Global Economy Readjusting In A Roundabout Sort Of Way?

After two weeks on holiday it is time to catch up on the economic situation and to whom better to turn than my old friends Dr Susan Swings and Professor Roy Roundabout.

I don’t think you have met these two, so let me give a few introductions. I have known both these distinguished economists since we all studied the subject together at University. But while I felt that economics really began and ended with the supply and demand curve, Susan and Roy both plunged more deeply into the subject.

Dr Swings is slim and blond. Her hair is cut short in a faintly masculine way, her dress is crisp and businesslike and she has the same sort of ‘doesn’t suffer fools gladly’ impatience that certain men seem to find rather attractive about Margaret Thatcher. Her serious demeanour, blunt opinions and ability to bite the top off a beer bottle have given her quite a reputation in the City where she has advanced to the position of chief economist with the US investment bank Floggit Burnem.

Professor Roundabout is rather different. Tall and bearded he appears to dress before turning the light on, has a detached view of life and a rambling way of speaking. His real name, by the way, is not Roundabout. This was his University nickname, derived from a habit of describing some theory of his at great length before concluding ‘...which is a roundabout way of saying so and so.’ The nickname stuck, Roy preferred it to his real surname, Pratt, and so he just sort of adopted it. Today Roy is Professor of Economics at Oakthorpe University, where besides lecturing with circuitous brilliance on economic theory he has produced a ground-breaking paper entitled ‘Parallel Traverse Theory and the Optimal Method of Searching for a Lost Golf Ball.’ I have read it and had I understood it I am sure it would have saved me several shots per round.

Anyway it is hard to get these two luminaries together, but I was able to do so yesterday and I began by asking them to describe what has happened in the last fortnight. While Professor Roundabout put his hand to his chin, looked ruminatively at the far corner of the room and drew a long breath, Dr Swings was immediately into her staccato stride

‘Commodity prices have collapsed. House prices are still falling as is the number of sales. Building societies are struggling to find the funding to finance new mortgages. The sense of crisis has hit Sterling, which has fallen against the dollar. Inflation is up and is heading towards 5% in the UK. And on the international front Russia has invaded Georgia.’

‘Not a very happy combination,’ I ventured. ‘I don’t suppose that this is quite, um, what investors are, sort of, looking for at this point in time...’

Dr Swings gave me the sort of contemptuous look that has turned many a waffling idiot to dust, and hurried on. ‘Of course not,’ she said. ‘It’s bad. Bad, bad, bad. The UK is in recession, the Bank of England cannot ease monetary policy while inflation is rising. Gordon Brown is dead meat. And now the one sector of the stock market that was standing firm, commodities, is heading down. It’s nasty and it is going to get nastier.’ She paused to give a rare smile, allowing me to bring the Professor into the conversation.

Inflation to fall and exports to be competitive

‘Well I look at things a little differently,’ he began. ‘It is true that the fall of Sterling has increased the cost of the commodities that we buy from overseas. But on the other hand it makes our exports more competitive. And anyway commodity prices, including oil, are now heading south so I don’t think we need to worry about inflation.

‘Indeed,’ said the Professor, stroking his beard, ‘I cannot help but feel that in a years’ time the price of many things, from flour, to petrol to domestic gas will actually be lower than it is today. So we may actually have deflation. And that, of course, would give the Bank of England the chance to cut interest rates.’ ‘Well maybe,’ snapped Dr Swings. ‘But you are just a typical... (I thought she was going to say ‘Man’ here)... bull. You are determined to see a bright side, even when it is perfectly clear that the global economy is heading downhill fast.’

She gave a snort of disgust before resuming her stride. ‘The consumer is in big trouble. People just don’t have any money to spend. They are defaulting on their mortgages. Banks and building societies are struggling to get any funding, and so they hardly dare lend.’

‘Ah, I know,’ interrupted the Professor, with just a hint of animation in his voice. ‘But look at it this way. Those very same banks and building societies are rebuilding their strength. They have decided not to lend money to those who might not be able to pay it back. They are lending on strict commercial terms and are paying a commensurate price for funds. Why, I have just made a one year deposit at 6.7%! Retired people have never had it so good. They are getting great rates of interest on their savings. And they could not care less that the value of their home has fallen. In fact they are rather relieved because they will not have to shell out so much to get their offspring onto the housing ladder. You are confusing financial sentiment with the real economy.’

He wagged his finger, drawing a bristling sound from Dr Swings. ‘In fact’, he concluded, ‘everything you describe is just the global economy’s way of readjusting. It is, in a roundabout sort of way, going through a necessary curative process of adjustment.’

‘Of course I know that,’ said Dr Swings fiercely. ‘But as this adjustment happens you underestimate the pain that will be inflicted upon all of you by my bank... er, sorry I mean by the recession.’ And with that she marched back to the trading room of Floggit Burnem. I think I just heard her mutter the words ‘Short Sterling! Sell the Pound’ before the door slammed behind her.

Regards,

Tom Bulford
The Penny Sleuth P.S. If you want to follow the tales of a small company investor, and uncover the hidden gems of the stock market, then sign up for the Penny Sleuth e-letter. It won’t cost you a penny…

^ Back to top

BlinkList
Del.icio.us
Digg
Facebook
Google Bookmarks
Livejournal
Newsvine
Reddit
StumbleUpon
Yahoo! My Web

Global Economy Readjusting In A Roundabout Sort Of Way?

RELATED ARTICLES

RED HOT PENNY SHARES

THE BULFORD FILES

Introducing Dr Swings and Professor Roundabout