The perfect storm

Yam Yam

Let's give this utter and unprecedented financial quagmire a name, shall we. How about 'Brownism'.

Chris lancashire

In the words of the execrable Balls, "So what?"
These facts are well known, however, until it has some impact on the man in the street they remain merely fairly abstruse. It will be the task of the Conservatives to convince voters of:
1. Who got us here.
2. What it means.

The only way it will impact at a personal level is in either increased personal taxes, reduced benefits or a massive devaluation.
Brown, pre-election, has no intention of seriously increasing personal taxes, benefits are a sacred cow (viz. childcare vouchers) and devaluation will not happen until and unless the Tories fail to win the election.

All in all therefore, the Conservatives still have an uphill task on this before the election.

jon dee

Weve been dropped in the Brown stuff.

The Puppet Master

There's only two possibilities; inflation or default. Choose your poison.

Cjamesk

Were all serfs in a bigger game.

H Johnston

"There's only two possibilities; inflation or default. Choose your poison."

Add emigration to that list...

chris as usual

This is where I come from. rather than prolonging the agony, we should bring it on so that we can sooner recover from it.

This means a shock reduction in living standards (like the Irish, who I understand are taking 20% pay cuts in some instances), with the accompanying slump in consumer spending, clearly explained by the politicians (who will need to set an example and end all hypocrisy on their part). Our businesses should become more competitive, so that those who are spending (particularly our overseas customers) will find our products attractive. Eventually the tax take will begin to recover, followed finally by personal wealth.

If we simply can't do this, since we are entirely dependent on spending money we (both us and the state) don't have. then God help us.

It seems obvious to me that if we keep up the existing policy we will see raging inflation and increasing interest rates - as you say, the perfect storm.

I await the reaction from the experts.

Bob Dixon

We need to create wealth so as to tax the profits.
However we seem to be looking at increasing tax now. Growth will be slow.

Reduce tax now & growth will be rapid.

I have seen nothing from the government or the opposition that this is their 1st option.

So hang onto your seats. We will go for raging inflation.

Ian C

This is the first column that I have seen where an economic commentators
distinguishes between an economy that is mired in debt across both private and public sectors and those that just have high public debt. Even (espsecially?!!) the much esteemed Samuel Brittan has decided that the gov't should not worry about its debt level at this time.

As the Americans say, 'do the math'. If a hypothetical economy has nominal GDP growing at 5%pa (we should be so lucky) and it has £1 trn of debt and a £1 trn GDP, then it will be using all of its growth, should it return at that level, just to fund the interest.

That this is broadly the calculation that apply to the British economy seems to pass by those who suggest that no cuts must be made yet. We're already trying to walk in treacle. It is only the prolonged sense of crisis that is preventing the economic and political 'elite' from taking the blinkers off their eyes.

oldtimer

Thank you for posting those revealing charts - worth a thousand words.

No doubt inflation, once again, will have a part to play but it will be us, the locals, who will take the sucker punch in reduced services, reduced benefits, higher prices and devalued assets.

This time around the potential foreign investors in gilts have long since seen that sucker punch coming and ducked early. No such chance for locals who have little choice but to stick around and take the punishment.

The idea that the pain can be put off for a year or two is for the birds. Either the next government will have to get a grip and fast - or the IMF will come calling and impose their solution.

greenslime3

There are at least three significant errors in this argument.

1. interest rates are unlikely to rise to the cycle average of 5% because the duration of government debt post-banking crises falls sharply, as indeed it is already doing across the developed world. UK 1-year gilt bill yields are 0.73%. New debt may double, rising by £600bn odd, but if this new debt is financed over the short term (via the banks) it will cost £4.2bn in additional interest costs (not £65bn)

2. government borrowings do not “need to be printed or borrowed from abroad” when household savings are low. Firstly the savings rate is now rebounding, so the household sector will lend to government (especially since government debt increases are required specifically because the household sector is paying down debt). Allied to this, post-bank crises banks lend to government – a lot.

3. UK average earnings are not £23k a year as claimed

Mark Bathgate

Greenslime - regarding your points:-

1. This is correct. The best case scenario for the economy is where inflation stays low for a long time, allowing debt service costs to remain low. I am not sure the huge attempt by the Bank of England. The scenario this happens in is important though - if it's the UK growing into excess capacity with a healthy recovery that's very good news. If it's a Japan scenario where inflation is low due to economic stagnation that would likely see the deficit push ever higher. The risk of funding debt very short term also is that if a strong recovery does come through, the rollover costs will pick up very quickly. 10yr Gilts today yield 3.8% which would be a more appropriate proxy for current debt costs to use.

2. This again is true, but do the maths on how much UK households would need to raise savings by to provide the Governments financing needs next year. To raise savings by 200bn, consumer spending - roughly 800billion per year would need to fall by 25% (unless wages take off). There is a real paradox of thrift risk here, where as fast as people save, the net debt increases due to ever slower growth.

3. Fair point. The Office of National Statistics estimates average weekly pay is £489 per week - so a bit above £25k per annum. See link - http://www.statistics.gov.uk/cci/nugget.asp?id=285. Average debt remains significantly above annual pre-tax income, not to mention post-tax.

chris as usual

@Greenslime3 / Mark Bathgate

I think you are talking about Median salaries.

