British Pound Panic Selling, Counting Down to Bankrupt Britain

By: Nadeem_Walayat

The British Pound continued to plunge to new lows in response to the latest step taken by Gordon Brown in effectively bankrupting Britain to win the next election, which is to under-write the toxic bad debts with an another tax payer down payment of £200 billion. This is on top of the £800 billion already committed towards the bailout of the banking sector that began in September 2007 with the initial £2 billion emergency loan to Northern Rock Bank. As you can see we have come a long way from £2 billion in September 2007 to today's £1 trillion, a truly huge number that amounts to £34,000 per UK tax payer, how much will it cost Britain to service such a liability? This is still but the early stages of Britain's road to bankruptcy and currency collapse as my earlier analysis pointed out in November 2008 - Bankrupt Britain Trending Towards Hyper-Inflation?

However the government, Treasury and Bank of England are failing to recognise that the markets are not going to hang around for bad debt statistics to materialise, but will move ahead of future expectations by discounting further borrowings and bailouts. Therefore the British Pounds reaction is not so surprising as the currency sliced through the £/$1.40 recent trading floor and through the original Bear Market target of £/$1.37.50 set some 6 months ago to a 23 year low of £/$1.36. As the below graph illustrates the currency collapse has been truly staggering, sterling has collapsed from £/$2.11 to just £/$1.36 in just over a year.

The unfolding currency crisis of the past 12 months has passed the mainstream press by, that continues to regurgitate nonsense in support of "Quantative Easing" aka "Printing Money" as analysis of 28th Nov 08 pointed out -

Those that advocate and support the borrowing binge in the mainstream press such as Anatole Kaletsky and Ambrose Evans-Pritchard need to take a look at the real value of their savings, properties and stocks, for they can subtract a further 20 to 30% loss of value over the last 12 months!, and there is more to come, much more, especially if the government takes the whole of banking sectors liabilities onto its books as Iceland was forced to do!

Starting with the sensible economics, the Chancellor is right to cut taxes and to spend and borrow through the recession, undeterred by rising deficit projections and the build-up of public debt. The main reason comes down to a simple proposition that almost nobody in politics seems to understand: for every saver there has to be a borrower.

Hysterical claims that Britain is on the brink of “national bankruptcy”, or that the Government has “run out of money” or that the pound is going the way of the Icelandic krona may be a normal part of political banter, but they are absurd. Britain's public debt-to-GDP ratio, at around 40 per cent, is the lowest among the G7 advanced economies and if it were to rise to 57 per cent, as suggested by Treasury projections, this would not present a serious problem. Nor would it drive up interest rates and inflation, to judge by the experience of Japan, Italy, France and Germany, all of which have public debt ratios above 57 per cent. - Anatole Kaletsky - 27th Nov 08 (Times Online)

With deep embarrassment, I plead guilty to supporting the Brown-Darling fiscal give-away - though with a clothes peg clamped on my nose. As the Confederation of British Industry and many others have warned, we face an epidemic of bankruptcies unless we tear up the rule book and take immediate counter-action . - Ambrose Evans-Pritchard - 26th Nov 08 (Telegraph.co.uk)

Gordon Brown is well on the route towards bankrupting Britain as the liabilities by 2012 will exceed £3.5 trillion from £1.5 trillion at the end of 2007. The prime consideration for the Prime Minister is clearly to win the next election at ANY COST.

The above liabilities do NOT include the £5 trillion of additional liabilities should the government be forced to nationalise virtually the whole banking sector. However, again people need to realise that the future gets discounted in the present, which is why the Bank of England, Treasury and Government policy makers do not comprehend that they cannot embark on the route towards £3.5 trillion plus of liabilities without the market reacting by selling out of the currency long before the country arrives at the debt destination. The effect of this is to make the current crisis far worse as the market seeks to discount the over 80% of the £5 trillion banking sector debt which is denominated in foreign currencies. Therefore the facility to inflate out of debt through "Quantative Easing" does not work, as the repayments have to be made in foreign currencies against which the countries debt burden rises as the currency falls and therefore puts Britain's banks under greater pressure. The impact on the economy is deflationary whilst import prices rise thus suggesting a stagflationary outlook or worse.

On top of ever expanding public liabilities that at the end of 2008 stood at an estimated £2 trillion, there is also the private sector debt of £2 trillion weighing down on the economy and sterling.

