"Recreational Dancer"

This weeks headlines:

1. Pre-Budget Report
   
2. CitiGroup (the worlds largest bank) bailout, $300bn
3. Another bailout, this time $600bn
4. Obama names his economic team, and Wall Street likes them
5. We own RBS, 58% of it to be precise, ergo RBS employees are civil servants
6. Bonuses will be down around 70%-100% for bankers
7. Woolworth's has gone into administration
   
8. The Bank Of Essex will be founded soon
   

1. The Pre-Budget Report (PBR)
As I mentioned before the government will try to stimulate demand by cutting taxes and this is what they have done:

• VAT cut by 2.5% for a year
• Introduced a top rate of tax of 45% on those earning over£150,000 per year
• Increase National Insurance by 1% from 2011
• save £5bn in efficiency gains.

However the main news is the projected borrowing figures. In 2009-10 alone, the government predicts that it will borrow £118bn, and only £15bn of this debt is from the fiscal stimulus. The government debt will rise from 40% of GDP at the start of the crisis to over 57%. Do you remember Gordon talking about prudence, about the end of boom and bust? Well, we had a massive boom, and now here comes that bust.

To make matters worse, all these figures are based upon the very optimistic assumption that economy will start to pick up again in the summer of 2009 and that by 2010 we will grow by 1.25% and that in 2011 by 2%. Very few forecasters are this optimistic, even the Bank Of England is more pessimistic.

Now if the government is wrong about the growth figures then borrowing will be even larger. Plus he expects growth to return to "trend", which means the average growth rate which is around 2.5%. However economic growth in the UK has been based upon the financial services industry and housing, the two sectors that are being most affected. Oh and he expects to return to a balanced budget in 2015/16, so not after the London Olympics, but after the Olympics in Chicago/Paris/or somewhere else. The government has gambled, only time will tell if it has paid off.


2. US government saved Citigroup from collapse by providing the beleaguered bank with $20bn in additional capital and arranging $306bn in credit guarantees, meaning that any losses over $29bn will be "shared" with the US government. With the US government taking 90% of those losses, not really sharing is it?

Citi is highly leveraged, meaning it has loads of debt and very few assets. For example, if I bought a £100,000 house with a £10,000, I have a leverage ratio of 10 (100,000/10,000 = 10). Citi's ratio is 56! That is like buying a £56,000 house with a £1,000 deposit. Now if house prices drop 10%, I lose my £1,000 and another £4,600. This is exactly why the banks have got into so much trouble, their assets are falling in value, and because they borrowed so much they end up losing money, hence the government has had to jump in, pump money into the banks to save them.


3. I was tempted to say this last bailout, but lets go with the latest bailout was to save the GSE (Government Sponsored Enterprises) with $100bn. They hand out mortgages to people who usually can not get mortgages. However it is important to note that these guys pulled out of the sub-prime market, recognising that it was too risky. The other $500bn will be used to buy MBS (Mortgage Backed Securities), and the toxic waste that helped to bring down the financial system.

Here is some bailout maths, all adjusted for inflation, to put the current crisis in perspective:

Marshall Plan: Cost: $115.3 billion
Louisiana Purchase: Cost: $217 billion
Race to the Moon: Cost: $237 billion
S&L Crisis: Cost: Cost: $256 billion
Korean War: Cost: Cost: $454 billion
The New Deal: Cost: Cost: $500 billion (Est)
Invasion of Iraq: Cost: $597 billion
Vietnam War: Cost: $698 billion
NASA: Cost: Cost: $851.2 billion

Total: $3.92 trillion ($3,920bn)
Oh and WWII cost $3,600bn

The current crisis is expected to cost $8,500,000,000,000 or $8,500bn or eight thousand five hundred BILLION DOLLARS!!! Even Dr. Evil couldn't imagine such a large number.


5. The effects of government ownership have already been felt, today the boss of RBS Stephen Hester announced that they will give their NatWest and RBS mortgage customers "6 month moratorium to right themselves before we begin repossession proceedings". The normal period of grace is 3 months, so this extra 3 months will be helpful.


Finally, I have been debating in my head "how bad it will be?" or more precisely "how deep and how long" (sexual innuendos on a post card please). One scenario is "This time it will be different", meaning we're all screwed, and there's is not much we can do about it other than getting into the crash position, and hope the pilot crashes the plane into a pillow factory. The second scenario is "creative destruction" which will pull us out of this doldrums, and as a beautiful girl (who was somehow as interested as I am in the economy, loser!) said "out of the ashes, a Phoenix will rise!"