The Castle of Doubt and the Key of Promise

Recently, a second wave of falling confidence has affected the stock markets. As firms unveil their projected losses, investors and customers alike are withdrawing their money. For example, this week Aviva (Norwich Union) felt its share prices fall by thirty-three percent following its announcement of losses approaching a billion pounds. While the values of land and gold continue to rise as people save more and more money. By all accounts the economy is in a state.

{{ quote In truth, it has been said that the recession is already over. It seems unbelievable }}

However, people’s immediate response to this disaster is to stop spending. Whereas, in fact, many signs in our economy right now suggest it is the time to spend rather than not. The rate of inflation now is incredibly low, edging on deflation, and in the same way that inflation means that money itself loses value, deflation does exactly the opposite; very soon money may be gaining value meaning that you are able to buy more for less.

It could be argued though that when prices are falling, it makes sense to wait for them to fall further in order to afford more. But in order to prevent this, the Bank of England is planning ‘quantitive easing’; the process of physically creating more money to put into the economy, counteracting its increasing value. The bank announced its plans to create £75 billion along with its further cutting of interest rates, down to 0.5 percent, this week. The result of this is that spending borrowed money has never been cheaper or more effective; all that is needed is for the commercial banks to pass these rate cuts on to consumers.

It is also important to recognise that money in the sense of value, in an analogy to matter, is never lost it only ever changes form. And while the media is currently focused on job losses in the diminishing manufacturing industries, other industries are growing; supermarket and real estate firms are experiencing a growth in demand and, as such, are expanding proportionally. Therefore, though many manually skilled jobs are under threat, numbers of unskilled jobs in some sectors are growing. In addition, right now, the pound is very favourable for export companies and so, while UK demand is dwindling, exchange rates should attract overseas demand assuming that protectionism doesn’t win over.

Historical precedents put the economy in perspective as well. Treasury forecasts show negative growth of between 0.5 percent and one percent for 2009 but this pales in comparison to the recession of 1980-1 where the economy sustained a contraction of two percent in the economy for two consecutive years. And positive growth is predicted for 2010.

In truth, it has been said that the recession is already over. It seems unbelievable when juxtaposed with the image of mounting unemployment and bankruptcy but the fact is that the whole of this is simply the fallout from the rush on Northern Rock last year. What is being experienced by the economy is the restructuring and working through of imbalances that were present in the market. All that is needed is the return of consumer confidence and some economic optimism.