So what can we look forward to in 2011 then?

Everybody else seems to be gearing up for a preview of the next year, and now is a good time to do it, far enough for the excesses of Christmas to have faded but not yet blinking into the bleary-eyed bleakness of January’s wintry landscapes.

Where do we in the UK find ourselves at the end of 2010?

We are still fighting the economic fallout of a party that started with the ushering in of the millennium. Allied to deep-rooted flaws in Western capitalism that probably date from twenty years before then, we have been living beyond our means for a decade. If our expectation of the economy includes providing jobs that enable the average person to bring up a family and buy a house outright by the time they retire, we’ve been living beyond our means ever since the 1970s.

More recently we were lulled into a false sense of security by borrowing wealth from hard-working Chinese people, who haven’t been so much enjoying the fruits of their labours, they have instead been generously lending it to us to buy their stuff, aided by our banks creating bizarre forms of virtual wealth to park their wealth and hide the ugly truth from us. Whereas normally living beyond our means results in inflation, as shown by previous experiments in the 1970s, this time our foreign creditors sucked it all up, and only now has the true horror been revealed, when our corrupt banking system was unable to create any more virtual wealth that people could believe in.

We don’t add as much value to the world as we consume, leastways as far as the rest of the world is concerned, though we feel fine and dandy about it. Said rest of the world has been only too willing to lend us the money to make up the difference, but after ten years they are beginning to get windy about getting it all back. Hence all that talk from Osborne and his chums about austerity, though all that talk is not reflected in action on the UK balance sheet.

This is a battle that we, the people of Britain, are going to lose in my view. As an eminent British politician once said

It is not even the beginning of the end. but it is, perhaps, the end of the beginning.

There aren’t any guarantees that you start winning after the end of the beginning. Britain is a game of two parts as far as the economy is concerned – it is quite possible that we may save the economic system and lose our future living standards as individuals.

What is in store for 2011?

• Higher interest rates
• Higher VAT – extra £12bn from you and me to the Government, lovely jubbly goes Gideon…
• Increases in direct taxation via National Insurance, changes to the 40% tax threshold, child tax credits for the well off, and indirect taxation such as fuel duty.
• Increased inflation - it’s even beginning to give the Bank of England the willies now, after they spent most of this year studiously looking the other way in order to give over-indebted householders a chance to pay down their debts.
• Reduced Government spending (and knock on job losses) as it becomes clear that for all the talk of austerity, it isn’t even getting as far as reducing the deficit, never mind the debt!
• More grief among members of the Euro. If Ireland get hoofed out and/or default our banks are going to take another sucker punch, which won’t do us any good at all.
• Possible loss of dollar reserve currency status, unwinding the last vestiges of Bretton Woods. That ride may be exciting, but it won’t be good

On the upside – what, there is an upside?

• we might get control of the deficit, as the flipside of some of the above
• the FTSE 100, with its massive overseas exposure may actually do okay
• QE seems to be on hold for a while
• house prices should fall by a good way. Nice if you haven’t got one, not so nice if you have a mortgage (that’s why you should have been paying the bugger down over the last year of low interest rates, rather than taking foreign holidays)
• we might rediscover some of the home truths, that it is who is in your life rather than what consumer goods are in it which leads to lasting happiness

There are a lot of very nasty headwinds coming our way, particularly for those who are in work but heavily indebted with mortgage and unsecured debt.

If you are in that position and haven’t heard the bell tolling for you, then I would say you’ve lost the fight. You need a tin hat, and you needed it yesterday, you should have cancelled Christmas if you’ve been carrying on like this. Your job and way of life may be at risk. There’s some nasty stuff coming down the ‘pike, and now is not the time for carrying debt – of any sort. If you are lucky, the Governement will print money like it’s going out of fashion, which, provided you

• stay employed
• your wages keep up with inflation
• your debt interest isn’t hiked

means your debt will be reduced as a proportion of your wages. That’s what they did in Weimar Germany, and it all took about a year to go totally pear-shaped. For those whose history is kind of hazy, it didn’t end well at all.

There are a lot of ifs in that list, and most of them are about to get less likely in 2011. If you have a guardian angel, get on the horn to them and get them on your side, you’ll need all the help you can get. A little bit of contrition for past profligacy might also help your case…

It doesn’t matter how many kids you have, or how much they want consumer goods like Silly Bandz, iPads and the like. The first duty of the executive of any household is to secure essential living requirements, and that means the roof over your heads, the food on your plate and the essential utilities to keep health. If your kids had a great 2010 Christmas but will be out on the street when the repo-man comes in 2011 then you have failed on all counts.

This store sells wants, not needs. Let's hope these guys have their mortgages under control at 10% interest rates, okay?

If you splurged this year on foreign holidays, spa breaks and Christmas gifts instead of reducing your mortgage you missed the plot.

Families used to be aware of how to prioritise needs over wants at a visceral level because they had seen it go wrong for enough other people on the street, and the threat of eviction kept the mawkish fondness for Christmas consumer frippery in check, as they knew it could happen to them.

Years ago while as a student in London I assisted with the University of London student union with a Christmas ‘soup kitchen’ for the homeless who then lived under the railway bridges at Charing Cross. Talking to people from the main charity they described how quickly a middle class life could fall apart, with the loss of a job leading to family breakdown and in those days usually the man ending up on the street. Senior civil servant to cardboard box resident in months…

I’m just saying that we aren’t very well prepared for this sort of thing. It happens suddenly, and my guess is a lot of it will happen next year. If you have a mortgage, ask yourself whether you can cope with base interest rates of 5%. Then ask yourself if you can cope with 10%.

Interest rates were 5% when I took out my first mortgage. I didn’t cover myself in glory in evaluating the risk I was taking on, but I was bright enough to ask the lovely lady who sold it me how much she expected mortgage interest to go up to. 7% was the reply, so I asked her to tell me what my repayments would be for that, and how much they would be for 14%. She harrumphed at the latter and said they’d never get that high. Well, it only took three years for me to end up paying 14% in 1992 ISTR. I was glad I asked the question, and had an answer, even though it meant a semi was out of the question and I had to slum it with a two-up-two-down.

It is possible that something is done to save the financial system, but very little can save the British lifestyle, we lived way beyond our means from 2000 onwards, and globalisation means that to preserve the economy a lot of that debt is going to get shaken out, from government, and from you and me, and that means a lot less money all round.

It’s payback time, for a 10-year long party when we hid the fact that we weren’t earning our way in the world from ourselves by splurging on the credit cards. Think repo-men and negative equity.And don’t shoot me for being a miserable scrooge-like git in the comments, I’m only the messenger reporting it how I see it. Believe me, I’d rather see you and your kids have a rotten Christmas in 2010 and a roof over your heads in 2011 than the other way round. If you know I’m talking bollocks then good luck to you, but if you just don’t like the idea and think why can’t someone else pay then I’m your party pooper of 2011, sorry about that.

The last financial crisis in the ‘developed world’ is almost beyond living memory now. That may not be the case for much longer…