Mervyn King’s rosy recovery prediction means little for a shattered nation

Prem Sikka

The outgoing Bank of England governor Mervyn King has presided over a huge economic crisis. His parting gift is the claim “a recovery is in sight” that the UK might achieve economic growth of even 1% this year. Despite this, the GDP will still be less than the 2007 figure.

Don’t be in a hurry to pop any champagne corks, because the assumed economic recovery is not what it seems and is unlikely to be sustained. It has been achieved through quantitative easing, printing money as old-fashioned economists used to call it, to the tune of £375 billion. That is equivalent to about £16,000 per household.

This money has been added to national debt – the only thing that citizens seem to own these days – but has not been used to restructure the UK economy or start new industries. Instead, it has been mainly given to the banks and they have used it to bolster their balance sheets and pay high executive salaries.

The plight of ordinary people has been getting worse. UK unemployment is rising and the official count now stands at 2.52 million. Nearly a million young people aged 16-24 are unemployed, taking the rate to a depressing 21.2%. The number of young people on zero hour contracts has doubled from 35,000 in 2008 to 76,000 in 2012. Zero contract hours are jobs which provide no guarantee of regular work or pay and have become the preferred mode of employment for some 23% of UK employers. Many miss out on rights such as sick pay, pension and paid holidays. Many firms and even charities and public sector organisations are adopting zero hour contracts.

Large sections of the UK population are wracked with insecurity. Since the 1980s, the governments have sought to weaken and destroy trade unions. In 1979, some 13.2 million UK workers, or 55.4% of the workforce was in a trade union, but by 2011 this declined to just over 6 million workers or 23% of the work force, compared to 69.2% in Finland, 68.4% in Sweden, 66.6% in Denmark and 54.4% in Norway.

In the absence of countervailing power structures, workers' pay has been ruthlessly assaulted. In 1976, wages and salaries paid to employees, expressed as percentage of GDP, stood at 65.1% of GDP. Now it stands at barely 53%. The plight of ordinary people is made even worse because the above statistics include the rewards lapped up by executives. The rates of corporate profitability are at historically high.

Wealth has been sucked upwards with the aid of state policies. Corporation tax rate has been reduced from 52% in 1982 to 21% for 2014. The top marginal rate of income tax has declined from 83%, in 1979, to 45%. Despite the recession, the rich are getting richer. In 2012, the richest 1000 people, representing just 0.003% of the adult population, increased their wealth by £35 billion to £450 billion, enabling them to fund political parties and shape public choices.

It is misery for ordinary people who have borrowed £1.423 trillion, equivalent to the GDP, to maintain a decent living standard. Thousands of people have become victims of the payday loans industry which does not shy away from charging interest at the rate of 4000%. Some 13.5 million people, including 1.8 million pensioners and 2.5 million children were estimated to be living below the poverty line and with a deep austerity programme these numbers will increase.

The number of people relying on emergency food handouts, simply to survive, has trebled to 350,000. People are facing massive hikes in the price of electricity, gas, water, transport and other essentials and simply do not have the financial capacity to take any further hits. One survey has suggested that an increase in monthly bills of just £99 will prove to be disastrous for a large number of families.

The above sketch of the social landscape is a million miles away from the rosy picture painted by the Bank of England. Equitable distribution of income and wealth is a key requirement for any sustained economic recovery, but it is not on the agenda of any major political party. Some may be happy to gather the crumbs of economic recovery; but most of us will simply be asking, “what recovery?”

• This article first appeared at The Conversation

Bankers try more of the same to solve crisis

From the Morning Star

Alarmed Bank of England policy-makers pressed the red button today and printed another £50 billion to try to boost the struggling British economy.

The bank's Monetary Policy Committee voted to increase the quantitative easing programme from £325bn to £375bn in a desperate attempt to drag the country out of a double-dip recession.

It held interest rates at a record low of 0.5 per cent.

They took the decision amid signs that the economy deteriorated in June, with the construction sector in reverse and the services sector suffering its worst performance for eight months.

The bank said the decision to pump more money into the economy came as Britain's output had barely grown for a year and-a-half amid signs its main export markets are slowing.

