Recession? What Recession?

Pah, it's only been since the April-June quarter of 2008, but the longest recession since records began is expected to have officially ended in the final quarter of 2009. Or, at least, that's the script as the same was expected last quarter.

According to Lord Mandelson on Radio 5 Live this morning, we have had less house repossessions, less unemployment (about 850,000 jobs lost), had less company liquidations, had only 6% contraction of the economy and faired better than other G20 nations during the recession - heck, we have hardly sustained a scratch to our way of life. In fact, under the Conservatives of 20 years ago, the recession then lost 2 million jobs.

The difference, of course, is that we have a record budget deficit of £178bn and rising. That and the fact that we have made no cuts to public expenditure - in fact, we have spent like crazy and not lost any public sector jobs at all. We have spent a few hundred billion rescuing banks and we have printed £200bn of new money to buy our own National Debt. What we have done is created a FALSE economic situation and mitigated the effect of the recession on real things like public expenditure by spending and creating money that we didn't have - and we will all pay dearly for that over the coming years.

Gordon Brown believes he has made all the 'right decisions' in this crisis but the real reckoning has been staved off to a later date. He has created a dreamworld, a fantasy of where we actually stand so that he can try and win the election.

It's an artist's impression rather than a financial one as the creativity of Lord Mandelson is evident wherever we turn. The figures today are pretty meaningless in the context of how much this crisis has cost Britain and the taxpayers. The pain has been delayed and that will costs us all even more.

Will There Be A 'Double Dip'?

Of the many questions that face us as we go into 2010, perhaps the most serious is, 'Will there be a double dip?'

It takes a moment to work out what that means, but effectively the climb out of recession is merely a false dawn and we lurch back into recession for another period before finally emerging into real growth. Of course, this would be a huge disappointment to the Government as we have already had the deepest and longest recession on record, so as we clamber up the sides of the slippery slope to growth, it could be disastrous if we slither back down - at least for their re-election chances it would be.

Just today we heard that the rate of growth in house prices has slowed. I actually think this is not such bad news - the return to economic growth would be far more healthy if it was not led by or dependent on house prices. However, there are more serious issues that we face.

Firstly, £200bn of Quantitative Easing (QE) is soon to end - where we have issued new, 'funny money' to buy our own debt. Pretty soon Government bonds will have to vie for real money buyers and that will be a crucial test of Britain's economic health in the eyes of others. The best that QE has done is to ease credit conditions but in reality it has been stored by banks to shore up their capital ratios and some have used it to play the markets again with devastatingly profitable effect. Little has got into the real economy and allowed people like us to get access to credit more freely - or businesses for that matter.

This lack of credit is still an issue. Today, as the recession lingers, businesses have not made big demands on banks for credit - not for growth or investment, at least. Most businesses have reined in costs and tried to decrease dependence on credit, hoping they will get good, easy access to money when the markets recover. That could be a real issue as not only will firms be making their demands at roughly the same time but it will be a crucial test once again of whether QE has worked. Many suspect this will be a tough time for businesses and impair the country's ability to recover and grow.

More importantly, around the same time, as thousands of businesses took the opportunity to defer the payment of tax bills, there will be cash demands on them. By taking up the Government's initiative on 'Time to pay', firms have kept vital cash in the business at a key time rather than have to borrow more to pay their tax bills or for that matter have to make deeper cuts. However, it does not mean that they do not pay their taxes, it merely gave them a stay of execution. The taxman will want his money soon enough. Once again, this will all happen at roughly the same time and companies will have to find the cash at a time when they most need it to grow and take advantage of the recovery. Again, it jeopardises the tenuous period of growth we have.

Similarly, there will be chaos for firms on 1 January as the VAT returns to its old rate. Those firms having their year end on 31 December will have a dilemma as they would normally bill all they can. If they are a distributor, then their customers who sell on to end users may fear receiving an invoice before 31 Dec if they cannot immediately bill the goods - so 'goods in transit' or 'shipped from factory' situations will be areas of uncertainty as the chain of invoices for VAT purposes may have differing VAT rates. While the situation may be clear in some accountants' eyes, I can tell you very large firms are very fearful of the lack of clarity issued by HMRC on the subject. For many firms, who operate on incredibly thin margins, if they are left holding the VAT difference, it could wipe out some or all of their profit on a transaction.

