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Over
the coming years we will witness the systematic destruction of the British
currency as witnessed through the inflation and commodity / asset price data
as the Inflation Mega-trend starts to unfold following the asset price
destruction induced Deflation of 2008 into early 2009.
This
is the next in a series of articles as part of my inflation mega-trend
scenario that I am in the process of writing up to complete before the end of
December and to finally publish as an ebook that I will make available for
free. Ensure you are subscribed to my always free newsletter to get the
latest analysis in your email box and check my most recent articles on the
inflation mega-trend at http://www.walayatstreet.com
UK
Debt Crisis Deepens as Government Plans to Borrow Another £510 billion
The
Labour government announced in the recent Queens speech with much fanfare a
LAW to halve the public sector net deficit over the next 4 years. Lets leave
aside for the moment that the Labour party is confusing calling an objective
a law for purely political electioneering purposes in an attempt to place a
burden around the next Conservative governments neck. The objective of the
Law is to halve the deficit and NOT to pay down the total accumulating debt.
What this amounts to is that the annual budget deficit of approx £185
billion for 2009/10 being halved to an annual deficit of approx £93
billion by 2013/14 which suggests Britians National debt is expected to
increase by a further £510 billion to an approximate total of
£1,300 trillion or 100% of GDP by 2013/14.
The
below graph illustrates the updated Government projection for the annual
Public Sector Net annual deficit against Alistair Darlings November 08 and
April 09 targets, as well as my original estimate of November 2008 (Bankrupt
Britain Trending Towards Hyper-Inflation? ) that remain unchanged.
 
The
target PSND of £1,300 trillion would approximately equate to 100% of
GDP by 2013/14. This is against my original target as of November 2008 of
£1.48 trillion by the end of 2003/14 at a projected 114% of GDP.
Therefore
there is nothing announced in the governments targets nor any change in
economic circumstances that warrants amending the total liabilities target of
£4.75 trillion by the end of 2013/14, which confirms that Britain
remains firmly on the path of a probable decade of economic stagnation
coupled with high inflation i.e. stagflation.
However
the problem for Britain is that whilst the British economy stagnates, many of
the other world economies will not stagnate but grow thus forcing up the
price of commodities, goods and services and hence result in higher
inflationary pressures. Which therefore implies that the budget deficit will
be widen further as public spending will need to be higher in an attempt to
counter loss of purchasing power of the currency. A higher budget deficit
would require higher interest rates and therefore more monetization of
government debt which confirms the vicious inflationary debt spiral cycle.
The only true answer to escape this viscous inflationary cycle is to get a firm
grip on the budget deficit in the immediate future, the longer we leave the
debt to grow the more difficult it will become to deal with.
Setting
a target of halving the budget deficit over the next 4 years is not going
save the economy from stagflation as by the end of this period Britain will
still owe far more than it does today so actually be in a far worse budgetary
and probable economic state in real-terms.
Quantitative
Easing Necessary to Monetize Debt
The
Bank of England embarked upon a programme of printing money or Quantitative
Easing during March 2009 with an initial print run of £75 billion of a
total set at £150 billion in an attempt to wave the central bank magic
wand to increase the supply of credit. However as I warned at the time (5th March
2009: Bank of England Ignites Quantitative Inflation) that once started the
Bank of England would continue printing money right into the May 2010 General
Election targeting an print run of as much as £450 billion and
therefore igniting Quantitative Inflation during 2010.
Virtually
all of the mainstream press swallowed the Bank of England's hints and winks
that Quantitative Easing had ended at £125 billion during the summer
months, which at the time I stated was not possible (8th July 2009:
Irrelevant UK Base Interest Rate on Hold as Real Rates have Already Begun to
Rise)
This
confirms my view that the Bank of England will continue printing money into
year end to beyond the current arrangement of £150 billion and probably
as high as £250 billion.
I projected
a Quantitative Easing total towards £250 billion by the end of 2009
with the current tally now standing at £200 billion of money printed
which is to mainly buy government bonds issued as a consequence of the huge
budget deficit that the Labour government will rack up by the end of this
year that projects to £175 according to Alistair Darling which is up
from his earlier projection of £38 billion in November 2008 as a
consequence of the Labour Government's objective of aiming to both aiming to
maximise the number of seats retained at the next General Election as well as
to deliver a scorched earth economy to the next Conservative Government.
Quantitative Easing is critical for the purpose of monetizing government debt
for without it UK long dated interest rates would have to be much higher as a
consequence of lack of demand for the huge amount of new debt issued.
