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Lets get it over with…

The problem is not confined to the U.S. Britain’s problem is almost as bad; gross debt there increased from 51.9% of GDP in 2008 to a projected 82.1% of GDP, an increase of 30.2 percentage points, or 6.2 percentage points a year – again double the increase in nominal GDP, which in Britain has consisted almost entirely of inflation. This is not due to British “austerity” – policies since May 2010 have slowed the debt increase somewhat, but killed the economy, since they involved heavy tax rises and very few genuine spending cuts.

- Martin Hutchinson. Read the whole thing.

10 comments to Lets get it over with…

  • Lee Moore

    I never cease to be amazed at all the historical comparisons that these fellows produce, eg with debt to GDP ratios in 1815 and 1945. These comparisons are complete lemons, because now the great majority of government accrued obligations are off balance sheet, whereas in t’olden days the great majority were on balance sheet, part of the official national debt. Both Britain and the US are already far deeper in the hole than they were in 1945.

    The truth is that debt to GDP ratios will fall rapidly to pretty much zero, when we have a good bout of inflation. Even indexed liabilities like pensions eventually succumb to inflation (after a while the uprating is too slow to maintain real values.)

    There won’t be a default in the US, UK or Japan – just a good ‘ol roaring inflation. In the Euro area though there’ll be lots of lovely defaults, as they don’t print their own stuff any more. But in all cases, we’ll have lots of windfall taxes and outright confiscations the closer the reckoning approaches, as politicians try to stave off reality for another month or two.

    I believe honey is the best food to stockpile. It keeps.

  • Paul Marks

    The fiscal and monetary position of the United Kingdom is hopeless.

    And Lee Moore is correct – like the United States most of the problem is “unfunded liabilities”.

    It is pointless to say “but the national debt was a higher percentage of GDP in year …..”

    Half the entire population were not dependent upon government then.

  • Johnnydub

    This is why I am amazed people still save for a pension – the chances of the government not getting desperate and confiscating most if not all of the money for the “common good” is simply too high.

  • James

    Exactly, Lee and Paul. Back in 1815 (a favoured year for people eager to claim that the government’s debt burden today isn’t a problem) government wasn’t 50% of GDP. Which meant there was a far larger private sector relative to total government debt than today.

  • Richard Thomas

    It’s the endgame. The gravy train has finally come to the end of its tracks so the western economies are being looted as fast as possible before it hits the end-buffers (sorry, mixing my metaphors a little). If this were a business, the owners would be tearing out the copper pipes and wiring.

    Lee, I think investing in precious metals, such as lead, may be the way to go.

  • Laird

    @ Lee: “There won’t be a default in the US, UK or Japan – just a good ‘ol roaring inflation.”

    Actually, I think there will be both default and hyperinflation; the only question is in which order they occur. My money (so to speak) is on hyperinflation first, with the collapse (and default) to follow.

    There’s not much really new in this article; anyone who has been paying attention knows most of it. However, what I found intriguing was the prediction that a Japanese default will be the trigger for other western defaults, including the US and UK. That makes some sense, and I hadn’t before seen it expressed that way. On the other hand, a Japanese default could trigger a “flight to quality” (such as it is) as all the money exiting the Japanese market floods into US and EU bonds. That could end up propping up the western bond markets (at least in the short run), rather than triggering their collapse. What do others here think?

  • Tedd

    Paul:

    Not to contradict what you said, but wouldn’t it be accurate to say that “unfunded liabilities” under the Parliamentary system would not be “liabilities” in quite the same way that they are under the American system? In know that in Canada many of the details of how such programs operate, such as the funding model for employment insurance, are under the control of the cabinet, or even the civil service, and can be modified without Parliamentary debate. Whereas, if I understand the U.S. system correctly, a change of any significance to, say, Medicare funding, would have to be debated in Congress, making any such change much more difficult to achieve.

    So the unfunded part might be the same, but the liability part is not.

  • Lee Moore

    UK unfunded government pension obligations are a mixture of employee pensions and state retirement pensions. The former are contractual the latter are statutory. As regards the statutory ones, the law provides for automatic uprating. So in order to reduce the liability, the government has to get Parliament to change the law. Parliament would also have to change the law to escape from its contractual obligations in respect of the official national debt, or in respect of employee pensions. (It might be possible to renege on some employee pensions in quangos, ie where the revenue to the quango could be stopped, leaving it to go bust, without any pension liability bouncing back to the government itself, but that would depend on the details of each quango and whether the government has given a guarantee.)

    Legally therefore, I think there is little or no difference between government pensions and the national debt. A change in the law is required to renege in both cases. The difference is more political than legal. A change in the law to wriggle out of the national debt, or a part of it, would be noticed and complained about loudly and immediately by the creditors. But the law has in fact been changed several times to reduce pension obligations, eg by increasing the age at which you start being paid. A few people grumble, but the government so far has been able to get away with it. (The money saved thereby is vastly in excess of the sums involved in Osborne’s fake “cuts.”)

    As regards the size of these obligations the ONS did a review a couple of years back, and at a time when the official national debt was about £900 billion, the value of unfunded state employee pensions was at about £850 billion and unfunded state retirement pensions was about £3.8 billion – ie the off balance sheet stuff was about five times the on balance sheet stuff. Since then the on balance sheet stuff has been growing at a couple of hundred billion a year, so the unfunded multiple may have fallen to a mere four times the funded by now.

    The pension liabilities were calculated using a 5% interest rate – while the 25 year gilt yield is more like 3.5%. The ONS’s sensitivity analysis suggest that if you used 3.5% to discount the pension liabilities the NPV might increase by 50% or so – ie the sensitivity in the quantum of the pension liability – that’s the sensitivity, never mind the actual liability – is double the official national debt.

  • Lee Moore

    Whoops – unfunded state retirement pensions are about £3,800 billion, not the trifling sum of £3.8 billion.

    Incidentally looking at a graph of UK national debt v GDP, after the 1815 peak at 250% or so, even with a collapse in government spending after the Napoleonic wars, down to a tiny percentage, it still took half a century to get the percentage down below 100%, and another 50 years to get it down to below 50%. For they were doing it without inflation.