Scottish Independence: What should we really be afraid of? Economy I
Welcome back to the second entry in this series of posts. In the previous entry I looked at the UKs approach to managing its natural resources. Unfortunately, unlike many other nations who have aimed to invest and grow this wealth by creating wealth funds to bank a proportion of the revenue, for the past 30 years the UK has used these revenues as it came in, missing out on a potential £28bn a year. However, the UK is still an incredibly wealthy nation and so in the next few posts I’ll take a quick look at how the UK manages and maintains it’s wealth and how effectively it uses it’s wealth to addresses issues such as poverty, health, education and the elderly.
So firstly, let’s see how they have managed the tricky situation arising due to the global financial crisis. You may remember that back in 2008 the banks had a bit of a problem. It’s far too complex an issue to deal with in detail in this short post, but basically through some rather naughty goings on in the US and UK real estate markets combined with a lot of unscrupulous products and advice from the financial sector, people were encouraged into taking very expensive mortgages and a lot of personal debt. When the housing bubble burst, many people were saddled with unaffordable mortgages, staggering levels of personal debt and the UK was facing the collapse of many of its’ major financial institutions (e.g. RBS, Lloyds TSB, Barclays, HBOS). The result was that the UK had to bail out their banks and, despite warnings, introduced what are fondly known as austerity measures, which now look set to continue until at least 2020.
Another option? Icelandic Strategy
- Let the banks collapse
- Bailed out the people by wiping mortgaged and personal debt so that their citizens were able to start afresh
- Jailed the irresponsible bankers
- Changed political system so that the people get to vote on new policy
- Economic Recovery
- 4% unemployment, aiming for 2% unemployment
- Better banking practices as banks know they will be allowed to fail
- A devalued currency, but it is regaining strength
- Fairer democracy
So, are we back on top? It seems so. The UK economy will be back to its 2008 pre-recession peak by summer 2014, which is ahead of schedule. So the UK government has done a sterling (no pun intended) job in getting back on track. There is though, one rather large but. It seems that in actual fact, although the economy is doing well, it has been predominantly generated by public spending and the housing market. The problem here is that given the UK has seen rising unemployment, stagnating wages, cut services and increasing costs of living as part of the austerity drive, the increase in public spending is likely due to increased public debt or diminished savings. So, basically although the UK economy is growing it’s the wrong type of growth, similar to that seen before the crash.
Now how could this happen? Well it’s in no small part due to the Bank of England’s quantitative easing policies, which pump borrowed money into the economy in order to artificially reduce interest rates below the minimum they can be set by the bank itself. This then makes lending, including mortgages, cheaper. This sounds like rather unsound principles to base an economic recovery on given the similarity of the conditions to those prior to the crash. Worryingly, the Bank of England has since issued warnings that the UK faces another housing bubble as UK house prices broke 6 times the median income of UK subjects (31% overpriced), and this risk of a bubble is especially high in London. And if this bubble bursts, what then? Well, we just have to hope it’s not as bad as last time.
So, how did we get into the same precarious position that caused the problem in just 6 short years? In the next post we’ll take a look at the UK’s response to the crisis and the steps they took to ensure that similar behaviours of the banks to those pre-2008 couldn’t return to wreak more dirdum on the UKs economy.
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