Britannia Radio

TELEGRAPH   29.10.08
1.The bigger the party, the longer it takes to clear up the mess

By Jeff Randall

DO YOU remember 1982? Beer cost 62p a pint, petrol £1.59 a gallon and 
the average house £23,600. Prince William was born, Channel 4 was 
launched, and British forces liberated the Falkland Islands.

Labour's unsuccessful candidate in the Beaconsfield by-election, Tony 
Blair, lost his deposit. Unemployment broke through 3m, a post-war 
record. It all seems a very long time ago, yet not everything has 
changed.

In October 1982, Japan's main stock market index, the Nikkei 225, was 
trading at 7,160. Earlier this week, it dropped back to that level. 
Yes, after 26 years of extraordinary industrial and technological 
development, Japanese shares are no further forward than when the 
compact disc was introduced.

Between then and now, of course, Tokyo investors have enjoyed, if 
that's the word, a stomach-churning ride. In the late 1980s, the 
bubble years for Japanese property and shares, the Nikkei surged 
through 20,000 and then 30,000 to peak at 38,915 in December 1989. At 
that time, deluxe property in the capital's Ginza district was 
fetching up to $140,000 per square foot.
Doing business in Tokyo, it seemed, was little more than a get-rich-
quick scheme. Most prominent among British players was Christopher 
Heath, then head of Baring's operations in Japan. His income was 
astronomical, and so too his spending. He loved the high life, 
especially racehorses.

He once took me for an expensive lunch to explain how price-earnings 
ratios of 80-100 for Japanese companies were justifiable, even though 
shares in their British rivals were trading at 10-15. His line was: 
"Conventional measurements of corporate performance don't apply in 
Japan." That was true - but only for a short while. Soon enough, the 
law of financial gravity began to work on the portfolios of Japanese 
punters. When the bubble burst, property prices collapsed, securities 
companies went bust and the Nikkei embarked on a dispiriting 20-year 
journey of value destruction.

I mention this as an antidote to those who keep telling me that 
because share prices have dropped sharply in recent days they must be 
cheap. These are the same people who said that British equities 
represented "remarkable value" when the FTSE 100 fell back through 
6,000, then 5,000 and finally 4,000.

The index closed last night at 3926, about 43pc below its peak of 
6930 (reached in December 1999). At that level, if you are prepared 
to take a very long view, the advice of the bulls will undoubtedly 
pay off. By a very long view, I don't mean the end of this year, or 
next, or even the one after. History tells us, the bigger the party, 
the longer it takes to clear up the mess.

Cambridge University's Clare College has just taken out a 40-year 
loan of £15m, enabling it to invest in equities, with the aim of 
reaping a profit half way through this century. That's what I call 
forward thinking. By contrast, those who are betting heavily on a 
swift and full recovery in share prices could find themselves in 
serious trouble. For them, the form book contains a horror story.

Just before the Great Crash of 1929, London's All Share Index touched 
39.80, having jumped by 73pc in eight years. After the bust, however, 
the All Share did not go above, and stay above, its 1929 peak until 
1953. A full recovery took 24 years. And before you say, "that's 
because of World War Two," let me point out that the index crept 
above 39.80 in 1944, reaching 41.41, but slid to 35.15 during the 
coronation year of 1952.

Pension pots, including mine, are taking a fearful beating. More than 
£150bn has been wiped off our long-term savings in this year's market 
mayhem. House prices, another form of wealth accumulation, are also 
in retreat. For many who were hoping to retire in 2009, there is a 
scramble to stay employed.

While the Prime Minister hails the "success" of his bail-out for 
banks, investors are working out that the cost will be a burden on 
taxpayers for many years. Those who promote the idea that share 
prices are being driven down by "irrational fear" are wrong. Risk is 
being re-priced to reflect the reality of where we are. Stock market 
gloom is a symptom not a cause of that.

As the tide of excess goes out, we are left with a world of over-
stretched consumers, businesses and governments. Here on The Daily 
Telegraph, we always said that too much debt would get them in the 
end - and it has.

Back in 1982, Michael Jackson launched "Thriller", an album that was 
to become pop music's biggest-ever hit, with more than 20m sales. We 
didn't know it, but Wacko Jacko's lyrics were a requiem for a 
generation of stock market losers: "You hear the door slam, and 
realise there's nowhere left to run. You feel the cold hold, and 
wonder if you'll ever see the sun."
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2. George Osborne: Slash interest rates to drag Britain out of 
economic nosedive
Interest rates should be slashed to drag Britain out of its economic 
nosedive, according to George Osborne, the shadow chancellor.

By Andrew Porter, Political Editor

Mr Osborne uses an article for the Daily Telegraph to clearly declare 
for the first time that Gordon Brown's policy of spending to get 
Britain out of recession is wrong.

And he raises the spectre of a decade-long deflationary slump like 
the one that gripped Japan during the 1990s if the Government borrows 
heavily and saddles the country with large debt.

The Shadow Chancellor's intervention signals his determination to re-
assert himself on the economic debate after the recent distraction of 
his "Yachtgate" involvement with Oleg Deripaska.

The Bank of England cut interest rates by half a point to 4.5 per 
cent on October 8 in a move co-ordinated with other central banks 
around the world.

But British business groups and a growing number of independent 
economists say that was not enough and are demanding more sharp 
reductions in borrowing costs to stave off the worse effects of the 
economic downturn.

While acknowledging that the decision has to be made by the 
independent Monetary Policy Committee, Mr Osborne today makes it 
clear that he too believes a significant rate cut is needed.

He writes: "It is a statement of fact that, with interest rates still 
at 4.5 per cent, there is plenty of scope to stimulate demand with 
lower rates."

The Conservatives have been attacked for appearing to agree with the 
"Keynesian consensus" that spending out of trouble is the right 
course of action.

But Mr Osborne for the first time unequivocally distances himself 
from the plans which he calls a "spending splurge" and a "reckless 
gamble."
He says: "This is exactly the wrong approach - the policies that got 
us into this mess cannot be the ones to get us out of it.
"It doesn't work. Look at Japan. Between 1992 and 2002, Japanese 
government net debt grew by 58 per cent of GDP. Over the same decade 
the economy only grew by 9 per cent. The end result was a crippling 
debt burden and a landscape littered with the evidence of endless 
white elephant public works programmes."

Alastair Darling, the Chancellor, will today set the framework for a 
new set of financial rules that will ultimately replace the old 
fiscal rules that have guided Labour for 11 years.

Mr Osborne says that scrapping the rules will "mark the destruction 
of the final remaining pillar of Gordon Brown's economic legacy".