By Guy Clapperton, 7th May 2008 at 7:42 pm
OK, sanity actually returning when it’s not shown all that many signs of having been around in the first place is a bit of a stretch. Nonetheless, there’s a lot to be said for Anatole Kaletsky’s recent column in the Times about the current economic crisis. Like the Bank of England last week, and the US Treasury today, he thinks it’s all been a bit overstated and suggests everyone should calm down a bit.
Long-term readers will be aware that I have a lot of time for Mr. Kaletsky. When everyone was panicking about the UK’s withdrawal from the Exchange Rate Mechanism over a decade ago, it was he who observed that this would offer a chance of lower interest rates and therefore a better standard of living. He was right then and I suspect he’s right now.
As always, however, the difficult stuff is in the detail. He is not, repeat not, saying the easy credit is going to come back. Business loans, like personal loans, will be harder to come by than they were six months ago. There are solid reasons for this. Banks had estimated the value of their assets at least partly on untested items - for example if you had a house and wanted to remortgage, the Bank would probably make you an offer and yet without the house on the market nobody would really be able to establish an actual value. This, on a massive scale, is what’s caused the short-term problem we’re suffering now.
If Kaletsky and two Treasuries including ours are right, that problem is about to go away. With a bit of luck its cause will also go away, and people won’t make rash valuations of assets and borrow against them again, either on an individual or national scale.
Unfortunately I remember saying something similar in 1995..
P. S. Interest rate day tomorrow and I got it completely wrong last time. So I’m going to stick my neck out and say ‘hold’ this month.
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By Guy Clapperton, 30th April 2008 at 12:23 pm
At least that’s what Mervyn King, governor of the Bank of England, seems to think according to today’s Times. More particularly he’s concerned that the top executives at said banks are using other people’s money to do it. So the bail-out the other week should be seen as an offer of breathing space and time to put financial houses back in order rather than license to continue as before.
In other words there will be no return to the good old days. Anyone thinking the current tightening was going to be short term was kidding themselves.
It might be a surprise to hear that I believe this is a positive move. I’ve said a number of times in this blog that we need to stop living on borrowed money and actually earn and save something. This is going to happen now because people - and by extension the mass of people that is the economy - won’t have the choice.
The problem is going to be that a number of small businesses tend to survive on other people’s credit. Would the likes of Amazon really be as big if it didn’t have the facility to order items on a credit card with one click? Personally I think not. This isn’t to blame online retailers for people losing control of their willpower and buying stuff they can’t afford, that’s down to the individual, but facilities like one-click make it very easy to do.
The challenge is going to be for retail businesses to restructure themselves so that they’re less dependent on people’s plastic. This is going to mean lower turnover, which in turn will need to attract more margin to keep a business running.
There are industries in which this will be possible. People will pay a premium for goods if there is genuine value in the form of services to be had. They don’t mind paying a fair price if they can understand why. Companies like Richer Sounds never compete with Internet companies because they know people will pay the money to keep them in business for next time they need advice from a human.
The difficulty is going to be in the commoditised markets. You can add value to a sound system in a way that can never apply to, say, a book. These are absolute commodities and will sell on price alone. How you keep that sort of product profitable in an environment in which people don’t want to use credit is beyond me.
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By Guy Clapperton, 23rd April 2008 at 11:45 am
In recent weeks, given the remit of covering business money, I’ve said quite a lot about the state of the economy. I’m going to give it a break this week; either confidence will return or it won’t (and I still believe a lot of the problem has been about either confidence or more likely overconfidence when it comes to, say, valuing a house and the bank valuing its assets on the value of the mortgage) and that’s pretty much that.
What’s more disturbing is the report today that we’re increasingly victims of Internet Fraud. Granted, this week is the week of the Infosec show in London so there will be a lot of people talking up security stories out there but it remains a concern that official figures are underestimating how many people are losing money by so much.
The usual caveats apply and the calls for a Cybercrime unit make a lot of sense. In the meantime this is going to hit customer confidence very hard indeed - it was getting a lot of coverage on the Today programme, for example. Businesses that have downsized to take account of non-face-to-face trading could be in for an unpleasant reality check (elsewhere the BBC has reported - shock horror - that people are increasingly resorting to cash they actually have to fund their purchases).
It’s just what we didn’t need, and makes it a good time for Internet traders to look at and upgrade their security - this afternoon would be a good time.
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By Guy Clapperton, 16th April 2008 at 6:26 pm
OK, it’s starting to look serious. The economic outlook has been poor for a while now but a number of people, including me, have been suggesting that if we can steady our nerves all will be well. There was a rate cut last week and no doubt others will follow.
Then this happens. The Government, bless them, plan to help the banks by converting some of their mortgage debt into Government bonds.
This might have been a good idea a while ago but it has to be pointed out a similar move has done very little for the American economy. We now have a Government that is admitting openly that things are looking scary and imitating an only mildly successful business model to get us out of it.
Mind you, at least they’ve made a decision this time. We’ll see whether they manage to pull it around.
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By Guy Clapperton, 10th April 2008 at 12:51 pm
It has come to my attention that a number of readers may have been given the impression in one of my recent posts that there was no rate cut imminent.
This post was of course a figment of your imagination and if you can still see it you need a holiday, or something.
OK, OK, I was wrong…
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By Guy Clapperton, 9th April 2008 at 3:24 pm
…because a lot of this economic forecasting is giving me a headache.
It goes like this. Alistair Darling’s forecast for this year was for 1.7 per cent or so growth in the economy. It seems not everyone agrees with him and the actual figure is likely to be 1.5 per cent.
More seriously for Darling, the figure next year is also likely to be under two per cent when he’s been predicting a figure over it. And this could be an election year.
My question is really quite simple. What do people understand by the word ‘growth’? OK, we’re not growing as quickly as hoped and yes, the American economy is having its effect - as someone whose mortgage is likely to increase twice in one month if reports are to be believed, I’m going to become all too well acquainted with the idea.
But it’s still growth, isn’t it? Nobody - repeat nobody - is saying there’s going to be less money (although less on credit, which is probably no bad thing), more unemployment, more inflation. Check the dictionary. Growth is growth. And yet confidence is suffering, simply because virtually the longest sustained spurt of economic growth in living memory is coming to its natural end.
There needs to be a correction, certainly, and we all need to pay back our borrowings - as a nation and as individuals, to set things straight. I just don’t see us as doomed, that’s all.
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