To save or not to save?

This programme on BBC2 last night addresses one of my major concerns regarding the US and UK economies, the amount of debt. Not just government debt, but personal debt as well. It's an hour long, and worth your time. You have until Monday 1st Dec to watch it as the BBC iPlayer is gay.

Des and Tiny

Another turbulent week, so much is happening that I may have to write twice a week, but only if I could find the time to do so! Again thank you for all your feedback, hopefully what I am writing is interesting, and if you have any questions or if anything is unclear, please do ask. Or even better if you disagree with something, or I have missed something out, contact me.

So here are the big stories of the week:

1. US Retail sales slid by a record 2.8 per cent in October, the fourth consecutive decline and the largest percentage drop since records began in 1992.
2. Banking layoffs. CitiGroup (the biggest bank in the world) announced that it was sacking 20% of its workforce, or another 53,000 with 22,000 already announced earlier this year, so a total of 75,000! Other banks and fund mangers are also sacking people. The City will have a lot less people working in it by the end of 2009.
3. Oil is below $50/barrel. Despite Somali pirate activity! There's even an economic theory about now!
   
4. At least one of the Big Three (General Motors, Ford and Chrysler) are on the verge of collapse. GM is in the worst state, and because the majority of car parts suppliers rely heavily on GM to stay alive, a collapse in GM would take down the whole of the US car industry. In normal times bankruptcy and then reorganisation would be welcome, however these are not normal times. These are extraordinary times, and thus GM has to be saved (something that I would NEVER normally support). The US can ill afford to have an extra 2 million people made unemployed all at once. Bankruptcy and reorganisation can happen later down the road. Here is the article that convinced me to support intervention.
   
5. On Monday we have the pre-budget report coming up. The UK government is widely expected to announce some sort of fiscal stimulus. This can come in two forms, either a tax cut or an increase in spending. The idea is to increase demand in the economy, a quick economics lesson:
   

Aggregate Demand (total demand in the economy) is made up of Consumption + Investment + Government spending + eXports - iMports AD = C + I + G + X - M

• A tax cut will mean that people have more money in their pockets and therefore will spend more, therefore Consumption will increase. Unfortunately it is not that simple, people are likely to save a considerable proportion of the money they get from the tax cut(as they are worried about their jobs), or use it to pay off debts, thus little new money will enter the economy.

• An increase in government spending can take many different forms, however the most cost efficient and therefore the most likely will be an increase in pensions/winter fuel allowance as old people are more likely to spend any money they receive (as there's no point saving it as they might/will die soon).

• As you all know a tax cut/increase in government spending will result in an increase in the government's deficit/debt. Government spending will also increase because of so-called "automatic stabilisers", an example is unemployment benefit. This acts as a cushion/stabiliser against the effects of people losing their job, giving them a little bit of money and thus propping up demand.

• However this will all come at a time when government's income is falling, this is because firms are paying less corporation tax (as they are making less profit, especially the banks which used to make huge profits and thus pay a lot of tax), people are paying less tax (as fewer are in work, and the City bonuses, a huge source of tax revenue, are much lower/none existent). It is estimated that the slump in the City has knocked around £40bn!!! from tax revenues.

• Governments, like you and I, have to borrow this money and then they have to repay it. Who are they borrowing the money off? Well against future tax receipts. Which means from future taxpayers, who will be you and me! And this will have to be funded in the future either by tax increases or lower government spending.

• I expect the government deficit at the height (or shall is say bottom) of this recession to reach between 8% to 9.5% of GDP, that is over£110bn!

• Robert Peston predicts that VAT will increase later in the future, and I agree with him. VAT is a tax on spending. If we were to have a deferred increase in VAT, people would be encouraged to spend now rather than later. However VAT disproportionately affects the poor, as they spend a greater proportion of their income.
  

In other news, I recently went to a posh West End night club purely to do some research on whether the recession has affected the super-rich. As I was conducting some serious research I deemed it necessary to fully immerse myself in that world for the night. I partied hard, maybe too hard, thus my recollections are a bit hazy. The super-rich do not seem to have been affected by the recession. However one of the striking characteristics of this current climate is its volatility, and unfortunately I will have to visit such establishments on a regular basis to ensure that my data is up to date. So if any of you have a table at such a venue, and you have a free seat, who better to fill it than a serious, but fun loving researcher like myself.

