The end of an era!

Is it a bird, is it a plane, no it’s a bubble. At least that’s what the cynics are saying

The economy is coming back. In the article to follow, we will be providing a quick summary of a number of key economic indicators: namely, on house Prices, the High Street and business surveys.

It’s good and it’s bad, but one thing is clear, those dark prophecies of doom which were the staple diet of economic commentators earlier this year, seem to have gone the way of the dodo.

Is it really possible, that just a few months ago, they were talking about the end of capitalism, about civilization itself tottering? Well, those days are gone.

The question we need to ask is what happened. If this is the worst recession since the 1930s, then why doesn’t it feel a lot worse?

The great depression led towards world war, the recession of the noughties seems to have led to a world of cooperation.

Here are three alternatives suggestions:

First of, we have seen proof Keynes was right – or at least we might have. Poor old John Maynard Keynes. Winston Churchill once said “if you get two economists in a room you get two opinions, unless one them is Lord Keynes, in which case you get three opinions.”

Keynes’s most famous contribution to the world came in the form of his paper entitled The General Theory of Employment, Interest and Money, published in 1935. He prescribed the remedy for what to do in an economic depression. His ideas influenced Franklin Delano Roosevelt, who launched his New Deal mark II soon after. But there’s a snag.

The results of the great experiment in Keynesian economics were invalidated by what happened next: World War II.

The anti Keynesians say the great depression was ending naturally. Keynesians argue the new deal didn’t go far enough, but the massive spending that came with World War II was a kind of Keynesian economics by mistake, and it was this that ended the depression.

And for 70 years academics rowed, and disagreed. There was plenty of theory, but no practice. That all changed last year. The great economic experiment mark II was kicked off.

Mind you, the Fed chairman Ben Bernanke is no Keynesian. He believed the mistakes of the 1930s were with the money supply. That the collapse in the banking sector during that era, meant too little money was floating about. That is why he famously talked about how a helicopter drop of money could, at the last resort, help an economy move out of a deep recession.

Then at the end of last year, and the beginning of this, policy makers threw the whole box of economic tricks at the problem: Keynesian economics, in which government spent, spent and spent, and monetary economics, in which central banks printed dollars and pounds.

Depression has been avoided. Civilization is in rude health. Economic theory has won. Keynes once said “practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” In other words economic theory matters, really matters, it shapes the world. The fact that the economic crisis has not been the cataclysm some feared, proves this.

So that’s the first opinion: that economic theory has saved the day.

The second opinion says something far more alarming: that the recovery is all an illusion. Keynesian economic is bunkum, because it just creates more debt, meaning an intolerable bill down the line. Monetary stimulus is just as bad. Quantitative easing has just fuelled inflation. It is already fuelling inflation in asst prices, and commodity prices, the rest of the price spectrum will follow.

In short, we have dealt with the recession by creating a new bubble. China is bubble blowing, because its growth is based on exporting to a world which needs China to buy more, and government spending which can not continue. The US is bubble blowing, hence the fall in the dollar, and rocketing price of gold. Did you know that the yield on US treasury bonds went negative last week? Equity prices are shooting up, and house prices, which remain high in the UK relative to earnings, are booming again.

The cynics argue this has got bubble written all over it. Government spending and, rock bottom interest rates, and new money have served to paper over the cracks; delaying the real crisis.

The third opinion is tad more unusual. It is not a view that tends to get that much exposure. In fact, you would be hard pressed to read it anywhere but here. This view relates to the Internet factor. The Internet, by promoting instantaneous communication across the globe, accelerated the rate at which the credit crisis set in. Alan Greenspan described the credit crunch as a once in a hundred years financial tsunami. Maybe the Internet means these types of cascading economic catastrophes are set to become a lot more regular. But, equally, the Internet, by promoting both competition and cooperation may also be accelerating the rate at which we move out of recession.

Maybe the internet has changed the pace with which things happen. Crisis erupt faster, they end faster too.

There is another issue, however.

The ultimate way out of trouble lies with our ability to produce goods and services. You can boost demand, but unless production rises too, it all counts for nothing.

Surely, the real error of the last few years is that money flowed into property and consumer spending, but not enough into business. Banks have ceased to be the means by which money that is lying idle is used to create wealth. Quantitative easing, is flawed because it has provided money to support the old way of doing things.

