Is It Time To Get Worried?

Yesterday marked an historic moment for Britain. For the first time since 1995, British Sovereign Debt was questioned when the auction to sell Gilts failed, with some saying the lowest interest in our bonds ever.

As Gordon Brown tours the world mustering support for his spending plans to fuel the economy which will rely so very heavily on the country’s ability to raise money via selling its debt, we may well ask is it time to get worried? Our inability to sell our debt is a very clear question by the outside world as to whether Britain has the long term ability to repay.

Government debt in the form of so-called gilt-edged bonds which bear a fixed rate of interest over their term are usually classified as the safest form of investment. As a sophisticated, rich and well developed democracy and having one of the major financial hubs in the world in the City of London, it is not a surprise that many traders have been shocked by yesterday’s failed auction.

Policy Worries

The markets may well have got spooked by Mervyn King’s comments and actions this week when he cautioned Brown over raising too much debt. He also was surprised that inflation had reared its head when everyone thought it would fall, which brought into question the Bank of England’s plans for Quantitative Easing (QE) which involves the Bank creating money to buy Government debt. The markets may well have felt that King’s apparent volte face would reduce the amount of bonds he planned to buy and they copied his lead.

Who knows what the real reasons may be but what is clear is that a sharp warning has been sent to the people at the top that the world is not in agreement with Britain’s policies on how to tackle the failing economy. Confidence in Britain’s future, so much part of the Brown-Mandelson mantra, is not shared beyond the realms of the Cabinet Room.

The long term effects of such a failed auction is that the cost of borrowing may rise as Britain may have to borrow from other countries or the IMF and suffer higher interest rates. Worse still, Britain’s credit rating may well get reduced, which was a rumour circulating a short while ago. The repercussions for taxpayers would be that all this massive borrowing required by Brown to fight the economic maelstrom we are in – which is now set to rise to over £1 trillion by 2013 - is that our personal burdens will rise once more. As unemployment rises, the burden on the welfare state gets heavier while tax revenues actually fall as we have already seen at the last announcement, which means that those in employment will have to shoulder more of the cost of that borrowing in the future.

Confusion

In the midst of all this is the apparent lack of consensus on the way out of the mess. Brown was preaching in the US that in fact King may be right in not borrowing too heavily which comes as some relief but in the same breath he says that the answer lies in QE. Sadly, Mervyn King had started to back track on that idea as the surprise rise in inflation had caused concerns that this tactic could horribly backfire as one of the disastrous side effects of QE can be inflation and, worse still, hyperinflation – the sort of nightmare suffered in 1930’s Germany and, more recently, Argentina.

The Slippery Slope

It seems we have teetered past that edge of the precipice that we had reached and are just beginning to scramble for footing at the downslope. The next few months, possibly weeks, could determine whether we lose our balance and start to slide without control or regain our composure. The problem is that having got to this horrific situation through uncontrolled greed, we have plotted a strategy that tries to get us back to the point where it all went wrong. For this, an incredible amount of money has been consumed and pledged in order to shore up the failed system. In reality, we cannot get back to the point we are aiming for as the system failed so badly that it needs to be completely remodelled and then restarted at a lower point – we must endure the punishment of decrease in the economy before we can move it forward again, and that will take time.

The first major mistake was to step in to rescue Northern Rock by taking it into public ownership instead of taking the time to look at alternatives and form a cohesive plan to fight the crash. It triggered a succession of similar knee jerk reactions which have cost us dearly and got us nowhere.

The reactions have been followed by management of the poorest quality by the Government and their army of advisers realised by a shameful attention to detail as to how the enormous mountain of money has been spent. Fiasco after fiasco surrounding bonuses, pension payments, consultancy fees show us how failure in execution of the plan stemmed from the lack planning and foresight by the people who devised it.

I am reminded, having stepped through it this morning, of the incredible lack of planning and execution showed by an inept British Airways (BA) and BAA in the Terminal 5 launch. Bad management is endemic in business and Government and it leads to poor execution which wastes money. Fortunately for BA and BAA they recovered to have a well functioning Terminal. After 12 years of incompetence, I do not have the confidence that this Government has the ability to get out of this mess. The clearest indicator that the same view is held by the wider world came at yesterday’s failed bond auction.

The reality may have dawned that the apparent success of the New Labour Project was built as a house of cards. Fine words and clever spin have been the key factors in creating the vision of a ‘Cool Britannia’, the stuff of dreams. Reality has proved that it was only a dream. But it could have been attained if as much attention to creating the plan and vision had been given to executing it.

For that, we will all pay a very high price as we bear the cost of their failure - every single penny of it plus interest.