Troubles Across the Pond, Too

11/26/2008 1:45 pm EST

Focus: MARKETS

Howard Gold

Founder & President, GoldenEgg Investing

Plunging home values, plummeting share prices, waves of layoffs, and a desperate government spending billions to save a shaky banking system. Sound familiar?

Welcome to the United Kingdom.

That’s right, Americans—you’re not alone. We’ve just returned from the recent World Money Show and a week’s vacation afterward in London, and it really brought home how global this financial crisis and bear market really are.

While Americans focused on the appointment of President-elect Obama’s new economic team and the latest zigs and zags of Treasury Secretary Henry M. Paulson’s rescue plan for the financial system, the British government was presenting its latest stimulus package for an economy that’s sinking fast.

The International Monetary Fund expects UK gross domestic product to fall by 1.2% next year, the biggest projected decline among major developed nations.

Just in the week and a half we were there, big-name employers like Rolls-Royce, AstraZeneca, BAE Systems, and Virgin Media announced thousands of layoffs.

The number of people receiving jobless benefits increased at its fastest pace in October, and unemployment now stands at a multiyear high of 1.8 million, or 5.8% of the workforce.

Citigroup’s shocking 52,000 job cuts were poised to hit the City of London hard, while other global financial giants like JPMorgan Chase and Goldman Sachs also will slash their London operations dramatically.

Some project that the City will lose so many jobs it will return to 1998 levels of employment.

London is expected to bear the brunt of the current recession, losing 370,000 jobs—or 8% of the total—by the end of 2010.

That would be quite a comedown from the glittering days of a year ago, when London vied to eclipse Wall Street as the financial capital of the world. Now both are in a race towards the bottom.

So, it’s no surprise that as talk of deflation filled the cold London air, the Labour government of Prime Minister Gordon Brown unveiled a new stimulus package this week.

The $30-billion program (mere pennies on the pound compared with what we’re doing here) includes cutting sales taxes and helping homeowners and small-business people. The Prime Minister and Alistair Darling, his Chancellor of the Exchequer (Britain’s Treasury Secretary), already announced a massive recapitalization of British banks that became the model for other countries, including the US.

Altogether, annual net government borrowing should reach £118 billion by fiscal 2010, or 8% of gross domestic product, the highest in the developed world.

In fact, by some measures, the UK is deeper in debt than we are. Really.

Total household debt stands at 109 percent of GDP, while the US number is a bit less than 100%. Home prices rose much more there (and in Ireland and Spain) than they did in the US. The UK’s national savings rate, while positive, is just a little higher than ours, which is in the red.

Whatever happened to the famous British stiff upper lip?  Apparently it went away with Princess Diana and the Rolling Stones.

Back in the 1990s, Prime Minister Tony Blair and his Chancellor, Gordon Brown, chose a similar path to that of President Bill Clinton and Treasury Secretary Bob Rubin—favor finance as an engine of growth.

Result: what historian and social critic Kevin Phillips calls the “financialization” of the economy. Finance now accounts for 10% of the UK’s economy (it’s slightly less here) and has accounted for more than a third of Britain’s growth.

But the UK’s GDP is less than a quarter the size of ours, so the financial crisis may hurt them more: According to ThomsonReuters, total bank liabilities were more than 400% of Britain’s GDP, versus “only” 80%-90% for the US.

So, is it any surprise that the pound is sinking—especially as Mervyn King, governor of the Bank of England, promises more interest rate cuts to come?

At last year’s World Money Show, we had to pay $2.11 for one pound, and it was hard to find even a moderate-priced restaurant where a meal for three cost less than $100. At the time, I wrote: “I find the strength of the pound mystifying. The UK looks as if it's six to nine months behind us, and I can't imagine the pound will be able to withstand that.”

Well, this time, it took less than $1.50 to buy one pound. And unlike previous years, when Britons came to New York with empty suitcases to gorge on a weak dollar, we discovered bargain-basement Britain.

Massive pre-holiday sales had London’s Oxford Street humming. Even venerable Marks & Spencer, the epitome of British High Street retailing, had a rare 20%-off sale last week.

I must confess, we indulged in some retail therapy, too, loading up on children’s clothing plus some outerwear for my wife and a couple of dress shirts for me. Last year, that would have been unthinkable.

But the main beneficiaries may have been the many continental Europeans who jammed London’s stores the way they crowded into Yosemite National Park last summer when the dollar was still weak.

The pound has fallen more against the euro than it has against the greenback.

We heard Italian spoken everywhere, as we did at Yosemite. Which raises two questions: How can so many people from western Europe’s most stagnant economy have the money to shop and vacation wherever they please? And why do high-minded Europeans, so quick to criticize Americans’ greed and materialism, seem to have a nose for bargains that’s second to none?

We were feeling pretty good about things until we landed back at John F. Kennedy International Airport on Sunday evening. The line of taxicabs stretched far beyond where we could see, and there were few takers. And the roads back into the city were eerily quiet at a time they’re usually busy. Pre-holiday travel is expected to be light this year, too. And high-end stores on New York’s tony Fifth Avenue are empty, even though they’re quietly offering bargains already.

So, as we gather around our Thanksgiving tables, we should give thanks for our many blessings. But being better off than other countries may not be one of them this year.

Because it’s looking more and more as if we’re all in the same boat. 

Howard R. Gold is executive editor of MoneyShow.com. The opinions expressed here are his own, and are not necessarily the views of InterShow or MoneyShow.com.

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