Overall £25,500 per annum
Public sector £28,000
Private sector £24,000

TGF UKIP

Many thanks for these brilliantly illustrated posts, Mark Bathgate, and please keep them coming - all very valuable tools to beat the Left over the head with.

What a pity though for the Tories that Dave can't/doesn't do figures and nobody takes a blind bit of notice of Boy George.

Steve L

As far as household debt is concerned, I think the credit card companies have a huge role to play.

As the risk of bad debt increases, they are raising interest rates (a competitive rate right now is 17%+, and the most punative is around 34%). The only thing this will do is make life harder for those with such debts, and flush out more defaults. It's a trap that many people are in, and it will do for lots of them.

The ripple into bankruptcy, property reposession etc will be horrible.

I think some regulation or other control should be seriously considered, or there could be a tipping point.

2trueblue

If inflation remains low then your debt may be cheaper to service but in real terms it grows. Some inflation erodes your debt.

Chris as usual.
Not sure I want to wait for the experts, they were not much use when the components of this storm were being rolled out.

As very few people saw this storm coming I don't trust them to come up with perfect solutions. So far we have no real figures what each country still owes so just hope for the best. Its the best we will get!

Stan the Friar

oh my God........

Moraymint

" ... a very material decline in living standards" is virtually inevitable. The longer that we (citizens and politicians alike) refuse to plan properly for the orderly management of this shift, the riskier the outlook for our society.

Geoff Miller

Perhaps we should all vote Labour next year.

It would be immense fun to see how they dealt with this mess. How they justified the education, welfare and NHS cuts. How they explain away the mass unemployment whilst, at the same time allowing millions more to migrate.

Or perhaps they would have to stop migration, expel a million illegals, get tough on bogus asylum seekers (about 90% of the total).

What about Islamic terrorism - seeing how they handle more attacks would be amusing. How they justify continuing multiculturalism and relativism.

The best punishment we could give Labour is another term.

But, I should say, I write this from the comparative safety of France.

Geoff Miller

A decade of buying Chinese tat and expensive petrol, and borrowing the money for it from the Chinese and the Arabs has dramatically weakened the West.

The next decade or two will be deeply unpleasant. The balance of power will shift and life in the west will drastically deteriorate.

It will echo the fall of Rome - the parallels are startling.

Roger Davies

If Brown wins the next GE or even if there is a hung Parliament there will be a run on the £Sterkling. If the incoming Gov. does not promise a substantial reduction in Public Spending we will lose our AAA rating and borrowing will become more expensive. If Brown is returned as PM then I expect to see the IMF in Downing Street within months. Nobody will believe that the architect of much of our economic disaster is the right man to deliver the cure. The City has already factored in a new Tory Gov. and if that is not the case the money will take flight.
Keep a close eye on GE forecasts and if Labour look likely go liquid and buy Swiss Franks.

Mr. Green

I IMd these graphs to a colleague and his response was :
"Jesus"

Sums it up nicely, I think.

Verity

Geoff Miller notes that “borrowing the money for it from the Chinese and the Arabs has dramatically weakened the West.” That is true.

I’m not worried about the Chinese. Their expansions, including in Africa, are all about money – not religious aggression. They’re pragmatists, and we can do business with pragmatists.

The Arabs, who have never done anything in the history of time except sit around in the desert gazing at the moon, making up picky rules whose breach carries the death penalty and only getting out of the tent to make religious assaults on advanced Europe in the name of their picky diety, owe their wealth not to their own efforts but to the West. We invented the internal combustion engine, we invented oil exploration techniques, we invented extraction of oil, we invented the refining of oil.

That they are now lending us money is shameful. (Do they charge interest, by the way, despite this being one of Allah’s many no-nos? Or, in the way of the souk, do they charge us interest and simply call it something else? A “service fee”, for example?)

The only prominent politician in the Western world who has grasped the enormity of this is Sarah Palin and I, along with Mark Steyn - shamefully persona non grata in these parts - devoutly wish to see her elected to the White House in 2012. One of her most important priorities is skiting away from dependence on Arab oil. She has proved this by her deeds, not her words. She’s a realist.

Obama, with his loyalties to the Islamic world (whether he is an official Muslim or not, his early, formative years were spent in an Islamic family being imbued with Islamic values), and his lack of intellectual depth, has America rudderless and drifting further down the road of decline. He came from nowhere, with no record of achievement or principles. He’s all hat and no cattle.

Sarah Palin is a natural leader and, like Maggie Thatcher, she has her head screwed on.

Charles Babbage

I can't remember people being forced into buying new cars, going on holidays etc and paying for it by borrowing against the rising value of their house. People have themselves to blame. But of course, no political party would promote saving up for things, living within your means and above all, not see a home as a cash machine.

Nick

So the government doesn't owe anyone a pension? State, state second, state employee pensions aren't going to be paid.

When will journalists get it into their heads that government debts are not just government bond borrowing?

Nick

PS this doesn't apply if you've been told they are going to default on all the pensions

Johnson

the UK's debts is not that huge. Look at this,

https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html

Germany and France is much worse.