This is my message to the world vis a vis the car industry.
Banks fell apart, the housing market is still falling apart and the car market is in serious trouble.
The banks have been very badly managed and essentially unregulated since Margaret Thatcher and Ronal Reagan were let loose on the world.
The housing market was fed by the rotten banking system.
The car market has been fed by the severe inflation that became a normal part of the housing market. Now we are seeing the pay off: many billions of Pounds are being asked by the car industry to prop it up.
For decades, the car industry has suffered from over capacity as every car manufacturer has expanded more and more. GM has to be allowed to fail now as the worst of the worst. One UK car manufacturer may well have to be allowed to fail. Don't worry, any slack that GM and the other one leave behind will be taken up by what's left.
I don't know how many tens or hundreds of thousands of us were encouraged to remortgage our houses to "release the equity" but as they did so, they spent the money on new kitchens, on holidays and on cars. Of course, many people will have used it to pay off (consolidate!) their debts. This is what has kept large parts of the UK economy booming over the last decade or so. Now that these three avenues of the economy have been revealed for what they were, we are suffering now.
Bad managers, bad economists, bad politicians.
DW
4 comments:
Dad, can I have the benefit of your experience and wisdom. Why are the powers that be insistent on continuing with the existing economic model post recession.
The short answer is that I think it's all they know.
What they are doing is, check with your mam for the fine detail, called Keynesian Economics. That is, pour money into an economy via tax cuts and increases in public spending. The idea is that this money will jump start the system and get people into work and spending again.
That works in part by means of the multiplier effect. That is, anyone getting a job might, on average, spend 90% and save 10%. So, I earn £500 a week and spend £450: I spend £450 in the shops and so on and the people receiving my £450 spend 90% ... that puts £405 back into the economy in the shops and goods and services ... 90% of that goes back ... Overall, this multiplier effect is worth 1/s which is 1/10% in my example. That means that with a savings rate of 10%, my £500 is worth £5,000.
If the savings rate is 5%, then my £500 is worth £10,000.
And so on.
One well known problem with this model is that it can create inflation. Putting more money into the system increases the demand for goods and services and so prices increase.
At the moment, they see this inflation as a good thing because the powers that be are worried about deflation as the recession bites. Evidence here is shown starkly in the car industry where demand has collapsed and car makers and sellers are discounting deeply. Deflation is seen to be bad because they think that in a period when prices are falling, people put off spending and investing because things will be cheaper in 3 months' time ... 6 months' time ... so the economy stagnates.
The evidence for this is Japan in the 1990s when they had their own property fuelled crisis that lasted 10 years. Japan is a low inflation economy anyway but they went into deflation and stagnation.
So, some sense in what they are doing now to try to stimulate the economy and avoid deflation.
However, my post on the car industry is a real warning because I really think it shows how significantly the UK economy has been skewed by the overly readily available credit over the last 15 years or so.
I also blame Thatcher because I also believe that her policies, both economic and social, started the rot.
Take a look around now and you will see that bankers and investment managers are still trying to convince everyone that they should be seeking investments that will give them higher than normal returns on their money. That is, why sit on a safe pile of money when you can earn more by TAKING SOME RISK. OK for some, but as the global economy is reeling from some senseless bleeders taking stupidly senseless risks and pouring our cash away, I think we should be re educating ourselves a bit.
I get the impression that the City has learned no lessons and is still working towards the biggest short term gains they can. I don't have any evidence for this but I look and listen and don't see anything to convince me that any lessons have been learned here. Madoff, Satyam and Stanford are evidence of a kind for the mentality that worries me, though.
Another aspect of this is that journalists and some politicians seem to think that businesses are all making massive changes to the way they carry on because of this recession. That's not true for many businesses. The survivors appreciate that most recessions are short lived and therefore they DO NOT adjust their long term strategies and plans in any significant way.
For example, many oil and gas companies are forging ahead with their exploration and exploitation investments even though the newspapers would have us believe that this isn't the case. They cite Dubai for proof of this but Dubai is NOT an oil based economy and its worries are largely property and tourism based and not directly oil price based.
Even the major swings in the price of oil over the last year or so did nothing to change oil companies' strategies and plans. Their budgets were based on an anticipated price of oil of $x a barrel and whilst they may have revised them a little for the coming year, they did not panic and make major changes even when the price went to $147 a barrel. They are smarter than to panic like that.
On the other hand, it is well known that Saudi Arabia wants a price of $75 per barrel in order to do what it wants for its country and people. It isn't getting that, however.
There you are, I hope you found that useful and any follow up is welcome!
DW
Thanks for that explanation, it made a lot of sense. I agree with your comments about GM. If their business model is crud (and it has been for years) let them go peacefully. It seems peculiar that in the last recession the UK government forced the closure of almost all pits and few cared at the time and in the long run fewer noticed. Obviously those losing their jobs will have an horrific time, something I never wish to happen.
I get really put out by the obsession with house prices. Why don't people buy a HOME and bloody live there till they die. The government/press should also calling people homeowners when most us have mortgages.
Fair enough: that Thatcher and her antics left me with nothing but loathing for her and her kind. Can't trust those toffs as Dennis Skinner calls them.
They closed the pits and did so in such a way that it seemed the right thing to do. Arthur Scargill was probably fooled by more than any of us into falling for Thatcher's trap.
* Make miners too expensive thus forcing the government's hand
* Make the miners the most militant workers in the country
* Elect an unstable person as leader of the NUM
* Engineer a strike and as you do so ensure the alienation of the workers from the rest of the community
* Lick the cream that has now come your way as the miners force themselves into submission
Thatcher did get more of us to own our own homes, that's true and it's probably a good thing. However, she stuffed the profit motive down our throats at the same time and we became greedy and needy as a result.
DW
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