It may have been caused by what happened in 2008, or the causes may run deeper than that. We are witnessing it at work in the US, and the result is that there is a chance the global economy may be brought down to its knees. We are seeing it in the UK too, and in Europe it may yet erupt. This is the rise of extremism, and investors need to factor in its inherent risk.

There used to be an adage about voting that went something like this: If you haven’t voted labour before you are 30, there is something wrong with your heart. If you haven’t voted Conservative by the time you are 50, there is something wrong with your head.

That was back in the 1970s before the rise of New Labour, when the policies of both the Labour and Conservative parties look rather moderate compared to those of today. They used to say that James Callaghan was the best Conservative Prime Minister the Labour Party ever had. Ted Heath was so moderate he makes Nick Clegg seem like rabid extremist. Then in the late 1990s and early noughties, the two main parties were so similar, that to liken the gap that separated their ideology to the thickness of cigarette paper, was to exaggerate. It was boring. In those days you could turn up at the election booth unsure which way you were going to vote – with your heart and brain interchangeable.

It may that those old enough to remember those days wish they would return, particularly bearing in mind the way party politics in the UK has become so extreme. Ed Miliband seems to have decided his best course is to follow Francoise Hollande’s near suicidal economic policies. As for the Tories, with the possible exception of Mr Cameron, and Michael Heseltine, they are lurching so far to the right that they are in danger of making Attila the Hun look like a moderate. The finance crisis of 2008 was a symptom of capitalism not working. There was too much greed, too much inequality. Some seem to respond by saying: “Let’s have even more of that.”

So we blame immigrants, even though the UK has less immigration as a proportion of its population than other countries whose electorate seem far less concerned about this issue. We blame the EU, benefit cheats, and now the scurrilous unemployed. Two years ago a well-known personal finance writer, who now writes for the ‘Times’, suggested that the unemployed should not be allowed to vote. Now we are seeing policies that seem only one step removed from bringing back the workhouse. Don’t underestimate the seriousness of public attitudes. You only need to spend time looking at comments on Facebook, and you will see that xenophobia is rife. “I am no racist,” is the gist of many Facebook comments, “but I think all Muslims should go home.”

But the polarisation of UK politics is yet nothing compared to what we are seeing in the US. Such extremism threatens to bring down the global economy – and that’s no exaggeration. It doesn’t bear thinking about what will happen if the US defaults. In the Eurozone, we keep hearing about how we need to give things more time, to be patient, to let hard work win through. It seems that if we have seen such extremism rise in the US and the UK, then the prognosis for the Eurozone, where the economic plight of millions is much more serious, is truly terrifying.

All this is happening at a time when technology has the potential to change the world for the better.

It is tempting to say investors need to buy gold, in response. A surge in gold is surely the most likely response to US default. It is surprising that it has not risen more this week.

And yet there is hope. It’s not exaggerating to say that – providing politicians don’t do anything stupid, which they might – the UK is poised to enjoy its best economic run for a very long time. Maybe what the UK needs is many more years of coalition governments.

As for the US, the one thing about the US economy is its extraordinary ability to re-invent itself. What the world needs is for it to re-invent its political system.

 

© Investment & Business News 2013

For an economy to grow it needs the money supply to expand. That’s the point that those who favour a return to the gold standard overlook. In a static economy with no innovation and which will look the same in a hundred years’ time, a gold standard would do nicely. But in an economy that has this thing called innovation, a gold standard spells permanent depression. This all begs the question: if we need the money supply to grow, whose responsibility should it be to decide how this should happen and by how much? Adair Turner, former chairman of the FSA, has a plan and it involves debt forgiveness and governments funding their spending via the printing press.

Let’s move sideways for one paragraph and pay homage to the late economist called Hyman Minsky. Mr Minsky had theories about debt. He reckoned that there comes a time when debt rises to such high levels that people can only afford to meet their credit obligations by borrowing even more. Such times are followed by a moment of realisation, and then markets crash. These days we refer to such an instant as a Minsky Moment. What is often overlooked, however, is that Minsky also believed debt was essential for growth to occur. See: Debt, do we need it?   So we need debt for growth, but then we get bubbles. That is why a growing economy is like West Ham supporters; it is forever blowing bubbles.

Now return to the main thrust of this article. These days, we have what is called fiat money, that is to say a money supply that is backed by nothing, other than confidence. In a gold standard you can theoretically swap your money for gold or silver. In a fiat system your money is worth money. One pound is worth one pound, nothing else. In such a system banks create money by their lending. Think of it this way. In an economy where there is only one bank, all money either exists in that bank or in notes and coins in circulation. If the bank works out that people like to hold, say, 10 per cent of their money as notes and coins, that means it can afford to lend out an amount of money roughly equal to ten times the amount of notes and coins that it has in its vaults. In the real world, the creation of money is a tad more complex than that, and involves fractional reserve banking. But you get the gist, when banks lend they create money.

It is by the process of banks’ lending that the money supply grows. That is why the credit crisis of 2008 was such a threat to stability. There was a real danger that as banks cut back on lending, as asset prices crashed, and the private sector tried to cut back on its borrowing, the money supply was going to crash out of sight. This is the point that those who thought QE would lead to hyperinflation overlooked. All it was ever going to do was stem the tide of a contracting money supply.

The critics of the current system of fiat money say that since we need the money supply to grow in order for growth to take place, and since money supply growth requires debt, that means the more the economy grows the higher the levels of debts. Lord Adair, who by the way was in the running for taking over at the Bank of England after Mervyn King, is worried about debt. He puts it this way: “In 1960, UK household debt was less than 15 per cent of GDP; by 2008, the ratio was over 90 per cent. Total US private credit grew from around 70 per cent of GDP in 1945 to well over 200 per cent in 2008.” See: Has financial reform been radical enough? 

Here is the idea then. Instead of promoting growth via debt why not promote it via printing more money. In this way you make banks follow much stricter rules on lending, adhere to much higher capital ratios, thereby limiting their ability to create money, but governments fund their spending by printing money. The idea is not new. It was suggested by the economist Irving Fisher during the US Great Depression. His proposal is now called the Chicago Plan. The IMF looked at a similar idea recently. See: The Chicago Plan Revisited 

Lord Turner put it this way: “Some combination of debt restructuring and permanent debt monetization (quantitative easing that is never reversed) will, in some countries, be unavoidable and appropriate.”

It all boils down to this. At the moment money is created by bank lending. Or to put it another way, market forces determine how much money there is via the interaction of demand and supply of money, savings and investment. Under the so-called Chicago Plan, the growth in the money supply is determined by governments. The advantage of this plan is that the money supply can grow without debt. The disadvantage is that without market forces occasionally blanching at debt levels, there is nothing to stop governments getting carried away and creating too much money, spending without the need to balance the books, and then crowding out the private sector and kicking off hyperinflation.

 

© Investment & Business News 2013

When was the last time you had a pay rise? Many people might answer that question by saying “about five years ago.” Envy the Chinese, or Poles, or Mexicans, or Indians. According to PwC, they are likely to see their wages shoot up. This is set to be a very important development, with implications for investors and businesses seeking new opportunities. But maybe workers in the west don’t need to be too envious, the pay gap will still be pretty enormous. It’s a very important trend all the same.

Between now (2013) and 2030, real wages in the US and the UK are expected to rise by about a third. Let’s hope that’s right – relative to what we have seen over the last half decade that would be a result.
But over that same time frame, average wages in India could more than quadruple in real dollar terms and more than triple in the Philippines and China.

Let this chart do the talking:


So what are the implications? First of all see the expected rise in wages across these countries in the context of re-shoring. See: Is manufacturing coming home? It will clearly provide the impetus for companies re-shoring their manufacturing closer to where most of their customers are.

What we may see, as wages rise in China, is not only more manufacturing in home territories, but nearby too. Opportunity, as they say, knocks for Poland and Mexico.

Looking further ahead, PwC says places such as Turkey, Poland, China, and Mexico will therefore become more valuable as consumer markets, while low cost production could shift to other locations such as the Philippines. India could also gain from this shift, but only if it improves its infrastructure and female education levels and cuts red tape.

From a corporate/investment point of view, who will be the winners and losers? PwC reckons western companies who may emerge as winners will include retailers with strong franchise models, global brand owners, business and financial services, creative industries, healthcare and education providers, and niche high value added manufacturers.

As for losers: well, watch mass market manufacturers, financial services companies exposed in their domestic markets, and for companies that over-commit to emerging markets without the right local partners and business strategies.

© Investment & Business News 2013

Re-shoring. If the last decade or so has been characterised by off-shoring, then maybe we are set to enter a new era in which manufacturing returns to home markets, or, failing that, to countries much closer to home. Re-shoring: if it proves to be real, it may provide real, underlying strength to economic recovery. If it proves to be real, then real hope can be added to economic commentary; hope that this time recovery can last. And now we have evidence that it may indeed be happening, right now.

Sometimes predictions can become descriptions. You can forecast what the weather is going to be like. It is much easier and more credible, although perhaps less interesting, to describe what the weather is like. But Boston Consulting has moved from forecaster to describer in one very crucial area. A couple of years ago it made headlines for forecasting a new trend in manufacturing, as companies opt to make their products nearer to their home markets. Now it reckons it has evidence that this is actually happening.

Being one of the world’s largest consultancies, Boston Consulting’s surveys tend to be pretty meaningful. It asked executives at US companies with sales greater than $1 billion about their manufacturing plans. A year ago, 37 per cent said they “are planning to bring back production to the US from China or are actively considering it.” In its latest survey, the results of which were published this week, that ratio rose to 54 per cent.

So why, oh why? 43 per cent of respondents cited labour costs; 35 per cent proximity to customers; and 34 per cent product gave quality as their reason for considering re-shoring.

Michael Zinser, from the consultancy, said: “Companies are becoming more sophisticated in their understanding of all the factors that must be considered when deciding where to manufacture…When you look at the total cost of production for many goods, the US appears increasingly attractive.”

The Boston Consulting survey probably provides the most compelling evidence to date that re-shoring is occurring, but it is far from being the only evidence.

Back in July a survey from YouGov on behalf of Business Birmingham revealed that one in three companies that currently use overseas suppliers are planning to source more products in the UK. John Lewis recently said that it plans to increase the volume of made in the UK products by 15 per cent between now and 2015.

This development is good news in more ways than one; it may even be very good news in quite a profound way, but more of that in a moment.

But what about China? This is surely not such an encouraging development for the economy behind the Great Wall. Well maybe it isn’t, but maybe it actually is. What China needs is for wages to rise, and for it to see more growth on the back of rising demand. Its economy is simply out of balance. No one is predicting the end of Chinese manufacturing, merely that it may lose some of its dominance. If this loss occurs because wages in China have risen, creating more demand, this is good news for China, its suppliers and the companies that sell to its consumers. Okay, changes are never smooth. There will be short-term headaches caused by re-shoring, but the overall impact will be positive rather than negative.

But there is another perhaps more important implication.

Over the last few decades we have seen growing inequality, and company profits taking up a higher proportion of GDP, while wages take up a lower proportion. Some think this is good thing, and accuse those who criticise of being guilty of the politics of envy. They miss the point. You may or may not think inequality is morally justified, but it is clear that from an economic point of view it is inefficient. For an economy to grow it needs demand to rise, and in the long run this can only occur if the fruits of growth trickle down into wage packets. It is perhaps no coincidence that the golden age of economic growth occurred in the 25 years after the end of World War II, an era which saw much more equality than we see today.

It is possible that re-shoring is symptomatic of changes in the balance of power across the markets. For years we have seen what the IMF calls the globalisation of labour: the reward to capital rose, the reward to labour fell. The underlying cause of this may have been the one-off effect of millions of Chinese workers joining the globalised economy. As this one-off effect begins to ebb, we may see the globalisation of labour work in reverse.

 

See also: Wages set to rise – in emerging markets

© Investment & Business News 2013

Innovation has always been a key foundation of a strong business, with even the world's largest brands continuing to push boundaries in order to stay one step ahead of their rivals with the latest must-have products or services. Strong innovative businesses also lead to a robust economy, attracting worldwide attention and creating conditions and cultures which allow other firms to thrive.

The UK government clearly recognises this; back in June prime minister David Cameron announced the creation of the £1 million Longitude Prize, rewarding any individual or company that can solve one of the "biggest problems of our time". In addition, Mr Cameron hopes that deciding what that problem is will stimulate debate about innovation and further highlight how important it is. In announcing the award, Lord Rees, the English Astronomer Royal and chair of the overseeing committee for the prize, noted: "There has never been a greater need for clever and socially useful inventions, and there have never been more people with the potential to make them if they're given the opportunity and incentive."

Lord Rees's view of the need for innovators is backed in one respect by research from Accenture, which shows that 58 per cent of businesses believe UK innovation is lagging behind that of the US, China and other Asian markets. It went on to reveal that many companies think the government should be taking the lead driving innovation, but experts at Accenture believe that companies need to take the primary role, starting with executive boards that encourage and reward that type of thinking.

In order to achieve this, companies need inquisitive and innovative employees, but too often firms find themselves restricted by the need for degree-level qualifications in a particular field. Where possible, it may be beneficial for companies to look for education not simply in their industry field, but in innovation itself.

A course like the BA/BSc Honours Product Design Degree from Middlesex University isn't bogged down in industry specifics, and instead provides students with "the skills, knowledge, experience and confidence to design and develop compelling products, services and systems for the 21st century". Graduates are therefore trained in how to direct curiosity and ingenuity into commercial applications, tackle challenges and build on opportunities. It is this kind of graduate that could help to drive innovation in the future, rather than those who are simply trained in how things have been done before.

There are an increasing number of such courses being offered by top universities, so it is up to companies to start making the most of these talented graduates, if they truly want to innovate. As for the government, it was recently moved to defend its innovation policy, insisting that a "wide range" of measures have been put in place to ensure that the UK Research Council is helping to drive business growth.

This article was written by Clayton Davis, who has been writing on businesses and the economy for over 5 years".

© Investment & Business News 2013

As far as the Bank of England is concerned, the inflation panic is over for now. You may recall that many feared that one of Mark Carney’s first acts as governor of the Bank of England would be to put pen to paper and knock off a quick letter to George Osborne explaining why he was doing such a bad job at keeping inflation close to target. If inflation moves by more than one percentage point above the 2 per cent target, the UK’s most powerful central bank is required to write a letter of explanation to the chancellor.

As it turned out, inflation was 2.8 per cent in June – less than was feared and 0.2 percentage points down on the level that would have triggered a letter.
This week the data for August was out, and this time inflation was just 2.7 per cent.

Will it continue to fall? Answer: unless something odd happens, surely yes.
For one thing sterling is up, and recently rose to its highest level against the euro and dollar since January. For another thing, past movements in commodity prices suggest food inflation should fall sharply.

But thirdly, sheer maths seems to make it inevitable. Last autumn the UK saw prices rise quite sharply – up 1.5 per cent between August and December. Between May and August, prices rose by just 0.2 per cent. If the inflation rate we have seen over the last three months continues for the next three months, annual inflation will fall to just 1.3 per cent.

Now look at house prices and apply the same approach.

According to the ONS, house prices rose by 3.1 per cent in the year to July. But between August and December last year, houses prices fell slightly. If house prices rise at the same pace seen in the past five months over the next five months, then that will mean house price inflation will be running at 9.4 per cent by December.

Today’s ‘Daily Mail’ headlined: “Property price bubble is a MYTH”, and described the latest 3.3 per cent house price inflation rate as “modest”. But simple maths shows why this will change very soon and a bubble is, in fact, being created in our midst.

