Saturday, December 6, 2008

Depression Across the Pond

Britain's economy is also in "historic low" territory. Yet another reason why the hopes for near-term recovery are delusional: this downturn is worldwide. Normal recessions are not worldwide, and prosperity in other nations helps lift a struggling economy. Like Japan in the 1990s, struggling on its own, but the rest of the world doing fine. How does an economic recovery proceed when everyone in the whole world is in the same sinking boat?

England is even more screwed than the US because of their even greater lack of wealth-producing jobs: almost 2/3 of their entire economy is the service economy. We are learning in real time what any sane economics text should have taught us long ago: service industry downturns are more drastic that in productive industries, and basing the majority of your economy on the service industry is an economic suicide-pill.

Notice how some sane and logical thinkers in England have thought this out the endgame: Willem Buiter, a leading former member of the Bank’s rate-setting committee, called for it to go still further and cut interest rates to zero. “If zero is the floor, there’s no reason not to go there immediately,” he said.

Cancelling our debt now is based on the same logic: we know that this economic downturn will force the wiping away of all debt, through traumatic default, so instead of grinding down to the inevitable, let's just get their immediately, before the whole productive economy gets ground down with it.

England is hampered in dropping rates to zero because it doesn't want to send its own currency down. That is the problem, small economies can't do it on their own. It is up to the US, as the linchpin of the whole world's economy, to get the job done. As bad as the dollar was doing last spring because of US federal inflationary policies, and as bad as the US economy is now doing, the dollar is now up, as money flees the lesser economies of the world.

A federal default, which I am advocating, would send the dollar lower, which should be acknowledged and anticipated. In fact, canceling the debt would lead to a general collapse in prices. Most people bring this up as an objection, but remember, without a debt load, a collapse in prices is not a problem. It is the shaking out of a false monetary value from the value of the real economy. It is common sense, really: without debt propping up the value of everything, everything will go down in price. It is natural, expected, and good, not something to be avoided. In fact, in our current deflation, almost all debt will be wiped away anyway.

As the last few sentences of the article indicate, England is also entering into deflation. Worldwide recession, worldwide deflation... This is going to get real ugly.

The pound plunged yesterday, with its overall value tumbling to its lowest for 13 years, as another spate of dire economic news left markets convinced that the Bank of England will order a further, drastic cut in interest rates today. Expectations that the Bank’s Monetary Policy Committee will cut rates by another full percentage point, and perhaps even repeat last month’s aggressive 1.5 point reduction, leapt after a key survey suggested that the services sector, making up almost two-thirds of the economy, shrank at a record pace last month.

A further one-point drop in official base rates would take them to 2 per cent, a level last seen in 1951. A still more radical cut of 1.5 points, for a second month in a row, would leave the Bank in uncharted territory, pushing rates to their lowest in a history stretching back to 1694.

A rash of figures signalling that the economy is in the grip of a severe and accelerating slump has forced economists to amend forecasts of the MPC’s likely verdict today, and to predict that it is ready to take unprecedented action to stave off a recession worse than that of the early Nineties.

Anxieties over the weakness of the pound were rekindled as it sank once again on foreign exchanges. The trade-weighted index of sterling’s overall value against a basket of currencies tumbled to 80.4, its lowest level since January 1996. The pound lost as much as 2.7 cents against the dollar, dropping to $1.4668. It has now fallen by more than 27 per cent against the dollar over the past 12 months, and by almost 20 per cent on the trade-weighted index.

Sterling is being battered as historic lows in UK interest rates, below those of the eurozone, reduce returns on cash deposited in Britain, cutting investor appetite for the currency. At the same time, markets are more fearful for the UK’s economic prospects.

Expectations of still deeper cuts in interest rates were heightened as the yield on gilt-edged government bonds plunged to record lows. Yields on benchmark ten-year gilts fell to 3.395 per cent, the lowest since records began 30 years ago, while those on two-year gilts fell to as little as 1.634 per cent.

Demands for the MPC to cut rates sharply were stoked by yesterday’s services survey, the gloomiest since it began in 1996. Scope for the Bank to cut rates was emphasised as the survey pointed to waning inflationary pressures, with services groups cutting prices for the first time in seven years.

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