If you believe all the hype, then it is countries like Spain, Italy and Greece who are the most indebted nations in the western world…not so! Actually, as Robert Peston at the Beeb points out, the UK counts as one of the worlds most indebted nations! The aggregate UK debt – that’s the sum of personal debts (credit cards, etc.), household debts (mortgages), corporate debts, government debts and bank debts – had risen to 492% of UK GDP, or almost five times the value of everything the UK produces in a single year.
And worse, the UKs debt mountain is growing (it was 481% at the end of 2008) not shrinking. If the country were to lurch into recession again as a consequence of the Tory cuts, we could well see this debt mountain spiral yet further, both due to the depression of tax receipts and the usual belt tightening that we will all be forced to undergo as part of our personal finances, as in any recession.
By comparison the debts of Japan (public and private) are around 491% of GDP, with America on 282% of GDP, Greece 252%, Italy 163%, Germany 176% and Spain 284%. Only Ireland, with a whopping 1,092% of debt to GDP (just a tenth of that public debt) outshines the UK. Again in Ireland as with the UK most of that debt is personal debt rather than government debts.
Now one may well argue that I and Mr Peston are being unfair, after all only around a quarter of this debt is held by the UK government, the rest is held by companies (notably the financial services industry), personal debts (credit cards, student loans) and property (mortgages). However, the point is that in many ways government debt is a more stable investment that personal or private debts (as Western governments are statistically less likely to default than you or I or any business). Hence it sees odd that the markets are constantly downgrading the debts of sovereign governments in the Eurozone while ignoring the elephant in the room of the huge private debts held in the countries like the UK.
Least we forget how this entire financial mess started. There was a slow down in the global economy, possibly triggered by the spike in oil prices around 2007 (which was possibly itself sparked by the passage of the world past the point of peak conventional oil in 2006). This caused a global economic slow down, which led to a bursting of the US housing bubble, leading to many Americans defaulting on their mortgages. The rest is history. And many of the Eurozone countries only got into serious difficulty with their debts recently, largely as a result of speculation from the markets about the pace of their economies…speculation that, if Peston is to be believed, defies any meaningful analysis.
Similarly, its not unrealistic to question what would happen if the UK economy entered into a further recession. One could easily propose a scenario where the UK, of all places, could be the centre of a severe financial tsunami. Firstly either the Tory cuts or a default in Greece causes the UK to lurch into a deep recession (as I pointed out in prior article 60% of the UK trade and 12% of its GDP is with the EU). This triggers a wave of personal insolvencies in the UK. This leads to major losses in the UKs already vulnerable banks and financial services companies. Inevitably some begin to fail or are forced again to go cap in hand to the government (again!). The government likely responds by either telling them to get lost (in which case several go to the wall and default on their debts) or in order to pay off this new bailout, the UK government is forced into a technical default of some sort (devaluing the pound, a debt haircut, deferring payment on its debts for some time period). This triggers a wave of financial contagion spreading across the global markets.
If ultimately the UK were to default on its debts, of course Id argue that Quantative Easing is all but a defacto default anyway, the consequences for the global economy would make Greece or Italy look like a side show. Consider that the UK owes 379 Billion to Germany, 578 Billion to the US, and 210 Billion to France. By comparison Greece owes a total of 400 Billion (public and private!), practically a rounding error next to the UKs total of 7,300 Billion, only £15.9 Billion of Greek debts being owed to Germany and only 15.6 Billion to the UK and America (combined!). The latter figure (15.6B ) is important as this is the total amount of money that has the markets in a frenzy running around screaming the sky is falling. Even Italy owes a mere 120 Billion to Germany, 35 Billion to the US and 55 Billion to the UK. Thus our UK default would hit certain countries very hard, the US and (ironically) Germany take a severe pounding, as does Ireland (owed a good 103 Billion by the UK, presumably run up by the brits buying Guinness in Temple Bar!). Inevitably this leads to yet further losses in these nations and further defaults, both private and public, worldwide.
Am I suggesting that the whole capitalism system is now on the verge of collapse? Will it shortly be raining investors on Wall street? Hardly! Actually the danger is that the spivs in Wall Street and London will profit quite handsomely from such a crisis (as a trader recently let slip, see my article on that here). As with the last time, theyll come through the crisis richer than ever, thought they might need to spend most of that money on security as I suspect the public mood will not be terribly tolerant of such traders and their mega profits (its already getting to French revoultion standards, article on that by the Beeb here). Obviously the implications for certain politicians would be severe, Merkel in Germany and her party will likely get wiped next election, being blamed (ironically enough) by the German people with failing to take decisive leadership on the Eurozone debt crisis. The Torys in the UK will similarly take a hammering. And we could be looking at a global economic depression on the scale of, if not exceeding that in the 1930s. The party might truly be over for many of us.
