Saturday, November 29, 2008

Trouble ahead

Bankrupt Britain

Nice summary. I think I have an explanation for the recent rise in sterling and stocks which I will put as a comment in case of length.

Posted by stillthinking @ 05:55 PM (2062 views)
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14 thoughts on “Trouble ahead

  • OK. This contradicts a fair amount of what I have been saying but I never realised the extent New Labour would borrow in fairness, and I have no idea whether this is right or not just an idea.
    So, GB announces a huge increase in borrowing. Now I think from this that people capable of funding the borrowing requirement are looking at squeezing him. We haven’t seen it yet although it has been mooted many times, that the UK government will be forced into raising the return on gilts. I think this is going to happen. All this, by the way, is against my deflationary stance but anyway.
    Carrying on, there are a lot of people waiting with funding for the UK government, because probably we can carry more than we have, maybe up to 200% you never know. However, given that the UK has 3% of global GDP then New Labour are talking about an overdraft of 6% of -global- GDP. A fair amount of cash for 60 million people to carry.
    Anyway, coming back to the squeeze. The squeeze isn’t yet. This is a key part of my reasoning. The squeeze comes later. There are still a few punters out there prepared to soak up the initial deficit funding, perhaps UK pension funds being obliged to or whoever. But the squeeze and the yields demanded come later. Now GB has pretty much announce the spending and he can’t backtrack, and -even- without the “stimulus” he will need to borrow substantially when employment goes sky high in 2009. So the additional borrowing is certain, also there are other governments attempting to do the same thing but without the backdrop of being unreliable socialists.
    OK. So I think that sterling has gone up because the markets want to get into sterling now, while its low, prior to squeezing GB on the gilts. I also think that the reason that stocks have gone up as a kind of parking measure, a temporary holding point for sterling valued assets before GB starts the big give-away.

    If this is right, then interest rates are going to be forced up in the future due to government funding (which to be fair is often pointed out), but I think people are now putting down their money on this being the case hence the admittedly small turn-around for sterling and UK based stocks. Key points being that stocks are used as a safe holding house for sterling, and sterling yields are looking as though they will improve in the future. Which kind of also implies that the fund holders don’t believe that the UK will start money printing a.k.a monetisation.

    Da daah ! Finished.

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  • ‘without the “stimulus” he will need to borrow substantially when employment goes sky high in 2009’

    you mean unemployment goes sky high in 2009.

    Thinking about Sterling interest rates, I don’t see how they can be held low. To do so would bankrupt the UK which needs a strong currency for both the banks and the government to repay the debts they owe in US dollars, Euros, Yen etc.

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  • Back from a break……….. Is it me or have the number of todays Posts shrunk……… I don’t remember seeing anything controversial.

    Anyway stillthinking you are way too economically academic for me and I do appreciate your hard work and points.
    What I often wonder about is the Black or Shadow economy and how much bearing this has. I believe this to be rather large or more likely rather huge especially in the UK……… Now this eventually finds its way back into the real economy and pays its dues to the tax systems………. Unless that is,there is a huge store of ill-gotten gains somewhere hidden???
    For obvious reasons it cannot be included in economic calculations but that does not mean it is not contributing and affecting the real outcome and even rescuing a situaton. Any views on this anyone? Or does it not exist?

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  • “Which kind of also implies that the fund holders don’t believe that the UK will start money printing a.k.a monetisation.”

    Your reasoning is sound. Now is the government’s?

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  • “Carrying on, there are a lot of people waiting with funding for the UK government”
    Nope…
    http://www.ft.com/cms/s/0/f56403b0-bcab-11dd-af5a-0000779fd18c.html?nclick_check=1

    As you say, interest rates will have to rise. People getting in now will not get those higher rates, instead the value of their gilts will fall. I think the recent rise in Sterling is simply due to it being oversold prviously, so now the market thinks it will fall more slowly than other currencies in the short term.

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  • planning4acrash says:

    Sterling hasn’t risen, it jumped from 450 to 530/ounce gold in the last week!! That is a massive devaluation. If other currencies are doing worse, then maybe GB is borrowing to support the pound relative to other currencies. That type of activity can only depress all currencies and will see a springback at a later point, if we fail to raise interest rates. Governments appear to think they can keep this up by co-ordinated interest rate cuts, but, what happens when others start raising rates, like, Russia for example?! Do we not enter the inevitable race to the top in terms of rates, once that happens? Now look, everybody is saying, oh, rates can only ever go down, can only ever go to zero, not true, there comes a point where government’s can’t afford to reduce rates and maintain currency strength, they start raising rates to strengthen their power base, because the currency is their power base.

    We will see a crisis, then, a swift move up in rates once the establishment have been given enough time to deleverage, leaving sheople still in debt holding the bag. Expect 15-20% interest rates, heck we could see LIBOR jump to 1000% overnight once the proverbial hits the fan.

    At that point, savers win out over speculators, asset prices in freefall, savers gaining by the second, and capitalism can re-commence. It will go hand in hand with commodity inflation and a massive upleg in gold, possibly forcing government into a gold standard to maintain currencies and their power base. If the sheople have any sense, they will then insist on constitutional sound money and sever clipping of government power. If that happens, it will begin in America and spread out to affect the entire globe.

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  • p4ac……… you are a genius………but that still doesn’t answer my question?
    I reckon it throws a lot of these calculations into question.

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  • “Sterling hasn’t risen, it jumped from 450 to 530/ounce gold in the last week!!”

    Tell me abut it! A few weeks ago I was going to go “all in” at £15100/kg with my last £1000ish at Bullionvault but decided to average in…all the way to £16250!!!

    Anyway, since gold is not in the basket of currencies making up the strling index (at least, I don’t think it is), it can be said to have risen in the last week or so. That gives me an idea…

    Dear Gordon,

    Please can you put gold in the sterling index so everyone can’t fail to see what a rubbish job you’re doing with our currency.

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  • Just an idea !

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  • @jimmy_joe,
    I read that article, but I think that at least for a while, the government will have a hard time off-loading their gilts, but purely because the main squeeze against the UK’s borrowing requirements will come -later-, as in not now. Which is why your quote has “waiting” in there, because I think the mysterious funders are waiting. After all, why buy now?
    GB has announced a need for money, a desperate need for money, but he isn’t quite desperate yet. But he smells desperate, so the money is getting ready.
    So they wait.

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  • Not 100% sure of the content of this but the basis is sound, i have felt sure for some time now that Gordan and co have spent the family jewels trying to look good and there are no reserves to cushion the bad times, after these inital perks on VAT and the like expect VAT to rise, national insurance to rise, taxes of all kinds to rise, services to be cut.

    If they think things are going to improve to the extent that they can cream off the fat they really are excessively stupid.

    I also expect them to be forced to raise rates – as the article says who in their right mind would want to invest in UK.PLC?

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  • I think the trend of lower house prices, coupled with reposession and personal insolvency is a major problem for the UK.

    It’s about due for more coverage in the press as distressed people get worked up and do crazy things. In the meantime the BBC will put out its message of “everything is OK, carry on as normal”.

    If personal bankruptcy spills over to state bankruptcy we have major problems in this country. Crude statistics as shown in the article won’t bring any comfort to independant, thinking people. It’s time to address the problem, the opportunity has been ignored for a long time now.

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  • planning4acrash says:

    Stillthinking, you are onto something there, but, goverment will never do that, because they will not accept that real assets are better stores of tradeable wealth (currency) than their pieces of paper, that only have value via legal tender laws, that force us to use the paper, via the barrel of a gun, thus pushing quality from the system. Counterfeiting always does that. If you clip a gold coin, as they did with the sovereign coin (used to be a 1/4 ounce, now less) – state via legal tender laws that its worth the same as before, and, the full weight coin is melted down, or pushed abroad. But, all commodities are currency, its just that gold is the best fitting. Its less volatile, has a more stable supply, stores more wealth/ounce than most other commodities. Silver, for example, tends to leverage gold volatility by a factor of between 1 and 2, largely because of its greater industrial usage, but even it is extremely stable relative to many other commodities.

    Plato, too kind, I was answering the initial comment. Now, the shadow banking system, derivatives, were intended for buying up real assets, but, prior to them being used for that, they’ve begun collapsing, and nobody but government will purchase them. Essentially, that system is collapsing in on itself. Rather than going into administration for all and sundry to buy up at pennies on the pound, government are buying them at above par. Government will need to raise taxes to a level that destroys the economy to survive. So, it will most likely end in revolution, war or both. Hopefully a quiet revolution, but, government, if they go put people in jail for reasonable protest, as in Iceland, there will be riots. Particularly from the close knit ethnic minorities. Brits have little community or backbone anymore, so, the minorities are our only hope now! Hopefully we support them if oppression comes.

    If the shadow system simply collapses on itself and government sucks liquidity into the black hole without being able to tax us, we get massive deflation (good result) – plus the boon of a huge revaluation of gold to pay off the sovereign debt, and, hopefully, government looking for stability by pegging the currency to gold. Alternatively, if we let them tax us, its game over, or, if a small percentage of the monetization of the derivatives seeps out into the real economy, we see hyperinflation, if just 1% is used to buy real assets. But, hopefully, the establishment have to offload all their real assets on we the people to get out of the hole. This is why I’m keen on gold. In personal possession, because government will try to get its hands on the stuff. Well, I’d go with 3/4 in personal possession and a liquid portion somewhere like bullionvault.com or goldmoney.com.

    Controversial position, but these are strange times indeed. The recent edition of theinternationalforecaster is good. Bob Chapman goes into depth about the shadow banking system, and he predicted the derivatives crisis 6yrs ago, so, his language is odd for most folk used to fanestream media, but, he’s right on the money.

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  • planning4acrash says:

    Now, the revaluation of gold, let me explain. At present, we have a quadrillion of dollars in the shadow banking system in the form of derivatives. However, the gold price currently only takes into account what’s in the normal banking system, and a percentage of that, due to derivatives trading shorts that depress the price. To pay off derivatives without simply writing them off (the best solution), they must bring the derivatives into the open and have gold reflect that paper money. In the most likely scenario, they’ll write off most of the derivatives (those not owned by the establishment (your pensions)) – and revalue gold to bailout the derivatives that the establishment could not get rid of. The latter could work in our benefit, if we get the gold, but, they will try to avoid that, and, we’ll probably just see a transaction between the banking establishment and government.

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