Just as the US president Barack Obama is endeavouring to mobilise the people of his country by asking them to rise to the challenges of their new 'Sputnik moment', Mervyn King tells the UK that it faces a massive squeeze on living standards unmatched since the 1920s.


Mr King's warning was delivered during a speech in Newcastle-upon-Tyne last night and comes on the back of the latest figures (albeit rough estimates) that GDP contracted by 0.5% in the last quarter of 2010.

"In 2011, real wages are likely to be no higher than they were in 2005. One has to go back to the 1920s to find a time when real wages fell over a period of six years. The squeeze on living standards is the inevitable price to pay for the financial crisis and subsequent rebalancing of the world and UK economies" he said.

Whilst pouring icy cold water on the immediate prospects for the UK economy and the burdened people, Mervyn King also stymied any hopes of a rise in interest rates to relieve the plight of the beleaguered savers and investors. In fact he said that amongst the biggest losers would be 'those who behaved prudently'.

He also said that the Bank of England 'neither can, nor should try to, prevent the squeeze in living standards' as figures show that take-home pay fell 12% last year and more of the same is expected this year.

Saying that the recovery would be 'choppy' he said the the biggest challenge to the Bank's Monetary Policy Committee (MPC) would be inflation. Some economists have warned that this would nudge over 4% this year and Mr King said it would get to 'somewhere between 4% and 5% over the next few months'.

In what some may see as a response to MPC member Andrew Sentance's call for a rise in rates, Mr King said that this rising inflation is caused by global forces moving the prices of commodities like oil as well as tax rises over which the BoE has no control.

It looks like we're in for a protracted period of rising prices for essentials and falling levels if real wages (except for bankers). Where the money is going to come from for a quick recovery is anybody's guess. And as to that bastion of every bull's dreams, the housing market, this statement can only come as bad news, yes interest rates to stay low but there will be less money available and fewer people really able to purchase a home.

The message for the people seems to be 'spend, spend, spend while you can! Or we'll tax your savings, inflate your savings away or let fund managers plunder them for their fat fees'.

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