I have just seen this and I am shocked. The economy is in worse state that I could have ever imagined!

Dr Doom

If you have 15 minutes spare I highly recommend that you watch this video there is a link on the right hand side on the site, and fast forward to 23:40 and follow it on the transcript. This is the so called perma-bear Nouriel "Dr Doom" Roubini (my hero!) talking about the economic situation and whether things are going to get better or worse, I'll give you a hint, it won't be getting better. I'll be summarsing some of this video in my later posts.

Also I now consider myself a "writer"....I could become Hank Moody in the future!

It is polite to listen to other people's opinions

great video...never listen to people on tv! but maybe just Peter Schiff

Responsibilities

Thank you all for the feedback, I have also received a lot of stick for writing a blog, and the responsibilities that come with it. I have also been questioned as to the purpose of my blog. There are two main ones:

• Firstly to (re)educate those who are interested in the economy and who gain all their economic information from either the LondonLite or another tabloid.

• Secondly to inform people that we are entering a recession (not a credit crunch, although is ones of its features) and to start preparing for the end of the party. Our generation has no idea what a recession is like. We have had it very good all our lives, and as we all know every good party is followed by a painful hangover.

What a week to start my blog. Over 17,000 jobs have been lost this week; that recession train has not only left the station but its beginning to accelerate, rapidly. I thought I would first mention where I acquire my data, opinions and facts from. I rely heavily on several sources, so if you want to go straight to the source, and miss me out, feel free to do so. I will list them in order of preference:

1. First up we have RGE Monitor that "delivers ahead-of-the-curve global economic insights that financial professionals need to know”. The site is headed by my hero Professor Nouriel Roubini, who wrote a paper in Feb 08 predicting the crisis, worth a read if you are bored. The best thing about the site is that at the moment it is free to sign up, “because of the financial turbulence”. So sign up!
2. Next up we have Robert Peston who is the BBC’s business editor. He offers a UK centric view of what is happening. Very good for the situation with the UK banks.
3. FT Alphaville offers updates and opinions throughout the day on anything happening that is relevant to the economy. Some of the stuff even I don’t understand but most of it is simple and very insightful. As there is a lot of information, so focus on the Lunch Wrap; which offers selection of the best articles of the day or search to find what you are after.
4. And finally The FT!

I realised that I missed out a few important events in my last post:

• For starters the lack of credit/money available to everyone from banks, companies to the consumer, and this more than anything will exacerbate the recession. A credit crunch! This is reflected in the 3 month LIBOR (London Interbank Offer Rate), which shows how expensive it is for banks to lend to one another. This has shot up, as the graph shows because banks no longer trust each other, especially after Lehman collapsed. If they don't trust each other, this means that the banks will not lend to busniesses or to normal people.

• This then turned into a liquidity crunch, where because companies could not get access to credit they did not have access to enough money to pay off their liabilities.

• Also the fact that the US and UK governments now own a sizable proportion of their respective banking industries
• Finally it is GLOBAL. Globalisation has driven the world economy and now it will make this recession worse than those before it.
  

Now to a review of the main news of this week:

• 17,00 job losses announced this week. Mainly from BT (10,000), Virgin Media (2,200) and Yell, the publisher of the Yellow Pages (1,300). All these job losses are for so-called white collar workers. It is not the manufacturing sector that is bearing the brunt of this recession, as it has in the past, but the service sector. Although manufacturing has been hit, especially the car makers, it is the service and banking sector that will be most affected. Thus this time round it will be “Grim down South”, with London the worst affected.

• London’s GDP is predicted to shrink by a massive 3.8% (Oxford Economics). The City will lose 35,00 jobs at least over the next two years, and house prices in the affluent areas of London and the “stock broker belt” will plummet. City workers who bought their properties based on the expectation of future bonuses will be forced to sell, as their will be no bonus this year.

