Heed Not the Vested Interests, Forge Your Own Path
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The state of the markets over the past week are not the harbingers of doom that many people are saying, they are, however, a clear sign of extreme uncertainty, even among professional investors and top economists. The basic indicators are confusing.
The Bank of England, for example, is stumped by the apparent strength of the UK jobs market. A recession should mean a sharp fall in employment, but that has not happened yet. The price of gold shot to a record high on Friday, a normal warning of a serious downturn. Yet the price of base commodities, such as iron ore, is also rocketing, a sign of a thriving world economy.
There are two halves to the answer. First is the nature of the crisis gripping western markets. It is driven by the extreme problems in financial services, where greedy banks have invested heavily in dubious loans and compounded the problem by trading them in arcane derivatives. Not only have banks stopped lending, but nobody knows the full size of the losses.
Britain’s economy is heavily reliant on financial services. If you take the widest measure, some 30% of GDP is generated by this sector. Serious problems on Wall Street and in the City would have a disproportionate effect on the wider economy and further reduce an already falling tax take for the Government. Add our rising budget deficit and a faltering housing market and things are looking shaky. No lifeline from vibrant China or India is likely to be strong enough to pull the economy out from the down draught created by America.
Despite Government statements to the opposite, we are facing a gloomy outlook. The Bank of England may well cut interest rates early next month, but its primary duty is to control inflation. This makes it more inhibited than the Fed in boosting the economy. Mr Brown’s reputation for economic competency is falling rapidly while that of the Tories is rising. Mr Brown will try to blame any setbacks on world events outside his control and appeal to voters as the strong man who can pilot the ship of state through the coming storm.
Yet the excuses will not wash. Rising taxes have hit private incomes. The state is running an enormous budget deficit to pay for the barely adequate services that it renders to the British public. In the boom years Mr Brown built up no reserve to compensate for falling revenues in the bad. He cannot afford to pump the economy full of more public spending as he did in the wake of the dot.com crash.
Of course the effects of the slowdown will not be felt at the top of the economy by the Prime Minister or the Governor of the Bank of England, but at the bottom by the ordinary people. Brown has been boasting that the British economy is best placed to weather the storm while various bankers bemoan a complete economic collapse. Remember, each party has a vested interest in making you believe their version of events. Tread carefully in these turbulent times and always plan for the worst while hoping for the best.
