LIBOR Interbank Money Market Earthquake Signals UK Debt Recession

By: Nadeem_Walayat

The LIBOR interbank money market rates have FAILED to respond to the co-ordinated and unprecedented interest rate cuts across the world by key central banks which includes the U.S. Fed, Bank of England and the European Central Bank (ECB), in conjunction with extra liquidity and in Britain's case a bank bailout package that could total as much as £500 billion or 41% of GDP which is on par with the amounts as a percentage of GDP the United States required to recover from the 1930's Great Depression.

The mainstream media as evidenced by the TV news coverage by the BBC stating that LIBOR market conditions have improved following the rate cuts are clearly completely failing to understand that a cut of 0.5% in the UK base interest rate 'SHOULD' result in an immediate cut in the interbank rates by the same amount to MAINTAIN the spread. Whilst this has happened partially in the overnight market, it has FAILED to happen wider out which suggests that the interest rate cuts have had NO EFFECT on the money markets, NONE. In fact due to non movement in the absolute 3 month rate the spread has widened to a NEW credit crisis extreme as the below graph illustrates.

As my UK interest rate forecast for 2009 stated that responses to interest rate cuts by the money markets would be muted, and that the banks are now wholly reliant on central bank and government funding to the tune of hundreds of billions of pounds. Therefore the proposed UK bailout package of £500 billion, rather than a short-term fix may become a permanent noose around the UK tax payers neck, which would and is already having consequences on the currency markets and which following the economic slump will result in higher inflation which sets the scene for stagflation for many years.

UK Stocks continued to tumble with the FTSE closing lower at 4314 (-1.2%), reversing an earlier 100 point gain, whilst the Dow Jones is managing to trade near yesterdays close despite the US Dollar spread also at credit crisis extremes.

The extra debt burden of £500 billion would cost the tax payer approx £25 billion a year in extra interest which effectively nearly doubles the countries official government debt of £590 billion which tends to exclude in what can be termed as creative accounting other public sector debt, such as un-funded public sector pension liabilities of more than £800 billion with other hidden debt totaling £100 billion would put real UK public debt at some £2 trillion or some 160% of annual GDP which is far above the governments official limit of 40% of GDP. However economic contraction will shrink UK GDP and hence the gap between spending and income will be again be filled by more debt. Therefore we could see public debt rise to as much as 100% of GDP and if the hidden debt is included, a rise to 200% of GDP.

Increasingly history will look back on the 1997 to 2007 Labour regime as the government that bankrupted Britain through excessive government spending, borrowing and negligent regulation of the banking system, through what can only be termed as systemic greed which was echoed right across the country from individuals to corporations to the public sector to the nations biggest banks.

As an example of the 'excessive greed' during the labour years we need only look at the NHS GP Doctor's hoodwinking of the Labour government into signing contracts which allowed greedy NHS Doctors to increase their salaries far above average earnings as the below graph illustrates.

An MP's report issued today states : GP Partners salaries now averaged £114,000 a year. This happened over a period when GP's started working fewer hours - 36.3 a week compared to 43.1 in the 1990s - and productivity fell. The result is that GP's' salaries have increased on average by an eye-watering 58% since 2003. "Their productivity has actually declined by 2.5% and the public is poorer to the tune of £1.8bn."

As the UK economy enters into recession the generally unproductive public sector will become increasingly more militant in demanding pay rises far above those negotiated earlier this year, which sows the seeds for many winters and summers of discontent and serious stagflationary pressures as the government prints ever increasing amounts of money whilst employing accounting tricks in an attempt to hide the true level of debt from the general public, but will not be able to hide the serious deterioration of the countries finances from the bond, stocks and currency markets.

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

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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 is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 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

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