Catching up on weekend reading

Britain’s economy is still looking shaky. According to a survey of employers by the Chartered Institute of Personnel and Development:

…38% of the more than 1,500 employers surveyed plan redundancies over the next three months, with a quarter intending to let go at least 10 employees.

And the Guardian publishes one of the most lucid explanations of what’s happening, and why it’s not about subprime:

Traditionally, consumers fund their spending out of growth in real incomes, in other words the increase in pay packets less the going rate of inflation. Over the past couple of years, though, real incomes have been squeezed: pay awards have been modest, inflation has picked up a bit and taxes are higher. Real discretionary income – what’s left over once the humdrum household bills are paid – has been hit even harder due to rising food and fuel costs.

Consumers saw no reason to tighten their belts because the large amounts of cheap money swilling around the financial system meant they could top up their real incomes with a large dollop of borrowing.

Note that the modest increase in pay raises applies to the U.S. and Canada as well as Britain. While there have been noteworthy year-over-year wage gains in the last few months, that comes after a long period of flatlining, even as unemployment hit record lows.

All the time house prices are going up strongly this looks a wizard wheeze, with consumer debt matched by the rising value of assets. The problem arises when house prices become too expensive for first-time buyers or when homeowners start to find it hard to meet the repayments, no matter how low interest rates might be. Then the wizard wheeze starts to look like a Ponzi scheme.

In this context, this month’s Toronto Life cover story (not yet online) can be viewed as a possible harbinger of an apocalypse to come.

A quote from an official from, of all places, Societe Generale sums up the thesis:

“Allowing economic growth to be based on unsustainable asset price bubbles was always a recipe for disaster because the snap-back, when it comes, can be vicious and usually results in deep recession.”