Left Economics Advisory Panel co-ordinator Andrew Fisher said: "The use of quantitative easing is based on the assumption that our economic system is in crisis due to a lack of available credit.

"But the economy does not suffer from a lack of credit - it suffers from a lack of demand.

"Unemployment, underemployment and wage constraint have all produced a situation in which living standards are falling.

"The Bank of England's now £375bn quantitative easing programme has clearly not been used to extend credit to meet any growing demand.

"Instead, the banks have used the extra liquidity to speculate in derivatives markets and to invest in safer foreign markets. It's good for the banks, but bad for the UK economy."

TUC leader Brendan Barber added: "This will only stop things getting even worse, not kickstart the economy."

Quantitative Easing isn’t working

There is an economic crisis, yet those who advocate quantitative easing as a solution have misunderstood both the nature and the magnitude of it. This blog has consistently criticised Osborne's austerity programme and his evidence free belief that the public sector has been ‘crowding out’ the private sector.

Now I want to look at the Bank of England’s monetary policy: quantitative easing.

Quantitative easing (QE) is often referred to as ‘printing money’. In fact it is more accurately described as giving banks cheap credit (see BBC guide to QE). The use of QE is based on the assumption that our economic system is in crisis due to a lack of available credit (a credit crunch) and a lack of lending.

The same intellectual malaise is evident in the ‘soft Keynesians’ who advocated bailing out the banking system, but now reject an economic stimulus. Their unspoken slogan is ‘save the banks, fuck the people’.

These people failed to foresee the crisis, and now fail to offer viable solutions for resolving it – in fact (if one assumes their policies are advocated rationally) they seek to make it permanent by institutionalising declining real pay and hoping the private sector will magic some jobs soon (crowding out theory)

There are several collective nouns for this group: Chancellors, Treasury ministers, leading economists or business leaders.

Today the economy does not suffer from a lack of credit. It suffers from a lack of demand. Unemployment, underemployment and wage constraint have all produced a situation in which living standards are falling.

Separately, the government has massively cut its capital spending, sucking further billions out of the economy.

Vincent Cable whinges that the banks are not lending to small businesses yet why would they in a climate of falling demand, and wider financial uncertainty? Regular pay is increasing at only 1.1% per year, outstripped by inflation at over three times the rate. It is no surprise that retail sales volumes fell 0.8% in February 2012 (incorporating a 1.5% decline for non-food items).

Some, to make the case that QE is necessary, have pointed to statistics showing that the number of small business loans rejected by the banks has quadrupled since the crisis. This ignores two very salient factors:

1. Businesses are now making more loan applications to cover (what they hope are temporary) shortfalls, rather than to invest
2. Banks, whose reckless lending practices played a major role in causing the crisis, are now more rightly more cautious
3. The same business plan in 2006/07 at a time of high employment and rising real wages was a lot more attractive to invest in than it is in 2012/13

The real need for the UK economy is not more credit, but more demand –and that means putting more not less money in people’s pockets. It would mean doing the exact opposite of what George Osborne is doing – redistributing £30bn from benefits and tax credits into the pockets of businesses via tax breaks. It would mean ending pay constraint and reversing the VAT hike (a tax on consumption). This could be funded by reinstituting the 50% rate and closing down on the loopholes used by the super-rich and big business to avoid their obligations.

Meanwhile the Bank of England’s now £325bn quantitative easing programme has clearly not been used to extend credit to meet any growing demand. Instead, the banks have used the extra liquidity to speculate in derivatives markets and to invest in safer foreign markets.

This is not to say quantitative easing is always a bad policy. It’s not, but in the current climate it has long outlived its utility. Part of the problem is the limited policy options open to the outsourced (independent) Bank of England and the lack of any coherent strategy from HM Treasury.

Instead of botched austerity, we need investment based around a new industrial policy to create jobs in sectors that meet people’s urgent needs, including housing, energy, and transport.