The
debt outlook for subsequent years remains bleak with budget deficits expected
to continue for many years as Alistair Darling's own forecast for government
net borrowing over the next 4 years has grown from a deficit of £120
billion in November 2008 to £608 billion as of the budget, which is
still below my forecast total of £735 billion and therefore the
expectation remains for further revisions to the upside over the coming
years. This confirms my view that the Bank of England will just continue
printing money regardless which on face value is both inflationary and
supportive of the economic bounce in the immediate future, both coupled together
i.e. economic bounce and money printing imply a surge in UK inflation is only
just around the corner.
Britain's
Debt Spiral Ensures Quantitative Easing Will Continue
Quantitative
Easing now totals £200 billion which equates to about 15% of GDP which
compares against U.S. Q.E. at approx 5% of GDP which illustrates that Britain
is further on the path towards higher relative inflation than most major
economies and therefore targeting a weaker exchange rate despite competitive
devaluation.
The
Bank of England will not stop printing money whilst huge budget deficits
persist that will not be borne but he open market which would demand much
higher interest rates. As the total national debt grows then so will the
interest payments demanded to service this debt which means that the deficits
will expand further which means even more money printing. Back in 2007 public
sector net debt was about £534 billion which demanded interest payments
of about £24 billion, now it is over £1 trillion demanding about
£36 billion in annual interest payments. However as the government is
eventually forced to raise interest rates by the market then so will the debt
burden grow both as a consequence of the higher rates and higher next public
debt that in 4 years time could demand annual interest payments as high as
£100 billion per annum. Therefore Britain HAS entered into a vicious
money printing cycle towards much higher inflation than we have experienced
during the past 10 years where even if the economy grows increasing tax
receipts will not be able to bridge the ever growing gap between income and
expenditure including ever higher interest payments hence the perpetual debt
spiral.
The
implications of the debt spiral should be seen in the currency markets which
does not bode well for a stable exchange rate, off course as mentioned
earlier competitive devaluations as a consequence of other countries also to
varying degrees immersed in their own debt spirals suggests that the real
impact will be seen in inflation data and fiat currency alternatives such as
GOLD.
Money
Printing to Monetize Debt.
The
Bank of England recently week announced that it would conjure another
£25 billion out of thin air bringing the print run to a total of
£200 billion that has a money supply multiplier effect through
fractional reserve banking of approx £600 billion, normally this would
be X20 to X40 but the Taxpayer bailed out bankrupt banks are just sitting on
the cash hence the multiplier is much lower at this point in time, that and
the fact that the bulk of the money is being used to monetize Government
debt. In response to this Mervyn King has threatened negative short-term
interest rates to force the banks to lend.
Money
Printing Only Solution to Debt Financing
Without
Quantitative Easing the Gilt auctions would fail as there is no way the
market can swallow near £200 billion of new debt per annum or 15% of
GDP, add to this maturing debt that needs to be rolled over which means that
there is no end in sight to Bank of England money printing in ever escalating
amounts to keep monetizing the debt. So again no matter what the Bank of
England states about bringing Q.E. to an end, it is just not possible given
the debt fundamentals to do so as we will see today's £200 billion
extended to £250 billion then £300 billion onwards and upwards to
eventually £500 billion or more than 40% of GDP.
Bankrupt
Governments Following Bankrupt Banks into Debt Defaults and Bailouts
Last
weeks major market event came late in the week whilst American's took the day
off on Thursday for Thanksgiving, Dubai declared that it will be freezing
repayments for at least 6 months on part of its approx $90 billion or so of
visible debt at the state run Dubai World company ($20 billion). The ratings
agencies responded by cutting the ratings on Dubai bonds to junk status.
Whilst
the consequences of Dubai's debt fuelled real-estate boom and subsequent bust
should not come as any surprise, however oil rich Abu Dhabi coming to its own
inevitable shock realisation that it just cannot afford to keep footing
bailout bill after bailout bill for their buddies just a few sand dunes away
which triggered the market reaction as the consensus expectation had been
that they would. However this is not September 2008 and Dubai Worlds debt
freeze / default is not on anywhere near the scale to that of Lehman's
bankruptcy so the perma-crash is coming NOW crowd were AGAIN disappointed,
just as they have been on EVERY stocks correction during the past 9 months!
