Thursday, 8 January 2009

Brown to be bonded for eternity


The Excellent Neil Hume has this over at FT Alphaville. Basically, as we go through this 'rally' (still likely to be bear market, but we'll see) in shares, Bonds become less of a good thing.

Last year, when share prices crashed, people bought bonds. Mainly US ones, but all bonds. Despite them having no yield (i.e. effectively cash) at all. This was very handy for high spending governments that had lost control of their public finances. This includes most of the Western World.

However, it has become obvious that this move in and of itself has been a bubble. All the hot money in the world moves very quickly these days. First half of last year was oil and commodities, then bonds..what next? Previously it was US mortgages and Private Equity. Maybe Shares will get a rally one the back of this move this year.

Anyway, back to the main point. Bonds are not going to be so attractive in 2009. Even Guido is shorting gilts. How Brown and darling must have quivered when even Germany, fiscally responsible Germany, could not get 32% of its latest bond issuance away.

Brown and Darling will have to borrow up to £180 billion this year. Adding a couple of percentage points of interest as a sweetener will decimate UK public finances for a decade.

I don't see anyway out of this trap. He had better call an election before everyone figures out we have a national 'together' mortgage.

32 comments:

Redfern said...

Love the picture. Stalin comforting Sergei Kirov.

AntiCitizenOne said...

180 Billion, rather than million

Nick Drew said...

thanks ACO, corrected

A Met Office warning said...

There is a deep depression heading from the west...

Anonymous said...

"I don't see anyway out of this trap."

They could cut public spending, thus reduce their need for financing.

Blue Eyes said...

Quite, anon. But Darling is intent on utterly destroying the economy by printing money. It worked so well in Weimar Germany and Mugabe's Zimbabwe, why shouldn't it work here?

Richard Elliot said...

Scary, scary stuff. We are going to be stuck paying off this debt for generations...

Anonymous said...

Inevitable really. And if Germany can't shift its Euro-denominated bonds from a supposedly "prudent" standpoint who the hell would buy UK gilts denominated in £? My guess is that even with higher interest rates attached the falling £ will see to it that the UK government will not be able to shift its gilts.

Which will leave the options of the government as follows:-

reign in public spending by 25%+ right at the start of a recession.

printing money.

Maybe they could come up with something clever, like issuing Eurobonds to take the currency risk on themselves, but investors are likely to plump for the real thing. Basically the government is utterly f*cked.

Houdini said...

Private Equity...hmmm, is that the next big crash for the first half of 2009?

Sebastian Weetabix said...

I doubt if the snotgobbler is quivering at all, cocooned as he is in his own deluded self-regarded. He's just going to print money anyway.

Sebastian Weetabix said...

self-regarded?? itchy trigger finger there

Tuscan Tony said...

Safest place for the country to have the PM is in a secure hospital, under heavy sedation, with various wires and tubes snaking to and from his body, thereby ensuring there's no reason to distrurb him.

Mark Wadsworth said...

A lot of people have written about a potential bond bubble, and in the same article mention the recent under-suscription for German Bunds (there was a similar story involving Spain recently).

Surely, these governments, in particular the UK are going to have to increase interest rates, or accept below-par subscriptions, same thing. The more they print money, the less people trust them and hence the higher the interest rate.

So any bubble is either already over or will be shortlived, like the oil bubble, or you can argue we are headed for a bond market crash, like in the USA in 1994 (give or take a year).

And somebody else had a good question, why is there a price for CDS on UK government bonds? The government can always print more money to repay them, so a nominal default is nigh impossible.

diogenes said...

But we have been here before. Charles Goodhart is best known for his "law"but, if my memory is correct, it was he who wrote a note headed "The Doomsday Scenario" that the Governor of the day used to persuade Healey back from the airport to go cap in hand to the IMF. It contained the memorable remark, " it would be politically unconscionable for a Labour Government to tax the working classes to pay interest to the rentiers."

But that is what is going to happen again.

And we have not yet seen the full cost of the next, inevitable, re-capitalisation of the banks, starting, but not finishing with RBS.

CityUnslicker said...

Thanks for all your comments. I wrote I can see no way out. I can't we do not have the money for the 'bailout' nor do we have the political will to cut costs.

In this scenario it will take an outside force to impose it upon us.

That will be either the bonds markets or the IMF.

Who this it will be the former or the latter?

mick said...

I expect it will be the IMF.

Brown is in total denial, so when the bond issues fail he will resort to more chicanery until the IMF finally pull the plug.

Steven_L said...

I'm tempted to get all my money out the bank, hop over the channel and spend it all on fags and vodka.

Bill Quango MP said...

Fags and Vodka is an excellent idea.
You must smoke only 19 of you pack of 20 and drink only 3/4 of your Vodka.Soak off the Vodka label and keep the fag packet.

That way you have the fag packet to make a wick for your Molotov, a final cigarette and you can use the soaked-off label to draw up a "People to Flame" list.

electro-kevin said...
This comment has been removed by the author.
electro-kevin said...

"In this scenario it will take an outside force to impose it upon us."

Well said, CU.

I'm inclined to want Nu Lab to stay in office. The wheel is going to come off big time and I want them left holding the big, ugly baby when it does. The people who listen to the news as background noise will blame the incoming Tories and the Nu Lab propaganda machine will spin it as such - spin is ALL that they are effective at and this could get them off the hook.

Throw them out later - by force if necessary. Then sort out the BBC.

This is not simply an economic implosion. It is a collapse of a nation deliberately undermined by a traiterous government.

Anonymous said...

Labour always leave power with more unemployed than when they gain power.A fact of life.

They have reached their target already.

Wake up folks!!

Anonymous said...

"Brown to be bonded for eternity"

Yup, - to a pair of heavy concrete boots, planted in dozens of fathoms, near a major North Sea oil rig, - "for eternity".

Anonymous said...

Electro, -

"It is a collapse of a nation deliberately undermined by a traitorous government."

You are getting there. :)

Letters From A Tory said...

I'm fairly certain that UK public finances will be decimated for a decade regardless of what Brown does next.

That said, he could still make things A LOT worse.

Blue Eyes said...

Without getting all Daily Mail I have to agree with EK. The economy is actually just the latest of the "institutions" that Labour have managed to destroy. Blair/Brown's genius was not to fiddle too much with it in the early years so that people wouldn't notice what they were doing elsewhere. I am beginning to think that perhaps a major, major crisis is the best way to set ourselves onto a course back to a sensible way of thinking. The total destruction of the economy might wake people up a bit.

mr popodopolous said...

Can't we just default our foreign debt? Who do we borrow off anyway?

AntiCitizenOne said...

> mr popodopolous

It's not like we import 50% of our food or ever need to trade or borrow abroad.

Anonymous said...

Blair didn't have any genius. He was just a grinning cypher for the Brown/Mandelson/Cambell conspiracy.

Notice how these three, who previously claimed to detest each other, are now all together again under the same roof.

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