Out in the world of consumers, there is the issue of deferred payments on mortgages. On paper, it was a good idea, but the problem is always about the detail and the time for returning to payment is a real issue. At some point, despite over 1m new claimants on the dole, people will have to start paying again which will make less available to spend in the high street, particularly if house prices have not regained sufficient value as to wipe out the negative equity many are suffering.

Clearly, there are many things to be negotiated in the coming year and some of them have the potential to drag as back into recession. The biggest of them all will be when the Government finally faces up to the inevitable cost cutting it will have to make in the Public Sector. Over the last 12 years, an extra million jobs have been added to the Public Sector as well as all the outsourced contracts. As many as one in four jobs are associated with the Public Sector and it is anticipated that the Government will have to cut back so far as to regain all of the incremental spending it has made over the last 12 years - that is the stark reality we face. A simple argument can be made that all of those 1 million extra jobs created out of nowhere in the Public Sector simply to support bureaucracy and red tape and creating untold inefficiency on inefficiency will have to be lost. It not be that many but there will be big job losses in the Public Sector for sure - that's more people claiming on the Welfare State and less paying tax; the double whammy that keeps knocking the Government estimates on borrowing off line. This, of all factors, has the biggest potential to hit us as it not only puts a huge strain on the system, it also throttles the business of those dependent on the Government for a portion of their profits but most of all it means that our ability to service our national debt is less certain - and this has a corresponding repercussion on the credit rating of the country which affects the price and attractiveness of our Bonds.

It will be a tough year still for businesses and a tough year for Government. If we are to avoid the double dip, it will take businesses to lead us and the Government to ensure there is credit available when needed most. None of that is really certain at this stage.

2010 - A Year of Hope?

At least there is a broad consensus that growth is returning in 2010 and the even the Organisation for Economic Co-operation and Development (OECD), which has traditionally set a gloomy outlook, has indicated next year should see a strong rebound with China benefiting most while the outlook for the UK is good too.

In revising its forecasts, the OECD has predicted that even the UK will perform better than it thought previously which must be welcome news at last for a beleaguered Alistair Darling. October was another farce in terms of predicting borrowing with a record rise in our Public Sector Borrowing for a traditionally strong tax month of £11.4bn, pushing this year to date to nearly £90bn.

The main 'head winds' to growth, as the OECD calls them, will be unemployment and our public finances - the two areas where this Government has performed poorly. October was a dire month for both, the borrowing figure showing finances are nowhere near under control as we dedicated yet more to bank bail outs, while in turn banks announced major swathes of redundancies. Just when the news needs to be getting better, October could not have been worse all round, particularly as we found out that were still officially in a recession.

Reports in some papers today talk of a 'Black Hole' in our finances which is affecting our Government's debt calculations while others talk of unemployment rising to 3m in less than a year as the full repercussions of the recession are felt, dragging as down as we recover. The Queen's Speech was depressing from three aspects - 1) we missed the opportunity to get action on MP Expenses, 2) we got some pretty ill thought through but headline grabbing initiatives on care for the elderly which seemed to favour only one sector for some curious reason and badly at that and finally, 3) we got no action on how to solve the public finances.

This latter inactivity will cost us dearly on our road to recovery. Yesterday, I blogged on 'Hope is not a strategy' and clearly the message falls on deaf ears. Hoping to cut the budget deficit by half and then seeing the forecast for borrowing missed within a day for the previous month just shows a hopeless lack of understanding of our finances and a monumental hubris about what needs to be done for the future. While the strategy of spending is generally accepted as reasonable, surely we must be focusing on where we can make cuts and efficiencies so that we try to at least cut the deficit now to have any kind of hope of meeting the increasingly delusional target of halving the deficit by 2014?

The danger here is that as we recover, we continue to spend recklessly and find cutting hard - in fact, the temptation will be to believe that because growth is returning there is less need to cut spending. This will be a huge mistake.

The public finances has been for the last 12 years, and will be for the next 12 years, the most critical part of a Government's strategy. We have wasted vast tranches of money in the belief our economy was 'robust' and the temptation will be to waste more because we believe it is recovering. Getting our National Debt down must be the number one priority going forward and we are already way behind in our action plan. The last few months of this Government is already laid out in terms of its plan and not a single action along the way is designed to cut the deficit.