Green New Deal would be more effective than QE2

Mervyn King is right that the UK is looking over an economic abyss (Britain in grip of 'worst ever financial crisis', 7 October), but giving greedy, tight-fisted banks a further £75bn in the hope that this time they will lend enough to business is a fantasy. Quantitative easing should instead have been used to increase economic activity and hence jobs and business opportunities. Without that, who is going to want to borrow when for many businesses the real crisis is increasingly a shortage of sales and not a shortage of capital.

The Bank of England could have started to tackle this demand deficit, had it used a substantial percentage of the £75bn to finance a green new deal to make all UK buildings energy efficient. This would have helped kickstart the economy by creating hundreds of thousands of jobs where people actually live. King admits he will probably need a QE3, but to be third-time lucky he should make it a green QE3. It could even be nicknamed plan B.

Colin Hines
Convenor, Green New Deal Group

This letter appears in today's Guardian, alongside several other good letters on tackling inequality, the effect of council service cuts and job losses, breaking up the banks or nationalising them.

Stop giving in to the markets

From today's Morning Star

Left economists advised governments to stop "kowtowing to the markets" today in the wake of a week of panic and turmoil following the US debt reduction package.

They hit out as David Cameron entered crisis talks with French President Nicolas Sarkozy to discuss doubts over the situation in the US and economic stability in the eurozone.

Left Economics Advisory Panel co-ordinator Andrew Fisher said: "There is a real concern that a further round of bailouts or quantitative easing will be demanded to prop up the markets, but this will only delay and exacerbate the inevitable collapse.

"Any public funds must be used to defend jobs and investment, not prop up overvalued assets and share prices."

Credit ratings agency Standard & Poor's lowered US creditworthiness down a notch to AA+ for the first time in the country's history on Saturday.

It said the cuts plan passed by Congress on Tuesday did not go far enough to stabilise the country's debt situation.

China, Washington's largest creditor called on the US to end its "debt addiction" and even suggested that the dollar may have to cede its position as the world's reserve currency.

Indian Finance Minister Pranab Mukherjee described the situation as "grave."

Mr Fisher said: "It is time for governments to stop kowtowing to markets - and with markets so weakened there has never been a better opportunity for democratic governments to regain some power and control.

"There is an urgent need for politicians to focus on the real economy - to tackle unemployment and to rebalance the economy away from the finance sector."

The real Keynes

Book Review by Graham Turner

Keynes Betrayed, by Geoff Tily, Palgrave Macmillan, 2010

Palgrave Macmillan have republished Geoff Tily’s “Keynes Betrayed” in paperback.

This is an important book because it contradicts so much of the perceived wisdom over Keynes’s policy prescription. And it should be stressed, the errors of understanding Keynes are committed by economists on both sides of the spectrum – right and left – as well as a good chunk of those sitting in the middle.

Keynes was far more concerned about monetary issues than fiscal policy. Unfortunately, most cursory reading of Keynes simply focuses on the General Theory, which was written in 1936. Even then, too many readers of this important book fail to appreciate the chronology of policy advice Keynes was offering in the 1930s – monetary first, fiscal second.

Indeed, Keynes made an enormous – and positive contribution – to policy long before the General Theory was published, as Geoff Tily shows commendably in this book. "Keynes's central policy priority was a permanently reduced long-term rate of interest", Tily argues. Keynes was a leading proponent of central bank long-term asset purchases – today called quantitative easing (QE). Furthermore, he was quite clear about the problem within bond markets which made QE necessary, as shown by his liquidity preference theory. Keynes also understood the importance of targeting the yield rather than merely setting a nominal purchase target for QE.


In all these respects, Keynes had a much greater understanding of the bond market – including the critical role of expectations - than today’s central bankers. The current FOMC has been content to announce an extension of its own, somewhat flawed QE, announcing last November that it would buy a further US$600bn of US Treasuries. Since then, sniping from hawks on the FOMC, a (modest) uptick in economic growth and an unseemly rush to extend tax cuts has sparked a huge sell-off in US Treasuries. And that has occurred just as the S&P/Case Shiller index for house prices is poised to break down to new bear market lows. Federal Reserve chair Ben Bernanke has been forced to admit that the economic recovery in the US is slow. It may well stall, precisely because the Fed chair, and much of the economic establishment, including New York Times commentator Paul Krugman (not to mention the departed, discredited Lawrence Summers and Chrisina Romer) simply do not ‘get Keynes’.

