Every big financial crisis has its own defining characteristics, but both in origin and consequence, such implosions tend to be remarkably similar. In virtually every case, you first see a long period of excess in financial risk-taking, where credit spirals out of control. This ultimately proves unsustainable, and in the resulting bust the process of credit expansion goes violently into reverse, causing often catastrophic economic damage, from which it will typically take many years to recover. There is no quick bounce back from recessions caused by financial crises.

 

In one important respect, however, the present maelstrom is unique. Never before have we seen a financial crisis result in such all-encompassing and explosive growth in public indebtedness. This is not a problem exclusive to Britain, nor is the UK even the worst example of it. To a greater or lesser extent, all advanced economies that were directly involved in the financial crisis have suffered the same phenomenon, with public debt climbing to previously unthinkable levels. This might be understandable in the event of a no-holds-barred military conflict, where nations are fighting for their very existence, but for public indebtedness to be approaching such extremes in peacetime is quite without precedent.

 

Admittedly, there have been a number of occasions over the past two centuries where individual countries have had much higher national debts, relative to GDP, but these have nearly all coincided with major wars, where the simple act of demobilisation alone has been self-correcting, causing public spending to fall and economic growth to come roaring back. That’s not going to happen this time around. To the contrary, low growth, combined with the mounting public spending obligations associated with ageing populations, threatens to make the problem steadily worse...