Economic inactivity and the recession

Short the UK

Economic cycle = V or U. This is an end to a twenty five year debt pyramid in the West. That is why we are going L shaped with saw toothed spikes.

I highly commend the writings of Martin Weiss, Market Ticker, David Rosenberg, Mish Shedlock and Gerald Celente. Just in case you find yourself caught up in the delusion of the British elite.

Satyajit Das nailed it best the other day:

"Economic growth was built on Credit pyramid scheme

Das argues the years of economic growth that preceded this recession were essentially a Ponzi scheme built on a foundation of excessive debt and a failure to properly cost carbon emissions.

"The first loan you make is to the person who is most creditworthy, the second to the one that is second-most creditworthy. As you move down the chain, as we saw in the U.S. subprime debacle, you start to lend to people who really have no capacity to pay," Das told the Toronto Star.

"And then it becomes a true Ponzi game because you're assuming that he will then be able to con someone to buy his house for ever-higher amounts to pay back your loan. And that grew across just about everything around the world."

At its root, debt is instant gratification, Das said. During the boom, easy access to credit artificially boosted demand, which led companies to ramp up production.

"So gradually, if this goes on for long enough, we build massive overcapacity, because we just assumed this was going to go on forever," Das said.

Only it didn't go on forever. As in past bubbles, "we discovered we'd bought stuff for excessive prices," Das said. Bad mortgages in the United States sparked a financial crisis that spread across the globe.

Banks around the world still need to deleverage on a massive scale, which will cut the availability of credit and prompt companies and individuals to reduce borrowing and spending, Das said. That, in turn, will eat into growth.

Automakers and other manufacturers that "financialized," or got into the business of financing the things they sell, also face deleveraging, Das said. They also can't get access to money to invest.

"So this is not a financial-sector problem, this is now a real-sector problem," Das said. "And everybody will have to go back to a very old-fashioned way of doing it, so we save our cash flow, save up, build up cash balances and then do something."

Yet, Das is worried world leaders are still missing the key lesson of the global financial crisis: that "there may well be limits to growth."

If that is the case, "how do you fund pension schemes? How do you essentially absorb people coming into your workforce? How do you plan in terms of tax revenues?" Das asked.

"This is what we should be debating, except we're not. All we are basically doing ... is we want the Ponzi scheme to go on, except that governments are now borrowing, rather than the individuals and the companies."

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Once again the sages in our elite who didn't see this coming are wrong with the "green shoots."

This is "L" not a recession.

Growl....

Kelly Mac

Fraser how do you square this 'good news' with this from the Guardian:

http://www.guardian.co.uk/education/2009/apr/20/neets-young-people-education

Johnathan Pearce

Good for you, Fraser, for being fairminded on this issue.

Purnell is one of the few half-decent Labour ministers out there. It is such a shame that Frank Field was not given more of a chance to reform welfare. What a wasted opportunity that was.

Michael Sweeney

Intersting Fraser. Do factor in the following though:

-the Employment Support Allowance is harder to claim than IB was

- this recession is in its infancy, and IB numbers have grown in the past when hope has run out

- working tax credits are very helpful to low earners (though I'd rather see income tax scrapped for up to £10-£12K). Also loans and credit are harder to come by, which means people are more incentivised to generate positive cash flow.

However, I do believe it is far too early to tell. Just who is recruiting in significant numbers at the moment?

Lance Grundy

Fraser, the slide shows historic data for JSA going back to 1979. JSA was only introduced in October 1996. Prior to that those out of work and job seeking claimed Unemployment Benefit or Income Support or both.

JSA brought with it two major changes that mean comparing pre-JSA and post-JSA figures is like comparing chalk and cheese. The increased conditionality of JSA and a halving of the period of entitlement to contributory, non-means tested benefit from 12 months to 6 months, will have had a significant effect on the level of claims. Which is, of course, precisely why they were introduced.

TrevorsDen

Of course there are good signs. Recessions end (even bad ones like this) and if there ARE good signs what does that say about Browns claims of impending deflation? What does that say about the need for QE.

What we do have and will have in spades as we come out of recession is huge debt and looming inflation and rising interest rates.
Inflation helped by your happy fall in exchange rate.

Our growth was fuelled by immigration. As we enter recession many of these will go home rather than go on benefits. Seems to me this will have as perverse an effect on GDP as the original immigration had a window dressing beneficial effect.

You are also saying that Purnell spoke to you and you actually believed him?? Hmmm...

Ian Walker

As a small business owner trying to pick up whatever scraps I can from a completely wrecked market, I will tell you straight that the economy is a very long way from recovering.

I'm about a months away from going bust, and I expect there are plenty of other small businesses in similar circumstances, and you can expect to see them closing down over the next six months. It's still going to get worse before it gets better.

TrevorsDen

So in fact Mr Grundy Purnell was giving Nelson a load of bollocks?

As a classic example of how the interweb works yours is a doozer. I nominate you for the interweb blogger comment of the year.

BTW - re Frank Field. brown must be suffering wet underpant syndrome at the prospect of Field defecting before the election - so what prospect of him being offered a job to shut him up?

