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Are we heading into a recession, or is it Mind Games?

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Are we heading into a recession, or is it Mind Games?

My wife made a fantastic observation at the weekend which to a degree can summarise much of what is happening in the media about the Credit Crunch we are experiencing at the moment, and I think this has a lot to account for with the downturn in the economy.

Her Father is widower on a fixed insurance income and pension. He is not employed, so not likely to get made redundant and has no mortgage. What I want to demonstrate is that he is one the least likely to be affected by a downturn in the economy than anyone.

The bad press and media coverage of the Credit Crunch has worried him, so he has started cutting his spending. When he goes shopping he has stopped buying the extra’s he would normally purchase and is only buying essentials, and when he puts petrol in his car he no longer fills up but only puts a tenner or so in at a time. He is cutting his spending in fear of the economy downturn, despite this downturn having very little overall effect on his personal finances.

All that my Father-in-Law is inadvertantly causing is a reduction in consumer spending brought on by csaremungering of the press and media. By reducing his spending, he is reducing the income into the economy, who in turn are reporting reduced consumer spending to the media, who in turn are spreading doom and gloom stories to people like my Father-in-Law who then cut their spending fearing the worse. Do you see what is happening here? Now put that on a national scale, where hundreds of throusands of people around the nation are fearing the worse and cutting their expenditure into the economy, holding onto their pennies for a rainy day. Businesses then have to pull in purse strings and make redundancies to counter act the reduced spending, which then again leads to ever more bad media coverage of the economy.

Before anyone mentions the downturn in the property market, this was bound to happen. The property market could not sustain unrealistic property inflation which was pricing first time buyers out of the market and making it practically impossible for them to get onto the property ladder. For example, I purchased my first home (a 2-Bed Semi) for £43,000 and sold it 8 years later for over £160,000. How on earth can that be sustainable? The property market needed a reality check, and that is what I believe this now is. It is just a terrible shame that people have to suffer redundancies because of it.

One Comment

  1. Avatar
    May 31, 2008

    Unfortunately you are applying a micro economic situation to a macro economic one.
    Your father in law is actually in the sector of individuals that would be substantially affected by rising prices. He only has a fixed income without the ability to move jobs or ask for a pay rise. He could take on a part time job but that would be taxed therefore possibly not giving him the incremantal income that he requires therefore his first (and most effective short term)option is to remove expenditure on non essentials.

    Regarding the property market we are told that many people have taken out credit on the basis of the increase in equity in their properties. We are now in the situation where the banks are now reigning in credit. Even the last reduction in base rates by the Bank of England was not passed on by the banks but merely used to shore up their profits so could we not postulate that the cause of this ‘impending’ recession has been 1) The greedy banks who place their profits above all else and
    2) The ‘pulling forward’ of expenditure by the readily available credit (Again the fault of banks chasing greater profits) which has created a glut of spending.
    3) The governments strategy over the last two terms has been to run the economy at a deficit on the basis that they will look at ‘sustainable debt’ over an economic cycle. Well that debt is now going to come back to haunt them as the previous strategies of governments is to borrow money during recessionary times to smooth out the impact. That strategy is no longer available as the UK has probably reached the limits of its own available credit.