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Robert Peston with Laurence Knight: How Do We Fix This Mess? (Hodder & Stoughton)

Just when you thought it was safe to go out into the economy again, along comes the BBC's business editor Robert Peston with another dose of grim economic reality.

Some commentators have been been spotting green shoots of recovery. Not Pesto.

The financial crisis isn't over; isn't nearly over. We have already been through a recession that is "deeper and longer than the Great Depression of 1930-34", he says cheerfully, but we are now in for "the longest sustained attack on living standards ever" (my emphasis). By 2013, real wages will have fallen, he says, by 7.4% from the end of 2009, quoting figures from the Institute for Fiscal Studies. And they are going to have to keep on falling, in real terms, for a decade.

So what is the root of the problem? Well, it is our old friend, debt – public debt, personal debt, corporate debt. We are drowning in it. After the credit binge of the Brown years, Britain has been left with net debt of more than 500% of GDP – that's about £7 trillion. Some households are trying to pay down their debts – and that is part of the problem. If everyone tries to save at the same time, the economy can fall into a deflationary spiral. People stop buying commodities, so factories close, throwing more people out of work.

In the past, this was resolved by governments stepping in to keep the economy turning over by spending on infrastructure and such like. Pump priming, it used to be called. But the trouble is that Western governments are so deep in debt that to borrow more might spark a sovereign debt crisis. This is what has happened in Spain and Greece.

Had it not been for zero interest rates, there would have been a housing crash in Britain and lots more banks would have gone bust. But zero interest rates cannot go on for ever. In fact, Peston suggests that we really need to have a housing correction, as happened in America, to clear some of this debt off the books. The economy is in a kind of deep freeze, a stasis, where households and banks are kept artificially alive by near zero interest rates and money printing. We risk becoming "a country of zombie banks and zombie home owners".

So what do we do about it? Well, don't ask him. In answer to his own question, How Do We Fix This Mess?, Peston writes "I don't know". This may come as a slight disappointment to those who have shelled out £20 in the hope of enlightenment. There are things Peston obviously favours, like a financial transactions tax, dividing up the banks, a return to making things. He fears that bank regulation hasn't gone nearly far enough and that our banks are still far too heavily "leveraged", ie in debt. They also have a culture of fraud which hasn't been addressed, as in selling dodgy financial products to small businesses, money laundering, scams like PPI.

Peston points out that, while Britain has the second biggest debt overhang in the world, we can still borrow at extremely low rates of interest. He suggests we need to put this cheap money to work now, because the longer we persevere with "austerity" the more of our economy will rust away. Britain is not in any immediate danger of a sovereign debt crisis, he says. "The UK government may have more latitude to alter the path of deficit reduction than I currently believe." That will please his pal, Ed Balls.

But we are living through an unfortunate global collision of circumstances. First, we have the hangover from the debt bubble; second, there is the eurozone crisis, which he sees as partly a symptom of the wider "crisis of capitalism in the West and also a special malaise of its own"; and third, there is the relentless rise of China.

Here is pump-priming Chinese style: "Between 2008 and 2011, under the government's stimulus programme, China built, among other things, 25,000km of motorways (more than half the circumference of the planet), an entire high-speed rail network, the five longest bridges in the world, 30 new airports (another 80 on the way) and new subway systems."

Oh, and that was after a quarter of the $590bn stimulus had gone on rebuilding Sichuan province after its earthquake. We can't even build a decent tram system.

How do you compete with that? Chinese families set aside between one quarter and one third of everything they earn, according to Peston. They work all hours for meagre wages, but he suggests that the impact of globalisation is such that we are facing a future in which we have to turn Britain into "a scrimping, grafting, making and trading economy". Somehow I can't see any of our politicians offering that at the next election.

Robert Peston with Laurence Knight, Hodder & Stoughton, £20

How Do We Fix This Mess?

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Finance

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