Blair's former adviser paints gloomy picture as low interest rates take their toll on economies
Increased government intervention, regulation and socialisation of financial markets is inevitable, Derek Scott, former economics adviser to Tony Blair, has told delegates at this year's Channel Islands Forum.
Scott, visiting professor at City University's Cass Business School, said the bubble had burst and the implications were emerging. He said: "The process is incomplete but it is already having a big impact on the American economy and will affect other economies too."
He argued that for many years the US, along with other economies, had been able to sustain inappropriately low interest rates to avoid recession. This was because of Asia's investment in its treasuries.
But he said the low interest rates had resulted in more borrowing by households and businesses earlier in the economic cycle than would have otherwise been the case. "More spending today, means less spending tomorrow," Scott argued. "This is not just a problem for the US, the UK has a problem, and some other countries in the single currency. Unless something happens to the economy to put up rates of return or increase productivity in some way, the only way bringing forward more spending can be sustained is if you have even lower interest rates - so you have to run faster to stand still."
Scott said moves by the Federal Reserve and other central banks since 2004 to rebalance their economies by raising interest rates had exposed vulnerabilities built up in the period of low interest rates. He said: "It's very clear that because of the build-up of household and other debt during this period, it's not possible to normalise interest rates without tipping the US economy into recession, and probably other economies too. Normalisation in these circumstances means liquidation. US and other interest rates are too high and too low at the same time. If you are going to deal with this problem of too much spending today, interest rates need to be higher, but if interest rates are too high, because of the indebtness that is built up, the economy will not stand it."
Scott said while the situation was similar to that in the 1930s, central banks would respond differently, but that would lead to more government intervention and regulation. He said: "We are not going to get a major depression because central banks will make sure we won't have that."
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