Can anyone be bothered reading this?

 

Folks I cut and pasted this article from what is a glorified online advert for a Magazine called "Moneyweek" which from the looks of it has a readership comprised of small time investors and petty capitalists. My question is will the shit hit the fan in the UK as this article predicts. Is this shit going to happen? I know some of you will think I'm a total fanny for even posting this but I know nothing about economics and I know there is no better source of advice than the SPGB. What do you think? 

 

 

Britain is about to be flattened by a tidal wave of debt. It doesn’t matter if you vote Conservative, Liberal, Labour, UKIP – or for no party at all. The facts are the facts. 

Let’s take a look at some numbers…

Two and a half years ago, when the Coalition government formed, we were already in a huge amount of debt. In fact, the previous government had left the country sinking under £700 billion’s worth. Take a look at the following chart:

Source: ukpublicspending.co.uk

The Coalition has spent the last two years desperately and very publically trying to get our finances in order. We’ve had an “austerity” budget. We’ve had tax hikes. We’ve had “the cuts”.

But for all that, our national debt is still growing at an incredible rate.

Despite David Cameron’s talk of “austerity”, he’s going to add an estimated £700 billion to the national debt in just five years. That’s more than Tony Blair and Gordon Brown added to the national debt in eleven years. It’s more than every British government of the past 100 years put together.

The fact is, when you look at our finances as a whole, the Coalition isn’t cutting anything. State spending is going up… our national debt is going up… and our interest payments are going up.

By the next general election in 2015, our national debt is estimated to stand at almost £1.4 trillion, as this chart shows:

Source: ukpublicspending.co.uk

It’s clear: our public finances are in an enormous mess. Anyone can see that. And to some extent, some politicians will admit it. But add in our financial, personal and private debts… and an even darker picture emerges…

Compared to the size of our economy, Britain is now one of the most heavily indebted countries in the Western world. That’s official. Our total debts stand at more than FIVE TIMES what our entire economy is worth.

Proportionally, that’s 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. We’re the odd one out because we haven’t collapsed – yet. But things can’t stay that way for long.  

You see, the only countries that havemore debt than us are Japan, where the economy has stagnated for 20 years and the stock market has crashed by 75%… and Ireland, where the housing market has crashed 50%, and the government has been forced to accept a bailout.

In fact, our debts tower above almost every other nation’s – here are the figures that prove it:

Source: Haver Analytics; Bank for International Settlements; national central banks; McKinsey Global Institute

That's absolutely incredible, isn't it? Yet you’ve probably never seen this fact reported in The Telegraph or on Sky News.

And the worst part is, even THAT isn’t the full story…

Because when you add in all of Britain’s “unfunded obligations” – promises the Government has made on things like public sector pensions – our debts swell to 900% of our economy.

That’s right – when you add everything up, we owe TEN TIMES what our entire economy is worth.

Our political leaders still like to see Britain as a world power. But let’s not delude ourselves.  It’s clear to see: we’re totally broke.

It doesn’t matter which set of figures you use, or which way you look at Britain’s debts. We’re merely talking about different shades of disaster here. 

A country can either pay back its debts or it can’t.

And it is very clear to us that Britain can't 
This inescapable problem has only ever had one outcome: financial collapse.

The next phase in this crisis could threaten our very way of life.

We fear that most people will not know what to do if banks fold and they are unable to withdraw their savings.  They won't know what to do if the stock exchange suspends trading. They will be clueless if their pension income dries up. And if their home loses 50% of its value.   

If the NHS is sold off and benefits are scrapped, the confusion will turn into rage. Media coverage will be of course, unhelpful. 

 

But how did we get here?

After all, we were once the richest and most powerful nation on earth.

What happened to all of our money?

A dangerous experiment gone wrong

On the 1st of January, 1909, something happened for the first time in British history.

The government agreed to redistribute taxes to support people in their old age. On that day, more than any other, the modern welfare state began in earnest.

The rules were simple. Men aged 70 and above could claim between 2 and 5 shillings per week from the government.

