Julian Knight: Don't let's get nostalgic for 1981 and all that

At big moments it's not unusual to get a little nostalgic and look for parallels with the past.

And some spent last week comparing 2011 with the last great royal wedding year of 1981. That was a year of economic turmoil, mass unemployment, seemingly terminal industrial decline and an increasingly unpopular government cutting spending. The prices of staple goods, services and fuel were rocketing and the streets were ablaze with riots. Remind you of now? Yes, I thought so. But the differences are as great as the apparent similarities between 1981 and 2011.

The deficit is much worse and the crimping of government spending has to be harsher than 1981. But then again the public sector has had years of money splurged on it and is in a much better state than in 1981. The riots on the streets are not – as yet – tinged by race, and the lack of jobs is affecting – how can I put it? – the middle class. It's not Toxteth Liverpool 8 exploding but a Tesco Metro in Bristol. Tuition fees are not of the same magnitude as what in 1981 was a reaction to lack of jobs and systematically racist policing.

This time round there is no dismantling of the economy of one part of the country. A Thatcherite "harrying of the North" was taking place between 1979 and 1981: of the million-plus job losses, 93 per cent were north of a line between The Wash and Bristol. This time the pain has been more evenly spread. Manufacturing is actually doing better, and the protection of the bank moratorium on repossessions has meant only minimal numbers have lost their homes. Individual incomes are on average two and half times higher than they were in 1981: if you've still got a job and a mortgage then your true disposable income until very recently has probably never been so high.

One area now much worse than in 1981 is personal debt. We have nearly £1.5trn of it between us, and some who paid top price for property in the parts of the North and West will spend years, if not decades, in negative equity. Excessive debt narrows options in life and whereas it boosted our growth post-1981, over the coming years it will prove a major drag. But this aside, you're much better off living in Britain in 2011 than circa 1981.

Price of summer rate respite

A third of Britons predict an interest rate rise over the summer months, according to Lloyds – and they are almost certainly wrong. But I can't blame them: until about six weeks ago I thought a rate rise due some time over the summer. The Monetary Policy Committee (MPC) thinks inflation should fall back during the course of the year, making a rate rise unnecessary. Certainly the most recent inflation figures indicate a slight dip, and it seems the fear of job loss is keeping a lid on wage increases, which are running at around 2 per cent in the private sector.

But one swallow doesn't make a summer on inflation. There are still huge pressures from abroad – not least fuel – which could again push prices even higher. The MPC is taking a huge risk with inflation. Spare a thought for savers, many of them pensioners, who are relying on savings. They are earning on average 0.46 per cent against a real rate of inflation in key goods and services well above 5 per cent. They are getting poorer even faster than workers, who are earning 2 per cent increases on average.

The real danger is that by holding off on interest rates the MPC is embedding inflation as well as ensuring that when rates do go up they have to go up sharper and faster than they ought. Everyone talks about a double-dip recession in 2011. But this has now almost certainly been avoided, with last week's output figures – skewered negatively as usual by the Office for National Statistics' practice of early announcement and the volatile construction industry. But the fear a few years out has to be of a fresh recession to get domestic inflation back under control.

US reality check

The recent decision by Standard & Poor's to change its view of US government debt to negative is a huge knock to those – such as Shadow Chancellor Ed Balls – who have pointed to the Obama administration go-slow on debt reduction as a model for how we should be doing things here. The US has for a generation escaped the norms of deficit control due to its position as the world's biggest economy and the holder of the global reserve currency.

This comfy position of deficit denial could never be aped by Britain: we have a fraction of the population and a rather insignificant currency. But now with the downgrading of US debt, even the mightiest of countries has a clear sign that it can't continue to live in a fiscal never-never land.

Last week analysts put the odds of a proper downgrade of US government debt over the coming weeks at one in three. Such a situation would have been unthinkable before the credit crunch.

At some point, it's going to have to stop borrowing and what's more the dollar's position as the world's reserve currency looks ever more tenuous. If this is happening to the US, what does Ed Balls think would happen to the UK?

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

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