© Investment & Business News 2013

There’s a lot of talk about the dearth of Merger & Acquisition activity in the UK and overseas but this would appear to be a bit of an illusion since business confidence is still sufficiently robust to underpin near record figures for global transactions.

According to Mergermarket, the first quarter of 2013 saw the value of deals total $ 406bn. While this was 10.3% down on the corresponding figure for 2012, the former was inflated by the multi-million dollar merger between mining group Xstrata and the commodity trading house, Glencore. By comparison, the biggest deal in the first quarter of this year was the $27.4bn purchase of Heinz by Warren Buffet’s Berkeley Hathaway conglomerate and the investment group 3G Capital.

Even private equity which has taken such a pounding is bouncing back strongly in the US with buyouts in the first quarter of 2013 reaching $84.8bn which was their highest level since the fourth quarter of 2010. Since the figures comprise formal offers as well as completed deals, they include the attempted buyout of Dell by the company’s founder, Michael Dell, and Silver Lake Partners, a private equity investor.

By contrast, the level of buyouts in Europe where the business cycle is running some way behind the US plummeted by over a third to $17bn.

As far as the UK is concerned, it would seem that the level of M & A activity is still largely inhibited by fragile business confidence, historically low stockmarket ratings and cautious credit markets. What has been noteworthy is the trend towards establishing footholds in faster growing emerging markets such as Brazil and India via the purchase of local businesses.

Clearly it makes sense for international companies and global buyout firms to delay buying more assets in slow growth economies and focus their attention more on faster growing areas. The case is made all the more compelling by the fact that company valuations tend to be lower in such countries and many of their currencies have depreciated against Sterling and the Dollar making acquisitions even cheaper. By way of example, the Brazilian Real depreciated 10.4 per cent against the U.S. Dollar in 2012, while the Indian Rupee depreciated 1.7 per cent during the same period.

Now that the Fed is starting to signal the end of Quantitative Easing, emerging market currencies are starting to depreciate still further so that local companies will look even more tempting to Western buyers.

UK merger and acquisition advisers hoping for more deals nearer to home will be hoping that the latest economic growth figures remain surprisingly buoyant and prompt takeover plans to be brought forward. The much-mooted £65 billion cash sale of Vodafone’s stake in its US arm, Verizon, would certainly help to kick-start sentiment.

© Investment & Business News 2013

'Give me a place to stand, and I shall move the world,' or so said Archimedes – supposedly. He was expounding upon the benefits of levers. A small action can lead to a massive reaction, if the pivots and levers are right. It is like that with the economy too, although economists often fail to grasp this point – which is why so few predicted the crisis of 2008. But it can work the other way too; a few small changes can have a radical upwards effect. Neither economists nor the markets realise how dramatic the economic turnaround might be.

The dangers of a housing bubble have been outlined many, many times. The point those who dismiss such dangers are not getting is the British psychology. It is as if the British DNA has been hardwired to expect house prices to rise, and to be in permanent fear of missing out on the opportunity to jump on or climb up the housing ladder. In the long run, this expectation may prove wrong; indeed the very idea that there is such a thing as a housing ladder may be wrong. But expectations are such that it takes very little government interference to create a housing boom. And because of the way UK households see the value of their homes as a kind of extension of their salary, or as the main part of their pension, when house prices rise consumer demand rises and with it GDP.

But this is not the reason why it is being suggested here that that the UK economy may be set to boom – although it will help.

Bear in mind that the UK economy today is around 15 per cent smaller than if it had carried on growing at the pre-2008 trajectory. Squint a bit, look at the data through glasses that may be a touch tinted by roses, and could it not be said that the UK economy has room for a period of catch-up. Let's say it will take five years before the UK gets back to where it would have been had the pre-2008 growth rate continued. Let's say the underlying growth rate for the UK is 2.5 per cent. This means that growth over the next five years will be around 5.5 per cent a year.

That is crazy, you might say. Well maybe a growth rate like that is crazy, but it might happen all the same.

