WITH interest rates at their lowest ever at 0.5%, the UK economy is at a dangerous junction, warns the Ernst and Young Item Club.
Its solution to the deepening economic crisis is to demand a further cut in the already miniscule interest rate down to 0.25%, to try and give the dying British capitalist economy the kiss of life.
However, all that a further rate cut would do would be to put an end to bank lending completely, after the bankers decide that at such a return it is not worth the risk to continue with a lending policy.
It would also encourage savers to draw out their cash from the banks on the basis that they are not gaining from saving at all.
The Item Club points to the obvious. This is the crisis of the eurozone, with its banks demanding recapitalisation and rescue from massive debts that threaten to bring about the end of the common currency and the European Union, with countries such as Greece, Ireland and Portugal being drummed out of it.
This economic and political catastrophe for European and world capitalism would bring about a collapse of European production, which the British economy, a major trader with the eurozone, would not be able to survive.
The fact that the Bank of England has increased its printing of money to £295bn, and has been making hints that the amount of new paper put into circulation could reach £500bn, has cut no ice with Ernst and Young.
It says that the Bank of England’s new quantitative easing bout is unlikely to prompt recovery, and has consequently downgraded its forecast for an increase in UK GDP to just 0.9% this year, down from its 1.4% forecast of just three months ago.
It warned that unemployment will rise to 2.7 million from 2.57 million over the next 18 months.
Ernst and Young said yesterday that ‘Ultimately we need to kickstart this economy’, but had no real suggestion of how to do it.
It could only wring its hands and declare ‘It’s worse than we thought. The bright spots in our forecast three months ago – business investment and exports – have dimmed to a flicker as uncertainty around Greece and the stability of the eurozone increases.
‘We think there is scope for targeted tax relief and spending measures to help put us back on track.
In the meantime, businesses need to be much more aware of the economic risks and have contingency plans in place given the current volatility.’
The contingency plans ‘given the current volatility’ can only be more wage cuts and speed ups for the workers and, as well, more job cuts and closures of whole swathes of already failing industries.
In fact, last Monday the professional services company Begbies Traynor provided a glimpse of the real situation when it reported an increase of 23% of companies reporting ‘critical’ financial distress in the third quarter of this year compared with 2010.
Companies with ‘critical’ problems are those with county court judgements totalling £5,000 or more, and/or wind-up petition related actions.
The Royal Bank of Scotland Group Plc also joined the fray. It stated that the plans to ensure banks have additional capital buffers are a ‘distraction’ from the need to address the sovereign debt crisis.
As far as it is concerned the crisis is not due to the banks! It stated: ‘This crisis is about the fragility of vast amounts of periphery European Monetary Union debt as the default risk of sovereigns becomes more probable. These sovereign debt issues are only being dealt with half-heartedly.’
It added: ‘We think all European government bonds except bunds are speculative.’ Only German bonds have worth – the rest is rubbish says the RBC.
It is obvious that the capitalist system is in its death agony. For humanity to have a future capitalism must be consigned to its grave and replaced by a socialist planned economy, with production planned to satisfy people’s needs. This is the only way forward.
