Labour's "Miracle" Economy

Allsmokeandmirrors

May I present my own view of what situation the UK economy is in, and why I don't believe there's ever been a "miracle".

The present Labour administration have become big buddies of the financial sector (AKA Banking) and Industry, and so during the last 9 years, have set about reducing interest rates (which people think control their spending habits- something Thatcher realised in the 80's).

Unfortunately they deliberately did not regulate the financial sector, which about making people think they could really enjoy themselves, and borrow more and more, since the banking sector as awash with so much cheap money.

And while the annual inflation fell (due to cheaper and cheaper goods from the new developing east), the whole consumer & services industries tempted people with must-have items, which could only be paid by increasing borrowing.
Our "available spending money" only increased for those borrowing, and homeowners (another misnomer- Home Equity)- and on the other side, savers saw smaller and smaller returns (ie Interest) on their money.
Deliberately lax lending by the financial industry, and the very clever marketing by the consumer industry persuaded people that living for the moment (with all this cheap money) was much better than saving for the future (with the miserly interest rates on offer).

But finally the chickens are coming home to roost. You can only borrow so much as a nation, before it's feeling like an addiction and an affliction.

Inflation is now rising (on almost everything- and now even life's essentials like food/energy etc), but still the government wants to sweep the specter of Inflation under the carpet for as long as possible. The days of cheap money are slowly ending.

What the government needs to do is recognise it and put up interest rates, which would then in turn, put those who were hoodwinked into an excessive borrowing game to wake up to the truth, which would then ruin the governments’ long-heralded "miracle economy".

The government is now well and truly backed into a corner. Keep rates low, and people still spend too much... Increase rates and people are going to be financially ruined.
No wonder they changed the insolvency rules recently- to stop people having to stick their houses on the market (remember the early 90's?!?- they learnt something!)

But the problem is unavoidable, in my opinion. We're heading for a recession, where people are scared off spending, due to seeing the inflation eating into their available spending money. Forget the official inflation figures- people aren't stupid, and are slowly waking up to what's really happening, and what mess they need to get themselves out of (ie too much debt). We owe, as a nation, far too much to the banks, and given time, people will wake up to this, and start to repay this debt.

And I haven't even put my opinion on the housing market into the whole equation. After people have really stopped spending on consumer goods, they'll then cut back on buying houses, which will then push people inevitably into selling-up (due to the recession- losing a job, or being up to their eyeballs in debt), and so the housing market will slide downwards.

At the age of 34, I have thankfully not been fooled into taking out more credit than I absolutely need, and I'd really like to trade up to a bigger house, but the increase I'd need to make on the mortgage would put me in the "over-indebted" category. So I sit tight, hoping, and waiting for reality to bite, when house prices fall, and I can then trade up.
Give it another 5 years, and my financial prudence should pay off.

Am I alone in these views?

Pobby

Great post.It links very nicely to my thread``It`s like a war``

Storm

You're not alone, although I don't completely understand how the economy works (I'm a bear of very little brain & long words bother me!) I too am waiting for the house prices to if not completely crash become a bit more affordable before I jump on the ladder!

This does however make me feel very bad for several of my friends who I've seen mortgage themselves to the hilt to get on the ladder (including some with interest-only mortgages with no endowment to pay off the capital!) who will probably suffer financially if and when a crash/downturn comes.

There is no such thing as a 'miracle economy' - we'll all end up paying in the end somehow!

nrsql

>> I don't completely understand how the economy works
There are those that realise they don't know how the economy works,
Those that mistakenly think they know how the economy works,
Those that mistakenly think historic models are predictive,
And those that rise to power and money by fooling others that they know how the economy works.

Currently we are living off a series of short term measures which will ultimately come home to roost.
The big question is how will this affect those that have been prudent?
Bit like saving for retirement then the state taking your savings off you so you don't benefit from your years of denial.
How about a large tax on savings to support those in debt - now that couldn't happen could it.
Maybe a - move your cash ISA into a government fund (i.e. lend to exchequer) for next 10 years or pay 50% tax type scenario.

Allsmokeandmirrors

Many thanks for the comments.
I wouldn't want to claim that I fully understand how the Economy works, but I was always brought up to be financially prudent, and never borrow more than is really necessary. I went without a lot when I was younger, and I suppose this has rubbed off on me.
And now where I am quite financially well off, with no debt apart from a £40k mortgage, many of my friends are crippled by debt, from borrowing to excess.
And many are still living at home with mum and dad. And these people are all now in their early 30's !!

This prudence looks to have paid off for me, but my future plans of buying a larger house are hampered by the current overpriced housing market.

