The link between the market falls and social disorder

Back in 2008 I wrote a series of published articles about the unfolding financial crisis. The events of the summer indicate it might be time to revisit some of my forecasts. I'm going to republish extracts with contemporary comments alongside over the coming days.

The Leadership Community Newsletter
September 18th 2008
It seems clear now that parts of Europe and the US are going to tip into a recession within the next 6-12 months. How deep this downturn is going to be, no one yet knows, and given the current financial bombs going off, no one would be wise to speculate. Whatever, what matters to most of us is an economic environment in which life is getting suddenly very much more expensive, and our assets are diminishing alarmingly.
Inflation in basic commodity and energy prices, in the UK, at least could be as high as 30% over the period of 12 months- a truly meteoric rise. At the same time, the value of property in both the US, UK and in those parts of Europe is declining- in the UK prices have deflated by an average of 10% over the past 6 months. No one knows what the bottom of the market will be, but what we do know is that there is a growing unease about our financial stability and sustainability.
In the UK, our government, and specifically our Prime minister, Chancellor for the previous decade, wants to assure us that because we have low unemployment and low interest rates, the impact of this global scenario will not be as deep as in other countries. However, the message is specious. Unemployment is low because of a very large public sector; and we can afford to offer jobs to public sector workers on the basis of tax revenues. And tax revenues require corporate firms, and private individuals to be generating profit and paying taxes out of those profits. If those fall, tax revenues fall. What will have to follow is one of three scenarios:
1. Pay freezes in the public sector- so effective wage losses in the face of inflation
2. Tax increases to sustain the public budget, effectively reducing private wealth further
3. Job losses in both the public and private sector, increasing unemployment, which will send many of those households into debt.
In fact, all three scenarios are likely to occur; the effect of this is not insignificant, because our economic personal capacity is already very stretched; personal consumer debt and mortgage debt is already at breaking point for many families; personal tax is already very high. Lose a job, or reduce a salary, or increase the cost of living, and the effect will tip many homes into repossession and bankruptcy.
In the face of this, the Chancellor will be under pressure not to increase interest rates, which would make the cost of servicing our debts even higher, making the situation even worse. It is estimated that a mere 0.25% increase would result in several tens of thousand repossessions. But higher interest rates are one of the only means of bringing down inflation (they encourage saving rather than spending). Without higher rates, money is effectively being devalued all the time, making your own savings worth less than they were last month- you are effectively poorer month on month.



Comment September 2011
What is now clear is that the UK and US governments’ preferred strategy of reducing their massive and unpayable public borrowing is by devaluing their currency and thereby, deflating their debt. Those punished for financial profligacy will continue to be prudent savers and it is a gross deceit. Not only so, but it is perpetuating the great imbalance of asset wealth at the older age sector of our population. Asset prices, and most particularly, property remains some 30-40% overvalued especially in the South of England. The one thing keeping property at these artificially high levels is effectively negative interest rates which are preventing 100,000’s falling into arrears and massive repossessions across the country. The government is protecting over-indebted home owners by penalising savers whose savings are being inflated away by 5% each year.
Structurally, this is an indirect cause of the rioting we recently witnessed. Too much wealth is held in our economy by the older population (where property wealth always resides), pricing out any ownership of property (i.e.land) by the younger generations. Young people are only slowly realising how disenfranchised they really are from economic participation in our society. Whilst these riots are not about this directly, they reflect what will be a growing sense of anger about one part of the population funding the unrealistic burdens of an ageing boomer group who had free tertiary education, own most of the land, retired too young having not paid enough for their pensions, and are living longer with guaranteed health care provision. The main structural instability causing rioting is only going to get worse I’m afraid in the coming years.



(c) Simon P Walker 2010 The Content of The Undefended Life, in its final e and hard format will be considered the intellectual property of Simon Walker. He will acknowledge by name any whose contributions on this site have been used directly in the final work.