The latest news about inflation – RPI up last month from 2.8% to 3.2% when wages are virtually flat – is bad enough, but the background makes this a whole lot worse. Since 9 August 2007 when the collapse at Northern Rock heralded the start of the Great Financial Crash, debt, despite all the privations of the last 5 years, has not eased, it has deteriorated further.
Total debt – not just government debt which gets all the attention, but the equally important household, financial and corporate debt – has actually increased in 10 Western countries since 2007. One of those is the UK, but the list also includes the US, Germany, France, Canada as well as the more predictable countries in deep trouble – Greece, Spain, Portugal, Italy, and Ireland.
That is deeply worrying since it implies two things on current policies: the crisis is going to get worse, a lot worse, and it’s going to be prolonged beyond any current estimates. If the limit for debt reduction is about 10% a year before it produces unrest and rioting on the streets, then this could go on for 15-20 years. Such a scenario is unprecedented since the quarter century depression in the UK that started in the late Victorian age in 1873.
What does that mean for living standards when the last 5 years have merely been a warm-up for the real thing ahead? In those last 5 years weekly pay rose by 9.8%. The rise in food prices however tripled that to 29% while energy prices rose 5 times faster by 45%. Transport costs are also rocketing, with air fares rising last month by 22%, and rail fares set to rise another 6.2% in January, leaving some commuters into London with an annual ticket costing in excess of £5,000. How long can this go on?
And there’s another nasty shock ahead. It is well known that when economic growth begins to get a grip, a virtuous multiplier effect kicks in. It is less well understodd that when the economy contracts, a vicious multiplier effect begins to operate in reverse, magnifying the downturn. Britain has already been in recession for the last 9 months, and with no sign of growth on the horizon – indeed with the eurozone looking likely to follow Britain into recession – this kickback can be expected soon to make things yet worse.
Still no mention of growth from either the Treasury or the Bank of England, only two proposals which show how utterly desperate the financial authorities are now becoming. After £325bn-worth of quantitative easing which has next to nil effect in promoting growth, they are now considering £50bn more, and on top of that actually reducing the unprecedentedly low 0.5% key interest rate to zero! The king really does have no clothes.