• The pound has nose diving lower and lower as each week has gone by. One pound now buys $1.47 compared to over $2 earlier this year. Why does this matter, well if the pound keeps falling any debts that are held in foreign currencies will become larger and larger, as you will need more pounds to pay them off. This will put a large strain on banks and companies that are already being attacked by falling sales, however it will be good news for exporters.

• This article poses a very interesting and worrying question, it asks whether the UK will follow in Iceland's footsteps and default. I believe that George Osbourne read this and then made this statement . Even that is a remote possibility is very worrying. All those jokes about what is the capital of Iceland, soon we could be asking what is the capital of the UK?
• Finally I am not the only one who is so bearish, so is the Bank of England. It has just published its November 2008 Inflation Report, and here are the headline figures. It expects growth to fall to -2% by 2009 and delfation to become the main worry rather than inflation. Deflation is when the general price level drops, the opposite of inflation. This is bad news as deflation can be very bad. Imagine if you know that prices of the goods that you buy are falling, so you decide to wait for a bit and the price will drop, you decide to wait some more for it to become even cheaper. This is the problem with deflation, consumers decided to defer their purchases, and therefore little gets bought. This is exactly what Japan experienced during the 1990's, its "lost decade".

Finally a little rant. I shall be very angry (bare vexed, suffering from inconsolable rage, angrier than a little spoilt girl who cant have that 35th Barbie) if any bank that has received state aid proceeds to pay out bonuses to its staff. I don’t care if you have made millions upon millions for your bank, your bank failed and it lost a hell of a lot more. These banks received state aid (taxpayers money, your hard earned money) in order to prevent them going bankrupt, thus these are failed businesses. The only reason they were saved was because banks are so important to the smooth running of the economy, if they were any other type of business the accountants and lawyers would be in sorting out the bankruptcy. Ergo the fact that they have a job should be their bonus.

It's a start

Hello, I thought I would use this blog (horrid word) as a vehicle to save my thoughts about the current economic climate. I will also try and summarise all the best/worst news from the week gone by (this may be a bit ambitious) but given that I am unemployed it should give me some focus and allow to develop and further think about the issues at hand. So here we go....

As Professor Nouriel "Dr Doom" Roubini (as you will soon understand I love the guy, economically speaking of course) the "recession train has left the station", it probably left about 2 or 3 months ago. So we are in a recession, a big, bad, ugly recession and I would like to call it a depression. As the title suggests I am a bear. For those who are not into their economic lingo (I don't blame you) it means that I am pessimistic about the short term economic future, and why name it after a bear? Simple, when a bear attacks its paw attacks downwards. And when things are going well its a bull market. If you recall the scenes from Pamplona every year where crazy Spaniards are chased through the streets by bulls. They are always tossed up into the air.

I thought of explaining why I am so bearish, but I realised that it would take far too long to explain. So I will do a quick round up of the major economic news to date:

• Largest intervention in the free market, by a supposedly free market country, the TARP in the US.
  
• Lehman Brothers collapsed.
  
• Germany, as of today, is the first major economy to be in recession, the others are just waiting for the formal confirmation.
• Oil has plummeted from $146/barrel to $60
• The Baltic Dry Index which is "an assessment of the price of moving the major raw materials by sea" has nose dived by 93% since its May 2008 peak.
• House prices are falling in the UK, US, Spain, Ireland and pretty much everywhere.

We'll leave it there for now, and I shall come back to some of these facts and explain why they have happened and why they are important.

I will leave you with two facts about the current direction of the economy:

1. In September 2007 Aston Martin sold 150 cars. In September 2008 Aston Martin sold 3 cars.
2. In the 3rd quarter of 2007 Volvo sold 42,000 trucks in Europe. In the 3rd quarter of 2008 Volvo sold 115 trucks in Europe. That is a drop of a staggering 97.3%.
   

So what is my advice? Save some money, however if we all do that we entertain the "paradox of thrift", and then things only get worse, because if we all save more, fewer people will buy goods, so demand will fall, then people lose jobs, so demand falls again, so we save even more.......

So.....use this recession wisely, learn new skills, learn a language, do a masters, and save some money, as this shall be a once in a lifetime (hopefully) investment opportunity, and remember from the flames of a forest fire a new forest shall be born.