Finding ways to provide funding for business is the real challenge we must answer. The credit crunch should have punished banks for putting consumers above business, instead Keynesian and monetary economics mean the lesson was not learnt.

But there are signs, that despite this, attitudes are changing for the better. The Internet may be in the vanguard too.

Future issues will look at how, at last, the issue of providing funding for innovation is being addressed.

The economy grinds out of recession

When the office of National Statistics revealed data to show that the UK was still stuck in recession during the third quarter of this year, the cat was set amongst the pigeons.

Up until that moment, the economic data seemed clear. The UK was last pulling out of recession.

So what is really going on:

The survey evidence

Perhaps the two best pointers to the economy are the surveys published jointly by the Chartered Institute of Purchasing and Supply and Markit.

The CIPS/Markit Purchasing Managers Index for manufacturing goes back to the year dot. The key level for this index, is 50. Any score over 50 is meant to suggest expansion, below, and there’s contraction. Last year this index collapsed, falling below 40 during the Autumn of 2008 and the beginning of this year.

Since then the index has been flirting. It has been licking its lips and looking suggestively at moving back over 50. In fact, the little flirt rise over 50 in July and August, only to fall back again in September. But the data for October, revealed just a couple of weeks ago, has the index lifting to 53.7, the highest score since 2007. So are we being teased, or is manufacturing at last recovering?

As for Services, the CIPS/Markit index has been even more suggestive. It rose above 50 back in May, and has stayed there ever since, reaching a very seductive 56.9 in October.

You may argue about the causes and how sustainable it all is. But the evidence from the two surveys which appear to be the most reliable barometers for the economy are pointing to recovery.

The High Street:

The high street seems to be in growth mode too.

The latest stats from the ONS had sales in October up 0.4 per cent on the month before and 3.4 per cent up on the same month in 2008. Not everyone believes ONS data, but the more anecdotal type surveys from the CBI and British Retail Consortium (CBI) back this up.

The CBI’s Distributive Trades survey for October hit 8. That may not mean much to you, but any score over zero is mean to denote growth. It was plus 3 in September. But that aside was in negative territory every month since April 2008, with just one exception, April 2009 when it hit plus 3.

As for the BRC, it recorded a 3.8 per cent rise in annul retail sales in October.

The apparent improvement in the high street puzzles many, while some retailers deny it is happening.

In part the high street recovery is a relative thing. 2008 was so awful, that improving on that year isn’t saying much. It is also possible consumers are cutting back in other areas. They are spending less on services and big ticket items, but hitting the high street with gusto.

Maybe this is a cultural phenomenon. Shopping has become a hobby. For many Brits, hitting the mall is thought of as a leisure pursuit. Maybe we are comfort shopping.

Maybe, shopping is so entrenched into the British psyche, that it takes more than a nasty recession to break the habit.

House prices

Talking of entrenched believes, that takes us to the housing market. If the High Street defies logic, what about house prices?

According to the Nationwide, house prices rose by 0.4 per cent between October and September, and by 2 per cent in the year to October. The Halifax had prices up by 1.2 per cent in the month, but is still recording annual falls of 4.7 per cent. Hometrack had pries up by 0.2 per cent in the month, but recorded an annul fall of 4.2 per cent.

The explanation for rising house prices is not quite so easy to find.

Why should prices rise so, when the economy is barely out of life support?

One explanation is low interest rates. Add that to quantitative easing. This combination probably explains the rise in mortgages which has been occurring for much of the year.

The fact is, however, both demand and supply of housing is low, very low. It is just that supply is even lower than demand, so prices are being pushed up. Recent evidence from the Royal Institution of Chartered Surveyors has suggested that more properties are coming on the market- which may in turn change the balance of the supply demand equation in favour of supply, leading to prices falls.

There is no short-age of those who believe property prices will fall again next year, with the chief exec of Nationwide, the latest to pin his colours to the mast of falling house prices in 2010.

The view here, is that the idea that house prices always go up in the long-run and those who are not only the so called property ladder have to jump on, at any cost, is so embedded into the British psyche, that any hint of good news on the market, brings in the buyers. This may yet prove to be a costly attitude.

Tomorrow:

The survey of the economy will continue as we look at inflation, the US, and China.