I told you so

In my post of 27th August 2010, I made this statement:

"The WPM is still recommending war-time economics but it looks like they'll be ignored again and the governments will incur further debt to prevent a double dip recession. But the market will see through this and the 2nd dip will eventually take place. This gives us a clue as to what is needed.".

We're entering a 2nd dip BEFORE the VAT increase and the spending cuts started. This means that something caused it other the austerity measures. My mother, a pensioner, received 4 £25 cold weather payments. This is only 1 month out of 3 and can't be responsible for all the fall. In the 3rd quarter the economy grew by 0.7%. To fall to -0.5% it had to fall by 1.2 percentage points which is the same magnitude as it rose in Q2.

I also concluded in August:

"It seems that there's a 6 month lag between the US and Europe: In Q4 of 2009 in the UK, GDP was 0.4% and 0.3% in Q1 of 2010; but was 1.1% in Q2 which was revised to 1.2%. Germany grew by a massive 2.2% and France by 0.6%. This reflects the good time the US was having 6 months earlier. This implies that Europe will experience a massive downturn by Christmas - if our economies are coupled."

The UK had at least 2 months to do something about this "massive downturn by Christmas". Instead, the Coalition Government decided to take £6bn out of the economy. It isn't the austerity measures that cause this massive downturn nor is it the VAT increase, but Government policy who ripped up Labour's plans to slowly repay the deficit. The cold weather may have contributed to it, but the decline had started in Q3 soon after the Government took the £6bn out of the economy. Even if you claim that the people were preparing for the austerity measures by curbing their spending, it's still a side effect of the austerity measures if not a direct effect.

I couldn't understand the strategy adopted by the Government i.e. the spending cuts because the resulting unemployment would mean less money for the local economies which will have a devastating effect on the GDP. This was touted as: if we reduce Government spending then international investors would invest in the UK and we get to keep our triple-A credit rating. I mean if the UK's economy is in tatters, who would want to invest in the UK? I alluded to this sometime ago. My fear then was the public sector would've suffered; the private sector would've suffered; and the UK will still lose its triple-A credit rating.

We are now seeing the beginning of that dark senario. You know, when I make a prediction, it's usually based on facts even though it seems like a load of drivel. The only way out of this is to create value and this calls for investment i.e. more borrowing NOT Qunatitative Easing. And I don't mean throwing money at the problem. The Government has to work together with industry and monitor their activities to ensure they're on track and facilitate working together so that one sector doesn't get in the way of another etc.

Many months ago, I read an article where small business owners complained that banks are not lending to them and the banks were saying the money is there but they're not taking it. Some small businesses don't want to take on too much debt - they've learnt that lesson from the quagmire we're in now. Similarly, banks haven't got the stomach for greater risks not after the excessive risk of the past decade that went bad; and small business loans are the riskiest (?) I thought derivatives were the riskiest. Besides, the Government is telling banks to set aside a lot of cash to support potential defaults.

I thought of many solutions one of them is credit guarantees a bit like factoring except that the Government underwrites them. For example A supplies to B who in turn supplies to C who supplies to D who retails to the consumers. Now the government can give a %age of the invoice total to A and ask B to pay up; B is dependent on C so B's bill is cancelled and C is asked to pay up; C is dependent on D so C's bill is cancelled and D is asked to pay up but D is dependent on the consumers. The government then ensures that the consumers stay in their jobs with adequate pay to pay their bills. Once D has been paid by its customers, they pay the Government's IOU who then distributes the profits among A, B, and C - D will have kept their profits before giving the rest to the intermediary for distribution.

This is obviously simplistic but you get the picture. The Government will ensure that goods and/or services are not only of a good enough quality but also that they serve a purpose. This will make transparency mandatory and will reduce fraud particularly tax evasion because the Government is directly involved.