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The UK is Broke

Although few people yet realise it, the UK is bankrupt: the Government cannot pay its debts.

This might sound a little pessimistic. After all, the UK debt to GDP ratio is still under 70%, and the debt to GDP ratio for some other countries is much higher.

However, for peacetime the current UK debt to GDP ratio is high and rising fast. Furthermore, observers of the UK economy have been sounding warnings for some time: one major bond investor early in the year warned his clients that UK Government debt was a “must avoid” as it was “resting on a bed of nitroglycerine”.

Unfortunately, the Government’s official debt is not the real problem: the Government’s ‘official’ debt is only a small percentage of its true debt exposure. The official debt is merely the tip of a very large hidden iceberg.

The Government’s true debt is the present value of all the commitments it has entered into, on the expectation that these commitments will be paid for by future taxpayers. Some prominent examples are the commitments implied by the public sector pension system, the state pension system, the health system and PFI. The costs of these commitments are staggering.

One recent Institute of Economic Affairs study by Nick Silver put this figure at 333% of GDP. Another, by Christian Hagist and his colleagues at Freiburg University, put the figure at 530% of GDP. Two different methodologies by reputable researchers, both painting a very bleak picture. The latter study also carries out an international comparison – and, relative to other countries, the UK comes out as a basket case along with the US: the US is bankrupt too.

Let’s take the first figure. This means that a typical UK citizen will be expected to pay well over three times’ their annual income just to cover this debt. If we go with the larger figure, then he or she will be expected to pay well over five times their annual income.

With an average income of about £22,000 for per person, these figures suggest a future tax bill in the range between approximately £73,000 and almost £117,000 for each man, woman and child in the country.

Yet even these figures are over-optimistic, in so far as they refer only to the unfunded tax burden that has already been incurred, whereas the reality is that this burden has been rising rapidly before the current crisis, and is rising even more rapidly now. So we are looking at an obligation on the future taxpayer that is not only very large, but still rising sharply.

The problem is made worse still because of the way the tax burden will be distributed. For some older people – such as those in retirement – there isn’t much problem at all. They benefit from the government’s commitments, but are unlikely to have to pay much towards their cost. For young people, it is the other way round: they are expected to pay large amounts into the system and get little back in return; and the younger the person, the worse the deal.

So we have an average, per person, tax burden of £73,000 if we are feeling optimistic and nearly £117,000 if we are feeling pessimistic – but in either case possibly much higher, and certainly rising – that is distributed very unevenly across the population: younger people paying much more, and older people less, if anything at all.

One recent estimate suggested that a UK citizen born in 2011 will inherit, on birth, a debt of perhaps £200,000, and it could easily be much more.

It is simply inconceivable that debts on this scale will be paid off in full.

Nor should they. These were not debts that youngsters freely took on, but obligations incurred on their behalf in many cases before they were even born.

The uncomfortable moral question then naturally arises: at what point does the debt become so large that our future children will be born into a new form of slavery, entering the world shackled by the debts of their forbears?

This highlights the underlying moral as well as fiscal bankruptcy of the system. For years, politicians yielded to the temptation to increase spending commitments and put off the costs of those decisions into the future, when it would be someone else’s problem. The political system itself encouraged them to do so – handing out goodies is so much easier to sell politically than handing out pain. Even the voters themselves were complicit, because they voted in governments committed to ‘spend now, [someone else] pay later’ policies, instead of penalising governments for long-term fiscal irresponsibility. Most of those who will pay the burden did not yet have the vote, so they didn’t count. No-one took responsibility for the long-term.

In so doing, our political system created a huge intergenerational Ponzi scheme, passing the buck from one generation to the next, until the whole rotten system inevitably collapses under its accumulated weight.

The long-term, even medium-term, outlook is therefore deeply unpleasant. Taxes will rise, sharply, but these rises will not be enough, and will leave younger people with little incentive to work or to save. Benefits across the board will be cut, massively: the government will renege big-time on many of its commitments, breaking its health, pensions and other promises on a huge scale. The social and economic consequences don’t bear thinking about. And of course there is the very real danger that even these draconian measures will not be enough: that the government will lose all control of its finances and end up printing money to pay off its debts, so leading to hyperinflation and economic collapse.

Make no mistake about it: the country is bankrupt.

32 comments to The UK is Broke

    • Tim Lucas Tim Lucas

      Should taxes rise, history suggests that some of the richest will leave, and businesses will certainly not choose to start up in the UK, thus increasing the burden on those citizens remaining.

