The phrase “Boom Bust” will always be associated with the Tory years. It was the Socialists who embedded the link in our minds. That means that they need another phrase to explain the current Boom-Bust cycle. Uprecedented Growth/Credit Crunch looks good.
Make no mistake, by the end of 2008, inflation will be at 10-12% per annum, house prices will have fallen even further and by the end of this year, unemployment will have reached (but not peaked at) two million and the FSA and bank-induced rigor mortis will have all but finished-off the British financial services industry.
Within the last month, we have entered the “Bust” phase of the economic cycle – or “Credit Crunch”. (Sounds much friendlier – almost like a breakfast cereal.)
One good thing has come out of the whole sorry affair: we have come to realise that the futile posturings of the Bank of England are irrelevant and that the BoE is no longer a “shaper” of the economy. It is merely an observer.
During “Boom” years, having lots of meetings and tinkering with the Base Rate is a harmless enough pastime. However, come the “Bust” phase of the cycle, the old chestnuts ” We are in a Global Economy” , “Downward slope of the Economic Cycle” , “Sorry mate, we didn’t see that one coming” and “It was those fucking Americans and their securitised mortgages” are trotted out.
What bankers practise is not an exact science – that is why there are usually several opinions as to whether or not rates should be changed or who to blame for the latest screw-up. What they practise is best described as a combination of “bucket chemistry” and “guesstimation”.
The Bank of England has no more effect on inflation than my wife recycling plastic bottles has on global weather systems.
In the good old days when the BoE did as it was told, successive Chancellors would order a change in Base Rate in the full knowledge that in the grand scheme of things, their machinations and fiddling would have absolutely no long-term effect on the economy. (Are you reading this, Norman Lamont?)
When government does finally intervene and shake up the financial system, they will have to do very BIG things such as nationalisation. The days of futile fiddling with interest rates are over.
Under Mervyn King, the BoE Monetary Policy Committee has become an irrelevance.
There is no longer any correlation between Base Rate and what happens to real borrowing rates. The banks are out of control and more-or-less doing what they damn-well please.
Everyone is reluctant to use the word “recession” which , just for the record, applies to a period when the economy experiences negative growth for two consecutive quarters. Or, to put it in plain English: when the economy shrinks for six months. The economy is now shrinking.
Some may say that certain “sectors”are not in recession while others are.
That’s like being slightly pregnant. Either you are pregnant or you’re not.
Sometimes it seems that even the economists and bankers don’t understand what is going on. Nowadays we live in a much more immediate and unstable age and therefore , the old economic principles are ceasing to apply. A single unpredicted event can have a major impact on either all , or on individual economies. More Chaos than Keynes.
The fact is that we can no longer manage Macro Economics through Micro Management. Interest rate tweaks, sugared by soothing political noises and underpinned by blind panic are having little effect . For instance, The Americans have decimated their interest rates recently with no particular effect on their economy although they “think” that they have had a slight effect on their inflation.
Bush staged a big dollar “giveaway”. Brown has now done the same. Both were decisions based in Politics rather than Economics. Perhaps the time has come to move Economics from the Politicians’ reach?
Looking on the bright side, in a few years, all this will be history. Mervyn will be gone, another Prime Minister’s hand will be up another Chancellor’s lower alimentary canal and in spite of the BoE’s and the Government’s ineffectual tinkering and rhetoric, those of us who survive will be enjoying another “Boom” but not before we have struggled through another recession/depression.
By 2013, the new Government will tell us that it was their policies and prudence that led us to the New Prosperity. The old Government had got it all wrong.
Economists and Bankers will tell us that they did not see any of this coming. I am not a banker or economist but reckon that we are headed not just for a recession but a full-blown , very painful Depression – à la 1930s. The hazy and illusory days of plenty will be over.
Finally, I don’t think that enough has been made of Tony Blair’s excellent timing.
He ruled over us during a time of “virtual” plenty (it wasn’t real because it was funded by debt-ridden banks funding increasingly debt-ridden companies and individuals).In spite of Gordon Brown’s mithering, Blair held on until the rubber-band of economic growth was at maximum stretch. Finally, he handed it to Gordon………
The real worry is that at the time Gordon Brown was the Chancellor of the Exchequer and should have forseen certain things.
Not only did he not see what was flying through the air but even when it whistled past his ear, he did not notice that it was heading straight for the fan.