Wednesday, 6 January 2010

National Debt - The New Sub-Prime?

If sub-prime mortgages in the US really did cause the Credit Crunch then perhaps National Debt will be the cause of the next Crunch.

Newsnight featured a piece on it last night and the subsequent discussion saw Will Hudson of Workgroup defending Government policy saying there was a clear pathway to cutting £100bn off the budget deficit. He seems to know a lot more than others, possibly the Government itself as today Peter Mandelson, fresh from giving us an extra Bank Holiday to celebrate the Queen's reign (how appropriate but which Queen?) is moving to allay market fears that Britain really knows what they are doing about cutting the deficit.

One thing is clear, it is no longer simply a matter of economics. There is plenty of techno-speak on what it's all about but it boils down to politics and the stomach of the British people to fund the deficit. The politics is all about the approach to tackling the deficit - current Government thinking is no better than to continue spending and hope for growth, making a few cuts and raising taxes after the election so as not to spook people. Conservatives seem to be lost in a parallel universe where they seem to have the same recipe but different ingredients. The Lib Dems - yes, well they always seem to be a bit lost on such matters.

What it boils down to is this - there are going to have to be drastic spending cuts and these will need to be deeper and more harsh the longer we leave it and we will be paying considerably more tax in the future. The people of Iceland just voted with great drama about how they feel on paying for the mistakes of their banks in allowing deposits from foreigners to burn elsewhere, there could be a time when the British voter wakes up and smells the whiff of bull enough to know that we are being fleeced for huge economic hubris.

The point being, should we slither down this pathway then Britain will almost certainly look like, if not become, a bad debt risk in the eyes of the markets. There is a view, expressed last night, that the Government may even flirt with being a bad risk before galvanising to do something about it all - like being put on a watchlist as many other nations are now. The reality is that many nations, some richer than others, are now showing warning signs that their ability to service their national debt is worsening. Britain is not yet one of those nations but as the Quantitative Easing is due to exhaust soon, our National Debt will become the focus of the open markets and at that point we will get the first clear indication of how others see our true economic condition.

I think we are in for a rude surprise.

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