      The truly terrifying thing about this for me is to consider what lengths the government may go in order to exhort the taxes from its citizens necessary to meet its obligations. We now have a government with unprecedented access to our personal data, our civil liberties have been eroded through the courts, the executive has trampled over the legislature such that there are few checks on government power.

      Surely this has all increased the risks of the sort of abuses that have thankfully not occurred up until this point in the UK? Capital controls, border controls, a creeping police state to catch troublemakers etc.

  • The UK is broke, but it isn’t yet bankrupt.

    Government borrowing is ultimately secured against future tax revenues. As long as taxpayers have created enough wealth to pay sufficient tax for the governments repayments can be made we are not bankrupt.

    We and our descendants have been virtually sold into slavery by the governments profligacy – but as long as there are enough mugs in the future to pay the taxes to pay for whatever it was the money was spent on over the past decade or so bankruptcy is defeated and those who own our debt are laughing.

  • Robert Thorpe Current

    Though I generally agree with a lot of the ideas expressed here, I’m not so sure about this one.

    There are several things we have to take into account:

    * 1. Many of the state’s liabilities are “soft” liabilities, the state pension for example. The pension age could be raised and probably will be raised to 69 or more.

    * 2. Percentage of GDP isn’t necessarily a good way to measure debt. What really matters is the real price of the interest payments. That varies with the interest rate.

    * 3. We have no reason to think that we face a similar problem to earlier generations. Earlier this century governments faced different long-run interest rates than they do today.

    * 4. Since almost all governments across the world have been similarly profligate investors don’t have much choice. They cannot choose to invest in countries that have low taxation because of low debt repayments, because there are so few countries of that sort. Even the few countries that do have low debt burdens aren’t always good targets for foreign investment because of other problems. Suppose you’re a schoolteacher and you have to give 2 As, 2 Bs, and 2 Cs for an assignment. Suppose that you class gang together and decide to submit very poor work. You must still hand out the same As, Bs and Cs as though they had really competed.

    * 5. Some governments require the purchase of government debt by pension funds. Governments can use this law to ensure a steady stream of income (probably at the expense of pension fund holders).

    I believe these problems will lead to much lower growth rates, but not sovereign debt crises.

  • Current,

    1. With rates of economic inactivity at around 18%, and many more underemployed, increasing the pension age will simply move the burden of state support from state pensions to benefits, unless wages adjust substantially downwards. Falling wages means deflation, which increases the weight of the burden of debt (of government, businesses and individuals). We are dependent on growth and inflation to make it possible to cover not only our on-balance-sheet debts in the various sectors, but also our unfunded, off-balance-sheet liabilities.

    2. True. Noticeably, the British government generally managed to pay its debts in the post-war period when they were an exceptionally high proportion of GDP, but struggled from the late 60s, when the national debt had got down to around 50% of GDP (thanks to a combination of growth and inflation – government surpluses barely featured after the first couple of years). But it was those very same factors that helped to get the size of the debt down, which also contributed to the gradual rise in interest rates. And as you point out, high interest costs can be crippling on significantly lower levels of debt than we have currently or are likely to retain over the next decade. Too often we focus just on the official government debt, but if you take all the debts and liabilities of government, businesses and individuals, we are far more indebted than after the war, in global economic circumstances that are less conducive to developed Western nations trying to grow their way out of debt. As per (1), the options look like deflation, which will make it harder to afford the existing levels of debt even at low interest rates, or inflation, which will (at best) deter the prudence and saving that we need to rediscover if the economy is eventually to correct, leaving us in an extended period of limbo where we can neither justify saving nor afford to consume, and may (at worst) result in an inflationary spiral as governments find that inflation only delays the pain for as long as it is accelerating.

    3. If investors are willing to lend money long-term to the government at 2 or 3%, what does that say about expectations of growth and inflation? Either they are right, in which case our debt will be increasingly hard to pay off, or they are wrong, in which case borrowing costs will start rising again.

    4. Investors have other options than lending to governments. After a while, if none of your pupils is making an effort, you get out of teaching, and leave the pupils to flounder in their own stupidity.

    5. Your brackets reveal the flaw – if governments force pension funds to invest in government debt on unattractive terms, people will gradually stop putting their money into pension funds. It’s the same point again in a slightly different guise – either government debt is cheap because there is no better option, in which case the economy is so bad that the debts will be hard to pay off, or the government debt is artificially cheap, in which case people will eventually stop buying it, whatever the law says.

