“We are spiralling into a prolonged and ghastly depression”: The economy in 2012

Despite missing the 2007 global crisis completely and despite dismal policy failures, economists’ predictions for 2011 were uniformly optimistic.

“The recovery is expected to proceed at a reasonably modest pace”

Dole-queue This was what the CBI predicted in December, 2010, while as always, warning firmly about the one threat they obsess over:

“We now forecast higher inflation in 2011.”

As 2011 fades away, recovery appears remote, and inflation is expected to fall like a stone in January when George Osborne’s misguided VAT rise drops out.

I am no professor of economics; nor do I have a post at the London School of Economics, but in 2009, at a time when everyone was talking up the recovery, I warned, in an interview with The Times, that ‘ the worst of the slump was still to come’.

I was confident of this prediction because New Labour, Liberal and Conservative politicians were building a consensus around austerity – and had not yet tackled the root causes of the crisis.

So, smart Alec (I hear you say) what lies ahead in 2012?

My humble and not very cheering view is that because of the vast unpayable debts of the global private banking sector; because policy makers will not address the private banking crisis; and finally, because politicians wrongheadedly persist with austerity – we can expect things to get a lot worse.

In fact I believe we are spiralling into a prolonged and ghastly depression. This will lead, in time, to dramatically higher levels of unemployment, the loss of savings, home foreclosures, bankruptcies, emigration, suicides, divorce, social unrest and political upheaval – to name but a few of the consequences.

Why do I, and many others, expect a prolonged depression?

Because the world’s globalised private banks, unable to obtain funding, are now in the process of liquidating the vast expansions of debt generated during the boom, money frequently borrowed for purely speculative purposes.

And let us remind ourselves: these debts were generated because politicians and regulators had removed all meaningful constraints on the creation and pricing of debt, and on the global mobility of capital.

Between 1945 and 1971, when politicians imposed restraints on bankers, on credit creation and on capital mobility, the world enjoyed high levels of employment and stability and virtually no financial crises at all. This is why the Bank of England’s recent paper on reform of the international financial system is welcome.

In Britain, private debts make up about 400 per cent of UK GDP – and public debt only about 65 per cent of GDP. (I am guessing that politicians’ blind spot for Britain’s huge private debts is not accidental, but then I may just be a touch cynical.)

It’s the disorderly de-leveraging (‘liquidation’) of those private debts that is the cause of Britain’s double dip, and of global financial instability. The failure of the global investment bank/brokerage MFGlobal and the downgrading of various banks, is the canary in the global financial gold mine.

The problem is not the UK’s or Eurozone’s public debts or budget deficits. They are both simply a consequence of private sector failure. Because of this wrong-headed analysis, politicians in all three political parties have been driven down the dead-end of austerity.

Of course, some would prefer not to drive so fast, but they’re all heading in the same direction: towards unnecessary cuts in public spending at a time when private spending is collapsing.

This growing political consensus fills me with foreboding.

Are our politicians planning a government of national unity? A government dominated by ‘technocrats’? Those very architects and defenders of the ‘light touch’ regulatory system that now threatens systemic economic failure? Will these technocrats impose austerity on Britain’s restless and angry population – regardless?

As the year draws to an end, I simply speculate, and may be wrong. After all, George Osborne’s autumn statement represented a small, but significant u-turn: a belated recognition of the scale of the crisis and an attempt at fiscal stimulus to finance infrastructure investment.

But while his mini u-turn is welcome, we need to remind ourselves that fiscal policy can take malevolent as well as benevolent forms. Hitler embarked on an ambitious ‘corporate’ fiscal policy in the 1930s, aimed at enriching big business, especially the military industrial complex.

(For more, read Guerin’s classic “Fascism and Big Business” first published in 1936.) By contrast, Roosevelt’s fiscal policies were aimed at creating full employment; at funding the arts and literature; at protecting the environment.

So we should remain on our guard when it comes to assessing Treasury ‘u-turns’. Whatever the true nature of the coalition government’s fiscal stimulus, at least it recognises that something must be done. The Labour Party will look pretty foolish if it too does not change tack, and instead keeps on backing public spending cuts – but at a slower pace.

The situation is currently most acute in the Eurozone, where the consequences of private economic failure are reflected in rising sovereign debt. These debts cannot be managed in an orderly way, because of the monetary framework and statutes of the Eurozone.

