Sadly, I believe that this recession probably has not reached its nadir. I know much evidence suggests it has, but fundamental problems remain that are being masked by the concerted action of governments in the most developed economies i.e. America, UK + Europe, and Japan. Even if recovery is now certain, crunch 2 is already set in motion.
Broadly, the problem was a collapse in confidence in the viability of high debt to income and income to savings ratios in the most developed economies. This was expressed as reduced confidence in the ability of debtors to service their loans. That problem was precipitated by a collapse in confidence in house prices as they reached unsustainable multiples of income in America and later the UK, and then other parts of Europe. That house price situation was mainly enabled by over generous lending criteria and stable low interest rates over a protracted period. At an anthropic level, irrational optimism and competitiveness are the underlying drivers of these problems. At a policy level, governments failed to take into account those human traits to exercise sensible control. At a factual level, it is obvious that no country or individual can continue to increase its debt to income ratio indefinitely, nor should have a high income to savings ratio. However, that is what governments continue to do and allow. Probably most politicians lack sufficient expertise to see and avoid the probelms. Those few that do just hope is to have their moment of glory and money, but be gone when the account has to be settled. This indicates another deep problem, that a system of government by politics is flawed at the most basic level. Government should be run by experts, not by power obsessed self-serving administrators.
Take a look at the video on this useful blog post to see a wise economist explain the debt problem in more detail, as not just a confidence problem, but also an absolute problem. Australian economist Steve Keen explains the problem, and that more trouble is to come.
The Times tell us of Ann Pettifor who also forecast the credit crunch, and also thinks the debt mountain has more trouble in store for us.
So why is the credit crunch yet to revisit us? We need to look at the main tactics being deployed to fix the crisis in confidence; they are low interest rates, public sector spending exceeding revenue, increasing the money supply, deferral of foreclosure on debtors, and direct incentives to spend. The most significant of these is ‘public sector spending exceeding revenue’. This is effectively shifting the balance of the problem from the private sector more to the public sector in the belief that confidence in a larger debtor will be higher. That is a reasonable assumption, but debts must be serviced even by government, and that is funded by taxation, which must then increase in the future. The notion is that as private sector spending slows, public sector spending is increased to help maintain business until private spending recovers. Governments have failed by overusing that tactic, so it needs cautious use. The tactic of ‘reducing interest rates’ is not safe. As we look back at the original problem, sustained low interest rates fuelled the unfounded early confidence that helped lead to high debt to income and income to savings ratios. In addition, low interest rates create compelling disincentives for savings, and low savings levels are part of the root causes of the problem. Further, the increasing retired population partly lives off the interest from its savings, so they will take a less active part in a spending lead recovery and at the margins will be looking for help. The tactic of ‘increasing the money supply’ enables more public sector capital expenditure in the short term, but also increases inflation in the midterm, which erodes the value of savings as welll as debt, further exaggerating the problems of savers stuck on low interest rates. If the problems are not rectified quickly, the tactic of ‘deferral of foreclosure on debtors’ only delays inevitable for many, and buries the remainder in long term debt. Providing ‘direct incentives to spend’ is another disincentive to save and head toward debt, so a lot of this kind of stimulus can also be a bad thing.
In conclusion, I think the wise among us know that moderation in everything is best. We have experienced a period of excess growth and are seeking to diffuse the inevitable correction and return to another period of unsustainable growth with some very strong policies over a short period. It is possible that one strong imbalance can correct another, but the stronger and faster the measures the more tortuous it is to achieve good balance again. I have low confidence that the failed institutions that enabled the problem forged in our human failings have the vision to correct it. I have even less confidence that a system of power obsessed self-serving administrators will ever be effective as government. I expect that even if this situation is rectified in the near term, unless sober experts are appointed to form governments that crunch 2 will one day visit us. On the bigger picture of how we conduct ourselves, perhaps we should question the race back to a hedonistic consumption based life style.
