One of the tactics that publishers of wealth management journals like to employ, or deploy, is to shock potential readers with the idea that things are about to go smash and they (the reader) needs to take immediate action to protect their wealth, their families and their future. The action they need to take, of course, is to buy the periodical in question and follow the sound/excellent/knowledgeable/life saving advice of the journal's panel of expert writers. So when you see a headline "The End of Britain", with a tailpiece inviting subscription, you kind of know the road you are on. Except, sometimes, the cloth the journal in question is weaving its tale out of, is rather too plausible - or at least, thought provoking - to be dismissed out of hand.
"As we speak, a perfect storm is brewing for the United States. A day of reckoning that will go down in history as a global watershed moment - when this great country is thrown from its pedestal as the #1 global superpower. I'm talking about a fiasco that will leave all others behind. One that will see our dollars become worth less than the paper they are printed on... " and so on.
I read Weiss from time to time since as perma-bears, they are a tremendous counterweight to the hopium that permeates much of the investment community, where shares are always about to rise. Plus, their analysts may pile on the gloom, but they know their markets. MoneyWeek does much the same thing for the UK market, and its latest report, which really is headlined: "The End of Britain", is a corker.
The gist of the report is really easy to summarize. In 1905 the then British Government decided to introduce a state pension for the working man when he reached the ripe out age of 70. This looked to be both a crowd pleaser and a pretty safe bet since, as MoneyWeek notes, at the time the life span of the average male worker was 48. However, that was the slippery slope. Roll the clock forward 108 years and here we are with a completely unsustainable set of pledges by governments throughout the developed world towards their populations - pledges that no government is going to be able to meet for much longer. Why? Because the pledges are unfunded and are essentially being met, to a vast extent, out of borrowings, creating a gigantic Ponzi scheme. MoneyWeek's case is that Britain has already run up a truly staggering level of debt amounting to 900% of GDP, and that despite the much spoken of austerity policy of the Coalition Government, if you count the unfunded pledges to the NHS, benefits and pensions, Prime Minister David Cameron is going to find that his government has added massively to the UK's debt mountain over the course of the next few years, and has in fact already done so. When the Coalition took over from Labour it inherited a staggering £700 billion national debt. By the next general election in 2015 the UK's debt, on its present path, will be £1.4 trillion, the journal claims.
Already the UK ranks just behind Japan and Ireland as the world's most indebted nation.
"Proportionally (the UK) has more debt than Italy... Portugal ... Spain and almost twice as much debt as Greece. Those are four countries already in the throes of financial crisis. (The UK) is the odd one out because we haven't collapsed - yet. But things can't stay that way for long," the report's authors claim.
The only reason the UK is able to swan along in relatively blissful ignorance of the cliff edge it is hurtling towards, is the unusually low rate of interest its debt currently attracts. If the interest on UK debt was to rise even a few percentage points things would get bad very quickly. How bad? Think back to the 1970s, MoneyWeek suggests. The three day week, rubbish uncollected, the dead unburied. The unpicking of the social fabric can happen very rapidly. Moreover, as the grey lobby gets more powerful and the votes of the over 60s really matter to political parties with waver thin majorities or no majority at all, the chances of any political party having the courage to carry out a really radical retreat from State spending on welfare and pensions, are small indeed.
So the road is set and at some point on that road, the interest rates demanded by investors for buying UK Government bonds is going to start to climb. When it does Britain will very speedily find itself in an untenable position. Since the UK is not constrained by the euro it will doubtless try to monetize its debt by printing its way out of trouble. When that happens every saver can kiss goodbye to their life's savings. Not a pretty prospect.
So, how does one refute the analysis? MoneyWeek's claim is simple.
"In all recorded history, no country has ever recovered from the financial position we find ourselves in today. No government has ever been able to reverse this trend. No emergency action has ever come close to a solution."
The financial collapse of the UK is inevitable, it claims. Maybe, maybe not. However, I personally would be more hopeful of a positive outcome for the UK in the medium term if I could see any way that a future government could roll back state spending very significantly. So far, there is absolutely no sign that this is achievable - at least not while there are investors willing to buy UK bonds at record low rates.
Further reading on sovereign debt:
- Sovereign debt: anxiety levels on the rise, by Anthony Harrington
- The Europe-wide web of debt, by Anthony Harrington
- Nothing but Painful Choices Ahead as the Global Debt Supercycle Ends, by John Mauldin
Tags: business confidence , Greece , Portugal , private debt , sovereign debt , sovereign wealth funds , Spain , State Pension , UK Budget , UK buget 2012 , UK debt mountain , UK economy , UK Inflation , UK Prime Minister , wealth management , Weiss Research