July 30, 2009
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?financialguy