Wednesday, March 30, 2011

Public austerity, private profligacy

... is George Osborne's recipe for economic recovery.

Links from Krugman and Naked Capitalism lead us to a great little piece in False Economy by Duncan Weldon. This points out that the counterparty to the Con-Lib government's deficit reduction programme is a substantial increase in private indebtedness. The Office for Budget Responsibility admits as much, with the following chart (courtesy of Krugman):


Wow. The increase in private debt swamps the reduction in public debt (£245 billion to £43 billion). And the Chancellor then has the nerve to talk about 'rebalancing the economy'....

This is surprising and shocking, except when you stop to think about it. If the state contracts, then the obvious alternative source of demand is households. Households are suffering an unprecedented income squeeze, and so the savings rate will go down. Unless we enjoy an export boom (exporting what? To whom?) then there is no other way it can go.

So we suffered a massive economic shock because of our private indebtedness, the government bailed households out for a while, and then decided to stop in order to allow private indebtedness to rise even further. The squeezed middle is about to get squeezed even harder than we thought, and we'll probably get another major financial collapse before too long.

(More on this here).