london telegraph.

article based on uk but the general effect will be everywhere across the globe as economies today are very much interlocked into one. it's just that politics create time lags. no worries about that.


The economic disaster will get worse
By Edmund Conway
Last Updated: 2:22am BST 11/06/2008


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It had to happen sooner or later. We have an economic disaster that cannot be blamed on Gordon Brown. No, not the collapse of Northern Rock, which the Prime Minister wrongly tried to attribute to problems in the American sub-prime market. Not the slump in house prices, rising unemployment or our stalling economic activity, which are all home-grown traumas.

We face longest era of turmoil in memory, says Bank boss
Read more from Edmund Conway
No, this is 21st-century stagflation: a toxic brew of soaring inflation and slumping growth. Technically, Mr Brown could have done more to prevent the latter, although I'm willing to give him the benefit of the doubt. But the return of stagflation - or globeflation, or whatever peculiar name the wise men will give it - is an international phenomenon, with higher prices generated by China's rising economy and the fear that we may be running out of oil/metals/food/water.

advertisementIts consequences will be keenly felt here on our sensitive, import-dependent island. While we won't see inflation shoot up to 25 per cent as it did in the 1970s, the experience will be no less painful.

Experts, who had assumed that the Bank's next move with interest rates would be down rather than up, are scrabbling to change their forecasts. They are now betting on the apocalyptic prospect that the Monetary Policy Committee will raise borrowing costs as we head into a housing crash. They are also wagering that inflation will remain above four per cent for the next half-century.

This is terrible news for Mr Brown, who was quietly hoping the Bank would come to his rescue and slash rates to generate a bounce in time for the next election. While he may have looked across the Atlantic for his scapegoat last time, this time the culprit - or at least the catalyst - for the chaos is closer: in Frankfurt. For it was there, last week, that the president of the European Central Bank, Jean-Claude Trichet, threw a massive spanner in the works by warning that inflation is such a concern that he is likely to raise euro rates next month.

Having weathered the financial markets crisis (give or take the nationalisation of a high street bank), we are now facing something quite different: a widespread economic crunch that will affect us all. And if this weren't enough doom and gloom, it is worth remembering that the behaviour by central banks in Europe and America is uncannily reminiscent of the spat in October 1987 that helped spark the worst-ever falls in the stock market (though, admittedly, share prices have fallen far enough to make a repeat of Black Monday a near-impossibility).

Either way, life is about to become even more painful - not just for homeowners, who are already having to contend with a fall in the value of their property, but for anyone with a job. Unemployment, already rising, will escalate, and companies will become increasingly reluctant to raise their wages. The standard of living for the average Briton will fall as the cost of living outpaces our earnings. The financial markets are starting to face up to this prospect. It will be some time before the full reality dawns on the wider public, but when it does it will be difficult to stomach.

Whether the Bank raises rates or not, the cost of borrowing for households and companies is already rising; this will accelerate over the next few weeks. With money market borrowing rates almost half a percentage point higher than last week, banks and building societies will soon pass this extra cost on to homeowners in the shape of higher fixed-rate mortgages and higher fees.

If the housing market were in good shape, this would be worrying enough, but coming as it does when prices are falling at the fastest rate since the last crash - by some measures even faster - it is a cause for concern. For all the damage done by higher taxes and regulations over the past decade, the economy is still a better-adjusted animal than it was in the early 1990s - albeit more debt-ridden.

But with mortgage rates spiralling just at the moment when consumers are at their least optimistic, there is no telling how severe the downturn could get. Mr Brown's personal poll ratings may have further depths to plumb as a result - even accounting for the traditional British affection for the underdog.

I used to believe that in economics and politics you make your own luck, and this dictum has applied pretty well for most of Brown's premiership. Having spent and borrowed too much when he should have been putting away cash for rainy days, he is now being punished for it. Unlike George Bush, he has nothing left in the can for major tax cuts, and would have to borrow in order to lower taxes.

This would be unwise. First of all, Alistair Darling has already cut taxes by £2.7 billion for those affected by the 10p tax fiasco; I doubt an extra few billion would make much meaningful difference.