TGF UKIP

Fraser, I am much more a disciple of empirical evidence than fancy economists graphs and charts, and I have been posting over the past few months that the picture I am getting from solid motor trade and residential sources in this corner of Northern England is at decided variance from that in which most of the Coffee House wallows so decidedly.

My previous picture is continuing to hold good with the exception that my estate agent contact is reporting not only that she is busier than ever but that the offers coming in are more and more sensible and realistic.

Contrary to all the economists predictions, my instincts tell me that unemployment is still unlikely to go over 3m.

Your Tory friends need to be ready to face a resurgent Gordon at the back end of the year when the economy has stopped falling and when the British economy can be shown to have fallen less than a significant number of others.

Far too much much gloating and complacency on this website both among Coffee Housers and journos. As long as it remains "an economy stupid" election Gordon has everything to fight for especially with your client Osborne as the Tories headline economic mouthpiece.

All this McBride stuff will long be forgotten by the time it really matters.

Fraser Nelson

Michael Sweeney, I agree with you that we're still in v early days. Lance, the DWP data is supposed to be JSA or equivalent, but I take your point about comparability. Add them together and I think we're heading for a record 6m souls on out-of-work benefits - and welfare taking up a quarter of state spending...

Michael Sweeney

TGF UKIP - I too live in the North and have similar stories. However, I think some of the car and house activity is linked to more realistic pricing and also some folks who have cash but are getting such poor saving returns they are spending it.

Regarding unemployment numbers, there are still few sectors that have vacancies in big numbers and business property is a bit of a mess. However, I have also heard that demands for business start up services are growing - many are deciding to become self employed, given the lack of opportunity in the jobs market. Prices adjusting downwards and more business startups may well be the more benign consequences of this recession.

Denis Cooper

TGF UKIP - Rather like you, I suspect that the Tories may be disappointed by the extent to which the government will be able to mitigate the worst effects of the recession, which may translate into a surprisingly close fought election next spring.

They keep chanting the mantra that Labour governments always run out of money, apparently not having absorbed the new reality that this allegedly deflationary environment has provided the pretext for the Treasury to, in effect, borrow large quantities of newly created money from the Bank of England.

That was never the case when previous Labour (and also Tory) governments ran out of money, because it was always in an inflationary environment and there was no possible excuse to set the printing presses rolling.

To recap on just last week's revolution of the "money-go-round":

New money created by Bank of England, used to buy existing gilts from private sector investors: £6.5 billion.

Money borrowed by Treasury from private sector investors, by selling them new issues of gilts: £4.5 billion.

So during the week the Treasury borrowed £4.5 billion from gilts investors to help plug the gap in the government's finances; yet those investors were not left with £4.5 billion less cash available to buy future issues of gilts, as would normally be the case, but instead were left with more cash - £2.0 billion more.

Obviously there must still be some limit to the amount the Treasury can borrow, but it's an enormous help to have the Bank of England rigging the gilts market.

So far, the Bank has spent £35 billion of newly created money buying back gilts, which could become £100 billion just on the current letter of authorisation from Alistair Darling.

Ultimately, the Bank's entire portfolio of gilts might be quietly transferred back to their issuer, the Treasury's Debt Management Office, at no charge; there they could be cancelled, so cutting the national debt at a stroke.

Mark

Fraser, do you get briefings from James Purnell because you've been nice about him or are you nice about him because you get briefings?

Tim Hedges

'IB was seen as a one-off measure for men in their 50s leaving manufacturing jobs that were not coming back' Is there any actual evidence for this - that the Tory Govt knowingly allowed people to lie about their health to get more benefits, or allowed doctors to be 'tolerant'? I have always suspected it but never seen any hard evidence.

Raffles

My old schoolmate Purnell has been quite impressive recently and seems to be quietly making a solid name for himself across the political spectrum. Presumably a McPoison proxy will have the knives out for him shortly as i bet Gordon is not so impressed. Incidentally why is Frank Field still in the Labour Party?

luke

Really good article fraser. You are the one journalist in the country who can get away with graphs!

However, if the first challenge is preventnig rising inactivity, the second is preventing long-term unemployment. That is the other route by which unemployment leads to a loss of talent and skill from the economy and a rising burden on the state. That will be a far harder task for both this government and the next one.

The Bellman

Fraser: Yes, the banks have been stabilised, and, as you say, at an unknown cost, both financially and morally. But do you think that type of 'stability' is worth the name? What would happen if the - increasingly unaffordable - state subsidy were removed?

There is an imperfect parallel with peace support operations: the fighting has stopped, so there must be peace, so well done the UN/NATO/EU/whoever. But how resilient is that peace without the veneer of the international presence? And how good is that international presence for the long-term health of the region?

I wonder how dynamic his modelling is. Britain is getting older, and we're having fewer babies. Quite apart from what that says about our long-term viability as a nation (as opposed to a State), this means fewer taxpayers supporting ever-greater numbers of economically-inactive pensioners. And as TrevorsDen says, our economy is now dependent on immigration, particularly for huge swathes of the grey economy. Just how brilliant is the socialist-engineered multicultural society when these chaps decide that they and their families are better off at home?

