No Great Slump, but Stagnant Inflation Looms


Not every boom is a bubble, though most of them become bubbles. Not every boom ends in a bust, though most of them do. In the present situation, one needs to be careful to distinguish between the two types of rapid price increase.

In the United States and in the United Kingdom, it is clear that the housing boom has been a bubble. In the United States, the bubble has already burst – the only question is when the U.S. housing market will reach its low point. Britain is following the same track, but is somewhere between six and twelve months behind.

There are some important differences between the two markets. For most purposes, the British housing market can be regarded as a single market. There are, of course, regional variations which largely reflect the distance from London – the Inverness market fluctuates in a different cycle from London. But, over time all the regional markets tend to move in a similar rhythm.

In the United States, the regional differences have been much more important. The housing bubble, which is now receding, is the first nationwide housing bubble in American history. In the past, Americans have been drawn into local or regional housing booms, like the great Florida boom of the 1920s. This time the U.S. boom ran throughout the States. I think that must have been caused by the universal availability of cheap credit, the same influence as created the boom in hedge funds and private equity. If the availability of credit is the chief determinant of house prices, then Florida and Chicago are likely to share in the boom and in the recession. Regional differences become secondary influences, as they are in the stock market.

The fall in the house market has wiped out very important assets of the banking system, leading to the collapses of Bear Stearns and Northern Rock and the distress of other banks. It is difficult to put a figure on the contraction of credit that has resulted. The I.M.F. has suggested $1 trillion, which is an impressive round number. What has actually been lost is a multiple of the fall in house values, since there is a multiplier effect on credit and on the willingness to lend. A bank which has lost a billion dollars in the housing market, or some derivative of the housing market, will feel itself to be short of capital and will seek to draw in as much cash as it can. It may well go from over-generous lending to exaggerated borrowing, which will take it from being a net lender to being a net borrower. This banking squeeze is pronounced both in the U.S. and the U.K.

However, there are other global price rises which are not bubbles. The oil market has risen to record highs, with Brent Crude at around $108 a barrel. This cannot be merely a reflection of excess liquidity, since the oil price has continued to rise at a time when credit was becoming much scarcer. In the case of oil there are non-monetary reasons for higher prices, including the high level of demand from Asia, the geopolitical risks of dependence on Iran and the physical loss of production in Iraq. The rise in oil prices extends to rises in products dependant on oil, particularly foodstuffs. There is a global increase of grain prices, causing most suffering in Africa and in the less developed Asian countries. These are not speculative increases, but are reflections of real economic and political factors.

I do not believe that the world is on the edge of another Great Slump, but the combination of the deflationary effect of the collapse of a widespread housing bubble with the inflationary effect of higher prices for oil and food does present Governments with the most difficult economic problems since the 1970s. It was then called “stagflation“, to reflect stagnant inflation. Both horns of the stagflation dilemma now look sharp and threatening.

William Rees-Mogg
For The Daily Reckoning Australia

William Rees-Mogg
Leading political editor William Rees-Mogg is former editor-in-chief for The Times and a member of the House of Lords. He has been credited with accurately forecasting glasnost and the fall of the Berlin Wall – as well as the 1987 crash. His political commentary appears in The Times every Monday. His financial insights can only be found in the Fleet Street Letter, the UK's longest-running investment newsletter.


  1. William Rees-Mogg as contrarian indicator?

    In the early 1990s William Rees-Mogg and James Dale Davidson believed that the ‘postwar world’ was near its end with a likely ‘great slump’. They were wrong.

    Now Rees-Mogg suggests “No Great Slump … Looms”. Wrong a second time?

    In “The Great Reckoning – How the World Will Change in the Depression of the 1990s” it is noted that “Debt cannot go on compounding faster than output forever”.

    It is “overindebtedness” (Irving Fisher) that will eventually result in a deflationary depression.

    The year 2007 and years 2007-2008 may be rhymed with 1927 and 1997-1998; (also 1987 and 1971).

    The trouble in Thailand in May and July 1997 compares with trouble with Bear Stearns in June and July 2007.

    The largest ever IMF rescue in December 1997, engineered by the USA for Korea, compares with Central Banks intervention in December 2007, especially the American assistance to Europe.

    The New York Fed bank organized bailout of LTCM and the interest rate cuts of September, October and November 1998 compares with the ‘present’ Federal Reserve organized bailout of Bear Stearns, interest rate cuts and another 1927-style American help for Europe.

    The Dow Jones is going to a new nominal high and then decline with the global economy into a great depression.

    In the second edition of “The Great Reckoning” it was said that:

    “…the transition between British and American predominance from 1914 to 1945 shook the world no less than a violent earthquake. The political, monetary, and military foundations upon which markets operated were severly tested. In more than one instance, they gave way, and as they did, prosperity – like a weakened building – tumbled into the chasm. The result was disorder: a world unpoliced, in which property rights and free trade were abridged or abolished in many places, and millions perished in brutal wars” (Revised Edition, (London:Sidgwick & Jackson, 1993), p.138).

    The coming “great slump” will play its part in the transition between America and a German-dominated Europe; not between American and Asian dominance!!! The world is going to be surprised when the global economy moves from West to West not West to Asia.

    Rees-Mogg’s and Davidson’s book “The Great Reckoning” was released at the beginning of the post-Cold War boom; it should have come out now, near the end of the post-Cold War boom, with the sub-heading “How the World Will Change in the Depression of the 2010s.

  2. I like the article but I am not so sure about your assertion that the price for commodities is not a bubble. We built the current housing bubble on the breaking bubble of the tech stock implosion. The masses as a herd stampeded out of stocks and into *safe* investments like real estate. The implosion of the housing bubble caused more investors to seek *safe* investments and who can argue that commodities are a hedge against inflation? Have enough people with the same investment strategy and you have a bubble as the feedback loop of rising values draws in more investment. If the Government, in an effort to drop the cost of food to consumers, pulls the plug on ethanol we will find ourselves up to our armpits in corn, the first commodity to implode. Then, as farm acres devoted to corn revert to other more profitable crops, the other grains will follow suit. Not sure about what will happen with oil, but I have to imagine that at some point there is a peak and a down hill slope.


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