The British Economy is Falling Down: "Depressed by Extreme Uncertainty"

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The British Economy is Falling Down: "Depressed by Extreme Uncertainty"
Consumer prices falling down, falling down...

By Bob Stokes
Thu, 21 Jun 2012 14:00:00 ET

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In the Elizabethan era, British poet John Donne wrote the line "No man is an island."

And in today's global economy, neither is any country.

Like so many other nations, Great Britain is in a financial fix. The British economy recently slipped into its second recession since the financial crisis – its first double-dip since the 1970s.

Recession is the official economic label. However, depression is the word that best describes the state of the British economy.

In a June 14 speech, Bank of England Governor Mervyn King said as much: "In present circumstances, when private sector spending is depressed by extreme uncertainty, there may be a case for a scheme to underwrite risks which the market itself is unwilling to take." [emphasis added]

In other words, the Bank of England Governor wants to add more stimulus to the British economy.

But risk-taking cannot be forced. Lending cannot be forced. Nor spending. Indeed, the British consumer has cut back on spending even as prices have fallen. Britain's Retail Price Index topped in late 2011 and recently fell to a two-year low.

For many months, Elliott Wave International's Global Market Perspective has been saying that the main threat to the British economy is deflation. Here's an excerpt from the April issue (lightly edited for public republication):

Britain's CPI measure of inflation peaked at 5.2% in September 2011 and then fell for six consecutive months. Market technicians may note the bearish “double top” on the chart below of year-over-year changes in the CPI (top line). Others need only observe that recent price weakness has carried the CPI to a 14-month low.

For three years, Britain’s official bank rate hasn’t budged from 0.5%, yet the trajectory of consumer prices is faltering again, while the broadest measure of Britain’s money supply, M4, still contracts (see lower line).

About five months ago, the Bank of England added £50-billion to its Asset Purchase Program, which brought the three-year total to £325-billion.

Now the Bank of England Governor is prodding Britain's banks to lend more. But few people want to borrow. As the September 2010 Global Market Perspective noted, "Credit is caving in faster than authorities can shore it back up."

The global economic trend is unlike any the world has seen in modern history – perhaps ever.

Is your portfolio positioned to withstand a market environment "depressed by extreme uncertainty"?

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Tags: Bank of England, central banks, credit crisis, deflation, economic depression, european central bank, European debt crisis, european markets, FTSE, quantitative easing

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