What happens when the hose pipe is turned off?

I paid my annual visit to the Edinburgh Fringe last week. The Book Festival provides a welcome antidote to a heavy diet of comedy, live music and theatre and I popped in to hear Larry Elliot (Guardian) Dan Atkinson (Mail on Sunday) Philip Augar (Author) and Paul Mason (BBC Newsnight’s Economics Editor). The first meeting with Elliot and Atkinson was pretty dire, but Paul Mason and Philip Augar were both on excellent form on Tuesday morning. Paul Mason in particular offered some vibrant insights into what is happening both in the United States and also in China.

In the USA you can still buy ‘snag-tooth’ properties in Detroit for less than $1000 using your credit card. Snag-tooth properties is a term coined to describe housing estates targeted by sub-prime lenders where there are huge numbers of boarded up and semi-derelict repossessed houses waiting for a buyer. It was Paul Mason’s luck to be in Detroit and then New York at the epicentre of the drama surrounding the collapse of Lehman Bros a year ago. His book Meltdown is a terrific read and one I am putting on my reading list for our new group of sixth form economists.

Both Augar and Mason doubt whether the evidence of a rebound in activity in the leading economies can be sustained as we head into 2010. The extraordinary macroeconomic policy response involving huge rises in government borrowing, bail-outs and scrappage schemes, ultra-low policy interest rates and extended quanititative easing must inevitably provide a boost to short term production. But the growing evidence that the commercial banks are largely hoarding the extra deposits created by QE is evidence that the banks have not sufficiently re-capitalised or cleaned up their act. A failure to fix the banks is limiting the impact of the monetary stimulus and small businesses across the country are finding lending conditions tightening and paying upwards of twenty times the policy rate.

Interest rates are likely to remain low for a long time to come - UK base rates may stay below 1% throughout the whole of 2010 - but a fiscal retrenchment is inevitable and it threatens to undermine the strength of any recovery. The government borrowing figures are horrendous within a short space of time the cost of servicing a national debt in excess of £1 trillion will take up to 10 per cent of tax revenues.

Philip Augar: Chasing Alpha: How Reckless Growth and Unchecked Ambition Ruined the City’s Golden Decade

Paul Mason: Meltdown: The End of the Age of Greed