Unemployment at 80%. No one has a job except for government employees, railway workers and the handful manning the few remaining shops. Children are malnourished, disease is on the rise.
This could describe any number of nightmare scenarios, in any number of countries, at various periods in history (including, sadly, the present day). But the place I have in mind is in England. Specifically, it is the town where I grew up (though, I’m fortunate to say, a few decades before my time).
Jarrow, on Tyneside, wrote its name into British economic history in 1936, when 200 unemployed men walked to London in the Jarrow Crusade (called a ‘crusade’ by the organisers to distinguish it from the Communist Party-affiliated hunger marches that also happened in the thirties).
It had been three years since the closure of Palmer’s shipyard – virtually the town’s only source of work. This event, and the desperation that followed it, was chronicled by then MP for Jarrow Ellen Wilkinson in her book ‘The Town That Was Murdered’.
Jarrow’s experience in the last worldwide depression left its mark. From infanthood I heard about it, saw exhibitions about it, read books about it in school. And, in a weird way, I’m being reminded of it all over again right now.
It’s not just that the world has once again plunged into economic turmoil. What’s niggling away at me is a remark my history teacher once made.
“Jarrow’s problem,” he said, “was that it was a one-trick pony.”
And, of course, he was right. Jarrow was totally reliant on shipbuilding. Once that sector went into worldwide decline, Jarrow got smashed.
Britain today is not, thankfully, entirely dependent on a single source of employment. But it is – and has been for several years – disproportionately reliant on one sector when compared with other mature economies.
I’m talking, of course, about the financial services sector. According to Office for National Statistics data, finance contributes between one quarter and one third of Britain’s GDP.
And here’s another thing you don’t need me to tell you – finance is a sector in worldwide decline.
My hometown of Jarrow is an extreme example of what can happen when an economy has its key supporting sector kicked away. I’m not saying we’ll see 80% unemployment, or thousands of Britons marching to…well, where would we march?
But I do expect this downturn to be painful. I also expect it last a long time – I’m thinking at least 2011 before we see an upturn.
That’s not just baseless pessimism, either. It’s not merely the spooky spectre of a 1930s-style global slump that’s haunting me. The mechanisms behind this downturn are fierce. Take the credit market. The Bank of England has drastically cut interest rates. The government is desperate for commercial banks to pass this on.
But banks remain stingy. Why? Two reasons:
- They need to hang onto their money. That’s true of many corporations right now, financial and non-financial. Balance sheets are in need of repair, especially with recession looming. Until they’re healthier, lending volumes will remain low
- The recession make lending more risky. Banks want a risk premium – in the form of interest – for the lending they undertake. And what happens in a recession? More people lose their jobs, and more businesses go bust. That means more loans don’t get paid. So the risk premium that borrowers must pay is higher for any given base rate
So where will it come from? Not the financial sector – at least, not until the Great Deleverage has unwound some more, and solvency issues are less pressing.
Where else? Well…there’s the nub of the problem. The lesson from Jarrow is that, when the engine of the boom ceases to function, it can’t be easily replaced.
The government has two choices now. It can either accept the recession and let it play out – long and painful as it will be.
Or – as I suspect will be the case – it can throw the entire Budget at it (and let someone else deal with the consequences that arise from that).
I think we both know where this is going…
Until next time,
Ben Traynor
Editor
Fleet Street Daily
The Daily Reckoning – Millions of mistakes need correcting
By Bill Bonner
So many things to correct...so little time.
Citigroup said it was letting 50,000 people go. How much will those people spend this Christmas?
USA Today says “Americans are digging to save money.” They’re digging into their budgets...exhuming every expense they can. And they’re digging into their attics too – selling “stuff” they no longer need.
Most people say they are cutting back on restaurants, travel, and luxuries, the paper reports. Instead, they’re staying at home and renting movies for entertainment.
You can read the Daily Reckoning in full here
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