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It was all just a bad dream


So, that was it. The worst recession in living memory is, if you believe the latest government think tank reports, now over. The recession that Alistair Darling said would be the worst for 60 years (and he recently revised that estimate upwards to 100 years) has passed with nary a whimper in real terms.

True, if you lost your job in the last year or so then you might not see it as being a particularly benign period of history, but really, as these things go, this has been ‘recession lite’, a recession for the generation that doesn’t dorecessions.

Which, of course, makes me and Lance look a bit silly. Having correctly predicted that the recession would actually occur (in marked contrast to 99 percent of economic commentators in the mainstream media), we also predicted that it would be long, deep and painful; a necessary correction to the years of insane excess.

Silly old us, eh?

And yet…

Rather than rant, I’ll simply state my position and vested interest (everybody has one), and where I believe we go from here.

It has long been apparent to me that much of the last decade’s ‘growth’ was predicated on negative real interest rates, which were based on inflation measures that excluded certain asset classes (e.g. houses) and ignored the growth in the real supply of money in the economy. The cheap money was leveraged up further to bid up house prices and other ‘assets’, then extracted from the perceived equity as additional debt and spent on cars, holidays, fake nails and so on.

Some time in 2007 (arguably 2006), the markets began to notice that the emperor had no clothes on. House prices in the US, the UK and many other industrialised countries couldn’t simply keep rising exponentially forever, boom and bust had not been eliminated, and giving huge and often fraudulent loans to people who had no means of paying them back was not good risk management. In short, it was not different this time.

You know the rest, or at least part of it. What should have happened (and I don’t mean ’should’ as in ‘I wanted it to happen’, though I think it might have been a better outcome for all concerned) if the markets were independent, is that the failing institutions with such moronic lending practices were allowed to die, with safeguards in place for deposits, so that the dead wood could be shaken out as quickly as possible, recovered capital could be put to new and better uses and the economy could truly start to recover on a firm basis.

What actually happened is that interest rates were slashed even further below inflation (CPI has remained above target throughout this recession), several of the major central banks started printing money with no firm plan to stop doing so and failed institutions were bailed out and semi-nationalised with taxpayers’ money.

This action has, inevitably, had an effect. With the government now owning large swathes of the banking industry and also buying up government debt in the form of gilts, the situation has apparently stabilised to an extent. But it’s a false dawn, a fake recovery. We’ve simply moved even further from a true free market towards a command economy where the government decides which companies succeed and which fail, and where moral hazard has been introduced to such a great extent that already we are seeing house prices start to rise again, though at the moment that seems more blip than trend.

In other words, nothing appears to have been learned. Excessive debt was the fundamental cause of this recession and excessive debt is being used to ‘cure it’. A cursory glance at some of the economic indicators would have you believe that the worst is now over, but since no practical action – spending cuts, efficiency improvements, tax breaks for efficient businesses, recycling of dead capital – has actually been taken, it seems highly likely to me that all that’s really been achieved is a postponement of the day of reckoning.

So the UK and US governments have borrowed from your children and your children’s children in order to prop up their economies at a level which never was and never will be sustainable.

There are several possible reasons for this. No government wants to be remembered as being in charge when the deepest ever recession occurred. Very few people are capable of taking a little pain today to ward off a lot of pain tomorrow (like going to the dentist when you first feel a twinge in your tooth, rather than waiting for the full abscess to develop). And, as the MPs’ expenses scandal is proving, there are plenty of vested interests in high places wanting to keep the debt gravy train on the rails.

My personal vested interest is a desire for a sensible economy based on real productive growth rather than debt-fuelled boom-bust cycles, for real wealth rather than illusory house-ATM debt and for a stable environment for my children and their children. The anti-thesis of the previous decade’s ‘get rich quick’ pyramid scam, in other words.

Even if the current ‘recovery’ is sustained, it will still not lead to a return to a sensible, equitable economy and society. Unfortunately for some people I think it is likely to fail, which means that not only will we have to suffer the second leg of a major recession, but we’ll have wasted billions of pounds of our children’s and grandchildren’s money in order to pay for a brief respite from the inevitable pain.

This is, of course, merely my opinion. I could be wrong this time. But the last couple of weeks have seen some new tremors starting, this time in the bond markets, as investors in government debt start to either move to more attractive, risky markets or price in the possibility of deliberate sovereign default through debt inflation.

There are always consequences. The bill still has to be paid and it’s growing all the time.

(c) Alex Cruickshank

The author doesn’t like financial Soma.

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