Christmas only works if it comes with a few weeks of wishful thinking.
How would we cope with high street shopping for pointless tat on December 23rd if we hadn’t managed to convince ourselves that that our gifts would be gratefully received?
How would we ever manage to get through an entire day with our extended families if we weren’t able to block the memories of exactly what happened last year?
And how could we eat 3000 calories worth of lunch in one go if we hadn’t fallen for the Sunday supplement idea that it is possible to detox off 5 pounds in a week in January?
‘Tis the season of self-delusion. And this year, nowhere more so than in the City, where any comment on the dismal state of the financial markets is immediately followed by the assertion that the odds of an actual recession in the US or the UK are low.
It would be nice if this were the case. But it is not. So far all efforts to ease the credit crisis have come to nothing and as far as I can see things are getting worse not better.
We are constantly confronted with headlines about falling house prices; about the disappearance of mortgage products (according to Moneyfacts.co.uk there were 1383 buy to let mortgage products on the market a few months ago, now there are 18); about banks and their myriad and seemingly endless problems with sub prime mortgage related debt; about rising corporate and personal bankruptcies; and now about inflation.
This last bit is a big deal. The last decade has been good to most people. Low real interest rates – made possible by low inflation – and the consequent rising asset prices have made the penalty for making mistakes very low: with rates falling overpaying for a house, for a stock or for an ugly painting has long come with no financial penalty.
No matter, as my colleague Bill Bonner puts it “how dumb you were,” by the start of this decade you could buy any fool thing at any price and watch it end up being worth more in a matter of months. For five years or so it’s been all but impossible to make a mistake and most investors and entrepreneurs have morphed into geniuses.
No more. With Consumer Price Inflation running at 4.3% in the US, 3.1% in Europe and 2.1% in the UK who’s going to be brave enough to cut interest rates in January? And if interest rates aren’t falling what’s going to keep house prices and share prices high?
And with that as a backdrop what’s going to stop the banks being so terrified of their capital bases being eroded that they won’t – or can’t – lend money out to consumers or businesses?
Nothing I can think of. There may be no recession until after Christmas but as sure as you’ll still be half a stone overweight after your January detox, one will follow pretty soon after.
First published in The Evening Standard