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An armchair view

Submitted by: MikeC (Admin) on 09-Nov-08 08:09:33 PM

OK, I'm no economist, but even I sensed when Northern Rock collapsed and oil prices began its upward trajectory, that this was not going to be something that passed 'before the end of the year', as economists and politicians were then telling us.

Well here we are: the end of the year!

We have a situation where banks are obliged, by circumstance and Bank of England monetary policy, to increase their capital reserves. So whereas, for instance, a bank might have loaned £100 and kept £1 (easy credit), now they're needing to keep, say, £10 in reserve (tougher credit).

Check out this vid, Money as Debt, which explains Fractional Reserve Banking far more eloquently than I have time for here.

Upshot is: banks cannot, themselves, lend as much money - or create money - because they must hold more back; meaning, higher deposits from borrowers and savers.


We might look at it another way: the system is conspiring to vacuum money away from the streets, into bank vaults; much like a ship takes on ballast to remain upright.

The Government and Bank of England have so far attempted to act as ballast, re-capitalising the banking system until we, citizens and corporations, dutifully play our part and replace the Government's cash (plus interest), with our own - the Government's cash, of course, being our cash.

Additionally, Government is pledging to borrow more money in order to "pump-prime" the economy in a bid to keep the ship above the waterline and moving.

Looking ahead

So that's today. One might say: 'It will pass'. Indeed, just the other day, I read a comment on a forum that expressed with certitude that:

The market WILL recover and house prices will bounce back, granted they are unlikely to increase at the rate they did during 2004 - 2007 but they will come back.

Note the capitalised, 'WILL'.

Of course, it's easy to claim something will recover without stating a timeline and base from where that 'bounce' will occur. So it might be useful, then, to switch on the radar.

In order for the common man to amass deposits of 25% to secure a mortgage (go with 10% if you want - makes little difference), he/she must now save for years at today's house prices. It stands to reason, therefore, that prices must fall a long way to bring them within sensible reach before transactions begin to flow at somewhere even near the rate we've become accustomed.

As we know, Govt. has - and is - borrowing astronomical sums of money to both bail out banks, and "pump-prime" the economy.

Unemployment is rising, sucking money from the coffers; businesses - as a group - are making less profits; bankruptcies are rising. Each casualty reduces the tax-take, further impacting Govt. borrowing.

We can safely assume, in coming years, that taxes will increase, reducing our future purchasing power.


We are also entering a period when 'baby-boomers' are beginning to retire - the 'pension timebomb'.

At some point, they (we) will want/need to sell their homes to pay for nursing care (if there's enough equity left) or probate. This activity will be a concentrated and drawn-out affair spanning at least a generation.

Oil / Energy

This story hasn't left us: oil prices are low because demand is. In some ways this 'financial crisis' is a blessing in this regard.

2013 is currently worrying a lot of energy forecasters. The lack of current borrowing facilities has already forced oil companies to abandon or delay planned projects - the situation is compounded for the smaller companies that build the equipment needed by the oil majors.

Even with those projects, forecasters were still worried.

The low oil price has made it uneconomic to drill for hard-to-extract oil. OPEC members are pressuring for a further cut in production to lift the price.

Brown has made several calls in recent weeks to OPEC, urging the cartel to keep prices low - clearly, a worried man for this is key to his "stimulation" plan.

International Energy Agency

Watch out for next week's much-anticipated report from the International Energy Agency (IEA). Until very recently, it has always basically been bullish about future oil supplies. In its interim report earlier this year, it began departing from that position (bit late considering oil was soaring already) and according to a draft copy of next week's report, seen by the Financial Times:

It says that in the future the world will face "persistently high levels of consumer spending on oil". / Home UK / UK - Oil at $200 will shift power to Opec

In other words: inflation.

Last weekend, Brown, Mandy, bankers and oil execs flew to Saudi for talks - this was no State visit; they chartered a private jet.

To switch this country over to "green energy" consumption - if it is even possible in the fullest sense of the meaning - will cost us huuuuge amounts of money; this is an infrastructural thing.

Where is the money coming from?

House prices may "bounce back" at some point in the future, but from what base?

The future outlook, IMO = not the same as the past, although I don't doubt, with all the frenetic activity in patching-up the "global finance markets", we could well experience a "false start" or two - much like inflating a tyre with a slow puncture which gets worse with each iteration.

What's your outlook?

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