle starts again.
How do you stop it? If the Bank of England sets the interest rates at a level that encourages gentle growth without irresponsible borrowing – this is a good start.
Chances of getting that right? None. It’s human nature to want to push onwards and to take risks. If it wasn’t, we’d all still be living in caves.
We’re on the “bust” part right now – you’ll likely see some more in your lifetime, just like your parents and their parents before them. Comforting factors are that a) it always recovers and b) the media always makes it sound worse than it is – they sell newspapers off the panic – especially in this intense media age.