1. Wealth and Poverty.
2. Overseas Indebtedness.
3. Housing and Mortgage Debt.
4. Personal Debt and Consumption.
5. Banking and Credit Contraction.
6. UK Government Debt and Austerity.
7. The Work Crisis.
8. Corporate Savings.
9. Failing Consumerism.
10. The Bank of England is stuck.
11. Europe and Brexit.
12. The Crisis – addressing it or full judgment?
This paper suggests the United Kingdom will have an economic recession beginning this autumn with a downturn in effective demand. It will become serious when the self-interested rich begin to move money around precipitating a fall in the £ and a collapse of the housing market in the South East and will then extend into the banking international and public sectors in 2018. Its underlying causes are the inequalities in income and wealth, the indebtedness of the poor and young, the banks dependence on credit expansion and UK international debt. This paper sets out how most of the important UK sectors have structural problems which have been growing since the time of Thatcher. Government policy since 2010 of continued support for banking-led credit and austerity for the poor has made the pattern worse. This crisis will dominate Brexit and shape necessary government policy and politics for a decade or more. It will require a new radical Government in 2018 if it is to be addressed.
1. The Wealth and Poverty Crisis.
As people are now realising, there is a crisis of poverty and wealth. For decades “wealth creation” has been preached as a justification for controlling national and international economic activity. Actually, of course, there has been no such thing, but a polarisation of wealth and poverty, financial and other windfalls to the South East, and a concentration of benefits to one class and age group, creating an underlying problem in the concentration of wealth. The top 10% in wealth in the UK own as much as the bottom 80%. This inequality is destroying the economy.
First, it is leading to stagnation and under-consumption. The poor are often in debt with tight budgets and have almost no room to take economic hits or adjust their household budgets; so their consumption is low and under acute pressure. They just cannot afford to buy much. Many others are constrained by housing costs and low wages; they have been functioning on debt and credit with low savings, but now cutting consumption is becoming inevitable. On the other hand, the rich have too much to spend. They save a lot of it and therefore under-consume in relation to their income. Over the coming months demand will fall on this bipolar pressure. Unequal societies are structured towards this inflexible under-consumption, and we are approaching this situation now.
At the same time, a lot of strategic decisions are in the hands of a few rich people in these unstable times, and they act on an immediate mercenary basis. Many of these rich hold their assets off-shore, move them about internationally, and escape tax. They will move fast out of falling markets and precipitate crises in housing, international assets, the stock exchange and other sectors. With a Conservative economic policy dominating public policy, the crisis will not be addressed and a recession will set in. The present Government has no intention of correcting the fundamental imbalances in the economy, although Labour, the Greens and other parties have seen the inequality problem, they have not yet thought through the business of addressing this recession and crisis.
2. Overseas Indebtedness.
The United Kingdom is running a deficit in its international trade. It is sometimes called the “hidden deficit”, is usually measured by the Current Account and is running at some £80-100 billion a year, or about 4-5% of GDP. This is big money. Each household is spending £2k a year more on goods, services, holidays and companies from abroad than we are earning from abroad. Although these patterns can go on for a long while, they also have a habit of being called to account. It is not unreasonable to say that every household, to pay its way, should expect a fall in income of £2k sometime in the near or medium future, a point all parties have ignored.
But the bigger issue is not the immediate deficit, but the accumulated external debt from repeated current account deficits. First, we need to be aware that we do not know how big this is. The problem is the banking sector which borrows from abroad and then holds assets, often from abroad. The quoted amount for Gross External Debt is some £6 trillion, but that is largely the banking sector which has some £4 trillion of external liabilities and we presume similar assets. But we do not know. It is a black hole of knowledge. There are no Net External Debt figures for the UK, unlike other EU countries. The best we can do is guess. The current account deficit has been going on for three decades, ever since North Sea oil and a high £ in the Thatcher era hit our exports. We have overspent an average of, say, at least 2% of GDP for thirty years, or a total of some £1 trillion or 60% plus of GDP over the whole period.
