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!