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Friday, January 23, 2009 

The recession blues.

We can now at least be grateful for the small mercy that we are officially in recession; we've already become so used to the fact that the news itself has only caused something approaching a small ripple, both markets and the pound recovering from drops earlier in the day, but for those of us who have only distant memories of the last recession, which includes almost all of those in their early to mid-twenties, things are undoubtedly about to become a whole lot bleaker.

While the 1.6% drop in the last quarter was higher than expected, it's the other figures that cast further light on how what started with the poor in America defaulting has now spread across the globe, infecting most severely our already distressed manufacturing base, where output fell by 4.6%. Most surprising probably of all was that even growth in the government sector fell by 0.5%, an indication of how bad things are likely to get. Likewise, the 1.6% growth in retail sales last month may as well be a mirage: boosted by the VAT cut and the panic discounting prior to Christmas, which has continued throughout this month, it simply cannot continue. More household names are likely to close their doors as the months pass.

Much of this was predictable: when you have an extended boom, especially one built upon massively inflated house prices and unprecedented private borrowing, the inevitable bust is always going to be painfully extended. This was the undoubted hubris, not just of the prime minister but of the vast majority of politicians. The last few elections were not fought on the economy, but on the public services and social issues. So too was the next one thought to be: under Cameron, the Conservatives offered even less than Howard and Hague. Sunshine was meant to win the day, the great gods of the macroeconomic cycle having decided that this was the End of History. Even after 9/11 destroyed the tiny basis for that claim, we still imagined the economic case to be sound. This bust is indicative not just of those politicians who believed it, but also the whole school of economic theorists who similarly declared that the free-market was the be all and end all, and that only governments and regulation were to blame for not delivering the full benefits of unleashing it wholesale.

In short, hardly anyone saw this coming when it was so completely predictable. You would therefore expect that the response would be humility from all sides, admitting they were wrong. With the exception of the odd columnist in the Times, this has been noticeable for its absence. No one really thinks that Gordon Brown, who whilst not arrogant is as stubborn as feasibly imaginable, is going to own up and admit that his claim to have abolished boom and bust was wrong, but the least he should be doing is now coming straight with us and saying that we face an exceptionally bleak economic prospect over the next year. We are not, as he repeatedly claimed, among the best placed to weather the financial storm; we are in fact one of the worst placed. This though too has been following the pattern which has emerged over the past 6 months. When Alistair Darling said in his Grauniad interview that we were facing the worst economic situation for over half a century, he was denounced. He was right. When George Osborne suggested that the amount of debt were taking on was likely to cause a run on the pound, he was criticised. He was right. When David Cameron now says that we could well have to go cap in hand to the IMF, he too might well be proved right. Nothing should be ruled out.

This isn't to agree with the Conservative's predictable positioning, which is to blame everything on Labour. If they had won in 2005 we would now be facing the exact same recession, possibly an even worse one if they had quickly introduced some of the policies which featured in John Redwood's later economic review. Labour's claims that this is all the fault of a global crisis are equally hollow. Countries which had far tighter regulated banking systems and the absence of such an inflated property bubble are not facing the same problems. Either one or the other can cause disaster, for which see Spain, which has a tight system of banking regulation but an absurdly out of control property market. For the former, we have not just one or two but three people to blame. The Financial Services Authority and and the tri-partite system of financial regulation was the direct creation of Brown, Balls and Gus O'Donnell. Paul Mason, who thankfully has a longer memory than others, recalls a speech by Blair towards the end of his tenure which was highly critical of the FSA for being too burdensome, for inhibiting the perfectly efficient and non-fradulent business of companies which were doubtless complaining too him about it all being so unfair. Who knows, perhaps it even included Northern Rock. Likewise, later in 2007 Gordon Brown, in his Mansion House speech, suggested to doubtless warm applause that the City was on the edge of a new golden age. It was instead on the edge of a precipice, but it's easy to mistake one for the other.

Neither the bankers, the politicians or the regulators are those will suffer the most from this recession, however much we would like it to be the case. Instead it's going to be the poorest, the ordinary workers now about to be drafted into James Purnell's welfare reform experiment. Already even the slightest thing to resemble largesse is being denounced, whether it be the "underserving" likes of Afghan families living in supposed mansions, the radio station for prisons which cost a massive £2 million, or less easy to justify, the bonuses for Northern Rock workers. They were though after all taking a leaf out of the book of their former bosses, so who could really blame them? Our apoplexy will not turn on those who brought us into this mess, but on those supposedly taking liberties. What already resembles a cruel nation will turn even crueller. What should be an opportunity for the left seems to have already been spurned, not helped by the fact that an authoratarian party masquerading as left-wing has been in power for approaching 12 years. Things can only get better, but they'll probably only get worse before that happens.

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The Germany economy is projected to decline about as much as the UK economy this year, despite its lack of a property bubble, its tighter banking regulation, and its current account surplus.

You know John, you're no fun.

Although at last they're owning up to how serious they think it's going to be and proposing a stimulus package far beyond our own.

True dat. And in some ways the German boom was just as unsustainable as the UK/US/Spanish boom, since it basically relied on foreigners who thought they were rich spending lots of money on BMWs. Remove the artificial wealth, and the BMWs follow...

However, that leaves nobody - except possibly DR Congo and Haiti - unbubbled, since everyone who didn't have their own bubble grew by making things for people who did. Even Somalia's economy is based on the massive growth in global shipping... ;-)

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