How has this been absorbed? Some of this money has been used to buy shares in British companies. This was welcomed by Thatcher and the Conservatives since then, as good international business. With oil, our external debts did not seem to matter, but now they have grown big. At the end of 2014 foreign investors owned 54% of UK domiciled companies, putting some £930bn, nearly £1trillion, into UK shares. Other have bought property; Private Eye identified £170bn of such property in 2015. The Government is at present considering forming a register of foreigners owning UK property to address money laundering and international crime; so again we do not know the net position on international ownership. Partly to invite informed knowledge we guess that some £0.5 trillion net is owed abroad on property. So, something like £1-1.5 trillion of UK assets are owned abroad by people who would be quite willing to move their money if they saw falls in their assets coming. It is ironic, given the rhetoric of Brexit, that most UK companies and much UK property is already owned abroad. These are two important triggers for falls in the Stock Market and the Housing and Property Markets, centred largely on London, and the guns are loaded on the desk.
They will go off. Though the trade position is important, far more significant is the view of international money on where they should put their funds. The precipitant is likely to be a downturn in the property market in the South East. This fall in the £ will be structural as analysts put together the underlying weakness of the currency, the housing market, share prices and the ability to earn returns in Britain. The lower £ will increase exports in the longer term, but increase the cost of imports in the shorter, leading to a further outflow of funds, making the downturn substantial. The effect of this outflow is masked by other factors, but it is a substantial depression to the domestic economy.
3. Housing and Mortgage Debt.
The UK housing market has a long-term shape – a failure to build the houses needed by new generations. In the 1980s Margaret Thatcher initiated the selling of council houses, but the money so raised was not ploughed back into local authorities for more house building, but syphoned off for other Government expenditure and lower taxes. Whereas the level of new builds was over 300,000 in the seventies, since then it has averaged well under 200,000. This is against a background where immigration is strong requiring more dwellings, households have shrunk in size, there has been a strong gathering of jobs and income in London and overseas demand for luxury property has increased. House prices have risen in surges throughout the period and now stand at about £230,000 in England and approaching £500,000 in London. A traditional way of looking at these figures is to say that a house is 8-10 times the average wage and more in London. It used to be about 3.5 the average wage. Only about 2% of the housing stock can be built in any year, and so supply is inelastic. We are short of houses. If this is so, how can the housing market collapse? The suggestion is that falling foreign demand, a lower supply of mortgages, tougher terms for landlords and profit-taking by speculators will bring it about. House prices in the South East could fall 5-10% or more quite quickly.
Behind this is the level to which mortgages fund the purchase of houses. At present some £1.3 trillion is held in mortgages. This, of course, was the main market which went awry in 2007-8 when banks and building societies suffered defaults. Since then the terms for a mortgage have been stiffened to prevent the same kind of collapse. Now the borrower is required to have a bigger cushion against negative equity. Mortgages now need a bigger deposit – something like £30,000 on a £100,000 loan and they are often for shorter periods.
They seem safer for the banks and building societies, even though the levels of debt are higher. First, let us look at mortgages, and correct the average figures. First, not everyone has mortgages because a lot of people do not live in (part) owner occupied houses. We take the average household debt (minus consumer debt) to give mortgage levels of about £50,000. The owner-occupied housing stock is about 18 million, and the council housing, housing association and privately rented stock about 7 million. They will not be paying mortgages. This pushes the average for those paying mortgages up over £69,000. But, of course, this average is also misleading because some have big mortgages and some small; so there are many with mortgages pushing up and beyond £100,000.