This system prevents a publicly owned, taxpayer-backed institution, the European Central Bank (ECB) from supporting and lending to sovereign governments. Instead that bank is mandated to lend and support – at almost any cost – the private banking system.

The obverse of that policy is that sovereign governments, like Italy and Greece, are obliged by statute to turn to private banks or the private capital markets for financing.

Unlike Britain, they cannot turn to the central bank for ‘quantitative easing’ and other helpful funding injections. (I leave readers to guess which lobbies may have been behind the drafting of these statutes, enshrined now in the Lisbon Treaty.)

However, while the Eurozone is a depressing mess, we must be careful not to wrongly analyse the crisis. European politicians, like those in the UK, are wrongheaded about causes, and therefore solutions. But they are not the root of the problem, of that we must be clear.

The crisis that will come to a head in 2012 is not a European crisis. It is a global financial crisis.

In that sense the eurozone is a side-show.

We, and many others, expect the banks of all the major OECD economies to collapse over the next few months. This will drag the UK, eurozone and US down. In other words, and to be absolutely clear: the eurozone and the world will be dragged down by the banks, not vice versa.

Politicians, advised by deranged and culpable economists, will hasten, and intensify this global private banking collapse by accelerating austerity. It is those policies that will prolong and deepen the global economic crisis.

So prospects are bleak. Unless and until, that is, politicians in the UK and eurozone get real, and face reality. It is time now to stop blaming the victims - public sector workers, pensioners, single mothers, the frail and vulnerable - for a global financial crisis designed by bankers, technocrats, economists and politicians.

It’s time now to address the solution: first, subordination of the private banking sector to the interests of society; and second, policies for employment. Only jobs can now generate the income needed to revive the economy, to pay down private debts, and to stabilise the global economy. “Look after employment,” said Keynes, “and the budget will look after itself.”

So if our politicians want to sleep at night, and reduce the budget deficit, they should do so by investing in the jobs needed to restore prosperity and stability - because the private sector cannot. Only then will we be able to look forward, hopefully.

See also:

• A word for 2012: Liquidation – Cormac Hollingsworth, January 4th 2012

• Manufacturers still fear a double-dip recession in 2012 – Tony Burke, December 23rd 2011

• More grim news: Economists predict UK will be back in recession in 2012 – Alex Hern, December 12th 2011

• Osborne proved the doommongers wrong – the economy is even worse than we predicted – George Irvin, November 30th 2011

• OECD: The economic indications are not good for Gideon – Alex Hern, November 15th 2011

http://twitter.com/ken0bii/status/155204204854652928 ken0bii

#UK : “We are spiralling into a prolonged and ghastly depression ”: The economy in 2012 http://t.co/7LJIRNxq
http://twitter.com/garyraymond_/status/155205607442497537 Gary Raymond

Tough reading. The brilliant @AnnPettifor looks at the economy in 2012 http://t.co/bDdflqI0 via @leftfootfwd
http://twitter.com/therightarticle/status/155207048072671232 Michael

“We are spiralling into a prolonged and ghastly depression”: The economy in 2012 – http://t.co/BHAHeCth
http://twitter.com/newsalternative/status/155207233855160320 Alternative News

“We are spiralling into a prolonged and ghastly depression”: The economy in 2012 http://t.co/MPhtP2Jz
http://twitter.com/judgemenot69/status/155207581525221376 Neil Courtman

“We are spiralling into a prolonged and ghastly depression”: The economy in 2012 – http://t.co/BHAHeCth
Anonymous

However, while the Eurozone is a depressing mess, we must be careful not to wrongly analyse the crisis. European politicians, like those in the UK, are wrongheaded about causes, and therefore solutions. But they are not the root of the problem, of that we must be clear.

It’s a Soveriegn debt crisis.

Cost of the bank bailout about 70 bn. Most of that was Gordon Brown buying shares at a high price, when the true value was zero. In addition he insured banks after they were bust.

However, the real crisis is fraud in government. 7,000 bn of debt when you include the off balance sheet debts. 1% due to the banks who went bust, 99% due to people like you.

Look after employment” said Keynes, “and the budget will look after itself.

No it won’t. It’s too far gone.

The problem is too much borrowing and spending. The solution isn’t Keynsian, more borrowing and spending. If it was the deficit spending would already have worked since its so large.

In the great depression in the US, deficit spending was a small percentage of GDP. The deficit spending now is over 10%, and its getting worse.

So these investments. Labour has been making lots of investments over the years. Those investments either produce cash or savings.

1. Tax revenue is down, so its not producing cash
2. Spending is up, so its not producing savings.

Until you put some numbers to your argument, its clear you’re in cloud cuckoo land.
http://twitter.com/warriet/status/155207967204061184 David W Edwards

“We are spiralling into a prolonged and ghastly depression”: The economy in 2012 – http://t.co/BHAHeCth
http://twitter.com/innamood/status/155209500394131456 Inna Mood

“We are spiralling into a prolonged and ghastly depression”: The economy in 2012 – http://t.co/BHAHeCth
http://twitter.com/howardrreed/status/155209572976566272 Howard Reed

"We are spiralling into a prolonged and ghastly depression": @AnnPettifor looks at the economy in 2012 http://t.co/hgC0d1eY
http://twitter.com/redjolly1/status/155210309601202176 Debbie Jolly

RT @TheRightArticle “We are spiralling into a prolonged and ghastly depression”: The economy in 2012 – http://t.co/dsRVEX3A
http://twitter.com/susanjones21/status/155210553231548416 Susan Jones

“We are spiralling into a prolonged and ghastly depression”: The economy in 2012: The obverse of that policy is … http://t.co/McQRwXz6
http://twitter.com/snobgirl/status/155221973679603712 Snob Girl Londontown

“@TheRightArticle: “We are spiralling into a prolonged and ghastly depression”: The economy in 2012 – http://t.co/4J1zYsYz” shocking…not
http://twitter.com/putneydebates/status/155225923061428224 John Hully

I am guessing that politicians’ blind spot for Britain’s huge private debts is not accidental @AnnPettifor on 2012 http://t.co/406NtLbE
http://twitter.com/sunnyskystar/status/155226502374498304 Carrie Schneider

“We are spiralling into a prolonged and ghastly depression”: The economy in 2012: In fact I believe we are spira… http://t.co/cGhcXJSG
http://twitter.com/jos21/status/155227085173043200 Jos Bell

Morning RT: "We are spiralling into a prolonged and ghastly depression": @AnnPettifor looks at the economy in 2012 http://t.co/hgC0d1eY
http://twitter.com/helengoodmanmp/status/155227276110336001 Helen Goodman

"We are spiralling into a prolonged and ghastly depression": @AnnPettifor looks at the economy in 2012 http://t.co/hgC0d1eY
http://twitter.com/davidschoibl/status/155227619401543681 davidschoibl

Morning RT: "We are spiralling into a prolonged and ghastly depression": @AnnPettifor looks at the economy in 2012 http://t.co/hgC0d1eY
http://twitter.com/putneydebates/status/155228240762515456 John Hully

"We are spiralling into a prolonged and ghastly depression": #ff @AnnPettifor for her understanding of root causes http://t.co/406NtLbE
http://twitter.com/valleeming/status/155228915084967936 Val Leeming

Morning RT: "We are spiralling into a prolonged and ghastly depression": @AnnPettifor looks at the economy in 2012 http://t.co/hgC0d1eY
http://twitter.com/alexhern/status/155229396133871617 Alex Hern

Everyone and everything is fucked RT @leftfootfwd: "We are spiralling into a prolonged and ghastly depression": http://t.co/wbj7364t
Anonymous

A lot of analysis of the problem is good but unfortunately you come to the wrong conclusions as to the solution. The lack of regulation was never the issue – it was the saving of institutions that had made such appalling decisions that is the problem. If Northern Rock had been allowed to go bust – with all directors and shareholders wiped out as a result, that would have concentrated the minds suitably.

Also Keynes has now been entirely discredited by world events – Austrian Economics is about to finally have it’s time in the sun.
http://twitter.com/hitchinengland/status/155231543277780992 Hitchin England

Morning RT: "We are spiralling into a prolonged and ghastly depression": @AnnPettifor looks at the economy in 2012 http://t.co/hgC0d1eY
http://twitter.com/oilywaters/status/155232047001112576 H. O.

