14 Sep 2009
It is not often that I hope to lose a bet. But this is an exception.
In July I had dinner with a friend and the inevitable discussion on the economy led to a £100 bet on the FTSE on 21st July 2010. I bet that it would be below 5,000 and my friend wagered the opposite. As matters stand I am losing the bet and I hope, for all our sakes, that this continues.
Read most newspapers and there are stories of recovery and optimism as we leave recession behind. My fear is that wishful thinking is resulting in us ignoring a rather large elephant in the corner. Trillions of pounds were lent by banks to consumers and businesses and much of this was secured on assets, such as homes, land and acquired companies. The value of these assets has dropped by somewhere between 20% and 50%. This means that at the very least there are hundreds of billions of pounds of wealth that have disappeared. The government has borrowed tens of billions and printed money to swish cash through the economy and ensure that banks have the funds to continue operating. Their survival has also been guaranteed by the government and this enables day to day business to continue without having to worry about whether the bank could go bust. These actions prevented the global economy grinding to a halt. However they have not replaced the lost hundreds of billions and the government now has borrowings that mean taxes have to rise and spending needs to be cut.
So the fire has been put out. But none of us want to look too closely at the foundations and check that they are sound.
I do hope I’m wrong. But I fear that there is still considerable pain to come.