Friday, 20 June 2008

Blame Game

"All blame is a waste of time. No matter how much fault you find with another, and regardless of how much you blame him, it will not change you. The only thing blame does is to keep the focus off you when you are looking for external reasons to explain your unhappiness or frustration. You may succeed in making another feel guilty about something by blaming him, but you won't succeed in changing whatever it is about you that is making you unhappy."
Wayne Dyer, 1940 - present

With more and more gloomy economic data that has been released in the past few weeks I can't help but think of the finger pointing that will be happening over the next few years. Banks are requiring more money, house prices are falling at the fastest rate since the last recession, job cuts, rising inflation - fuel, energy, food - its all gathering pace into the perfect storm, and one I'm afraid that many informed people have seen coming for a long time. For the general public however all this news will come as a shock as it has happened so quickly. It was only a year ago that people believed this was the new age economy and house prices and stock prices would rise indefinitely. 'Experts' were telling us all of the sound fundamentals of the economy. However now things are starting to go wrong, the finger pointing begins.

The fingers are already being pointed at the government. They lost the recent local elections, by a huge margin, and then the Crewe by-election. Then the blame towards the banks - hiking mortgage rates and not giving the people the cheap money they have become accustomed too. However it will not stop there. Over the next few years it is going to get very messy, with more job losses and more repossessions - more than the last recession. The blame game will shift to other people. People such as the 'experts' that built up house prices, for example to such unrealistic levels. One such pundit would be Kirsty Allsop from Location, Location, Location. If you watch this video, you will see how she is completely out of her depth - I actually feel sorry for the presenter (funny how the media and government have recently started talking about first time buyers again after years of neglect, and now that the speculators have headed for the exits). She famously made the comment "I will eat my hat if house prices fall" or words to that effect. Like most other uninformed people she is also a clear believer in that if interest rates are not 15% then we will not have a contraction of credit. Shame she doesn't have a clue about economics. A good case example would be Japan. They had rates near zero for over a decade after their crash - and still houses now are cheaper than they were in 1989. Of course it could be any of the pundits, each one selling the dream and the untold riches to be made. The public will be looking for blood when the drops really pick up. It's all been one big pyramid selling scheme. Property 'experts' Inside Track have gone bust already - before the bust has even begun. All these investment clubs are cons and will no doubt be a focus of blame for the people who gave them money. The only person you can trust when it comes to financial advice is yourself. You have to understand a market yourself before you invest in it - and all good investors will tell you this. When an 'expert' says this market is a one way bet, its time to walk.

Property will be one of the major factors in the current crash. Why? Because people have abandoned saving or pensions and gone for property, when in reality their new property pension is nothing more than a pile of debt. Money that does not exist and is based on future earnings. The "wealth" in peoples homes is little more than huge sums of debt that over leveraged investors and poor first time buyers have been willing to commit to. This new land "wealth" has further eroded the UK economy's competitiveness. Savings and productivity have been sidelined, for the new age economy (remember the new age economy during the dot com boom, or the roaring 20's?). Perversely finance has become the key, the engine room for UK PLC, which relies heavily on land prices in order to issue more debt and make more money. So what happens when no one wants to take out the debt thus depressing the land values? I'm afraid there is no plan B - and there never was. The above has been the easy solution for the government and the public, a short term ploy to gain votes. Leverage works both ways - when prices rise you make more money - but when prices fall loses are multiplied and everyone needs to exit the market and cover their margin calls, which is what will happen when people who have geared heavily in BTL. Then the whole pyramid will come collapsing down.

People always have a view that when things go wrong, it is for some reason not their fault. It's much easier to blame others and fend off responsibility for the predicament they face. You see this all the time in the real world, at work, at home, even children from a young age learn this trait. People will blame the wrong groups for the wrong reasons, when in reality, everybody has to carry the blame. It is us as individuals who vote for the politicians that implement the economic systems that we favour. It is our fault if we have become politically inactive and indoctrinated by the state. However people will not see it like this and will choose to blame certain institutions for the wrong reasons. So how could the impending UK recession/depression have been managed and our country been better prepared to deal with the downturn.

Well the current government have not helped. They have squandered billions of pounds while in power and are now in serious debts. Not only do they have approximately debts of 40% of GDP, running budget deficits but with the PFI projects that have taken place over the past decade have incurred further off book debts. These will have to be paid for in the coming years and will put further strain on government resources. The UK has a trade deficit, and this will only get worse as north sea oil depletes - a real issue that will come home to roost in the coming years. Tough decisions were not taken regarding public services, consequentially they will not be able to deliver these services to an adequate standard to future generations. We entered a costly war, in Iraq and took part in the "war on terror". When Gordon Brown came to power as chancellor in 1997 he famously said "No more boom and bust" but should have said "You thought the Tories were bad - it will be much worse under us". So the government have let down the people to some extent - but then people will insist on tunnel vision voting, as long as house prices rise, that will do.

