UK Bankrupt? Does the market now realise?

Despite suggesting in my last post that I would move on to a discussion of regulation in the UK economy, I thought I should make a quick post in light of some of the latest headlines.

The first comes from the Telegraph, and the article reports:

'It is the first time a major international forecaster has explicitly said Britain is facing a technical recession, in which the economy contracts for two successive quarters.

Even more embarrassingly for Gordon Brown, the OECD forecast shows that Britain is the only major economy in the world which will face recession in the next six months. The warning severely undermines his claims that the UK is well-placed to withstand the global downturn.'

This is very much in accord with my earlier post in which I pointed out that the UK is uniquely poorly placed to weather the economic storm. However, I do believe that the OECD is being far too optimistic about the prospects for the other OECD economies. However, this is not about finding further vindication for my predictions but mentioned as further evidence of the loss of confidence in the UK economy.

The OECD appears to be waking up to the severity of the situation in the UK economy, and the market appears to be doing the same. The £ sterling is continuing to plunge, as is discussed in another article in the Telegraph:

'The pound's slump accelerated for a second day in London as traders abandoned British investments following Alistair Darling's warning that the economy is facing its worst threat for 60 years.' and 'The slump leaves the pound worth the least - against a basket of world currencies - in 12 years.'

Again, this is much as predicted but, more to the point, is a strong indicator of the loss of confidence in the UK economy. Finally, and perhaps most disturbing is yet another article from the Telegraph which indicates the terrible state of the British banks:

'The City's embattled banks packaged up the biggest amount of mortgage debt in history last quarter, in a desperate scramble to gain access to the Bank of England's Special Liquidity Scheme.'

The big question here is whether the UK government has accepted toxic waste from the banks in an effort to save the banks, or whether the swap was made against sound instruments. Even more pertinent is the question of the state of the UK banks in general. Many of these swaps have been made during the relatively 'good times', and this raises questions as to how bad the state of the banking sector might be now that times are getting tougher and tougher. I have suggested that there will be a further credit crisis in many of my posts, followed by a rash of bank failures, but perhaps the carnage will be greater than I previously thought.

I have quoted these articles and posts to highlight the gradual and accelerating loss of confidence in the UK Plc financial position. I have pointed out before that I believe that the UK is structurally bankrupt. By this I mean that the UK's ecternal debt exceeds the ability for the UK to ever repay the principle, and that it is increasingly impossible to pay the interest. There is simply not the productive capacity for export to achieve this.

The reason why confidence is so important is best explained through an analogy. The analogy is an 18th century aristocrat who is living beyond his means. He gambles, he entertains, and he has a wonderful time. All of the tradesmen extend to him long lines of credit, and he continues with his profligate lifestyle, all the time feeling that he is above the petty business of managing finance. After all, his family has been wealthy for generations, and it is his right to enjoy the good life. However, he is actually spending his family wealth, and the earnings from his estate are no longer covering the costs.

His creditors also know that his family have a long history of wealth, they see his fine house, they see his expensive furniture, his lavish lifestyle, and can not believe that he will not repay the credit that they are extending.

Then a rumour starts that he is in financial trouble. One or two of his creditors start to press for payment, and restrict his access to new credit. He is unable to make the payments. The word starts to go around that maybe he is not as solid a credit risk as everyone first thought. Creditors start to refuse to extend his credit further, and the aristocrat starts to realise that he has no money. The entertaining, the lavish clothes, all become beyond his means. He can no longer make repayments. His estate does not generate enough cash, and now that the credit has stopped, he can no longer afford anything at all. He is bankrupt.

The UK has long lived on such confidence but, like the aristocrat, it is a misplaced confidence. It is a confidence built upon an idea that wealth is a birthright. However, as the UK is about to learn, it is not a birthright, but something that requires effort and energy. You can only live so long on your inherited wealth before it is squandered away, and you can only live so long on credit before the creditors start to ask questions of your ability to make payments.

It is for this reason that I am looking so closely at news that indicates loss of confidence in the UK economy. As I have said, the UK is structurally bankrupt, and it is just a question of time before all the creditors start to notice. At that point, the UK will visit the IMF....

Note:

On another indirectly related issue, it is apparent that the government is considering a stamp duty 'holiday' in an attempt to revive the housing market. As I have pointed out in a previous post this suggests that the government has some special knowledge about what house prices should be. I will not rehash what I have already written, but would recommend you take a look at the post. It will highlight how absurd such intervention in the market actually is.