Thread: Britain at risk of worse deficit crisis than Greece

Yes, this is a very serious issue which not enough people are discussing.

The fact is that our economy is totally f*cked, it really is. The government have only just been able to keep things steady (which they want to do until the election) by two means: printing money and borrowing money. Neither of these can be pursued indefinitely.

The Bank of England has, so far, created £200,000,000,000 through the policy of so-called 'quantitative easing' - which is just the modern electronic version of printing money. It was thought they would now stop this, but Mervin King (the BoE chairman) recently announced that they may well have to create even more money out of thin air, as the economy still faces what he euphemistically describes as "many challenges" (!).

The trouble is that the markets have had enough of this. They were prepared to accept this initialy, as an emergency, on-off, stop-gap policy, but if it seems to be becoming a permanent policy then the markets will simply stop lending Britain any more money - or charge exorbitant interest rates to do so. And that is when the economy will fall off the cliff, as we are entirely dependent on constantly borrowing more and more money.

The papers have recently been filled with schadenfreude about Greece's economic problems, and how this is affecting the euro, but nobody seems to have noticed that the pound has not risen against the euro - in fact it's gone down. The fact that the pound is outside the euro is, of course, a damn good thing, as this means it can float and, by dropping, help our exporters. But the fact is that the pound's weakness against what is itself a weak currency should tell us all we need to know: our economy is in a coma.

Which brings us back to the money we need to keep borrowing. Greece's deficit is 12.7% of their GDP. Britain's is 12.6% (at least, that's what the government is saying, but some believe it could actually be higher than Greece's, at 12.8%). This deficit is financed by borrowing money. This financial year we will be borrowing almost 200 thousand million pounds. God knows how much we will need to borrow in financial year 2010/11, which isn't that far away. But in order for us to borrow money there must be people willing to lend it to us, and if the markets become nervous they will, as I said before, either stop lending us money or charge more for it through higher interest rates. Britain currently has the top, AAA, credit rating, but the credit agencies have declared that they will review this after the election, once whoever wins announces their budget. In other words, unless the budget contains convincing deficit-reducing measures our credit rating will fall and we will have to pay a lot more for the money we need to borrow. So either government spending is cut (or taxes are raised) to satisfy the credit rating agencies, or government spending is cut (or taxes are raised) to pay the higher interest rates. Both spending cuts and tax rises will cut economic growth and thus lengthen the recesssion. So it's heads we lose, tails we lose. Great, isn't it?

It could, of course, be worse: the markets could simply decide that there are better and safer ways of investing their money and not lend to us at all. And that could happen. Britain is not, after all, the only borrower seeking to attract money. While we can compete against Greece, the fact is that over this year other European countries will be looking to borrow one and a half million million euros. And then there's the private sector which will also be wanting to borrow money: over the next couple of years European banks will be borrowing one million million euros. And then there's the US. They too have a large budget deficit (11.2%), but the markets are happy to lend to them because they have confidence in their economy (and hence the increase in the value of the dollar). Worlwide borrowing is at peak levels and investors have no shortage of places to invest their money; they may well decide that Britain is not their best bet and, if they do, we're screwed.

So you see things are not looking good.

Beans, rice, a gun and plenty of ammo. And I'm being pretty serious.

Grow up you little boy.

Originally Posted by angelman

Grow up you little boy.

And your views on the serious economic situation are ...... ?

Like you, I really don't think that quantative easing is going to be a viable solution. When we get inflation (or more likely stagflation) then we'll really see what problems we have. I also totally agree that the markets have had enough. People have been saying that the Euro is in trouble but against sterling it has moved from €1.12 to just under €1.15 and it seems fairly well set there.

I will continue but my supper is getting cold...

But we are in a different position to Greece in as much as they are constrained in their fiscal policies under the rules if the Euro. That may or may not be small comfort.

But in order to lend money, surely interest rates should be higher. There is of course the problem for businesses of higher interest rates, but being offered nothing for your money on deposit is not hugely attractive!! Coupled to the fact that the banks have highish rates for borrowing (although not always as my business pays 1% above base rate on my overdraft) there is definitely a problem there. QE solves this in the short term but the volume of money......

Indy, whose bonds would you prefer to buy? Greece or UK?