Julian Knight: Your country needs you to spend, spend, spend. Don't
Sunday 19 December 2010
Your country needs you to spend when you should be saving.
Saving for what? Towards paying back those debts that most of us acquired over the past two decades of living beyond our means. I will explain why later.
When I think back on the past couple of years it really is rather amazing that we have got away with as much as we have. Iceland fell at the first puff of wind; Ireland's reckoning has now arrived, and Spain's looks on the cards. Yet in Britain, which has some of the highest personal debt levels in the world, and a public finance system wrecked by Gordon Brown and almost completely reliant on financial services, we are still able to borrow money at only a slightly higher rate of interest than the Germans – now restored to their rightful position as the gold standard in fiscal prudence and economic good sense. Unemployment is climbing again, but is nowhere near as bad as it could have been. As for the public sector cuts – despite the hysterical coverage in some quarters – their effect on the wider economy may prove transitory and, frankly, rather small.
The economy itself is growing at twice the level it was expected to and, despite the VAT rise in January, I can see this trend continuing into the summer.
If the economy is like Houdini performing one of his tricks, to date we have done little more than loosen the handcuffs; we have still to loosen the chains and escape the sack before the flame burns through the rope we're dangling from. I'd have given our chances of reaching this point without mishap as 50:50; but, from here on in, the odds of pulling off the whole trick are narrower still.
Inflation – rather than deflation, as so many mistakenly feared until quite recently – could spoil everything. The retail price index currently stands at around 5 per cent (best forget the CPI measure as this is irrelevant to anyone's real expenditure). Fears of job losses are keeping a cap on wage demands to such an extent that we haven't quite had a 1970s-style wage- price spiral. However, inflation is getting to such a point that it is eroding other assets and values. For instance, if I earn 0.5 per cent on my savings and don't receive a pay rise, yet inflation rises at 5 per cent, I am getting poorer very quickly. This erosion of assets and savings can only go on so long before an attempt (which has no guarantee of working) is made to squeeze this out of the system. The only method the Bank of England has to do this is higher interest rates, which is where all this economics starts to hit you and should dictate your thinking over the next year.
The Bank of England's financial stability report warned last week that seven million Britons are suffering "latent distress", in that they are close to the financial precipice. Any substantial rise in interest rates may either make them unable to meet their repayments or unable to move (because they couldn't possibly borrow to fund a new purchase because of the changed lending criteria that came in after the credit crunch).
What should they do? The only rational thing is to cut right back on spending, try to expand income as much as possible, and hurry to pay down debts, whether mortgage or otherwise; or, at the very least, build up a war chest against potential job loss and the economic shock of higher rates.
But this is the last thing policymakers want you to do. They want you to keep spending through the VAT rise and well into 2012. And what happens then? Well, you'll be on your own. They're just hoping the economy will be robust enough when the lenders start repossessing homes. "Your country needs you." My advice would be to ignore this call.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
- 1 Jeremy Clarkson 'sees no problem' with his racist language on Top Gear, says BBC
- 2 'Alien thigh bone' on Mars: Excitement from alien hunters at 'evidence' of extraterrestrial life
- 3 Richard Dawkins on babies with Down Syndrome: 'Abort it and try again – it would be immoral to bring it into the world'
- 4 London restaurant 34 creates champagne glass modelled on Kate Moss’ left breast
- 5 ALS ice bucket challenge co-founder Corey Griffin drowns, aged 27
Richard Dawkins on babies with Down Syndrome: 'Abort it and try again – it would be immoral to bring it into the world'
Scottish independence: English people overwhelmingly want Scotland to stay in the UK
Isis threat: Cameron wants an alliance with Iran
Michael Brown shooting: Chaos erupts on the streets of Ferguson after autopsy shows teenager was shot six times – twice in the head
Disgusting, frustrating, but intriguing: how the country really feels about its politicians
Bin bag full of cats' heads discovered near Manchester's Curry Mile
iJobs Money & Business
£30000 - £40000 per annum + benefits+bonus+package: Harrington Starr: C#.NET ...
£20000 - £30000 per annum + benefits+bonus+package: Harrington Starr: Junior D...
£550 - £650 per day: Orgtel: Business Analyst - Traded Credit Risk - Investmen...
£55000 per annum: Harrington Starr: A financial software vendor at the forefro...
Day In a Page
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony