UK Prepares to Seal Its Borders!!!

RT, today has a report that the UK is drawing up plans to seal its borders in the event of a deepening of the crisis in the Eurozone.

The Treasury is reported to be working on plans to introduce full-blown Capital controls, to prevent the draining of funds out of the country, whilst plans to seal the borders are intended to prevent a mass influx, at a time when, in any case, millions of British ex-pats may be seeking to return home. The Government is already known to have been working on plans to bring back up to 1 million holidaymakers and ex-pats in a huge airlift, as any Euro crisis caused a large scale closure of European Banks, and a consequent inability to access individuals bank accounts, the closing down of cash machines etc., and, of course, the possible losses caused in any return to the old national currencies. One of the reasons that many of the Greek super rich, have been getting their money, yachts and other valuables out of Greece, is the prospect that their Euro Bank accounts might be frozen, and that the exchange rate they might get for a new Drachma, when they are unfrozen, would be extremely poor. Its likely that a similar process would unfold in other countries where such a return might be likely i.e. Portugal, Ireland, Spain, and possibly Italy.

As the report states, British banks could not avoid the financial deluge. They have at least €170 billion of exposure to these banks, but the real exposure is likely to be much greater than that as no noone really knows the extent to which all of the complex interaction of financial derivatives extends across the global financial system. What is clear as I showed previously is that the Credit Crunch is already upon us, demonstrated by the huge increase in Banks short term borrowing costs. The ECB has provided half a trillion Euros to European Banks in the hope that they would use the money to buy the Sovereign debt of their particular countries. Some hope. In fact, around €300 billion went to cover their existing exposure, whilst the rest has been used to shore up their own Balance Sheets. In recent days that has meant record amounts of over €500 billion being deposited overnight with the ECB by those Banks, who are too scared to lend it to each other.

What the action by the ECB does show is that the argument about whether it will act as lender of last resort, for the sovereigns, is over. Clearly it will. This was merely an attempt to achieve that by the back door. When push comes to shove it will step up to the plate itself.

Meanwhile, recent economic data shows that even without a Euro crisis, the UK economy is in deep trouble. It now looks like GDP will have shrunk for the fourth quarter of 2011, by between 0.25% - 0.5%. The services data for October, showed a 0.7% contraction. Given that Services account for two-thirds of the UK economy, and given that other survey data show the rest of the economy flat on its back, its clear that the economy is already back in recession. That is likely to be confirmed technically as the first quarter of next year looks likely to see a further contraction of growth.

Orthodox economists, not to mention the Government and Bank of England, are pinning their hopes on a fall inflation coming to the rescue as next year progresses. That is unlikely. They hope that depressed economc activity will cause prices to fall. But, this analysis of inflation, as being due to demand-pull or cost push, is faulty. Inflation is a monetary phenomenon. It is caused by excessive printing of money tokens, and provision of credit. That was seen in Weimar in the 1920's when severely curtailed economic activity did not prevent hyper-inflation. On a lesser scale it was seen in the stagflation of the late 1970's and early 1980's, when growth cratered, but inflation rose to 25%!!!

With official interest rates at near zero, with massive money printing via QE - the UK is likely to increase QE from £250 billion to £400 billion in February - it is inevitable that this will feed through into higher prices. Despite the claims of the Bank of England, that is why inflation, even on the rigged official bases, has been more than double its target rate for most of the last three years. For one thing, it reduces the value of the pound, which means that the cost of imports rises. With demand for raw materials still strong due to the continued high levels of growth in Asia, Latin America and Africa, with rising wage costs in those countries driving up the prices of their exports, it is inevitable that the UK will face higher not lower inflation in the coming year, though statistical anomalies might cause drops during January and other months.

In the meantime unemployment continues to rise sharply, and seems headed inevitably to the 3 million mark, whilst the Chartered Institute of Personnel Managers is forecasting that the number of jobs themselves will fall sharply too. They are also warning of what they call a sigtnificant rise in passive-aggressive sentiment amongst employees. In other words, workers are feeling screwed but powerless to do anything about it, and so manifest it through a lack of co-operation, sullenness, and so on leading to a sharp reduction in productivity levels.

2012 looks like being another interesting year!