26 february 2010, merchant of gloom

Friday 26th February 2010

Despite my perennial optimistic bent, I just cannot make the economy read like good news. OK, so the end of 2009 did see anaemic growth, but what’s happened since ? House prices down, investment weak, mortgage lending down, retail figures terribly bad... and so it goes on. And I fear this is not transient but trend, driven by conservative (with a small “c” !) official forecasts seeing the uk's budget deficit rising beyond where greece is today by 2013. Market confidence is already fragile and we don’t, like greece, have a global reserve currency to prop us up. I have been saying for over a year now that the phase of the downturn still to come is a sterling crisis, and I fear it is close at hand. The end point of that must surely see interest rates rise far sooner than the bank of england would want, crushing any nascent recovery far more effectively than reining in the fiscal stimulus “before time”. A singular failing in the earlier phase of the crisis was banks’ and systems’ inability to appropriately weight “tail risk”, meaning they accounted for what would happen in the 90% most likely circumstances but discounted the effects of any “long tail” outcomes, i.e. those that were highly unlikely, but, were they to happen, would be catastrophic. Fool me once, shame on you, fool me twice, shame on me.