The banks and building societies seem safer, but does this strategy of pushing the risk of default onto the mortgage holder work? The Bank of England’s Financial Stability Report in June, 2017 noted that the average mortgage debt to income ratio is now up at 101%, close to the level in 2006. How secure are the households who hold this debt? They could not cope with a rise in interest rates, as the Bank of England well knows. They therefore fix the Bank of England without its most normal policy instrument of changing interests rates; it must not raise rates, except very slowly. Now households who cannot pay their mortgages will be forced by the banks to sell their houses, a move they will desperately resist, but when it arrives, it will be another tidal wave of downward pressure on house prices; the lenders’ security depends on further depressing the housing market. Households are vulnerable to a recession, loss of jobs, and poverty and many will fail. If a lot of houses have to be sold off, house prices will further decline and the threat of negative equity still emerges. Indeed, the process may now be underway as mortgages decline so that the banks are more secure. The downward pressure on house and property prices is already there. If mortgages fail, the financial institutions which have lent to them will be threatened. The transfer of risk does not really work.
4. Personal Debt and Consumption.
Personal credit, (or more accurately personal debt) has been a strong driver of economic activity for a number of years. The public sector, exports, wages and company expenditure and investment have been relatively muted, but domestic demand has held up backed by consumer credit. Average unsecured debts have climbed to £13-15,000 per household over the last few years, but, of course, the average figure does not tell us much since many do not have debt and others have more. It is also a shadowy figure, because there is a penumbra of loan sharks and other forms of debt, and immediate credit card payments are not debt. Debt is both a stock, a cumulative amount, and also a flow, as new credit is given or withdrawn. The flow looks bad. People are moving to living in credit in areas of their lives. A key one is cars. Over the last decade we have moved from one in five to four in five having a Personal Contract Purchase where cars are leased on a monthly payment. We used to own cars, but now we borrow them. In many families not being able to pay and losing the car would be a family crisis. Mark Carney and Alex Brazier at the Bank of England have both issued warnings about these levels of personal debt. The banks are being asked to tighten up by the Bank of England. But the tightening is not easy and may even be dangerous.
Those with large levels of credit amount to millions of people and many have few resources. Some five million or so have no savings. Three million have rent arrears. Six million are financially vulnerable. We tend to ignore the significance of these households because they are small economic units, but actually many are teetering on the edge of financial collapse. In the first three months of this year, 2017, savings out of disposable income were the lowest since the 1960s, when records began, at 1.7%. Households without reserves could fail in large numbers; then there could be another rise in bad debts for the banks calling on their reserves. Again, the banks are lending to a lot of people, directly and through intermediaries in the loan shark end of the market, who are up to their necks in debt on the understanding, or vague hope, that they will not go under. But people floundering do go under. The high returns on this kind of debt shortens the risk that clients will default. We are talking about several hundred billion unsecured debt. Cutting personal debt when people are on the edge of insolvency will generate bankruptcies on a large scale. Again the market is fragile.
5. Banking and Credit Contraction.
We have become used to credit creation for several decades, but it is still not properly understood and there is a danger which has not been recognised – a credit contraction multiplier effect in the banks. As banks expand credit, they give themselves newly created electronic money through a kind of seigniorage process. When the Bank of England printed money it got a windfall of most of the value of the paper money. Banks create electronic money by extending credit, not directly for themselves, but disseminated through the banking system. For all the money finishes up redeposited in one bank or another. This process has given the banking system a windfall of £20-30bn a year. Their profits expand, not through their competence, but through this windfall, allowing exorbitant bonuses and spreading affluence in the London area. This explains the growth of the banking sector to over 10% of the economy over the last few decades. The broad calculation of the money supply M3 expanded from about £0.8 trillion in 1998 to about £2 trillion in 2008. It was this which allowed the loose banking of the crisis of 2007-8 in the UK and US, in which the banks showed their incompetence in the area they were supposed to understand, namely lending money. The same pattern has picked up since then, increasing more steeply over the last two years than at any time outside the crisis response in 2010. This money has kept the expenditure relatively buoyant in the middle of this decade.
