Saturday, December 19, 2009

Have Yourself A Merry Little Christmas, It May Be Your Last

Wartime cheer

Tyler's Mum was a great Judy Garland fan, so he's pretty familiar with the back catalogue. And this particular number from the 1944 film Meet Me in St Louis seems to sum up Xmas 2009 quite well. Especially with its original lyrics, which were so depressing they had to be toned down for Garland to sing in the film - play the vid and read along with the original below to see how comprehensively MGM wimped out:

"Have yourself a merry little Christmas, it may be your last,
Next year we may all be living in the past
Have yourself a merry little Christmas, pop that champagne cork,
Next year we will all be living in New York.

No good times like the olden days, happy golden days of yore,
Faithful friends who were dear to us, will be near to us no more.
But at least we all will be together, if the Fates allow,
From now on we'll have to muddle through somehow.

So have yourself a merry little Christmas now."

Now that's Xmas 2009. Because with GDP down 6% from its peak, unemployment already up by a million, government debt fast heading for 100% of GDP, and inflation on the rise, this yuletide is likely be your last champagne cork popping for a while.

Except that somehow, out there, it just doesn't feel like that.

For example, Tyler has an irritating (to Mrs T) habit of asking shop assistants how biz is going, and right now, they all seem pretty happy. "Last year was terrible," they shout above the din of jingling cash registers, "but this year we're well up."

And they're not spinning a line. According to the official ONS stats, retail sales have increased by 3% over the last 12 months. Even more extraordinary, they've also increased over the last 24 months - ie from before when the crisis broke. In fact, retail sales volumes (ie adjusted for inflation) are currently the highest they have ever been:

Compare that to the last recession in the early 1990s, when retail sales fell by 5% and took three years to regain their previous high.

Yes, OK, there has been a big fall in other spending not included in the ONS definition of retail sales - like tourism and cars. But the fact is, whatever professional doomsters like Tyler may say, most people in the real world don't seem terribly fussed about the impending economic apocalypse. Everybody can see there was a banking crisis, and everyone probably knows someone who's lost their job, but the general view is that it's all over bar the shooting of those greedy bankers.

Now in one sense this is good. As Keynes preached so strikingly back in the Depression, the economy ultimately depends on confidence. If people are fearful, they don't spend, they don't invest, and the economy goes into a nosedive. So confidence is good.

But false confidence, that's something else altogether. False confidence leads to people spending beyond their means, borrowing up to the hilt, and sooner or later facing bills they cannot pay.

Which brings us to a very striking chart in the Bank of England's latest Financial Stability Report (see here - 4mb):

The chart shows the proportion of the average UK household's income that is taken up by interest payments on mortgages and other loans. And as we can see, the current low level of interest rates has helped them out considerably, freeing up nearly 3% of household income for use elsewhere.

But the Bank knows - as we do - that these low interest rates cannot last, and the two blue diamonds on the chart are what the Bank calculates will happen to the interest burden when rates go back up to pre-crisis levels. There will be a significant squeeze on average household spending power.

Of course, for savers the opposite applies. They have been squeezed savagely by the fall in interest rates, and they will benefit from a reversal. But savers tend to be prudent, and they will not be rushing out to take up the spending slack.

So all those shop assistants Tyler chats up had better make the most of this merry little Christmas - it may be their last for some considerable time.

And you? What should you do?

Eat, drink, and be merry.

And think seriously about where you're going to move to next year (despite Garland we suggest not NY - their top rate of income tax next year will be 35% Federal plus 9% state).


BOM will now be taking  its seasonal break. Happy Christmas, and try not to worry. The events depicted on BOM over the last year are very rare and almost certainly won't happen to you. Unless you're a UK taxpayer, that is.

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