It was about 80 years ago when John Maynard Keynes spoke about how critical it is to revive people’s ‘animal spirits’ after an economic slump. In 2009, not long after the start of this one, Akerlof and Shiller reminded us how important our confidence and individual human behaviour is to rebuilding – http://bit.ly/1munmcc. No one can be in any doubt as to the importance of confidence generally.
5 years on, have your animal spirits been rekindled?
For many the answer is a resounding ‘no’.
And why am I asking this question now?
But before that, let’s be a little controversial!
In my view, the last few years have seen a massive deterioration in the capacity of individuals and business owners to make major decisions on money matters.
This sounds harsh, but how many times have you heard ‘Well I know what you say makes perfect sense, and I know I have to do it some time, but just not right now, let’s see how things turn out’. We’ve all got used to kicking the can down the road, so much so that I’m really not entirely sure any more what motivates us to spend, borrow and lend right now. Although we are all different, surely there must be some common ground which we could press?
This is the first real recession in recent times that the professions have really hurt: work volumes for many are massively down. But I’ve not only been looking at the legal and accountancy professions to ascertain which buttons get potential clients to buy, I’ve been looking outside too. Only last week a small top end ladies clothing retailer in a nice area consulted me, unable to sell her wares even at a 50% discount. Another clothing retailer reduced their prices by 50% in the lead up to Christmas yet could only increase their sales by 16% over the previous year, resulting in them losing money rather than making it at what is a key time for them. It is almost as if price doesn’t matter any more. Make do is the order of the day.
I think it’s no longer enough to (i) have a great product / service; and (ii) compete or beat others on price. And I think that’s because, despite all the stimulus, our animal spirits if not dead are in a coma.
Over Christmas the US announced it was going to reduce the rate at which it will be printing money. What’s patently obvious is that if the US sneezes, over here we catch a cold. The size of the stimulus was set so as to send out a message that everything would be done to avoid recession becoming depression. And in some ways it has succeeded. But this ‘shock and awe’ strategy was supposed to increase confidence among investors AND the public – and I don’t think it has had a major impact on the public. Given most of us want to be happy even if it means borrowing from the future, and we’re all more likely to spend if everyone else is, I have to question whether the stimulus has been as successful as it was supposed to be. Certainly it hasn’t been as successful here in the Midlands as it has within the M25. Here, despite interest rates and the stock market both being favourable, our ‘animal spirits’ seem to have left us to reside in the knacker’s yard.
Here’s a quotation from the European Central Bank’s monthly bulletin on the subject of ‘global imbalances of debt’: ‘The diverging pattern of current account positions that have been observed at the global level for a number of years raises two important questions. First, while it can be expected that some countries may run deficits for a considerable period of time, the fact that the world’s largest economy is recording increasingly large deficits – currently absorbing around 75% of world net savings – has a material effect on global trade and financial patterns. Indeed, the continuing accumulation of large deficits, even if they can be easily financed in the short to medium term, will eventually lead to the accumulation of large and likely unsustainable levels of net foreign liabilities, which needs to be addressed. Second, the fact that most emerging markets run current account surpluses and the United States a deficit is, in many respects, puzzling, since it implies that spending by one of the world’s richest economies is financed by economies with far lower income levels’.
Go on.. guess when it was written…Last month? Last year?
No, it was from the ECB’s monthly bulletin of November 2006 – here’s the link if you don’t believe me, see page 12 – http://bit.ly/1bzWgML … a good while before the start of the financial crisis.
The worrying thing is that since November 2006 the US national debt has doubled from $8 to $16 trillion!
Well if the ECB had cause for concern in 2006, I guess they must be quietly crapping themselves now.
A few days ago two commentators for the IMF, Reinhart and Roggof, published a seemingly innocuously entitled paper ‘Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten’. In it they said ‘Even after one of the most severe multi-year crises on record in the advanced economies, the received wisdom in policy circles clings to the notion that high-income countries are completely different from their emerging market counterparts. The current phase of the official policy approach is predicated on the assumption that debt sustainability can be achieved through a mix of austerity, forbearance and growth. The claim is that advanced countries do not need to resort to the standard toolkit of emerging markets, including debt restructurings and conversions, higher inflation, capital controls and other forms of financial repression. As we document, this claim is at odds with the historical track record of most advanced economies, where debt restructuring or conversions, financial repression, and a tolerance for higher inflation, or a combination of these were an integral part of the resolution of significant past debt overhangs.’ Here’s the link to the paper http://bit.ly/JNXbh2 In other words, things have got so bad that only bankruptcy is the solution.
In their 2009 book, Akerlof and Shiller said ‘there are limits to the effectiveness of such standard monetary policy when there is a loss in confidence, and businesses and consumers are loath to spend.’
Too right…Just how safely do you sleep at night knowing that a good proportion of everything you have is invested directly or indirectly in a country that only last week saw reducing its annual deficit to $1 trillion as a positive move? Do you feel confident enough to go out and buy, lend or borrow? Me neither… And I cannot really see that changing for a good while, so in the meantime, I’ll continue paying down my mortgage, driving my old car until the wheels fall off, not buy replace the three piece suite, not buy that house or business, pay my accountant less…
And I’m not the only one doing so because while we may think we’re wealthy, as Imagination said, it’s just an illusion, we are nowhere near as wealthy as most think we are. Most of what we have could disappear very quickly indeed. Telling us that we are now out of the longest and deepest recession since the Great Depression; that the US is performing well; that the banks and countries like Spain, Ireland, Italy etc are all fine; in fact everything is fine and dandy doesn’t wash. But talking about animals, I do smell bull.… and plenty of it…and I’m not the only one, which is why when it comes to big ticket purchases of goods or services, including legal and accountancy professional services, things are going to get much bleaker in 2014.
I’ve already been consulted by several solicitors who are already feeling major pain, I suspect many more will follow, followed later on by my fellow accountants … I’m sorry to say it but a bank of experience is being built up here.
This month a short list…
Distressed professional services businesses sought
Turning over £0.5m to £5m
Successful tax specialist seeks merger into a general accountancy practice
Guy, mid 50s, long way off wanting or needing to retire and still with plenty of get up and go, is looking to back his successful West Midlands based tax practice into a general accountancy firm as he has simply had enough of the admin involved in paddling his own boat.
And this is a favour for someone I know quite well…A guy I know who is training to be an accountant, attending Worcs Uni, is looking for work experience 23 June to 1 August. Can you help?
Finally, to lighten things up, for those of you who throw things at the television when Benefits Street comes on – watch this. http://bit.ly/1f5FHqP ;
As always, I’m here to deal with your formal insolvency needs. And if you or your clients are interested in the business opportunities, just drop me a line – firstname.lastname@example.org.
Paul Brindley FCA
Licensed to act as an insolvency practitioner in the UK by the Institute of Chartered Accountants in England & Wales