Friday, 9 October 2009

Is There A 'Real World' Anymore?

I hadn't realised that there was a famous Economist who has been credited with predicting the world financial crisis. There is one and his name is Nouriel Roubini, from a New York University.

Although I know of several people, including myself, who reasonably accurately predicted that there would be, in my own terms, 'A hole in the economy', largely as we believed that asset values had lost all connection with the world's voracious creation of money, we had no idea of the real technical issues. There was one other minor problem - none of us were world famous or economists and therefore we were not allowed to have such opinions, express them in public or have any credence attached to them. That's just a fact.

In fact, even as a shareholder in RBS, Lloyds, Northern Rock and Bradford & Bingley I have no say as that shareholding is managed on 'our behalf' by UK Financial Investments plc, a company that has not issued share certificates to any of us or in which we have any rights to vote. I have an unnerving feeling that we probably will not not get full value for our 'stock holdings' as the staff associated with that company will not only get a salary but bonuses too. Just like the FSA who received bonuses to a person as the world economy melted down on their watch.

But we should be grateful, because the politicians who did not want my opinion then do not want them now - not because I would probably start each sentence with, 'I told you so' but because they really could not give a flying fig what people like me think, even if we are vaguely right. We are the 'programmables' - the people who are fed the information and soundbites and duly absorb and believe them. In a single weekend of spending our future tax to an extraordinary and unprecedented extent just to save the skins and bonuses of a group of greedy bankers to the tune of £1.5 trillion, the Government now believe that the enormous debt burden they have put us all under can be halved by 2014. Yeah, right.

It's complete cod's wallop and I know it. But they rely on the fact that no one will listen to me as I am not a world renowned economist and nor is anyone else in the front bar of a pub.

I have talked about Joseph Stiglitz before. He's not a personal friend, and you probably would not like to get caught in a lift with him, but I feel a kind of kinship with the Nobel Laureate for economics as he could have come into the front bar of most pubs and been greeted warmly as a person who we might have described as not having his head up his arse. And so too Nouriel Roubini. Again, I probably wouldn't recognise him if he walked into the White Lion in St Albans. I might have even nudged a friend and nodded toward him and said ,'Isn't that the bloke off Bergerac' and gained 10 points for a good lookalike, but if he joined into our conversation then we may forgive him that he knew nothing of rugby but as long as he could name at least 5 films with a memorable song in them then he probably would have got a fair hearing. If he spoke of the economy, then I would expect a hearty pat on the back and a pint of Black Sheep would be bought for him. Assuming, of course, that even a lowly economist would stump their round at some point.

Roubini is supposed to have predicted this financial meltdown. He also points out that we are not out of the current financial crisis yet as the world economy looks very weak - his words not mine but, without blowing my own trumpet, I would agree. He claims that in a general sense shoppers are 'shopped out' and 'debt burdened' - this despite the fact that last month saw the first reduction in the £1trillion unsecured debts that UK consumers have for years. Roubini believes that we all should 'cut back consumption and save more'.

Hear, hear from the front bar. Wise words, another round on the slate or my debit card, please. What? I can't have credit? Well Roubini then goes into techno-speak claiming that the financial system is damaged and that not much corporate spending on capital is going on. That's true - and most companies are reining in expenses too as credit is scarce as well as the markets depressed.

But here comes the real blow in his message. He reckons that US house prices have yet further to fall. That's a worrying comment as the problem of inflated asset prices was far more acute in the UK than in the US. Our prices had soared uncontrollably over the last 10 years and our drop has only really been 20% or so during the crisis. Enough to send everyone into a panic and many into negative equity exposing the stupidity of the markets for buying debt but there you go. So Roubini is saying we have not seen enough of a fall in house prices yet - that's really bad news. It's really bad as that is just about the only financial instrument that has propped up the economy for the last 10 years and is currently our barometer for recovery. Wages have fallen over that period and so household income in real terms fell, but we leveraged our rising assets a great deal to supplement our spending spree.

