News of the American administration finally reaching an agreement to raise the US debt ceiling certainly gave short-term relief to global stock markets. However, it hardly solved the long-term problem. The truth is the Western world has been on a borrowing binge for at least the last 15 years. Unfortunately governments of all persuasions have confused the effects of borrowing with genuine economic improvement, and some even seem convinced that their policies have actually driven growth. This was certainly true of the previous Labour government, and of Gordon Brown who famously pronounced the end of "boom and bust". Such misplaced confidence that growth was here to stay exacerbated the problem as proceeds were largely spent on the public sector rather than used to reduce borrowing.
Sadly governments are, and always have been, poor spenders of our money. We see examples of it all the time in the UK: Bloated IT budgets, spending binges from local governments and even the profligacy revealed by the MP expenses scandal.
The financial crisis (which in my view is still continuing) has brought these problems under the spotlight, and closer scrutiny has revealed a level of government spending out of touch with economic reality. The boom in public spending is now over. We have hit our credit limit, and according to Richard Jeffrey of Cazenove, it is on track to show a decline of around 0.8 per cent in real terms.
Governments on both sides of the Atlantic and in Europe have tried to offset such problems by inducing consumers to spend more. In my opinion, these policies have been counterproductive. Like governments, consumers are indebted too. Borrowing more to spend our way out of a recession will only postpone the painful but necessary process of reducing our collective debt burden.
The trouble is that the public in most countries has become accustomed to unsustainable levels of government spending and state benefits. Understandably, no one likes the idea of "making do with less". This has been demonstrated spectacularly in streets of Athens, and to a lesser extent in rows and protests over public-sector pensions and benefit cuts in this country.
Unfortunately, most politicians are only really interested in the electoral cycle, and the mantra of "save more and spend less" isn't a vote-winner. Therefore they devise ways of spending more in the name of economic growth so that people feel happier.
Ed Balls' grand idea of an emergency VAT cut is a prime example. It seems similar to giving an alcoholic another bottle of vodka, yet politicians often remain deluded that they can actually do something to improve long-term economic growth with these kind of measures. All they really do is draw out the problem and postpone the day of reckoning.
The amounts of money we are still borrowing are scary – the UK's national debt is set to balloon from around £780bn today to almost £1,200bn in 2014-15, despite "austerity" measures to keep it under control. So far we have been fortunate that international markets have focused their attention on the eurozone and America. The UK gilts market has been an amazingly safe place to be with the 10-year gilt yield falling below 3 per cent, but these low costs of borrowing will soon evaporate if the market loses confidence that the Government is committed to debt reduction.
Unfortunately, just like the person who has maxed out on his credit cards, the only way to recover is to give up some of the things we like and slowly pay back our debts. It might be painful, but it will give us a firm foundation for future growth and ensure we are not at the mercy of financial markets. Naturally this process will take a long time, and while it is happening consumer spending is likely to remain weak and growth anaemic. Not a winning electoral message for the present Coalition, but a realistic one for those with longer-term concern for the economic health of the country.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent