The UK economy is still in recession, but the effects have been cushioned somewhat by the government’s policy of throwing money around, especially to the banks, but also in pointless VAT cuts, phantom “assistance schemes” for those having trouble paying mortgages, “ghostly” export guarantee schemes, (58 companies assisted Nationwide) and the like.

The problem is, the more the government borrows to spend, the more the lenders will want to know how the money is going to be repaid. And, in the same way as all lenders do, they will start to apply higher interest rates to the loans that they make to the UK.

Most other developed countries, (all of which are now in positive growth, with the notable exception being the UK), have started to raise interest rates (even slightly) to reign back the potential for increased spending on consumer and industrial credit because they know that if it takes off in an uncontrolled fashion, the result will be another crash, another drop back into a recession, rampant inflation and more misery for their citizens.

Of course, in the UK, where dependence has largely been on finance, consumer credit and housing, we’re slower into any possible productivity-led recovery, (shopping, especially for foreign goods, is not productive), and with the government not daring to feed us any of the essential medicine until after the next election, so as to give a semblance of normality until then, the current scenario really is one of sand castles being built on a beach with the tide coming in but everyone trying to believe that they won’t fall down.

We have seen recent comments that asset values have risen, but this is a bubble, and the recent recovery in asset prices is based entirely on the huge monetary stimulus that’s been pumped out by the central banks, (government), and it’s unsustainable.

As we know, the stimulus was applied to head off the mooted Second Great Depression – in other words, to prevent output and employment (the real economy) collapsing. And in most economies outside the hopelessly overstretched UK, (and Ireland and Iceland), it seems to have started to work well.

But the biggest effect has been in asset markets, where not only have equities soared by 50% since the low mark, (with, incidentally, commodity prices pushed up by 20-40% as well – your food and energy got more expensive), but even property prices have recovered and UK prices are now higher than a year ago.

Higher prices than a year ago is strange, as UK property remains highly overvalued in relation to incomes. Just before the crisis broke, the IMF said UK had the third most overvalued property in the world, yet less than half of that – 13% – has since been corrected. Compare that to Irish property prices, which are down 25% and still falling.

So desperate is the government to cling on to power that, until after the next election, we won’t be touched by fiscal reality. Thereafter, (not in 5 – 10 years from now, but less than 10 months), whichever government is in power will start to act, because central banks in the recovering economies will start increasing interest rates, and clawing back their huge monetary stimulus.

When the other major economies follow the lead, the first thing that will happen is that the global asset bubble will deflate, and it will deflate fast. At that moment, those shoppers in Shrewsbury and Telford, (and everywhere else of course), will see that wealth cannot be conjured out of nothing, and the past debts still remain to be paid for. We really are much poorer than we thought two years ago.

House prices will resume their downward trend, but, if the Bank of England keeps our interest rates down while others are increasing theirs, sterling will drop further than the sheer plummet that it’s already taken as other countries decide that Sterling is not worth buying. Import prices will rise steeply and then the shoppers, also, will start to cut back.

Because the bond market starts to worry that the UK government has the highest borrowing requirement of any developed country, the cost of government borrowing will rise as steeply as asset values fall, leaving UK taxpayers to spend more than the annual NHS budget just to pay the interest, not even the capital repayment.

There are those who might suggest that consequent inflation would be a good idea. After all, many years ago, houses cost only a couple of thousand Pounds and those who were paying mortgages in the seventies and eighties will remember that because inflation, (and thus salaries), rose so much, it was possible to pay off your house with just a few months’ salary.

However, it’s all very well for young people and other debtors to wish for inflation, but for pensioners with savings, this would be a disaster. if, as many people do, one depends on bank and building society accounts to finance our old age, the last thing anyone needs is to be put into penury through the actions of a bankrupt state.

We’re getting older as a population, so the problem of affordability is more acute than in previous recessions. However, the government is taking a course that will throw many older people into misery, stripping them of the ability to manage things themselves and consequently stripping them of most of their dignity.

There will be those who will shout “benefits”, “government pensions”, “state care”. But there will be no money left to pay for them and, unless you’re blind, deaf and have no contact with the outside world, we can all already see what’s been happening on that score recently.

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….or any more b***dy winebar cafes!!

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Should have said….

“The current crew either lack the intelligence to know the game’s up, or lack the courage to act upon it if they do know.

Exponential growth on a finite planet? Do the maths..”

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I must congratulate Rodney (#2) for his excellent response to this article.

How futile it is to think that opening shops is a sign of recovery!

I have always said:

“Creation of wealth is achieved by changing the state of raw material”

That is to say – only “manufacturing in its broadest sense” creates wealth.

By contrast – shops don’t create any wealth at all, and certainly BANKS and the finance sector don’t!!

The UK has a much smaller manufacturing base now – and I worry that in the coming months especially after the General election – things will change drastically – and not for the better as far as the shopper in the high street is concerned!

If we want to be a nation of shoppers and shelf stackers – then lets carry on regardless! however…

IF we want the UK to be a real leader in the 21st century – then we need to get a sound manufacturing base back, with all its attnendant (UK based) skill base that it produces – pretty damn quick.

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No, glyn, it is not nonsense. Heard of personal debt? Well the UK has the highest personal debt in the world. And much of that is thanks to people buying stuff they can’t afford… and that includes over-inflated houses. Get real.

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