But there is a downside to this pattern, aside the dangers of massive levels of debt. When credit falls, the money supply undergoes a multiple contraction through a reverse effect. When A is given credit, their funds are moved to banks X, Y and Z, but when credit is withdrawn, so money disappears from these banks irrespective of their own transactions. Mervyn King understood this process. A contraction of credit is fraught with danger by reducing the money the banks have beyond their own accounting by a multiplier effect according to the leverage they have built up. It can only happen properly through a steady required contraction of credit, which has been absent since 2010.
This process the Bank of England has now set in train in order to reduce the exposure of the banks to debt. The Governor of the Bank of England is requiring higher reserves from the banks and building societies – some £5bn now and another £5bn in November. It will curtail the levels of mortgage and personal debt – a sound move in principle – but it will involve a sharp contraction in the money supply this autumn and Christmas. It may actually contribute to the crisis through this multiplier effect, both too big and too late.
6. UK Government Debt and Austerity.
The UK government has had a deficit in its budget for some time. The deficit is an annual calculation of government expenditure minus tax income, and it accumulates into the National Debt or Sovereign Debt as a total. The phrase, “National Debt” is often used in an alarmist way, but it is really money owed by the State mainly to British people and institutions on a long-term basis because it has not taxed the rich enough and has fought too many wars. The accumulated total is now about £1.7 trillion, about 90% of a year’s GDP. It would take a long time to repay and the debt interest has been used in the past to fund pensions and give returns to savings.
In the 2010 election the Conservatives claimed that the 2007-8 crisis was caused by Government overspending by the New Labour Party, and that a period of “austerity” was required. It was largely an inaccurate charge, first, because rescuing the banks had pushed up government debt, second because the tax deficit was largely caused by failing to tax the rich; companies and individuals were moving into tax havens to avoid taxes, and third, because the banking sector was almost entirely untaxed and had grown to some 10% of the economy through windfall profits. There was some loose expenditure in the Blair-Brown era, but the problem was misdiagnosed, deliberately and through ignorance, by the Conservatives. The deficit was not the problem. Rather, it reflected money owed to the rich by the State because the rich have been under-taxed for nearly four decades. More than this, the extra borrowing needed mainly to address the financial crisis has cost little because interest rates were so low. The Conservatives, in favour of banking deregulation for three decades and even more in favour of supporting and subsidising the banking system, were dishonest in the way they cast the problem. They stated the answer was to eliminate the deficit by 2015 through cuts in Government expenditure mainly in public services and benefits. Osborne’s ministrations as Chancellor failed to have that effect. That date has now changed to 2025. Most commentators reckon that more government expenditure and a more dynamic economy would have increased tax revenue enough to produce results similar to those we now have. The main consequence of this situation is that the Bank of England cannot raise interest rates without increasing substantially the interest it must pay on this debt of £1.7 trillion, which now run at about £60bn annually.
The Conservative “Austerity” policy of 2010-20 was a cut in expenditure in public services and benefits, substantially falling on the poor. Austerity for the rich was absent. The main kinds of tax are: Income Tax (27%), National Insurance – employment (19%), taxes on bought goods and services (29%), Capital Taxes (4%), Company taxes (11%), Council Tax (5%), Other (5%). The impact of these taxes together is rarely recognised. It hits the poor proportionately more than the rich. For several decades the overall tax system has been regressive; the bottom 20% by earnings pay proportionately more than the top 20%, increasing disparities between the rich and poor. The Conservatives have tended to cut taxes on high income groups. So, it is a tax system which tends towards inequality. But this is less than the full story, because a lot of rich people and companies from the UK and overseas have used tax havens and off shore companies to avoid taxes on a massive scale. The cost of this to the tax system are estimated to be somewhere between £40-100bn. So, the rich are evading taxes and that is the main reason why the Exchequer is awry. The cuts were the wrong policy for the wrong problem.
