Will the Future be Bad?
No, just different.
It will be a bit like doing freefall parachuting for the first time.
The current "credit crunch" has sparked a wave of re-alignments to the new digital world. For a number of years the growth in the use of digital technology and the really far-reaching changes this has had on increasing the underlying productive capacity of the world has largely gone unnoticed by government statistics that are rooted in the manufacturing societies of the 20th century.
In our own industry we have seen the costs of being able to analyse data fall in virtually incomprehensible ways. We can now crunch volumes of data on laptop pc’s in seconds that 20 years ago would have taken several months on a mainframe.
Back in 1996, after Schezzer’s first internet surfing session at an IDV conference in London, Schezzer predicted that the internet would unleash a wave of personal creativity such as the world had never seen before. Today we are seeing this manifest in every aspect of our on-line personal interactions. This blog is just one tiny example.
These changes are fundamental and the post-20th century world in which we currently live has to adjust to these changes.
But why is this happening now, and suddenly, rather than more gradually?
Well the reality is that such realignments always happen "suddenly" and, what appears for many people to be, "unexpectedly".
The truth is, however, that what usually happens is there is a catalyst which first creates a temporary bubble and then usually a specific event (sometimes directly related, sometimes not) which causes people to re-assess the situation.
Such events can be as simple as your local postal service deciding to increase the price of its stamps by twice the rate of inflation which makes you start to think about re-assessing your options for your postal services followed by the need to send a package.
Or they can be as big as the world wide banking sector re-assessing whether it is actually ever likely to get back the money on all those loans it made after seeing a whole housing estate get into difficulties when the local factory closed.
What triggered it this time? Well, as Schezzer predicted late in 2007 and again in the Spring of 2008, the big bubble in demand was caused by the phenomenal investment China was making in itself in the run-up to the Olympics – and this was bound to be punctured almost as soon as the Olympics finished and the money taps were suddenly turned-off.
Unfortunately Schezzer does not have the money to speculate in stocks and commodities but if we had have done we would have been betting on a dramatic fall in the oil price (and all other commodity prices) in the final quarter of this calendar year – when "suddenly" no one can understand where all the demand has gone and, within a short step, drift blindly into "panic mode". It would be comic were it not for the fact that we’re all affected by their collective actions!
Is the situation really as bad as everyone is making out? Well, actually, no.
The dip is being exacerbated by the media hype, which fuels more panic and sells more media. Yet the underlying creativity and "soundness" of the real business world remains.
The big shift is the reluctance of banks to lend, either to us or to each other. We will have to come to terms with this. It is true they were lending unwisely in the first place which helped inflate the bubble.
Back in the early 1980’s when Schezzer first applied for a mortgage we were restricted to a loan of 2.5 times first income plus once times second income, were only allowed to borrow a maximum of 90% of the value of the property (and only then if we signed in blood – the normal restriction was 80%), and had to contend with interest rates that were significantly north of 10% per annum more or less all the time.
As the Assistant Governor of the Bank of England recently acknowledged, getting to the stage where banks were lending people six times joint income and up to 125% of the value of the property was "a little silly", even with interest rates at less than 5%. And Schezzer remembers thinking when being engaged by one of the major insurers to do some marketing research into "lending to the sub-prime market" that they must have found some way to offset the risk.
Our mistake it seems – we should have asked the question! They clearly hadn’t!
So what of the future?
Well, we know that the Government is deeply scared of "deflation" and, in the sense of the spectre of the 1930’s, some wariness is justified. However, the likelihood of deflation is slim in the extreme. Indeed, to Schezzer’s mind, as we live in what used to be called "Rip Off Britain", a bout of heavy price deflation would in fact be well overdue! However, the chances are slim in the extreme.
Any tendency to deflation will be strongly tempered by the reductions in interest rates which will mean that saving money will no longer be a virtue (not that many people in Britain thought it was virtuous in the first place).
Over the next few years inflation will actually begin to spiral out control. Why? Because all the money being pumped into the economy, the low interest rates, and the heavy indebtedness of every part of society will require it. That is the only way we can reduce the real value of the debt burden we are now facing.
How will this come about? Firstly the Tories will win the next election on a promise to reduce taxes where they can and keep the lid on them everywhere else. They will then deliver them but have no money to pay for them. So the only way out is to print money. By hook or by crook this will happen though everyone will deny it even when it is plain to see. Printing money will reduce the value of the pound on world markets and create inflation at home. To some extent this can already be seen even now with the Pound close to parity with the Euro – an anticipation by the markets of what they know has to happen. This reduction in the value of the Pound will cause a massive hike in the cost of imports – including Oil – 12 months from now.
So deflation? You have to be kidding me.
So, my advice is, if you can afford to do so, now is actually a good time to run down your savings or (if you are allowed to do so) run up some more debt. By the time you come to repay it the value of that debt will almost certainly have halved and in the meantime you will have had the benefit of all those goods you purchased.
So enjoy the future, enjoy it’s freedom and it’s creativity, and don’t worry too much about taking on more debt. The current regime is such that they’ll never expect you to be able to pay it back anyway.