Pay back time
It's funny how when people were borrowing endlessly, nobody was worried. Mortgage equity withdrawal has been increasing for years before the bubble burst. Few analysts were worried about this - it was a new era when money would be forever cheap and plenty.
Now, customers don't like the idea of paying 7% interest when the Bank of England has dropped its own rates to record lows, and have started the painful process of clearing the debt. If we are to return to stability, this may take years. Unless of course inflation kicks in to reduce the value of this debt. Paying back the debt means less spending, and of course this has the analysts disturbed about the effects on the real economy.
The graph from The T elegraph tells part of the story.
This would suggest things may soon be back to equilibrium.
What it doesn't say is that these positive bars in 2007 stretch back almost a decade (from The Economics Blog):
Inflation
Not too long ago I was writing about deflation hitting the UK economy.
Well, I may have been too quick. More recent reports and the markets seem to now expect inflation - and I mean serious inflation.
A businessman I was discussing with yesterday was worried. He noted that all governments had printed money too fast to get us out of the recession, and suggested this had happenned more than publicised. If all this money is around, it will surely lose its value.
This was a businessman from overseas, who was keen to buy real assets with his cash and was shopping around for land, property, gold and oil. And his only worry was that commodities and property are sold in local currency which means they are exposed as well.
The problem of course is not monetary. When you have a country that doesn't produce anything, printing money will just be translated into inflation in the long term. This is known. The challenge here is for all this trickery to create some business growth quickly before markets realise that cooking the numbers doesn't make a country stronger financially.
I wonder if Adam Smith (featuring on the £20 notes) had thought about all this government intervention in his free market theories. I somehow doubt so.
The trillion dollar question
A very interesting article in the Telegraph talks about the shift in economic muscle taking place between China and America in the current economic crisis.
To simplify the story, think of an unhappy marriage in which one partner does all the saving, while the other does all the spending. (We all know at least one couple like that.) But then the partner with the retail therapy habit maxes out on his/her credit cards. At the same time, the parsimonious partner finds her/his job under threat. What previously was a stable relationship is suddenly on the rocks.
To me, it's not a question. People who work hard and save money always do better than fly-by-nights who borrow, spend, and then borrow more. The same will apply for nations. If an American bank predicts China's GDP to overtake America's by 2027, my bet is that we won't have to wait that long.
House prices
The BBC is showing us the above graph.
It definately looks like the last two months are a bit better than the ones before them.
This could go three ways... A long slide with a little pause in the middle; a V shaped; or a U shaped graph.
Either way, things are changing in the marketplace and it's now the time to start looking closely again.
Fractional Summit
I went to the Fractional Summit last week, and it's the first event I've been to in a while that has exceeded my expectations.
I noticed many new faces, both developers and suppliers coming into the industry. In a time when most markets are looking inwards, it was great to see people actually making plans to enter or expand their operations in the fractional market.
Very excited also to see Barclays Wealth give a talk - an indication that some pretty big names have fractional in their radar.
All in all a very positive couple of days. I am really looking forward to growth in the fractional market, and hope next year will be even more successful.
The penny drops
Reading this post will cost you about 10 pence.
According to figures that have been described as optimistic, the UK government is set to borrow an extra £700 billion over the next five years.
There are countless figures and articles trying to put this in perspective using various techniques, including writing the full £700,000,000,000 number, or saying that interest payments for this amount will be more than the UK budget for defence.
There are then of course those who recall those bankers were deemed evil for borrowing too much with no real plan for repaying.
I decided instead to do this to understand the concept of time:
60 minutes x 24 hours = 1,440 minutes in a day.
x 365 = 525,600 minutes in a year
x 5 = 2,628,000 minutes in 5 years
And this to break down the numbers:
£700,000 million is the new debt (note the word new, this is to be added to existing debt)
26 million income tax payers in the UK
i.e. £26,923 new debt for each tax payer.
And then worked out that
£26923/2,628,000 minutes= £0.01 per minute
Equals 1p a minute
Every UK tax payer (me including) will borrow 1p a minute every minute, even when they sleep for five years.
And paying it back will also cost interest.
And that's also optimistic.
It's like picking up the phone and leaving it connected for five years.
Did the penny drop?
Ten principles for a Black Swan-proof world
Came across this article in the FT recently.
Interesting to see that people have started providing some feedback on what needs to change. I wonder if our politicians will turn any of this into policy.
Less worse
Apparently, there are some "signs of recovery" in the world economy in recent days.
Well, economists and the US President have re-defined "recovery". Yes, unemployment is rising and bankruptcies are rising sharply. Yes, the housing market is still dead. And yes, car manufacturers and others are joining the banks and going to the government for help.
The governments themselves are not too rich either and are slowly creating a debt crisis of their own right.
But, things are getting "less worse" (a new term). That is to say, the stock markets are not falling as much as people thought, housing transactions and values are on a downward trend but not as sharp a trend as people thought, and so on.
In other words, the decline continues, but at a rate slower than some analysts were predicting.
Which could either mean stabilisation is on the way, or that those analysts panicked so much with "sell sell sell" as they did with "buy buy buy" in 2008.
My advice to everyone is not to listen to analysts, or at least to choose your analysts wisely.
What does deflation mean
For savvy consumers, it means bargaining for the best deal and feeling proud to get better prices than last year. Accroding to Office of National Statistics Personal Inflation Calculator I've been living in deflation for a while.
For businesses though, this can mean making a challenging environment even worse. Once people get used to thinking that prices will fall, they postpone buying anything until they do. Which in turn adds to the economic problems.
This BBC article discusses what deflation meant for Japan in the 90's - just as the UK reports its first deflation in decades.
World recession
This is pretty serious news. Japan shrinking a good 7%, the rest of the world also shrinking for the first time since WWII.
And noone wants to see WWII devastation anywhere.
Economics has definately become my new favourite topic.