Budget Basketcases

I haven't posted much of late. The main reason for this is that there are a couple of big topics that I've meant to post about, but knowing it would take a while I have never bothered to start writing them. So I didn't post anything...

The big topic in front of us at present is Government spending. Namely all those deficits and 'stimulus plans'. Our ever thoughtful governments taking it upon themselves to spend ever larger sums of unearned cash to stop the recession getting worse. How considerate.

Or not in my view...

Let me explain. In days gone by, we used to have something called an economic cycle, the main cycle often being 14-16 years in length. This had periods of expansion (where we lowered debt) and periods of stagnation or contraction (where we borrowed more). But now, following the inspired policies of intellectual heavyweights like Dubya Bush and our own Gordon Brown we are now trapped in a situation of ever-increasing debt.

The graph below of US spending (from http://www.mwilliams.info/images/obama-budget-deficit.jpg) illustrates the point. Governments (led by UK/US) now are just borrowing obscene amounts for which there is no plan to repay, despite what the spin doctors / idiot journalists say. If anyone dares question this, they are dubbed a doom-monger who does not understand the need to get out of recession. But there is a cost associated with debt, even if you don't repay it. The UK govt is likely to borrow £200bn this year (and probably the same again in 2010). At 5% bond rates (the current level) this is £10 bn of interest just to service. If rates went up to 10%, it would rise to £20bn. That is equivalent to 5-6p on the basic rate of income tax. Big sums. Now try multiplying it by 5-10 years of culmulative borrowing....

Problem is this can't go on forever. At some point time will be called on this nonsense. The likelihood of the above 10 year forecast coming true is low in my view. In the last couple of weeks, the UK has been put on notice of a debt rating downgrade. This is the equivalent of the bond markets telling us to get our house in order quick. Inspired policies like printing money (sorry QE) won't get us out of this pickle. Indeed they will make it worse as debasing our currency discourages bondholding, further driving up bond rates. At some point, we'll have to act - possibly drastically as in places such as Iceland (headline interest rates fluctuating in 10-20% range) or Ireland (drastic public sector cutbacks and 10% pay cuts). If we don't then we'll be consulting the Bob Mugabe book of fiscal discipline for ideas!

Meanwhile our leaders put off much needed activity - similar to my blogging really...