Take corporate cash. According to Capita Registrars, no less than £166 billion in cash sits on corporate balance sheets. Since 2008 cash minus short-term debt has risen from £12.2 billion to £73.9 billion.

If you want to know why the downturn has been so severe, the above numbers give the reason. Just imagine the economic implications, not to mention the implications for equity values, if some of this money was released to fund investment, higher dividends, and mergers and acquisitions.

The reality though is that this is understating what might happen. When you think about it, the build-up of this cash mountain at a time when interest rates were at record lows was extraordinary.

If the corporate world was to start thinking that economic growth is set to accelerate, it won’t just start spending its cash, it will engage in leverage to make Archimedes’ ideas for moving the earth look quite modest.

Now consider what the surveys are saying. The latest composite Purchasing Managers’ Index from Markit/CIPS covering August hit its highest level since record began in 1998. According to Markit, the survey pointed to quarter on quarter growth of between 1 and 1.3 per cent – so you see a year on year growth of 5.5 per cent is not that far off what the surveys are suggesting may be happening already.

Interest rates are set to rise. The time to engage in leverage is now, before rates rise too high. And engage in leverage is what companies will do. The Vodafone Verizon deal is just the beginning.

Will we see a bubble? Will it be too good to last? Maybe. But the Institute of Economic Affairs is taking the opposite approach; it is saying that from now on the UK’s sustainable growth rate will be a mere 1 per cent year.

What the pessimists overlook, and they are being led by an economist called Robert Gordon, is technology. If you shop in Luddites‘r’us, you may well conclude such predictions are absurd.

© Investment & Business News 2013

The deal between Vodafone and Verizon announced earlier this month is, in fact, the third largest corporate deal in history. In comparison the deal between Microsoft and Nokia is small beer, but it is still a massive arrangement by any normal yardstick. Interest rates are low, but they may not be low for much longer. Is now, and pretty much right now, the time for a new M&A boom?

Let’s look at some of the reasons why the two mega deals of this month have happened. Okay, there is good strategic fit. Verizon and Vodafone both see new opportunities, particularly thanks to 4G in their domestic markets. In the case of Microsoft and Nokia the rationale for the arrangement is pretty obvious and has been discussed to death elsewhere.

But consider two other factors less commonly discussed. In the case of Vodafone and Verizon the factor is low interest rates. Fears that rates may rise soon, was possibly the main rationale for the timing of their deal – indeed Verizon referred to this very point. In the case of Microsoft, the software giant is one of the companies with a massive cash pile. There are many of them. Corporate cash piles have been a particularly notable phenomenon of recent years. Market bulls have been predicting the release of this cash mountain for some time. In the case of Microsoft, its partial release has been triggered by desperation – fear of Google, Samsung, and Apple, even Amazon. Other companies may start spending because they see signs of an economic pick-up. The reason may not matter. It was surely inconceivable that companies were going to sit on all that cash for much longer, but a trigger was required to release it.

Look further down the corporate league and other evidence of new M&A activity emerges. David Lloyd Leisure has been bought by private equity firm TDR Capital – and its new owners have plans for expansion.

The ‘Telegraph’ recently quoted Greg Lemkau, who is the co-head of M&A at Goldman Sachs, as saying: “Within two or three years from now, people will be looking back on this time as a golden opportunity.”

But the overriding point is this. The economy both here and in the US seems to be improving, and pretty significantly too. M&A is always popular during an economic upturn. But because interest rates are set to rise, the ideal timing for such activity is now.

Not everyone in the corporate world has cottoned on to the recovery; they were likewise slow to spot the seriousness of the crisis five years ago, but as the recovery gatherers momentum, the penny will drop, and then we will see a rush for leveraged deals before rates rise much further.

What are the implications? AS M&A activities rise, so too will equities. The FTSE 100, the S&P 500 and the Dow will all pass new highs – probably.

Is it all a good thing in the long run? Well that will be the subject of another article.

