Wednesday, 22 April 2009

It's broken and it can't be fixed

Please view this movie and you will see why I believe the economy may not recover from Alistair Darling's trillion pound hangover any time soon!

Let's face it - the changes we need to make in order to create a viable economy are going to be different from any other recession recovery.

We need to devise a sensible and realistic plan for a financially healthy future both on an individual and national basis.

Please see previous entry for the text version of my presentation.

State of the UK Economy

The great problem with democracy and a 5 year election cycle is that there is little incentive for the Government to speak the truth or candidly make honest forecasts. In October last year the Government and Bank of England were ‘pretending to be surprised’ that the forecast contraction in GDP for 2009 was at 0.5% and not the 0.3% they were expecting. With car sales already down by 30% and retailers already holding their New Year sales at that time, any sane person could predict that the decimal point was likely to be on the wrong side of the point five percent.

What I find truly staggering is that every statement, whether by the Government, Bank of England or financial commentators, talks of ‘when recovery will come’.

I would raise the scenario that there is a strong possibility that recovery will never come and that continuous economic growth is not an absolute ‘given’; that this recession has no previous parallels.

In my view, this is why recovery will not happen:

The birth and subsequent rise of the internet has changed the world and the basic economic principles upon which it used to exist.
Capitalism has always relied upon the ‘the imperfect market’. In the 1930’s a man wishing to buy the best value bag of nails basically had a choice of a couple of hardware shops within his street or town. Today the best value of any goods across the entire world can be identified on the internet within a few minutes at most.

Taking books as one of many examples, we are already nearing the frightening point where the world only needs one ‘’ per industry. W.H. Smith and Waterstones remain in business only for our added convenience but will increasingly be forced to trade on the customers terms until viability finally gives way. Even now these two retailers are forced to provide us with ‘perfect market information’ (where all information is known) on the internet thereby laying their pricing structures wide open for all to compare. The creation of ‘perfect markets,’ is the disaster of the 21st Century and is completely at odds with the model of capitalism.

The High Street will never re-populate since, apart from fast food, no business person can think of any viable business that can compete with internet based businesses.
The internet business model will naturally win every time, since it has no High Street rent and rates and furthermore it can serve every single town, every UK individual, oh…and everyone else on the planet, from one non-prime location.

In recent years the only mass saviour of the British High Street has been new branches of banks and building societies. The reason for having a multitude of such institutions was to offer competition and choice. The principle in play was that every institution offered its own different deposit rates and investors made their choice based on their perception of risk and reward. Originally small building societies paid slightly higher rates of interest, since they were not regarded to be as ‘safe’ as larger societies such as The Halifax, hence more people still invested with the Halifax despite the slightly lesser rates.

The Government has made it clear it will effectively not let British banks and Building Societies ‘go bust’, so it is now dawning on these institutions that there is virtually no risk and reward game to play. As more and more banks and building societies merge, fewer High Street branches will be needed and the smartest institutions will eventually end up with ‘online only’ services. Already most banks offer better online rates than those in their branches.

The writing on the wall doesn’t get any clearer than this!

Once all banks are ring fenced against failure, it follows that the country ultimately only needs one, bank and if the Government was in a position to be frank and honest, this conclusion would already be published. Recent part nationalisation of some of the banks only makes this statement even more obvious but the idea and reality of a one or two bank nation, is something Governments naturally find best swept under the carpet.

The UK individual has no real concept of what the trillions and billions and millions of economic stimulus really means.
In 1995 the world was aghast when Nick Leeson crashed Barings Bank for the then incredible sum of £823 million. It was regarded as an almost incomprehensible sum of money. In September 2007 Gordon Brown told us the Northern Rock bail-out would cost 9 billion and it has now cost us £20 billion. Only 14 years after the Barings Bank crash, it is now generally accepted that current proposed UK plc bail-outs will be in excess of £100 billion and stimulus package figures of a trillion pounds are on the table.

As a sure sign the British public are sheep being led to the slaughterhouse by ‘economical with the truth politicians of every colour’, not one of my 18 employees were categorically sure whether a billion is £100million or £1000million, or £1 million, million! One mathematical wit has calculated that to recite a count from zero to one trillion, would take a person 190,259 years! The point I make is that we are now dealing with such staggering sums that we, as a human race are so unfamiliar with, we can have no concept of the repayment scenario and I would wager that our politicians most certainly don’t either. As such, do we really know what the consequences are or going to be?

Government’s across the world find themselves in a situation whereby bank cash reserves are woefully short of any ability to satisfy significant withdrawals, should any whiff of a bank failure gain hold. May I suggest that we have now realised we have been living in a financial environment that is almost ‘State Ponsi?’

Quantitive Easing: as a general principle, even the least financially savvy person can work out that if this was a sustainable proposition, then every struggling ‘banana republic’ would adopt this option.
Financially hit countries would simply print the money and then order the world’s contractors to build them the finest state-of-the-art roads, hospitals, housing and infrastructure. The obvious catch is that if the country has ceased to have a respected currency, backed by sound fundamentals, then nobody will accept their currency in payment. I’m sorry but this policy has just not got legs in any medium term scenario.

In the 1960’s changes in base rate were always by a minimum of 1%. Goverments then explained that the effect of such changes were too dramatic and ¼ and ½ percentage changes could have significant effects on the pace of the ecomomy. The base rate has fallen from 5% to 0.5% in 6 months! Quantitive easing is a desperation measure with all interest rate cards already played.