Fraser Nelson

Mark, the DWP does regular unemployment briefings and can persuade about half a dozen journalists turn up. There's never a news story, but its useful for the journalists who analyse labour market trends: a very small number. Their office, Caxton House, is behind ours in 22 Old Queen St, so it's never a great strain to pop along. I'm nice about Purnell because I think his welfare reforrm agenda is genuinely bold, and I admire reformers from all parties. But there are no special favours, I assure you.

Luke, thanks - but it's the internet that allows you to blog graphs, and policy at this level. One of the many great things about political blogging is that it creates space for the above for those of us who are interested. No newspaper could justify giving space to what is a rather technical point, and graphs tend to deter readers. But online, we can - our "click to read more" facility on CoffeeHouse also means that I can go on at length for the happy few interested enough to follow the jump on a story with "economic inactivity" in the headline.

Now and again, when politicians whinge about the internet, I think of this side of it: it allows us to go into far more detail on policy that you could ever justify in print.

And, best of all, we're lucky enough her in CoffeeHouse to get superb comment threats from informed people - look at the points made by Michael Sweeney and Lance Grundy, above.

What I blogged above is a fairy typical example of a background briefing given to journalists all the time. Mostly they are off-the-record, but the DWP kindly have permission for me to put the material online. I'm hoping more departments do it - because there are thousands of better policy analysts out there than us humble hacks. The great thing about the internet is that we now can share briefings with you guys. And we intend to do more of it in CoffeeHouse, so if you're into that kind of thing then please keep coming by.

Raffles

Fraser, i read on Guido's site that you had been sidelined by Number 10 for your endeavours. Is this true and if so is it not a feather in your cap?

P Bateman

Is the quality of brain in Englands brain gain superior to that of Englands brain drain, during the period 1999 to 2009,?

ie comparison of Englands gain in professional skills to non professional skills

Ian C

Just because the banks are stablised, thus far, does not mean that the recession is not as bad as expected. The 'inactivity' indicators and patchy positive news could be reflecting the 'the recession is bad but does not affect me' answers to surveys last autumn.

There is no end to the downturn until the toxic debt is removed from the banks and worldwide perception is that US, UK and European banks are well enough capitalised to survive a prolonged downturn.

If there are some who think it does not affect them and can pay current prices for big ticket items, they are more than likely to regret it this time next year.

One swallow etc. The next big test is the outcome of stress tests to US banks - after that Obama will have to cease funding the banks via AIG.
Unemployment is a lagging indicator. perceptions of financial strength are THE leading indicator.

Rhoda Klapp

"we're lucky enough her in CoffeeHouse to get superb comment threats "

I can't decide whether this is a mistake.

Susan Hill

James, I have not been seizing on negative data I have been boring on in these comments for months about the good signs all around me - I did it again at the weekend. Here we go again then. Houses in my area selling well for the asking price and above; roads jam packed; shops both in small country market towns and the large town I use very busy indeed - out of town shopping centre heaving a 9.30 this morning.Garden centre, you couldn`t park your car. Couldn`t get a table to eat at any of 6 nearby pubs on Friday night. Mortgage payments for many down so far so fast there`s plenty of money about.Petrol up a bit again but most other things back down. Good mood. Fine weather.Local builder employing skilled men to work on two large projects for a South African businessman - house being restored and rebuiult double its size in m village has had 36 men working on it since this time last year. Of course some people unemployed and of course some houses repossessed but from where I have been looking for months if you didn`t read the papers or see the tv or listen to the radio you would not know there was a recession.
But nobody ever listens.

mark

http://www.imf.org/external/pubs/ft/gfsr/2009/01/index.htm

Some good data here on what the real cost of this is.

$4.1trillion likely total bank losses. 200bn hit to UK taxpayer.

The banking crisis is very far from being fixed and will continue to drag the UK economy down with it.

See p5 chart - no country in history has been this dependent on credit - add a bust banking system to that mix and you get a depression.

TGF UKIP

Denis Cooper, another very interesting and illuminating post, thank you.

It would seem that the BoE is just as pliable now in the Labour party's interests as is the Civil Service.

Either that or they have calculated, after looking at the Cameron Tories, that Brown is still unlikely to lose the next election to Cameron and Osborne. A conclusion I believe to be only too credible.

Jet

Little late joining the party, but just need to get something off my chest.
Yesterday the Guardian front page was along the lines that the recession is over.
This according to some 'highly intelligent research / analyst'
How can anybody in the right mind say that?? Acyually... the worst pain for many is still to come. What is going to happen when in a couple of years tax and interest rates rise at the same time? How many people will fall short on their loans / mortgages? On top of that we're looking at some severe inflation (hence interest rates go up), which means your daily shopping will go up as well.

It's disgusting how any news paper can print such rubbish and lead people to believe that all is on the road to recovery.
All this propaganda hoping that with this 'fantastic news' people will start spending again.

NOT ME!!