Alistair Darling was pleased this morning. As you know, these days Mr D owns a bank. To be precise, we all own a 57.9 per cent stake in RBS. This morning, our bank did as it was told.

RBS has now agreed to provide its mortgage borrowers with six months’ worth of grace if they fall behind with their mortgages.

At last we are seeing banks wake up to a bit of reality - they can now see what most of us felt was blindingly obvious for some time.

It is one of those occasions when an analogy with football seems rather apt. It seems there is a talent that great footballers must have, which is not quite so obvious. Sure, they must have good ball control, pace, fitness and determination, but they all need to have a knack for reading the game - for a kind of positional sense, which comes with an understanding of the wider rhythm of the game. The player who does that runs off with the ball, and in the process takes a couple of defenders with him, and creates a space for someone else. The great football player can read the game.

In business, however, it often seems that we tend to forget that we don't work in isolation. In a particular industry, if demand exceeds supply, new companies will enter the market, existing companies operating in the sector will up production - before you know it, supply has exceeded demand.

Companies tend to react to the same circumstances in the same way.

In his book Origin of Wealth, Eric Beinhocker told the story well. In his story, you are a manager working for a large maker of, say, widgets, and you obtain market intelligence suggesting demand is set to surge. So, you make your presentation to the board, get additional investment agreed, and production is upped. For a while, you are the company's star, and then it all goes pear shaped, you just can't sell all the widgets you produce. Production is cut back, job losses mount, profits turn to losses. Then some time later at an industry exhibition, you meet up with your peers working in competition. After mutually all agreeing how tough times are, you discover they all saw the same intelligence, and consequently upped production in tandem.

A few years later, your firm acquires another piece of intelligence suggesting demand is set to surge. Has the company learned its lesson by now, does it avoid the mistakes of the previous cycle? It doesn't, and it doesn't because you lost your job in the last round of job cuts, your successor was recruited from outside the industry, and she repeats the same mistakes you made.

If you get behind with your mortgage, it may well make sense for your bank to start taking legal steps to take possession of the property pretty quickly. But it makes no sense if there is a sudden surge in the number of people behind with their mortgages - if banks start possessing properties in tandem, there will be a rush of properties coming on to the market, house prices will fall, and the banks will find it to be less likely that the properties they sell will cover the size of the mortgages they are secured against.

That is surely why Stephen Hester, the new boss at RBS said: “We need to recognise our customers’ needs and fulfil them where we can. Not because of any moral pressure - although we understand it - but because it makes commercial sense.”

One assumes other banks will follow suit - Northern Rock, which is of course another bank we own, has come under all kinds of flak for repossessing properties. They will almost certainly follow RBS's lead. No doubt HBOS will follow, too.

Alistair Darling seems to be cock-a-hoop over it all. A Treasury secretary said: "Alistair Darling is very pleased with this. It was done without legislation, just pressure from us. We want to avoid repossessions at all costs."

To be honest, it does make sense, although, a lot depends on how the banks manage this. If they insist that mortgage holders who have fallen behind catch up quite rapidly, then they are merely pushing the problems further forward. If, on the other hand, they just extend the timeframe over which the mortgage is paid, or simply add the debt on to the total size of the mortgage, so that the cost of repaying the missing six months is amortised over, say, 20 years, then really this is something of a win-win situation.

Of course, it is bad news if, even after six months, those behind still can't pay their mortgage, but it does seem likely that on a national scale the money saved via unnecessary repossessions, will be greater than the money lost through the banks being too sympathetic.

Is there a downside to this? Well, yes, there is, but it is difficult to know what can be done about it.

The truth is, the sooner house prices reach bottom, so that the recovery can begin, the better. The big problem in Japan 18 years ago, was the protracted period over which asset prices fell.

True, it is a good move from RBS. It makes sense for them, and it is morally the right thing to do, but in the long-term, it is doubtful whether the move will help the housing market, or accelerate the timing of an eventual recovery.

©2008 Investment and Business News. All Rights Reserved.

If you wandered around the High Street this weekend, it was tempting to ask: credit crunch, what credit crunch? - it seems the precincts and malls were brimming over with shoppers.

The trouble is, how many of these shoppers were actually buying anything? Well, it will be a few weeks before we find out. It seems likely that MFI and Woolworths will not be the only casualties seen. The real crunch might be by the end of March, when the next quarterly rent is due for payment.

But so much for the evidence of our eyes, what are the surveys saying? Friday saw the latest distributive trades index from the CBI. This is one of the big three retail reports. The ONS report is the most comprehensive, and yet constantly seems to present data that was better than we were expecting. The British Retail Consortium and CBI, however, have been reporting findings which are a lot more in line with what you might expect.

Alas, it was not good news from the CBI. "High street sales fell more sharply than feared, and retailers expect the Christmas shopping period will be especially slow," said the employers organisation.

