The coming economic collapse

OK, I'm sticking my neck out here. I predict that the deficit reduction measures applied in the UK and endorsed by the G20 on Monday will lead to a global economic collapse (depression) in the next couple of years or so. This will be followed by at least a decade of economic stagnation. Reducing the deficits by half is a crazy idea at a time when we are still in the biggest economic crisis since the Great Depression. Yes, we are still in it. The mountains of 'toxic waste' created during the 'credit crunch' which lead to the collapse of Lehmans and many other banks, leading to the bailout, haven't just evaporated. They're still there. Governments worldwide spent $17 trillion on the bailout, £1.4 trillion here in the UK.

There is also the massive amount of 'toxic waste' from the collapse in the commercial property market estimated at £50 billion in the UK alone which has been swept under the carpet. The likelihood is that there were banks that were insolvent before the bailout but that this was hidden from us and many may be insolvent now. Now we have a report that the stock markets are falling because of new fears that European banks are insolvent - see here. But there is no more money to bailout these banks again. When the crunch comes there will be nothing to stop the slide.

The assumption of the 'free' marketeers has always been that the private sector will pick up the slack. But America, long the engine of the world economy, is bust. Japan is still mired is economic stagnation. It has been assumed that growth in China will help to lift the world's economy but there are sign of a downturn there now and increasing unrest from workers who are organising. In any case, the China's economy still isn't big enough to pull the world economy out of recession.

Many people think the Great Depression was about the market crash in 1929. There was much more to it than that. It was followed by further decline in the markets until 1932. The world economy only recovered due to massive American spending on the Second World War, which lead to prosperity in the 1950s as European economies recovered from the War.

No one likes a doom monger, and I'm hoping that history doesn't repeat itself. But the lesson of history is that you can't cut your way out of an economic crisis. That is what Keynes taught us. Ironically he was ignored during the Great Depression and his contribution was only really recognised after the War when things had improved economically. Then, as now, the deficit reduction hawks were in control and that lead to a decade of economic misery which was only relieved by a catastrophic war. History may well be destined to repeat itself. Not as a farce, but as a tragedy.