One economist who clearly does is Geoff Tily. His book is based on a PhD thesis, supervised by Professor Victoria Chick at the University College of London. Professor Chick is one of a handful of economists who truly comprehends the importance of monetary affairs in Keynes’s work, and encouraged Geoff to write his thesis.

Geoff provides clear evidence of the role Keynes played in driving the shift towards QE in the early 1930s, long before the General Theory was published. He also dissects the manner in which Keynes’s legacy was traduced by economists, both on the right and soft left in the post-war era, after his untimely death in 1946.

This book is rigorous, and readers will be impressed by the comprehensive manner in which Geoff takes Keynes’s critics to task. It is not the sort of book that can be read in one quick swoop. It is a demanding read, because it is so thorough. It challenges many of the misconceptions over the policies pursued during the 1930s. For these reasons, this book helps to explain why the West has botched its response to the credit crunch.

International currency war under way

The Bank of Japan’s decision yesterday to further reduce its close to zero interest rate looks suspiciously like one of the opening shots in an exchange rate war that will intensify the problems besieging the already weakened major economies.

In dropping below its lower limit of 0.1%, and looking at a small programme of quantitative easing (QE) (aka printing more money), Japan managed to get the yen to fall on currency markets. This has the effect of making its exports cheaper.

But Tokyo didn’t start it. They just followed Brazil’s finance minister who, on Monday, took measures to hold down the value of the real. Guido Mantega warned:

'We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness.'

Both Japan and Brazil pre-empted the widely expected “return to QE2” – a sequel to the fading effects of the previous programme of money creation by the now struggling Obama administration. Washington wants the lower dollar to fall to give its exports an edge.

So the alarm bells are ringing at the International Monetary Fund, which is warning that the “recovery” has run out of steam. IMF head Dominique Strauss-Kahn told the Financial Times:

'There is clearly the idea beginning to circulate that currencies can be used as a policy weapon. Translated into action, such an idea would represent a very serious risk to the global recovery.'

It’s not long since world’s leaders in government, banking and finance came together to hammer out the agreements that enabled at least the semblance of a co-ordinated programme of measures designed to restart lending and bring about a return to growth.

Whilst the previous concerted action is credited with averting a financial and economic Armageddon, its effects are best described as a phony recovery. And that is now over. The optimism induced by unprecedented measures couldn’t and didn’t overcome the uncontrollable logic of the capitalist system of production.

The global crisis may have erupted in the financial system but its roots are elsewhere.

Throughout its short period of existence on the planet, the capitalist system has been racked by contradictory forces. Competitive pressures have obliged companies to invest in productivity enhancements which, whilst giving the front runners a temporary advantage, inevitably reduce costs, prices and profits for all.

To offset the tendency for profits to fall, greater volumes of every product have to be cranked out and sold, and the pressure for even more productivity accelerates and accentuates the growing economy.

This irresistible objective logic created the globalising corporations that came to dominate the world. And when the surging millions of cars, computers and mobile phones overwhelmed the market, a house of (credit) cards and mountains of debt were created so that consumers could buy them up. At least until we, and the rest of the economy found ourselves drowning in that very same debt.

Optimism is now being replaced with realism. Cuts in government spending to reduce the budget deficits they’ve accumulated over years of trying to keep growth on track are just one part of the story.

The phony recovery allowed manufacturers to restock their warehouses and showrooms, but there’s still not, and won’t be enough buyers. So the factories that restarted production after the 2008 collapse will go back onto short time and no time.

Competition for the remaining market will sharpen, and the intensification in the rate of exploitation will prove truly shocking, sparking social unrest to match. These are the objective laws which shape the decisions in the boardrooms and in government buildings.

Successful resistance will depend on individuals and communities creating new forms of democracy – People’s Assemblies with the power to terminate the web of contracts and property relationships that tie workers to capitalist employers and ensnare us all in debt. The system of profit-chasing growth must be torn up at its roots. Let’s compost capitalism!

