Friday, 21 June 2013

The Beginning of the End of the UK

Sorry to end the week on such a rum note, but as long-term readers will know the blog rather prides itself on havign predicted both thre credit crunch and the bounce back in 2011. Even the use of QE was discussed months before it happened. Overall the track record is pretty strong, although the last two years have been very hard with the eurozone crisis being politically driven making economic predictions hard.

But now the dark times are to arrive. We have put it off, but the total failure to make austerity work (i.e. to actually do it) means there is no escape...here's why:




Bank of England Implied Inflation Curve

UK nominal forward curves graph
Bank of England Implied Gilts Yield curve


The problem shown above is thus; inflation is expected to rise over the next few years to towards 4% by the markets. In a normal environment this would mean interest rates at 6%. The second grpah shows the yield curve of UK bonds. Again these are expected to rise sharply over the next ten years and very fast over the next five years.

This means that the Government, whatever the Bank of England rate maybe, will have to pay more and more debt interest on its borrowing. And our borrowing are now over £1.1 trillion. Debt interest in the current was a mere £43 billion (for 2012) or 16.% of Government spending.

This year the debt will have gone up 10%, so that cost will be at least £4.3 billion higher. But instead, with the Yield curve increasing, payments will start to increase. Now Britain has a very long-term debt profile, the longest of any country. So a doubling of rates does not double the payments as it would with one's own mortgage. However, it will add 1% or so to bill for each 100 basis point rise as a rule of thumb. So next year, in addition to the extra cost of borrowing due to the debt being higher, we can expect another £5.05 billion to be added to the cost of the debt with a 50 basis point rise which is what is predicted.

That is £9 billion, the 2016 Budget cuts are looking at try to cut £16 billion off the following years spending...We are not in 2016 yet. The cuts in budgets to just pay for the extra debt costs - let alone actually reduce the deficit or the nirvana of the total debt - are going to be impossible.

Then of course we know that private debt int he UK is the highest in the OECD, as is corporate debts due to our large banks and the Government does not allow for the debt commitments like pensions which it pays for out of its own funds.

With private consumption hit by the cost of rising rates and inflation and also by public expenditure cuts, the economic outcome is very gloomy.

Suffice to say, I am very bearish now. We had a chance to recover from 2008 by now and we have blown it. The UK finance don't stack up. The answer will be painful. Over the coming months we will need to explore what the Government will try to do such nationalise pensions, currency restrictions and big tax increases are on the cards as we know from the eurozone crisis. Potentially they could monetise the QE debt or embark on a drastic devaluation of the Pound. 3

26 comments:

Electro-Kevin said...

Thanks CU.

That's my weekend fucked then. (My first off this month)

I suppose I now have a reason to get totally pissed.

DJK said...

Unfortunately, hard not to disagree. But you don't say where govt. spending is out of control and where they refuse to cut. (Ans: pensions and health care for oldies.)

dearieme said...

The point of a Conservative government is largely to undo the bloody stupidities of a Labour one. If they now complain that it's all the fault of the Libdems, that just means that they, the Conservatives, didn't negotiate the right terms for the Coalition anyway.

It seems likely to me that Cameron, Osborn, Hague et al had no idea of the dreadful position we were in. What chumps.

CityUnslicker said...

All,

There are no votes in the truth. The reality in 2010 was the minute GO discussed deficit reduction in full force the Tory lead collapsed to the point at which they fell short.

This was it; no one likes to be told the sweet shop is empty. This is why everye country that falls in our position has a total financil Argentia/Weimar meltdown.


Politicians find telling the truth hurts. So they don't, then when the real world interferes they blame foreigners or say they had no idea it would come to this and act as shocked as the populace.

Graeme said...

Welcome to Athens by the Thames our corruption is done is slightly more subtle in manner.

Though corporate welfare (include the NHS in this category) is easily as much a problem as actual welfare.

The political class are c*nts but they are a symptom of a rotten system and lazy infatilzed people.

