Monetary Crisis … Borrow our way out?


With the American election out of the way and some of the dust settled we can perhaps have a look at the way that things are starting to shape.

Bear in mind that to sustain our current level of GDP we need to maintain our current levels of consumption spending. We have seen above that our current level of spending has been built out of increasing foreign borrowings by some $1 trillion a year. We have already seen a resistance in the market to free movement of money between banks in the wholesale market. Banks with money are lending to their customers … rather than take a small percentage and pass it on to another Bank … in spite of those interbank loans being guaranteed by Flash!

We have seen that while the FTSE 100 is very volatile that it is still on a basic downward trend. My own figures actually suggest a sound base or bottom approaching 3600 … I don’t expect to see that point reached for another year or so. Our exchange rate is still heading South with a probable bottom somewhere around $1.25/1.35. The Euro is very close to its highest medium term sustainable level against the Dollar, but has perhaps another 5% upside potential, which means that a pound will reach parity with the Euro sometime early next year.

The housing market … where is the bottom? We hear all sorts of nonsense about supply and demand … they never tell you that in a perfect market supply and demand results in prices equal to cost of production after a normal profit. I have always believed that there is a certain amount of rationality about markets and that they are predictable over the long term … so where should housing prices be? If we deal in terms of averages the sum is fairly simple … the average should be somewhere between 4 and 5 time the average wage or more accurately the median wage. I think this still puts housing prices more than 25% above a naturally sustainable level. However, I do not have any stats on median housing prices and a more accurate number can be calculated.

So how does Flash Gordon’s bet look?

At the moment it is still 36 to 1 against success.


It is all based on that old smoke and mirrors story … confidence dear man confidence!

It is simply spin.

There is no focus on the real issue … the increasing current account deficit.

There is a reality that was never impossible to see, for all Gordon’s off balance sheet manoeuvres that current account deficit has been a growing, a growing, and a growing! There has always only been one cure for excesses and that involves pain. You don’t treat cancer with aspirins you cut it out.

Our bet has been that we can borrow our way of misery, carry on as before and the rest of the world will always be willing to pump in the money.

But, will they?

The Japanese Banking crisis had similar medicine applied … the Banks were propped up … Central Bank interest rates fell to 0.5% and alas no recovery happened … only after housing prices had fallen by 50%, the banks written off all their bad loans, re-capitalised themselves was there anything resembling recovery … it took nearly 10 years.

Or, as Mr Micawber said: “Annual Income £20 – annual expenditure £19 19 shillings and sixpence result happiness, annual expenditure £20 1 shilling and sixpence result misery.”

Leave a Reply