UK economic recovery worse than Great Depression, and no sign of improving

Generali

From the rather excellent Bond Vigilantes website:

http://www.bondvigilantes.com/2012/03/28/uk-economic-recovery-worse-than-great-depression-and-no-sign-of-improving/

It was announced this morning that the UK economy grew just +0.5% in 2011, a downward revision from +0.7% previously announced. As the chart below from Citi illustrates, the UK economy has stalled. UK real GDP is 4.1% below its pre recession peak, which makes this ‘recovery’ worse than the Great Depression.

Well of course it's all the fault of the Tories and their austerity right? Ermm, think again:

....for all the talk of austerity in the UK, the reality is that government expenditure actually increased by 0.1% in real terms last year. Austerity hasn’t really started yet.

The UK is over-borrowed in the state and private sectors. The 'solution' is almost certain to be more financial repression, very low interest rates and potentially more [STRIKE]money printing[/STRIKE] QE.

My guess is that we can see another 5-10 years of very low annual growth as the debt is repaid or defaulted on.

ILW

Cannot find it at the moment, but read an article recently that stated that one of the reasons for the relatively fast recovery in the 30s, was a period of deflation for around five years which got the middle classes spending. (Just in the South though)

DiggerUK

The government fudge describes recession as two successive quarters of negative growth, in most peoples eyes Investopedia is more appropriate.

It does allow the government to play with the dandelion and go "recession maybe, recession not; recession maybe, recession not" quarter on quarter though.
Taken year on year, it reveals the true story.

If it feels like you are getting stiffed over, it's a recession, trust old Digger on that one.
..._

Graham_Devon

Very interesting, thanks Gen.

Thing is (and I don't know), by this point in the cycle in the 1930's, had they actually fixed any of the problems? We don't seem to have done that. Everything is still overhanging, with a notion that the "fix" will be applied tommorow. By fix, I mean cuts, financial regulation etc.

Take for instance the EU bailout fund. There are simply calls to make it bigger again. This isn't fixing issues, it's merely making the bailout for the fallout bigger and bigger. Take Greece. Nothing is being fixed per se, they are just taking on more debt to replace debt defaulted on.

Was it anything like this in the 1930's, or was it more of a crash and burn, with a natural floor applied and then a recovery after that?

We seem so hell bent on stopping the natual floor being reached, are we not indanger of prolonging this for decades to come?

Take the UK for instance. Interest rates hit rock bottom, freeing up finance for many families. But now increasing prices elsewhere have eaten up the majorty of the increased finance, and we hadn't even got around to "fixing" the issue...and we appear to be back of breaking point with oil and fuel prices...a key feature of the initial crash.

Generali

Graham_Devon wrote: »

Very interesting, thanks Gen.

Thing is (and I don't know), by this point in the cycle in the 1930's, had they actually fixed any of the problems? We don't seem to have done that. Everything is still overhanging, with a notion that the "fix" will be applied tommorow. By fix, I mean cuts, financial regulation etc.

Take for instance the EU bailout fund. There are simply calls to make it bigger again. This isn't fixing issues, it's merely making the bailout for the fallout bigger and bigger. Take Greece. Nothing is being fixed per se, they are just taking on more debt to replace debt defaulted on.

Was it anything like this in the 1930's, or was it more of a crash and burn, with a natural floor applied and then a recovery after that?

We seem so hell bent on stopping the natual floor being reached, are we not indanger of prolonging this for decades to come?

Take the UK for instance. Interest rates hit rock bottom, freeing up finance for many families. But now increasing prices elsewhere have eaten up the majorty of the increased finance, and we hadn't even got around to "fixing" the issue...and we appear to be back of breaking point with oil and fuel prices...a key feature of the initial crash.

The 1930s were a very different time to today economically speaking and I don't think it is reasonable to compare what happened then in the UK with what is happening now. Maybe the USA in the 1930s bears some comparison with the USA today but not the UK.

Lots of people seem fixated on 'solving the problem' but that is to misunderstand (IMHO) where we are. If you borrow to invest you are hoping that the return on your investment is greater than the rate of interest. However if you borrow to consume, which millions of Britons did, all you are doing is moving consumption from tomorrow to today. You had the increased consumption yesterday, both in the private and state sectors, today it's time to repay some of the debt. There is no problem to solve: if you're solvent you repay the debt and if not you default. Either way the impact on the economy is identical.

It's worth noting that at the peak about 6% of GDP IIRC was borrowed by MEWing.

wotsthat

The current slowdown does seem to be following the same pattern. It's only the last couple of quarters that allows the headline "UK economic slump worse than great depression".

Of course the economic slump isn't really worse than the 1930's. Standards of living are much much higher - I wouldn't swap our economic slump for that of the thirties.

ILW

Generali wrote: »

The 1930s were a very different time to today economically speaking and I don't think it is reasonable to compare what happened then in the UK with what is happening now. Maybe the USA in the 1930s bears some comparison with the USA today but not the UK.

Lots of people seem fixated on 'solving the problem' but that is to misunderstand (IMHO) where we are. If you borrow to invest you are hoping that the return on your investment is greater than the rate of interest. However if you borrow to consume, which millions of Britons did, all you are doing is moving consumption from tomorrow to today. You had the increased consumption yesterday, both in the private and state sectors, today it's time to repay some of the debt. There is no problem to solve: if you're solvent you repay the debt and if not you default. Either way the impact on the economy is identical.

It's worth noting that at the peak about 6% of GDP IIRC was borrowed by MEWing.

And nobody in a position of power seemed to have understood this. Some (Ed Balls) still do not.

Wookster

Generali wrote: »

Well of course it's all the fault of the Tories and their austerity right?

If you listen to Ed Balls, then the reasons (in order) are

1. Austerity
2. (when proved that austerity hasn't kicked in yet) its confidence

His arguments are like shifting sands. No foundation and they change all the time.

Graham_Devon

Generali wrote: »

You had the increased consumption yesterday, both in the private and state sectors, today it's time to repay some of the debt. There is no problem to solve: if you're solvent you repay the debt and if not you default. Either way the impact on the economy is identical.

Very succinct and to the point!

Are we actually doing this though? Going back to what I stated, we seem to be trying to ramp up the debt, especially that based on consumption in order to stop a decline (that decline taking countries with it) rather than paying it back? (By that I mean policymakers and the like, not neccesarily your day to day family).

A perfect example of many was the scrappage scheme. We have a consumption problem, so throw money (borrowed) at it, and hopefully ramp up the consumption. It worked, to some degree....but that was all consumption taken from tommorow. (though on this very point I have a sneaking suspision they are making cars uneconomic to actually fix now with all this polution guff, reducing their life span considerably).

kabayiri

wotsthat wrote: »

...
Of course the economic slump isn't really worse than the 1930's. Standards of living are much much higher - I wouldn't swap our economic slump for that of the thirties.

I'm interested in the 'perception' of a continued slump, as much as the reality.

If we have relatively lower growth; continued erosion of the value of savings - a middle/older class effect; and high unemployment - then what are the political impacts ?

Voters always seek the easy win; the voice with the clearest solutions. Will we see the rise of extremist views, or are we embedded into middle-ground politics.

StevieJ

ILW wrote: »

Cannot find it at the moment, but read an article recently that stated that one of the reasons for the relatively fast recovery in the 30s, was a period of deflation for around five years which got the middle classes spending. (Just in the South though)

At least you are consistent, with your deflation is good message