The present system has also destroyed a number of income stabilisation methods. It reflects a pre-Keynesian lack of awareness of income analysis in the Treasury. People used to be given good levels of unemployment pay without being hounded. This cushioned the economy against an unemployment recession. Now they are not. The amount is desultory, and falls in employment mean a multiplier effect follows. Quite a few areas are already experiencing this. Other benefit cuts have a similar effect, holding up income and consumption in poor areas. Most of these are gone. More than this the long-term loss of public assets (rail, electricity, water, telephone, post office, steel, coach, gas, council houses, libraries, schools, hospitals, land, manufacturing) to the value of perhaps £1 trillion, extracts more from household budgets than used to be the case in the 50s and 60s, and costs the Exchequer vast amounts more in Private Finance Initiatives, School and Hospital budgets and other subsidies. These buffers against recession have been lost by Conservative policy in their great privatisation con and the lessons of Keynesian economics have been lost. The recession, when it comes, will build.
Finally, the policy of the Government and the Treasury does not address recessions and cannot address them. The obvious well-tried mechanism is public works regenerating local economies, but this was demonised in 2010 and thrown out of the tool-kit. And U turns, although the Treasury makes them behind the scenes, are not easy for a Conservative Government which has so loudly condemned Labour’s tendency to overspend. So the present Government cannot address the crisis. It has tied its own hands.
7. The Work Crisis.
Let us look at a conundrum. There are more people working in paid employment than ever before in the UK. In 1971 there were 25 million people over 16 working and now there are 32 million. If we think about this for a moment, it is rather strange. Over that period we have lost maybe 5 million jobs to automation in higher technology manufacturing and service provision; you will hardly remember telephone operators. If the computer and electronic revolutions are taken into account, the figure is probably closer to ten million. A similar level of job transfer has taken place in manufacturing. The making of chairs, computers, bikes, tools, and hundreds of other goods now happens in China, India or many other countries with cheaper labour, better technology or more abundant resources. Let us say some 15 million jobs have been lost as a result of these two factors. Between five and six million people born outside the UK are now working here, more than three million from outside the EU and more than two million from inside the EU. In all we are, and this is very rough, “doing”, or absorbing, perhaps 21 million more jobs now than we were in the early 70s. We are now doing twice as much work as a nation compared with the early 70s. This is astonishing. Why? Of course, the normal answer is that we are working to produce a more affluent lifestyle now. But that is not fully the case. We do not have enough houses. We do not have time for many of our children or old people, and many of us are not rich, but in debt.
The real reason for this large number of employed is that there has been intense pressure to generate jobs, partly through poor unemployment pay and a requirement that they register each day as looking for work, and partly by the creation of a lot of poorly paid self-employed people with little capital. Many of these jobs do work which produces some income but has little longer-term rationale or structure. Often employers try to use “self-employed” people, so that they can get rid of them quickly. When the economy starts a recession, the shedding of these kinds of jobs could be severe. It is another process whereby the down-turn can gather momentum. Jobs can evaporate as quickly as they have come.
8. Corporate Savings.
Of course, if UK companies were investing strongly, this too could add to effective demand and result in a growing GDP. Yet something strange is happening in companies. They are saving on an unprecedented scale. In the era of international capitalism we must look at the big picture, not just British firms. Corporate excess saving of companies in the US amounts to perhaps $1.7 trillion and €1 trillion in the EU. The companies have made the money in profits, but they are holding them in a complex mix of off-shore tax havens, buying up their own shares, and lending to government and other banking operations. Perhaps there is just so much capital investment that it is difficult to do more. Perhaps the structure of companies requires this hoarding of funds. Perhaps there is a fear of a coming downturn, or perhaps a few of the major shareholders are concentrating their assets in non risk-taking assets and avoiding tax by the way they hold their assets. Perhaps the difficulty of repatriating profits keeps them stored. Whatever is going on, these companies are emphatically not going to invest during a recession, but more money will stack up in accounts off-shore and in the domestic economy. Again, a sector has a policy which is inherently recessionary.
