Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

U.K. General Election That Cannot Be Won

ElectionOracle / UK General Election May 04, 2010 - 07:20 AM GMT

By: Money_Morning

ElectionOracle

Best Financial Markets Analysis ArticleMartin Hutchinson writes: The British general election campaign reaches its climax on Thursday, and at this point appears to be anybody's game. The most likely outcome is a "hung parliament" in which no party has a majority and a government is formed through backroom haggling.


However, after looking yet again at the state of the economy in my native Britain, I'm forced to ask a simple question: Why would anybody want the job?

Great Britain: 2008 BC (Before Crisis)
Until 2008, the British economy looked to be in decent shape. It suffered badly in World War II, and then failed to enjoy the same postwar growth as France and Germany because its taxes and government spending were way too high. The simultaneous financing of a free National Health Service and a vast-and-rebellious imperial overhang during the 1950s and 1960s was impossible.

As the British Empire was abandoned and cutbacks made there, the National Health Service and the expansion of university education ate up all the savings. After 1979, however, under Prime Minister Margaret Thatcher, significant free-market reforms in labor law and privatization, together with fairly minor cutbacks in the state sector, produced a much-healthier economic picture.

The early 1990s were painful years for Britain, partly because the attempt to link the pound to the German mark in 1990 made the economy very uncompetitive for two years and required interest rates of 15% to sustain it (as a London homeowner during that period, I still bear the scars - British mortgages are floating-rate!).

Once the pound was allowed to float (downward) in 1992, however, the economy never looked back: From 1992-2007, Britain had the best-sustained growth in Europe.

Two problems remained.

First, even in the 1990s, Britain had again become sloppy about public spending. Spending was allowed to increase, and the increase accelerated after 2000 as the Labour government elected in 1997 settled in and started implementing its wish list.

British public spending - which had bottomed out at around 38% of gross domestic product (GDP) in 1989, Thatcher's last full year - would actually exceed 50% of GDP by 2009. What's more, tax revenue was allowed to fall behind, so that in 2007-2008, a boom year, Britain still ran a budget deficit of 5.3% of GDP.

The other problem was that the economy became increasingly dependent on revenue from the City of London financial district, which developed into a kind of offshore island with very little connection to the rest of the economy. This was partly because London housing prices had zoomed into the stratosphere (the London house that I sold in 1994 for three times what I had paid in 1984 was worth four times that sales price by 2007).

Needless to say, with inflation fairly modest, incomes in 2007 were not 12 times what they had been in 1982. Except in the City. There, even more than on Wall Street (because they started much lower), incomes had gone through the roof. Unfortunately, only Brits earned a modest proportion of those incomes.

In the aftermath of a poorly designed deregulatory push in the middle 1980s, the British merchant banks had been bought out or had gone bust and almost all London banking was controlled from either Wall Street or continental Europe.

Naturally, most of the bankers - like "Fabulous Fab" of Goldman Sachs Group Inc. (NYSE: GS) - weren't British, either. Even more annoyingly, they didn't have to pay British tax, because they could pretend to earn their income outside the country. Add in a sprinkling of Russian mafia and Arab oil sheiks also attracted by the tax benefits - and a mass of impoverished immigrants attracted by generous social benefits - and you had a society in which there was huge inequality and very little in the way of domestically generated productive endeavor.

Needless to say, that's why there's a problem now.

A Tough Road
The British budget deficit is considerably larger than that of its U.S. counterpart. In fact, at about 12% of GDP, Britain's budgetary shortfall is now nearing Greek territory. The City of London looks much less likely to sustain the entire economy going forward - the financial-services business itself may get smaller, and there is now little reason why it should not move elsewhere.

House prices in Britain haven't fallen as far as they have in the United States, which could well mean that there are more huge losses to come in the housing-finance sector.

Various social pathologies have been encouraged by the last 13 years of politically correct public spending, so the forces that should produce an entrepreneurial revival here in the United States may prove too weak to prevail in Great Britain.

There's a second difference whose impact is worth noting. In the United States, a mere year of government expansion has produced a huge political backlash. In Britain, the expansion of government was twice rewarded with thumping election victories - one in 2001 and the other in 2005. Only now, when disaster has occurred, is there any possibility of change - and even now there's no certainty of it.

Bank of England (BOE) Governor Mervyn A. King recently said that the party that wins this election would become so unpopular because of the policies it was forced to introduce that it would be out of power for a generation.

I tend to agree. As a young lad, I wanted to become prime minister (until my student electoral record of zero for 32 (0-32) told me that I'd better shift my career aspirations into banking...). However, even if I were guaranteed the chance to achieve my dream, I wouldn't want to take over right now: They could offer me full dictatorial powers and a guaranteed 10-year term, and I'd still turn it down.

Prime Minister Thatcher turned the British economy around in the 1980s. But today's problems are much worse, and the solutions far more painful - so painful, in fact, that any reformer would get tossed out of office after one term, after which all the "reforms" would get reversed.

That brings us to the eventual outcome of this long and painful story. The probability of an eventual British default on debt must be quite high - and since Britain is not a member of the euro, there would be no bailout.

Source : http://moneymorning.com/2010/05/04/british-general-election/

Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in