RT @leftfootfwd: "We are spiralling into a prolonged and ghastly depression": The economy in 2012 http://t.co/AOs1m09W
http://twitter.com/folatevit/status/155232385724715008 folic acid

“We are spiralling into a prolonged and ghastly depression”: The economy in 2012: In fact I believe we are spira… http://t.co/2UDosfZM
http://twitter.com/davetaylor2112/status/155232485310074880 David Taylor

"We are spiralling into a prolonged and ghastly depression": @AnnPettifor looks at the economy in 2012 http://t.co/hgC0d1eY
http://twitter.com/4depression/status/155235049728507904 4Depression

“We are spiralling into a prolonged and ghastly depression”: The economy in 2012: In fact I believe we are spira… http://t.co/PEbTSLt2
cjcjc

I am unclear as to how the replacement of private debt with public debt is going to solve the problem of too much debt overall?
But then I just spotted that the author is associated with the bonkers New Economics Foundation…
http://twitter.com/putneydebates/status/155240860785721344 John Hully

RT @RichardJMurphy Why UK has most to fear from collapse of banking system http://t.co/qNtEdxAQ || http://t.co/PpNeiOoS http://t.co/406NtLbE
http://twitter.com/primeeconomics/status/155245924652810241 Prime Economics

"We are spiralling into a prolonged and ghastly depression": @AnnPettifor looks at the economy in 2012 http://t.co/hgC0d1eY
http://twitter.com/annpettifor/status/155245930113810432 Ann Pettifor

"We are spiralling into a prolonged and ghastly depression": @AnnPettifor looks at the economy in 2012 http://t.co/hgC0d1eY
http://twitter.com/nahlahetta/status/155246302266011648 nahla hetta

"We are spiralling into a prolonged and ghastly depression": @AnnPettifor looks at the economy in 2012 http://t.co/hgC0d1eY
http://twitter.com/annpettifor/status/155247861913759744 Ann Pettifor

Thnks Gary. RT @GaryRaymond_: Tough reading. The brilliant @AnnPettifor looks at the economy in 2012 http://t.co/PDria2RQ
http://twitter.com/jane_samuels/status/155248641915891713 Jane Samuels

Tough reading. The brilliant @AnnPettifor looks at the economy in 2012 http://t.co/bDdflqI0 via @leftfootfwd
http://twitter.com/creativecrip/status/155249181487931393 TheCreativeCrip

Morning RT: "We are spiralling into a prolonged and ghastly depression": @AnnPettifor looks at the economy in 2012 http://t.co/hgC0d1eY
http://twitter.com/moiracathleen/status/155284408960679936 moiracathleen

RT @RichardJMurphy Why UK has most to fear from collapse of banking system http://t.co/qNtEdxAQ || http://t.co/PpNeiOoS http://t.co/406NtLbE
http://twitter.com/brianfmoylan/status/155307351686127617 Brian Moylan

“We are spiralling into a prolonged and ghastly depression”: The economy in 2012 http://t.co/27b0qjZy #ukeconomy #ukpolitics
http://twitter.com/cormacholly/status/155311330432270337 Cormac Hollingsworth

RT @leftfootfwd: "We are spiralling into a prolonged and ghastly depression": The economy in 2012 http://t.co/9UrAChWB
http://twitter.com/mattfinished/status/155326270375333889 MattFinnegan

"We are spiralling into a prolonged and ghastly depression": The economy in 2012 | http://t.co/dgezfS8K
http://twitter.com/labour4europe/status/155327439977988096 LME Executive

RT @leftfootfwd We are spiralling into a prolonged and ghastly depression The economy in 2012 http://t.co/CicEL9wk
Djwillder

Hong Kong
No sales tax No capital gains tax
No VAT
Maximum salary tax of 20%
Profit tax maximum of 16%
And yet it thrives!! Perhaps austerity and tax rises are the wrong way to go.

en-gb.facebook.com/david.willder
Djwillder

Hong Kong
No sales tax No capital gains tax
No VAT
Maximum salary tax of 20%
Profit tax maximum of 16%
And yet it thrives!! Perhaps austerity and tax rises are the wrong way to go.

en-gb.facebook.com/david.willder
http://profiles.yahoo.com/u/FNLULSHMDEZAFEXE2X4ICB2AJA Tom

If you lived in Hong Kong, as I do, and understood the unique dynamics of the city (and the vast number of problems this ‘thriving’ city faces) then you would not suggest the UK follow suit.
http://profiles.yahoo.com/u/FNLULSHMDEZAFEXE2X4ICB2AJA Tom

