The effects of the recession/depression currently building up steam depends largely on how fast as well as how hard it bites.
What has happened over the last decade is that incomes have been supplemented by debt. This has allowed low inflation to be combined with rising living standards. Most of this debt has been piled into home mortgages which as the capital sums have increased have taken an ever larger percentage of incomes thus reducing disposable incomes and increasing the reliance on debt as income. Not a problem so long as house prices kept rising, which is where the problem lies.
Simultaneously private manufacturing industry has been replaced by public social engineering projects as the main source of wealth in the economy, one fifth of the employed workforce currently work directly for the state, the overwhelming majority of the rest are employed servicing themselves and the public sector. Therefore there is very little real economic activity within the British economy. Making it extremely vulnerable to any sort of competition for resources with the new industrial nations.
The main reason why this has been possible is the revenues the British government has derived from North Sea oil which at its hight in 1999 supplied 5% of global production. Between 2005/6 that dropped by 25% and now Britain is a net importer of oil, at a cost measured in the tens of billions per year.
The secondary source of revenue for Britain is financial services. Obviously in very bad trouble itself at present.
We are in a position now where debt engine which was powering the economy has stalled, instantaneously removing a huge chunk of the collective income of the nation, hitting the luxury and service industries particularly hard. Simultaneously revenues to support the Byzantine bureaucracy of the British State are being punished as oil revenues and earning from financial services are going into steep decline. And all this against a background of rampant global inflation.
Therefore every area of the economy is being gouged; private and public service and productive and that gouging is reinforcing and multiplying the effects on each sector. This manifests itself as declining business in all sectors which will inevitably lead shortly to massive and spiraling unemployment.
This is not some strange conjunction of disparate factors. It is motivated by what is effectively a "correction" whereby the economy of the world is coming to terms with the massive demands of six billion people and in the process revaluing the West. Just as house prices in the UK are being revalued to what they are actually worth in a de industrialized society so the value of the West will be reassessed in a global context.
My guess is that the productive capacity of the UK is about the same as the Ukraine, assuming that it can get to that level without suffering a societal collapse reducing it to something like Somalia but without the nice weather. This was after all where we were in 79' just before the North Sea bailed us out.
The question is how will people deal with a total change in their lifestyles? How will they deal with not having cars, not having infinite credit to exchange for whatever they like in Argos, how will they deal with their entire income being used for food and domestic power? What will be the effect of huge numbers of unemployed people, not merely the usual victims from the productive sections of society but vast numbers of former state employees, the nice middle class people who have been running the state and supporting its agenda?
If they take a mature attitude and understand the economic forces which are driving the change and it happens slowly enough for them to adjust then we should be able to survive with an intact society, all-be-it a radically different one than we have now. If the change is resisted until it breaks through then it could rip chunks out of the system and cause a disaster which could rapidly turn into a catastrophe. For example if arrangements are not made to -reimburse the fuel costs of owner-drivers and small companies who carry a significant proportion of the container traffic then the supply chain it represents could simply cease to function. This would strip the High Street of all of its consumer goods and a considerable proportion of its food products. Thus opening the door to panic and chaos. Similarly if the State decides to tie itself to the mast of another stricken bank that bank could well simply take the state down with it, resulting in the bankruptcy of the state and anarchy within days. The opportunities for one part of the machine to break down and take the whole thing out are everywhere in the kind of economic environment we live and with an economy as distorted as ours.
There are two ways in which this might be averted. Either "demand destruction" halts the inflationary spiral. This is a nice way of saying we price our competitors out of the global market and they starve instead of us. However there is a serious question about who are the poor? Indian peasants have cotton, tea and corn to trade, we have management consultancies. Moreover in a globalized world the collapse of any markets/economies might start all the dominoes toppling anyway. Alternatively the West could halt the inflationary spiral by offering to buy at a fixed price or take what is required at gun point. Which is why the cynical believe the West is in Iraq. But quite frankly I seriously doubt that we have the balls, and so does everybody else.
So to answer the question "Arrrggg; how bad can it get?" the optimistic answer is very bad indeed the pessimistic? That the four horsemen of the Apocalypse could ride like lightning over the White Cliffs in the very near future, take one look at the nightmare of fear and loathing Britain has become and ride out again considerably whiter and faster than they arrived.
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