We lost sight of the 'real world' where you only spend according to what you earn. We participated in a new 'unreal world' where we all discovered the new banks - our homes - and the world of cheap credit it released. So when the financial system went into meltdown, our homes were right in the middle of it.

You see, while property prices in the US have fallen just 13%, there has not really been a corresponding spread of price decreases into the commercial property market. That would cause chaos as that is where the big pension funds that we invest in for our future have all the money. The chaos so far has affected those who largely backed only the housing world. Should the price of commercial properties also fall, then we will have a very gloomy world to live in.

Roubini clearly has, at some time, been in the front bar of a pub as he believes the current 'froth' in the world markets which has seen the FTSE rise some 40% in a year is due to the manipulation of the Federal Reserve and the Bank of England. As Roubini puts it, "There is a wall of liquidity cashing assets, but I think that there is a growing gap between what is the asset prices and the real economy."

The 'real' economy. The real world. That's really the issue. This is why armchair sages like me struggle to communicate our thoughts - we have no formal economic education, I am a humble scientist by training and a salesman at heart. The economy is something that I glaze over when people start mentioning the 'Broad Money Supply' and, to me, M4 is just a motorway I use to go and see my family in Wales.

But Roubini is right. We have disconnected what are the underlying economic things from the new world order where we can create money out of nothing, profit out of profit. Even our solution to the problem compounds it all as we create money out of nothing to buy our own debts as Quantitative Easing has done. There is a real concern in the US that Government Bonds will not get bought as interest rates are too low. Meanwhile, when our Government stops buying its own debt with fake money, will there be a market for our bonds?

What the solution to the global economic meltdown has been, across the board, is an exercise in saving a small number of wealthy individuals' careers and re-fund them to make more money for the future. In doing so we stopped a collapse that could have taken us all with it that's true, but in reality we have just resupplied these individuals with the means to carry on creating more of a fake economy, very distant from the real economy.

Instead of these individuals using our precious cash to provide credit to business they have used it to buy the reduced value 'toxic' debts at the very companies that crashed in order to rekindle the whole fake economy and get their bonus train going again, making vast profits from effectively barrow loads of manure - worthless debts. The one thing that could really exaggerate all this is if house prices do start to rise because this will just get us all back into the groove and contribute by withdrawing from our equity and forgetting that in real terms we are getting worse off - as we forgot for the last 10 years.

The likes of Roubini and Stiglitz are the 'turds in the swimming pool' of new economic thinking. Stiglitz may have offered his advice on the solution to the global economic problems for free but that was his mistake - Credit Suisse knew the British Government was willing to pay and so they made sure they bid accordingly and have been paid handsomely for their advice. You see, in the new world of economics your value is not perceived by the number of Nobel prizes you have won but by the pounds you can bill or the value of your bonus. Porsches and Bentleys count in that world and that's what Gordon Brown asked for and got. So it's little wonder that we have a set of solutions which effectively threw enough faeces against a wall until some stuck in the form of incredible sums of money instead of resetting the 'real' economy by making sure banks did what they were supposed to.

But that is the issue. The banks have carte blanche to carry on as before. Oh yes, we can posture about bonuses, we can moan about imposing taxes, we can even supposedly turn on our friends as Peter Mandelson has done and accuse them of the very things he applauded, benefited from and whose advice he has paid for not months ago, but until you get to the root of the problem banks will carry on producing a fake world in which only a very few benefit and the world becomes a far more precarious place to live in.

Has, indeed, the fake world of the new financial order taken over from the ;real' world of fundamental economics of supply and demand?

If we do not reform the whole banking industry, there will be more than money to pay in the future - as Roubini puts it, 'We are already planting the seeds of the next crisis'. At the heart of it is the stability of the world as, if the financial system does break to an extent where mere money cannot repair it, then those with the most valuable commodities will rule.

My God, David Icke WAS right.

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