Wednesday, September 09, 2009

Shoots of

Why Labour spinners
are so desperate to talk up
the economy.

A major factor prolonging a recession is a lack of confidence. Consumers and businesses who feel that bad times still lie ahead will tend to spend less - creating economic conditions of poor demand in which recovery becomes very difficult. As a result of this leaders, the media and most business institutions have an interest in 'talking the market up' even when often there is no uplift at all.

Norman Lamont famously got into trouble for talking up the economy even as the 1990's recession was just getting going (In October 1991, based on CBI and Institute of Directors business surveys, he said "what we are seeing is the return of that vital ingredient - confidence. The Green shoots of economic spring are appearing once again).

In January this year Labour spin doctors were forced into a massive rescue operation when Baroness Vadera claimed there were 'green shoots' of recovery in the air. The remarks came on a day when UK firms announced large-scale job losses and share prices slumped by almost 5%. The economy then plunged into a record second quarter recession, a steeper faster decline than any recession since the 1930's depression.

Of course for Labour there is another reason to talk up the economy - an impending election. Labour have built their entire election strategy on the basis that if the public can be persuaded that the 'recession has ended' they might just get some credit for it come polling day.

Dr Pedrick Friend has joined in this week through the local newspaper, here he is making utterly ludicrous statements about the economy which, even though the claims are so wrong they insult our intelligence, cannot be allowed to go uncorrected.

He says in his letter : "Economic green shoots are all around, economic confidence is surging as the stock market rockets, house prices recover and the manufacturing sector see more orders."
  • House prices have not recovered - they lost at least 20% last year and are stagnant.
  • Shares have not 'rocketed' either - the stock market has climbed back to where it was in 1997 when Labour came to power
  • Manufacturers are not 'seeing more orders' The CIPS monthly index of manufacturing orders fell in August.

The problem with calling the bottom of a recession is that often the pain is felt by people long after the technical period of economic contraction has finished. Although Vadera was wrong, Lamont wasn't. The 1990 recession ended -as he said- in 1991. But it was 1996 before there was a return of 'the feel-good factor' and consumer confidence came back.

But another issue is going to make this recession much harder to call anyway. 1990 and 1981 were recessions that had a distinct beginning, middle and end. They were 'U' shaped where economic activity fell, stabilised for a bit and then grew again.

But in the 1950's and 1970's we had a series of 'W' shaped recessions, where economic conditions meant that the recovery created another overload, creating another recession. We used to call this 'stop-go' economics and it's main cause was inflation. Every time the economy started to expand prices and then wages shot up, then the pound would fall as its value become less compared to other currencies, then interest rates had to go up and the whole economy ground to a halt again.

Pedrick-Friend refers in his letter to the Governments actions being ' a sensible Keynesian fiscal boost'. In fact their plan involved devaluing the pound, doubling the national debt and then printing £200,000,000,000 to fund a Government spending spree. The inevitable inflation this policy has unleashed will devalue savings and drive interest rates upwards. Higher interest rates will impact on the economy at just the wrong moment, causing pain to millions of home owners, it will also divert billions that could have been spent on public services into paying interest on the trillion pound National Debt we have accumulated.

Maynard Keynes will be turning in his grave.

1 comment:

Anonymous said...

There is another reason. The threat of an election in October?

What do you think about that Marcus? Could you be in Government before Christmas?