Monday, 18 July 2011

Worried? You should be

While Westminster and Whitehall elites are busy forming a circular firing squad over the phone-hacking and bribery allegations swirling around the police and Rupert Murdoch's News Corp, a terrifying set of clouds are building up on the horizon.

The world economy is facing a great big storm, and no-one in the developed world seems quite to understand just how big the risks really are. European banks' stress-testing seems to have failed, as bank shares continue to slide. The very structure of the US Federal Government seems ill-equipped to meet the challenge of the United States government's spending deficit. Both tax rises and spending cuts are desperately needed, to shore up confidence if nothing else. But both parties in Congress - spurred on by an absolutist but economically illiterate Tea Party - seem set on a collision course. If the US does default on its debts in two weeks' time, by which time its debt ceiling must be raised, members of Congress will bitterly regret their pathetic point-scoring.

Here in the UK, a combination of the Chancellor's doom-mongering, spending cuts, tax rises and lack of a growth strategy look likely radically to slow economic growth. Forecasters are cutting back their projections; some forecasters think next week's growth figures will take us back into negative territory, and tell us that the economy is shrinking again. That still seems unlikely, but growth is likely to power down to a slow and painful crawl.

The risks are huge. Collapse of the Euro as the weaker brethen are peeled off by the bond markets refusing to lend? American default? Renewed recession at home? In this situation our public discourse, about who said what to whom, seems like a bit of a distraction.

It's often forgotten that the world economy actually began fairly rapidly to recover from the shock of the Wall Street Crash in 1929. It was the second wave of banking crises - starting with the Austrian Credit Anstalt (above) in 1931 - that really put the boot in, and led to more than half a decade of horrifying economic pain. It might happen again. The signs are not good.

I don't want to spoil your day or anything, but if I were you I'd start worrying.

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