Bankrupt UK

[Begbie]

I borrowed this article in full from a news site. (Apologies and thanks to the author). It's the most understandable explanation I've read of why the UK is Bankrupt and how the government are now stealing everyone's savings.

2011 - Now for the Pain

Why This Year Will Wake You Up

Let me take you back to the financial crisis of 2008 in the UK. The spectre of DEflation had our central bank all concerned. So the ‘Old Lady’ slashed interest rates, and continued cutting them, until they reached their historic low levels of 0.5% in March 2009. They remain there to this day.


But this wasn’t enough, in March 2009 the BoE announced that it would print up £75bn, which extended to £150bn and then to £200bn in total today. At the time the BoE said it would use the money to buy up Government Bonds and Corporate debt. As it turns out, the BoE used about 97% of that £200bn to buy up Government debt. This type of debt monetisation is what gave the Republic of Weimar such a headache in the 1920s. Again, this action and all subsequent additional money printing was deemed necessary to fight off those evil falling prices. But let's look at the evidence of their actions and remember that the BoE has a mandate of achieving inflation as measured by the CPI of 2%.

To add to the BoE woes, we get news just before Christmas that CPI inflation is again on the rise, reaching 3.3% in the latest report, with many pundits seeing a rise to 4% in 2011.

The BoE couldn’t give a damn about its 2% mandate, the game plan is to inflate away our debts by making the pound in our pocket increasingly worth less.

For an example about how clueless those at the central bank are about predicting inflation, the Central Bank in November said:“The chances of inflation being either above or below the target by the end of the forecast period are judged to be roughly equal.”

What kind of an assessment is this? This isn’t a prediction, saying something has a 50:50 chance of happening is just a coin toss. It’s like me saying in a two dog race I think fido’s chances of winning are exactly the same as K9. They’re basically admitting they don’t know, and yes, these people really are in charge of the value of our money.

To add insult to injury, in September the Deputy Governor of the BoE, Charles Bean, said savers should “eat into their capital a bit” to help them get by. The country is capital starved and debt saturated, what we desperately need is MORE capital and savings - NOT less. You can’t have capitalism without capital, which comes from savings (under-consumption). This sort of nonsense spouted by people who are supposed to regulate the value of our money should have you sincerely questioning their ability. For a quick recap on how an economy actually grows read Suicide Shopper's Last DanceSuicide Shoppers' Last Dance

This all stems from a mis-definition of what inflation is. Simply put, it is an increase in the supply of money, it has nothing to do with prices. A consequence of inflation are rising prices. So how can I say with certainly that we will have inflation in 2011? Because it is already here in spades, it just hasn’t fully filtered through into everyday goods ........ yet.

The reckless policy by the BoE in ignoring its mandate is hammering savers. You know, the people that 'do the right thing' and don't go out and blow their money on new fangled i-whatevers, but rather ensure there is capital to grow the economy. It's also crippling those on fixed incomes like pensioners as the purchasing power of their Pound decreases. In short, it is a wealth transfer from those savers to bail out the debtors like our banks and our government. Is that fair?

To highlight just how acute the problem is, this report Savers will find it hard to put money aside in 2011 - Telegraph
indicated that out of 2,203 savings accounts on the UK market just 3 offered any real rate of return. All the people with their money in the other 2,200 savings accounts were losing money because the rise in prices is greater than the interest being paid.

Lets be clear, the deflation argument and why it must be avoided (because somehow, things getting cheaper is bad, right?) is a diversionary tactic. The only reason for the money printing was that our largest banks were (and still are by the way) insolvent as is the UK government. Deflation was put forward as cover to legitimise this transfer of wealth.

To keep the current banking system in place, all those crappy loans and toxic assets which were discussed ad-nauseum in the press in 08 and 09 were dumped right on the back of the UK tax payer. They didn’t go away, they were merely transferred over to the tax payer. They are still there to this day.

The politicians, of whatever political strip really doesn’t matter - they all bat for the banking interests when push comes to shove - claim that with the help of the Central Bank and money printing “we’ve managed to avoid another Great Depression”. Not so fast.

You see nobody, especially the majority in our increasingly irrelevant main stream media, has ever asked the simple question; At what cost?.

We had a chance in 2008 to fix the underlying problem in the UK, debt. Vast, unprecedented world beating debt levels. The cost of government isn't what it taxes, but rather what it spends. It doesn’t have any money, it only has what it can take through taxes. And if it doesn't have enough through taxes it borrows the rest, which it must pay for in the future via higher taxes. In 2008 we were bumping up against reality for New Labour's profligate spending and promises.

