The End of Britain?

There is a very scary bulletin from the investors' magazine MoneyWeek doing the rounds. It is entitled "The End of Britain", and forecasts an imminent disastrous financial collapse.

I've checked with the editor of MoneyWeek, and yes it is genuinely their production. The reason why it looks different from the rest of their output is because it was written by their marketing department. And that of course gives the clue as to what this is all about. Whether or not they genuinely believe there will be a disastrous collapse is not the point, though to be fair MoneyWeek is generally fairly pessimistic about the UK and has been forecasting a property market collapse for several years now. No, this is all a marketing ploy. They want to scare you into buying a subscription to their magazine.

I could just say "Don't do it", but actually as this bulletin is seriously scary I think it would be more useful if I took it apart and debunked it. So here goes.

The first thing that the bulletin does is establish credibility by listing all the events that MoneyWeek has correctly forecasted in the last few years. So they claim credit for forecasting the 2008 oil price spike - which actually is a much under-rated phenomenon which is not often discussed. And the reason it is not discussed is because of the financial crisis and the fall of Lehman, which happened the same year. Did MoneyWeek forecast that? No, they did not. They claim that they warned people to "stay away from the big banks". But Lehman wasn't a big bank. Nor was Northern Rock, or Bradford & Bingley, or even HBOS. Nor were the Icelandic banks. Nor were the hundreds and hundreds of US lenders that went bust. MoneyWeek DID NOT forecast the financial crisis.

Then they claim that five years ago they forecast the slide in the pound, and that it has now suffered a "long decline". Let's check this, shall we? Here's the GBP/USD exchange rate chart for the last 10 years:




click here for larger version

Five years ago is January 2008 - by which time the pound was already falling from its 2007 high. Doesn't take a genius to forecast something that is already happening. Admittedly the pound did then fall off a cliff because of the base rate cut later in 2008, but it then climbed back up a bit and has held at around the same level ever since."Long term decline"? Doesn't look like it to me. And what about that dramatic drop? Oh wait, they didn't forecast the fall of Lehman and the subsequent deep recession, did they - you know, the deepest recession since the 1930s? So obviously they couldn't forecast the exceptional measures taken by the Bank of England to support the economy, including deliberately weakening the pound - of which Mervyn King is still rather proud.

Then they also say that three years ago they told everybody to SELL EUROPE. So that''s January 2010. When exactly did the Eurozone crisis start? The BBC has helpfully provided a timeline here. Here's an extract:

2009

Slovakia joins the euro.

Estonia, Denmark, Latvia and Lithuania join the Exchange Rate Mechanism to bring their currencies and monetary policy into line with the euro in preparation for joining.

In April, the EU orders France, Spain, the Irish Republic and Greece to reduce their budget deficits - the difference between their spending and tax receipts.

In October, amid much anger towards the previous government over corruption and spending, George Papandreou's Socialists win an emphatic snap general election victory in Greece.

In November, concerns about some EU member states' debts start to grow following the Dubai sovereign debt crisis.

In December, Greece admits that its debts have reached 300bn euros -the highest in modern history.

Greece is burdened with debt amounting to 113% of GDP - nearly double the eurozone limit of 60%. Ratings agencies start to downgrade Greek bank and government debt.

Mr Papandreou insists that his country is "not about to default on its debts".

2010

In January, an EU report condemns "severe irregularities" in Greek accounting procedures. Greece's budget deficit in 2009 is revised upwards to 12.7%, from 3.7%, and more than four times the maximum allowed by EU rules.

Well, well. It seems that here too MoneyWeek "forecast" something that was already happening. It didn't take much imagination to realise that the Greek crisis was going to affect the countries tied to it by a single currency. And "Europe" is a rather wide defnition, don't you think? Here are the yields on 10 year German bunds over the period 2007-2012 (just to remind you, falling yields=rising prices and vice versa):

I hope MoneyWeek have a disclaimer on their investment advice, because they could have some very angry investors who took their advice to "Sell Europe". Germany is part of Europe.....

Anyway, that's enough of debunking MoneyWeek's claim to be clairvoyant. Now let's look at what exactly they are forecasting this time and whether it is reasonable.

1. The Debt Tsunami

The first claim they make is that Britain is about to be overwhelmed by a "tidal wave" of debt. And they produce some very scary charts indeed to show how the UK's national debt has risen since 1900. Now those charts come from a reputable source and are indeed correct. However, they show the NOMINAL amount of debt - which means they take no account of inflation. It's amazing what happens to your debt figures when you remove the effects of inflation:

Here's the chart from MoneyWeek showing UK nominal debt in £:

Now here's the same chart adjusted for inflation:

Doesn't look quite so scary now, does it? Though there is still a spike in the last few years. But I haven't finished yet. Most people would agree that the general standard of living in the UK is considerably higher now than it was in 1900, or indeed in 1950, or even 1970. That's because our national production has risen - considerably, actually. Which means we are wealthier than we were before. So if we look at our debt in relation to GDP, this happens:

We would have to suffer an absolutely catastrophic drop in GDP for our debt to be anything like the sort of burden on the economy that it was in the 1920s and 30s and after World War II.

Ok, so MoneyWeek's use of debt statistics here is distinctly dodgy. Their next chart is actually correct and reasonable. Britain does indeed have a large private debt burden and has the third highest total debt level in the world. MoneyWeek doesn't mention that nearly half of that comes from the financial sector, in which the UK is the world leader and whose business is intermediating debt to create credit. That does rather distort the figures, really. 

And Money Week then go on to add in future liabilities as if they all have to be paid today. Sigh. No, my children don't need to receive their pensions yet. Nor do I, actually. So there is no reason to show those liabilities as falling due now. That is not to say we don't have a FUTURE problem with unfunded liabilities. But MoneyWeek is forecasting imminent collapse. I really can't see how the UK can collapse in 2013 due to liabilities that don't fall due for another 20, 30, even 50 years. 

Oh, and they compare the UK to Eurozone countries. They aren't comparable. We really aren't going to end up like Greece, for reasons that I explain here.

So that debt tidal wave looks like it could be surfable. On to the next scary subject. 

2. The Overblown Welfare State

And another dodgy chart. In fact the same thing again, but for govt spending instead of debt. Here we go:

UK govt nominal net spending in £

Adjusted for inflation:

And related to the increase in national production (GDP):

Where exactly is this unaffordable growth in the welfare state? Yes, public spending has indeed grown in nominal terms, and much of that can be laid at the door of more generous health and welfare spending. But we have got richer too, and the thing about being richer is that you can afford things that poorer people can't afford. As MoneyWeek's readers should know very well. 

So is their claim that "Britain is broke" really true? Here's what they say:

If the UK had been a business or an individual, we’d have been declared bankrupt by now. We’d have been forced to sell our business premises or our home and would have been housed in a run-down flat long ago.

Er, no we wouldn't. You see, although we have a lot of debt and we spend a lot of money, we EARN a lot too. Our charts versus GDP look pretty good, really. I'd say we were definitely a going concern.

3. The great collapse

They take about 15,000 words to do it, but in a nutshell MoneyWeek forecast that rising interest rates will cause failure of the banking system, collapse of the bond and property markets and hyperinflation.

Firstly, let me say that MoneyWeek are correct to make the point that the UK's borrowing costs are historically low, and debt would be more of a burden if they were higher. No doubt their investors would like rates to be higher, which might be why they are forecasting that they will rise - talking things up often does work. At the moment there are no signs whatsoever of interest rates getting off the floor, so this looks very much like wishful thinking to me.

But then they lose the plot and start comparing the UK to Greece again. Greece had falsified its debt position and deliberately misled investors as to the true state of its public finances. Is it any wonder there was a buyer's strike? And what on earth is the reason for supposing that the UK would suffer the same fate?

And it gets worse. Further down they compare the UK to Argentina. This is frankly silly: a large part of Argentina's problem was its attempt to hold a currency peg to the US dollar at the expense of its economy. The only time the UK ever came close to trashing its economy in the same way was 1988-92 when it was pegging its currency to the Deutschmark at too high a rate, which forced the economy into recession. The UK was eventually forced out of the ERM and now has an absolute horror of pegged or managed exchange rates. Sterling is fully floating and likely to remain so. No way are we going to suffer Argentina's fate.

The property market crash they forecast I think is possible. I don't think the housing market corrected sufficiently in 2007-9 and it still has further to fall to reach a sustainable price level. In the short term this would indeed hurt people who were over-mortgaged and financially overstretched. And it would annoy the people (mostly middle-aged and elderly) who bought their properties when prices were much lower and were expecting to profit from house price appreciation. Tough, frankly. But we have had housing market crashes before and recovered. Why should this be any different?

The bank failure that they forecast simply isn't believable. The run on Northern Rock was caused by the inept handling of what was originally a liquidity crisis by both the Treasury and the Bank of England. There are measures in place now to ensure that banks really can obtain emergency liquidity - the Bank of England now has a proper discount window facility like the Fed, which it did not have in 2007. And banks actually DO have more money: they are being required to have more capital and more liquid assets to protect them from bank runs. But more importantly, it is absolute nonsense to say that the UK won't have enough money to bail out its banks. This isn't the Eurozone. The UK has a central bank and issues its own currency. It can NEVER run out of its own money. As I've said numerous times now, the risk for currency issuers is not insolvency, but inflation. Which brings me to the next scary story.

4. The inflation monster

There are two parts to this: firstly that we would see a return to the inflation of the 1970s, and secondly that the public debt level would so erode confidence in the currency that there would be Weimar-style hyperinflation. These two are not remotely related, which demonstrates how very muddled this paper is. I shall take each in turn.

The background to the economic problems of the 1970s was the breakup of the Bretton Woods managed exchange rate system, the Yom Kippur war leading to the oil price shock of 1973, and a property market collapse leading to the Secondary Banking Crisis of 1973. But underlying it all was inept fiscal and monetary management of the economy. Inflation had in fact been rising steadily since the devaluation of the pound in 1967, and the wrong measures were used to contain it. We are, frankly, MUCH better at managing inflation now. Yes, we have had slightly higher inflation than we would really like in the last few years. But in no way has inflation been allowed to run "out of control", and there is absolutely no reason to assume that that would change. I debunked the 1970s inflation monster myth here.

The idea that the UK's debt level would cause Weimar-style hyperinflation is also rubbish. The roots of Weimar's hyperinflation lay in the First World War and its aftermath, particularly the imposition of war reparations which far exceeded the ability of a war-damaged economy to pay them, as Keynes noted, and which had to be paid in foreign currency (gold). As far as I can see, the UK has not recently lost a world war and there are no claims for punitive reparations that I know of. Nor does the UK have particularly high levels of debt denominated in foreign currencies - unlike Hungary, for example. Most of its debt is in sterling. And as I've already noted, sterling debts can always be serviced - perhaps at the price of slightly higher inflation, but not hyperinflation. Whoever wrote this should have done some basic research into the causes of hyperinflation - here, for example.

And finally we get to what this is really all about:

5. GUBMINT COULD STEAL YOUR MONEY! Subscribe to our magazine to find out how to protect your wealth.....

Oddly enough, this is actually the strongest part of this bulletin. They really did do their homework on the occasions in the past when governments have fleeced their own citizens. And I have to admit that it is certainly not beyond the bounds of possibility that UK savers could indeed suffer savings confiscation in a variety of ways. Indeed they already are, through negative real interest rates. Am I bothered? Probably not. I lose much less sleep over the prospect of savers losing their savings than I do over the prospect of ordinary people losing their jobs and their homes. 


I think it is very sad indeed that a respected investment magazine like MoneyWeek is so desperate for business that it is resorting to despicable scaremongering. This bulletin is poorly researched, badly written and presents completely the wrong image. I'm not about to advise anyone what to do with their money, but I can certainly think of much better things to do with mine than subscribe to this rag. This marketing ploy by MoneyWeek is a very, very bad mistake.