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Scott Sando

Serious Problems Ahead For The British Pound

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Serious problems ahead for the British pound

By James Turk

'December 21, 2010 – Last week the British pound fell 3.0% against the US dollar. Some say it was because of UK bank exposure to Spain, which Moody’s warned could be downgraded. Others blamed the UK’s close economic link and heavy debt exposure to Ireland, which Moody’s did actually downgrade last week by 5-levels to Baa1. This low grade is barely above junk status.

These downgrades in different corners of Europe no doubt had some impact on Sterling’s weakness, but there is I think another factor closer to home. It is the growing awareness of the runaway spending and borrowing by the British government.

Despite all the rhetoric and promised cuts in spending by the newly elected coalition, the hard fact is that government spending and borrowing continue to soar – and look as if they are spiraling out of control. The following chart illustrates the magnitude of the problem as UK government debt nears £1 trillion.

Earlier this year, UK government revenue (the blue line) once again began to grow. It was an indication that the British economy was on the mend after the billions spent on the bailout of Northern Rock and the UK government’s rescue of most of that country’s major banks in the aftermath of the collapse of Lehman Brothers. But look closely at the above chart. Expenditures (the red line) remain on the same well-established upward trajectory, climbing higher every year. This growth in spending is unabated, and is now rising at about the same rate as revenue growth. As a consequence, the country’s deficit has barely shrunk from the record level reached at the depth of the financial crisis.

Note too the accounting sleight-of-hand at the end of 2007. How is it possible that UK government debt grew back then even though the budget deficit was negligible?

Following in the footsteps of Greece and other basket-case sovereign debtors so adept at creative accounting, UK government accountants glossed over the Northern Rock bailout, the net effect of which made the deficit in 2007 look smaller. Convenient accounting like this cannot possibly instill confidence in UK government bondholders.'

The bottom line is that the UK’s huge deficit is not sustainable. It will lead to ever greater amounts of so-called “quantitative easing” by the Bank of England, and inevitably this money printing – the turning of UK government debt into British pound currency – will sooner or later lead to hyperinflation.

I had always thought that the US dollar would hyperinflate and collapse before any other major currency. Lately, I am not so sure. Government spending and borrowing in the UK look even worse than the dire levels being reached in the US. Therefore, the dubious distinction of being the first currency to hyperinflate in the months ahead may end up going to the British pound.

Edited by Scott Sando

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Serious problems ahead for the British pound

By James Turk

'December 21, 2010 – Last week the British pound fell 3.0% against the US dollar. Some say it was because of UK bank exposure to Spain, which Moody’s warned could be downgraded. Others blamed the UK’s close economic link and heavy debt exposure to Ireland, which Moody’s did actually downgrade last week by 5-levels to Baa1. This low grade is barely above junk status.

These downgrades in different corners of Europe no doubt had some impact on Sterling’s weakness, but there is I think another factor closer to home. It is the growing awareness of the runaway spending and borrowing by the British government.

Despite all the rhetoric and promised cuts in spending by the newly elected coalition, the hard fact is that government spending and borrowing continue to soar – and look as if they are spiraling out of control. The following chart illustrates the magnitude of the problem as UK government debt nears £1 trillion.

Earlier this year, UK government revenue (the blue line) once again began to grow. It was an indication that the British economy was on the mend after the billions spent on the bailout of Northern Rock and the UK government’s rescue of most of that country’s major banks in the aftermath of the collapse of Lehman Brothers. But look closely at the above chart. Expenditures (the red line) remain on the same well-established upward trajectory, climbing higher every year. This growth in spending is unabated, and is now rising at about the same rate as revenue growth. As a consequence, the country’s deficit has barely shrunk from the record level reached at the depth of the financial crisis.

Note too the accounting sleight-of-hand at the end of 2007. How is it possible that UK government debt grew back then even though the budget deficit was negligible?

Following in the footsteps of Greece and other basket-case sovereign debtors so adept at creative accounting, UK government accountants glossed over the Northern Rock bailout, the net effect of which made the deficit in 2007 look smaller. Convenient accounting like this cannot possibly instill confidence in UK government bondholders.'

The bottom line is that the UK’s huge deficit is not sustainable. It will lead to ever greater amounts of so-called “quantitative easing” by the Bank of England, and inevitably this money printing – the turning of UK government debt into British pound currency – will sooner or later lead to hyperinflation.

I had always thought that the US dollar would hyperinflate and collapse before any other major currency. Lately, I am not so sure. Government spending and borrowing in the UK look even worse than the dire levels being reached in the US. Therefore, the dubious distinction of being the first currency to hyperinflate in the months ahead may end up going to the British pound.

Nothing new in this article that we didn't know before.

I get a bit irritated by this sort of throwaway use of the word 'hyperinflation'. What the writer really means is a return to Labour-style high inflation, eg: the 15%, 20%, 25% of the 1970's / 80's. Hyperinflation is another thing entirely.

Space-filling nonsense.

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The bottom line is that the UK’s huge deficit is not sustainable. It will lead to ever greater amounts of so-called “quantitative easing” by the Bank of England, and inevitably this money printing – the turning of UK government debt into British pound currency – will sooner or later lead to hyperinflation.

We've all seen the monthly deficit figures and month after month they are getting larger and larger. The new austere ConDems are just not making any headway on the deficit problem at all, instead they appear to be hoping that some sort of fantasy growth will come along and save us all.

Despite Cameron (pre-election) saying printing leads to inflation and is not the right way to go Osborne has issued King with a license to print should times get tough.

We are boxed in, the debt is simply too large, the only answer they have is to print and suffer the wrath of inflation.

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Link to the original article

There is a chart in the article which I am not sure that I understand:

UK%20debt%20continues%20to%20grow(1).gif

Sure, the debt is increasing and tax receipts have taken a hit since 2008.

There was a big jump in debt in late 2007 even though receipts and outlay seem to be well matched at that time.

Were they well matched? I was under the impression that we were consistently running a budget deficit.

Perhaps the big increase is QE funny money?

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Link to the original article

There is a chart in the article which I am not sure that I understand:

UK%20debt%20continues%20to%20grow(1).gif

Sure, the debt is increasing and tax receipts have taken a hit since 2008.

There was a big jump in debt in late 2007 even though receipts and outlay seem to be well matched at that time.

Were they well matched? I was under the impression that we were consistently running a budget deficit.

Perhaps the big increase is QE funny money?

The Treasury (and the BoE) botched the forecasts for 2007-8 which meant spending was starting to accelerate beyond receipts before the end of 2007. Even before the crisis of 2008 we had got into a bad place.

I read blair's autobiography and found only one interesting thing in it - that was that in hindsight more effort should have been put into preventing the deficit growing before 2007, that the seeds of the problem were there in 2005 and should not have been allowed to grow.

Edited by needsleep

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At what point does this become treason for those damaging the nation in the name of popularity?

Good question...but 'they' make the rules. Who knows how long this can go on for.

£911

I need more miners!

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  • 314 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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