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Britain Opts for a Bubble Play

Cameron - UK Government

The UK government has “lost patience” with austerity, and with a general election two years away, has abandoned it in favour of a new bout of debt creation, “tempting consumers to leverage their balance sheets into a new housing bubble,” suggests Trevor Greetham of Fidelity Worldwide Investment.

In the UK and other countries that gave priority to tackling high levels of state debt by slashing interest rates, raising taxes and cutting spending, this “front-loaded austerity failed to trigger the spontaneous private-sector recovery its advocates expected.”

This lack of economic growth ought to have come as no surprise, as “in a balance-sheet recession banks want to shrink their loan books and consumers want to rid themselves of debt,” so cheap-money policies are ineffective.

The new home-purchase subsidy programme in the UK amounts to “tempting a new generation of consumers into debt, in the hope the government can improve its own financial position.

“The Bank of England’s forward guidance framework is designed to keep mortgage rates low for years, and an expanding range of government schemes is underwriting house prices and mortgage debt directly, using taxpayers’ money.”

Although starting a housing boom is “a sure-fire way of generating a strong economy,” it means there is a risk of “another house-price crash further down the line,” or a sustained rise in inflation.

Neither outcome represents an appealing prospect for investors.”

CopyRight – OnTarget 2013 by Martin Spring

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