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On the edge

Why I asked to borrow the book I’ll never know but looking back I wish I hadn’t. Ignorance can be bliss.

“Crashes” is the non-too-cheery title of the book in question. It was written in 1988 after the famous 1987 ‘Black Monday’ crash and covers this and every major international financial crisis, economic meltdown, depression, recession and failed speculation since the 1600s.

The first chapter covers Tupliomania in 17^th century Holland. This was a quite phenomenal situation where once-sane people took leave of their senses believing that values of tulip bulbs could only go up. The reason? Well, they had been steadily rising for some time already. People sold their houses to get on the bandwagon and borrowed money to invest. Most importantly they got involved in schemes where they would put down a deposit in order to secure a future investment but at today’s prices. They assumed the value would always increase, so that they could sell this promise-to-buy before the full-payment date was reached and so make a profit. This is known as ‘Futures’ and ‘Options’ in today’s world. An easy way to lose your shirt.

The country went mad, letting all other industries go to rack and ruin as people did nothing but get rich from speculating. Ultimately, though, a tulip bulb only has a certain value and it can’t provide you with an investment income, so the market got scared and people started to sell in large numbers. There was a catastrophic collapse in values followed by a lasting collapse of the economy. What was the cause? Human greed and a belief that “prices can only go up”.

In Germany before the first world war, one US Dollar would get you around 4 German Marks. By 1923 one US Dollar would get you around 1 trillion (1,000,000,000,000) Marks. If you had two coffees in a café in 1923, the second of the two could cost twice what the first one cost when you originally ordered it, such was the inflation. There was a tale of someone pinching a wheelbarrow full of cash, but tipping out the money before making their getaway. What was the cause? The Government allowing more money to be put into the economy than was actually required and so as supply outstrips demand the value of the currency drops. There was also little of value backing the currency so it only became worth the paper it was written on. We now call this printing of money “Quantitative easing”.

In Miami and Chicago in the late 19^th century there was a colossal property boom, People started speculating of land and houses under a misguided belief that “people will always need houses” so again “values can only go up”. When the crash came and the late investors lost their shirts, many of the banks went under crippling their business customers and wrecking the economy. When a home becomes an investment it is liable to the same crashes as any other investment.

Finally I’ll tell you about the early 1980s and the gold crash. Gold had been around $200 an ounce for decades. This metal often being the backing for currencies i.e. the money printed technically is a note referring to a value in gold, stopping it simply being printed paper. Speculators had seen the rise in prices and “experts” predicted it could go as high as $5000 a ounce. But again, gold brings you no income, a reason its values are normally steady and so after hitting $900 an ounce in 1981, it crashed.

So why am I telling you this? Well let’s take a look at a few things close to home:

• Gold prices have risen from £170 per ounce in 2000 to £750 per ounce now and everyone is speculating, even advertising buying gold on TV  –  “It cant go down! It will keep rising forever!”
• The Bank of England has printed hundred of £billions to bail out the banks to cover bad losses on sub-prime mortgage investments
• House prices are unaffordable now and if interest rates rise they will be totally unaffordable, therefore removing the demand which has kept prices high
• Speculation is hitting all sorts of markets including the classic car market (which also boomed just before ‘Black Wednesday’ 1992 crash)
• The Government is borrowing £20billion a month – in the time it takes you to read this sentence, assuming it’s 5 seconds, another £40,000 has been added to our national debt
• Price of goods are expected to rise as more money comes into the market and this inflation could lead to a need for interest rises to stop our currency devaluing, which takes money out of people’s pockets

These are truly frightening times. We need to bring borrowing down sharply by the equivalent of more than 2 times our largest spend areas – We only spend £100billion on the NHS but need to reduce borrowing by twice this amount. We can’t go on spending more on debt repayments than we do on educating our children.

It will take pure financial wizardry to steer us on a path to economic recovery and out of this mess. We need to not frighten the horses along the way but we need some radical changes because what we’re doing now can’t go on. We are in a worse situation than probably all other developed countries because even struggling economies like Greece and Japan have people have personal savings, which we don’t have here.

So please do invest wisely and I’m sorry if I’ve dampened your day…

All the best

Matthew Lobley

Roundhay Ward Conservative Councillor

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