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Urgent Stock Market Message

Bankrupt Britain's Debt Credit Ratings Crash

Economics / UK Debt May 21, 2009 - 02:51 PM GMT

By: Nadeem_Walayat

Economics

Best Financial Markets Analysis ArticleOn the day when the Government announced a surge in net public borrowing for April 09 totaling £8.5 billion against £1.8 billion a year earlier (the deficit is the difference between what the government earns against what it spends), the S&P credit agency cut Britain's credit worthiness to negative from stable which puts Britain's AAA credit rating into question, the direct impact of which would be that Britain would near immediately be required to pay a higher interest rate on the continuing huge surge of bonds being issued in advance of the 2010 general election, as Labour throws all of the fiscal rules out of the window in an attempt at turning the economy around by 2010 to prevent a Westminister wipeout.


Credit Ratings and Agencies

The credit worthiness of Britain cut by S&P whilst a significant marker enroute towards the bankruptcy of Britain is in itself not important as the market has already been marking down the value of UK government bonds as a consequence of the huge £220 billion of debt to be issued during 2009, therefore what the credit ratings say is pretty much irrelevant and more media hype than reality as those in the markets have ALREADY reacted to the policy of Quantitative Easing months ago.

However, it is an apt time to remind the readership of the rating agencies such as S&P and others culpability in the fraud on investors where near worthless mortgage bonds were given and maintained a triple AAA credit rating all the way towards bankruptcy of the banking sector and near wipe out for investors who had been mislead by the credit agencies into thinking they were buying low risk bonds when they were buying extremely high risk. The reason for this were the fee's earned by credit ratings agencies from the investment banks that created the mortgage debt packages that were to be sold onto investors, hence culpability of the credit agencies. Perhaps the credit agencies are seeking a higher fee from the British Government to sustain British Bonds at the triple AAA ratings?

Britain's Debt Crisis Explained

The Chancellor, Alistair Darling in his recent budget started to come clean on the huge amounts of debt that the country will need to borrow on just its visible official balance sheet as illustrated by the below graph. However much talk by politicians and the mainstream media about how there will now need to be severe cuts in public spending and tax cuts to reduce the level of debt are partially in-correct, in that yes taxes will rise and public spending will be cut to stabilise the budget deficit, but the argument that the level of debt will be reduced is flawed and fly's in the face of over 300 years of history of debt accumulation since the founding of the Bank of England.

Alistair Darlings forecast for government net borrowing over the next 4 years in November 2008 totaled just £120 billion which was in total denial of the collapse of the UK economy that had fallen off of the edge of a cliff during the summer of 2008 and accelerated during the September / October financial crisis. The magnitude of the level of the budgetary crisis is now some six months later being publicly acknowledged by revised forecasts for the budget deficit that the Chancellor now sees totaling £608 billion instead of the £120 billion forecast of November 08. This is still significantly below my forecast total of £735 billion and therefore the expectation remains for further revisions to the upside over the coming years.

Furthermore as I have mentioned already the government has instructed the Bank of England to BUY its government debt, i.e. £125 billion of the debt Britain issues will be bought by the Bank of England in an attempt to prevent a bond auction default and to thus keep long-term interest rates down. However this has highly inflationary consequences as printing money eventually leads to hyperinflation as 1920's Weimar Germany found out, so Britain IS sowing the seeds of much higher inflation, maybe not this year and for the first half of 2010 as recent inflation analysis illustrated, but there will be a quantitative easing day of reckoning in terms of economic stagnation coupled with high inflation.

The Government Will NEVER Repay the Debt

One thing people need to understand and that is that the Government will NEVER repay the debt that they are borrowing today, NEVER, the amount of debt outstanding WILL ALWAYS GROW HIGHER, Why ? Because our economic system can ONLY function if the total amount of debt and hence supply of money is ALWAYS INCREASING, before the credit crunch debt increased or should I say exploded higher by means of banks creating money out of thin air by means of customers borrowing money from the bank that was turned into a liability AND AN ASSET TO LEND MORE MONEY AGAINST and therefore multiplying original fractional reserves by more than X30 per bank and if taking the whole closed loop banking system into account probably as much as X90, which is why a small % of defaults has resulted in the cascading bankruptcy of the whole of banking sector requiring tax payers liabilities that are expected to extend to more than £2 trillion.

The level of debt is exploding higher, both that which is on the visible balance sheet as well as off the balance sheet tax payer liabilities that now project a rise from £1.75 trillion at the end of 2007 to £3.9 trillion by the end of 2010. As pointed out several times over the past 12 months following the Bank of England's initial £50 billion hand out to the soon to be Bankrupt banks in April 2008 that loan would in all likelihood never be repaid and mark the start of a series of hundred billion pound loans that would put Britain on the path towards a debt crisis that in the first instance would manifest itself in a sterling bear market whilst the Bank of England remained paralysed by the fear of inflation and failed to respond to the housing market crash of 2007-2009 until forced to do so in October 2008.

The current economic state of debt deleveraging as banks go bankrupt as defaults soar due to extremely lax lending standards, the governments of the world are attempting to offset this contraction in the credit supply by engaging in huge amounts of borrowing and printing money aka quantitative easing. Can they succeed ? Well the debt bubble as measured by the size of the derivatives market had grown to more than $600 trillion!, a trillion here or a trillion there is basically an attempt to plug the holes in the debt deleveraging damn, it is too early to say if they will succeed or fail, but the expectations are for ever more panic government spending actions to offset the risks of a debt collapse, the effect of these government actions has the ultimate effect of devaluing the value of ALL currencies, i.e. inflation, and I am talking REAL INFLATION not that manipulated statistics that generate CPI of 2% or 3%, but the real inflation you experience that you find in the shops when your money can no longer buy today to a significant degree compared to what it bought a year ago!

How Can Everyone be in Debt ?

Welcome to the un-wonderful world of fractional reserve banking. The economy is built on credit that has been created by the banks by means of fractional reserve banking. The reason why the banks are bankrupt is because they have loaned out money many times over that they never had ! The countries banking system through the reserve requirement at the central bank (Bank of England) was supposed to regulate the amount of money or credit the banks created by a traditional factor of 9 to 1. Unfortunately as we are seeing the greedy, corrupt, culpable, and to all intents and purposes thieving banks have been lending many times that in league with an incompetent Bank of England, were talking forget X10, forget X20, forget even X30 that had been the limit until recent years, some of the greedy banks have been lending out as much as X60 of actual reserves, and hence why the British tax payer has woken up to an already £1.4 trillion hangover that continues to mushroom up towards £2 trillion. IF the incompetent buffoons at the FSA and the Bank of England HAD DONE THEIR JOB by running a SUSTAINABLE BANKING SYSTEM, Then the current crisis would be of several orders smaller, instead of £2 trillion+ of liabilities we would be facing liabilities in the region of £500 billion, which is STILL a big number but not so big that as we have seen today actually threatens the bankruptcy of the state!

Not only would the liability to the tax payer be smaller, but the actual STRESS that the banking system is under would be less and therefore many more banks would be able to survive via capital injections from market place and in the final instance the tax payer. Unfortunately the Bank of England IS incompetent, the Treasury IS incompetent, the FSA IS incompetent the Labour Government IS incompetent, as they allowed those running the banks to turn them virtually all into hollow shells after having banked bonuses for fictional non existent profits, where a loss of a few % on bad loans brings the whole edifice crumbling down.

Whilst the British security services have been busy keeping their eyes on a few turban wearing ethnic minorities, the bankers have perpetrated the biggest heist in history and have clearly got away with it ! £2 trillion of debt thrown onto the backs of tax payers to suffer the consequences of for decades!

My conclusion can only be is that both the Labour party and the Conservative party are deep in the pockets of the bankers, for instead of allowing the bankrupt banks to go bankrupt they have bent over backwards to ensure that the likes of Fred Goodwin can do a runner with millions more in tax payer cash which they would NOT have received had the banks gone bankrupt. As I voiced over 6 months, nay now approaching a year ago ! That the bankrupt banks should be allowed to go bankrupt with the profitable assets restructured and refloated as a retail bank that cannot make any calls on the money markets for funds thereby separating retail banking from investment banking activities. Instead of what the government should have done, the government is handing over literally unlimited amounts of cash in various off the countries balance sheet that ensures the tax payers will suffer the consequences of which for years if not for decades.

How can we Prevent the Banks from Bankrupting the Country Again ?

Firstly REAL REGULATION ! I am talking truly independent regulation along the lines of the courts system, none of this back slapping insiders on the boards of the likes of the FSA, who is in charge of the FSA ? Adair Turner former Vice chairman of Merrill Lynch, that's right a BANKING INSIDER in charge of the regulator. Even if Adair Turner understands the truth of how the bankers run the country, which he probably does, he will never point the finger at his banking buddies and institute changes that take power away from the banks and put it into the hands of those that the British people have actually elected to run the country. The prime requirement should be that the regulator is headed by NONE BANKERS.

Secondly, we need to rethink our economic model, do we really want it to continue as an never ending expanding debt bubble economy that will periodically burst ? and more importantly seeks to enslave EVERYONE to the bankers and I MEAN EVERYONE ! That includes, individuals, corporations AND the GOVERNMENT. BEING IN DEBT EQUALS to BEING A DEBT SLAVE. You Work in part to PAY your Debt Slave Master, the Financial Institution that wrote your debt into existence at the tapping's of a few keys.

Thirdly Fractional Reserve limits must be enforced at 9 to 1. - NO Banks should ever be allowed to leverage to more than X10 capital.

Fourthly, an Independent regulator MUST BE COMPETANT ! The FSA DOES NOT HAVE A CLUE OF WHAT IT IS DOING either by Choice or Design. IT IS INCOMPETANT AND SHOULD BE ABOLISHED and start from scratch. The sole responsibility of regulating the banks should be with an independent and restructured Bank of England, most of the current board should be dismissed, as i wrote a 9 months ago, the MPC committee at the monthly meetings apparently instead of acting sat sipping tea and talked about the weather.

Fifthly - Accountable Bank Executives - The laws need to be greatly tightened where the culpable such as Fred Goodwin are actually made to account for their actions in a court of law, instead of being rewarded by ex-banker buddies in the government with multi-million pound cash lump sums on the tax payers backs.

Sixthly - The Labour party Is incompetent and the Conservative Party are in the back pockets of the culpable Bankers where had they been in power then we would already be where Iceland is today, therefore we really need a LIBERAL government that is not tainted by this crisis. The Liberal Party should be given the chance to PUT the DRASTIC but necessary actions into effect that aim to re-balance the financial system in favour of the citizen as opposed to the greedy bankers.

Seventh - The credit ratings culpability in awarding of worthless mortgage bonds triple AAA ratings means we need some agency or organisation that is outside of the market place to rate debt i.e. independent and not reliant on earning an income from

Eighth - INDIVIDUAL RESPONSBILITY - It is NOT ALL the bankers fault, many if not most individuals over a period of time turned themselves effectively into debt slaves, and now cry at the government to do something to alleviate themselves form their debt burden by the government punishing savers by cutting interest rates and devaluing the currency and also making it easier for debtors to default on their debts and wipe their personal slates clean via bankruptcy. The independent institution that overseas the regulation of the banking system needs to also have the duty of educating the population on the dangers of debt, and how to manage personal finances. This is even more important than competent regulation of the banks as once the population understands the value of money, debt and savings then they won't be sucked into crazy 100% mortgages at X7 salaries that set themselves up for default and the banking institutions up for bankruptcy.

In closing, the credit crisis has enabled the general public for perhaps the first time to awaken from a 300 year debt induced coma to see the reality of the way our world works, where most people are born into perpetual debt slavery to work for the bankers and go through the phony process of voting for political parties who are in the pockets of the bankers and pander to their every whim as we have publicly witnessed where our countries future has been given on a platter to the banking industry. Rather than holding the thieving bankers to account, all the politicians have done is to utter a load of hot air, whilst letting the bankers to publically and blatantly rob the countries future.

The so called once socialist Labour party either do not understand the way the world works or those that run the government are deep in the pockets of the bankers seeking their own stake of interest on the back of indebted and enslaved ordinary citizens who will pay for the crimes of the bankers for at least the next decade and thereafter continue to have the debt noose around their necks in perpetuality. The Labour Government is NOT FIT FOR GOVERNMENT. The Conservative Party is DEEP in the pockets of the banking industry that perpetuates perpetual indebtedness of ordinary citizens.

The MP's fraudulent expense claims crisis has shown that what Britain urgently needs is an revolution in the way this country is run.

Is the country run for the benefit of few thousand bankers and the political aristocracy made up of 650 greedy MP's that they funnel cash to in one shape or another, or for the other 60 million people ?

Unfortunately neither the Labour party or the Conservative party that are swimming deep in the cesspit of abuse of tax payer funds offer the British Public a solution to 300 years of debt enslavement to the banking industry. Still voters can try and have their say within 12 months.

Subscribe to my always FREE Newsletter to receive my key forecasts and analysis in you in box.

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-09 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 250 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

bouncer
21 May 09, 15:50
uk rating

S&P downgrading our rating is a disaster.

This is Brown's economic legacy to this country.

This is a very dark day for our standing in the world.


Wen
21 May 09, 15:51
ratings agencies

is'nt it about time these "Credit Agencies" were investigated and asked to explain themselves? If they were any good surely they would have predicted the current financial crisis? or at least warned us of some of the problems inherent in the banking industry? Why does anyone still pay any attention to them?


Rapture
21 May 09, 15:54
ratings agencies

This is the rating agency that rated all the CDO's as AAA. Now they are trying to grab headlines by downgrading the UK economy.

Since Standards & Poor have no credibility left who gives a toss what they say about anything?

The answer is to take all the funds back from the Banks, stop under writing the bad debts adn pay back the nation debt.

Let the Banks fail and bring criminal charges against all Fund Managers that played a part in the Credit Bubble. Charges should also be brought against Standards & Poor for their part in rating the CDO's. They were a central part of conning investers and Bankers into believing that the CDO's were safe.


True Brit
22 May 09, 03:55
UK credit rating

In other words, Gordon's 'economical miracle' was a castle made of sand built on bad debt.

Back to normal now though.


spootrader
22 May 09, 06:40
Sterling equities correlation

Thank you for your informative analysis Nadeem.

You called for Sterling Dollar parity earlier this year. Cable now stands at 1.58, above its 200 day moving average. Cable has been moving up with the US equity indicies.

IF US equities continue to rally into year end, say to 1000 SPX without any large corrections along the way, do you still predict parity for cable this year?

My feeling at the moment is that we will only see a resumption of sterling weakness if US equities weaken and parity will only be seen if SPX retests/breaks the 666 bear market lows.

Your thoughts on the questions above would be appreciated.

Kind regards.


Nadeem_Walayat
22 May 09, 08:26
Sterlings Strength

Sterlings strength warrants indepth analysis rather than a quick reply, though it does imply relative economic strength i.e. that the forecast economic recovery into 2010 will be stronger than expected and may infact achieve Darlings optimistic growth forecast for 2010!

More on this in my weekend analysis which will pull all the threads together,

Best.


Dr M
27 May 09, 10:26
sterlings strength

Hi Nadeem,

Following on from your response to spootraders...any developments regarding your analysis on cable strength and forcasts?

Cheers


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