Our Prime Minister, Gordon Brown, has revealed just how directionless, and ineffective his government's recent measures have been during his premiership; the lengthy interview in the linked article with the excellent Christiane Amanpour I'm afraid also reveals how little he understands what has happened, and why - and consequently what to do about getting ourselves out of the mess we are in.
All the political flim-flam on both sides of the Atlantic seeks to mask from electorates a simple fact; living standards are going to have to drop significantly in a number of countries, specifically those countries which have been running significant balance of payments deficits for very many years - two prime examples of this are the US and the UK, both of which at a national and individual level have been living on borrowed money for many years; both have very low levels of individual saving. All this has led to a too-rapid growth in the economies of countries such as China which, because of their traditional low labour costs and large and generally well-educated populations were able to supply the goods the consuming nations wanted; obviously the producer nations (China, India etc) were anxious to raise their own populations' standards of living and in the process these countries have built up massive savings, both nationally and individually - which they have for many years loaned to the consuming nations to fuel their purchasing binge. All based on 'confidence' that the currencies of the consuming nations would retain their values in the light of all this national borrowing to fuel consumption. Of course this could not go on for ever - eventually people began to see that the whole structure was built on nothing more than a confidence based on historic assessments, rather than realistic current valuations.
The current mantra is that markets have failed and that the 'State' must step in to put things right. This is crazily wrong! The markets have been circumvented for so long by government by over-regulation that eventually the power of the market can no longer be resisted. Brown wants to keep public spending (and taxes) high and to fuel a continuing decifit with yet more borrowing, whereas the lenders are becoming increasingly reluctant to go on funding us (the consuming countries) - just look at bond spreads to see what is happening in the underbelly of the market and how it assesses the relative strengths of various economies. The civil unrest that started a few months ago in places such as Greece and in eastern Europe has now spread to France and the UK - not to mention the tensions that are building up in places such as China where many factories have had to close because we are no longer buying.
Brown wants to keep interest rates low to 'kick-start' the economy so individuals and companies can 'afford' to borrow to keep their consumption levels up. As I've written here before this is analagous to offering a drug addict more drugs to stave off the pain of withdrawal symptoms. Short-term relief, but a lot more pain to come in the future. This is all, so we are told, to prevent deflation. How is it going to work, though, if people fear they are going to lose their jobs (and increasingly ARE losing their jobs)? Beats me! How are savers going to be encouraged to continue to save (to do their small part in propping up the financial system)? They answer is they are not.
Unless we reduce our national outgoings significantly, currently funded by high taxes and government borrowing, this problem is only going to get worse. What's going to happen to our political and social stability in a few years time when the bills for this continuing fiscal folly start to come due? Well, I think the answer will be found in the euphemistically-named 'quantitative easing', or running the printing presses for paper money much faster to increase the money supply massively - and the burden of debt will be 'magicked' away by a massive increase in inflation which in the low interest climate the government wishes to maintain will be absolutely disastrous for those who have loaned the money to fuel the party, whether domestic savers or international lenders. Expect further falls in the value of the pound in coming years, too. Social unrest? We ain't seen nuthin' yet!