The economic waiting game

Are the green shoots of recovery real or will we see more pink slips?

Knowing what is coming is surely better than not knowing, even if the outlook is dire. But it is not always human nature to want to see something unpleasant up ahead. Most people would rather ignore what is on the horizon if it is not very pretty. In the case of the recession the reluctance to see what is coming is even more troublesome. Instead of looking ahead, many people are choosing to look back. With their rose-tinted spectacles they see a swift return of the years of easy credit, booming markets and fast returns. They seek out newspaper headlines about the ‘green shoots of recovery’ and are filled with a warm sense of hope when the see the stock market rise a little. The recession is bottoming out, they say. The Great Inventory Clear-out is almost over. Soon, the world will be back to something more like normal.

If only that were so. It is all very nice being optimistic and laying out the sun-bed in the hope of catching a bit of a tan. But when a nasty storm is likely to followed by a hurricane, it is better to bolt the doors and strap down anything you want to keep.

This recession will be the nastiest for decades. It is not just the banks that are shot to bits. There are thousands of companies filing for bankruptcy too. Even national governments are facing collapse, some of them none too small.

At the bottom of this twisted mass of headlines and dollar signs are ordinary folk. And here, millions are also being wiped out, economically speaking. As businesses close, ever more people are being laid off. Once it was just part-time and contract workers. But progressively it is middle-class working people, normal people, the back bone of the economy. In much of the developed world these are people who have lived a good life for many years. But they have also borrowed too much on their credit cards and mortgages, assuming the boom would continue. They are people with little or no savings. People who will have no choice but to default on their loans, setting the stage for the next wave of sales declines and cutbacks.

It is here the downward spiral is being fuelled.

Stopping this trend is hard, especially when there is so much debt in the system. The amounts that need to be written off are already huge and far greater than can be easily forgotten. Moreover, as unemployment rises the debts are growing. When Bank of Scotland, one small example, went bust in 2008 it had loans outstanding of nearly $300bn. Yet it had a market value of less than $10bn. There are thousands of banks in a similar situation. Every time house values drop by just a few percent it wipes them out. This is why governments have to keep bailing the banks out and why they see no end in sight. As unemployment rises, confidence falls and house values drop further. Lenders and politician are becoming giddy.

Nor is there any chance of the housing market bouncing back soon. Housing markets don’t do that. Economies need to bottom out first. Jobs need to start being created again. People need to want to spend again. None of these conditions exist yet. The last time house prices peaked in the UK was 1989. Values then fell for four years. Then they stagnated for a further four years. It was 2003 before peak 1989 values eventually returned. The down-cycle lasted 14 years.

If politicians say they know what they are doing in the midst of all this, don’t believe them. We are in an economic maelstrom which has yet to blow itself out. We do not know how long this will take. Nor do we know what many of the consequences will be. We know that there will be higher taxes and that unemployment will rise further. We know that currencies and stock markets will be very volatile. We can be pretty sure that there will be social and political change, some of it grave. But speculating much further is pointless. In the meantime, all we can do is exercise great caution.

And have patience.

We can copy everything except your mother

The trickle of counterfeit cars in China has become a stream. Legal action against copy-car firms has proved almost useless. Without scale how do these companies make any money? See The Economist

Bad press in China

Foreign firms are not just having problems with fakes in China. They are having troubles with fake news too.

This week’s target, on China’s Consumer Rights Day no less, was French carmaker Citröen. Newspapers across the country published pictures of one of its cars being towed to a dealer by four rather bedraggled-looking horses. The car’s owner, Mr Chen, was making a very public show of his fury, they reported. Despite damage which looked suspiciously like the car had been in a nasty front-end collision, Mr Chen claimed instead that the car was defective. It had ‘exploded for no reason’, he told reporters. ….. from The Economist