Gerry Gold
Economics editor
A World to Win
http://www.aworldtowin.net/
6 October 2010

Is Britain turning Japanese?

Graham Turner

A defunct banking system, spiralling government budget deficits and an economy mired in recession. This description of the UK economy sounds all too familiar to those who followed Japan closely during the 1990s. The parallels are indeed troubling.

Japan tried to spend its way out of trouble, incurring record budget deficits that were buttressed by quantitative easing. A brief recovery from 2003 onwards was cut short by the credit crunch. And now, the Japanese government’s public debt burden is racing towards 200% of GDP, nearly three times that in Britain. Deflation has intensified to fresh highs, and wages are being slashed. Property prices across Japan have continued to slide uninterrupted for nearly two decades.

It is a sorry state of affairs that reflects a series of policy mistakes, which are being repeated not just in the UK but also in the US. There is time for policy makers to reverse tack. However, there is a real danger that the 'Anglo Saxon' world will be blighted by the Japan economic disease for years.

For years, Japan was dismissed as an idiosyncrasy by Western commentators. Many claimed the country’s problems were unique and that 'it could never happen here'. Some even revelled in the sudden downturn in Japan's fortunes. The remarkable rise of Japan from its defeat at the end of the Second World War had left many in awe. The spectacular growth of Japanese industry and the world domination achieved by so many of its leading companies had been viewed with considerable envy.

When Japan's bubble burst in early 1990, the Bank of Japan was slow to cut interest rates. Japan's central bank had become obsessed with the spectre of inflation and it failed to cut interest rates quickly. The threat of a deflation spiral was completely overlooked.

Frustrated by the Bank of Japan's inaction, the Japanese government responded by trying to reflate through demand management or Keynesian policies. Virtually every fiscal policy option was tried in a bid to end the decline. The first emergency supplementary budget was introduced in the spring of 1992. A total of ten emergency budgets had been crafted, worth a massive ¥124.6 trillion before Prime Minister Junichiro Koizumi came to power in April 2001, calling a halt to the great ‘Keynesian’ experiment. Large sums were pumped into building new roads, bridges and dams to keep construction companies in business.

But it was all to no avail. No matter how hard the politicians tried, the economy would only respond for a short while before slipping back into recession. The failure of fiscal policy to reverse the decline did not deter them. Politicians reasoned that if they did not try, the situation would be even worse.

The experience of 1997 in particular convinced many that the government had no choice but to keep incurring record budget deficits, otherwise Japan would slip further into difficulty. The tax increases of that year – the consumption tax (similar to VAT) went up from 3% to 5% – were followed by an alarming dip in the economy. The decision to tighten fiscal policy was blamed by many for pushing the country back into recession.

It is an argument peddled by Richard Koo in "The Holy Grail of Macro Economics", a book cited by many commentators today in defence of fiscal profligacy. His analysis is wrong.

A number of economic indicators suggest that the Japanese economy was in trouble well before the tax hikes took effect. And significantly, Japan suffered the first of five major bankruptcies in the life insurance industry. The failure of Nissan Mutual Life Insurance in the spring of 1997 caused people to panic, pushing the savings rate up sharply. The South East Asian crisis then struck. But none of this gets a mention in Koo's book, which has become the bible for those advocating relentless fiscal stimulus to keep the economy on life support.

Koo and many others also cite the 1930s to support their assertion that big budget deficits are necessary for an economic recovery. Historical evidence does not support their case. The primary tools for reversing the Great Depression were an aggressive monetary policy combined with extensive restructuring of the banking system. The US economy turned up in 1932 in response to quantitative easing. Bank recapitalisations in the spring of 1933 then added momentum to the recovery. The War Loan Conversion in the UK, a similar policy to quantitative easing, was critical in turning the tide in the UK. Abandoning the Gold Standard in both countries helped too.

But the role of fiscal policy was secondary. The budget deficit rose to a peak of just 5.1% of GDP in the US and 5.0% of GDP in the UK, during the early 1930s. The contrast with today is stark. On current projections, the US administration may run a deficit more than double this in financial year 2010. The UK is on track to run a deficit of more than 13% of GDP this year.

