It is extraordinary that Conway can write this article without mentioning that we have overborrowing to a staggering extent and must pay back our debts for years to come before prosperity can be found again.
The second article forecasts today’s Bank of England decisions. Now that it is clear that QE has only served to enrich foreign banks and shore up the financial structure of our own banks and has totally failed to increase lending to sound companies needing to’roll over' their debts and for mortgages, all the government can think of to do is impoverish us still further by upping the stakes in this desperate gamble.
Christina
TELEGRAPH
9.7.09
1. When recovery comes, it won't feel like one
The end of the recession will merely be the start of a long, painful journey, says Edmund Conway.
It's a game of far more than two halves: more tactical than cricket, more stomach-churning than boxing and more complex than bridge. Throughout a magnificent summer of sport, one competition has lasted longer than any other, and generated the most heated debate. Its goal? To guess when the recession will end.
Every week, it seems, has brought new economic indicators, good or bad. Indeed, the whole thing has recently descended into farce: first, economists were tripping over themselves to declare that we were heading for a "V-shaped" recovery, in which we soared out of the downturn at speed. Then they realised that the economy had contracted in the first three months of the year at the fastest rate since, most probably, the 1930s (the quarterly figures don't go back that far), and started talking about "double dips". [These are the facile guesses by economic journalists and NOT by economists. -cs]
In fact, from a technical point of view, we are close to the end of the recession, in that economic growth is probably stagnating rather than shrinking. But this misses the fundamental issue: this recession was unlike any we've experienced since the Second World War. All the old yardsticks – those that measure economic expansion or contraction, for instance – are of limited use.
What we must fear this time is not the recession, but what follows. In 1931, in a lecture in Chicago, John Maynard Keynes spelt out the lesson we need to remember. The spring of that year had, much like this summer, been dominated by the search for green shoots. Markets had bounced back after the Wall Street Crash; industrial production had started to level out; confidence was returning. But, the great economist warned, "it is a possibility that the duration of the slump may be much more prolonged than most people are expecting and that much will be changed, both in our ideas and in our methods, before we emerge. Not, of course, the duration of the acute phase of the slump, but that of the long, dragging conditions of semi-slump, or at least sub-normal prosperity, which may be expected to succeed the acute phase."
In other words, it is not the recession itself that will change the way we view our economy, but what follows it. It might feel like an eternity since the banking system collapsed, but as we impatient humans frequently forget, economics is a slow-motion affair. Having undergone a life-saving emergency operation, we are (in structural terms) still barely out of the emergency room, and still under the heavy anaesthetic of lower interest rates and fiscal stimulus.
This, perhaps, explains the strange feeling that many people have, which is that it doesn't really feel like a recession at all. Most of us still have our jobs; even those whose companies are under threat of collapse are able to stave off unemployment by cutting back their hours and taking breaks from work. Consumer consumption has hardly come to a standstill: many restaurants are still doing good business; mocha frappucinos are being downed; life goes on.
Yet recessions are, by their very nature, events that affect only a minority of the population. Throughout the next few years, most of us will keep our jobs and be broadly unaffected by the ordeal. But there will be no return to the boom years: the recovery will instead take the form of a long convalescence, one that has barely even begun. [It won’t begin at all until the state stops quantityative easing and starts to pay back all Brown’s vast borrowings. That alone will take a decade or so -cs]
Neither is the gloom about to lift any time soon. At some point in the not-too-distant future, the anaesthetic will have to be cut off – interest rates must rise, the Government must start cutting its deficit and either reducing spending or raising taxes. Indeed, the International Monetary Fund spelled it out yesterday: while every other major country has budgeted to spend at least something on measures to lighten the downturn next year, Britain's parlous position means we will not been able to put a bean towards another stimulus.
Meanwhile, unemployment is already on the rise: the number of people in work has fallen by 400,000 in the past year – the biggest drop since comparable records began in 1971. Many of the jobless are City workers with a bit of money to support them, or university graduates unable to find work (the case for one in five young men between 18 and 24). Redundancy hurts, as does failing to get an internship after college; but neither is as bruising as facing years of repeatedly trying and failing to find a job.
In terms of house prices, the worst of the price falls are over, but the prospect of buying has become no easier for the majority, because borrowing money is so difficult. [It’s QE again - it’s not working and costing us our whole national prosperity -cs] The Bank of England's interest rates are at near zero, yet banks are offering three-year fixed-rate mortgages at more than 6 per cent. And although the banks are making profits again, and financiers may award themselves even bigger bonuses, it is likely to be just as ephemeral, especially when the Government's grand pledges to clamp down on City excess actually become law. Even if yesterday's White Paper doesn't do for the bankers, there will still be intense recrimination from the masses of the unemployed in the months and years to come.
In other words, we might well be coming out of recession. But for almost every section of society, the recovery will feel anything but.
2. MPC to hold interest rates, but increase QE
The Bank of England's Monetary Policy Committee (MPC) is expected to leave interest rates unchanged at 0.5pc and to increase its programme of quantitative easing by £25bn to £150bn today.
By Angela Monaghan
The move to pump more newly created money into the economy through the purchase of Government bonds and other assets would follow a stream of worse-than-expected economic data in recent days, and a lack of evidence that the programme of quantitative easing is having the desired effect.
"QE is not yet achieving its aims. The amount of money held by companies, and lending to businesses, both fell in May. More forceful measures are needed to nurture confidence," said David Kern, chief economist at the British Chambers of Commerce (BCC). [He’s still living in ‘Never-never land’ -cs]
The MPC has so far committed to spending £125bn on QE, £25bn short of the £150bn authorised by the Chancellor. The BCC called for the ceiling to be lifted to £200bn.
Separately Halifax said said on Wednesday that house prices fell by 0.5pc in June, despite reporting a 2.6pc rise in May, trampling on hopes that house prices have reached their bottom. The average house price in the UK is now £157,713 according to Halifax, 12.5pc lower than a year ago.
"It is far from clear that prices have bottomed," said Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors. "The combination of further job losses and a continuing lack of mortgage finance remain major headwinds for the market," he said, commenting on the Halifax data.
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