Wednesday, October 05, 2011

Inevitable Recession

I was interested to hear how David Cameron had to "edit" his speech today after initially suggesting that we should all follow the government way by "getting out of debt". This immediately brought a hail of protests from business and economists claiming that encouraging the public to repay their debts would cause the economic problems to worsen.

And this is true. Our economy is based on consumption. We can only experience growth if spending and therefore consumption increases. The problem is that because public sector borrowing was used to consume goods and pay saleries, that debt funded the economic growth over the previous couple of decades. Cutting public sector spending has resulted in fewer people being employed and has cut the revenues of a significant number of suppliers causing further cuts in employment.

If everyone was now encouraged to pay off their debts instead of spending and consuming then a second recession would be inevitable. The cuts have been so severe that even individuals and organisations who were not affected by the cuts have tended to cut their spending to build up reserves because it is difficult to determine how long this will continue.

The underlying problem highlighted by all this is that unless we continue to consume at an ever increasing rate, we will by definition fall into recession. Business wants us to continue borrowing and spending largely on products we do not need, or which we are conned into needing by planned obsolescence.

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