    You are wise nevertheless to veer away from the most strident catastrophic predictions (not that the original article could be described as such). There are many paths that the economy and events could take, which could stave off disaster long enough for us prophets of doom to be suspected by the general public of crying wolf, regardless of whether we will be proved right in the end. Markets can stay irrational longer than you can stay solvent or credible, to paraphrase the old conman. It is better to point out that all scenarios eventually come to a dead end, than to nail one’s colours too firmly to a particularly dreadful scenario over a relatively short-term timescale.

    But I am convinced that even the best case would turn out to be another blind alley in the end. Let’s imagine that the attempts to reflate the economy appear to succeed, governments successfully cut their deficits, and businesses and individuals somehow manage to de-leverage without causing an economic contraction, so that we appear to be on a path to restored growth and sound government finances. Our resources are no more able to expand at a rate that keeps pace with several billion more people continuing their pursuit of Western standards of living than they were before the crash. The best case would see a return in the not too distant future to the sorts of price spikes that preceded the credit crunch, and in fact probably significantly more extreme spikes. That would lead to strong inflationary pressures and/or (depending how much the money supply is expanded accordingly) a decline in the income available to be spent on other goods with more elastic demand, and would precipitate the next crash.

    We need the creative destruction of a much bigger correction than we have experienced so far. We need earnings-expectations and asset prices to be decimated, bad debts to be properly acknowledged and written off (with the associated widespread bankruptcies), the prudent to be rewarded by greater control of the remaining capital, the imprudent to pay the price, and people’s expectations of their purchasing power to be substantially reduced. You may be right that the efforts to prevent that correction may be successful for a while, maybe a long while, but I find that prospect very much less appetising and more fearsome than a sharp adjustment. In fact, I like the idea of the world after an adjustment to reality – where scarcity, efficiency and competition regain (of necessity) their place at the core of our economy, rather than the long-drawn-out hangover where over-consumption, inefficiency and corporatism continue to be encouraged by governments in their efforts to insulate people from reality.

    • To Current and Bruno, great contributions for sure. I posted this on the Conservative Home Web site where Steve Baker posted his comments on Prof Dowd’s article in response to someone.

      ” Toby Baxendale said in reply to 1AM…
      To 1am

      I would be very interested to know the following from you.

      1. Do you think it right that the government should be able to account one way and our great pension companies another way?
      2. Would you accept that if they did have to account as we do in the private sector, to all intents and purpose whatever the %X growth rate is, we (the government ) are bust to how we all use the term?
      3. If you do think that the government should be allowed to not provide for its creditors (pensioners) in the usual format but extract from current wage earners as is currently the practice, what economic and philosophical justification would you use to justify this?
      4. For a person who has contributed to his/her pension for 40 years thinking that there is a “pot of money” that has been put aside for their retirement by the state, do you think we should tell them that this is not the case?
      5. With the nearly one thousand billion pounds of extra non balance sheet public / private sector spending , do you think we should be honest with ourselves and put on the books of the national and disclose how many generations at even say 3% growth will take to pay this all off?
      6. Would you accept that the government can only do the following
      a. Redemption
      b. Repudiation
      c. Rescheduling
      d. Refinancing
      e. Repression
      f. Redenomination

      What is your preference?”

      You both know I have a radical proposal of my own in mind, but leaving that aside, if we stay as we are, and yes, we can rub along for many more years, a-f or a mixture of them, what do you think it will be?

      • Robert Thorpe Current

        Though it’s not the best outcome, I don’t think it’s that much of a problem that some state pension-holders may be tricked.

        The root cause of this problem is the public’s unthinking reliance on the good-nature of the state. If people are conned by the state then others will become much more wary of it.

        The challenge for us Classical Liberals is to get people to understand this. If problems begin to occur due to debt then the left will seek to blame stingy governments. Or, they will claim that the previous corporatist governments that ran up the debt were not authentically left-wing.

        They will make the argument that Marxists made after the fall of the USSR. They’ll say that it was not authentically Marxist and they never really supported it anyway. When the Berlin wall fell Classical Liberals were quick to attack this argument.

        If the welfare state suffers a similar sort of crisis we must be similarly quick to respond.

    • Robert Thorpe Current

      > and inflation to make it possible to cover not only our
      > on-balance-sheet debts in the various sectors, but also
      > our unfunded, off-balance-sheet liabilities.

      My point #1 is that the state pension age can be moved upwards. Certainly, many in the age group 65-69 will probably decide not to seek work, and draw welfare instead. However, not all of them will and if the change were made then they would in many cases recieve less money from welfare than from the state pension.