Just 16 per cent of firms who replied to the CBI survey said that sales were higher in the first half of November compared with a year ago, while 62 per cent said they were lower. So that is a balance of minus 46. This is the joint worst score seen during this slowdown - equalling the index in August.

The only ray of hope really rests in that the CBI survey covered the period from 28 October to 12 November, so it missed the high profile sales - especially the Marks and Spencer one-day sale. So there is reason to hope sales will have picked up later in the month.

But looking forward, the picture is not very nice. A balance of 37 per cent expect the retail business situation to deteriorate over the next three months. This has crushed investment intentions, where a net 57 per cent of firms plan to cut expenditure, which is the weakest figure since the survey began in 1983.

Andy Clarke, Chairman of the CBI Distributive Trades Panel, and Retail Director of Asda, said: “Christmas is going to be extremely tough this year, with retailers having to work harder than ever to keep the tills ringing. The added pressure of changing millions of prices, to reflect the cut in VAT, will be an unwelcome and costly burden. Big ticket items like consumer durables, furniture, carpets and DIY, are really being hit, and with a thawing of the housing market remote, this is unlikely to change. Lower petrol prices and recent cuts in interest rates should help put a little more into people’s pockets, as will the VAT cut, but only if retailers pass it on before Christmas.”

And so now we wait for the next BRC survey.

The real snag, though, with the High Street, and it's a problem that politicians and economists have not really acknowledged, is that it has become too large. The sector has reached a scale that can not be sustained. Only if we continue to spend more money than we have got, can the High Street see its boom continue.

An adjustment has to occur. This is unavoidable, and no attempt by the government to try and boost expenditure by tweaking with VAT, can alter this fact.

©2008 Investment and Business News. All Rights Reserved.

There aren't many hawks left these days. Time was when the central bank dovecote, was all but empty, and the hawks looked down from their lofty perch upon the economic terrain and made all kinds of squawks about the threat of inflation.

Well, in the US, they turned tail months ago. In the UK, the last few months seemed to see something of a hawk purge. But in the Eurozone, the hawks still seemed to dominate the sky, at least until very recently. In fact, incredibly, the European Central Bank voted to up rates to 4.25 per cent only in July.

But then, Friday saw the most dramatic news yet to suggest that has all changed. The stage is now set for big cuts in the Eurozone rate of interest, as the Bank of England and European Central Bank join a race to zero rates.

But dig a little deeper, and you find that the real forces that are at work are quite different from what you might expect.

In the Eurozone, inflation, as measured by the consumer price index, fell from 3.2 to 2.1 per cent. That's a massive drop.

The index is now at its lowest level in 14 months, and just 0.1 per cent above the target rate.

At the time of writing, data was not available to show how the inflation figures break down, but one assumes falling food and oil were behind the declining index.

It seems the index is set to fall even further over the next few months.

You may know that Mervyn King, the Governor of the Bank of England, expects negative inflation as measured by the retail price index next year, and says there is a possibility of negative inflation as measured by the consumer price index.

For some time now, it has been argued here that this analysis is wrong.

Falling asset prices, falling credit availability and slumping demand mean prices are set to fall, and then fall some more.

And yet, ironically, maybe we will see a reverse of the conditions seen earlier in the decade.

Back then, asset prices soared, and food and energy costs went up. Other products, especially products imported from China, fell in price. So, for example, we had cheap furniture. It is possible that the next few years will see the opposite.

In the UK, the falling pound is making imports more expensive. In China, reports talk about factories closing and unemployment mounting. In the UK, the closure of MFI, and no doubt other furniture retailers will follow suit, may eventually lead to a shortage of furniture stores. Maybe the products that fell in price earlier this decade, will rise in price moving forward.

If this economic cycle proves to be symmetrical, then expect a funny kind of deflation moving forward.

There are two dangers with deflation. One is that falling prices mean we put off our spending, but it often seems that this is an exaggerated danger. People can't put off their expenditure indefinitely. As for non discretionary items, such as food and petrol, there is hardly any option to delay expenditure at all.

The real danger lies with wage deflation. Employers may respond to falling demand and increasing looseness in the labour market by cutting wages. And this is the real dilemma.

Time was when economists used to argue that unemployment shouldn't exist. They said wages were determined by demand and supply for labour. Supply was fixed, so, therefore, wages would sit at that level required to ensure there was no unemployment.

It was Keynes who spotted the flaw in that argument. If wages are falling, he argued, demand would fall too, leading to more job losses and a rather nasty downward spiral.

This is less of a danger in the Eurozone, where the labour market is inflexible. The minimum wage and union intransigence will surely reduce the danger of falling wages. In the Eurozone, sharply rising unemployment is more likely to be the result of falling demand.

In the UK, wage deflation is a more serious threat.

But then if it comes down to a choice between unemployment and wage deflation - it is difficult to know what to do.

