The Economy and Repossessions

In February 2011, I forecasted that the UK would lose its triple-A rating. Although I didn't fully explain why, it's because the austerity measures would make it hard for industry to be profitable thus they'll lay off people i.e. unemployment would rise. The economic effects of this would be lower GDP if not recession; lower tax take from industry and from employees; and higher benefit payments as a result of unemployment. Investors will see this as proof that the Government is not in control and would reduce their confidence hence the UK would lose its triple-A rating.

Ironically, the Chancellor gave retaining the triple-A as the reason for the austerity measures. Boolean algebra tells us that if you have 2 option with 2 results each, you'd have 4 outcomes. The options are: austerity or no austerity; the results are: retain triple-A or lose it. The outcomes are:

1. austerity measures and retain triple-A
2. austerity measures and lose triple-A
3. no austerity measures and retain triple-A
4. no austerity measures and lose triple-A

Because the Chancellor introduced austerity measures, we were left with 2 outcomes. I wasn't pessimistic when I forecasted a loss of the triple-A rating, I was being realistic. In the end, we lost the rating i.e. we ended  up with the worst possible scenario - enduring the austerity measures and losing the triple-A rating.

I also forecast that we'll endure a double-dip recession as the economy was already suffering negative growth BEFORE the onset of the austerity measures which will make it worse for the economy.

But the most important forecast was that corporation tax needs to be reduced to help industry in these difficult and that the economy would firm up by 2014 such that we don't need a tax cut. Q2 and Q3 registered the strongest growth in 16 years to such a point that Chancellor revised his March GDP forecast from 0.6% to 1.4% which was corroborated by the IMF. Early indications is that Q4 had grown even more strongly leading people to forecast 2013 growth of 1.6% and some even 1.9%.

The point is that, with growth this strong, we don't need another tax cut - unless it was promised in the March budget when economic growth was very sluggish. See how far sighted of me with my predictions - I made this prediction almost 3 years ago.

I also shelved the forecast for repossessions for 2011 at 32,000 mainly because the austerity measures had scuppered our target. We didn't attempt a forecast for 2012 either as we were busy securing the economy not only in the face financial crisis but also with the detrimental effects of the austerity measures. In the end, there were only 36,000 repossession - same as the previous year and actually fell to 33,900 in 2012. In 2013 they're set to fall below 30,000 especially with the strong growth registered in the last 3 quarters of the year.

The WPM is now working with industry and is encouraging them to achieve GDP growth of 4%. This will overheat the economy but this heat can be taken off by the Chancellor raising taxes which will increase his ability to repay the National Debt and reduce it to manageable levels. An overheating economy would also increase inflation but this should be minimised by a strengthening sterling. The problem is that the BoE may be panicked into raising interest rates which would knock the economy taking us back into crisis territory. Hence, the lever to be used is either interest rates or taxation. Can the proceeds of increased interest rates be used to repay the National Debt?

The solution proposed by the WPM is that the interest rate mechanism should be abolished and that savers should become investors with their investments guaranteed up to say £100,000 and revised annually. This means that retail banks would become investment banks but not the casino banks currently practicing. In fact, banks whether merchant or retail, must not be allowed to enter into these types of gambling instruments. Better still, derivative trading should be abolished altogether.

So, the WPM is forecasting or rather hoping for GDP growth of 3% in 2014 and 4% in 2015 the election year. Now would the incumbent government delay any tax rises until after the election or bite the bullet and raise before then especially if the growth rate becomes too fast? If they delay, the independent BoE may be panicked into raising interest rates. This is why the WPM is recommending the abolishing of the interest rate mechanism. This would force the Government into acting. Remember, the idea is to sustain a high growth rate and raise taxes to repay the National Debt not necessarily for extra public expenditure.

This begs the question, what would be the remit of the BoE. Answer: lender of last resort without interest rates - it will have to be investment by the BoE. This would force the BoE to keep an eye on its investment and ensure it's getting value for money.

I'll update you in late January 2014.