Bill Jamieson: Pillar of cloud foreshadows a fiery economic reckoning

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FIRST there came the pillar of cloud. And then there came the pillar of fire. For the past 18 months the world of finance and business has been engulfed in a pillar of cloud. Visibility as to the way out has been dire. The consensus best guess is that a year from now we will have moved out of recession. The banks will have taken visible steps to recovery. Business and jobs should be picking up.

But supposing this consensus view is wrong – wrong as it was at previous points of national crisis: 1921, 1930, 1976? Supposing that the political class has hopelessly misread, or refused to recognise, the depth and magnitude of the crisis we are in? A year on from now it is more likely than not that our national borrowing and debt will be greater, unemployment higher, and the banks no more able than they are now to withstand a further relapse into recession.

Might it not be that as we draw comfort from one crisis receding we are blind to a bigger one: the frailty of the world's financial system to a debt stall such as Dubai, and that Britain may not be entering a sustained recovery at all, but rather a Japan-style "lost decade"?

As the financial convulsion has unfolded, with unprecedented bank collapses, slumps in business confidence and falls in output not seen for 70 years, we have become only slowly wise to the magnitude of the crisis we face.

Take just two figures. This year, and for the next four years, the UK government will need to raise close to 220 billion to sustain the operations of the British state. These are the highest ever levels of borrowing raised in peacetime. Earlier this week the Bank of England Governor Mervyn King warned the Treasury select committee of the risks to the UK's credit rating.

The massive losses which engulfed our banking system and staggering levels of support are the main problem – and that's the support we know about, as opposed, that is, to the 61 billion of clandestine support revealed by Governor King earlier this week.

Last month Adam Posen, an American who sits on the monetary policy committee, spelled out the threat that we face. "The UK", he declared, "has an uncomfortable parallel with the Japanese financial system – when its economy began to recover in the mid-1990s and was unable to sustain it. The closer one looks, the more worrisome this specific parallel becomes."

Our debt needs, of course, are puny in relation to the trillions of debt now being raised around the world. Which brings me to my second figure.

This year and next, the major industrial nations will need to sell more than $12 trillion (7.2 trillion) worth of government bonds to finance their debts – by far the biggest borrowing total ever raised by these governments, and a rise of at least a third in just two years. With growing fears over a return of inflation which would smash through the returns on this debt and cause prices to fall, little wonder some fear this surge in paper debt could be a new subprime disaster in the making.

As for recovery, it is set to be long and gruelling. A study of previous recessions by the think tank Policy Exchange suggests that as long as spending cuts dominate over tax rises, "tightening appears to be more likely to promote recovery than impede it". In this process the legacy of Gordon Brown will come to be as nationally reviled as that of Stanley Baldwin.

Those who attended the David Hume lecture by the principal Financial Times commentator Martin Wolf, will know what I have written here to be no exaggeration. Mr Wolf, honorary fellow of the Oxford Institute for Economic Policy and a special professor at the University of Nottingham, gave a tour de force on "The World After the Financial Crisis". I cannot recall, in more than 30 years of financial reporting, a presentation more sobering in its effect and worrying in its implications.

His thesis is that Western domestic spending has been effectively sustained by massive flows of savings from the booming Asian economies into our debt markets: a grotesque imbalance that cannot last. The debt crisis has now engulfed about half of the world economy, and the IMF simply does not have the means to bail out the US and the rest of the West in the event of a financial relapse. Our fiscal deficit, he warns, will not be easily cut, real business cycle theory "is just a joke", and most of modern macro-economic theory now needs to be re-written in the light of the financial slump.

I hope readers will therefore excuse me for not writing about Calman this week. I struggle to understand how our politicians have sought to downplay or marginalise the greater problems that will impact on our lives in favour of a spat about borrowing powers. It is a pathetic spectacle, like watching two sclerotic drunks fighting over a bottle long since drained.

We are as good as bust, gutted with debt, spent out and played out, with the UK or what passes for it, in the terminal ward. The cancer of debt has hollowed it out from within. Far from higher spending and sky-rocketing borrowing having banished poverty, or raised educational attainment, or brought great infrastructure, or equipped a shrinking army in basic equipment, it has abjectly failed in all these areas. More borrowing powers? Never have two bald men bickered so blindly over a toothless comb. Little wonder that Jim Sillars in an electrifying pamphlet this month urges Scots to get shot of all this.

Unfortunately, the debt will go with us. And I see no evidence yet that Scotland is minded to turn away from the 50-year trudge of ever bigger government, a bleak crocodile march on a national road to nowhere that has ended with a political class out of money, out of ideas and out of time. Thus we are brought to a Rubicon, and the need to take a different road.

As for that bigger picture, have we considered the consequences of the years of debt pay-down to come and the trauma it will cause? So far we have had the pillar of cloud. It's nothing compared to the coming pillar of fire.