Borrowing and investment

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That there must be limits to economic growth is self-evident, but pinning down precisely where and when those limits will be reached is considerably harder.  Whilst pretending that we can carry on and simply ignore the issue is foolish complacency, there is a danger that those of us who take an alternative view can sometimes sound a bit like American fundamentalists looking for evidence of the End Times.

To listen to Vince Cable, one would think that economic recovery depends largely on a willingness by the banks to lend more money to businesses for investment.  I’m not so sure; and not solely because it sounds like a return to the excessive lending which was part of the reason for the crash in the first place.

Dylan Jones Evans pointed out about two weeks ago that “it is estimated that large companies in the UK are currently sitting on around £65 billion of cash within their balance sheets”.  As far as big businesses are concerned, at least, it isn’t simply a matter of lack of access to capital.

Dylan puts the lack of investment down to this stuff called ‘confidence’ – or rather, the lack of.  I’m not so sure, although I suppose it depends on confidence in what.  But I wonder whether there isn’t also a serious lack of investment opportunity at present.

My doubts were heightened by the reported comments of another well-known Welsh-based economist, Patrick Minford (coincidentally in the same edition of the Western Mail), in which he suggested that we could be in for a long period of readjustment, and that the global economy simply cannot expand any more at present.

It certainly seems likely that we will be facing a world in which countries such as China and India use a growing proportion of available resources, and probably without a significant increase in the total availability.  It’s also likely that they will be meeting higher levels of domestic demand as well. 

Price rises for many commodities and raw materials would be an inevitable consequence of the former, and for finished goods of the latter.  It’s hard to see where demand is going to come from in our own economy if we have both rising prices and falling real wages.

Faced with a possibly lengthy period of stagnation, Plan B needs to be about more than a difference in the speed and size of public sector cuts.