Electro-Kevin said...

CU - I would have much appreciated this post six months previously.

As it is my twins have reached 15 and yet are not too big to send up chimneys.

Wifey is still a looker and highly rentable.

I am still in email contact with Beast of Clerkenwell (aka The Real Peter Hitchens). He celebrated his 50th earlier this week (alone) by buying a Vacheron watch and a Gillette razor which (he tells me) he shaved his arse with. Doubtless he will make a good and wealthy lodger lodger.

EK will do OK.

(Well what else is there to do but make light of a dreadful situation ?)

Electro-Kevin said...

PS, Yes. I've started the weekend's imbibing.

BlackRaven said...

the uk may have one of the longest maturity debt profiles, but it also has a huge proportion of that inflation linked something like 25% if i remember correctly, which means that there really is little benefit to the longer maturity at all.

the other thing to note is the trillion pound public sector pension liability is also inflation linked, as clearly the care costs for baby boomers.

andrew said...

Nationalise pensions - I think you will find ECHR will not allow that.

Currency restrictions - I think you will find the City will not allow that

Big tax increases - Possibly

Drastic devaluation of the Pound - we have previous on this, so likely

Cancellation of Trident... possible

The one I think might happen is a dismantling of the NHS. Replaced by private insurance - backed arrangements that are up to you.

- Stealth tax increase if you do get the ins, because tax wont fall
- Stealth reduction in Pension Liability if you dont because you will die sooner.
- Of course all to stop the Eastern Europeans from getting free care.

The other problem is - where do you go - most of western Europe is not in a much better state.

Australia?

Nick Drew said...

what with HG's tales of the decline & fall of Italy ... how very depressing

perhaps we should all apply for the International Space Station

CityUnslicker said...

Andrew you do not have to go very far back, only to the 1980's for currency restrictions.

In a dark moment the desperate politico's will ignore the ECHR..in Argentina even the international banks conspired to help the Government rob the people.

CityUnslicker said...

Andrew you do not have to go very far back, only to the 1980's for currency restrictions.

In a dark moment the desperate politico's will ignore the ECHR..in Argentina even the international banks conspired to help the Government rob the people.

Lord Blagger said...

Ans: pensions and health care for oldies.

===========

Disagree and agree.

1. What would a 26K a year worker have had in a fund, if their NI had been invested? Answer 627K

2. What does the state pension cost? Answer 152K

3. The difference? 475K. That's the loss to a 26K a year worker.

So I disagree

4. What's the state debt for pensions? 5,010 bn 2 years ago

5. Rate of increase? 734 bn a year

6. Current spending 722 bn

7. Current taxes? 600 bn.

Yep, I agree. Spending is too much

Just shows what the state will do to screw people.

Andrew.

Nationalise pensions? Legal now, see Cyprus for how to steal the money

Revaluation? How does that work when all other countries are doing the same.

Tax increases? Screws the economy. That's why austerity isn't working. It's all tax, nowt about spending.

Now for Cityslicker.

Where's the problem with private debt? Its pretty much all covered by properties. The number of people in negative equity is small.

Unlike the government. It has to hide pensions off the books so people don't find out.

It's problem is Gilts. No one has been lending too them. QE has all gone on Gilts. They only keep going by lending to themselves.

Monetise the debt? Yep. Write it off.

It's dire. However don't underestimate how bad other countries are too







Anonymous said...

Just pull the plug on pensions. If you expect a pension at least have enough kids to pay for it.

It's really a case of let the baby boomers reap what they sowed or go the way of Japan.

Yet they call the millennials the "selfish generation"...

Anonymous said...

State appropriation of private capital is the only option now.

It'll start slowly, 'mansion tax' for Londoners, 'bail-in' of PIBS etc.

But by 2050 all immobile private assets will be been thrown into the black-hole of Ponzi welfarism.

Graeme said...

have any fake charities complained about cuts? I thought not.

DJK said...

> Nationalise pensions.

