I am beginning to think that only the central banks have understood how bad the recession is going to be.
Because we quickly get used to dramatic news, so that what astonished us a few weeks ago seems routine today, a lot of people must have thought that when the Bank of England yesterday cut its official Bank Rate by a further percentage point to 2.0 per cent, it was doing what central banks do all the time. Or that it was a quite normal move for the European Central Bank to follow on later in the day with a cut from 3.25 per cent to 2.5 per cent.
No it wasn't. Nobody at work in the financial markets has seen this sort of thing before. The two decisions were a signal of how terribly difficult things are.
Of course we know in a general sense that hard times have arrived. But we are heading into more than just "hard times". At present it is a bit like being in a country where a civil war is taking place. Away from the fighting, everything seems normal enough, bearable certainly. Open-air cafes are full, shops are busy and the best restaurants have no spare tables. But in the combat zones, perhaps not very far away, life is hellish.
So when I hear economists say that the current situation is no worse than the early 1990s, I think they resemble the customers in the cafes where, even in war-torn countries, life seems to continue as before. They perceive only what their computer models of the economy are showing them rather than seeing what is going on nearby. Did you notice earlier this week, for instance, that a survey of more than 400 recruitment companies warned that the jobs market was "heading downhill at breakneck speed"? That is a report from the front line.
One way to get a measure of it is to look at the tag line that accompanies each set of statistics. These days the most recent figures are always "the worst for X years". Thus bank lending where security has been taken was more sluggish in the summer than at any time since the Bank of England began collecting data in 1963. The Bank also told us that British company finances are facing the most severe squeeze in almost 30 years. New car sales in November fell 36.8 per cent on the year before – the steepest decline in nearly three decades.
Or just look at some raw statistics from around the world. US manufacturing activity in November suffered a further slowdown to a 26-year low. All six leading car manufacturers in USA reported year on year declines of more than 30 per cent in November. Toyota was down 34 per cent. To take another example at random, Italian industry has slashed its electricity consumption by almost a third in two months. And all round the world, prices, too, have been collapsing in an unprecedented manner. For instance, eurozone producer prices fell more steeply in October than in any month since records began in 1990.
The numbers, however, tell only part of the story. There is also a qualitative difference between the present situation and the recessions we have experienced since the Second World War. It is the very relentlessness of this one. You will remember that the first sign of trouble was the collapse of a small German bank in August 2007 that had bought too many dud mortgage loans. That story was confined to the financial pages.
Then a few weeks later a sudden weakness in the Northern Rock share price spooked depositors, a run developed and the bank had to be nationalised. Later that autumn, house prices began to decline. A year later, that still continues with 2.6 per cent drop in November – the sharpest monthly drop since the housing market crash of the 1990s. Consumer self-confidence began to take a series of knocks.
Then across the Atlantic we saw that some famous financial firms were in trouble. The first hedge funds were forced to close their doors. By this spring the financial crisis had begun to pass over into the real economy. Continuing to hold unfashionably apocalyptic views, I wrote here on 28 April that I believed that March was the first month of the 2008-09 British recession. According to the official statistics, I was many months premature in this observation. But I noticed earlier this week that the US is now said to have been in recession since December 2007.
It is as if governments and central banks have been confronting a sort of doomsday machine. This is a fictional weapon launcher, like an out-of-control tank, that cannot be disabled; its actions unstoppable even if its crew has been killed. Well, now we can see one in action in the financial markets. As asset values decline, whether houses, crude oil, metals, food commodities, shares or even contemporary art, owners who supported their positions with borrowed funds are being forced to sell. And as they do, thus pushing prices further down, fresh ranks of debt-financed investors must follow suit.
This is an unbreakable process.It cannot be halted. It was what brought the giant Citibank to the brink of failure the other day. The Bank of England admitted its powerlessness in its statement yesterday: "Despite the actions taken to raise bank capital, ease funding and improve liquidity, conditions in money and credit markets remain extremely difficult."
As the doomsday machine continues its unswerving course, the banks remain terrified, albeit that they set the thing off in the first place. As a result, they maintain a deadly caution. Governments may huff and puff, but banks won't start lending again on any scale until the doomsday machine has done its work and not a single overgeared financial institution remains standing.
Does this mean that cuts in interest rates have limited utility? They are a good deal better than nothing. Low interest rates do help to prevent a vicious circle developing very far in the real economy. As Keynes described it, when the total demand for goods and services declines, businesses throughout the economy see their sales fall off. Lower sales induce firms to cut back production and to lay off workers. Rising unemployment and declining profits further depress demand, and so a downwards spiral is created.
Nonetheless, I don't believe that we will equal the 1930s depression. Still being in an apocalyptic frame of mind, however, I do expect the 2008-10 recession (I have added a year to my previous forecast) to be the worst since 1945.Reuse content