© Investment & Business News 2013

George Osborne recently tried to assure us. "I don't think in the current environment a house price bubble is going to emerge in 18 months or three years," or so he told parliament this week. The Bank of England governor promises us he won’t let it happen – no bubble here, thank you, not today, tomorrow, or for as long as he is boss. Yet a poll among economists found that around half reckon a new bubble in the market is likely. The latest survey from the Royal Institution of Chartered Surveyors (RICS) may even provide evidence that such a bubble is underway right now. Why then, do we see such complacency? And how dangerous is it?

Actually the no bubble here argument seems to come from two different sides of the spectrum of economic thought. There are those, such as Capital Economics, who tend to be on the bearish side. House prices won’t shoot up in price, it suggests, because prospective new home owners can’t afford higher prices, and real wages are, after all, still falling. From the other side of the spectrum seems to come the view that there is no bubble because the very word bubble seems to suggest something negative. It may be true to say that this other side of the spectrum sees rising house prices as a good thing.

Okay, let’s look at the surveys. The latest Residential Market Survey from RICS may or may not provide evidence of a bubble but it certainly seems to provide evidence of a boom. The headline index, produced by taking the percentage number of surveyors who said prices fell in their region from the percentage number who said they rose, hit plus 40 – that’s for the month of August. It was the highest reading for the index since November 2006. The survey also found a rise in supply as more properties come on the market, but that the rise in demand was even greater.

As has been pointed out here before, the RICS index is not only a good guide to the housing market, it seems to provide a good barometer reading of the UK economy. The trajectory of history of this chart, and its correlation with the GDP a few months later, suggests the UK economy is set to see growth accelerate.

Now let’s turn to the other survey. This one comes courtesy of Reuters. A total of 29 economists were surveyed and asked about the prospects of another housing bubble. Nine said the chances are small, seven said the chances were even; 11 said likely; two said very likely.

Mark Carney suggests, however, that he won’t let it happen. He recently told the ‘Daily Mail’: “I saw the boom-bust cycle in the housing sector, the damage it can do, the length of time it took to repair.” These are encouraging words. He is saying trust me. Just bear in mind however that a housing bubble appears to have developed in Canada during his time as boss of the country’s central bank.

George Osborne turned his attention to the topic. On the subject of loan to value ratios, and the way in which first time buyers have had to find such enormous deposits in recent years, he said: “This change is not something we should welcome. It is both a market failure and a social problem – imagine if you’d had to find twice as big a deposit for your first home. 90 per cent and 95 per cent LTV mortgages are not exotic weapons of financial mass destruction. They are a regular part of a healthy mortgage market and an aspirational society.”

Here are two observations for you to ponder.

Observation number one is the British psyche. It is as if it is hardwired into the DNA of the British public. They are driven by fear to jump on the housing ladder, driven by more fear to rise up it, yet without questioning the view they believe that when the equity in their homes rises, they are better off, have more wealth, meaning they don’t need to save so much for their retirement. In short the UK housing market is prone to bubbles. The UK economy can often boom when house prices rise, and the reason is deep rooted in the British psyche. Whether this is good thing or not is open to debate. However, this point about the psychology does not seem to be understood by many economists, the markets or the government.

Observation number two: The new governor of India’s central bank Raghuram G Rajan used to be the chief economist of the IMF. Between his stint at the IMF and his new role in India, he wrote a book called ‘Fault Lines’. In it he suggested that rising house prices was the way in which democratically elected government were able to compensate their electorate for the fact that their wages had only risen very modestly. Mr Rajan was not suggesting a conspiracy; merely that the economic fix found by authorities proved to be the path of least resistance.

A boom in which the UK economy becomes more dynamic, maybe one in which QE funds investment into infrastructure, entrepreneurs, and education, creating a work force better equipped to cope with the innovation age we now live in, would be a wonderful thing. A boom based on rising house prices, however, would be a much easier thing to create, so no wonder Mr Osborne is so keen on the idea.

© Investment & Business News 2013

© Investment & Business News 2013