      The level of economic inactivity is a somewhat separate issue. I may be wrong, but my interpretation of what you’ve written above is that you think that real wage demands are too high. Workers are demanding real wages higher than the market rate. I think that’s true, but it doesn’t follow that once the unemployed moderate their demands then deflation will result.

      That’s because at the present time it’s unlikely that the unemployed are judging their spending based upon a predicted high future income. It’s more likely that they are spending less as a precaution. If they were to moderate their wage demands and enter employment then, realistically, I think they would spend more. I know that Friedman’s permanent income hypothesis doesn’t predict this, but I don’t think that theory is realistic in this case.

      Also, inflation and deflation don’t only relate to income and expenditure. Just as importantly, they relate to money creation. The central bank can head-off price deflation with money creation.

      > 2. True. Noticeably, the British government generally
      > managed to pay its debts in the post-war period when they
      > were an exceptionally high proportion of GDP

      However, in WWII the government sold a lot of war-bonds to investors who expected the gold-standard to continue after the war. In the 50s those investors were duped by high inflation eroding their interest and capital.

      In some ways the period just after WWII in Britain is very special because it was the time of a monetary regime change. In the past there had been occasional gold-standard suspensions, but little concerted effort to actually implement Keynesian policies. In the 50s and 60s things were quite different though.

      At the beginning of this period the government were able to trick people, but it was a one-shot deal. After price inflation became the norm the Fisher Effect took hold and an inflation premium was added to all interest rates.

      > but struggled from the late 60s, when the national debt
      > had got down to around 50% of GDP (thanks to a combination
      > of growth and inflation – government surpluses barely
      > featured after the first couple of years). But it was
      > those very same factors that helped to get the size of the
      > debt down, which also contributed to the gradual rise in
      > interest rates.

      Yes, I agree with you completely there. In the long-run (which need not be very long in terms of historical time) the bond market will not be fooled by inflation.

      > And as you point out, high interest costs can be crippling
      > on significantly lower levels of debt than we have
      > currently or are likely to retain over the next decade.

      Yes, but the issue is: will interest payments be crippling in this case? Certainly if the state has to pay, say, 10% then they may be. But, so long as the state keeps the price inflation rate in sensible bounds it seems unlikely that they’ll get that high.

      > Too often we focus just on the official government debt,
      > but if you take all the debts and liabilities of
      > government, businesses and individuals, we are far more
      > indebted than after the war

      How are you making that calculation?

      Why do you think that debts of businesses and individuals are problematic?

      > As per (1), the options look like deflation, which will
      > make it harder to afford the existing levels of debt even
      > at low interest rates, or inflation, which will (at best)
      > deter the prudence and saving that we need to rediscover
      > if the economy is eventually to correct, leaving us in an
      > extended period of limbo where we can neither justify
      > saving nor afford to consume, and may (at worst) result in
      > an inflationary spiral as governments find that inflation
      > only delays the pain for as long as it is accelerating.

      I don’t understand your reasoning here. I agree that price deflation would result in a higher debt burden. I agree also that price inflation could deter saving if the price inflation rate is higher than the nominal interest rate. However, I don’t understand the problem you suggest with a reasonably stationary price level. Why would that create a situation where “we can neither justify saving nor afford to consume”?

      I’m struggling to understand the macroeconomic framework from which your comments come.

      > 3. If investors are willing to lend money long-term to
      > the government at 2 or 3%, what does that say about
      > expectations of growth and inflation? Either they are
      > right, in which case our debt will be increasingly hard to
      > pay off, or they are wrong, in which case borrowing costs
      > will start rising again.

      That investors are willing to lend to governments at 2 or 3% is a good sign because it means that they don’t expect high inflation to wipe them out.

      I don’t see how this rate could be interpreted as the market signalling that “our debt will be increasingly hard to pay off”. If the market thought it would be hard to pay-off then they would demand a higher rate.

      The danger with my line of thinking here is considering the bond market to be a free market. Because of the government requirements on pensions it isn’t really one. I don’t know the extent to which this affects bond prices though.

      > 4. Investors have other options than lending to
      > governments. After a while, if none of your pupils is
      > making an effort, you get out of teaching, and leave the
      > pupils to flounder in their own stupidity.

      But, since the private sector is taxed by the government that doesn’t seem to offer much of a solution for the investor.

      The problem that the investor faces is the universality of deficit imprudence. It has happened all over the developed world and in lots of the developing world too. If the rates of return on private investment become too competitive with bonds then the governments can tax private investment.

      The governments could, for example, set income tax on unearned income to 95% and have a special exemption for government bonds. (Similar tricks were used in the 60s).

