In yesterday’s Sunday Times, the august newspaper’s economics editor David Smith headlined “if this is the bust, why wasn’t it preceded by a bigger economic boom ?”
As you know, bust is the price we pay for too big a boom. But Mr Smith, who we have previously said must be hoping to win the award of most optimistic economics writer of the year, doesn’t see it like that.
“In the run-up to the last recession, in the early 1990s the economy was characterised by runaway growth in consumer spending, ” he said, then added “ this time, however, one striking but unappreciated feature of the economy has been the absence of a consumer boom”.
Is he right? Are we really seeing bust without boom? Maybe, therefore, we can all assume all this talk of crisis, is overdone. A few banks got their sums wrong, but that is it. The slowdown will end in no time.
It seems though, that the above argument really hits a quite different nail on the head. It explains how policy makers got it all so horribly wrong.
It is true that consumer spending did not rise so fast in the nineties. From 1996 to 2000, year on year consumer spending rose by between 3 and 6 per cent a year. That was impressive, but not unprecedented growth.
Since 2000, consumer spending has slowed, ranging between a growth rate of 2 and 4 and half per cent a year so far this decade.
House prices, of course, shot up during this period. Ergo, as consumer spending only saw modest rises during their period, there is no significant link between house prices inflation and consumer spending growth.
This, in turn, justifies the policies of governments and central banks. Talk of a debt bubble, is a myth.
There is one snag with this argument. It flies in the face of common sense. If economic data does not support what seems to be blatantly obvious, one is left concluding there must be something wrong with the data.
Explain this. While consumer spending saw only modest rises, the savings ratio in the UK plummeted.
So rising house prices may not correlate with changes in consumption, but they do correspond with the falling saving ratio. It is easy to guess why. The logic goes like “I don’t need to save, my saving is in the form of the rising value of my property.”
And here is another explanation as to why consumer spending did not rise so fast this decade. It was already too high. There should have been a crash in consumer spending in 2000. Instead rocketing house prices stopped this crash from occurring.
We may not have had a massive boom this decade, but we have seen the longest ever boom, over 16 years in length.
There was a debt bubble. And the bubble maintained consumer spending at a level that was too high. But the subtlety of this meant that central banks just didn’t spot the danger.
Exactly: small growth of spending on top of excess means even more excess, not moderation. I suggest you point this out directly to the rather complacent Mr Smith so he can clarify the point for his readers.
As you say, of course there was a boom, of great length and sustained far past its normal end date by the house-price ‘miracle’ that was in reality a massive debt bubble. And this illusion had the further effect of allowing that other pillar of complacency, Gordon Brown, to delude himself that he was presiding over ’stability’, so he could open the government spending taps.
Big boom, big bust.