With that kind of leadership, what hope have we of meeting goals and reducing debt by 2014?

This is already, and will be for the future, a massive millstone around our necks as taxpayers. Add that to our limitless liability for bank losses, of which there could be more massive losses in 2014 as Private Equity Houses default on their loans, the future is actually not as bright as we would think.

Perhaps Brown has already worked that one out and has already 'lost the election' in his mind and so is actually preparing the ground for a ruined economy to be handed over to the next poor incumbent to make their tenure really awful.

What a nice way to thank John Major, who did precisely the opposite for him.

The Ticking Bomb

According to Guy Hands, CEO of Private Equity House, Terra Firma, the good days of making a fast buck on leverage buy outs are over. It's no bad thing.

But the really bad news is, as the global markets have gone down, Private Equity Houses have gone into what we would understand as negative equity on our mortgage. As they scramble to renegotiate loans, of which some £420bn are due in 2014, banks are giving them the stonewall treatment as they do not want to increase what are now looking very shaky lending positions.

It's a ticking bomb - if the markets do not recover sufficiently for the Private Equity Houses to sell their leveraged assets for a price which can repay their loans and interest, then they face total ruin. Imagine then what clever companies that have bought toxic debts like 'Protium' from Barclays are facing long term.

Hands asserts that by not renegotiating, banks are going to halt recovery. Once again, it seems that such companies believe the markets and economy revolves around their own ability to make money - as if we all owe them something. The fact is that Private Equity is still doing well in the main and over the last 5 to 10 years, investors have made billions by leveraging huge loans for little capital outlay - the risk taking has been enormous. As with all gambling, you will lose at least some of the time and with such high stakes, one failure can wipe you out totally.

Talking of ticking bombs, public sector borrowing in a typically good month for the taxman was up by a record £11bn in October. Once again, the Treasury miscalled the amount of borrowing as corporation tax collected was a good deal below expected. It seems that the old calculators once again let the Chancellor down and makes Gordon Brown's pledge to halve the budget deficit by 2014 a complete joke if he can't even get it right one month at a time.

Finally, the good news is that Tony Blair's simpering face will not be seen as the first EU President. Thank God for some common sense.

Debt Is Good?

Hey, if bankers can make billions out of trading debt then every penny we clock up as a nation must be a good thing? Right?

Really, we owe £825bn as a nation and we must be getting richer if we borrow more, according to the rules of bankers - so borrowing a record £175bn more over the next two years must actually be a good thing. No need to tighten our belts, rein in the spending, cut costs, make efficiencies - perish the thought. Spend as if there is no tomorrow, because debt is seriously good.

Well there is a minor flaw to the logic. We know as individuals and consumers that we can borrow and borrow thanks to the plentiful supply of low cost credit using the above logic. Then the party can come to a shuddering halt. As if someone has noticed a small turd in the bath water or that the emperor is actually wearing no clothes, someone always realises that your ability to service the debt gets in the way of a good time. The debt suddenly becomes a millstone around your neck and for consumers that can mean a lot of hardship, possibly bankruptcy in the extreme. Banks can be merciless if you cannot pay up, as we know, yet when they get into debt, we get to pay for it. An odd story but that's 'Big World Economics' for you.

While our Government continues to spend as if there is no tomorrow, we ordinary folk in the street know that it cannot go on - just as many of us realised that the rise in house values had to collapse at some time. Too much debt is a nightmare. We know that, yet we are not the equivalent of financial 'rocket scientists'.

It seems the public know more about the current national situation than the ministers at the helm - in line with people at the IMF and other bodies that look at Britain as growing pile of sewage on the world seas when it comes to borrowing money. We borrow and borrow yet we make no long or short term plans in which to pay the money back other than believing we will win phenomenal growth at the next throw of the dice or that the economic recovery will take care of all that we need to repay the money. It's like an executive asking the bank for a loan as the business is losing money but makes no modifications to his or her business because they believe success is just around the corner when it hasn't been for six straight quarters.

Put in those terms, Britain is heading for a financial disaster. By all means follow the creed of Friedman but there comes a time when you have make cost cuts as the situation will start to spiral.