      > 5. Your brackets reveal the flaw – if governments force
      > pension funds to invest in government debt on unattractive
      > terms, people will gradually stop putting their money into
      > pension funds. It’s the same point again in a slightly
      > different guise – either government debt is cheap because
      > there is no better option, in which case the economy is so
      > bad that the debts will be hard to pay off, or the
      > government debt is artificially cheap, in which case
      > people will eventually stop buying it, whatever the law
      > says.

      Perhaps, as I said above, it depends on what other choices they have. There are lots of choices regarding saving for the future. But, the governments could also tax other things.

      They could stipulate that banks keep a percentage of their debts as government bonds. That would increase the cost of bank accounts but I doubt many people could abandon their bank accounts. See the discussions and articles about the Baxendale plan on this site earlier this year.

      > It is better to point out that all scenarios eventually
      > come to a dead end, than to nail one’s colours too firmly
      > to a particularly dreadful scenario over a relatively
      > short-term timescale.

      I absolutely agree with you there. The key point that we should emphasis is that government borrowing is bad for the taxpayer.

      > The best case would see a return in the not too distant
      > future to the sorts of price spikes that preceded the
      > credit crunch, and in fact probably significantly more
      > extreme spikes. That would lead to strong inflationary
      > pressures and/or (depending how much the money supply is
      > expanded accordingly) a decline in the income available to
      > be spent on other goods with more elastic demand, and
      > would precipitate the next crash.

      I don’t really see how that is likely. Why do you think this could happen?

      > We need the creative destruction of a much bigger
      > correction than we have experienced so far. We need
      > earnings-expectations and asset prices to be decimated,
      > bad debts to be properly acknowledged and written off
      > (with the associated widespread bankruptcies)

      Well, certainly we want earning-expectations and asset price to reflect the underlying economic reality. How much of a correction that requires is quite a different matter.

      > the prudent to be rewarded by greater control of the
      > remaining capital, the imprudent to pay the price

      We can wish for that all we want, it ain’t going to happen any time soon.

      > In fact, I like the idea of the world after an adjustment
      > to reality – where scarcity, efficiency and competition
      > regain (of necessity) their place at the core of our
      > economy, rather than the long-drawn-out hangover where
      > over-consumption, inefficiency and corporatism continue to
      > be encouraged by governments in their efforts to insulate
      > people from reality.

      As I pointed out in my other post, why should we expect this to happen? I certainly don’t want a crisis of any sort, because I’m sure I’d suffer from it. I expect you would too.

      Throughout history crises have rarely being times when the masses have “come to their senses”. They have mostly being times when they have lurched from one kind of madness to another. I don’t expect any crisis caused by deficits to be any different.

      The best we can hope for is for one or two countries to deal with their debts. Those countries will then be able to charge low tax rates. Because of the comparative advantage that will create capital will be rapidly moved to those countries. They could then act as an example of how the benefits of prudence.

  • Tim Lucas Tim Lucas

    The truly terrifying thing about this for me is to consider to what lengths the government may go in order to exhort the taxes from its citizens necessary to meet its obligations. We now have a government with unprecedented access to our personal data, our civil liberties have been eroded through the courts, the executive has trampled over the legislature such that there are fewer checks on central government power.

    Surely this has all increased the risks of the sort of abuses that have thankfully not occurred up until this point in the UK? Capital controls, border controls, a creeping police state to catch troublemakers etc.

    • Tim, do remember in 1934 Roosevelt confiscated the private ownership of what was then money, gold, and commanded that all holdings be sent to Fort Knox, issuing paper dollars in exchange.

      From March of this year in the USA they passed a law for funds that invest in the USA that confiscates 30% of all USA sourced income from investments if you do not register your fund with the USA government. This is a prelude to making sure not only do USA citizens have to pay tax on all their income world-wide, but also their capital is coming under scrutiny that they have already paid tax on. Why is this? I suspect another wave of confiscation of hard earned wealth.

      Will the UK get involved with this?

      I suspect the banks may well be told who to lend to as a start. Then I suspect they will be obliged to buy more government debt.

      We are on the slippery slope as well.

      We can only hope that our political master have the courage to deal with the issue at hand: bloated government.

  • Current/Bruno,

    With regards to your point 5;

    The UK government already does require pension funds to invest certain precentages of their funds in long dated Gilts – ostensibly to match the funds maturity profiles.

    In reality though this was one of Gordon Brown’s two raids on pension funds (the other being the better known tax on dividends) done to make government funding cheaper and allow the Labour government to spend more whilst massaging the true cost of the debt. Long dated Gilt yields collapsed into the start of 1998 and haven’t really moved since as the new regulations artificially created massive demand.

