Sunday, 7 February 2010

Austerity, Repudiation or Inflation?

I'm talking about the national debt folks.

Whoever wins the next election, what are the chance that our sovereign debt will be actually be paid down during the next parliament?

Pretty slim if you ask me.

Political expediency demands that our MPs must continue to spend like crazy in three areas: welfare for the poor, government jobs for the middle class and corporate welfare for the largest companies still nominally in the "private sector".

Making major cuts in any of those three areas would draw tremendous political flack.

Austerity is not on the cards.

Is the next government likely to default on its obligations?

That might sound like a trouble-free way out of the hole, especially if Labour wins again. It would bolster the party's "left" credentials with the grass-roots, wouldn't it?

Lenin did it in 1917...

While credit rating agencies such Moodys do not discount the possibility of default, the backlash would be fierce.

As well as royally shafting the current holders of UK debt (including commercial banks, foreign central banks, the BoE, pension funds and small investors), a default would make Britain a financial pariah.

Future British governments would be forced to live within their means.

Repudiation is not on the cards.

That leaves us with the last remaining possibility. That the UK national debt will continue to grow at breakneck speed and the principal market for this debt will be our very own central bank.

In order to monetize this debt, the BoE would credit the Treasury's account with astronomical figures and take on equally vast sums of worthless UK debt.

It is absolutely no co-incidence that so many other western nations are struggling in the same way that Britain is at the moment.

The post-war Bretton Woods agreement tied the world's paper currencies to the US Federal Reserve Note and the dollar itself to Gold at the rate of $35 per troy oz.

Richard Nixon's administration shut the "gold window" in 1971 and gave us the modern era of total fiat money.

Tax revenues and debt became the new "backing" for central bank paper as inflation ran rampant. The soul singer Marvin Gaye described these political developments in his song "Inner City Blues".

Inflation is definitely on the cards.


john in cheshire said...

I think you are correct, unfortunately. I wish someone would, however, give the like of me some advice how to minimise my losses. I am effectively retired and have a limited amount of funds. I hoped to live out my life in average comfortableness. I don't have a company pension and I am totally terrified about being made destitute because of the socialist agenda.

sound money man said...

For those on a limited budget, I recommend stocking up on essentials.

Think of survivalists living in remote areas of the USA.

They might have several years worth of non-perishable items stashed away in the basement.

Urban Brits (like me) won't be able to take it quite that far, but we can still make a lengthy shopping list, cross off anything that isn't storable, buy what's left in bulk and stash it.

Getting out of debt is another key priority. I know that inflation will reduce the value of any debt, but the ability to repay debts is also impaired.

For those who want to protect the value of their long term savings, I'd suggest purchasing some silver/gold bullion or ANY hard asset that is likely to appreciate in value.