But for all the positive press and good feeling, the government wasn’t really making that big a financial commitment – because back then the average working man could only expect to live to 48 years of age.

That’s the equivalent of offering someone a pension today… but only when they reach the ripe old age of 115. So the idea of rewarding anyone who made it to 70 with a hand-out from the public purse seemed perfectly fair. And more importantly for the government, cheap.

That first year only 500,000 men qualified for a government pension. So at the time there were 10 workers for every pensioner.

 

 

It was a perfectly workable policy, but few politicians realised that they were setting in motion a sequence of events that would inevitably lead to the crisis Britain faces now.

And let’s not forget, at the beginning of the 20th century, Britain still had a booming overseas Empire. It had yet to fight in the cripplingly expensive First World War. The economy was on a seemingly permanent upward trajectory.

And the idea that Britain could face any kind of decline – financial or otherwise – had not yet entered mainstream thinking. We could afford to pay for a welfare state, so why shouldn’t we implement it?

But there was one problem: now the welfare state had started… no one had any idea where it would stop… or whether it could actually be stopped if it became unaffordable.

We’d created a trap for ourselves… then stepped right into it.

“Please sir, can I have some more?”

It wasn’t until the Second World War was finally over that the welfare state really began to grow…

 

Welfare was seen as a major part of “Winning the Peace”; keeping the forces of Socialism and Fascism at bay. Of course, politicians soon realised welfare wasn’t just a tool to win the peace. It was also incredibly effective at winning votes too.  

This same scenario came to be repeated across the world – in the USA, Japan and across Europe. Seemingly limitless economic growth and prosperity allowed politicians to make an essentially unlimited promise:

The government promised to look after you “from Cradle to Grave”. This single, powerful idea gave government the licence to swell to a size unimaginable just half a century earlier.

The promises got bigger, and so did the cost.

In just a few short years, the size of the welfare state grew, almost uncontrollably, in a flurry of new laws. There was The Butler Act, which reformed schooling. The Family Allowance Act. The National Insurance Act. The National Health Act. The list went on. The problem was, this all came with a nasty side effect. It was immensely expensive.

Everyone assumed we’d be able to pay for it forever.

But they were wrong.

Politicians found themselves totally and utterly caught in this trap. Any attempt to reduce the size of the welfare state was met with often violent resistance in the form of strikes and protests. Or the party trying to cut back – to do the sensible thing – was simply voted out of power.

After all, an ever growing proportion of the population now benefitted from the welfare state, in one way or another. The safety net couldn’t just be pulled away. The government would forever be saddled with an expense that could ONLY grow.

And grow it did:

• Since public pensions were first introduced, average life expectancy has grown from 48 to 80 – a 67% increase. But the age at which we retire has remained essentially the same. This has resulted in an estimated £5 trillion worth of pension promises the state has made to its citizens – roughly five times what our entire economy is worth. No one has any idea how we’ll pay these. The recent attempts by the government to change the retirement age don’t go anywhere near solving the problem.

• As people have lived longer, the strain on the NHS – the demand for medication, more doctors, nurses and other staff, as well as a skyrocketing cost of caring for the elderly – has pushed our finances to breaking point.

• In fact, as state spending has grown, so has the cost of running the welfare system itself. For instance, the state employs half a million civil servants. To put that into perspective, during the height of the British Empire, when Britain ran a quarter of the planet, the state employed just 4,000 civil servants.  

If you’re in any doubt just how out of control state spending has become, simply take a look at this:

Source: ukpublicspending.co.uk

As you can see, spending has exploded in a way no one could have imagined 100 years ago.

With the idea of welfare being such a vote-winner, no government could take the bull by the horns and cut it back. Not in any meaningful way. They could fiddle round the edges and save a few pennies here and there, but as the population grew larger and lived longer, all they could really do was sit back and let a future generation sort it out.

And now it’s come down to us.

In 2012, for example, the government will spend roughly £120 billion more than it collects in taxes.

