FinancialGuy Writes!

Are the ‘green shoots of recovery’ that keep being mentioned in the press and by politicos real? Is this, the worst recession of our generation really likely to be done and dusted in another 18 months? Or is this set to become a true depression?

Across most of the coroporate world, earnings are collapsing, banks still are reluctant to lend and firms are heading towards bankruptcy. In the personal world, people are still being made redundant, debts need to be paid and homes are being repossessed. In the government world, bailouts are still happening, social security and unemployment claims are rising whilst tax revenues must be falling.

It is on this last point that I wish to focus.

If there are less people in jobs, there is less tax revenue coming in and more unemployment payments going out. So far, so obvious. In time, this must cause a squeeze of the public purse strings – everywhere. On top of this, the public accounts are groaning under the weight of significant borrowings during the boom years (I know…) and now very significant extra borrowings from the first bailout year.

This means that in time, and it is only a matter of time, there must be the equivalent of a public sector recession. The day will come – and it is approaching quickly – when ‘the state’ will be unable to step in and help. There will be no more Middle East or Far East governments willing or able to purchase our government bonds and the game will really be up.

When this happens, governments will have no choice but to hit the general public with the double whammy of tax rises and significant inflation. It probably will not be enough to raise taxes or inflate the debt away. We will need to go through both. This will of course be accompanied by high interest rates. All of this debt will need to be squeezed out of the economy somehow.

For now, governments are still spending as if they have the money, which many clearly do not have. They need to recognise that the money is not arriving as a first step.

If this is all possible and likely, then the public sector recession will prolong the recession faced in the wider economy. It will, of course, start later. This would likely therefore be a secular rather than a cyclical market.

My own personal guess is that we have another two or perhaps three years before any public sector slowdown starts to bite. That is 2011 or 2012. But then there will be a period of real depression while the capsized public sector tries to right itself.

What might that take? Four or perhaps five years? Using my recession-ready-reckoner (a term I ought to get copyright for) we are looking at between 2015 and 2017. So I’ll play it safe and suggest 2016.

That isn’t what the politicians are saying, is it?

What this all means is that we all ought to be managing our finances as if we may never see the good times again and that things are going to get much worse before they get any better.

But I’m no expert – I could be right or wrong. What do you think?

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  1. Bright analysis.
    Why does the US media industry as no journalist to dig that matter?
    Are the ad paying companies censuring the TV network to look for clue in this new Watergate?
    Are they afraid that any deeper appeal for socialism could arise among the population?

    [WORDPRESS HASHCASH] The poster sent us ‘1055386704 which is not a hashcash value.

  2. The recession is ending, and the economy resetting. Inflation is the natural blowback against the foreign countries who otried to imprison us with debt. Bailouts are necessary to spread the pain around the wealthy, as it should be. Yes, there will be inflation, but we had that in 1979 as wll, and survived.

    The real problem is that a lot of people in this coutnry can’t function in the tech economy. They will be left behind as illiterates should be, while those who are futuristic will snatch power and wealth from those who aren’t.

    This recession is “top heavy,” dsigned to hurt the wealthy who didn’t share on the way up. Specifically, they didn’t run the last leg of the relay, where they are supposed to invest in new talent, and new people. Instead, they power-tripped, played god with the poor, instead of investing in them and hiring them, and it’s biting them in te butt now. Instead of them lifting others up, their stupidity is bringing them down.

    This will seem like a crisis to those who live in denial, but it is a logical evolution. Things looked more hopeless in 1979, and we dug out of it in a few years. As we dig out of this, revenue, property values, wages, and tax revenues will begin to improve, and the picture will normalize into a new reality that rewards merit instead of cronyism.

    Put another way: this IS the recovery. A recovery from the stupidity that got us into this mess. It’s been going on for almost three years now, which means we are three years closer to the end.

    People who are skilled and resourceful have nothing to worry about. Thoe who aren’t need to understand that when you run out of chips, it’s time to get up from the betting table and leave the casino, so the new top dogs can claim their spot.

    Ray Gordon

    [WORDPRESS HASHCASH] The poster sent us ‘1055386704 which is not a hashcash value.

  3. Thanks for your thoughts gents. I’m not sure though Ray whether ‘this IS the recovery’. My fear is that we are still a long, long, long way from finding the bottom of this particular barrel. I hope that this is just my perma-bear nature and not reality – but you never know.

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