Financial Advice Enquiry
Is Mr Brown going to bankrupt Britain?
By Marco Pietropoli, 30 November 2008
Investment Performance
It is scandalous that our leaders seem to have taken leave of their senses and decided that what is blatantly staring them in the face is totally insignificant. It is impossible to sustain a ballooning budget deficit with rapidly reducing interest rates!
The idea that any government, even one as established as ours, can borrow an unlimited amount of money in the current climate is delusional. If the British government is going to get itself in serious debt, the least we can do is offer a reasonable amount of return to attract the investment required. Or maybe the printing of money has always been the plan!
Are we trying to persuade everyone to take out more debt at lower interest rates? If a credit bubble created this mess, how can more debt be the solution? We should encourage savings rather than further debt at low interest rates. It is like treating a drug addict by giving them more drugs at a cheaper price!
We should be supporting the pound so as to encourage the world to trust us with their money and thereby recapitalise our broken banking system.
Medway Independent Financial Advisor
We are an importing nation. If we still had a manufacturing industry worth talking about then devaluing the pound wouldn't be a bad idea. What do we buy that is actually made in this country? By letting the pound crumble all we are doing is encouraging capital to go elsewhere and importing inflation!
Within a few months we will hit a brick wall. Inflation is going to rocket and we will have to rack up interest rates quickly to stave off an inflation storm and to support the pound. This will have to be done when the economy is potentially at its weakest.
The UK government has decided that it is a good idea to have temporary tax cuts for permanent tax rises later. How we are going to get out of this mess if we are going to have high interest rates and high taxation twelve to twenty four months down the line?
Mr. Blair managed to lose our ability to conduct foreign policy effectively by following Mr Bush into an illegal war. So now, Mr. Brown has decided that we should lose our status as a respected financial hub with a government that has a basic understanding of economics. Once people lose faith in the UK government's ability to manage its finances properly, it may take generations to restore.
This idea that we are entering a period of deflation when many central banks in the world are printing money as if there were no tomorrow, is again delusional. Are we are basing this on the performance of oil over the last few of months? I know that it has come down sharply, but surely past performance is no guarantee of future performance? This is all based on the Dollar staying strong, which is very unlikely.
Remember the massive fluctuations in commodity prices over the last 2 years? Oil has gone from $55-60 a barrel, to $147 and then back down to less than $50. Did demand and supply really change by that much in two years? No, it did not. What has changed during this period is the value of the Dollar. As the Dollar weakens, upward pressure will be put on commodity prices again. There will be such a shock when we find out that deflation was a brief myth we bought into to justify irresponsible interest rate cuts.
Are the Americans not bankrupt? They seem to have thrown caution to the wind and are now printing a staggering amount of paper. If you don't believe that we are about to have an inflation storm then look for yourselves:
Percent change of US Money Supply at seasonally adjusted annual rates
|
|
M1 [1] |
M2 [2] |
3 Months from July 2008 To Oct. 2008 |
19.9% |
10.4% |
6 Months from Apr. 2008 To Oct. 2008 |
14.8 % |
6.5% |
12 Months from Oct. 2007 To Oct. 2008 |
7.6% |
7.4% |
Source: Federal Reserve Statistical Release 28thNovember 2008.
Over 3 months M1 Money Supply is currently running at 19.9% (annualised rate). If you have rapidly increasing Money Supply and a rapidly slowing economy, inflation will ensue. Is there no one in charge who understands basic economic principles?
It has taken the UK hundreds of years and many wars to build the national debt we currently have. We are now talking about doubling our debt over the next five years, with very optimistic figures from the Treasury. The actual UK government borrowing over the next few years may end up being much more than that.
The Americans managed to double their national debt overnight when they rescued Fanny and Freddie. Since then they have continued to spend money they don't have at an alarming rate.
How are they going to raise all the money they need without giving a fair return?
Yields on US Treasury Notes
|
|
Yield |
3-Month |
0.04% |
6-Month |
0.42% |
12-Month |
0.90% |
2-Year |
0.98% |
3-Year |
1.26% |
5-Year |
1.91% |
10-Year |
2.92% |
30-Year |
3.44% |
Source: Bloomberg 28th November 2008
Inflation in October 2008 in the US is running at 3.7%. Can you see what the problem is? The whole yield curve is below inflation. Base rates in the US are at 1% and set to go even lower. Would you lend the US government money for the next five years for an annual return of 1.91% and potentially have to pay tax on the income?
How much money is the world going to have to print if governments find they can't borrow anymore? All these bail-outs will come back to haunt us.
We should be protecting depositors, as we do not want a run on all the banks, but we should not be rescuing the banks. These people have made huge, staggering mistakes and we should not bail them out. Is the plan to take money from the good people that have looked after their pennies and give it to the incompetent people?
Are we to have capitalism on the upside, when only a few people make the big bucks and socialism on the downside, when the average person has to bail out the incompetent rich people? It is unsustainable.
It appears the UK government has decided to throw away the last 30 years and return to a 1970s model of numerous zombie state owned companies making a loss that are supported by the tax payer. The government cannot even manage to run the Post Office properly, so what hopes does it have to run a successful banking system!
