Just as in the U.S., the United Kingdom is having concerns about credit getting to the small and medium businesses. Being that is the backbone of almost all developed economies. Adam Posen says it is likely we will see a “double-dip” recession or really slow growth.
In the slow growth scenario in the U.S., I would expect to see deflationary forces to continue because we would not generate enough income as a whole to support the existing debt so the excessive would need to be defaulted on and where those defaults happened, those underling assets attached to the debt would fall in price.
“I am concerned because the financial system in the UK does not seem to have a spare tire for the provision of capital to non-financial businesses when the banking system has popped a leak.”
He said in this way the UK drew a “worrisome” comparison with Japan in the mid-1990s, when recovery began but the economy was unable to sustain it.
Analysis: The core of this global crisis is one of confidence and in turn that disrupts the credit in all markets because of their interconnected nature. Credit is only recovering because we have external support in the markets and no more serious shocks at this point. The next test will be if the markets can operate without this government intervention.