Recession?

It occurs to me that there are business cycles, created partially by the availability of credit. When credit is readily available, businesses are able to expand using borrowed money from banks and investment agencies that offer easy terms at low interest rates. As the economy heats up, more money is borrowed by more and more people. The banks, not wanting to miss out on good thing, start to be less vigilant in their lending policies. More and more people and businesses that cannot really afford the money they are borrowing are sucked into the credit frenzy, usually by short term preferential introductory rates.

This is what happened in America when the Federal Reserve lowered interest rates to 1%. The so called Subprime market that developed sucked in people of low income and poor credit history, fooling them to fool themselves that they could afford a $500,000 home even though they were only earning $10 at Walmart.

Unfortunately, credit booms are always followed by credit contractions, where the easily available credit gets withdrawn from the market. It becomes harder to get credit, and the banks get more stringent on repayments. This period usually occurs when people start to default on their payments on mass, resulting in losses. In the old days the bank would take the loss, repossess the home or the asset, and after a period of months all the dead wood would be flushed from the system allowing the credit cycle to reset.

It's a little bit different this time. The American banks, in their wisdom, sold on the mortgages so that they were no longer liable. Wall street firms wrapped this Subprime debt up with other debt in various instruments, and then insured these instruments int he event of default. Nobody seems to know where all this dodgy debt is, and as such none of the banks are willing to lend to each other. They also want to keep as much cash as possible for fear of their own investments being hit by this subprime timebomb. The credit gets withdrawn from the market, businesses no longer have access to easy money and start to fail, people get made unemployed........ and the favourable introductory interest rates on millions of American and Uk mortgages reset at much height levels. Repossessions and loan defaults skyrocket and the whole economy sinks into a recession as the consumer shuts his wallet and refuses to buy.

Americas top investment bank now says that the US is in a Recession. Roughly 15% of our exports go to the US, and the Christmas retail period was an absolute disaster. This will hit the UK hard, just at the time when PCT's are getting ready to deal with the new paradigm of 2009. Hundreds, if not thousands of dentists may leave the NHS to enter the private sector JUST AS the UK economy enters a recession. Massive increase in the overall cost of dentistry with a decrease in its availability and a decrease in the consumers ability to pay.

It's a possible scenario, so it's worth planning for. This isn't financial advice by the way, just thoughts that are probably wrong. After all Gordon's in charge!