  • I agree with much of what you’ve said. However, as long as we retain control of our own currency there are always options – though those options are painful and lead nowhere pleasant.

    Of course if you or I run up massive debts we do eventually die and the majority of our debt dies with us. Governments, on the other hand, get to pass them on and on and on.

    Perhaps its time to consider legislation that prevents governments of any colour or hue from borrowing except in national emergencies. Of course, the horse has already bolted, but still…

  • Tyler, Indeed. I took that as read. Likewise, the decline in pension saving is already well under way. The benefits of saving into a pension fund, rather than into some other vehicle (or simply relying on the government), have been so diminished that they are beginning to be outweighed by the disadvantages. By further burdening pension funds with the requirement to invest more of their money in instruments whose value isn’t even keeping pace with inflation, governments are simply hammering another nail into the coffin of pension funds.

    On the upside, pension funds are as guilty as any group for the lack of scrutiny and constraint applied by shareholders and remuneration committees to the corporations. I won’t shed a tear if we are seeing the back of them, particularly if they are replaced with more self-administered saving and investment. But it will be a higher-risk and more time-consuming world for savers.

  • Steve, Governments cannot bind future governments. A government that wants to ignore an earlier government’s strictures on borrowing simply has to change the legislation. Ultimately, as Mises pointed out, the main constraint on the behaviour of governments of any type (democratic or authoritarian) is what the majority is willing to accept.

    I made a point similar to your initial point to our financial advisers (who are strongly in the camp of deflationary expectations) today. As you say, if one ignores the long-term consequences, central bankers (and arguably governments, as governments have the power to change the rules by which central bankers operate) have the tools to devalue our debt burden. Our advisers quibbled about the transmission mechanism (how you get the newly-minted money into the wider economy without being snaffled by the banks), but it seems to me that a determined government could find a way to push the new money into the wider economy. They could, for instance, move to a Japanese balance between taxation and borrowing (50:50) and use the printed/borrowed money to cut taxes, on some sort of supply-side pretext. There’s scope for injecting £300bn p.a. fairly widely and quickly into the economy that way, if a government really wanted to.

    I don’t doubt the ability of determined governments to inflate if they want to. But I do doubt whether that would dig them out of the hole. If it could, we wouldn’t have had the problems that we did in the 70s, not to mention many other more extreme examples from other countries. The problem is that the government would continue to have substantial (and increasing) debts, albeit in a devalued currency and at initially low rates of interest. To avoid interest rates going up at a rate that outweighs the impact of growth and inflation on the national debt, the government would have to print ever increasing amounts of money. And if they do that, they get hyperinflation.

    Contrary to what some monetarists believe, governments cannot manage the economy and override fundamental economic imbalances ad infinitum through currency manipulation. They can delay the inevitable (in the process making the denouement worse) but they cannot prevent it.

    • Robert Thorpe Current

      I can’t remember the paper right now, but there is some evidence from empirical research on this.

      From a set of economic crises in South America is was found that repudiation out-performed debt repayment and inflation.

      If you think about that it makes sense. Inflation distorts every set of accounts so it creates additional discoordination loses apart from the seignourage loss. High taxes cause incentive problems.

      The problem with repudiation is proving to the debt market that you’ve changed your ways. In the paper I mention the governments involved must have successfully done this. I think doing this in the UK could be a challenge though, as Bruno points out future governments cannot be bound.

      • mrg mrg

        “The problem with repudiation is proving to the debt market that you’ve changed your ways”

        Would it really be so bad if, following repudiation, people were unwilling to lend to the UK government? Are there any worthwhile projects that couldn’t be funded honestly through taxation? By the current generation rather than future generations?

        My fear is that people would lend to us, just as they resumed lending to Argentina and Russia and countless other irresponsible governments throughout history. We will need legislation to outlaw government debt, and public education to discourage future governments from repealing that legislation.

        • Robert Thorpe Current

          > Would it really be so bad if, following repudiation,
          > people were unwilling to lend to the UK government?

          No, I don’t think it would be.

          > Are there any worthwhile projects that couldn’t be
          > funded honestly through taxation? By the current
          > generation rather than future generations?

          I don’t think there are. In this regard the Keynesians are very inconsistent. On the one hand they argue for the case of Knapp and the Nominalists, which includes the idea that the size of the government deficit doesn’t matter because the government is omnipotent in the debt and money markets. But, on the other hand they argue that debts are necessary for the government to fund new investment projects.

