UK Government Borrowing

In my essay 'A Funny View of Wealth', written last November, I had the following to say about government spending:

'All the while this is happening the government will fall into crisis. With a falling pound, an economy collapsing around them, and an already overstretched borrowing position, they will be faced with ever more expensive borrowing, meaning higher interest rates, or massive cuts in public expenditure. There will be no room to manoeuvre. The only solution will be to cut back on expenditure. Continuing to borrow will be too expensive, and would destroy the value of the pound, as well as creating an even deeper crisis of credibility that the UK government can manage the economy. As the government is forced to cut back, many of the new state sponsored jobs that have been developed over the last ten years will start to disappear. This will not impact immediately, where funds have already been allocated, and contracts remain, but the process will accelerate over time. Some regions, such as the North East, will be hit very hard, as their economies are largely dependent on the state sector.'

The part about 'All the while this is happening' refers to the slide of the UK economy into depression (you will find the full context for the quote towards the end of the essay).

Today you will find articles showing that government borrowing is now at record levels. For the news articles see The Times and The Telegraph.

This is the final element in the predictions I have made for the UK economy; Unemployment, housing, the drop in the £GB, and consumer spending are all following the path that I predicted almost perfectly in 'A Funny View of Wealth'.

I am not mentioning this to be smug, though it is nice to be proven right (as much as I wish I were proven wrong). The point in mentioning this is that the essay, and some of my subsequent posts, make predictions further out than now. As such, if I have been right up to now, it suggests that I may be right about the next phase.

So what have I predicted? I will summarise.

First of all, the contraction will accelerate. In the original essay, I suggested that what will happen next is that the economy will contract such that GDP will fall back to the levels of 10 years ago 'or even longer'. In a post, when I first started this blog in June, I suggested that it may be worse than I originally thought. In short, the contraction is going to be of a degree that the economy will contract back to a point even earlier than ten years ago. I hesitate to say where this will be.

My prediction was that the current downward spiral is just the start; that the UK economy has a long way to go down before it can start to even level off. I have, since the original essay, been emphasising the fragility of the banks, and that a second credit crisis is brewing. Consumer and business defaults are going to accelerate into a deluge, and these defaults will take several financial institutions to bankruptcy.

As such, if you are reading this, now is the time to get your finances in order. Spread your money across several institutions, and watch the news carefully. Get into banks with online accounts, and be prepared to move your money at very short notice. If a crisis occurs, you will need to be among the first to move your money, and online accounts give you an option to do this.

Is there any investment that is safe at the moment?

In the turmoil that is taking place, the short answer is 'no'. The key to getting through this crisis will be cash, and the ability to move it to safety. For financial institutions, look for the institutions which have had the most conservative lending policy. I do not have the time to do this, so it will be up to you (do not look at policy now, look at their history).

As a note on cash, the £GB has a long way to fall, but I can not recommend any currency as safe, excepting the RMB, and that presents particular difficulty. I also have some niggling doubts about the RMB. If exports start to fall, will the Chinese government seek to boost exports through currency manipulation?

I would like to give more firm advice, and tell you there is a way to protect your assets, but this is the best that I can do. Flexibility, and an eye on the news. Things are going to get much, much, much worse in the coming months.....