New Prime Minister Gordon Brown -- Boom/bust economy

July 4, 2007

Gordon Brown became Great Britain’s new Prime Minister last week.  Former Prime Minister Tony Blair stepped down to become the new Middle East peace envoy for the Quartet, which is ironic considering his major role in the Iraq war. Gordon Brown has essentially been running Great Britain's economy for the last 10 years in his former position as Chancellor of the Exchequer (which is similar to the U.S. Treasury Dept).

Great Britain’s economy has done well under Brown’s prior stewardship, experiencing over 14 years of uninterrupted growth, high employment and, until recently, low inflation. GDP growth was 2.8% in 2006, while inflation is only slightly above the target of 2%. GDP per capita is now better than Germany's.

As Chancellor, Brown did three things:

1. Gave the authority to regulate interest rates to the Bank of England, thus freeing monetary policy from politics.
2. Enacted taxes to improve health care and reduce poverty.
3. Kept Britain out of the euro, which reduced economic volatility.

What Gordon Brown as Prime Minister means:
As Prime Minister, Gordon Brown will be vested in maintaining the status quo. This means he may be resistant to the idea that the real estate market is now driving the economy towards a boom/bust cycle. Home prices have more than doubled in the last 10 years. London prices have jumped more than 40% since 2005, making the city more expensive than New York or Paris.

This boom is attributed to bonuses paid to managers of London-based hedge funds and private equity funds. Last year, 4,200 workers were paid bonuses worth $2 million each. In addition, London has experienced much immigration (many from the new EU Eastern European countries) and more people choosing to live alone. Housing construction has not kept up. Finally, a lot of people are buying to rent out as a form of retirement savings.

To head off a housing boom/bust cycle, the Bank of England has raised interest rates five times in the past year, and is expected to raise it again to 5.75% at next month’s meeting. As Prime Minister, Mr. Brown may oppose the increase because it makes it more difficult for young people to buy new homes, which is one of his pet projects. Another reason Mr. Brown may oppose it is because he feels his Treasury Dept weaned out all economic booms and busts.

If Brown is successful in halting interest rate increases, the pound could lose value, increasing the trade deficit, which has risen over the past five years. This would further contribute towards an economic bust. (Source: The Economist “The Day of the spider,” April 26, 2007; Country Briefing Report, June 5, 2007; ThisIsMoney.co.uk, “Bank chief: Rates must go up,”, June 27, 2007)

Action steps:

The best protection from a market boom/bust cycle is a well-diversified portfolio. Find out how to protect yourself with my home study course, “Retirement Planning 101.” This course will guide you using the same steps I took to retire at age 50.

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