25 October 2008, Saturday
Unemployment will rise, living standards will fall and the whole of Britain will be affected.
There are three large dangers here. First, that the banks continue to suffer losses they are ill-equipped to cope with. The second danger is deflation. The lesson of the world economy in the 1930s, and of the Japanese post-bubble stagnation of the past 20 years, is that it is extremely difficult to reverse a situation where prices – in the shops and of houses and shares – routinely fall. This is both a symptom and cause of an economy where confidence has virtually collapsed along with the banks.The third danger is simply that the recession drags on, and the economy stagnates for a long time – the so-called "L-shaped" recession. In this case, the Bank of England could be prevented from cutting interest rates radically because of a collapse in the pound, already under way and possibly set to accelerate, with a commensurate danger of inflation.