Too many economists and politicians have invoked Keynes to justify the aggressive use of fiscal policy, without realising – or admitting – that this was not his prescription. For much of the early 1930s, his time was devoted towards the correct debt management policies that would support a recovery. Keynes was first and foremost a monetary economist. His work on liquidity preference and the difficulty central banks faced getting borrowing costs down when asset prices collapse were the most important of his many practical contributions to economic policy during the early years of Great Depression.

But much of this was overlooked during the post-war era. Keynes was cited by those who wished to promote fiscal stimulus to drive economic growth, while ignoring many of the underlying structural problems, including the persistent downward pressure on wages that ultimately reared their head during the credit crunch.

The Bank of England would rightly argue that its aggressive use of quantitative easing has indeed adhered to the 1930s textbook. Even if the budget deficit has been allowed to rise far beyond that seen in the early 1930s, extensive buying of gilts has produced a powerful monetary response that should, in theory, see the economy emerge from recession in the fourth quarter of this year.

Adam Posen, a recent recruit to the Monetary Policy Committee, gave an articulate defence of quantitative easing in a speech at City University last month, rightly admonishing critics who warn that 'printing money' will inexorably lead to higher inflation. With wages being squeezed so hard, a resurgence of inflation remains a distant prospect. Even though the headline CPI may rise above 3% early next year, this is very modest given the scale of sterling’s decline since 2008.

However, Mr. Posen did also highlight the limits of quantitative easing in an economy like the UK, where too many of its banks are too large – and broken. The UK may be a 'world leader' in international finance but, Mr. Posen warns, the banking system is ill-equipped to support companies that do not have access to capital markets. Quantitative easing works by driving bond yields down, both for the government and for companies. Buying government debt – or gilts in this case – has a very direct impact on yields, if done on a sufficient scale.

GFC Economics has been vocal in its support for quantitative easing. Indeed, when our book The Credit Crunch was published in June 2008, the warning was explicit. "There is only one monetary policy option that is likely to work at this late stage. That is quantitative easing".

When the policy was finally unveiled in March this year, we argued it was necessary, but it would not be a panacea. Two risks were apparent. Borrowing costs might fall, but because the banks were so weighed down by non-performing assets, the recovery might still be slow. Mr. Posen gave a good critique of the structural problems within the banking system that any incoming government will need to address next summer.

The second problem remains entwined with the first. The US Federal Reserve (Fed) has plainly not learnt from the 1930s. The Fed chair, Ben Bernanke, has been widely touted as an expert on the 1930s, but closer inspection of his academic work shows a limited understanding of monetary policy during this era, and in particular the role of quantitative easing.

The Obama administration has failed to address the foreclosure crisis too. The latest National Delinquency Survey in the US made for grim reading. By the end of September, one in eleven homeowners with a mortgage was either in the process of being repossessed, or seriously in arrears (more than three months).

Despite repeated bailouts, capital injections and tax-subsidised incentives, the homeless crisis is intensifying. The banking system is failing to support a recovery in the US too. Real GDP may have risen in the third quarter, courtesy of tax giveaways, but the US faces an economic and political crisis in 2010 if President Obama does not tackle the housing debacle.

That is perhaps ironic, as critics of Japan often claimed banks were too slow in recognising their losses, which exacerbated the deflation spiral during the 1990s. By contrast, it is claimed that the losses have been acknowledged sooner in the UK and US. And yet, credit is still contracting in both countries. Owning up to bad debts does not automatically presage a recovery, if banks are not willing to lend and are busily defaulting on borrowers: in a deflation spiral that simply creates more bad debts. And the UK banks may have more nasty surprises in store for the UK taxpayer, if property prices in the US – commercial and residential – continue to slide next year.

Alternative avenues to get credit flowing are needed if the UK is to avoid a double dip. The current Labour government is trying to inject more competition in to the banking sector, allowing new entrants, but these are long term solutions to a chronic over-concentration of the finance industry – which it has long supported. State backed, democratically accountable institutions offer an alternative route. But again, time is of the essence.

