Wednesday, February 18, 2009

Final Knockings

Eat, drink, and be merry

Last evening Tyler dined in the City with a group of ex-colleagues. A day on which the Prime Minister had banned bank bonuses, the FTSE had sagged further, and more skeletons had clattered out of the financial fraud cupboard.

Yet the restaurant was packed. What's more, it was our second reserve restaurant because the first choice had been fully booked.

WTF is going on? Here we are in the midst of the biggest financial crisis the world has ever seen, unemployed unbonussed bankers strewn all around, and yet City restaurants packed.

"It's Berlin, March 1945," suggested our ex-Guards officer, cheerily. "Eat, drink, and be merry, for tomorrow we die."

We hastily took a group swig, and looked to the only one of our company still in full-time City employment. All these jolly diners... maybe they're telling us things aren't quite as bad as the FT says?

"No. It's bad. Our banking system is bust... funding has dried up... nobody knows where it's going, but as far as I can see, we could be looking at 20% off GDP... for a very long time. It could get very ugly."



New Zealand it is then - New Zealand and a pile of gold. We exchanged details of gold brokers and personal armourers.

We're now so far off the chart, nobody can be sure of anything. It's all very well asserting the world is round, but right now that edge feels awfully close.

And while a 20% GDP fall is much worse than anything currently envisaged by mainstream forecasters, it's not unprecedented. Between 1929 and 1933, US GDP per capita fell by 30%, and did not recover its previous peak until 1940 (all data taken from Angus Maddison - the definitive source of historic GDP stats).

But as we all know by now, in the 30s, the US authorities made a series of disastrous policy mistakes, including allowing busted banks to default on their deposits. And by and large, those mistakes have been avoided this time.

Moreover, outside the US, the 30s saw smaller falls in GDP. Even in Germany, the decline was "only" 17% (although arguably it would have gone further had the Nazis not begun their public works programmes and rearmament - not something we'd really want to see repeated).

Here in the UK, average GDP per capita fell by a mere 6-7% from its 1929 peak and had recovered all of that by 1934. A key factor of course, was the forced decision to leave the gold standard, and the subsequent devaluation of sterling - something we immediately emulated this time.

Of course, history schmistory, and as our working friend said last night, nobody knows how bad it's going to get this time. But for the want of anything better, here's how UK GDP per capita moved in the last seven recessions, going right back to the 1870s:

As we can see, contrary to what Commissar Balls recently suggested, the 1930s was our very worst recession (purple line), although the 1890s (sludge orange) did run it close. In contrast, the boom'n'bust Tory recessions were a walk in the park.

On average, these seven recessions saw per capita GDP fall by 2.6% from the previous peak, and a full recovery within five years of that peak.

Just one thing - we've almost certainly already dropped more than 2.6%.

Pass that bottle over here.

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