Sodium Haze: No way out of UK debt trap say brokers.

Thursday, 9 June 2011

No way out of UK debt trap say brokers.

The wise folks at [Positive Money] are digesting a report from city brokers Tullet Prebon that makes for pretty sobering reading – you can read the report here, but for your convenience, The Haze has been digesting it as well.

The main point made by the report is that the UK government is probably deluding itself when it imagines that it can solve the UK debt problem by relying on increasing growth – they think short-term growth is unlikely for a number of reasons:

1.   Government and private spending over the last ten years has been funded by an increased element of debt.

2.   Increased spending has not led to a sustainable growth in the economy – in fact the relationship between debt money spent and growth achieved has been poor.

3.   Government spending has not been on ‘self-liquidating’ (stuff that pays for itself) projects  but on more healthcare, education and defence (stuff that just costs)

4.   Private spending of debt money has been on Mortgages and consumerism – stuff like TV’s, cars, holidays and iphones just cost money and ‘investment’ in property now increasingly looks like a big ponzi scheme with the full downside yet to emerge.

TB says that the prospects for 58% of the economy are poor because they have been built on public and private spending of debt money. Indeed private debt is forecast to rise to £2.1 trillion by 2015.

As private individuals are now unwilling to take on any more debt and the government is trying to reduce its annual budgetary deficit – the money will simply not be available to grow large sectors of the economy (financial services, construction, real estate, public services) and so overall growth of the economy is unlikely.

TP bemoan the lack of investment in manufacturing (making stuff) and warn that there may be no solution to the UK debt problem. They warn that incremental borrowing has put Britain into a high-debt, low-growth trap.

The collapse in private borrowing (particularly mortgages to buy houses) will inevitably depress real estate, construction and the financial sector.  

Health / Education and public administration and defence are as they put it ‘ex-growth’ as public spending is being cut across the board. Together, these six sectors account for 58% of the economy, which makes the delivery of aggregate growth very difficult, and perhaps impossible.

They conclude that since the coalition government’s strategy to clear the UK debt problem relies on at least moderate growth – then it is likely that it simply can’t work.

They say that real incomes are declining as bills for food, fuel and utilities increase and that interest rate rises seem inevitable, either for policy (inflation) reasons or because of bond market jitters.

A failure of the government’s plan to tackle UK Debt would put sterling under severe pressure, exacerbate inflationary pressures and compound the misgivings of international investors holding British debt – (the Haze notes that this may lead to a downgrade in credit worthiness from the ratings agencies and a subsequent increase in the cost of servicing UK debt – perhaps prompting a debt spiral that would look similar to the ones in Portugal and Greece.)

TP are about to write a report on the premise that both sides of the debt reduction debate are right but that neither potential government solution – ie spend your way out or cut your way out – can work.

As they say it is imperative to understand why this is so, and to look at ‘whether there are any radical solutions which might prevent catastrophe’

The Haze opinion:

Anyone reading the Tullet Prebon document that comes to end of it without concluding that we need radical global monetary reform is either stupid or insane.

Our global money supply is created as private interest bearing debt - so default is inevitable for someone. Banks create the capital of loans into the money supply but not the interest, so default, instability and crisis are built in to the system.

The fact that the UK in recent years has spent too much debt money on consumerism and public services and not enough on its potential to generate income is undeniably true – but the wider picture must be examined.

As 97% of the UK money supply has been loaned into existence by private banks it is THEY who have set the agenda for spending in this country.

Banks will lend money into situations that promise the quickest short-term profit – and in recent years, that has meant mortgages, credit cards, personal loans and equity releases – loans for the manufacturing sector have been far less attractive.

The C4 programme Despatches commissioned its own research into bank lending in 2010 as part of its ‘How the banks won’ programme – their researchers found that in the decade before the 2008 crash just 21% of UK bank lending was for productive industries – and 74% was for residential and commercial mortgages – so its small wonder we have a property bubble and an inadequate manufacturing base.

One must also remember that the global system of money supply is a closed loop – and that when money is created as debt, a credit for (a)  is only possible if (b) is in debt – our aggregate indebtedness is inevitable and the overall global burden of debt increases every year.

Tullet Prebon reckon there may be no way out of the current UK fiscal predicament.  The Haze agrees – in the bust phase of the ‘boom n bust’ inherent to Fractional Reserve Banking, there really are no solutions - so what of the ‘radical solutions which might prevent catastrophe’ that TP are seeking...

...well here’s an idea – TP should get themselves over to the Positive Money website and learn about Monetary Reform pronto.

 The only way we will solve this debt disaster is to return to 100% reserve requirements for banks - and for money to be spent into the economy by a duly elected government WITHOUT INTEREST rather than loaned into existence by private banks WITH INTEREST.

If we don’t tackle this problem with our money supply – we have no hope of rescuing the UK economy and even less hope of dealing with the onrushing calamities of climate change and peak oil.
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