Perhaps profits-driven companies have fewer options. All the routes to quick profits – exploiting resources – poor workers, new products, establishing state-wide monopolies, capturing addicted or psychologically dependent consumers, picking up windfall profits, buying cheap assets or companies, bribing governments, buying land, obtaining technological monopolies, infiltrating health, care, military, transport, energy and other markets – and others, have been exploited, and the pickings are now more meagre. China and other non-western countries stand as a competent alternative to western capitalism to which the West is already in debt. In this situation, the perceived options for profit driven investment are small. Looking to this sector to turn around a recession is not fruitful. Come a downturn, it will hoard and wait.
9. Failing Consumerism.
We have had decades of advertisement led consumerism, pushing products and services into every area of our lives. We can have our toe-nails polished or our hair coloured, our holidays in the Arctic or the Caribbean, our films horror or humour, our cars pink or magenta. The future beckons; it is one where millions of drivers sit in driverless cars emoting their responses as the vehicle takes from them the one area of competence where they still feel in control. Or we can all walk with our mobile phones in front of us guiding us through life. Of course, the possibilities to buy and want are limitless, especially when pushed by addictive, manipulative advertising, but there are limits which arise when we actually think about what is good for us. Consumers become aware that overeating is bad, that roads are congested and cars often move at 10mph, that product promises do not work, that the rich are often miserable, that broken families in a mansion rattle, that drinking holidays involve hangovers, that the rich die, and stuff around the house is a nuisance. The downside of consumerism is also a big part of the public psyche. The cosmetics of promise do not cover the face of reality, and really the face without cosmetics is quite nice anyway.
Another way of approaching consumption is to identify goods, bads, remedials and indifferents. The goods are often simple – enough food, water, warmth and being at peace with people. The bads include too much food and alcohol, smoking, traffic jams, many drugs, weapons, clothes we don’t need and will not wear, stuff in the garage and attic, instant disposables, adult toys and many other things that mess up our lives. There are bad quality films, books, magazines, pictures, garden furniture, computer games, cars, holidays, hairdressers and many other goods and services. There are thousands of ways in which we can be defrauded. These bads may be 20% or 40% of many people’s consumption, so that buying less is better, especially if the effort of earning the money in the first place is taken into account. Then there are things to address other things that have gone wrong, and consumption that is remedial. We have locks, bolts, security systems for money, cars and houses to prevent theft, diet and fitness aids, ways of relaxing from stress, doctors, dentists, car repair people and many others. Often, these would not be needed if we lived more wisely. Finally, there are a lot of things to which we are really indifferent a week or two after we have bought them – the empty picture frame, the lamp that has no-where to go, the expensive meal we did not need. So, the consumption drive has its downside. It could cease to be the treadmill of the economy, especially if money is tight. This change could become significant in a month, a year or ten years, but it will become stronger, aside global warming, the biggest aside of all in our need to consume less. Consumption can, and probably will, fall sometime because it does not work on the scale we now have.
Of course, when the sun comes out people buy summer clothes, ice cream and go to the beach and Christmas rescues retail outlets. But the Centre for Retail Research in Norwich forecasts retail sales to grow 1.2% in 2018, not very promising.
10. The Bank of England is Stuck.
The crisis of 2007-8 was mainly a banking crisis in the US and the UK. Banks and Building Societies had lent money carelessly and their bad debts accumulated on such a vast scale that they had to be rescued in packages amounting to $2.5 trillion. This stabilised most of the banks involved or allowed them to be taken over at favourable rates by other banks. The process of assessing the assets bundled up after these failures is still going on among the merchant banks. The effects are still being understood and assessed by economists, but include a subsidy to the banking sector of perhaps £100-200 billion. That is in addition to the windfalls of £20-30billion the banking sector received before that period through the creation of credit and electronic money. So the banks have been vastly subsidised and not contracted their levels of lending.
