23 April 2011

Welcome to 1981

A Royal Wedding, spending cuts, rising unemployment, special taxes for banks and North Sea oil producers, inflation worries, and a new government trying to convince people that its plans are the best way forward. Welcome to 1981!

An unknown future
The interesting comparison with 2011 came from Fidelity and reminds us of the challenges we were facing in those early days of the Thatcher government. There are some differences, though. Our concerns about inflation increasing are from a current relatively low base of 4 percent, whereas we were at 12 percent in 1981. Although today's inflation perhaps feels worse, particularly since it applies to things we can't avoid like food and fuel.

Our approach to our present predicament is pretty much the same as it was then - cut the public sector back to size and raise taxes where possible. The public response is also similar, although on a lesser scale so far than the unrest of 1981 - remember Toxteth, Brixton, Moss Side. Compare that to the US approach which also was the same back in Reagan's 1981 - cut taxes to stimulate spending and think about how to repay the resulting deficit some time in the future.

After the 1981 Royal Wedding a long term bull market started which was great for investors. Whether the same thing happens this time around remains to be seen, because there are still major structural issues in the financial world which may prevent that. We could still see big repercussions from the Euro problems. Spain may be the next problem and it's a bigger economy than any of the others which have so far been rescued, and the Greek "fix" was only temporary and is likely to come back to bite. Budget issues in the US could also have a negative global impact, with S&P's recent downgrade of America's credit outlook a warning sign - you just can't print money for ever.

All in all, challenging times for savers and investors which emphasise the need to avoid putting all eggs in one basket ... Oh, and to take professional advice!

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