Thursday, 25 June 2009

Public Sector Borrowing: A Tightrope Walk Without a Net?

Earlier, I blogged about the huge Public Sector Borrowing policy Gordon Brown and his glove-puppet chancellor Alasdair Darling are committed to.

We all know that UK borrows money from investors by the the purchase of guilts. But what happens if the purchase of UK guilts dries up? Earlier this year, a UK guilt issue failed: not enough people decided to fund our debt.

Now, what happens if the UK guilt market fails completely? What if in 6 months (and £120 billion) time, our government is still spending more than it earns and our global sponsors refuse to fund any more?

The first thing would be a huge crash in the value of Sterling. Quantative easing is already putting a downward pressure on the pound, but a guilt market failure would put it into freefall.

Second, the government would have to dramatically cut public spending. Remember, it is spending £20 Billion a month more than it receives from taxes, etc. So thats a £20 Billion a month spending cut right away.

Public Spending is so entrenched in the economy, from public-sponsored call centres, to tax credits and Jobseekers, that the removal of a large swathe of it would decimate the UK economy. Just think if tax credits were suspended, if NHS direct and other call centres closed, if grants to local government were suspended....

The whole country will become paralysed. People won't be able to afford rents or mortgages, millions will be thrown into poverty, retail activity will collapse as people start to prioritise on things like food and heating, local government will collapse as council tax goes unpaid, national government will lose tax revenues as vast numbers of people lose their jobs and whole sectors of the economy go into the cash-in-hand, or bartering "underground" economy.

In short, UK PLC will grind to a halt. Overnight we become a 3rd world economy. It doesn't bear thinking about.

What will happen to the EU if one of their major contributing countries goes belly up? Would they kick us out, help us, or make a bid to subsume us? What happens to world finance markets under the same circumstances?

Nor does thinking about what our creditors might do if we go bankrupt. We owe Russia, China, and the Middle East huge sums of money. Hardly understanding regimes any of them. Will they help us, or demand their pound of flesh? Will China demand our mineral reserves? Will Russia cut off our gas supply, or demand we allow the Eastern Bloc seperate from NATO? Will the Middle East demand a bigger Muslim influence on government, or repayment in the form of advanced armaments?

Have no doubt, this is the risky course that our government has set us upon. It has millions here and across the globe crossing their fingers and hoping to hell that someone, somewhere in the world will continue to buy into funding the increasing UK debt burden whilst our profligate government continues to fritter money away wontonly.

Would you continue to fund a spendaholic?

Update:

Via the excellent blogsite Burning Our Money, I've found the Debt Bombshell website, which goes into much detail about our unsustainable national debt. However, the details of a guilt market failure are scant. Don't misunderestimate such a failure: it will be catastrophic. It won't be 1976 and the IMF all over again, it'll be far worse. The state is far more entrenched in society than the seventies. We've had a decade of centrist policy-making that involves the state in everything. To extract the tentacles of public finance from the economy would risk the collapse of society. Far worse than the tough early 80's. We would see unemployment on a vast scale, poverty on a vast scale, inflation on a vast scale and a collapse of public services that would catapult us into third world status.

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