Mr Clarke, 68, said the British economy is headed for a "catastrophic crisis" that will be "far worse than anything that has occurred in my lifetime".BOE Prepared to Cut Rates as Low as Needed
"There will be a very serious recession next year," he said in an interview with Telegraph TV. "I think the big problem in 2009 will be the catastrophic fall in consumer spending demand, spending in shops will get worse."
Mr Clarke, who as Chancellor of the Exchequer between 1993 and 1997 led Britain's recovery from Black Wednesday, called for a temporary cut in VAT to boost spending.
Speaking as the Office of National Statistics revealed unemployment has reached an 11-year high of 1.82m, Mr Clarke said the number of jobless could soon reach three million.
"We are not yet in a state where we can be absolutely certain we are not going to have something close to meltdown next year", he said. "You do have to see what can be done with taxes."
He cautioned that Britain has "mounting debt, which is unsustainable" but said policymakers should bear in mind the effect a "full-blown depression will have on public finances".
Bloomberg is reporting BOE Prepared to Cut Rates as Low as Needed
Bank of England Governor Mervyn King said policy makers are prepared to reduce interest rates as low as needed to prevent a recession from fueling deflationary pressures.Deflationary Hurricanes to Hit U.S. and U.K.
Asked whether he would take rates to zero, King said today policy makers ``are prepared to cut bank rate to whatever level is necessary'' to make sure inflation hits the central bank's target. The Bank of England's forecasts, published today, said inflation may slow "well below'' their 2 percent goal in 2009.
The pound dropped to a record low against the euro after King today forecast a deepening recession. The bank has already trimmed the benchmark rate twice in the last month, reducing it by 1 1/2 percentage points last week to a five-decade low of 3 percent.
The downturn has worsened in the past month, reports show. Unemployment rose at the fastest pace in 16 years in October, house prices are falling the most in a quarter century and manufacturing is in its worst recession since the early 1980s. Until last week, the central bank's benchmark was the highest among the Group of Seven nations.
"Today's inflation report is a courageous acknowledgment that they are definitely behind the curve and quick action is definitely needed," said Chiara Corsa, an economist at UniCredit MIB. "Risks of a deflation scenario loom at the horizon."
The central bank's forecasts, presented as fan charts, show deflation has slipped into the range of possible outcomes over the next three years and King conceded there's a "risk" that consumer prices will start to fall.
Flashback June 30,2008 : Deflationary Hurricanes to Hit U.S. and U.K.
Congratulations (of sorts) go to the UK as British household debt is highest in history.British Pound Pounded
What started as a tropical storm called "Subprime" has intensified in magnitude to engulf Alt-A, HELOCs, credit cards, commercial real estate, municipal bonds, corporate bonds, and the stock market, just as baby boomers are headed for retirement. If you prefer, you can think of this as Many Hurricanes, Many Eyes.
It will be hard for the US and UK to avoid a depression.
click on chart for sharper image
The British Pound has been pounded recently and now you know why. I have long maintained that the UK was in as bad a shape as the US, if indeed not worse. Evidence is starting to build to support that thesis. The pound is highly likely to roll back the entire move up off the 2001 low, if indeed not a lot more.
US Travelers headed to the UK will certainly find better prices in US$ terms than at the beginning of this year.
Risk of Deflation
Notice all the silliness over the "Risk of Deflation". Deflation is a benefit to anyone not deep in debt. And why is nearly everyone deep in debt? Because of fractional reserve lending, reckless policies by central bankers, and poor lending practices by banks.
Those seeking evidence that the US is already in deflation can find it in Industrial Bond Yields Strongly Support Deflation Thesis.
Central bankers are going to be shocked at how little they can do about this. It's time to fix the problem at the source. The way to do that is to abolish the Fed.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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