Ultimately, the UK government needs to recognise the role it can and should play as the major shareholder of RBS and Lloyds/TSB, and forget trying to prepare these banks for an early return to the private sector. The banks are currently being run on commercial lines. Shrinking balance sheets and raising margins is the inevitable private sector response to a credit crisis. But more direct control of these institutions might allow the flow of credit to smaller and medium companies to resume, putting the economy in better shape to withstand a double dip in the US, and a necessary tightening of fiscal policy in the UK.

*The LEAP Red Papers 'The Cuts', available to download and discuss in full.

The Credit Crunch – Causes And Resolutions

A lot of ink has been spilt analysing the causes of the Credit Crunch. Much of the discussion has understandably focussed on the culpability of financial institutions, regulators and even central banks.

There is no question all three must take their share of the blame for bringing the world economy to the brink of depression. Financial institutions were reckless, regulators asleep at the wheel, while central banks were at best naive, at worst, complicit in the creation of grotesque credit bubbles.

And in one respect, Prime Minister Brown is right when he claims this crisis is global.

Based on IMF data, there are over a hundred countries which have seen private sector borrowing rise faster than the UK since the millennium. Many have seen increases that are multiples of the rise in UK debt. Top of the poll goes to Ukraine, where private sector debt has jumped by an astonishing 5671% since the turn of this decade.

From the Baltics, down to the Balkans and across to Kazakhstan, eleven countries are in more trouble than Thailand during 1997, in the midst of the infamous SE Asian crisis.

Another nine countries are on the critical list. Eastern Europe is the fault line of a global capitalism that is badly ruptured.

And one Eastern European economy has already slipped into depression. The accepted benchmark for a depression is a contraction in real GDP of 10%. Latvia passed that unwelcome benchmark in the fourth quarter of 2008. Many more will follow.

They will be quickly matched by the major manufacturing exporters. Japan is likely to report a decline in GDP of 10% or more from its 2008 peak, when it publishes first quarter data for 2009. The collapse in exports – down 45.7% in January from a year earlier - has been astonishing. The February report on manufacturing production is expected - by the government – to show a decline of 37% from a year ago.

These rates of decline are easily comparable to the Great Depression. Indeed, in the worst year of the US slump, manufacturing output fell 21.0%. From peak to trough, it shrank 47.9%. That was over three years, between 1929 and 1932. In Japan, we have seen a large proportion of that decline in just one year.

Other big manufacturers are suffering too. Taiwan, South Korea, Germany and Sweden have all seen a collapse in exports, and will soon be in depression.

But it is wrong for Mr Brown to take comfort in the travails of Britain’s partners. The global credit bubble was a manifestation of economic policies he espoused. And Adair Turner and Hector Sants, respectively chair and chief executive of the Financial Services Authority, have come closer than most to recognising an important truth: politicians were ultimately responsible for allowing banks to lend freely.

However, even they are reluctant to admit to an even deeper and politically more uncomfortable explanation. As we argued last year in our book The Credit Crunch, the growth in lending was a necessary antidote to the pernicious effects of globalisation.

Shipping jobs abroad to cheaper locations, from China, to Eastern Europe to Turkey and India, has been a fallacy. The median wage has been relentlessly squeezed, not just in the UK, but in the US and other European countries too. If there had been no credit boom, GDP growth would have been almost negligible after the collapse of the dotcom bubble. Deflation would have become entrenched.

Led by their obsession with free trade, politicians in the West were happy to preside over the resulting housing bubbles, believing that low inflation would sustain the extreme house prices. For a while, it did.

But it is perhaps ironic, that when inflation did eventually accelerate, it was never likely to last precisely because of globalisation. Wages were being squeezed even during the boom, and as oil prices rose, there was not the slightest chance that inflation pressures would become embedded, as seen in the 1970s and 1980s. Tragically, central banks in the West could not see that. They kept interest rates too high for too long. They misjudged, because they did not understand the forces of globalisation that gave rise to the credit bubble in the first place.

Indeed, it is quite possible to show that a more timely response on interest rates, particularly in the US, but also in the UK and in Euroland, would have alleviated much of the distress we are now seeing.

But that is for the history books. What matters now is the response of central banks and governments to a looming depression.

