Are We Bust?

WEDNESDAY, NOVEMBER 26, 2008

Are We Bust?

He's after your wallet

On Monday, Tyler was so shell-shocked by the afternoon's financial revelations he went down with a nasty dose of something, almost certainly Publicus Debitum Gravis. But after he'd taken to his bed, Mrs T made the mistake of watching a late night horrorshow with Niall Ferguson. In graphic detail, the Prof described how a breed of reptilian replicant humanoids, known as politicos, routinely suck the lifeblood out of their innocent citizens, and if left unchecked will destroy the very fabric of civilization. Mrs T was scared to death.

In case you don't know it, the Argentine debt crisis is a hideous tale of grossly mis-managed public finances leading to ballooning public debt. Debt that spirals way beyond the long-term servicing capacity of the state. Hyperinflation ensues. Governments fall. The currency collapses, credit is cut off, and bartar replaces cash. Nobody wants to hold the national currency and bank accounts are emptied. Then things get really nasty. In 2001, the Argentine government froze/confiscated all bank accounts. Riots in the streets. The economy died. Over 50% of the population sank below the poverty line.

Gulp.

And the Icelandic version of the tale may well turn out even worse - each and every one of Iceland's citizens are now liable for well over £100 grand of public debt, all denominated in foreign currency. There is no credible plan for repaying it, and Iceland's credit is effectively worthless.

Could it happen to us? asked an edgy Mrs T. Because if so, let's get the gold now and bury it in the garden. And buy some shooters.

A good point.

Then yesterday, longtime BOM correspondent HJ sent a link to a US consumer credit blog, which has calculated a startling comparison of indebtedness. Specifically, it has applied a standard consumer credit ratio - the ratio of debt to income - to the whole economy. It has worked out an "effective net worth per citizen", and it finds we are horrifically worse than any other major economy:

Now of course, we economic sophisticates could come up with all manner of arguments as to why the straight difference between external debt and annualincome is totally meaningless. But in today's circs, we can't seem to think what the arguments are, mainly because we're spending most of our time in bed hiding under the duvet.

So what will happen? How on earth are we going to pay down all this debt?

I'll tell you - tax.

Tax, tax, tax, and more tax.

We will be working for the government's creditors. Just like after WW2. A new age of austerity.

And to get a sighting shot on how bad it will be, consider the Chancellor's own forecasts. Despite their ludicrous optimism, it turns out that half of the income growth he reckons we'll get post-2010 will go in tax. Bang. Just like that. He forecasts a c £350m pa increase in money GDP, and an increase in tax of c £175bn pa.

I've instructed Mrs T to stick to Desperate Housewives in future.

Time To Choose The Good Way

Are you sure this is the Good Way?

No blog yesterday - Tyler was too depressed by the BBC/C4 coverage of Monday's horror show.

They seemed to buy the government line pretty well whole: entirely out of the blue, those crazy yanks blew up the world financial system, and with it, the global economy. Brown/Darling have heroically launched a massive fiscal rescue package to reflate the economy and stave off another Depression.

All right thinking people like it. Bishop Snow likes it, and even had Victoryposters of Gordo as Winston Churchill stuck up round the C4 News studio. Will Hutton likes it. Anatole likes it. Everybody likes it.

Except of course, the heartless Tories. And those selfish small traders who've spent the last two days calling radio phone-ins to whine about having to change a few price tickets and pay extra duty on diesel.

Yesterday, the IFS gave us some much more sensible analysis.

We won't dwell on the horror highlighted by their debt and borrowing analysis - BOM readers are only too familiar with that. But one point they make quite clearly is that even the government now recognises its public spending habit is totally unsustainable.

How do we know that?

Because they've been forced to accept spending cuts as the only realistic hope for reining in their massive borrowing.

As we know, the pre-election fiscal "giveway" so praised by Snow et al, isswamped by the fiscal takeaway/bombshell planned for later. According to the IFS, in 2012-13 the planned takeaway will be running at £22.5bn pa, or getting on for £1000 pa per household.

But the interesting thing is that most of that - £18.6bn - will come not from tax increases but from spending cuts (relative to previous plans).

Now, you might think that we'd applaud that, and in broad terms we do - our dire economic outlook means the need for growth stimulating tax cuts is greater than ever. But the way the spending cuts are being lined up is a re-run of every Labour public spending crisis we've ever had.

In particular, the heaviest cuts will fall not on day-to-day activities, but on public investment programmes - the very thing Brown has always slammed the evil Tories for.

As we learned during the Wislon/Callaghan years, in terms of value for taxpayers' money, this road is known as The Bad Way. It comprises successive waves of arbitrary cuts, starting with the easy ones like capital spending, and culminating in across the board percentage haircuts for all spending departments. Rationality goes out the window, public services get whacked, and taxpaying consumers pay the price.

But there is another way. It's called The Good Way, and now is the time to choose it.

The Good Way comprises the grasping of nettles. It comprises breaking up the big public service monopolies and harnessing choice and competition to drive improvement (see many previous blogs).

Why now?

Because right now, we no longer have that oh-so-seductive alternative of simply pumping in more cash. There is no more cash. And as we saw so graphically in the 70s and 80s, The Bad Way with no cash, is no place for anyone.