In its latest Fiscal and Sustainability Report, the OBR notes that the Public Sector Borrowing Requirement (PSBR), or what it now calls public sector net borrowing, is likely to come in at between 13% to 21% of GDP. For a comparison, after the 2008 global financial crisis, it rose to only about 10%. But, in fact, the deficit this time around is likely to way exceed this projected 13% to 21%, for reasons I have set out in previous posts over the last few weeks. The truth is that the measures announced so far, and the money spent on the furlough scheme are small beer compared to the massive sums that are going to be required to bail-out large chunks of the British economy that has been sunk by the government imposed lock down. After 2008, £2 trillion was spent bailing out the banks, though everyone was told that the figure was only going to be a fraction of that when those bail-outs began. This time, the figure will be several times that.
As set out in previous posts, to find the money to cover all of this, the government is going to have to borrow on a huge scale, and that borrowing is going to inevitably send interest rates soaring, because its not just the government that is going to be engaged in such huge borrowing, its also businesses, and households on an unprecedented level. Nor is it just British government, business and households that will be borrowing on this huge scale, but that same pattern is going to be the same across the globe. The government is not going to raise taxes or cut spending, because the government imposed lockdowns have sent the global economy into the worst economic slowdown in 300 years, and to impose further austerity now would be insane. In 2008, initially, all government introduced Keynesian fiscal stimulus to stabilise their economies before beginning to impose austerity. So, the only way to cover this deficit is by huge borrowing.
Real interest rates are already much higher than the fantasy rates quoted on the business channels, i.e. the highly manipulated yields on government bonds, or the more or meaningless bank rates that central banks announce, which is what they charge to commercial banks. The yields on government bonds (with a knock on effect to top rated corporate bonds) are a total fiction, because they simply reflect the huge amount of QE undertaken by central banks to print money so as to buy up those bonds, and so inflate their price, and consequently reduce their yields. It is meaningless, because this is just a means of those central banks protecting the paper wealth of the top 0.01% that owns these bonds, and other paper wealth in the form of shares, as well as inflating the prices of those assets held on bank balance sheets, and without which, most banks around the world would be seen to be massively undercapitalised, probably to an even greater degree than was the case in 2008.
The difference with all of this borrowing is that it is going straight into consumption spending not into the buying of financial assets. So, the idea that it could just be paid for by raiding the magic money tree once more, by printing even more money tokens is again a fantasy. Printing huge amounts of money tokens in the past thirty years hyperinflated all those asset prices that the money was used to buy. Printing money to cover borrowing to finance consumption will similarly cause the prices of all those consumption goods, and of the producer goods required for their production to inflate rapidly, which will simply make even more borrowing required!
At the moment, speculators, intoxicated on the money printing and asset price inflation of the last thirty years, think that the promises of governments and central banks to do even more money printing will push up those asset prices even further, and initially bond prices. So, they have again been rushing in to buy bonds, ahead of what they expect to be a surge in bond prices, even though those bonds are currently offering negative yields. And, of course, in the short-term that is a self-fulfilling prophecy, because as they rush in to speculate ion those bonds, the additional demand does indeed push up their price. Such is the course of every speculative bubble just before it bursts.
And burst it undoubtedly will. We have yet to see the real borrowing taking place, and the issuing of debt to cover it. But, when it comes it will be like a deluge. As the money from that borrowing starts to surge into the real economy this time, and not simply into financial speculation, it will start be feeding already rising prices caused by rising costs caused by the drop in productivity imposed by the results of the lockdown. The IFS recently published a study showing the real increase in consumer inflation, which rose by s much in a month as it usually does in a year. As the lockdown ends, there are reports that hairdressers, for example, have doubled their prices, partly because they can, as demand has been unleashed, and partly because the restrictions means their unit costs have risen, partly to try to get back some of their lost income over the period they have been closed. That kind of increase in prices will be common throughout the economy, and flooding it with liquidity will only increase such propensity to raise prices. As that initial inflation rises, so the first warnings of what such money printing heralds for the future, which will cause bond speculators to think again.
Rising interest rates as all this borrowing unfolds will cause asset price to crash. And, as asset prices crash, so that is again going to devastate the banks and financial institutions. Europe is particularly susceptible to that, as it never eally resolved that issue following the 2010 Eurozone Debt Crisis, instead it just printed money and inflated those asset prices to paper over the holes in the banks balance sheets. Now those holes are going to be torn wide open. States with conservative governments are again likely to seek to save those banks with yet more bail-outs, which will now be in addition to the huge bail-outs they will have to make for all of those huge strategic industries such as airlines, airports, aerospace industries, and vehicle production.
This crash will make 2008 look like a minor blip.
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