Plans to save Britain from recession could end up capsizing the economy, says Philip Delves Broughton
How quickly could the United Kingdom go bankrupt? Given the speed at which countries and companies have been brought to their knees in recent months, it is no longer hard to envision a scenario in which foreign investors become spooked by the UK's soaring debts and flee.
The hot money, which has propped up the UK economy for the past decade, will seek safety in Switzerland, Japan and the Middle East. And within days, Regent Street will look like downtown Reykjavik.
The bankruptcy scenario goes like this. British output is already falling, and tax revenues along with it. But the government is not merely holding spending steady, but actually increasing it to fund tax cuts and bank bail-outs.
Suddenly the prospect of a £1tr national debt does not seem so distant
This year the government is expected to borrow at least £70bn to add to the £640bn it already owes its creditors. Throw in the hundreds of billions it has made available in credit to banks, and suddenly the prospect of a £1tr national debt does not seem so distant.
Now, if you were a lender looking at the United Kingdom's credit application, how would you feel? Here is a client who spends around 10 per cent more than he earns every year. His income is now set to fall, while his expenses will rise as he has to support ailing family members and pay a mortgage about to reset to a higher interest rate.
He acquired his main asset, his house, with a 95 per cent mortgage and the house has just fallen 15 per cent in value. The client advises that he is going to solve this blip in his personal finances by running up every available line of credit he can and spending. He is already awash in consumer debt and has the lowest savings rate among his neighbours.
Are you ready to lend? Or more inclined to run screaming from the room?
Meanwhile, every other lender around is running around with his hair on fire, not lending to anyone. And the client is also asking to borrow money in a fast-depreciating currency, so the value of his repayments, if you are a foreign investor, is set to fall. Are you ready to lend? Or more inclined to run screaming from the room?
Evidence that investors are doing the latter can be found in the market for UK gilts, which the Bank of England has been issuing 
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Long-term gilts are NOT at 30-year lows. Yields on them are. The yield is, roughly, the total return from capital gains and interest divided by the price and can be thought of simply as being the interest rate for the period in question. It is yields on 30-year gilts that are at record lows, which is equivalent to saying that their prices (more strictly the price of a gilt with a coupon interest rate close to the yield on it) are at record highs.
Posted by John Presland at 2:09pm on November 25, 2008
I don't know if you read john Redwood's blog? this idea has been current on there for some time now. I do not think the government is going to take public spending in hand myself and I am expecting a sudden, unexpected collapse - especially if Labour gets re elected.
Posted by prziloczek at 7:11pm on November 25, 2008
Pure Torygraph twaddle.
Posted by Fred Smith at 3:56pm on December 10, 2008
Capitalism will eat itself seems to be coming true.
Posted by Peter Simmons at 10:10am on December 16, 2008