We are constantly being told by the present government that strong UK recovery is underway and that this is due to the austerity policies that HMG has pursued. This, of course, defies Keynesian economic principles that, faced with recession, what government should do is NOT tighten its belt but INSTEAD open its wallet. Keynes was, unintentionally, proven correct when WWII caused government to throw huge amounts of money about on guns, ammunition, uniforms, boots, etc. etc. and accidently ended the 1930s depression. Perhaps the present recession proves Keynes wrong in the modern world?
The present recovery is consumer led. We are spending rather more than in the years up to 2012 and this is stimulating business. One thing I have been scratching my head about is where this extra money is coming from. It doesn't seem to be coming out of pay rises. Many people have had no rise; many have had just 1%; the average is only 1.7%. This is lower than RPI inflation (currently 2.3%) and the lower CPI measure (now 1.2%) has only come down below pay rises this last couple of months. So if the extra spending isn't coming out of pay packets where is it coming from? The obvious answer would be it comes from credit; that people are getting more confident in flashing the plastic. Well it doesn't seem so. Total credit card debt in November 2013 was £57.4bn; in August 2014 it was £57.6bn; up £200 million = not very much. So where is the extra money coming from?
Here's a thought. Perhaps people are getting windfall payments; unexpected money raining down upon them. Then they go out and spend all this unanticipated, unbudgeted, cash and doing this stimulate the economy and fuel the UK recovery. Preposterous, you say? I've gone into fantasy mode, you think. He's stopped taking the tablets, you mutter. Actually, no. It has been happening. I know many of us on CBF have had CPP repayments; in total there has been £1.3billion paid out. Not really all that much. But PPI repayment is a different matter. So far £16bn has been paid out and predictions of what is in the pipeline go up all the time. Lloyds alone has set aside £11bn for claims.
So, huge amounts of banks' cash have been handed over to the public. Has the recovery been based not on public austerity but by the involuntary injection of private monetary stimulus (i.e. throwing money at the problem)? Has Osborne been wrong about all this? (You'll know my answer to that one). And has Keynes turned out to be correct yet again? And what happens when the PPI tap is turned off? Do we go back into recession?