Because housing debt is so large, the Bank cannot use interest rate rises as a tool of policy; too many people would default on higher payments. They also cannot raise rates because of a policy called Quantitative Easing (QE). When the Banking Crisis broke, in order to make the balance sheets of the banks easier, the Bank of England started buying its bonds. Normally, it sells bonds to the banks for money to meet its debts and pays interest on the bonds. The more bonds it sells, increasing the supply of bonds to the market, the lower the price and the higher the rate of interest. When it does the opposite, buying its bonds, it pushes the price up and lowers interest rates. It also transfers money out to the banks who are able to increase the liquidity of their balance sheets and are not likely to run out of money. In 2009 the Bank of England bought some £350 billion of loans, mainly its own bonds, and made sure that the banks could weather the storm. It bought another £60 billion in 2016 to stabilise any perturbations around Brexit. An easy way to think of QE is that it is the same as if the Government had paid for its debt by printing money in the first place.
The obvious question in relation to QE is, “Will it cause inflation?” Economic orthodoxy used to be that more money, especially on this scale, meant higher prices almost on a proportional basis. Why has it not happened over the last decade? It is not clear. In part, the money is not in the pockets of ordinary people, except as credit, so they do not bid up prices. Second, goods often come from abroad and so their prices do not rise, but probably the most important is that Conservative policies prevent wages from going up by keeping a competitive, low wage class, fearing unemployment. Somehow, apart from concentrating in areas of London and other places of affluence, where it does cause inflation, the money does not generate demand inflation and does not generate much demand except in certain areas like luxury housing. All of this is by way of suggesting that the Bank of England does not have much ability to stimulate the economy, even by using QE.
11. Europe and Brexit.
We have not really mentioned Brexit, although many feared negotiations and a likely decrease in European trade would lead to a recession. That prediction was always suspect, given the long negotiations, but it is possible that the process or substance of the exit. Perhaps there could be market reactions made more sensitive by the Brexit negotiations or political crises. Yet, this paper suggests the domestic sclerosis of the sectors presented here is a far bigger problem than the presenting one of leaving the EU, and the present Brexit obsession is a displacement from the real issues.
12. The Crisis, addressing it or full judgement.
It seems the structural problems perceived in the various sectors of the economy will interact and lead this autumn to a slowdown in growth to stagnation. The car and housebuilding markets will be sluggish especially as the banks lower the credit they offer. There will be a rise in the level of unemployment, and the housing market in the South-east will fall in price quite markedly. As the banks cut credit, so the money supply will contract. Definitive will be the time when the international finance in the property market begins to withdraw, say, late August-November. Then the momentum of the crisis will be underway. The value of the £ will fall putting further pressure on international money to withdraw. The Chancellor will wrestle with the difficulties, but given the ideology of the Conservative Party, without the policies to address them properly, though the Autumn Budget statement will be the last chance. There are policies which would avoid an acute crisis. One, for example, would be for the State to offer to buy a proportion of houses where households face mortgage default allowing reduced mortgages and State ownership of part of houses. There are some issues about valuating and requiring building societies and banks to redraw mortgage contracts, but it can be done. Taxes on wealth, banks and high income can make Government expenditure on benefits and public works available fairly quickly. So there is an opportunity to respond, but it will recede.
Christmas will probably be well below normal for the retail trade, credit default and family poverty will be acute, together with hospital and other public sector problems through underfunding. Stagnation in demand, especially in the South-east, unemployment, higher prices of imports and low benefits will produce a recession and the need for quite drastic action. The crisis will reflect judgment on the last forty years of concentration of wealth and the neglect of poverty and will feed again into the banking sector.
By the Spring it is likely to bring down the Government, and then perhaps some quite basic reforms to the economy can be undertaken, including a wealth tax, the closing down of tax evasion, offshore and within the UK banking system, the proper funding of public services, the transfer of taxation from the poor and young to the rich and old, and the proper taxing of the banking sector for the common good. Then, perhaps, we will learn that economies are not run by bogus wealth creation, but through loving your neighbour as yourself, fair trade and markets, public service and making sure that all have the proper means of livelihood. We will see the magic money tree of the bankers does not exist, and it is better to love God and your neighbour than run an economy on greed and self interest.