Analysts
for the more mainstream agencies such as Routers called the news out of Dubai
a black swan event (A black swan in the desert), well to the mainstream press
these days virtually everything is now a black swan! I assume Nassim Taleb
never meant for events such as Dubai's debt freeze to be termed as a Black
Swan? After all the whole point of the black swan theory is to suggest that
black swan's are rare and totally unexpected events, i.e. along the likes of
Arch Duke Ferdinand's assassination triggering World War 1, and not one of
the the dozen or so in-debted teetering on the brink economies eventually
going pop !
I mean
there is a long trail of suspect economies dating back to September 2008 when
Iceland first went pop, with a dozen or so contenders other than Dubai
including Ireland, Venezuela, Argentina, Greece, Portugal, Spain, the whole
eastern block and not forgetting Britain! Its only a matter of time before
another country goes pop, which one could be next ? Well going by the credit
default swap risk prices on sovereign debt, Venezuela tops the list, though
closer to home I would definitely be wary of Greek stocks and bonds! the
safest in terms of default risk are France and Germany which by and large
missed out in the debt fuelled boom.
I
specifically warned about Dubai back in March 2009 that the 22% drop in
property values at the time where not even half way there, that projected to
something along the lines of an average drop of 50%. Where are we today ? You
guessed it average property prices in Dubai are now 50% lower than the peak!
Which says a lot for the so called Dubai property experts back in March who
were calling a bottom for Dubai property prices, though if one took an look
under the bonnet one would see that these 'experts' had a vested interest in
rising prices! Much as we saw with our very own soon to be bailed out
mortgage banks in the UK such as HBOS which pumped out soft landing
propaganda during 2007 and first half of 2008, which I repeatedly ridiculed
as utter gobbledygook.
March
2008 - UK House Prices Tumbling- Interest Rate Conundrum
Britains
biggest mortgage bank also gave a positive spin on UK House prices in March
08, the Halifax's Chief Economist continued to suggest that there will be no
fall in UK house prices this year. - "strong underlying fundamentals
will continue to support the market throughout 2008". "Over the
past year, the average price of a home in the UK has increased by
£4,390 to £196,649," he commented. "Whilst the housing
market has slowed over the past six months, it is supported by sound economic
fundamentals. Interest rate cuts by the Bank of England are also helping to
underpin house prices,".
My
earlier analysis of February 2008 illustrated why it was impossible for UK
house prices to avoid going negative in April 08, not only that but even if
house prices stabilised and no longer fell, that the property market would
still be heading for a sharp year on year fall for the quarter April to June
2008, which the media would eventually term as a mini-crash for the UK
property market as the below table from the February article illustrates.
8th
March 2009 - Dubai Property Market Crash
A
warning to those investors being swayed, the Dubai property crash has only
just begun which seeks to correct a 6 year property boom. The Dubai
construction boom is expected to come to an imminent halt with many partially
finished projects littering the landscape as investors walk away from the off
plan deposits in the wake of the ongoing crash in property values. It remains
to be seen how much of this excess supply will eventually be reclaimed by the
desert as many foreign investors in off plan Spanish properties are painfully
experiencing. My expectations are for an average 50% retracement in Dubai
property prices from the peak, with many of the more over-leveraged high end
properties possibly crashing by as much as 75%.
So
where next for the Dubai property market? Well the crash is NOT over, we are
in free fall territory towards a 75% drop! Maybe the worst case scenario may
yet come true i.e of the desert reclaiming large chunks of abandoned
developments?
The
Dubai debt crisis gave plenty of skin deep copy text for deflationists to
continue betting on another imminent Market Collapse, that FAILED to
materialise Friday! However to interpret what is probably likely to follow
one needs to peel away several layers than opt for the obvious i.e. debt
deleveraging deflation, as I continue to develop the inflationary mega-trend
over the coming weeks as a consequence of ever greater money printing in the
face of escalating debt burdens that ensure INFLATION. Your money will be worth
significantly LESS as a consequence of Money Printing! The Deflationists
Advocate the WORST solution of cash being King. Stocks are Up more than 50%
since March, Gold is up more than 25% over the past year, does this sound
like cash is king to you?
My good
Deflationist buddy, Mike Shedlock questioned my inflationary logic earlier in
the week to which I replied here - Mike Shedlock, a Deflationist Lashing Out
at Nouveau Inflationists?
Don't
get me wrong, to be of a deflationary mind set from mid 2008 and into March
2009 was correct, but being stuck there for the past 9 months is tantamount
to giving up Most of not ALL of any gains for being right during the
DEFLATIONARY downdraft, which my analysis has concluded was a temporary
corrective wave in a ocean of inflation. Will we have more deflationary
corrections ? Off course we will (great buying opportunities!), Will they be
as severe as 2008/09? No Chance! How will one protect ones wealth and make
money ? By gearing towards accumulating towards higher overall inflation and
its consequences which I will continue to elaborate upon during the coming
weeks.