The UK needed to pay off its debts, and there are only 2 honest ways to do this, and one very dishonest. The UK could've raised taxes to meet its obligations. But with the outcry over 20% VAT this year it's easy to see just how unpopular this is. Secondly, we could've defaulted, but the banks and bondholders who leant us money would've been severely burned - so that was never going to happen. So instead we've opted for the third way of liquidating debt - inflation. This method is tried and tested by governments throughout history, and because of the people's bad understanding of the causes of inflation, people fail to make the connection between the rising prices and money printing, courtesy of the Central Bank system.

Essentially inflation is a tax, instead of raising your taxes the government with the central bank just prints up the money to pay down the debt. So the value of your money goes down and the 'stuff' you can buy with the same amount of money goes down. It's exactly the same as a tax in that you now have less purchasing power left over to buy things. It's a very dishonest tax, and the UK is about to get the mother of all tax bills courtesy of inflation in 2011.

We all know the expression "there’s no such thing as a free lunch". So when we 'rescued' the banks and government in 2008, the 'at what cost' question was largely ignored. Well the people in the UK are about to find out the hard way just what the cost actually is.

As our central bank still deceptively talks about DEflation, here are some things to consider that will be happening this year. Can you see the deflation?

• Petrol is the highest price ever in the UK - set to rise to £1.40lt by April
• Gas and electricity prices set to soar as much as 10%
• Anything that attracts VAT (for those that think this doesn’t affect your weekly sainsburys shopping bill because ‘food’ is exempt, think again) is going up 2.5%, permanently
• Rail travel up around 13%
• Tuition Fees (in 2012) up 300%!
• BA fuel surcharge 10%

Now let's take a look at the price of commodities today (you know, the stuff that makes all the things we buy), which have a lag time of about 6 months before they are felt by the consumer in the shops. These price rises are already baked in the cake for 2011.

• Do you drink coffee? Highest price in 13 years
• Do you take sugar in your coffee? Sugar Price 30 year high
• Do you like cheap t-shirts from Primark? Cotton at 15 year high
• Do you want anything with electrical wiring in it? Copper all time high
• Toast with your coffee in the morning? Wheat prices highest in 2 years.

I could go on - but the trouble is, these prices are expected to rise further in the new-year not decrease. Yeah, clearly there is a severe bout of DEflation just around the corner. Sarcasm off.

These price increases are going to hammer corporate margins, especially those whose business model already operate on razor thin margins (Primark to go out of business in 2011 anyone?). But more importantly, by the time UK citizens have paid more for petrol, more in taxes, more in food, more for just about anything people need in order to go about their day, disposable incomes for electrical trinkets will evaporate. And the 'at what cost' question will start to become clear to the UK citizen.

Into these disposable income sapping price hikes, we have unemployment in the UK going the wrong way again. It now stands at 2.5m (7.9%) according to the government numbers. This number is likely to rise as public sector jobs are culled, and private sector jobs are also cut because of the margin compression mentioned above.

With already 25% of borrowers struggling to pay off debts, throw into the mix the price rises and more unemployment and look for that number to rise further. How can anyone look at the state of our economy and think we've saved ourselves from 'The Great Depression 2.0'? At best we delayed it by a couple of years.

What ever you do please don't listen to absurd argument that as long as wages are 'sticky' i.e. not rising you can't have inflation.I thought that one of the big lessons from the problems in the 70s was to prove how fallacious this argument is. Wages in Zimbabwe are pretty ‘sticky’ - how did that low inflation work out for them?

So how will our government and central bank deal with this looming problem in 2011?


Just before Christmas we had the staggering "Plan b" from that unelected mandarin, Sir Gus O'Donnell. The talk in Whitehall and Government is that there is a real chance the economy 'falters' next year - one wonders why we pay these people upwards of £285k a year to come up with genius assessments like this.

What was staggering about the “Plan b” memoBBC News - Downing Street plays down economic 'Plan B' was the very first action the government, through the BoE, should apparently undertake. Print more money. Yes you read that correctly, option number 1 in 'Plan b' is to "extend quantitative easing".

A Quick aside, we're constantly told that the 'independence' of the central bank is crucial for a smooth running economy. Question; if it is really independent, then how can an un-elected civil servant's first action for countering a downturn be “extend quantitative easing”, is that not a decision solely for the 'independent' central bank to make? Truth is the idea of independence is just a fig leaf covering the private parts of corporatism in the hope the public don’t notice. Every time you hear someone in the press talk about BoE independence, just replace that word with secrecy and you'll be a lot closer to the truth - "The secrecy of the BoE is vital to the smooth running of the economy".

So the UK policy, in the face of massive price hikes this year, will be to follow the US Central Bank right off the cliff. The Fed has just announced another $600bn of money printing themselves, with the threat of more to come. It is clear now, that in the face of huge cost of living expenses in 2011, the Central Bank will pull its one and only lever, and print and print and print some more. This completely reckless policy of 'debauching' the currency was warned about by the very economist they revere so much.

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become 'profiteers,' who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat.

As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
JM Keynes.

