... and why the public, companies and the government keep making things worse.
We Brits never had it so good as in the 'Golden Age' of the Nineties and Noughties.
Go-go growth
From the third quarter of 1993 to the first quarter of 2008, our GDP (gross domestic product, or total national output) rose for 63 quarters in a row. This was the longest period of continuously rising prosperity since the 'wigs, powder and perfume' splendours of the Georgian period.
In nearly 16 years of growth, UK GDP grew at rates ranging from 0.5% to a blowout 5.2% a year. On average, the UK economy grew by more than 3.1% a year during these glory years.
Alas, the crucial problem with this growth is that much of it was stolen from our future, as Britain went on the biggest borrowing binge in history.
From Q3 1993 to Q1 2008, personal debt -- including mortgages -- exploded from under £400 billion to more than £1.4 trillion. In other words, to live the high life and pay for increasingly expensive homes, we increased our debt burden by 256% by putting more than a trillion pounds 'on the slate'.
Down goes the house of cards
After mid-2008, it was all downhill. Following the credit crunch that began in August 2007, the UK underwent the longest, deepest recession since the dark days of the Thirties. We also threw almost £1.5 trillion of public money -- an entire year's output -- at liquidity measures and cash injections to prevent our banks from a systemic collapse.
Looking back on this boom and bust, it was all so very predictable, as I forecast when I started warning of the coming financial hurricane from 2005 onwards. Just as a big bill and a hangover follow a night on the tiles, we Brits have paid a high price for our excessive financial partying during the Nineties and Noughties.
Grief without growth
Today, it's all too clear to see that governments, companies and particularly individuals became overleveraged and overextended during the last boom. Today, as we lick our economic wounds, our national focus is on deleveraging (reducing debt).
During this new age of austerity, individuals save more, companies hoard cash and governments introduce austerity programmes to cut public-sector spending. Unfortunately, this collective thrift has led to reduced consumer spending, lower business investment and increased pressure on public spending.
As a result, the economy has struggled to grow in these crimped times. Indeed, it shrank by 0.3% in the first quarter of this year and 0.2% in the final quarter of 2011. These two quarters of negative growth have put the UK into a double-dip recession.
The paradox of thrift
This ongoing nightmare of weak growth and delayed recovery got me thinking about what's known as 'the paradox of thrift'. For an individual struggling with rising bills and/or falling wages, the simple answer is to cut back, spend and borrow less, pay down debt and save more.
At an individual level, this is the ideal cure for previous excess. Sadly, at a national lesson, it becomes a collective suicide note. When we all cut back at once, this creates a vicious circle of reduced spending, falling demand, rising unemployment and negative growth.
In short, by being collectively sensible, we condemn our nation to an anaemic recovery. By doing what seems prudent individually, we all share in our national suffering. This, then, is the paradox of thrift.
Maybe Krugman is right
On 30 May, I saw an excellent edition of BBC2's Newsnight featuring Nobel Prize-winning economist Paul Krugman. In this programme, Krugman argued passionately against the UK's current 'Plan A' of more austerity and budget cutbacks.
Citing the paradox of thrift, Professor Krugman convincingly argued that Chancellor George Osborne should abandon his belt-tightening. Instead, Krugman argued for a 'Plan B' to boost growth through increased government investment in infrastructure improvements and other profitable projects.
Hence, I'm now beginning to think that, having wrecked our economy through excess, we Brits and our government are only making things worse through austerity. Perhaps Krugman is right and raised spending is the answer? After all, the lesson from Ireland is that strict austerity leads to long, drawn-out recession, rather than a swift return to growth.
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Further investment opportunities from Cliff D'Arcy:
