There’s no pleasure in the vindication: four years after Northern Rock’s collapse, three years after Lehmann, those of us who predicted a double dip recession are seeing it transpire before our eyes.
In that sense, it is fair to argue that the recent increases in the public-sector indebtedness of many developed economies is the consequence in large part of the decisions taken in 2007 and 2008 not to let the banks and the financial system collapse.
Arguably the deleveraging of the banks, the shrinkage in their balance sheets, has been transferred to the state.
The overall volume of indebtedness in the economy is therefore still with us – although it has been shuffled from financial sector to public sector.
The massive debt of the shadow banking system, now socialised and transferred to the tax payer across Europe and the US, is causing a run on sovereign debt across Europe: Greece, Ireland, Portugal, Spain, Italy and now even Belgium are seeing the costs of government borrowing rise. They’re trapped in a uniquely evil trap:
1. Borrow to reflate – and see the bond markets speculate the debt is unserviceable
2. Cut expenditure – and see the bond markets speculate the lack of growth is unsustainable