They are just beginning to wake up! OR THEY'VE KNOWN OF THE SCENARIO ALL THE TIME?

Wary of sparking panic, politicians are neglecting to

 acknowledge the true scale of the catastrophe that may

 await us, says David Cox

By David Cox

FIRST POSTED JANUARY 15, 2009

There is something oddly muted about current discussion of our economic difficulties. The Government fears we may have to wait until the second half of the year for an upturn. The Opposition warns that counter-recessionary measures may mean higher taxes in future. We should be so lucky.

Doubtless those in charge of our destiny are wary of sparking panic. Hence their reassurances that whatever we face, it won't be anything like the 1930s. On this, at least, they're right. Things could be far worse.

Today, a frozen credit market and impending deflationary spiral are combined with unprecedented global imbalances. The predicament this creates will not be dissolved by fiscal stimuli, debt guarantees and quantitative easing. Such measures may however make things worse.

The US cannot run a deficit big enough to keep its people in work. Attempting to do this will doubtless prompt increasingly impoverished but ever more indebted Americans to demand protectionism. This seems likely to prompt competitive devaluation and the disintegration of the global economic system.

In a worst-case scenario, strikes, riots and looting could all occur – forcing the Government to impose martial law

In such a world, Britain's debt will leave our country particularly disadvantaged, as sterling's slide is already indicating. UK bonds are likely to become unsaleable long before their American equivalents. If our public finances collapse, the IMF is unlikely to be in any position to rescue us.

The Government may find itself obliged to default on pensions and benefits, ravage public services and resort to hyperinflation to dissipate its liabilities. This could make the middle classes as disaffected as the workless.

Our society is no longer cohesive enough to accept whatever share-out of pain authority dictates. Strikes, riots and looting could all occur. Martial law may be required, as Britain loses, perhaps for ever, its standing as a serious world player.

It might never happen. However, any serious approach to our present difficulties must acknowledge that it might.