Second, and most important, it would threaten to undermine the economy in more deep-seated ways than one can easily imagine. The two borrowing rules Brown laid down as Chancellor (that the Government must borrow only to invest; and that total government debt should not exceed 40 per cent of GDP) are among the few threads helping us avoid those double-digit inflation rates we saw in the 1970s. The minute anyone sensed that Labour really was preparing to borrow its way out of this, we would be punished by the international capital markets with an even weaker pound and far bigger price rises as a consequence.

The most sensible thing would be to batten down the hatches, keep cutting spending and to borrow as little extra as possible. We will have high inflation for the next year or so, but as the world economy slows, so will the price rises. Although the markets have become overexcited about high inflation, I still suspect the next move in Bank rates will be down - not up. Labour could put this at risk if it went for unfunded tax cuts.

Of course, an eventual upturn won't save Brown from what seems his inevitable fate - any more than it did John Major. However, it may prevent him from going down in history as the man who wrecked the British economy for the first quarter of the 21st century.

There is only one thing that is wrong with the West economically, but it is a massive thing that by itself has and will cause massive damage: free trade with the developing world, ie China.

Onward Chartered Soldiers, on to heathen lands,
Prayer books in your pockets, rifles in your hands.
Take the glorious tidings where trade can be done,
Spread the peaceful gospel --- with a Maxim gun.

Tell the wretched natives, sinful are their hearts,
Turn their heathen temples into spirit marts.
And if to your teaching they will not succumb,
Give them another sermon with the Maxim gun...

When the Ten Commandments they quite understand,
You their Chief must hocus, and annex their land;
And if they misguided call you to account,
Give them another sermon --- with a Maxim from the Mount

There is a liquidity crisis worldwide, not just in the west. It will be felt in China and Japan. India and the Middle east.

I'm very concerned because US can't seem to turn things around. Our Central Bank has used all the tricks in it's bag.



Would you trust this man"

The fed hasnt used everything, not even close, when they start touching the reserve req. than you will know there is a problem.

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filin, what you mean reserve req?
aemrican economiques is down and only going down.

The federeal reserve has 3 essential tools that it can regulate the economy with, easiest is the open market transactions which they have already tweaked with. The more powerful method is the adjustment of the discount rate, which is the borrowing rate for other banks, even though they tweaked with this most banks didnt take the bite as it looks bad for the investors. Third is the reserve requirement, this is the most powerful method and it involves changing the ammount of money banks need to keep on hand thus adjusting the money supply. They have yet to touch that and until they do you have nothing to worry about.

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This is what Joseph Schumpeter and Nicolas Kondratiev called the "long wave", a 50-60 year commodity price and demand cycle, during the 1900-1920 commodity boom Great Britian's economic leadership collapsed under the pressure of demand of the US transition to leadership, something similiar is happening between Asia and America now, American economic influence is retreating under pressure from Asia just like Great Britain failed under the pressure of US economic emergence 100-110 years ago

The US share of global market cap has retreated from 45% to 29% in 4 years and the trend looks to be accelerating if the US economy collapses there unlikely to be any truly safe havens

The only countries that should worry are the nations orbiting around the West.

Siege of Tobruk - One German POW said: "I cannot understand you Australians. In Poland, France, and Belgium, once the tanks got through the soldiers took it for granted that they were beaten. But you are like demons. The tanks break through and your infantry still keep fighting." Rommel wrote of seeing "a batch of some fifty or sixty Australian prisoners ... marched off close behind us—immensely big and powerful men, who without question represented an elite formation of the British Empire, a fact that was also evident in battle."

Playing around with banking's Reserve Requirement (I assume you mean allowing lower reserves in US banks) would be catastrophic in my opinion. Inflation is already too high and that would make it higher. Further, it would put many banks at higher risk of failure.

The best solution is to focus on inflation control in the United States and let the economy seek it's own level. Currency trends are moving in the right direction anyway, with a strong Yuan, Yen and Euro. But it will take political discipline and it wont be solved in 4 years or even 5.



Would you trust this man"

i think we are in a no way out position - let the economy crash and then rebuild to an even stronger one not unlike the crash of the 1920s....i think a war is inevitable as the price for base commodities is far too high and are not going down any time soon.

The US is desperately trying to stop a recession and keep lowering the interest rate's, obviously for people to spend. IMO they should of let the recession happen quicker (it's going to happen eventually), fighting it delays it and makes it worse when it finally hits.

I mean lowering interest rates just encourages people to borrow, and borrowing the sheer amount that is need is turning this into a catastrophic build up. When something goes wrong, i'll collapse hard.

Siege of Tobruk - One German POW said: "I cannot understand you Australians. In Poland, France, and Belgium, once the tanks got through the soldiers took it for granted that they were beaten. But you are like demons. The tanks break through and your infantry still keep fighting." Rommel wrote of seeing "a batch of some fifty or sixty Australian prisoners ... marched off close behind us—immensely big and powerful men, who without question represented an elite formation of the British Empire, a fact that was also evident in battle."

Can somebody explain to me how exactly is an increase a spending by American consumers going to help the American economy? The vast majority of consumer goods are made in China, so two parties wil benefit: multinational corporations who brand these products and the Chinese economy. How is the American economy to be helped by Americans buying Chinese made goods is beyond me.

Onward Chartered Soldiers, on to heathen lands,
Prayer books in your pockets, rifles in your hands.
Take the glorious tidings where trade can be done,
Spread the peaceful gospel --- with a Maxim gun.

Tell the wretched natives, sinful are their hearts,
Turn their heathen temples into spirit marts.
And if to your teaching they will not succumb,
Give them another sermon with the Maxim gun...

When the Ten Commandments they quite understand,
You their Chief must hocus, and annex their land;
And if they misguided call you to account,
Give them another sermon --- with a Maxim from the Mount

Quote: Can somebody explain to me how exactly is an increase a spending by American consumers going to help the American economy? The vast majority of consumer goods are made in China, so two parties wil benefit: multinational corporations who brand these products and the Chinese economy. How is the American economy to be helped by Americans buying Chinese made goods is beyond me.

Who do you think owns stock in those multinationals?



Would you trust this man"

Third is the reserve requirement, this is the most powerful method and it involves changing the ammount of money banks need to keep on hand thus adjusting the money supply. They have yet to touch that and until they do you have nothing to worry about.<



If memory serves me correctly, I think that China has actually done this recently. I believe I heard this on BBC news, caught the tail end of the report. Anyone know for sure?





http://kypros.org/Occupied_Cyprus/lambousa/

Nevermind, here it is:



http://www.interfax.cn/news/2321/



http://kypros.org/Occupied_Cyprus/lambousa/

Chinese banks are structured differently, along with the fact that their economy has a different money supply and a different growth rate.

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good friend filin even tweaking with bank reserve req wont do much as inflation will skyrocket (either way) and american economy is set for a recession (lasting half a decades). speanding on war military poor infrastructure poverty made a natural resource rich country poor this is deserving.

Russia is now 6th largest economy by end 2008 amazing turnaround. american economy is just doomed.

lets hope so, the west will win naturaly

I think you are overestimating the recession, I highly doubt it will last 10 years with all the tools the banks and the government have at their disposal. US economy hit a bump recently but there is not indication that it cant get over it, if the situation does become critical and there is a prospect of depression than adjusting the reserve requirement should help the country avoid that fate.

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your judgment I can respect mr filin but my opinion it is wrong USA fed reserve cant do scht to save their backside from impending crash us$ going down oil price up inflation up unemployment up poverty up storms in iowa blackout crisis pollution grime crime murder income disparity spending in iraq trade deficit china rising russia roarrrrring khaleejis booming iran spreading influence and list goes on. american socio-economic-political future is bleak very bleak

Economic predictions are a roll off dice, how many mutual fund firms have consitant positive results? None, but with monetary and fiscal policies the US has a pretty good control of the economy today. Only time will tell if the fed and congress made the right descisions.

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yes filin this is true ANY prediction is roll of die; however my opinion is different than yours and I say USA is facing imminent economic prolonged downturn.