A survey of the public agrees - so it is not the population of this country that wants to keep clocking up this debt. We have to pay for it in taxes - the interest bill by 2014 will be £60bn, the size of the NHS budget in a single year - and contemplating it scares the heck out of us. A BBC poll suggests 59% of people would prefer to cut spending rather than have increased taxes. Almost half of those surveyed (48%) also believed there should be a pay freeze in the public sector - the reason it was only half, I suspect, is that the proportion of jobs in the public sector must mean that statistically half the people who were surveyed that work must be in the public sector - it's a position which itself is a time bomb. Bureaucracy and civil service should be the first big area to get the knife, there are just oceans of people doing little of value to this nation other than occupying a seat and consuming tax pounds.

31% of those surveyed reckon the pay freeze should for two years - welcome to the world of sane thinking. The good times, as the public know, are over.

Here's a thought, over half the people reckon that the highest earners in the public sector should take between a 5% and 10% pay cut. During the entire recession and credit crunch, the Sunday Times Appointments Section has been chock full of public sector senior jobs with huge salaries - far greater than the private sector for similar jobs and with gilt edged pension plans and benefits. It seems as if the public sector has been booming while business has experienced reality.

Of course, you have to get the priorities right - the Armed Forces and parts of the NHS should not endure some cuts but there is so much wastage in this country all the way to the top that thinking you have only to cut all salaries is the mindless way of viewing things. It's like us cutting spending on training reservists and then sending them to fight the Taliban - doing such things are stupidity in the extreme but increasing the pay for MPs is exactly the same. You have to look at things from a value point of view. Increasing the pay of a CEO at an NHS Trust gets you no value while increasing the wage of a nurse or hospital doctor does. It makes you shudder when Labour introduced the manic scheme for GPs that increased their pay overnight by a huge amount for nothing extra only to find they had made a gross mistake in calculating how much they actually worked to qualify for their money.

This whole Government tenure has been one of laissez faire management of finances, policing and immigration as examples and now, as we contemplate the abyss of massive and unmanageable public debt, they continue to spend on stupid things like MoD and FSA staff bonuses when the country is on its knees while cutting spend on Armed Forces and frontline weapons while trying to fight two wars.

The penny has not dropped in all quarters yet as Glasgow North East showed - but at least this survey shows we are finally getting there.

The Danger Of Big Debts

I blogged only this morning on Alistair's Darling's dogma about borrowing to rescue Britain from the recession - 'borrowing to grow' is the mantra that he and the PM repeat endlessly.

I had a discussion with someone today about my negative response to this sentiment. And I tried to explain, beyond Alan Greenspan's gloomy view about borrowing too heavily as to why I believed it is not the only way out. I acknowledge that running a business is not the same as running a country but certain principles about debt are true no matter how you look at it.

Today, Government debt has been easily 'sold' as bonds as the main buyer in recent months have been ourselves - Quantitative Easing (QE)has allowed the UK to buy its own debt and so make it look very attractive. QE is drawing to its conclusion and the Government has indicated it will not spend any further than the £175bn already spent. Some speculate that when our bonds go on the wider market there may not be the enthusiasm by institutions and other Governments to buy our debt so willingly.

The reason is this, in my view. Anybody looking at loaning a person or a business more money will look closely at how it is run. If the lender (effectively the buyer of the bonds in our debt) sees that the person or business is not making efforts to create cash of its own, then there are warning signs about the long term ability of the person or business to keep up the payments on the debt. For an individual, a lender will look at income, savings, assets, prospects, other loans and current spending habits - indeed, new mortgages are rumoured to require much more rigorous scrutiny of how income is disposed of before assessing how much can be afforded. Business has the same scrutiny - the last thing that any lender wants to do is to lend money for an expensive lifestyle or wasteful use of money by a business. So if the MD wants a loan to buy a yacht to take customers around the Mediterranean while business is bad, the lenders will not be keen, just as Citigroup could not buy Corporate jets during the credit crunch.

What lenders would certainly want to do is to see how an individual or business accommodates their lifestyle or business to service the debt. If an individual receives the money and blows it on champagne and high living, the lender will not be happy as this is not helping the servicing of the debt and may well end up with the individual getting into more difficulties financially. For a business, if the business does not look to its own cost line, income or cashflow to maximise the use of the money, lenders, particularly in austere times, may not believe the business is going to be able to keep servicing the debt without coming back to ask for more.