Obviously these stark facts of life immediately tell you that the markets dont have a clue what theyre doing. They are driven, not by smart people who spent hours pouring over complex data and running elaborate computer models, but by herd instincts, and the prejudical opinions of the Bullingdon set good old boys. I recall for example a Brazilian who worked for their finance ministry once lamenting to me that any time the Lefties took over, the US ratting agencies would cut Brazils credit rating, even when the socialist went out of their way to try and balance the books! Of course when the right wing took over (or a coup was launched) the rating agencies often raised Brazils credit rating, even when the new government began running up huge debts (or buying vast amounts of military hardware)! Go figure!
If Greece and Italy are “Junk” status how is can Britain’s AAA+ rating be justifed? I have this image in my mind of the Rating Agencies working out ratings by going down into the basement and asking a druid to interpret the movements of a flock of headless chickens!…
…Or maybe it has something to do with the fact that the markets, largely based in UK and USA, could (as noted) profit quite handsomely from a debt crisis in the eurozone (Money box program on that here).Whereas a similar crisis in the UK/USA (where they live) could cost them dearly (I mention that in prior post here).
The Hedge funds having bet the Euro house would burn down are now determined, with a little help from their golfing buddies in the rating agencies, to light the fire. They have thus startled the market herd into stampeding away from the Eurozone. Although the actions of certain Eurozone countries and the failure to get to grips with the present crisis, hardly helps matters. One thing thought is clear, that it would be foolish for governments to pander to “the markets” or assume that we can judge future events by the actions of “the markets”. Another crisis in a different direction (such a severe US recession triggered by those $1.2 Trillion in cuts the Republicans have just forced on the US) could send the markets scurrying away in a different direction, with the whole eurozone crisis essentially then just blowing over.
So what should we learn from this? Well firstly, that the constant dithering of politicians, in the Eurozone or in the US, is now unacceptable. Decisive leadership in both cases is needed, quickly! Yes, Germany might take a hit from the various solutions presented to the current Eurozone crisis. But look at the numbers and consider that this will pale in comparison to the hit theyll take in the event of an unravelling of the Euro, or a default of a Eurozone country destabilising the US or UK. But German savers will be horrified with the idea? Not as horrified as they will be if they loose theyre entire life savings and pension (which is a real possibility if such a financial crisis as Ive outlined, and this is but one possible scenario, heres another by documentary film maker). It is the duty of governments to do what is in the best interest of the country – politics is not a high school popularity contest! If Merkel feels unable to take the form of decisive leadership her country (and the EU) now needs she should do everyone a favour, and like Berlusconi, resign at once.
And speaking of popularity contests, similarly the reason for the failure of the US debt deal was an unwillingness of the Republicans to accept tax rises because we signed pledges. Of course, as Ive pointed out before, the biggest and most obvious place to start trimming the US budget, is with the military budget. But this is also off the table for cuts, as far as the Republicans are concerned…largely because it would mean major job losses in Republican districts and hit their special interest sponsors hardest (maybe that pledge the Republicans should have made to voters, should have gone I pledge not to raise taxes but instead have the lot of you sacked, destroy the economy of this state and force you all to immigrate to Oregon and become car bums). Least we forget only 6% (see here) of the current US debt run up since 2001 is a consequence of Obamas Stimulus package. Bushs tax cuts are to blame for 13%, the wars 15% and his two recessions 28%. Obamacare is scheduled to be revenue neutral (indeed it may even run a slight surplus). So the Republican party, after causing this whole US debt crisis are now too spineless to take the actions necessary to solve it. As with the eurozone the fundamental problem with the US debt situation is a failure of leadership and indecisive politicians unwilling to take the decisions required. Again, as with the eurozone, if the Republicans are unable to walk the walk, they should quit trying to talk the talk and make way for someone else.
And it is also unacceptable for governments to be spending half their time second guessing how the fickle herd of startled sheep that we call the markets is going to react to anything, particularly where we know that certain forces within “the markets” have a perverse incentive to destablise national economies (wolves in sheeps clothing!). Constantly politicians and the media worry what will the markets make of this?. And when did we have that election putting the markets in charge of the world? I dont remember signing up for that! There is a urgent need for us to break the power of the markets. A number of measures could do that ranging from maximum wages, a financial transaction tax, a super tax for the mega rich, various changes to our currency systems (I discuss that more here) or how about introducing a new hunting season (for bankers!). Either way, there is no good reason why we should tolerate the markets unless they can prove they have a positive role to play in the world.