Time is running out for the government, forget 2011, 2010, even mid 2009, a currency collapse would bring the debt crisis to a head within a matter of days. Just as occurred with Iceland as it did not take 3 or 4 years for Iceland to collapse into hyper-inflation, it took 3 or 4 days!, as I warned off in the article Iceland Going Bankrupt? , and subsequently warned that all of the conditions that led to the bankruptcy of Iceland are present in the UK.

Sterling's fall below £/$ 1.37 is extremely worrying as it implies the ultimate trend after allowing for a corrective rally is towards parity to the U.S. Dollar. What does this mean for ordinary people? It means your house prices will not have been DEFLATED by the projected 38% nominal price trend (UK Housing Market Crash and Depression Forecast 2007 to 2012), but rather DEFLATION of 69% on an exchange rate basis, add to that the INFLATION of an increase in import costs across the board, and you have the potential for an Iceland style collapsing economy with hyper inflation that destroys the REAL VALUE of peoples investments and savings.

The British Pound is extremely oversold on a technical basis which suggest a bounce from current levels to above £/$1.45. However in an atmosphere of panic, price moves occur that are outside of the scope of technical analysis as the price action being observed is more akin to a earthquake measuring Richter scale then the chart of one of the worlds major currencies.

How Britain Could Prevent Bankruptcy and Currency Collapse

Tax Cuts - Firstly the recent tax cuts are a red herring, they are such a small component of the growing debt mountain, therefore the tax cuts are political in nature that will have little lasting effect on either the economy or the total debt mountain. Though cutting VAT by 2.5% is pretty much a useless exercise given the discounting that's already taken place amongst retailers, the £20 billion could have been much better utilised by putting cash in peoples pockets by raising the tax free allowances.

Public Sector Pensions Liabilities- The government needs to take urgent action to bring the public sector pensions inline with the private sector pensions, which effectively means that the amount of retirement benefits is reduced by 2/3rds as the current growing liability is unsustainable and will mean a huge burden on tax payers that will start to be felt in the near future and is already being factored onto the prospects for the UK economy by foreign investors.

Budget Surpluses by Cutting Public Spending - The public sector is unproductive, it always has been and always will be, for instance for every extra £1 spent on the NHS only results in 10p increase in output. Now that the productive private sector is contracting fast as the once highly profitable financial sector goes bankrupt and increasingly takes many corporations that were barely able to survive along with it in the meantime the unproductive public sector continues to grow and demand ever larger resources which is resulting in the large increase in the budget deficit and hence borrowing, the government needs to be forced to stick to balancing the budget which means severe cuts in public spending and increases in taxes so as to pay down Britain's debt to prevent the country from spiraling into hyperinflation.

The Bankrupt Banking System - The banks are sitting on huge undisclosed losses that run to over £1 trillion. Unfortunately the only answer here seems to be for a step by step systematic nationalisation of the banking system, where each bank is taken over, its debts written off, restructured and quickly re-privatised in a form where retail banks only operate based on the amount actually deposited, i.e. the interbank market can no longer be called upon by any retail banks. The same should apply to other critical financial institutions such as insurance companies. The statements by Mervyn King and Alistair Darling of forcing the banks to lend is naive or foolish or just plain ridiculous, because they cannot lend because they are virtually all BANKRUPT ! And any capital that they do have is being closely guarded in an attempt to survive the Banking Crisis, the last thing the banks want to do is to lend to corporations that may go bust just as we fall off the economic cliff into a deep recession.

Saving Initiatives - To enable the banks to increase the amounts available to lend the government needs to make saving a far more attractive option than it currently is. This could be done by greatly expanding the amount that can be saved tax free which currently stands at £3,600 per annum per person. A more radical approach would be to index savings against a fall in the currency just as bonds and savings certificates are available that are indexed against RPI inflation.

Join the Euro - The last resort for Britain is for monetary union with Europe. The benefit will be that the falling currency problem related to the issue of debt and underwriting of the banking system is diluted as the currency then has far, far more reserves backing it then that for the British Pound alone would be left to suffer a currency collapse. This is effectively what the Irish did when they guaranteed all bank deposits at 100%, for if they had been outside of the Euro then they would have been on the fast track to where Iceland is today as no way could Ireland meet such as liability.

The above measures would be extremely painful but but with a light at the end of the tunnel which is far better than the debt fuelled path to bankruptcy that Britain is now upon where as I have mentioned many times during 2008, what lies at the end of the current path is the Weimar republic that resulted in the total loss of value of the German currency and savings due to hyper inflation.

My in depth analysis and forecasts on a range of financial markets for 2009 is due for imminent completion, to receive this in your email inbox on the date of publication subscribe to my always free newsletter .

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'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

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