The Bank of England along with the Federal Reserve have also created the biggest asset bubble in history. They pursued a policy of pumping massive amounts of money into the system and encouraged society to go spend, and essentially waste money. Central Banks are not as competent as people like to believe. There is an aura around them, as though they know how to handle all economic situations. They don't. Or they do, but their actions go against what decisions should be made. The Fed held interest rates at 1% for roughly a year. People at the time said that it was madness, but were ignored. Recently they have cut their rates to 2% - again this is madness and let me explain. In the face of rising inflation, they are effectively bringing more money into an economy, that already has too much (The FED stopped reporting Broad Money Supply M3 since 2006). Commodities are going up, this is one type of inflation, supply demand imbalances (although inflating a currency exacerbates this form of inflation). The other is monetary, where the institution that issues the money supply can raise the amount in circulation by cutting interest rates. This is one thing people can't understand. We all hold the currency yet most of us want lower interest rates during high inflation times. When in reality we are asking the government to devalue the money we hold. Its like being a shareholder and asking to company to make a rights issue thus lowering the value of the shares we hold - effectively throwing money away. All this cutting of interest rates is completely counterproductive and will make the downturn worse. It just leads to higher inflation, thus people in effect are robbed of their savings and have to spend more of their wages to purchase core goods such as food and oil which are rising in price. As Lenin said

“The best way to destroy the capitalist system is to debauch the currency”

Effectively he is saying that devaluing a currency is the best way to destabilise capitalism. Central banks should at least be keeping rates on hold, or better raising them. Real interest rates that we actually pay as consumers, that is rates on mortgages and loans have gone up as the markets are pricing in real interest rates, so like I say cutting rates are counterproductive. Yet people fall for it and cheer when central banks bring down interest rates. It's a ploy so in the next few years they can say "Well we tried cutting rates to save the economy" rather than getting blamed for doing nothing. The Bank of England has not been much better. At least the Fed put the brakes on the economy 2005/2006 successfully. The BOE couldn't even do that correctly and dropped interest rate in 2005 - putting more unnecessary liquidity into the system and further expanding the broad money supply. The fall out will be worse than what the US is experiencing.

Along with central banks another sector to blame is finance, which has become key to the UK economy. Financial engineering rather than scientific engineering has become the new 'in' job. However this will not last and will contract significantly over the coming years. Lots of people will loose their jobs in all areas of finance. It was during the Regan and Thatcher reforms in the 80's that has led and built up to this peak. Many financial betting instruments were invented during this period. One of the major financial innovations was mortgages being sold as bonds. The idea is to get a whole set of similar mortgages and sell them as a mortgage backed security (MBS) that can be easily traded and is portable. This market exploded in the eighties as leverage became fashionable. Louie Ranieri and others at the Solomon Brothers were the first in pioneering these new devices. This has been taken to new levels with sub prime and derivatives. A lot of worthless junk that will soon come tumbling down. We've only just started announcing the initial losses.

There is no new age economy and finance is just a fad, that actually brings little productive elements to the economy. At least with the tech bubble, it improved business productivity in the long run. People in financial centers such as London and New York are getting million pound bonuses and think this is normal. This isn't normal and just highlights our age of excess. These financial areas will see significant declines through the next decade as this whole debt ridden mess unfolds. If anything, the financial sector decreases productivity of an economy, all this debt, mal-investment, market bets and short term investments based on a reward system that looks at the short term rather than the mess it will cause later down the line. So we can definitely blame this area.

Sadly the above two will get little mention or debate with the general public. The government will be public enemy number one along with all the experts. One good thing may come of all this. Public debate of politics once again. Sadly our political system is hardly diverse. Labour may have carried out Tory policies over the past decade but the Tories haven't changed. They offer no real solutions with no policies. The Liberal Democrats seem to offer something different, sadly though many people will never vote for them. Their Shadow Chancellor Vince Cable warned of the impending housing bubble for years and was the only mainstream politician I saw who talked about it. Will people engage? I doubt it, no matter how bad it gets. Our society is becoming less aware of current events and social political decisions that are being made. I think this video best sums up our society. We are interested more in finding out what 'celebrities' are up to, the latest footage of big brother. It's all part of dumbing people down making them less aware and active. Accepting our leaders decisions as most of us are now incapable of understanding their implications. The television has become modern societies new religion, telling people what to believe, controlling people without them knowing, taking decisions out of their hands.

Since the thatcher reforms during the eighties British society has become much more divisive. Social mobility seems to get worse, as children from asset rich parents have more choices and opportunities than children from parents with no such security. The media even has a bias towards the connotations they put on news reports, insisting that house price falls are 'bad news', and the middle classes are being squeezed. The BBC are the worst at this type of reporting, although many media entities portray the same images. Ironic that we live in a country that is defined as rich, yet people still struggle with the cost of living, despite the period of deflation we have just had. With the levels of debt that everyone has taken on, I'm not surprised. We all live 'lifestyles' which is basically companies trying to sell you stuff you don't need or use. It worries me how much people spend on excessive material items, yet earn modest incomes. Not all people get suckered into this. I got into a conversation once about watches with one person, as he had one of those cheap £5 plastic watches, and he said he could never understand why people got expensive watches. He met numerous people with such products and always said "well mine tells the time, what else do you need from a watch?". This basic case applies to everything we buy. Those trainers with the "air" bubble, the alloy wheels on a car, designer clothes, Sky digital, paying for ring tones for mobile phones. Age of stupidity, more like age of insanity. Like I have said before, we only have ourselves to blame.

The key to the success of our nation will depend on the next 5-10 years. If we play the blame game I feel our economy and many other western economies will become stagnant for a longer period then the usual length of an economic cycle. If however we all accept part of the stupidity that has gone on and decide to work, invest, open our minds and produce creative goods and ideas, we will see a newer improved nation. In my opinion however, our mind set has changed drastically over the past generation and old habits die hard - stagnation for a considerable time seems more likely as time goes on.