Credit Crunch 2
Sadly, I believe that this recession probably has not reached its nadir. I know much evidence suggests it has, but fundamental problems remain that are being masked by the concerted action of governments in the most developed economies i.e. America, UK + Europe, and Japan. Even if recovery is now certain, crunch 2 is already set in motion.
Broadly, the problem was a collapse in confidence in the viability of high debt to income and income to savings ratios in the most developed economies. This was expressed as reduced confidence in the ability of debtors to service their loans. That problem was precipitated by a collapse in confidence in house prices as they reached unsustainable multiples of income in America and later the UK, and then other parts of Europe. That house price situation was mainly enabled by over generous lending criteria and stable low interest rates over a protracted period. At an anthropic level, irrational optimism and competitiveness are the underlying drivers of these problems. At a policy level, governments failed to take into account those human traits to exercise sensible control. At a factual level, it is obvious that no country or individual can continue to increase its debt to income ratio indefinitely, nor should have a high income to savings ratio. However, that is what governments continue to do and allow. Probably most politicians lack sufficient expertise to see and avoid the probelms. Those few that do just hope is to have their moment of glory and money, but be gone when the account has to be settled. This indicates another deep problem, that a system of government by politics is flawed at the most basic level. Government should be run by experts, not by power obsessed self-serving administrators.
Take a look at the video on this useful blog post to see a wise economist explain the debt problem in more detail, as not just a confidence problem, but also an absolute problem. Australian economist Steve Keen explains the problem, and that more trouble is to come.
The Times tell us of Ann Pettifor who also forecast the credit crunch, and also thinks the debt mountain has more trouble in store for us.
So why is the credit crunch yet to revisit us? We need to look at the main tactics being deployed to fix the crisis in confidence; they are low interest rates, public sector spending exceeding revenue, increasing the money supply, deferral of foreclosure on debtors, and direct incentives to spend. The most significant of these is ‘public sector spending exceeding revenue’. This is effectively shifting the balance of the problem from the private sector more to the public sector in the belief that confidence in a larger debtor will be higher. That is a reasonable assumption, but debts must be serviced even by government, and that is funded by taxation, which must then increase in the future. The notion is that as private sector spending slows, public sector spending is increased to help maintain business until private spending recovers. Governments have failed by overusing that tactic, so it needs cautious use. The tactic of ‘reducing interest rates’ is not safe. As we look back at the original problem, sustained low interest rates fuelled the unfounded early confidence that helped lead to high debt to income and income to savings ratios. In addition, low interest rates create compelling disincentives for savings, and low savings levels are part of the root causes of the problem. Further, the increasing retired population partly lives off the interest from its savings, so they will take a less active part in a spending lead recovery and at the margins will be looking for help. The tactic of ‘increasing the money supply’ enables more public sector capital expenditure in the short term, but also increases inflation in the midterm, which erodes the value of savings as welll as debt, further exaggerating the problems of savers stuck on low interest rates. If the problems are not rectified quickly, the tactic of ‘deferral of foreclosure on debtors’ only delays inevitable for many, and buries the remainder in long term debt. Providing ‘direct incentives to spend’ is another disincentive to save and head toward debt, so a lot of this kind of stimulus can also be a bad thing.
In conclusion, I think the wise among us know that moderation in everything is best. We have experienced a period of excess growth and are seeking to diffuse the inevitable correction and return to another period of unsustainable growth with some very strong policies over a short period. It is possible that one strong imbalance can correct another, but the stronger and faster the measures the more tortuous it is to achieve good balance again. I have low confidence that the failed institutions that enabled the problem forged in our human failings have the vision to correct it. I have even less confidence that a system of power obsessed self-serving administrators will ever be effective as government. I expect that even if this situation is rectified in the near term, unless sober experts are appointed to form governments that crunch 2 will one day visit us. On the bigger picture of how we conduct ourselves, perhaps we should question the race back to a hedonistic consumption based life style.