Dawn Ritch, ColumnistStorm clouds are gather-ing for 2008. Both the United States and Europe face grave economic upheaval. More of their citizens own their own homes than ever before, and have been treating them like piggy banks because they have shot up in value in a short time.
They have, therefore, borrowed loans against these homes, and have been spending the money like there is no tomorrow. The vast majority of these people have no personal savings at all.
Now the party is over. It ended like November when the housing bubble burst and the subprime market collapsed. The world's largest banks have written off loans in the tens of billions of US dollars.
No one is yet sure just how far or where the contagion has spread, and whether or not this will be the end of the matter. Most people think it won't be. It's hard to see, therefore, how Jamaica can escape its ripple effect.
The subprime debacle won't affect only the borrowers overseas, but investors as well. Investors will become gun-shy and tighten borrowers' credit. Even individuals, entities, and countries with the best repayment records will face difficulties in refinancing their debt.
Banks in the United Kingdom have cut credit-card lines, are not renewing credit cards, or are cutting the credit line in half.
Consumer spending in the United States accounts for 70 per cent of that country's gross domestic product (GDP). Now, citizens of both the US and the UK face a major cut in their disposable income.
Dampening effect
This means that fewer houses will be bought and built and with that comes a decline in the sales of household appliances. These things use aluminium. That could have a dampening effect upon the demand for Jamaica's alumina.
Demand for exports from China and India may fall in the west. Tourism may fall even in the UK and Europe because of the fear of job losses. The slowdown could feed on itself and cause a major recession, and not only in the US. That country alone accounts for 40 per cent of the world's GDP.
Here, in Jamaica, our balance of trade figures are getting uglier and uglier because of our fuel oil bill. There has been a 25 per cent increase in the world price of oil since mid-August last year. Nobody here has bought into the message of energy conservation, because many believe that the sole supplier of electricity to consumers, the Jamaica Public Service Company, is ripping us off anyway. So we would all really rather steal the power than pay for it. No amount of advertising will ever change that. Only a fair price can.
It is noteworthy that after four months of kicking against the prick of providing subsidies on basic items, and requests to do so by the Opposition, the Bruce Golding-led administration has finally caved in. They will provide J$500 million in subsidies on basic foods which have themselves sky-rocketed since the last general election.
These subsidies are no skin off the government's nose. The same level of duties and general consumption tax are being applied to the import of fuel oil, the price of which has gone up by 25 per cent.
It is obvious, therefore, that the JLP government is experiencing nothing less than a windfall because of the higher price.
They need not have hesitated to implement subsidies in the first place, much less say in this niggardly way that the situation will have to be revisited in March, as though they might find themselves unable to keep it up. What else might they like to do with all that unforeseen income?
Alternative investment schemes
The Government itself is getting more income, at a time when th investment schemes are all crumbling and reducing the income of their local investors. Indeed, it is fair to say that many Jamaican individuals and companies will go bankrupt.
A local study has reported that these are mainly middle-class people. But the people I see on the television news every night demanding their money don't look very middle class to me, even if some of them do drive motor cars.
They are not quite salt of the earth, but almost. They certainly don't look like loiterers and idlers, and no government is going to find it comfortable to sweep them under a carpet, or dump them in the red mud lake. They are an inconvenient truth.
Many of them admit to having borrowed money from the formal financial sector in order to invest in thes schemes. Those loans will not be repaid.
Still others took out mortgages on their homes to invest the money with these high-paying interest schemes. Those homes will be lost, and the value of Jamaican real estate will decline if too many distressed properties come on the market all at once.
Two of these schemes are reputed to have been very generous to the Jamaica Labour Party in the run-up to the last general election. I am told that contributions from them ran into many millions of United States dollars.
Were a general election called this year, as some think will happen, those organisations will not find themselves in a position to be quite so financially generous again.
It is hard to see, therefore, how a JLP government can credibly claim to be disinterested in the fate of th investment schemes, still less that of their investors.
The Government has responded to the crisis of higher fuel and food bills by increasing interest rates by one per cent, in the hope that people will be less inclined to sell their Jamaican dollars and convert to US.
It will take more than a one per cent increase to do that, but any port in a storm I suppose. The Government's logic seems to be that anything is better than the continuing devaluation of the Jamaican dollar.
Yet inflation in Jamaica is stubbornly remaining in double digits. The central bank will be obliged, therefore, to increase interest rates further still.
The course will be clearer when we see what kind of foreign exchange-earnings the island makes between now and April. This is the traditional time of the highest tourism earnings, and commodity exports.
The domestic realities of our major trading partners, however, may have a negative impact on these inflows. A grim situation in Jamaica will then be grimmer still.
