Have a look at this cutting I found from the Wall Street Journal, 2nd March:

Market has encountered resistance since hitting new highs Tuesday, natural in view of the sweeping rally up to then. Previous pauses in early Jan. and mid-Feb. were followed by renewed rallying; evidence this is a similar period of consolidation seen in pattern of declining volume on recessions, indicating line of least resistance remains upward.

With the Dow today on 10,500 and the FTSE around 5,500, are we moving onwards and upwards towards a recovery?

Nope! The date line on that cutting was 2nd March 1931. That’s about the same length of time after the Wall Street Crash as we are now from the crisis of September 2008.

At the start of 1933, just two years on from that optimistic Wall Street Journal market view the Dow would be one quarter the value it was in ‘31.

That was the same year that the Chancellor of a new UK National Government, Philip Snowden, produced an emergency budget which imposed severe cuts in public spending and wages. Public sector wages and unemployment pay were cut by 10%. Income Tax was raised by 11%. By 1933 unemployment had risen by 150% and exports were down 50%.

What is on offer to the British public in the coming General Election? First, the Conservatives are not advocating a replay of the Eighties. No, Osborne boasts that ‘the cuts will be worse that those of Margaret Thatcher’. It will start with an emergency budget.

Labour on the other hand advocates a steady fiscal tightening to placate the markets; an earlier rather than later introduction of consolidation to remove the structural deficit and a handing over of the baton from the public to the private sector.

But this is exactly what Japan did in the early 1990’s when they ended their economic stimuli too soon. As the chart below, courtesy of Mike Shedlock, shows over the last twenty years Japan has choked off four or five nascent recoveries when political will crumbled.

The Nikkei peaked in 1990 at 38.9k. Property prices had risen by 50% in the previous four years. A year later the Nikkei fell to 20.2k only to rebound 35% during the next four months to 27.3k, which is very similar to our position today.

Over the next year the Nikkei halved to 14.2k and today, twenty years later, it is at the dark depths of 10.25k. What you are looking at in this chart is not a double dip recession but a six (and counting) dip recession! That would mean for us a FTSE level of 2050 in the year 2028 (and Japan had its export performance to help out). A thirty five year old today would have to work ‘til they were 75 or 80 to fund a sufficient pension.

And what does Japan tell us about property prices over a period of persistent demand deflation? Since 1991, property prices in Japan have halved. Not with a dramatic single-year fall, but with a steady decline over those 20 years. No-one would say that housing was exactly affordable at the moment but the social and economic consequences of a twenty year decline in house prices would be a mighty big problem for a lot of people.

There are fears that inflation is just around the corner. The prices of imports and commodities may be rising, and prices generally may be up 5%, but wage increases are far behind. People will just cut back. That is what they did when commodities rose in 2007, which may have started the rot in the first place. A round of price inflation can’t take root unless it is accompanied by wage inflation. Unemployment is taking care of that eventuality.

Demand deflation remains the greatest threat, and ordinary people (that is those who are not in the Westminster Village and neighbouring Commentariat or down in the City) sense this. It is expressed in their private fears about jobs, about wages, about pensions, about their homes. This shows in the polls.

Last week’s Channel 4 New’s YouGov poll of 60 Con/Lab marginals is revealing and should be a clarion call to radicals. It asked respondents what Gordon Brown could do to improve their opinion of him. Taking more radical steps to protect people from the economic crisis, at 44%, was the most popular answer.

On the state of the economy, only a minority (29%) blamed the government for causing the problems, but they think the government’s reaction has been ineffective or counter-productive. Only 12% think that the actions Gordon Brown has taken, or is planning, will improve matters. 24% think they will make things worse. 75% think the government are out of touch with how the economic problems are hitting ordinary people.

In Conservative seats the swing to them is far less than in Labour areas. It is among their previous core vote that the sense that ‘something more radical must be done’ is most pronounced.

Some amongst the Liberal Democrats have been saying that the cuts must come, sooner rather than later. You get the feeling that these people wouldn’t mind being part of a Coalition or even a National Government helping to enable those cuts, taking those ‘tough’ decisions.

Some Labour supporters are openly saying that this would be a good election to lose. That it would be better to let the Conservatives get on with the unpleasant task of cutting expenditure.

To both sets I ask, could this country’s already precarious community relations cope with a Japanese style period of continuing deflation, a doubling of long term unemployment and persistent fall in home values? What role would the far right seize? How long would free trade survive? Quo Europe? How would even the arms-length mutualism of the present welfare state survive declining tax revenues and rising demands on benefits, heath care costs and security?

Some argue that the Conservatives won’t go through with their tough talk. We cannot leave this to chance.

Some say that the Liberal Democrats could moderate Conservative economic policy. The risks are too great.

Some say that there is no alternative, that we have tried extraordinary monetary creation. But QE was devised by bankers to support the banking sector and the stock market in the hope that this support would spill across into the rest of the economy. It hasn’t. Companies may have raised £42 billion in new share capital, but they have cut investment by £45 billion.

Some say that the gilt markets won’t buy anymore gilts. But what is stopping us paying for government commissioned investment, intellectual and physical, by issuing cheques on the Government’s account at the Bank of England – direct money creation, direct demand stimulation operating through ordinary people and not through bonus loving financial intermediaries?

The answer is ‘nothing but the fear of politicians who want to behave like bankers and bankers who want to behave like politicians’.

Our fight is always and everywhere against those who would use deflation and unemployment to achieve power and protect their own interests.

Our fight is always and everywhere to help people take and use power so that they are free from domination; be it the domination of arbitrary decisions or the domination suffered by the hardest pressed, by the un-informed and by the dependent that rises during economic decline.

The paramount task for Liberal Democrats is therefore to avert an Osborne Budget. The society it would lead to, the unemployment and dereliction it would create would wreck lives, tear families apart, divide communities and confiscate freedoms and opportunities from the many to the few.

The second task is to ensure that fiscal and monetary policy after the election continues to stimulate economic activity in the short term by compensating for insufficient private investment, replacing depleted demand with the necessary public led and commissioned investment in infrastructure projects, small and large, physical and intellectual, that will provide longer term economic activity, opportunities and capacities.

And in Birmingham this weekend we should declare loudly and persistently that this is our stance now and after the election – whatever the result – so that they know what they get with their vote and they know where we stand if the Commons is balanced.

“And I saw a new heaven and a new earth: for the first heaven and the first earth were passed away; and there was no more sea.”