Echoes of the 1970s Economy

Rob Mackrill - Tue 11 Mar, 2008

The economic backdrop today resembles the 1970s but there are differences.

Dear Subscriber,

An oversized US trade deficit...soaring commodity prices...food inflation...a slump in the dollar and sterling...public finances under pressure and a stumbling of the financial sector after years of excess...

Sound familiar?

Well that was 1973, says Tom Stevenson in the Telegraph. The year the UK’s leading stock market index of the day – the FT30 – fell 32%. It’s a reminder “how little is new under the economic and investment suns”, says Stevenson. But while there are similarities, there are also differences. It’s more of an echo than a digital reproduction.

For one we don’t have politicised union militancy whipping up chronic and endless strikes which eventually led to the introduction of a three-day week. A three-day week! Ah, the socialist heyday before Thatcherism got to work on the national mindset and globalisation started bringing us cheap DVD players. The Conservative Prime Minister of the day, Edward Heath, faced up squarely to the problem of a country then dubbed...”the sick man of Europe.”

"Who governs Britain - the unions or the government?", he asked at the time. A bold, but ultimately futile, leadership gesture which went unrewarded by the electorate when the Tory government fell in 1974.

So the outlook maybe looking gloomy today, but for those of us who remember doing homework by candlelight due to power cuts...rubbish piling up in the streets when the refuse collectors were on strike and assorted union leaders ranting on TV every night for more money for the dockers...miners...railway workers...car workers etc. – the outlook has been plenty worse.

Not to make light of the current slowdown, news of which arrives daily. A reader working for a US owner subprime mortgage lender writes:

“During the last four months I have seen many lenders closing the doors to lending, or making huge numbers of redundancies (including the company I am in). What I would like to know is how you feel the economy will suffer with a huge number of people losing their jobs? Those who are still employed want to hold on to what they have got and companies are not recruiting, so what [are] the options? I know that I have started to look outside of the UK into the Middle East, but what is to say that this effect will not spread out there?
 
“I just wonder if you think that moving out of the UK for a few years would be enough time for the industry to regain its confidence.”

How do we feel the economy will suffer with a lot of lost jobs? A lot is our guess. Record high levels of employment will kick away the major prop holding up an over-extended and sagging housing market. In a worst case scenario, mass job losses, 70% home ownership and £1.3trn in consumer debt load makes for a potent deflationary brew. As to looking East, well that makes sense.

One of Bill’s ‘Five E’s’ is the Exodus of wealth from West to East. Those in the money business are likely to follow the money trail. Manraaj Singh, editor of the Profithunter global investment service, notes that according to McKinsey, at the end of 2006 the six states comprising the Middle East’s new trading union, the Gulf Cooperation Council held between $1.6-2 trn in foreign assets. Assuming oil prices stay high (currently $108) the bounty of petrodollars looks set to continue piling higher. Should be good for migrant job seekers and canny investors alike.

Oh, in case you were wondering, Bill’s other four ‘E’s shaping the economic world are: Energy getting more expensive; Economic cycle downturn; Experimental money not backed by gold to be tested to destruction and the peaking out of the US Empire.

Regards,

Rob Mackrill
The Daily Reckoning