This is a very powerful quote, and one that demands be read a few times to realise just what is being said. Essentially devaluing a currency is a way to steal wealth from the citizens with not "one man in a million" noticing.

Remember, we highlighted the fine work over at Hinde Captial who pointed out that on a per-capita basis, the public and private debt of citizen of the UK is the highest in the world, yes, even the US. Being number 1 in the world isn’t always great.

The clear policy of the BoE, the Government and now we understand the head of our Civil Service, will be to run those printing presses until those debts are liquidated. Which means a Pound with vastly less purchasing power than it has today. Because we have a 'fiat currency', it doesn’t have any intrinsic value, it's just a piece of paper with some pretty signatures on it, it only has value so long as people believe and trust that it does. That trust will be stretched to the very limit this year.

And if we are not careful with our money printing, we run the very real risk, according to Keynes, of "over-turning the existing basis of society". We are already starting to see those cracks with ongoing riots in Ireland, Greece and here in the UK. 2011 will be a very interesting year indeed.
Tom Paterson

[Butterfly]

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become 'profiteers,' who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat.

As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

funny how something written almost 100 years ago is still apropos today,

that said, central banks seems to be more capable of managing inflation than managing growth. If you have a collapse of GDP, and a left shift in long term aggregate supply, you would get both inflation and a recession. Currently we have inflation and small growth, the lesser of 2 evils.

the idea was to save us from a deep depression at the cost of inflation. Inflation eventually will be addressed. Basically central banks tried to keep the boat afloat by speeding up to the shores so we can sink into shallow water for a better rescue

[CaptainNemo]

It's the most understandable explanation I've read of why the UK is Bankrupt and how the government are now stealing everyone's savings.

What savings?! Thanks to Labour's economic incompetence we've got the biggest pile of debt since... the last Labour government's economic incompetence!



...years of unsustainably low interest rates to create an illusion of growth to get them re-elected. As well as through unnecessarily high taxes and an unnecessarily large state, handing out preposterous amounts of money to economically unproductive people, e.g.: https://teakdoor.com/world-news/85291...led-250-a.html ('Gang-rape' asylum seeker jailed for £250,000 benefits fraud)

Isn't it the case that: interest rates stay low, consumer inflation rises... consumer spending falls because everything is more expensive; and if interest rates rise, the housing bubble turns into an avalanche... and people have to switch from servicing a mortgage debt to a bank to servicing a rent debt to a landlord... with increased demand for rental properties if loads more people start needing them because they can't afford to keep paying a mortgage, means consumer spending falls because a larger proportion of income has to go on rent + smaller savings & investments? (not to mention the effects of an increase in negative equity and bankruptcies).
Seems to me that the low interest rates are just a wedge to stop the avalanche from coming... but how can housing keep growing when it's so far beyond the reach of every average (mean, mode, and median) of income?
Surely it would be better to slash tax and double VAT to free up spending options?
Lower corporation tax to help small businesses grow (and reduce unemployment, with jobs and paid training)?
People are supposed to be saving for things like pensions, and banks are supposed to be making profits so they can repay the bail-out, but how can they with these ridiculously low interest rates?

This whole propping up of the housing market with low interest rates coupled with the inflation seems a recipe for disaster... delaying the inevitable perhaps?

It's quite well-written. Here's another similar link (or two):
UK Economy 2011 — Economics Blog
Economics Essays: Forecast for Government Debt
Keynesianism is all about tweaking the market to counteract the inefficiencies of cartels isn't it?
It just seems to lead to grotesque levels of market distortion and intervention by the state... there are alternatives...

What is mystifying is the inability of people to conceive of drastically reducing state spending/size of the state, to both to help clear the debt and to increase efficiency and growth in the market. Not just one-off things, but chronic spending.
Surely everyone wants a situation where it's easy to start a business and for it to grow and create jobs, and were people pay tax more on what they spend than on what they earn, and where government is local and decentralised and accountable, and doesn't sink billions into giant stupid software projects.
What the crunch has done is reveal how overcentralised the country is and how many of the areas far from London have fake economies based on public sector rather than actual industries.

I know it's old now, but just look at all the stuff that could be cut back on and replaced with more private stuff:

[blue]

you could see this crisis coming years ago when the

the value of the average house was going up by hundreds of pounds a week ,
times that by 20 million houses ,and every week Britain was getting so many billions richer.
people were bragging, eg thier house had gone up £100 yesterday ,
if you asked them where that money to make Britain and them so much richer than last week ,had come from -they had no clue -
well it wasn't exports -

it was borrowed from the future - now -

[Begbie]

House prices aren't going to fall, it's just that everything else is going to get much , much more expensive.

What the crunch has done is reveal how overcentralised the country is and how many of the areas far from London have fake economies based on public sector rather than actual industries.

Now that the banking sector is worthless I'd hazard a guess that London has joined the rest of the country in having a fake economy.