It seems, however, that if deflation really does occur, governments via central banks do have one more weapon left in their armoury - there is always the printing press. There is the option of central banks lending to banks with negative interest rates - or through unfunded tax cuts.

You can't do this, of course. We all know that if the government prints more money - inflation mounts. But if deflation is the danger, surely that is the right thing to do.

Except this. All that extra money the central banks create will not go away, and could leave an inflation legacy for years.

But, and this is where the opinion expressed here is unusual, there is another way of looking at this.

The last ten years or so have seen global capacity shoot up; this was caused in part by globalisation, in part through improving technology - although the improving technology also helped promote globalisation so, in a way, the surge in capacity is solely down to improving technology.

Under those circumstances it is right to increase the money supply.

In the days before the Industrial Revolution, the money supply was determined by the amount of gold that was in existence. In that era, innovation had to mean deflation. The finding of gold in the New World, and the development of banks and credit, surely underpinned the Industrial Revolution.

There is a good TV programme on at the moment - The Ascent of Money by Niall Ferguson. He shows how the growth in the banking sector created much of today's wealth. At some stage during the series - it may be tonight's episode - he will argue that the Mississippi Bubble in France 250 years or so ago, led to greater suspicions of debt-based economic systems in that country. He argues that is why the Industrial Revolution occurred in Britain and not in France.

We are of course seeing manifestations of that belief today, whenever Nick Sarkozy criticises the Anglo-Saxon banking model.

Ultimately, though, the crisis we are seeing today was not caused by silly bankers or booming house prices; it was not even caused by a lack of balance with some countries saving too much and others saving too little. These are surely symptoms of a deeper force at work. This deeper force is surely the mismatch between demand and supply, caused by rising global productivity.

When was the last time we had such a mismatch? - well, it may well have been the 1930s.

©2008 Investment and Business News. All Rights Reserved.

Cast your mind back, right back, and you may recall a time when this country made things. We don't do that anymore, of course. These days, our entrepreneurs make hair look nice, they invest in property, or the really bright ones set up retail chains. The other good way to earn a living these days is, of course, to become a celebrity. Eat a few bugs in the jungle and you are made for life.

It seems the government has two choices. Either encourage this new breed of entrepreneurs by throwing money at the housing market, by slashing VAT and by boosting demand in every way it can, or it could look at finding a way to encourage the UK to export its way out of trouble - perhaps focus all that money it is planning to give way, and indeed is giving away via VAT - in providing real hope for people who want to work their way back to financial health.

Anyway, with that diatribe above in your mind, read about the most dramatic and scary fall yet in the UK's Purchasing Managers Index, the index which tells us how strong the manufacturing sector is.

Here is the sentence to make you sit up: "The downturn," says the Chartered Institute of Purchasing and Supply, which publishes the data in conjunction with Markit Economics, "is, in terms of both absolute and relative magnitude, without precedent during the near seventeen-year history of the survey."

The seasonally adjusted CIPS/Markit Purchasing Managers' Index® (PMI®) fell to 34.4 in November, down by a record 6.3 points from a downwardly revised 40.7 in October and the lowest reading since data was first collected in January 1992. The headline PMI has now fallen to new lows in each of the past three months.

CIPS said: "The extent of the downturn was far-reaching, with indexes tracking trends in output, new orders, new export orders, employment, stocks of raw materials, purchasing activity and backlogs of work all falling to series record lows."

Despite the falling pound, not even the export sector could perform well.

Hope did come in one form, however. "Raw material costs dropped for the first time since July 2005 as the seasonally adjusted Input Prices Index fell to a reading of 44.2. Although average output charges continued to rise, the rate of increase was the weakest for over two-and-a-half years and much slower than in October."

Roy Ayliffe, Director of Professional Practice at the Chartered Institute of Purchasing & Supply, said: "Purchasing managers said no stone was left unturned as the credit crunch continued to eat into all areas of capital, consumer and intermediate goods sectors. What's more, it's clear that the UK isn't suffering alone as the more favourable sterling failed to encourage demand from foreign clients - especially those based in the US, mainland Europe and East Asia.

"Though there were some gasps of relief as the cost of key commodities slumped for the first time in over six-and-a-half years, even this was another echo of dwindling global demand."

Rob Dobson, Senior Economist at Markit Economics, said: "The scale of the downturn in the UK manufacturing PMI data during November was unprecedented. Output, new orders and employment all fell at series record rates, while manufacturers were unable to benefit from the weakness of sterling as export orders tumbled on the back of the deterioration in global demand. These data suggest that the UK government and MPC may need to consider additional support to the sector despite recent sharp cuts in central borrowing rates. The situation on the inflation front has reversed sharply in Q4. As long as pipeline deflationary pressures do not become too entrenched, the drop in cost pressures will be a welcome development at UK manufacturing plants."

©2008 Investment and Business News. All Rights Reserved.