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Wednesday, 8 October 2008

0.5% Interest rate cut

Oh yeah, that'll fix it. Let's all rush out and buy bigger houses.

The economy is now in the shitter and tinkering with rates isn't the answer. Why?

We have had years of debt fuelled consumerism. Vast sums on the credit card for plasma TV's from China etc. New cars and bigger houses.

Today we have a mass realisation that borrowing can't go on forever. The brakes are on.

It now feels risky to borrow money, people are worried about their job security so won't extend themselves. Do you want a new mortgage on a house that is still depreciating heavily.

Most of the stuff people have been buying on credit is nice to have: Plasma TV's, new cars, bigger houses, foreign holidays; when their old TV, car or house or a cheaper holiday was perfectly usable. So they can stop spending right now; without much impact on their standard of living. This is shrinking the retail sector, the importers and financial services leading to high and sudden increases in unemployment in these sectors. This is a snowball effect.

It's going to get a lot worse yet.

2 comments:

  1. Most of the stuff people have been buying on credit is nice to have.

    Woah! 90% or 95% of that extra credit has flowed straight into the house price bubble. So people have been buying the same old things for new, enlarged amounts of money.

    Debts are real, land values aren't.

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  2. In that mortgage debt is a lot of cash that was raised against housing and spent on non-essentials. Often with the help of Carol Vorderman

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