A good example of this for our Government is the fact we borrowed, yet again, at much higher rate than previously forecasted in September, once again missing our forecast on borrowing and requiring us to borrow yet more. This lack of understanding of our own 'business' by the Government has to make lenders think twice about our long term ability to run the 'business' that is Britain. Further, we are not growing - despite spending astronomic sums pushing our borrowing sky high, Britain's GDP contracted again last quarter when other countries emerged from recession. Time and again, our Government has repeated the views that Britain's economy was strong and resilient to the recession and we were not overly reliant on the house market.

Time and again, the Government has been wrong.

Like a bad management team in any business, a lender will take a dim view of those managers who do not fundamentally have a good grip on their business. It is clear that our finances are run more in hope than in knowledge and lenders cannot lend endlessly against such poor management. The fact that there is a clinging belief that growth will come so just spend more, is a sure symptom that our 'management' has little clue as to what is going on.

But there is another big issue. The Government's stubborn refusal to cut costs is a major factor in putting doubt into would-be lenders' minds. Just like a person who takes a loan and blows it on champagne and good living, lenders will want to see where our money is going. If all we do is support the lifestyle of rich bankers, it has to be a worrying sign. The fact that we have written an open cheque to underwrite banks' bad business for the future is another serious issue - this is not supporting growth, this is supporting liability - to a lender for a mortgage this would be akin to another loan having a preferential or equal charge on your assets, this would have to limit the size of available loans and the appetite of the lender to risk it. Further, the Government just keeps avoiding the issue of making efficiencies and saving money. We need to show that we can create cash to help service debts so that if the economy remains in recession for longer, we can at least cover part of the 'miss to the forecast' if nothing else.

Finally, there is the taxpayer. While we are the 'collateral' for the loan as Britain has few assets left to sell, if growth is slow or the debt burden gets too high, then the Government will keep turning to us to get more of the money in tax to service the debt. If unemployment continues to grow, less tax is taken and the burden on the welfare state increases as a result, then we can borrow money to pay for the 'miss in forecast' but the debt servicing on the increased borrowing comes from increased taxes. It isn't rocket science. Lenders will observe that as time goes on and the tax burden increases, the appetite of British people to continue paying will decrease and this spells danger to the country's ability to service the debt.

Today, the Government are acting as if there will never be a time when it cannot go to the open market and raise money or take it from taxpayers. I think that lenders will start taking a dim view of Britain's ability to repay soon. From my own perspective, I am getting more shirty about where that increase in tax would be spent - if it is on wars I don't agree with or MP allowances or bureaucracy and inefficiency, I will not be happy to pay it.

I believe that making cost savings on our budget is essential to the country's good let alone to prove we can manage ourselves. We have too much flowing through the public sector and too much inefficiency - we can easily save money if we want to. We must prioritise what is important and cut costs where we can meaning some services will be affected, that's just a fact. Only when we have our house in order will be be able to see where we can invest money that we may have to borrow to create growth. Today it is just pure guesswork and it has almost exclusively been wasted on the financial sector.

Given that everyone pounds on that the financial sector is only 9% of our GDP is has taken a disproportionate amount of money on a grand scale to bail it out. This means that our dependency on this sector is far greater than its contribution to our wealth would suggest. That also suggest that we are pouring money down a drain in saving it - this is not good news for would-be lenders as right now we are funding lifestyles in the banking sector as much as if the Government borrowed £100bn before the crash and handed it all back to us in tax cuts to spend on what we wanted - they wouldn't have done it as it made no sense. But that's what they have done - but the billions have gone to a small percentage of people to not just save their careers but to make them far richer than they were before. It is that stupid.

In simple terms, if Britain were an individual wanting a mortgage and it had a budget and sources of income as it is today, our finances would not stack up. The lender would want to see how we adjust our spending and plan to grow and to be right on top of our 'managing the debt' before lending us more money.

Because the prospects right now are not good. We need to staunch the losses we are making as a nation to slow down our rate of burning money which is fuelling our requirement for more debt. Until we get that balance right - Britain is a bad debt in the making.