On Debt
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A funny thing happened along the way of this recession : UK unemployment has gone up surprisingly little - from 5% to 8% (compare this to the US's 4.5% to 10%) while company failures at near-30-year lows. The 1990s recession was only one-third as deep yet insolvencies six-times today's level. Similarly, housing repossessions are startlingly low given the financial mess. What gives? A reason, according to turn-around and private equity investor Jon Mouton, the result of near-term policies designed to lower UK interest rates to levels not seen in 30 years. One can manage a lot of debt if interest payments next to nothing. The Bank of England has printed money. And the government increased borrowing to avoid cutting spending to the public sector. All of which has reduced unemployment and avoided financial pain. But what cost?
We have tried to solve our difficulties with borrowing and use more borrowing to support existing borrowing. UK govt debt stands at 100% GDP - excluding public pensions obligations, private finance initiative commitments and bank support, which adds 3x. The US came back from the '70s because corporate America fired everybody resulting in the Rust Belt and creating Silicon Valley which has been a much better investment than Detroit, which we bail out again. Bad businesses should be allowed to fail redeploying resources elsewhere. This be capitalism
The debt we are accumulating means that we live better, no doubt. But those after us must deal with the same debt. The low interest rates hurt savers and pensioners and reward those who borrow rashly. Pain aversion, Molton argues, and not morality, is the abiding characteristic of current economic policies. Even today deficit reducing coalition has dodged hard decisions like cutting net investment by two-thirds over the next five-years. Cameron and Co. rely on low interest rates persisting on good economic growth (following December, this looks challenged) and stable financial conditions. Even if the planets align, we have a debt mountain to live with.
The UK, despite it all, is trying to avoid Greece and Ireland and maybe Spain, Portugual and Italy. The conservatives in power after all and they are lopping a third from the arts and public services, 20% from the NHS and 8% from the military (public education 'ring fenced'). They are able to do so, too, unlike the stymied USA. There we get the shrills at Fox News and the Tea Party wagging the Republican party doing nobody any good.