Please note that it's already started to happen, when Osborne seized the assets of the Royal Mail pension fund in return for a promise that future governments would see the postmen all right. Expect the assets of the other public sector pension funds (teachers, universities, NHS, etc) to be next in line. Private sector pensions will probably be the last to be seized.

Happy weekend!

Anonymous said...

"to do such nationalise pensions, "

Yep, this is the one that caught my eye.

Laban said...

"or go the way of Japan"

Japan still makes things and is still full of Japanese. Dire fiscal position, but I'd still rather be in their situation than ours.

If we had an earthquake/tsunami type tragedy we'd see rioting and looting.

PS - time lo load up on EMED?

Budgie said...

I agree with many of the comments and CU's post - it appeals to the inner pessimist. I have often said that Camerborne is so completely useless that we will end up begging to be let into the euro - it surely looks like the plan is coming together now.

The alternative is politically unthinkable at the moment, but should have been put into effect in 2009. It must include: sell off the BBC as pay-to-view; amalgamate track and trains and sell off, no subsidies; cancel HS2; close DfID; exit the EU; shut down many Quangos; no subsidies to unreliable Wind and Solar; no imposition of the CAGW agenda; imposition of Glass-Steagall here.

Then the real hard work of going through government departments, looking at what is actually being done, then adjusting legislation so that we get the most bang for our buck. This is very difficult but really necessary.

I have personal experience of working for a business supplying to government. The government customer's sheer incompetence, the imposition of absolute, petty rules which change arbitrarily, the money sloshing around, the political correctness, and the pantomime of in house political jockeying was worse than anything I had previously imagined - and I was never a fan of government. There is lots to cut before the main services are affected (NHS, pensions and welfare).

Electro-Kevin said...

@ Laban - All the UK needs to cause rioting up and down the nation is a couple of weeks of fine summer weather and the police shoot an armed gangster.

assurance auto said...

great said ... it is very good to read that """ Sorry to end the week on such a rum note, but as long-term readers will know the blog rather prides itself on havign predicted both thre credit crunch and the bounce back in 2011. Even the use of QE was discussed months before it happened. Overall the track record is pretty strong, although the last two years have been very hard with the eurozone crisis being politically driven making economic predictions hard.
""

web maroc said...

really this is very interesting for us ....""Suffice to say, I am very bearish now. We had a chance to recover from 2008 by now and we have blown it. The UK finance don't stack up. The answer will be painful. Over the coming months we will need to explore what the Government will try to do such nationalise pensions, currency restrictions and big tax increases are on the cards as we know from the eurozone crisis. Potentially they could monetise the QE debt or embark on a drastic devaluation of the Pound. 3 ""

cours informatique said...

i agree with the person who says that "" Nationalise pensions - I think you will find ECHR will not allow that.

Currency restrictions - I think you will find the City will not allow that

Big tax increases - Possibly

Drastic devaluation of the Pound - we have previous on this, so likely

Cancellation of Trident... possible

The one I think might happen is a dismantling of the NHS. Replaced by private insurance - backed arrangements that are up to you.

- Stealth tax increase if you do get the ins, because tax wont fall
- Stealth reduction in Pension Liability if you dont because you will die sooner.
- Of course all to stop the Eastern Europeans from getting free care.

The other problem is - where do you go - most of western Europe is not in a much better state.""

creation site web said...

right ,,,,,,,,,, this is one of the great and very interesting articles that i read .......... i find it useful and perfect because it can solve so many issues that happen to us...... when i read it i get the message and i know the key way that will provide me with good solution ..... so thanks so much for this article is very great ...... and very interesting ..... to share it with us is like a honor from you ........thanks a lot ...

Agence communication said...

yes this is true "" The problem shown above is thus; inflation is expected to rise over the next few years to towards 4% by the markets. In a normal environment this would mean interest rates at 6%. The second grpah shows the yield curve of UK bonds. Again these are expected to rise sharply over the next ten years and very fast over the next five years.""