Britain
at the Core of the Dubai Property Bubble
Out of
the $80 billion or so of Dubai debt at risk of default, some $50 billion of
that is with UK banks or near 66%! Why ? Because it is symptom of the spread
do the British disease of blowing property bubbles that eventually burst. As
UK house prices reached to the stratosphere during 2005 to 2007, British
speculators of all sizes spread their wings further a field across Europe
(East and West), across the Atlantic (Florida) and Across the Middle east
into Dubai, where the smaller the local market and less regulated the greater
the subsequent boom and hence the greater the subsequent bust. What does this
mean ? It means as property induced bubbles continue to explode right across
the world, the impact of them will be even greater on Britain than the local
economies, as UK government will once more have to step forward to bailout
bankrupting UK banks, failing that to provide teetering on the brink banks
with ever greater amounts of liquidity in an attempt to kick start lending.
Higher
UK Interest Rates Are Inevitable
Regardless
of the objective of the Bank of England to KEEP UK interest rates at ZERO for
the foreseeable future, the fact is that the growing government debt issuance
and despite monetization of the debt via money printing which has the effect
of driving sterling lower is that the market will eventually FORCE the Bank
of England to RAISE interest rates, i.e. gradually we will see the Government
losing control over the levers of power as the market will not stand to watch
losses mount on government bonds as inflation statistics respond to the real
world increase in commodity prices. My interest rate forecast for 2010 will
expand on this, ensure you are subscribed to my newsletter to get this in
your email box.
Declaration
of War on Savers
The
people of Britain are being hoodwinked by the politicians and inept
mainstream media into thinking that money printing is a free lunch, there is
no such thing as a free lunch, printing hundreds of billions out of thin air
is akin to running a fiat currency ponzi scheme, the price of which is paid
by the holders of existing currency i.e. investors, bond holders and savers
who are hit by the double whammy of -
a.
Artificially low interest rates of 0.5% which results in NEGATIVE REAL
INTEREST Rates, increasingly so as I expect inflation to rise considerably as
part of the inflation mega-trend.
b. The
devaluing currency as the money supply increases well beyond that of the
average of the past 10 years. Again don't be fooled by the British Pound
holding steady against other fiat currencies as all of the worlds central
banks are engaged in their own ponzi schemes aimed at defrauding exiting
currency holders of their real value.
Ever
escalating money printing is a silent declaration of war on the value of
every British citizens hard earned current wage and accumulated savings. All
prudent savers are suffering in terms of the loss of quality of life as
interest rates have been slashed in many cases to less than 0.5%, making life
time accrued savings of more than £100,000 worthless in terms of income
generation with worse to come as money printing seeks to stealthily destroy
the capital value as well.
Inflationary
Consequences of Escalating Debt and Money Printing
The
consequences are INFLATIONARY, inflation means RISING CONSUMER PRICES which
in the UK means rising RPI and CPI indices. Inflation rises as more fiat
currency chases a limited supply of commodities, goods and services, more so
in a stagnating economy which over time sees diminishing output, it is only
that in the present that the consequences of debt deleveraging is MASKING the
building inflationary forces that will let rip with a vengeance which we are
already witnessing in the commodities markets as many markets such as gold
and crude oil have doubled from the Post September 2008 lows.
Recent
articles on my inflationary MEGA-TREND outlook include :
22 Nov
2009 - Natural Gas Screaming Long-term Inflation Mega-trend Buy, But UNG...
19 Nov
2009 - UK Budget Deficit Could Hit £200 Billion, 18% of GDP
18 Nov
2009 - Deflationists Are WRONG, Prepare for the INFLATION Mega-Trend
01 Nov
2009 - Gold Bull Market Forecast 2009, 2010 Update
For
more on my inflationary mega-trend ensure your subscribed to my always free
newsletter, especially as I converge towards including major forecasts for
all key markets for 2010. I.e. what will become of the stocks stealth bull
market that has soared during 2009 ? What about the debt fuelled UK housing
market and economic bounce.
Your mega-trends
investing analyst
Nadeem Walayat
Market Oracle.com.uk
Nadeem Walayat is
the editor of MarketOracle.co.uk.and has over 20 years experience in trading
and investing.
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