What a great year that was! Will ’09 be any better or will we be wise after the event again?
In many ways ’08 was no surprise, but for reasons most won’t have noticed.
Noise was the biggest culprit, with everyone believing global demand was soaring. I didn’t believe that as this column explained a year ago. Inflation was the focus of our monetary policy committee yet that inflation was out of our control.
So we entered that New Year with soaring cost of inflation, benign house prices, credit tightening and the threat of higher interest rates – ultimate concoction of hell!
But like most situations, it depends what you believe. I knew that inflation was being driven by index speculators buying up commodities. In the five years where oil, wheat, maize and every natural source we needed soared, the total amount of money invested into commodity index traded strategies soared by an amazing 1900% from $13b to $260. That demand caused false inflation, and interest rates were not allowed to soften in pursuit of stabilising the UK economy. In November ’07 we told the MPC to ignore that but they didn’t, and in November 2008, they decided to take action. Too late!
Higher interest rates, mixed with a threat of increasing rates and an inevitable tightening of credit, blasted the housing market and consumer confidence into oblivion.
Looking forward will 2009 be any different? We can choose to once again look at our feet when making forward decisions or lift our heads and look at what the potential is. Which is the better thought?
Inflation is no longer a risk, deflation is. With the above mentioned commodities having been dumped and wheat, zinc, oil, maize etc plummeting in price, coupled with demand crashing, the cost of living will become remarkably cheaper. Interest rates will probably bottom at 1% but much of that will depend on whether or not the UK consumer starts spending. I suspect many will allow the massive savings in mortgages to bed in before realising they are indeed a lot richer at the end of the month. Once the tail of expensive inventories for oil/wheat etc fall out, prices will plummet and consumers will consider they are indeed ‘safe’. Only at that point will spending begin in earnest. My calculations however make the average homeowner at least £500 per month better off.
That confidence will probably embed itself in the ‘February sales’ and will bring a short term boost to the markets. However the poor management of the economy will carry its sting in the tail (redundancies, property excesses, company failures, repossessions etc) and short term boosts will be followed by short term losses for the rest of the year, but the trend will be upward. Remember we have an election in 2010.
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