10 November 2009

Financial mess isn't even the end of the beginning.. Halligan

This blogger prefers Liam Halligan to Ambrose Evans-Pritchard, any day....

So terrible was Gordon Brown's economic stewardship during his decade as Chancellor from 1997, and so huge has been his "fiscal stimulus" since, that the UK now has the biggest structural deficit of any major country.

Britain faces a 2009/10 fiscal shortfall equal to 13pc of GDP – the biggest in our peacetime history – with little sign of improvement. The Government will borrow some £200bn on taxpayers' behalf every year until 2012/13 at least – eight times above "normal" levels. In just four years, an extra £32,000 will be added to the existing sovereign debt burden of every British household.

In an admirably frank report last week, the International Monetary Fund singled out the UK as "uniquely vulnerable" to spiralling debt service costs as we deal with the mess left by Brown's fiscal incontinence. In 2007, Britain spent 4.2pc of its tax revenues on debt interest. By 2014, we'll spend almost 10pc of receipts on servicing government loans, before we even start paying them back, as our national debt sky-rockets from 40pc to more than 100pc of GDP.

Just the increase in annual debt service will equal what the Government currently spends on public transport. Thank you, Mr Brown, for your contribution to our country.

Yet Brown didn't do this alone. Most of our political classes have been complicit in this historic policy error. The UK's mainstream parties, having finally admitted our fiscal situation is desperate, have only recently stopped competing on the basis of who can spend more. Public discourse is now starting, very slowly, to recognise that we actually need to spend and borrow much less. But the politicians still claim, sotto voce, that a debt burden equal to 100pc of GDP "isn't all that bad".

The UK's debt stock is accumulating rapidly, though, at a time when tax revenues, used to service that debt, are going through the floor. Government receipts were down 9pc in September, compared with the same month last year. So we're at risk of plunging into a "debt trap" – having to borrow to pay the debt service on existing debt, causing the total debt stock to spiral out of control.

A sharp economic downturn is always bad for tax receipts. But with the City in meltdown and the UK now a net oil importer, two big sources of government cash have been hammered, indeed making Britain's public finance "uniquely vulnerable". And that's before interest rates start rising, cranking up debt service costs even more.

Faced with such realities, rather than telling the public straight that we face the peacetime equivalent of "blood, sweat and tears", and that sacrifices must be made, our so-called leaders keep the Keynesian rhetoric going. Behind the scenes, though, even Brown and Co have grasped that yet another "fiscal stimulus" would see a sovereign debt downgrade, in turn provoking a creditors' strike – under which the UK would be rendered "insolvent", unable to roll-over its debts.

So that leaves "quantitative easing" – or QE – the even more extreme policy where the Bank of England creates electronic money from nothing, apparently in a bid to stimulate the economy.

The Bank has already created £175bn of such "funny money" since March – some 99.7pc of which, in a bizarre example of circular financing, has been spent on government securities. So our central bank prints money and gives it to the Government, which in turn gives it to the banks. This is the economics of Zimbabwe and the Weimar Republic.

This QE money is supposed to boost bank lending. But banks have instead stuffed much of it into shares on their own account, creating yet another asset bubble. Banks say they're lending more – and they are in the sense that they're "lending" to their own off-balance sheet vehicles, in a desperate attempt to shore-up disastrous sub-prime positions and avoid the write-downs and bank restructuring desperately needed to purge the system.

Lending to the non-financial sector, meanwhile, remains in negative territory despite QE – with thousands of viable UK firms, employing millions of people, facing closure due to a lack of working capital.

Last week, the Bank announced that QE would carry-on – with another £25bn being "injected" into the economy. But heavy hints were dropped that this is the end.

The Bank had to hint this. The UK's international creditors are getting nervous. Despite the on-going "deflation" propaganda, there is growing concern that Britain's money-printing will cause not only inflation to spike, but a sterling crisis too. Both would be very bad news for anyone holding sterling-denominated government securities that aren't indexed-linked – as is the case with the vast majority of UK gilts that are sold.

This latest dose of QE isn't the end of this age of deeply-damaging policy-making by the British political elite. It isn't even the beginning of the end of this ghastly episode in our history, in which our leaders throw all caution to the wind, ignoring centuries of accumulated wisdom and make a bad situation even worse.

I fear we have reached, merely, the end of the beginning of an extremely difficult period in our history, when living standards plunge, our public finances deteriorate further and enterprise stagnates. And as a UK citizen and taxpayer, I write that with a very heavy heart.


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