Government over-spending = BORROWING

And in a situation like this – when you spend more than you earn – there’s onlyone way of paying for it. By borrowing money.

That alone is bad enough. But remember, we also have to service our debts – to pay interest on a pile of debt that’s mounting ever higher… debt that we’ll never pay back.

So a vicious cycle was set in motion. Politicians realised that to remain in office they needed to make bigger promises, call for bigger reforms, and ultimately borrow more and more money.

This addiction to debt has spread into every corner of British society. Banks… businesses… the ordinary man on the street – these days they all carry a great weight of debt. Debt has become normal. Want a holiday? Pay for it on credit. Want a new crowd-pleasing cut in taxes? Fund it with debt. To put it bluntly our politicians – so-called educated people who are meant to be looking after our interests – acted like teenagers with their first credit card – all to win votes.  

If the UK had been a business or an individual, we’d have been declared bankrupt by now. We’d have been forced to sell our business premises or our home and would have been housed in a run-down flat long ago.

We are broke.  We have been for a long time.

But very soon, it will really hit home.

The most powerful world trend of the next 20 years

So what’s different about today? Why can’t the government just keep giving us MORE – and take on more debt to pay for it. That’s worked for 100 years – why won’t it work now?

The answer to that is simple. The explosion of government spending and government debt has mostly come in the past 30 years. And during that time, it’s been easy and cheap for the government to borrow money.

You see, interest rates on the government’s debt have been steadily falling for thirty years. Here, let us show you…

Source: Gecodia.com

In 1982 Margaret Thatcher’s government had to pay 15% to borrow money for three years. This came in the form of a bond (a gilt). Anyone with money – be it a rich country or a pension fund – could invest in the bonds, and receive 15% interest in return. 

But over time the government’s borrowing costs have fallen – dramatically. Now, the government only has to pay 2% to borrow money over the same period. That’s seven times cheaper than in 1982.

And low interest rates make it easier to borrow money.

Debt has been getting steadily cheaper for three decades. That has allowed the government to borrow more and more money, without having to face the consequences.

But these ‘good times’ are about to come to an abrupt end.

The simple truth is, if interest rates were at their normal rate of 5% – instead of the extremely low 2% they’re at right now – there’s absolutely no way Britain could ever repay its debts. In fact, at normal rates of interest we’re already bust. Not just ‘in over our heads’ but six feet under.

It’s simple maths. If interest rates moved back towards the normal 5% level, our cost of borrowing would triple.

Just to put that into context, if our current debt repayments tripled, the government would have to take drastic action – like abolishing the state pension. Or privatising the NHS. Or pushing tax rates back up to 90%, as they were in the 1960s.

In short, Britain would change radically.

And that’s just if interest rates move back to “normal” levels.

The fact is, when you’re in a lot of debt, interest rates are either your lifeline… or your death sentence. So long as rates stay low, you can just about keep things on track. You can service your debts… keep borrowing… and keep the wolves from your door.

When rates move higher… you get squeezed… and eventually, you’re finished. All of a sudden, you have to find more and more money to cover the interest on your debt. 

They say a picture tells a thousand words. So we’ll save a few words and show you this:

Source: Bloomberg

This is an extreme example of what happens when interest rates take off. As you can see, in 2009, the Greek government could borrow money at just 1%. Then in the wake of the financial crisis, the Greek economy hit the rocks, fell into recession and the markets realised what a complete mess the country was in.

 

Interest rates shot up vertically.  And Greece imploded. Not just financially, but socially and politically too…

As you’ve seen on the news, there have been riots, suicide, overnight poverty, snap elections and crushing general strikes. People couldn’t get their money out of banks fast enough, businesses collapsed. In that environment, just keeping your family safe is a big challenge. That’s the danger of rocketing interest rates to a country with huge debts.

As Douglas Carswell, MP, said recently: “Greece might be the first Western country to discover that you cannot keep running up debts to pay for a lifestyle you did not earn. She will not be the last. The laws of mathematics are universal.”

