Keynes way of kick starting the economy

22 10 2008


Argos Logo 120x60
Home Retail Group, the company that owns the DIY store Homebase and retailer Argos, reported a loss of £450 million in its half-year operating profit. The reason for this loss is attributed not only to consumers restricting their spending, but also the weakening of the Pound which means that it costs more to import products from other countries, add to that the increase in the cost of raw materials, production and transportation. Products that are seen as a luxury have seen their sales and consecutively their profits drop as consumers switch to cheaper value-for-money products. Budget stores, as a result, have seen their sales and profits increase rapidly, in cases like Poundland, even double.

However, a drop in sales at Argos, which is not exactly an upmarket store, should create a little more than just a flutter amongst businesses operating in similar sectors. This is because it suggests that not only have consumers changed their shopping habits and switched to cheaper stores, they have stopped spending altogether on items they deem unnecessary. There are concerns about unemployment as many are worried that they would lose their jobs. The utility bills and mortgage repayments are rising. All this creates an atmosphere of uncertainity and leaves people preferring to save any surplus rather than spend it as they did before.

John Keynes, Image from Business Week

John Keynes, Image from Business Week

According to John Maynard Keynes, a well-known British economist, who lived during the Great Depression of the 1930’s, the only way to give the economy a kick-start, is to spend and spend and spend. This is because a recession is caused by a fall in demand, not by the fall in supply. Demand has fell quite a lot recently because the credit that backed it no longer exists. Although Governments around the world have injected banks with capital, banks in turn have effectively turned off the tap of credit. Keynes believed that in the event of consumer spending decreasing, the Government should maintain or even increase its spending rather than cutting back. The people employed in the sectors where the Government spends its money would in turn spend their wages benefiting the local businesses who in turn spend and make investments and that gets the whole economy moving again. That way, a downward spiral of recession could be turned into an upward spiral of growth.

Alistair Darling, the Chancellor of the Exchequer, is adopting Keynes’s ideas. He said that the Government would increase its spending on large scale projects. In the long term, it means increasing the national debt as the Government has to borrow money to keep up its spending. So be it. Keynes said that Governments should think of the short term, because, as he put it, “in the long run we are all dead”.





HSBC, Bradford & Bingley and Seagate cut jobs to cut costs.

26 09 2008

HSBC announced today that it was going to sack 1,100 of its 335,00 employees employed worldwide. According to the BBC, half of these job losses will be from the investment banking section of HSBC whose headquarters is situated at Canary Wharf.

Mortgage lender Bradford & Bingley announced yesterday that it would sack 370 of its employees in a bid to cut down its costs. 300 of these will be from its mortgage processing centre in Borehamwood, Hertfordshire, while the rest will consist of mortgage advisers and sales staff. Bradford & Bingley believe that these job cuts will save them around £15 million in costs. However, it also plans to add about 70 more staff to collect repayments from their customers who have failed to pay up. B&B specialises in buy-to-let and self-certified mortgages and has been hit heavily by the falling property prices since the fall in price leads to negative equity of its assets, i.e., the value of the property is less than the loan secured against it. B&B is also finding it hard to attract depositors because last week, B&B’s credit rating by the credit rating agencies Fitch, Moody’s and Standard & Poor’s was downgraded to just above junk status.

Electronics company Seagate Technologies, which is one of the world’s largest manufacturer of hard drives, announced yesterday that it is moving its manufacturing from Limavady in Northern Ireland to Malaysia which will see 1000 employees lose their jobs. The factory at Limavady has operated for the last 10 years and was due to be shut down around October end this year but its closure was brought forward. Although Seagate may not be a household name, its hard drives can be found in consumer electronics ranging from computers, portable music players and games consoles such as the PlayStation and Xbox.





Lloyds TSB confirms HBOS rescue.

18 09 2008

Lloyds TSB confirmed the speculations and rumours about the rescue deal of HBOS which is to be worth around £12.2 billion. This deal is still awaiting the approval of the majority of the shareholders and the Financial Services Authority to go ahead. Should this deal go ahead, it will create a bank which will be worth about £30 billion and will have about 28% of the mortgage and savings market.

However, the staff at HBOS may not be celebrating as yet from the news of the takeover since it is very likely that many, some estimates being around 40,000 members of staff, will be made redudant. It is likely that in places where branches of HBOS and Lloyds TSB are too close to one another, the least effective branch will be closed. This will certainly reduce costs for the new bank, something it needs in such times, but will also contribute to unemployment.

http://news.bbc.co.uk/1/hi/scotland/7622711.stm

http://business-easy.blogspot.com/2008/09/lloyds-tsb-confirms-hbos-rescue.html