Facing Another Recession

It seems to me that not only is the recession not over yet, in the UK, but we have no real idea what is coming in terms of economic performance.

We discovered a year ago that economies were not smooth running systems with a stable equilibrium (where you can find such things as a natural rate of unemployment - a relationship of resources use decided by comparative technology/ efficiency and comparative advantage producing variable measures of unemployment in economies) but that, like climate and evolution, these are chaotic systems and, increasingly, one chaotic system.

That is to say an unstable dynamic sets hold, which no one can quite see when in it, or if people can then hope for a 'soft landing' - but then a piece of behaviour somewhere becomes a tipping point where the whole edifice comes crashing down to a completely different and lower equilibrium, once it settles.

The banking system not only sold duff packaged mortgages in a way that maintained property prices higher than real incomes could afford, but they also had packages of in effect insurance for sale as derivatives which also expanded and sped the circulation of money. This happened at the same time as the Far East's efficiencies and costs shielded the West from price inflation, but the financial system still was dealing in inflation of a sort that went into property prices and other assets. Insurance cannot work for chaotic systems, only for bell curves (and, incidentally, chaotic systems undermine quantitative research principles of regularity - such research also depends on stable bell curves).

Since the crash, the authorities have in effect printed money in a non-inflationary setting as a form of propping up demand and maintaining cash flow both to banks and still healthy businesses, but only with some success as the money tends to be 'lost' when circulation is so much slower. It gets stored in pockets of the financial system and does not reach where it should. However, the money that would normally reduce interest rates, or 'appear' when interest rates are reduced, is still excess from the central bank and to be contrasted with actual economic output, leading to the fear that any pick up in economic activity could be rapidly inflationary or send the values of assets up again. Indeed, property prices ought to be lower than they are, and the suspicion is that there is idle money floating around.

If the difference next time will be no buffer from the Far East, and oil and other commodity prices will simply shoot up again, and then we are in for actual inflation next time we live beyond actual means.

Mandelson and now Brown have been wobbling on a number of issues lately, and public spending is another area. The difficulty we face in the UK is that public spending rose as part of the boom, much of it financed in a mortgage-like manner (the Private Finance Initiative - build now pay later). The public debt shot up along with private debt. Now the public debt has to be curtailed. There just have to be sweeping cuts in public spending - but if there are such cuts then actual purchasing power and the economic product of the public sector (and there is economic product from public activity) will be reduced. That could kill a recovery on its own.

Plus one can see how the unemployed with be affected. The same demands will be made on the unemployed but all the expensive assistance will be chopped away (which employs people). There are ways to improve Job Centres at little cost and libraries too to make them more like Job Clubs (places with assistance to physically attend and look for jobs) but one can see all but the basics of training for 16 to 25 year olds going - and even that going in severe circumstances. I can see Further Education colleges being slashed left, right and centre, and employment contracts in them vanishing and being curtailed.

The fact is that other parts of the world have been more productive more cheaply, and we have been massaged by a financial system and by public spending that hid these economic realities.

What is required is how we can preserve and enhance the basics of life and a decent living standard for all (including free delivery of education and health and, increasingly, social welfare) and become more communal and responsive regarding the collective life and the economic production that we do have. Benedict Anderson's Imagined Community has to have a twist put into it, to become about localised communities and governance to include all, and build attitudes about sufficiency and broader well-being and less to do with acquisition for the sake of it. Of course there should be no blockages to individuals of innovation, and productive finance is a very important oil of the economic engine.

The danger is that higher level politicians look for quick fixes, and wouldn't mind if the financial system showed some of its old life again. One suspects that's why they are doing so little about banking bonuses for short term successes. But it is absolutely the wrong approach, as all it will do is produce another cycle and one with even greater debt and massaging in a potentially explosive inflationary system.

The debt has to be cleared, but it has to be done with communal intent. Perhaps socialism, a local and liberal socialism, is not as dead as made out by the ideologists and world commentators. People need support and ways to live, and there is nothing wrong with modest living.

Economies are there to serve us, not we the economies, and this is where we have been going wrong for all too long.

Meanwhile it took two weeks for Grimsby College to tell me it was not requiring my services, saying such in a two sentence otherwise meaningless letter.