In Britain, interest rates on government borrowing now stand at record lows. If we’re not at rock bottom, then we’re incredibly close.

That means the most important trend of the next twenty years is almost certainly rising interest rates.

Debt has been getting cheaper for thirty years. Now it’s about to start getting much more expensive.

We’re now facing an unprecedented crisis.  As interest rates rise, our record debts will become impossible to bear.

No one can say how quickly things will escalate. Interest rates could rise overnight. Or they could slowly and inevitably push higher, taking years to slowly strangle the economy, the housing market, the stock market… stripping us all of our wealth one day at a time.

What we can say with certainty is that sooner or later interest rates WILL rise. We’re approaching the day when foreign investors realise the scale of our problems, and demand higher interest rates… or stop lending to us altogether.

When that day arrives, we are certain things will get nasty.

How Britain collapses from within

So what happens to Britain when interest rates rise? What shape will the crisis take? And what does all this mean for you, and your family?
 

• The first “flashpoint” will be the banking system. We’ve already seen this across Europe. This is because banks hold huge amounts of government debt. When interest rates rise, the value of government debt (bonds) falls.  Even a small jump in interest rates would wipe billions of capital off banks’ balance sheets. It’s impossible to say exactly which high street banks – if any – could withstand that kind of hit.

Imagine standing outside your bank, not knowing whether you’ll be able to withdraw your savings.(Image © Bloomberg)

As news of the banks’ problems hits the press, and rumours of a new round of bailouts spread, the public will catch on to what’s happening.  We are likely to see a run on the banks. Picture the scenes we saw at Northern Rock, as people rushed to get their savings back, but ten times worse. That’s because this time round, the government simply won’t have the money to bail the banks out again.

But the crisis will not be confined to the financial sector.

The disturbing reality is that a tiny increase in the interest rates could force tens of thousands of people to miss payments and default on their mortgages.(Image © Bloomberg)

The next domino to fall will be the housing market. Most mortgages are linked to interest rates. As interest rates shoot upwards, millions of people will be pushed “underwater” by a combination of falling housing values and rising mortgage payments.

But that isn’t all…

When a financial system ceases to function, the social fabric begins to fray. We are not simply talking about shares falling or house prices dropping, which is devastating enough. We are talking about the breakdown of social order.

The important thing to realise is that Britain is going to change – very significantly. Things might never be the same again.

A warning from history

Is this all too alarming? Some of our critics would say so.

Most people think Britain’s debt collapse can’t happen. Of course, it’s hard to picture. Banks look safe until they announce they’re broke. Governments say everything’s under control, until they beg for bailouts.

These events often come as a shock to the public. Many people assume they’ll never happen. But assumptions can be misleading. Especially ones that are widely held.

The Victorians thought the British Empire would last forever.  Americans in the 20s thought the stock market boom would never end.  And here in the UK, during the 90s and early 2000s, we thought we could keep borrowing and spending forever.

But if you need any convincing of how quickly things can change… of how rapidly order can turn into chaos… history offers us a number of painful reminders.

Let’s take just one of them…

In the early 20th century Argentina was one of the world’s largest economies. Rich in natural resources, a massive industrial sector, so cultured they called Buenos Aires the Paris of South America. In fact, a popular saying 100 years ago was as ‘rich as an Argentine.’ 

But fast forward to the end of the 20th century, and things looked very different. Argentina’s borrowing spiralled out of control…

A debt implosion isn’t pretty. Order very quickly turns into chaos. That’s what happens during a debt collapse.(Image © Bloomberg)

As Argentina’s debt accumulated in the late 90s, its financial system buckled. Austerity measures were put in place (sound familiar?), businesses closed, trade fell off a cliff and investment fled the country by the billion…

Come early-2001 the country was in a state of siege, with banks blocking cash withdrawals, rioting in the streets and the total collapse of government.  So desperate were villagers for food, they hijacked livestock trucks and slaughtered the animals in the streets.

 

 

 

“Them Was Rotten Days.”

