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It’s not just the war, Tony

UK prime minister Tony Blair is facing the biggest test of his political career as he tries to persuade the British public to support military action against Iraq in alliance with the US. But his government is not just dealing with a major foreign policy problem. The UK economy is also under scrutiny.

In all of the Anglo-Saxon economies - the US, the UK, Australia and New Zealand - there are huge consumer debt bubbles. But the UK has the biggest. It might deflate slowly or burst suddenly.

As UK house prices rocket by more than 25% a year, the government, the Bank of England and most analysts continue to deny that there is a debt bubble. Debt is not at danger levels, and the consumer is still spending because incomes and property values are rising and unemployment is at historical lows.

Irrational optimism?

Are the optimists right? They admit that house prices are high in relation to income and rents. And the ratio of household debt to income has risen. But the level is not much higher than in the late 1980s during the last housing boom. And the cost of servicing debt has never been lower.

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