Are we revisiting the 1970's

Are we revisiting the 1970’s?

Wait long enough the saying goes and everything comes back in fashion. Well I don’t know about you but the pain and suffering being experienced by many people in the UK today is one fashion I could do without.
The press and social commentators are happily comparing now with the financial meltdown that occurred during the 1970’s. So, is it the case that there are parallels between what happened then and the beginnings of what we are experiencing now and are there any lessons that we can learn?
One of the good things that the current Prime Minister did whilst Chancellor of the Exchequer was to make the Bank of England independent. His brief to them was to keep inflation at 2%. If they failed to do so they had to write to him to explain why and tell him what they intended to do to bring it under control.
The Bank of England PPC (public policy committee) have been very successful in keeping inflation within its boundaries, but now they have had to write that letter as inflation rises above three percent. Cast you mind back to the 1970’s when inflation ramped up to nearly 27%.
The reason why inflation is so feared is that costs escalate, and as costs escalate so prices have to rise to ensure profits are maintained. As prices rise, so wages have to rise to enable goods to be bought, this causes inflation to rise again and so the cycle continues. It is unsustainable for businesses facing wage demands from employees seeing the value of their earnings plummet and so this is why inflation is so feared by businesses.
Back in the 1970’s the unions had a lot of power and held the government of the day to ransom. In the 1980’s Margaret Thatcher challenged the power of the unions and many say broke them. She did this to drag the country out of the doldrums it was in and to try to turn it competitive again. In this decade, union and government relations are peaceful and their leadership on the whole responsible.
So whilst the PPC has control over inflation in the country it can do little if anything about global inflation, which is being fuelled by an ever rising price in the barrel of oil, which is now over $140 a barrel. This has been caused in part by speculators, the demand for oil from emerging economies of India and China, and problems with refining capacity across the globe. In the 1970’s we saw this type of situation when OPEC cut production.
In addition we also have a global food crises in which a combination of crop failure and alternative use of land to grow crops such as for bio-fuels, has caused prices of staple foodstuffs such as rice and wheat to be in shorter supply. Certain countries have already experienced food riots.
All this is happening at the same time as banks restrict the availability of credit, due to the problems incurred in the US where banks over lent to sub-prime borrowers, who subsequently defaulted on their home loans. These loans were packaged into billions of dollars of security and traded. When the true nature of the value of these loans was discovered, it caused billions of dollars of losses to global financial institutions. This led to dissolution of their capital bases and the restriction of credit by those institutions both between themselves and the public.
In the UK, the high street, has for a number of years been kept afloat by consumer spending on credit card and other types of credit. Whilst times are good, this credit can be re-paid. The economy needs this activity to continue otherwise growth will stagnate.
In the UK we have also had rising house prices for a decade which has given society a false feeling of wealth. People thought that if they had equity in their property, they could continue to spend as even if they couldn’t repay the instalments they could always sell up and repay.
However there is now a major problem with this debt solution as the restriction in credit has meant that mortgages are not available for first time buyers who need a large loan to value. This has prevented many people getting on then housing ladder when coupled with the high prices of housing stock.
The lack of movement in the housing market is causing house prices to fall, maybe by up to 15% this year. With that envisaged, those same people who couldn’t get on the housing ladder, are now waiting to see how far house prices will fall. This is further exacerbating the problem and may well lead to falls in prices last seen in the early 1980s’
An additional problem is that with houses not being sold, builders are unable to shift stock, which has the knock on effect of causing those builders to downsize staff. As more people are made redundant, this has further negative implications and headlines.

With potential inflation and a slowing economy, we face every economist’s worst nightmare. Stagflation.

The economic news every day is gloomy. Nobody is quite sure where this is all going to end. The government argues that the economy whilst experiencing difficult times will not enter recession. Many others argue we are already effectively in one, no matter what the official definition might say. I say if it looks like and recession and feels like a recession………

Hold on tight, this is going to be a bumpy ride.

Steve Thatcher.
http://www.helpwithdebt.org/