          If the former were true then the government could just pay people with money without issuing debt to reflect that money.

          > My fear is that people would lend to us, just as they
          > resumed lending to Argentina and Russia and countless
          > other irresponsible governments throughout history.

          I’m sure they will resume lending, but at a premium. The Argentinians and Russians paid a premium after their defaults.

          > We will need legislation to outlaw government debt, and
          > public education to discourage future governments from
          > repealing that legislation.

          That would certainly be useful. When democracy was first attempted it was tyrannical. Over time the old system of estates found ways to tame democracy then the constitutional liberals found more. But, the task isn’t finished, we have to find out how to finish it, which means dealing with debt and welfarism.

          We must destroy exactly enough trust in government, and in the right way. That’s the challenge.

  • Robert Thorpe Current

    I’ve been busy recently and I haven’t had a chance to reply to this discussion thread. I think Bruno Prior’s posts are excellent and I’ll reply to them soon.

    Before that though, I think there’s a general point that needs to be made about the deficit debate. I’ve noticed that lots of libertarians are quite fond of talking up the problem of deficits. In some ways that is reasonable the UK government deficit does pose a great problem.

    Now, if you go over to the “Coordination Problem” blog there is a smart Socialist who comments sometimes called Stephan. He points out that if there were a large-scale economic and political crisis caused by deficits then that would most likely cause a _Socialist_ revolution. The crisis may well be caused by Social Democrat policies, such as the deficits run up by New Labour and those that will probably be run up by the current coalition. But, I think it’s unlikely that the public will understand that. The public are not well enough informed about economic matters to be able to understand when a crisis is fermented by the state. And, because of the general positive attitude towards statism of our times it’s likely if there were a crisis they would run into the arms of the state, not away from them. There is no chance that a deficit crisis would result in more capital being put in the hands of the prudent.

    Certainly, it’s our responsibility to point out the problems of the deficit. But, it’s not in our interest to talk up the problem.

  • Paul Rogers

    That we are broke is not in doubt. Are we insolvent?

    Probably not since many of our ‘liabilities’ can be changed. For example, raising the retirement age reduces the pension liability.

    Much as a business or household facing this situation has to cut expenditure, we also have that option. The government will have to do less, and we will have to accept that some things will stop being the responsibility of the state.

  • [...] readers will remember the Cobden Centre article by Prof. Kevin Dowd, which suggests the figure may actually be as high as 530% of GDP — [...]

  • [...] Slowly but surely, the message is getting out: The UK is Broke. [...]

  • [...] Furthermore,  the long-term prognosis for the UK is much worse than the 70% debt/GDP ratio would suggest, as this ignores the vastly greater ‘hidden’ debt that the government has already accumulated off-balance sheet. [...]

  • Kim Mason

    It seems to me that the government will always prefer the hidden tax of inflation, simply because most people don’t understand the mechanism of monetary expansion. Expect to see more quantitative easing (i.e. ‘printing’ of money by the central bank in order to buy government debt). I put printing in quotes because this is actually done by computers without printing physical currency.

    It is through this mechanism that the government will devalue the bonds held by its existing creditors. The result will be an eventual loss of confidence in government bonds, but that will be irrelevant, because by that stage, the government will probably force people to buy them through compulsory ‘savings’ schemes.

    The result will be decades of low or no growth, and declining living standards. But don’t expect the government to default; when you have a floating currency, ‘printing’ more money is trivial, and always less immediately painful for the government then announcing a default.

    Of course, this is not guaranteed to occur, but with the race to devalue their currencies that the world’s governments seem to be entering (to give a slight export advantage at the expense of price stability), it seems likely.

  • John Train

    There are 3 choices for a govt to deal with debt:
    - Default on debt
    - Inflate away debt
    - Grow GDP to reduce debt
    Historically the Uk has used inflation (via a debasement of sterling) and growth. Inflation was used to remove ~80% of debt post WW2, and growth in GDP ~20% of debt.
    However, remember that much of the GDP growth came after north sea oil was found. This time round we face a Peak Oil scenario and worldwide debt crisis.

    I predict the following:
    - Short-term austerity cuts that will fail (like Ireland)
    - Further debasement in sterling and high inflation eroding the savings of UK citizens
    - A crash in the housing mkt, causing a run on UK banks and MASSIVE money printing in the UK, leading to an inflationary spiral
    - Currency controls and emigration banned
    - Attempted IMF bailout that will fail (UK will be unable to meet the austerity measures)
    - Social unrest, labour govt re-instated leading to confiscation of savings, assets and wealth of all middle and upper classes

  • [...] [22] Cf. Kevin Dowd, The UK is Broke, 23 august 2010 [...]

