James Meadway writes on the growing danger of a new crash facing the debt laden British economy
“One shock away from a further crisis.” That’s the damning verdict on our economy in an excellent new paper by Jim Cuthbert, published by the Jimmy Reid Foundation. It’s a concise, methodical piece of research that illustrates just how overstretched we are, as well as showing the merits in taking a balance-sheet approach to big economic questions.
Financialisation – the ballooning of finance and its intrusion into every part of life – led to the calamity of 2008. Since then, as Cuthbert demonstrates, remarkably little has been done to even restrain the process. A brief dip, some efforts at repayment of debt by households and firms – which led directly to the non-recovery over 2009-12 – and we’re straight back to where we were, prior to the crash. With the return to growth starting to pile on the debt once more, we’re simply adding to future risks.
It is worth stressing, once more, that little of this is dependent on public sector debt. Government debt rose sharply as a direct result of the crash, having remained very stable for the decade or so beforehand. On Cuthbert’s figures it’s now around 105% of GDP: substantial – and certainly more than its historic average – but utterly inconsequential relative to the 1,364% of GDP that are the total liabilities of the UK’s financial sector. This is much larger than the estimate NEF has used in the past. We quite deliberately took a conservative approach to the calculation, following the method used by McKinsey in this 2011 report, since the case for transformation is solid even on these conservative figures. Cuthbert, more ambitiously, includes financial derivatives, the use of which expanded wildly over the 2000s.
These are (largely) private sector liabilities, held by (largely) private sector institutions – the twist being, of course, the semi-public ownership of two major UK banks. But 2008 revealed that the location of ownership need not matter: in the event of a major crash, it is the whole of society that can be forced to carry the costs of a privately-owned financial system. This is precisely what happened, through the bailouts and the recession.
So one way to understand the seeming irrationality of austerity is in part, as Cuthbert suggests, not the need to shrink government debt now, on which it has in any case been so far wholly unsuccessful. Rather, it is the need, as far as possible, to clear the decks in the event of a future crash. Bailouts last time came close to bankrupting us; there is no way they could be afforded on this scale the next time round. And “next time round” may, on current evidence, be far sooner than we would wish.
All this is further confirmation of something NEF has argued over the last few years. That is, without a fundamental rewriting of the rules for our economy, and a sharp change in direction, we are all stuck straight back on the railway lines the led us to 2008: of house price bubbles, growth driven by debt not earnings, and growing dependence on borrowing from the rest of the world.
It is, in fact, worse than 2008, since we have not cleaned the stables from before. Overall debt fell somewhat, post-crash, but any new debt created now is simply adding to an already towering pile of liabilities. The trigger could come from any number of sources – domestically, from a wobble in the property market or the unwinding of quantitative easing; or internationally, from a shock in the Eurozone or China, say. But in any case, without a profound restructuring of the economy, the UK will be increasingly (and uniquely) exposed.
Radical economist James Meadway has been an important critic of austerity economics and at the forefront of efforts to promulgate an alternative. James is co-author of Crisis in the Eurozone (2012) and Marx for Today (2014).