The Bank of England’s decision to embrace quantitative easing should be welcomed on one level. This in essence involves a central bank targeting long term interest rates. The base rate may be 0.5%, but it is only one borrowing cost. There are many more interest rates, and the most important of these is the long term rate on government debt. This underpins all other credit costs. If a central bank drives the long term rate down, it can have a demonstrable impact on other borrowing costs.

This policy has many critics, but the recovery in the US from 1932 would never have happened without quantitative easing. Indeed, had the Federal Reserve in particular followed this policy more aggressively, the recovery would have been more robust.

Unemployment would have come down more quickly. It is beyond dispute that quantitative easing is a powerful monetary weapon.

There are however, several problems. The Bank of England cannot reflate in isolation. The Swiss Central Bank has joined the along with the Federal Reserve. But it remains to be seen how far the Fed, the most important central bank of all, is prepared to push this policy. It may yet fail if not used radically enough.

And it should not be seen as an excuse for profligate fiscal policies. Quantitative easing does make it easier for a government to expand its budget deficit to support an economy.

But the funds should still be used judiciously. The debt still has to be paid back.

Japan’s experience illustrates the pitfalls. Eleven emergency government budgets stretching over ten years pushed the public debt burden up from 64% to 175% by 2005. Quantitative easing has pinned down the long term interest rate – it has not been above 2% this decade, and is currently languishing close to 1%. But the sheer scale of the rise in the government debt means that 46% of tax receipts will be used to cover interest payments this year.

In this respect, we have to be alarmed that the UK budget deficit has raced towards 10% without the increased funding being put to more effective use. A bigger budget deficit tied towards an industrial strategy based around alternative energy, green technology, biotechnology and new growth sectors, would represent a sound investment in a UK recovery.

Instead, the deficit is being driven higher in part by the cost of bank bailouts. The government claims that banks have to be rescued otherwise the credit lifeline to companies would be severed, and many more would default pushing unemployment up even faster.

But the banks should have been nationalised from the outset. The government may still have needed to recapitalise the stricken financial institutions. But once nationalised, the banks could have been turned into utilities. Instead, they are being driven on commercial grounds to increase margins, to repay their loans to the taxpayer.

This way spells disaster. Loan rates need to be lowered, not maximised. Bankruptcies need to be minimised. With banks under full public control, they can be used as an extension of monetary policy, ensuring credit flows on terms that ensure companies stay afloat.

State supervised banks can also provide the support needed to allow many companies to restructure towards the new products that will help to combat climate change. The alternative technology already exists to generate a new wave of green industries.

The proposed rescue of LDV, the troubled van maker, is an acid test of the government’s willingness to marry the preservation of jobs with its carbon emission targets. It is unconscionable that LDV is on the verge of default for want of such a small capital injection, jeopardising the company’s plans for an expansion in battery powered vans.

The Bank of England's recent shift to quantitative easing will not be enough. Now is the time for an industrial strategy to reverse the huge job losses in manufacturing, which have disproportionately hit Wales, the Midlands and the North East. The 138,400 increase in the claimant count for January may have come as a shock to some. However, this could be a long way from the peak.

The Government must use its control of banks to support industry, otherwise vital skills and manufacturing capacity needed to sustain any recovery, will be lost.

The Government needs also to take proper, effective and accountable control of banks, to arrest the wave of business foreclosures. Banks need to be run as utilities and not on the basis of profit maximization, otherwise soaring defaults will entail huge social costs.

The UK is danger of following the US into mass unemployment. The wider measure of US unemployment - the so-called U6 rate - has already soared to 14.8%. This includes those who have given up looking for work and thus do not count in the official rate, and it also includes involuntary part-time workers, many of whom may lose their job. The U6 rate is heading for 20% by year-end, and could top 25% next year. It is a warning to New Labour. If it does not intervene to support industry, unemployment will soar here too, topping 4.0 million by next year.

Graham Turner is an Economist and Author of The Credit Crunch, from Pluto Press. Available from Bookmarks The Socialist BookShop, for £10 plus postage and packaging. Phone 020 7637 1848. Or www.bookmarksbookshop.co.uk