Hereward

Whilst I agree that the current state of the economy doesn't belong to "New" Labour, I do not agree with your analysis of it. Interest rates have are near the 1993 level (which were falling at the time, currently there rising), GDP growth has been strong since the Second World War and RPI close to the early 1990’s level (it has been falling since 1982, if you ignore the blip arounf black Wednesday). Economists believe that we are returning to the pre-19th century state of having low inflation and low interest rates as advances in technology continue to push the cost of manufacturing and services down.

The lack of regulation of the financial sector has enabled the UK to build an extremely strong base. These policies are being copied in other parts of the world to try and mimic our success. The changes in the insolvency rules were enacted to allow more entrepreneurs to start their businesses and continue the growth of the economy: it was not the intention of the government to make it easier for individuals to avoid their debts, although this has happened to some extent.

When people compare the change in the price of their goods and services they always do so in percentage terms and then compare this figure with their percentage change in income, but most people forget that a small rise in a large number (lets say 1% of £20k) can be bigger than a large increase in a very small number (10% of £100). The inflation rate experience by people will vary as no two people will buy identical goods and services at the very same time; therefore, inflation itself is individualistic.

ariba10

Is this a Party Political Broadcast?

HokeyCokey_3

Allsmokeandmirrors, great thread!

I am so fed up with the people around me, telling me that I NEED to get on the property ladder or that I NEED to get furniture on credit. I don't see how stretching ourselves to buy a pokey flat will give us long term security. But this is what most people seem to class as 'normal' nowadays. Sometimes I am left questioning my own sanity! lol My OH and I live on the money we have coming in, we have shares, long-term savings and good pensions. We do have a car loan, which I can't wait to pay off! I would like nothing more than a totally debt free lifestyle. Obviously I would love to own my own property again, but there is no way I will 'waste' my money on an overpriced dwelling just to seem normal.

Seems like everyone just wants to keep up with The Jones' nowadays. Even my OH family do not seem to bother with us that much anymore and I think it's because we are not materialistic like them, think it depresses them or something lol, because we are perfectly happy living within our means. I don't think they understand how anyone can be happy only owning one car, instead of four!

As they say good things come to those who wait. I personally think the country is heading for a financial disaster, but when....is anyones guess!

Allsmokeandmirrors

Thanks for your input Hokeycokey!
I'm of a similar mind, that I'm conscious of being deliberately targeted by advertisers of things that I'm being told "I must have". Not a day seems to pass when my letterbox fills with pre-agreed overdrafts or mortgage advances, credit cards, gadgets etc, and then emails of the same..
Thanfully I decide when I want to replace the TV with a nice 37" HDTV wall mounted TV, and when I decide it's time to change the car, or go on exotic holidays.
I feel in control of my life, and spending, and it's not as though I'm a total tight @rse. For example, I have a nice home with a PS2, nice Widescreen Toshiba TV, new kitchen, new car, and I go skiing once a year..

I spend my money, but I spend it wisely, within my means, and when I want to spend it.
More emphasis on personal budgeting should be placed on the younger generation, in my opinion.

saubryn

I'm 24, and when I was in the last year of school, in Personal Social Education class we did a module on debt - we were told 'Overdrafts are for short term small borrowing, credit cards are for slightly larger purchases, but should be cleared quickly because they're high interest. Loans are for bigger purchases, and you should borrow over a shorter time than the life of the product - e.g. don't take out a two year loan to cover a holiday when you want a holiday once a year, and mortages are for buying houses'.

Thats the extent of the credit education I had at school. We weren't told to budget, or to avoid taking this stuff out - we were given effectively a 'cheat sheet' of 'if you want this, borrow like this'...

If thats normal for 'education' no wonder people borrow so much.

ZTD

ts_aly2000 wrote:

*Technically* we are in a recession.

Actually it's the other way round. Technically, we're not in a recession. For all practical purposes we are. Inflation is - of course - understated. GDP growth is a great deal less than the difference between stated inflation and "real" inflation - hence negative real growth.

This isn't a Labour thing BTW, I looked at the figures and decided it all went "crooked" back in 1992. I think that was when they changed the measure of inflation (it was all so long ago... )

ts_aly2000 wrote:

It's being falsely propped up by all of the borrowing going on.

Not just by personal borrowing, but by governmental borrowing too. Not only the issuance of bonds, but the issuance of notes, which if you look carefully, aren't money, but promissory notes organised as currency. The difference becomes apparent when things go pear shaped. Things are not pear shaped right now.

I just can't understand why people are getting so uptight about this. This sort of stuff happens every so often. Governments promise oh so much to their friends/supporters, then rob everyone blind to pay for it. This happened in (for example) the time of Charles I , and the later Roman Emporers.

I could choose loads of examples - but won't. They all have something in common though. They all end badly.