If you lived in Hong Kong, as I do, and understood the unique dynamics of the city (and the vast number of problems this ‘thriving’ city faces) then you would not suggest the UK follow suit.
http://www.leftfootforward.org/2012/01/look-left-06-01-12/ Look Left – Boris attacks welfare reforms while Byrne goes the other way | Left Foot Forward

[...] Here is a list of our 2012 previews (with a few more to come – stay tuned): • Ann Pettifor: The economy in 2012 [...]
http://twitter.com/punkscience/status/155384476040564736 punkscience

Thnks Gary. RT @GaryRaymond_: Tough reading. The brilliant @AnnPettifor looks at the economy in 2012 http://t.co/PDria2RQ
http://twitter.com/punkscience/status/155385305640349696 punkscience

MUST READ "politicians in all three political parties have been driven down the dead-end of austerity" http://t.co/UqmNbPfs
http://twitter.com/briarwyn/status/155387232079982592 Edilee L. Matteson

#UK : “We are spiralling into a prolonged and ghastly depression ”: The economy in 2012 http://t.co/7LJIRNxq
http://twitter.com/Newsbot9 Newsbot9

The real crisis is the welfare given to the 1% like you and your companies, you mean.

The government is working for you, of course, eliminating the social structure of this country and ensuring that it keeps it’s foot on the neck of consumer confidence, ending up with being able to sell healthcare and education to the middle classes.

(The poor? Oh, they don’t get).
http://twitter.com/modditydodds/status/155556270395498496 Knut Cayce

RT @leftfootfwd: "We are spiralling into a prolonged and ghastly #depression" – The #economy in #2012 http://t.co/Y6pXtdvN
http://twitter.com/beckonstruth/status/155556413928771584 TruthBeckons

RT @leftfootfwd: "We are spiralling into a prolonged and ghastly #depression" – The #economy in #2012 http://t.co/Y6pXtdvN
http://twitter.com/cameronsfollys/status/155602078348226560 cameronsfollys

Quote/ unquote! “We are spiralling into a prolonged and ghastly depression”: The economy in 2012 http://t.co/ZvI7MbUD http://t.co/FN3ORqrO
http://twitter.com/cameronsfollys/status/155602784840986624 cameronsfollys

Quote/ unquote! “We are spiralling into a prolonged and ghastly depression”: The economy in 2012 http://t.co/ZvI7MbUD http://t.co/vmbAQhMH
http://twitter.com/danhind/status/155615561215262721 Dan Hind

An ounce of Pettifor is worth any weight of Peston. http://t.co/I3Gjx0BB
http://twitter.com/danhind/status/155616410213687297 Dan Hind

Sorry, my last should read: An ounce of @AnnPettifor is worth any weight of @Peston http://t.co/I3Gjx0BB
http://twitter.com/garyraymond_/status/155617583071113216 Gary Raymond

"@danhind: An ounce of @AnnPettifor is worth any weight of @Peston http://t.co/zR0xz2my"
http://twitter.com/melissa_benn/status/155618514399531008 Melissa Benn

…..'stop blaming the victims' of the global financial crisis…..another good, if gloomy analysis, of 2012 http://t.co/AsB1IIV9
http://twitter.com/chr1sr0berts/status/155619763236769792 Chris Roberts

Quite right >> @danhind: An ounce of @AnnPettifor is worth any weight of Peston. http://t.co/289uM9Go <<
http://www.leftfootforward.org/2012/01/economic-update-january-2012/ Economic update – January 2012: Outlook not all bad | Left Foot Forward

[...] also: • “We are spiralling into a prolonged and ghastly depression”: The economy in 2012 – Ann Pettifor, January 6th [...]
http://twitter.com/observarebox/status/156311580907282432 Dg

RT @leftfootfwd: "We are spiralling into a prolonged and ghastly depression": The economy in 2012 http://t.co/iuoGirXu
http://twitter.com/phreakedathome/status/156429878596616195 Phreaked

The economy in 2012: http://t.co/0qhZbOLG
http://www.leftfootforward.org/2012/01/british-investment-bank/ The economy is crying out for more investment; we need a British Investment Bank | Left Foot Forward

[...] also: • “We are spiralling into a prolonged and ghastly depression”: The economy in 2012 – Ann Pettifor, January 6th [...]