Come on Mervyn, lighten up.
It might never happen. Hardly a week passes now without the Governor of the Bank of England making an apocalyptic forecast about the economy: comparing the recession to "another Second World War"; warning of "black clouds of uncertainty" on the horizon; and putting the frighteners under MPs on the Treasury Select Committee by announcing this week that the recession is only half-way through.
Half way? That means a ten-year-long downturn. We keep calling this a "recession", but that is defined as two quarters of negative growth. Ten years is a depression in anyone's language and considerably longer than the Great Depression of the 1930s.
Central bankers are supposed to be sober types whose main concern is to calm markets and reassure investors. Not our Mervyn. Where Roosevelt said: "The only thing to fear is fear itself," Sir Mervyn says: "Be afraid – be very afraid."
A dose of realism is all very well, but these things are self-fulfilling. Business is flat-lining right now because there is no confidence in the economy, and I suspect Sir Mervyn has single-handedly knocked another couple of points of the index of business optimism.
Of course he is right about Britain being in a pickle. The Government's "deficit reduction" strategy is clearly not working. Europe is not working. Working is not working. Instead of going down, Britain's borrowing is actually going up. The Government borrowed a staggering £17.9 billion last month, up from £15.2bn in April. The Coalition's deficit reduction programme is turning into a deficit enhancement programme. But how? If George Osborne is two years into the greatest austerity cuts since 1921's Geddes Axe, why is Government borrowing going up? Why are those febrile financial critics, the ratings agencies, threatening to downgrade Britain's triple-A credit rating?
Clearly, the recession has been intensified by Government cutbacks which have reduced spending power and contributed to economic slowdown. As people lose their jobs or go part-time, tax returns fall. As more people fall into the benefits net through low income or unemployment, welfare costs increase – which is one reason David Cameron is threatening to cut benefits disproportionately in places like Scotland. Cutting the state should reduce the debt burden, but the danger is that if you do this in the middle of a recession it just makes the recession worse. Around one sixth of us work directly for the state and many more are dependent on state spending. Think of the firms that maintain roads or supply equipment for schools and hospitals.
The private sector has not been able to take up the slack. And as in the 1930s, we have a tidal wave of negativity sweeping across from Europe. Fortunately this is not a wave of extremist leaders launching invasions and wars, but the economic equivalent. The eurozone is descending into a war of all against all as the grand dream of European Union disintegrates under the force of economic nationalism. There seems little chance of an early resolution of the crisis, as EU leaders hold endless summits to measure the dimensions of their disagreement. More than half of Britain's exports go to Europe, so the Government cannot look to an early economic recovery there to float Britain off the rocks of recession.
Critics of Scottish independence like John Cridland of the CBI keep talking as if Scotland has a deficit problem, when in fact it is the UK that is the real basket case.
With an annual deficit that is £120bn and rising, public and private debts worth five times GDP, a monster trade deficit, a zombie banking system, and a moribund manufacturing industry, Britain has a domestic economy largely run by part-time workers and migrants living on the minimum wage, which provides no sound basis for any kind of recovery.
This is indeed, a fearful picture, and the tragedy of it is that people like Sir Mervyn King have only now realised how deep-seated these problems really are. Only five years ago, the self-same governor was prattling about the "NICE Age", defined as Non Inflationary Continuous Expansion. He was denying Britain was experiencing a housing bubble, even as banks like Northern Rock were still giving 125% mortgages.
The Bank was hypnotized by the Ponzi schemes of the City of London and happily watched British manufacturing industry decline to insignificance. I suppose we should be glad Sir Mervyn is now forecasting doom, because if past performance is any guide he is almost certainly wrong. But unfortunately we cannot rely on that.
The Government must recognise as a matter of urgency that there has been a qualitative change in Britain's economic circumstances. This is not a recession any longer but a full-blown economic depression. Deficit reduction, however necessary in the long term, is wholly inappropriate in a depression, where the priority has to be stimulating demand by any means possible.
When businesses are so pessimistic that they are sitting on hundreds of billions in potential investment, and when consumers are desperately trying to save the roofs over their heads, some agency has to enter the picture to provide enough demand to keep the economic wheels turning. .
Yes, Keynsianism has its limits. Any dramatic increase in Government spending right now certainly risks sending the bond markets into a spin. With so much debt around, it seems counter-intuitive to call for more debt. But economics is often like this. Remember that after the Second World War, the UK Government had debts far greater than they are today, and still managed to set up the National Health Service.
The Great Depression ended the moment the Government started manufacturing munitions on the eve of war. We must hope and assume that history will not repeat itself and that there will be no war in Europe, or anywhere else. In the age of nuclear weapons, a world war is literally inconceivable and certainly no solution to the problem of lack of effective demand.
Therefore the state must intervene in a comprehensive manner to provide the economic equivalent of war spending – that is the only answer to Sir Mervyn's defeatism. Not by hiring a lot more lap-top wielding bureaucrats with final-salary pensions, but by developing a manufacturing strategy for a bankrupt economy. We have to spend our way out of depression by working our way back into the world.
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