The only reason the pound has not crashed further is due to the utter mess in the U.S. and the impending contagion of Armageddon awaiting Europe, where the previously healthy are now chained to the terminally contagious by the ankle and there is no key that fits!

Relative weakness of the pound when compared with the weak should not be misread as strength.

Many 20th Century inventions have had a significant impact on why the current situation is so much more dangerous than the depression of the 1930’s.
For example; if JCB’s, combine harvesters, car making robots and computers had not been invented, the Western economies would still have millions of extra jobs for manual and clerical workers. The data in a large Excel spreadsheet would originally have kept and army of clerical workers employed for months. Manipulating that data can now be done in literally seconds.

These industrial revolutions cannot be undone and hence the employment jobs are lost forever. Mans ingenuity in many ways, is now proving his downfall.

After the Tsunami in 2004 I visited India and when I saw Indian women carrying stones in baskets on their heads, I concluded that mechanical machinery was clearly the most urgently needed equipment. The local state Governor made it abundantly clear “these things are not welcome here, we have plenty of people happy to do the work by hand; machines would be a second disaster!”

The demand for material possessions will continue to reduce and will never regain the levels of the last decade.
The prosperity of recent decades in the West has basically meant that the vast majority of people have created a demand surge, whereby so many houses are now filled to the brim with material goods such that we all have enough TV’s, computers, games consoles and pullovers. This demand surge cannot be genuinely recreated in the medium term and false initiatives such as VAT reductions, ‘cash to scrap’ car proposals can only be a fruitless waste of funding. Goverment borrowing to create fake demand cannot be sustainable and is simply a ploy to create favour with the voters. The fact remains that the vast majority of the West are unable to find a birthday present that any 6 year old hasn’t already got Q.E.D.

Whilst in recent decades the West rushed to satisfy every demand of prosperous consumers, the remaining bulk of latent demand lies in countries like India and China. If we are to be realistic, there is ‘zero chance’ of that demand being satisfied by external goods from Britain and America.

Ever increasing mass demand is now a thing of the past and we need to accept the reality of the situation. Living in denial simply makes the problem harder to deal with when we eventually admit the truth.

Low interest rates are hiding the true ecomomic situation from much of the nation; the headache hasn’t kicked in yet.
In the long term world economies cannot be run on minicule base rates; one reason being that the tool of lowering rates to stimulate economies or regulate inflation is lost. Many working people in the UK are currently living during the recession whereby perversely they have more disposable income than when their mortgages were higher. Yet again the Government is letting people live in false reality which is not sustainable in the medium term.

So what should we do?
Individuals and businesses should decide if the above principles and statements are broadly true or false.

If they seem to be sensible, the first act is the acceptance of the situation that Economic Growth ‘per se’, is over, probably for good, particularly in your own lifetime. Visualise an iceberge under the surface with just the tip showing and you see my vision.

My advice would be start acting with caution and try to make lifestyle adjustments by assuming the worst and hoping for the best. Let others buy more shoes, pullovers and their 4th TV if they so wish but try to buy only what you sensibly need.

If you have a job, work your butt off! Those who think it is ok to have a day off in the snow may soon rue that mindset; they may never work again. Assume that your boss knows everything, would be a good criteria to adopt.

If you have cash, think ‘big picture’. Consider buying say 6 currencies on the basis that, if a couple of these countries really hit the wall, you do not lose everything. Think in terms of defending your cash capitol rather than looking for big gains or worrying about minor variations in return.

Strong businesses should entrench to where their core skills are and try to ‘stick to their knitting’, at all times questioning all their processes and methods. Bosses should do everything to keep up good morale amongst the workforce, working hard to engender feelings of security and loyalty.

Already it is clear that wealthy businesses and individuals have an easy line of cash facilities at fantastic rates, since it is the safest way for banks to meet the lending targets laid down by their new masters.

Vulnerable businesses which are short of cash, unfortunately should realise that no matter what the Government wishes, the banks will appease lending levels forced upon them by Government, by lending to those who least need it. Struggling businesses would be wise to take in strong partners without delay. Realistically the heavily criticised banks are highly unlikely to lend into areas representing any level of meaningful risk.

In conclusion
The Government needs to make a start by giving the nation a few spoonfuls of honesty and reality. The very best hope of creating some sort of recovery is by letting the ‘depression’ happen and getting the populace used to a less indulgent form of materialism.

If the world does not need more petrol motor cars then simply throwing good money at it can never be a solution.

If internet businesses, hydrogen cars and green energy are the viable businesses, then it is these that must emerge, however painful it may be for the, now lesser needed, conventional businesses.

To the Government; stop borrowing, stop printing money and stop kidding yourselves and your people with misplaced hope.

The internet is only 20 years old and along with other factors has changed the world irrevocably. It is clear that traditional economic fixes used in the 30’s, 70’s and 90’s are not relevant to today’s world.

A quick fix just isn’t going to happen and the sooner we face up to it, the more effectively we can adapt to the consequences.

Reading Alistair Darlings ‘apology’ in recent Sunday papers, that the downturn may not end before the year is out, led me to naturally conclude the following:

“Mr Chancellor, you don’t get rid of a trillion pound hangover between one Christmas and the next!”

Acceptance of the above points in my view does not represent a negative attitude. It is an acceptance of the reality which I feel is a positive step, from where people and businesses can adapt and lay plans appropriate to that reality.

Tuesday, 7 April 2009

Up and Running!

Well, we are up and running, there will be much more to follow and I hope some items worth reading and digesting.

Watch this space...