The Smiths

Back in the 1970s inflation ate into cash savings at a rate of 28%. Yes, 28%. It seemed like every time you turned your back, bank savings lost more of their value. Every single day, you became a little poorer.

The FT30 entered the worst bear market in history, falling 73% between 1973 and 1974. Even gilts – our so-called “safe-haven” – collapsed as interest rates went sky high.

Rising interest rates buckled the financial system. But it went deeper than that. The speed of the social breakdown was frightening…

It seems insane now, but social order quickly breaks down when the money stops flowing. Britain’s coming debt implosion could plunge us back to the darkest days of the 1970s. (Image © Getty)

The general strike meant dead bodies went unburied as gravediggers joined the picket line… Stinking piles of rubbish rotted on the streets, towering inside Leicester Square… Those lucky enough to have jobs had to swallow huge wage-cuts during the infamous ‘three-day-week’. Shoppers scoured supermarket shelves by torchlight during blackouts.

“We used to think you could spend your way out of recession and increase employment by boosting government spending… I tell you that option no longer exists. And so far as it ever did exist, it only worked on each occasion… by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.”

 Jim Callaghan. (Image © Getty)

These words are amongst the most important ever uttered in the history of modern British politics. Unfortunately, almost everyone has forgotten them.

For a left wing Prime Minister to admit that too much state spending is dangerous SHOULD have marked a big turning point in our history.

But of course, it didn’t – as this chart so aptly illustrates:That’s not to mention the violent civil unrest, where thousands of the unemployed and strikers clashed with the police. For millions of people trying to keep their hard-earned money secure, it was a nightmare.

 

As the top rate of income tax peaked at 83% in 1974, foreign investment steered away from Britain as if it were an island colony of lepers. We were the ‘sick man of Europe’.

Property and banking crises meant that, people’s lives changed dramatically for the worse: jobs were lost, family businesses closed, people had to dig deep into their savings just to make ends meet. The country was brought to its knees.

So when we’re talking about financial emergencies, don’t be under any illusions. It can happen here in Britain just as it can happen anywhere – given the right conditions.

In 1976, humiliated, the UK government had to be rescued by the International Monetary Fund, with Jim Callaghan going cap-in-hand to beg for a huge bailout. Humbled, he delivered what was meant to be a wake-up call for the British financial and political system:

Source: ukpublicspending.co.uk

In the 1970s the spend-borrow-spend experiment should have ended. It should have been our wake-up call. But we just kept on spending. So long as interest rates kept going down, there was always a way to put off the pain… a reason to borrow more… a justification for not balancing the books.

But the day of reckoning is approaching.

When?

Well, we can’t say exactly. It might be a long, slow drawn-out process that drains your wealth over the next decade. Or this time next year, the financial system could be breaking apart. It’s impossible to say.

 

When these events unfold, very few people will have any idea how to respond.  Most will see the assets they have worked all their life to secure begin to lose value, rapidly.

It won’t matter if you have £5,000 in the bank or £500,000. It won’t matter if you own a five bedroom house in Esher or a one bedroom flat in Croydon. This crisis will lay waste to the wealth of anyone who isn’t prepared for it.

The most horrible feeling will be the loss of control and the confusion. 

Desperate to take some sort of action, many people will feel pressured into making investments that could blow up in their faces.

The cost of making the wrong move with your money, over the next few years, could be lasting. What if your money is trapped in one of the banks that collapse? What if your invested wealth is stuck in one of the companies most likely to crash? This is about knowing what you CAN do with your money if the worst of the crisis unfolds.

Our intention is not to be melodramatic. But if events unravel as we expect, thousands of people will lose a lot of what they have. And they won’t be able to do a thing about it. 

By the time most people have pieced it all together, or the true significance of this information makes the headline news in the financial press, it will be too late. And that’s why so many people could get caught out and lose so much money.

Our message right now is that we believe Britain is entering a long, downward cycle. One that is likely to be punctuated by a devastating financial, and even social collapse.