Solutions...

As the economy slips into a deeper recession by the day, the rate at which new 'solutions' to the crisis appear to be growing exponentially. Along with this, they also seem to be becoming increasingly desperate.

An issue (to me anyhow) is that it appears the same people who looked the other way, by ignorance or by design, when the problems were growing between 2001 and 2007 are now the same ones telling us that they have the 'solutions'. Errmmm.... Ohhhkayyy...

I've found a useful acid test when one of these 'solutions' is announced is to consider how we would switch them off when things have returned to normal. If it is difficult to see how they would switch it off without causing catastrophe then you have an idea that is likely to be poorly conceived and short-termist. Here's 2 pertinent examples:

1. Printing money - Usually, printed money leads to further misallocation (i.e. badly spent on things like failing companies or the public sector) making the problem worse. This means 'good' companies struggle to compete and also the budget deficit (government spending gap) becomes bigger and cannot be funded without crippling tax rates. Switching the printing presses off therefore leads to bigger problems downstream, reducing the motivation to stop printing. Viscious circle formed. (all of the above assumes your currency is not spanked by the markets first!)

2. Lower interest rates - Low interest rates in recent years have encouraged too much credit. Now the economy can't take 10% rates. Arguably now we can't even take 5%. But 5-10% has been normal for the last 50 years. How do we get back from 1.5% to more normal values. Dear knows!! Oh I know, a lot of pain downstream...

I'd argue that these mistakes have already been done to death. Now we've found we can't get back to normal. Since 2001, too much money has been injected. Our leaders (globally) had the chance to nip it in the bud in 2003 and 2005 but chose not too because there was a risk of recession if they did. They might become unpopular and get voted out. Now, don't we all wish we could turn back the clocks....
(2005 was such a missed opportunity for the UK - I get very frustrated that we chose to reduce rates then when we had the chance to avoid the worst consequences of what we have now)

As solutions come thick and fast, think of how we get back to normal in the long term before concluding whether it is 'the right thing for hard working families' now. Sometimes doing nothing is the better option...

Good News! Rates at lowest for 315 years!

I never used to understand the concept of why people stored 'money under the mattress'.
Now, with rates at 1.5% and banks offering diddly squat to park your money with them, the mattress looks like a very attractive option. At least your cash is at hand and not at risk with people like the Icelandic 'terrorist' banks! (boo hiss)

The flip side of this is that people with debt (particularly mortgagees, HM Government) are celebrating the benefits of the recent changes. I have to admit I find it a little bizarre that people are celebrating...
Below is the GBP Globex Index for the last year (graph produced using http://www.timingcharts.com/). The pound has lost 25% of value over the last 6 months. So, in the long term, this is the equivalent of a loss of purchasing power by 25%. If someone told you you were getting a 25% pay cut, would you celebrate? Thought not...

The law of unintended consequences has a nasty habit of biting in these situations. An example in this instance is that there may well be LESS lending by the banks rather than more lending as the government desires. The banks are struggling to rebuild their balance sheets and need to hold reserves - normally by having bank deposits. But if you offer 0.01% interest to savers, they are likely to take their money elsewhere; so less reserves and hence less lending. This was a point made by Nationwide (boo hiss) who last week said they wouldn't be passing any more rate drops on. The risk they face is that it makes sense for cash to go elsewhere.

Is this what our leaders want? It's very hard to tell in the surreal world of finance at present...

'Quantitative easing'

In the last couple of weeks there has been an increasing number of drip-drip media stories about the Government considering the clever idea of printing money. But we can't call it 'printing money' as that is too crude, plus Joe Bloggs might be able to comprehend the consequences. No, the government prefer to refer to it as 'quantitative easing'.

I prefer the term printing money personally.

Today they've denied that they're going to do it in the near future (http://newsvote.bbc.co.uk/1/hi/business/7817063.stm) which, in the current double-speak world we live, means they are going to do it in the near future - possibly even this year.

Bad idea... Money printing has an inglorious history of catastrophic failure. Be it the schemes devised by John Law in the 1700's or the more recent examples of Weimar Germany in the 1920's, Argentina in the 1980's or the current disaster unfolding in Zimbabwe. It simply will never work as a solution.

That won't stop our government telling us that it is the 'right thing to do' in order to help 'hard working families'. 'Tough times call for tough decisions'. Borrowing another £100bn is a tough decision? Telling all government departments to trim their budgets by 15% to save £100bn sounds tougher (and braver) to me...

Our hand may well be forced by the bond markets. A lot of countries are trying to issue bonds this year when money is scarce. Germany has just struggled to offload £6bn of 10-year bonds(http://www.ft.com/cms/s/0/16c7ceba-dcbe-11dd-a2a9-000077b07658.html). What hope does the UK have with the £146bn of gilts we hope to foist on the market in 2009?

I think the treasury has a cunning plan! (in the Baldrick sense)