Thursday, 25 June 2009

When will the IMF ask for the keys to the Treasury?

You might think this is an incendiary headline, but really it only reflects the growing consensus among neutral observers of the UK's fiscal position.

Even Guido is reporting what Mervyn King said yesterday to the House of Commons Select Committee. Effectively, the UK is on an unsustainable spending spree. Worse, it was on one before the crisis started.

The OECD predicts the UK will have the worst fiscal deficit next year in the Western world, worse that Iceland and Ireland. Iceland has already been bailed out by the IMF and Ireland by the EU (under the radar). yet the UK is worse set to spend more.
Mervyn suggests that printing money and huge guilt sales are being accepted by the markets now as the price of avoiding total financial meltdown. but the time will come soon when they demand an end by forcing up interest rates.

The major ratings agencies too have the UK on watch for downgrade, which really seems inevitable and will push our debt burden up further.

All eyes are actually on the election next year. Outside observers expect the Tories to win and implement massive spending cuts. Only this will avoid an IMF bailout (unless there is some huge recovery turn around in the meantime, which is unlikely to say the least).

If Labour are re-elected then the IMF will storm the treasury immediately, via a collapse in the Gilts bond market - this is nailed on now with Gordon Brown going on about spending ever more money in a make-believe utopian socialist fantasy.

The reality is now that the 'money' being 'spent' now is mainly printed:

Extra Government debt estimated to be taken on this year - £170 billion
Money to be printed by the Bank of England - £150 billion

What a mess.

I think the saddest thing, is just like personal debt, everything can seem fine until the end, when the bailiff's come round and you lose your house and all your possessions. Until then the mirage can be maintained. I think this macro level shock it is going to come as a big surprise in 2010 to most people in the UK.


Old BE said...

Excellent post. As I have said, I think the mood of the country is changing. I think voters are sensible enough to realise that they should have left the party a while ago and that the hangover is going to be pretty nasty.

The Tories can win the election by being up-front about how much they are going to cut and how they can mitigate the reduction in public services. If they are credible and appear honest then they will be onto a winner. Surely nobody believes Brown's assertions that public spending can go on rising forever?

Tom Paine said...

Is "guilt sales" a Freudian slip or just a typo? Excellent post. Needed saying.

Tuscan Tony said...

Great post. I'm even more a bear of Sterling at the moment.

Anonymous said...

A situation I envisaged some time ago.

Should be shouted loud by all MSM.

In the US, I am reading of quiet instructions to US embassies to purchase enough of whatever their local currency is, to last "normal operations" anywhere between 6 and 12 months.
Massive amounts of $ are being dispatched to them for these purchases, which should be "quiet".

Timescale for a "bank holiday", - anywhere between 90 days and 180 days.

The only restriction is that they don't purchase the £.

Add in the IMF, OECD recent words, and Mervs words to the select committee, and you start to get nervous.

I had anticipated the devaluation of the £ and the $ to be slow and controlled, as it would aid S E Asia divestment of $ and £, so some "event" is being considered as a trigger. It could be international sanctions by bond vigilantes, or the BIS or IMF as you suggest.

Really, I have no notion of what the "event" could be, but also, there is Iran, Afghanistan and Pakistan-with-nukes, or a miscalculation by Israel, or North Korea, or it could be foney and fraudi rearing up again. It could also be legal action against any or all of the oligarchs, or Fed, or Treasury officials.

I can see a domino effect from the US affecting the UK, but not the reverse!

Interesting times.

Protect yourselves.

CityUnslicker said...

@ Tom P. - i do slip in a guilt - after all it is not their money they are spending - it should feel guilty!

Anonymous said...

A serious bout of inflation is rarely caused by normal business activity, such as commercial bank lending and private debt.

In almost every case that I have studied, a very serious monetary inflation is triggered by excessive government debt obligations,- and not private debt, - that can no longer be adequately serviced by a productive real economy and domestic taxation.

That unserviceable debt becomes 'monetized' and a serious inflation results. It is a form of debt default.

Devaluation of a currency is a form of inflation which specifically addresses external debt obligations, as well as default on bonds which is a form of selective national bankruptcy.

The reason that the output gap is no barrier to this type of inflation is that it actually feeds it, since it dampens tax revenues and domestic GDP.

But the notion that banks must always lend to create inflation, or employment must be at robust levels, absolutely flies in the face of all historical experience.

Hyper inflation is always a currency event.

Michael fowke said...

Gordon Brown is either evil or mentally ill. Actually, maybe a combination of the two.

Anonymous said...

What is Brown's problem?
Is it the damaged eye that prevents him seeing the situation?
Or is it a mental problem?

Unknown said...

Is an IMF bailout ever going to be necessary no matter how bad our financial position?

While it's not good finances, I could imagine the government could sell off ever larger amounts of gilts as they are guaranteed by the inhabitants and future inhabitants of the UK. It might mean we are all paying 50% tax and receiving little in the way of public services but that would not matter to the international bond dealer who simply receives their yearly coupon safe in the knowledge that his money is guaranteed by the output of 60m people.

Michael Fowke said...


Are you nuts? If we all have to pay 50 per cent tax with little public services, there will be blood on the streets. UK people are very passive, but not that passive.

Anonymous said...

A gentleman who staged a lone protest on May 18th in Parliament square, will have another one on Monday the 29th from 11.AM. This time he will not be alone but we need as many people as possible to tell Brown that enough is enough.

Please come and join. Tell all your like-minded friend and acquaintances. Bring you own banner.

We also need media exposure so, call/write to the national and local press. Also call your local radio.

It’s time to take action.

Judy said...

Anonymous said... at 12.01. A situation I envisaged some time ago.

CU says in main post:Iceland has already been bailed out by the IMF and Ireland by the EU (under the radar).

A devaluation of sterling now for Ireland would make the even 1000% more shit than it is now.

EU Treaty???? Will the second run work, run, work make sense?

CityUnslicker said...

Irina - given the huge QE a further devaluation is inevitable; the only question is by how much.

i think the EU has twigged this and has now started its own QE big time yesterday. It is a race to the bottom that no one can win.

All you can say is the US and Uk decided to do it first and got their retaliation in early.

Anonymous said...

If you want a preview of a potential outcome, look at California. Despite repeated warnings that the budget hole had to be fixed by 15 June in order to avoid running out of money, and enable a bond sale with a possibility of success, the Ca legislature has done nothing. Ca is now 1WEEK away from paying with IOUs. Imagine what kind of social unrest will occur, since there is not at present any real plausible date when this will get resolved.

California is like a car on fire heading for a sheer cliff with the driver keeping his foot on the accelerator pedal. This will end in a firery crash.

Anonymous said...

Well, my children may be doomed to a future of financial serfdom, war and doom but at least they are safe from Micheal Jackson!

Barry said...

Governments throughout the world seem to have lost the plot entirely. Most wnat to spend and spend while at the same time copnstructing some ludicrous fantasy about remoulding the economy so we can reduce burning those fuels that produce our power. Frankly Britain, followed by the US and the rest of Europe are now dominated by idiots who masquerade as leaders. I also have concluded that only the whole thing collapsing will wake the ordinary from their self indulgent lethargy.

eda said...