6 years ago (around this time of year actually), the world economy entered what is now dubbed as “The Great Recession”. Banks were out of money and were on the bring of collapse and the Government stepped in to bail them out. Sadly, this left a lot of us “consumers” pretty skeptical about the future (rightly so), so we weren’t doing anyone any favours by saving all our money. The Governments answer to a recession with low-consumer confidence? Spending. Public spending in the UK has been rising constantly since 2000, but rose even more so after 2008 in a bid to jump-start the recovery (can be seen here). This required an awful lot of borrowing. However, there wasn’t enough revenue coming in from taxes and other public sector areas to cover this up (there still isn’t). What we have now is a Government that borrowed a lot of money with no way to pay it back (de ja vu. More detail on the Government’s activities can be found here)
This isn’t just limited to the UK government of course. This situation extends to the private sector, where people have been taking advantage of ultra-low interest rates (debt has fallen slowly in the UK, but it is rising rapidly in the Far East. The trend over there is that risky borrowing is reaching unsustainable levels – another de ja vu), and the Eurozone, which is on the brink of a triple-dip recession. (Fun fact: global debt rose from 180% of total GDP in 2008 to 212% last year). Now although the UK economy IS growing, we can argue that it’s not growing fast enough (it’s growth rate fell to 0.7% in Q4 of 2013, down from 0.8% from Q3). For the private sector, the only way to deter risky borrowing is to raise interest rates, however this may damage the prospects of a healthy recovery in the short-term. For the public sector – they need some more revenue through taxes and profits from corporations they own. So now we are left with a dilemma – should we make an effort to curb debt in the short-term, which will damage the recovery in the short-term, or keep the ball rolling and see what happens in the long-term?
One thing is for sure, Rising debts + slow growth = another crisis. China – the economy practically holding the world together, has seen a significant deceleration in growth over the past few years. So there is no guarantee this recovery will work out in the short-term with current policies anyway.
It seems pretty clear that in an attempt to save their respective economies, Governments have probably made a bad situation even worse. With governments closing in on bankruptcy because of their net debt, who will be there if the big banks were to fail again?
This article is something I read precisely 1 and a half years ago – it’s regularly updated and has some scary yet interesting information about the UK economy (whilst also trying to sell you their service).
(Sorry if this post is a bit all over the place – it’s been a while since I posted on here, still trying to get back in the swing of things!)