  • James Bromfield

    Dear All

    Its an empire guys, you expand and expand and expand until you are forced to stop, and then you realise you have been relying on other countries to give you stuff, or else we send the gun boats over.

    I would like to offer a solution, and i dont care if its derided because i dont see any real solutions being offered anywhere.

    Default on the debt and sell whatever technology we can to who we can to clear the debt.
    use the remaining north sea oil to mobilise every county in the nation in cultivating and growing industrial hemp as local food, fuel and industrial material.
    Keep basic services on such as water, electricity to preserve social stability
    Hold tight, take the hit for four or five years until we are a producing nation again.

    Its not a nice situation but i’m 32 years old and debt free (not involved in corrupt industries) yet am stuck in a society that seems unable to correct its course. Ultimately, i think the empire ended 50 years ago, but no-ones been allowed to move on from that, and the powers that were cant face the fact that they cannot dominate everything and everyone, even if its to the detriment of the whole. It seems to be a case of burn down the business that isnt making any money. I have two little nieces, why are they in 200k debt because someone before them wanted a mansion and a SUV – criminal!

    Incidentally, i was harassed for the past two years at work and outside of work by elements connected with well known organisations because i stumbled across the fact that millions of pounds is absolutely squandered on IT every year by government and organisations with no real return. Its an unpleasant fact to face, but lots of people in this country, myself included, should really be working in agriculture or manufacturing, and be happy with it, because consumption economies simply dont last.

    Lets get real, this is very serious and i’ve given up on any sort of governmental solution from the data i’ve analysed and researched and my own work experience. I’m not a defeatist, but if you are blatantly bankrupt, then things have to change, and in my opinion you have to change yourself. If MI5 are watching, then yes, i care about my country so that makes me a threat, better luck on your next assassination attempt boys:-)

    All the best

  • Tim22

    Much learned discussion and chair-rearranging by the above. The problem is one that apparently dares not speak its name. The world is in the grip of rapacious global bankers who have spent generations tightening their stranglehold on nations; which have in turn passed on the grip to their “citizens”, who are now simply collateral for debt. As has been noted above.
    US Presidents of the past have been assassinated for attempting to get free of the anaconda by issuing debt-free currencies such as Lincoln’s greenbacks. Today we have presidents and entire governing bodies which are pre-selected for their craven compliance to the agenda of these monsters, who operate via their preferred global structures to strip away national sovereignties and thereby emasculate a nation’s ability to resist the catastrophic and ineluctable consequences of government borrowing.
    As has been succinctly stated, “Give me control of a nation’s money and I care not who makes its laws.” Allowing the life’s blood of the greatest nations on Earth to fall prey to the wicked machinations of these partially-hidden entities is folly of cataclysmic magnitude.
    There is no justification whatsoever for the welfare of the whole world being sacrificed on the altar of the wickedness and egregious greed of a few individuals.
    An expanded analysis of this viewpoint is given by Bill Still, in his movie entitled “The Money Masters.”
    Available via You-Tube.

  • jonny

    It’s OK to say that the UK is bankrupt, but how can you prove the “Bankruptcy Act of 1869” and have a magistrates to agree and allow remedy via accept for value or some other bond claim? Anything else is absolute hearsay and can result in contempt and perjury charges.

  • It’s okay knowing that the UK is bankrupt, whether the government admits to it or not. However, there will come a point in time, when the government declares us bankrupt. My concern is not the fact that they’re trying to hide it from the public, but the question of what will happen if we are officially declared bankrupt…?

  • Roy

    For me the problem is
    1/ yes we potentially are,

    but more worryingly

    2/The public at large (inlcudes most of the West) are not prepared to accept the reduced government spending that is needed to try to resolve the position. I am still left wondering why the public sector pensions schemes are still available to new recruits!

    The nature of democracy is that political parties need to win public support and their quest for power is stronger than their desire to be honest with the electorate about what needs to be done with the result that no government will i think ever take the draconian actions that are needed as they will lose power.

    • mrg mrg

      2/The public at large (inlcudes most of the West) are not prepared to accept the reduced government spending that is needed to try to resolve the position

      What puzzles me about this is that we wouldn’t need a very radical reduction in spending to balance the books. In Britain, all we’d need to do is roll spending back (in real terms) to levels seen in the mid New Labour years. Hardly ‘austerity’!

      It should be an easy enough message for politicians to communicate, but they are seemingly too enamoured of the status quo.

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