A higher tax for the rich seems to be on the cards too. Will we again have to endure an outflow of capital and talent as a result? Do we not remember the 70s and the result of years of failed policies? Are we going to throw away all the pain and suffering of the Thatcher years and go back to where we started? Just because our government cannot admit its mistakes, are we are going to throw away the capitalist model and return to a socialist model that obviously didn't work?
Recessions happen. It is the way the economy readjusts itself and then moves on. Trying to prevent a recession means that we will not have an upside in the coming years and we will be stuck in a long drawn out affair that may last fifteen to twenty years, possibly more. If the government had put something aside in the good times, then of course a fiscal stimulus would be appropriate, but the UK government and the UK population have no savings.
If you are an alcoholic the first thing you need to do is admit it to yourself and others. Mr Brown needs to stand up in front of the world and admit his mistakes. How can he blame speculators for the mess we are in? What sort of capitalist system do we have if you cannot gamble that oil prices may rise and banks may go down in value? New Labour was a real champion of the free market until it started working against them.
Speculation by investors creates the liquidity that is needed for the financial system to work. It is too easy to find a scapegoat for our problems, especially as it is something that hardly anyone understands. Speculation and investment is a business area that the UK has been very good at for hundreds of years. The UK government is likely to over react and over regulate the financial system, so business that is currently being done in the City of London is likely to move to other jurisdictions.
Let us not forget that anyone who buys a property, invests in a pension or buys government debt is in fact speculating!
Of course, there are areas of regulation that need to be addressed. Starting with the government, there needs to be a proper way of monitoring the financial system. Recent events have uncovered that no one really had a clue as to what was actually going on. Individuals, companies (especially the Banks) should not be allowed to borrow as much as they have. The secondary debt market, credit default swaps, hedge funds and private equity also need to be regulated properly.
The UK went through a massive credit expansion in the 80s that resulted in a property bubble which subsequently burst. However, we did not learn the lessons and instead introduced the whole sub-prime market to make things even worse!
How can people be allowed to borrow 125% of the value of their property? Why are we handing out lots of credit to those who have a history of not servicing their debts?
If you wish to invest some money there is a huge amount of costly regulation. This is nearly prohibitive for the vast majority on the population. But if you wish to borrow money, all you have to do is sign the pre-approved credit card applications that you receive in the post every week! What sort of society have we become where debt is encouraged, but savings and investments are discouraged?
We have gone through a period of massive excess. We have experienced huge over consumption and an asset bubble based on credit that may never be repaid. To readjust the system we are going to have to go through a period of pain.
There are times in life when you have to admit your mistakes and take it on the chin. Mr. Brown, the UK government, the Bank of England and the Financial Services Authority have let the banking system and overall credit in the UK get completely out of hand. A complete failure of oversight!
By rescuing failing institutions we are transferring the losses from the private sector onto the public purse. Future generations are going to have to pay for this. What will they think of us and the present decision makers? In a capitalist system, bad companies fail and their assets are taken over by the competent people. Instead of this, our leaders are rewarding mistakes and incompetence. But even worse than this, we are encouraging significant further risk taking in the future.
Once we own up to our mistakes then we can then improve matters. Our leadership needs to admit that we need to go through two to three horrible years. It will be painful, but we can come out stronger on the other side if we stop making the problem worse through the current economic policies. Saving failing companies, printing money, a ballooning national debt and encouraging further credit expansion at lower interest rates is absolutely the wrong way to go!
The Americans have already made the mistakes that the UK government is making now. Why is the UK simply replicating what the US is doing?
Shouldn't Mr King and the Monetary Policy Committee (MPC) know better? Are they incompetent or are we discovering that the Bank of England's MPC is not really independent of the UK government or the Americans? Should we have an elected person in charge of our monetary policy system?
We are about to experience a huge shift in investor confidence. The value of any form of paper based investment will soon become questionable. Shares, company debt, government debt and cash itself will be dubious. Investors will seek to place their money in real assets to safeguard value. In the absence of property as a viable real investment, commodities and therefore mainly gold will return as a place to store value in these troubled times.
Money flowing into commodities and the global printing of money may result in an inflation storm on an unprecedented scale!
As the strength of the US swindles sharply, there will be a vacuum of power and the world is likely to become a far more dangerous place.
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[1] M1 consists of (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveller's cheques of non-bank issuers; (3) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (4) other checkable deposits (OCDs), consisting of negotiable order of withdrawal (NOW) and automatic transfer service (ATS) accounts at depository institutions, credit union share draft accounts, and demand deposits at thrift institutions. Seasonally adjusted M1 is constructed by summing currency, traveller's cheques, demand deposits, and OCDs, each seasonally adjusted separately.
[2] M2 consists of M1 plus (1) savings deposits (including money market deposit accounts); (2) small-denomination time deposits (time deposits in amounts of less than $100,000), less individual retirement account (IRA) and Keogh balances at depository institutions; and (3) balances in retail money market mutual funds, less IRA and Keogh balances at money market mutual funds. Seasonally adjusted M2 is constructed by summing savings deposits, small-denomination time deposits, and retail money funds, each seasonally adjusted separately, and adding this result to seasonally adjusted M1.
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