Wednesday, November 26, 2008

Are We Bust?

He's after your wallet

On Monday, Tyler was so shell-shocked by the afternoon's financial revelations he went down with a nasty dose of something, almost certainly Publicus Debitum Gravis. But after he'd taken to his bed, Mrs T made the mistake of watching a late night horrorshow with Niall Ferguson. In graphic detail, the Prof described how a breed of reptilian replicant humanoids, known as politicos, routinely suck the lifeblood out of their innocent citizens, and if left unchecked will destroy the very fabric of civilization. Mrs T was scared to death.

In case you don't know it, the Argentine debt crisis is a hideous tale of grossly mis-managed public finances leading to ballooning public debt. Debt that spirals way beyond the long-term servicing capacity of the state. Hyperinflation ensues. Governments fall. The currency collapses, credit is cut off, and barter replaces cash. Nobody wants to hold the national currency and bank accounts are emptied. Then things get really nasty. In 2001, the Argentine government froze/confiscated all bank accounts. Riots in the streets. The economy died. Over 50% of the population sank below the poverty line.


And the Icelandic version of the tale may well turn out even worse - each and every one of Iceland's citizens are now liable for well over £100 grand of public debt, all denominated in foreign currency. There is no credible plan for repaying it, and Iceland's credit is effectively worthless.

Could it happen to us? asked an edgy Mrs T. Because if so, let's get the gold now and bury it in the garden. And buy some shooters.

A good point.

Then yesterday, longtime BOM correspondent HJ sent a link to a US consumer credit blog, which has calculated a startling comparison of indebtedness. Specifically, it has applied a standard consumer credit ratio - the ratio of debt to income - to the whole economy. It has worked out an "effective net worth per citizen", and it finds we are horrifically worse than any other major economy:

Now of course, we economic sophisticates could come up with all manner of arguments as to why the straight difference between external debt and annual income is totally meaningless. But in today's circs, we can't seem to think what the arguments are, mainly because we're spending most of our time in bed hiding under the duvet.

So what will happen? How on earth are we going to pay down all this debt?

I'll tell you - tax.

Tax, tax, tax, and more tax.

We will be working for the government's creditors. Just like after WW2. A new age of austerity.

And to get a sighting shot on how bad it will be, consider the Chancellor's own forecasts. Despite their ludicrous optimism, it turns out that half of the income growth he reckons we'll get post-2010 will go in tax. Bang. Just like that. He forecasts a c £350m pa increase in money GDP, and an increase in tax of c £175bn pa.

I've instructed Mrs T to stick to Desperate Housewives in future.


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