Global Economic Crisis

According to the United Kingdom’s Office for National Statistics, the British economy contracted by 0.5 percent in Q4 of 2010. The ONS data came as a deep shock to the British economic and political establishment.  Expectations were that the UK economy would continue a pattern of weak growth during the last three  months of last year. By any stretch of the imagination, this is not good economic news.

The UK’s prime minister, David Cameron, already has his spin-masters working overtime. The official explanation is that “the weather” caused the contraction in Q4. However, even if the weather is taken out of the picture and the ONS data adjusted accordingly, the Q4 result would still show no growth. Undoubtedly, the UK coalition government is hoping that the ONS will eventually “revise” the Q4 number upwards. However, no matter how the politicians spin the news, the UK economic crisis remains intractable.

What is especially distressing about the ONS number is that the draconian spending cuts that have been formulated by Cameron’s government had not yet kicked in during the period in which Q4 economic statistics were being tabulated. With the British economy seemingly on the verge of a double-dip recession, the sharp cuts in public spending will prove to be a powerful pro-cyclical policy measure. The likely result is a renewed recession, resulting in a drop in tax receipts for the British government, ultimately defeating the stated purpose of the sharp fiscal cuts. In essence, the UK economy is caught in a dangerous fiscal trap, which the most recent ONS data for Q4 clearly illuminates in all its dark reality.

The Conservative/Liberal Coalition now running the government in the United Kingdom began its administration with a flurry of draconian spending cuts. Under the leadership of Prime Minister David Cameron and its chancellor of the exchequer George Osborne, this imposed austerity has been unleashed under the threat of a looming sovereign debt crisis. Social spending is being radically reduced, and the armed forces, especially the Royal Navy, are being virtually disarmed. The question therefore must be posed; will these austerity measures succeed in their stated purpose, which is removing the danger of a sovereign debt catastrophe in the UK?

There are disturbing indications beginning to accumulate that point to the steps being undertaken by Cameron and Osborne as being too late and insufficient. The UK’s Office for National Statistics has just released public spending figures for November, and they show that net public borrowing requirements increased to a record  £22.770 billion. This staggering level of deficit spending seems to show that the UK is now in a public debt trap. Even though unlike the U.S. most of its public debt is long-term, the British government has accumulated a national debt so large that even small increases in bond yields will add significantly to the need for more public borrowing, making it unlikely that even Osborne’s austerity budget will have much impact. Furthermore, these same austerity measures risk a double-dip recession in the UK, further depressing government income. All these trends point to an elevated danger of a sovereign debt implosion confronting the United Kingdom, in a timeframe that may be much sooner than many analysts would anticipate.

A century ago, when  it was said that the sun never set on the British Empire, it was the policy of London politicians that their country’s navy was at least as large as the next two biggest naval powers combined. Those days are long gone. Even during the Cold War, the Royal Navy was in perpetual decline. Whenever a financial crisis arose in Britain, it was the fleet that took the most savage cuts. Now, amid a catastrophic fiscal crisis, the Conservative UK prime minister, David Cameron, has announced an 8 percent cut in defense spending over the next four years. As with previous defense cuts, it is the Royal Navy that stands to be the biggest loser. This time, though, the cuts may actually destroy what is left of the UK’s naval power, leaving in its wake a small coastal protection and fisheries enforcement flotilla, more akin to a glorified Coast Guard.

The key element in the defense cuts is the scrapping of the flagship of the Royal Navy, the aircraft carrier HMS Ark Royal. This will leave only one carrier in Britain’s fleet. However, that carrier will be almost useless, as another key component of the defense cuts is the elimination of all combat jets currently serving in the Royal Navy’s Fleet Air Arm

David Cameron and his minions boast that this is only a temporary suspension in naval capability, as two new aircraft carriers are already under construction. However, under current plans, when these multi-billion dollar carriers are completed, they will become glorified helicopter carriers, as no new naval jets will be available until 2019.

In the last run of naval cuts under the previous Labour government, the Royal Navy lost about half of its destroyers and frigates, and several submarines. There was a grand bargain, however; the money saved from scrapping the escort vessels and submarines would be used to buy the new aircraft carriers and a complement of naval fighter-bombers. However, with no jets available to the Royal Navy until 2019 ( and that commitment is a tenuous one) it would not surprise anyone if the UK government ended up scrapping or selling at least one of the new aircraft carriers, and perhaps mothballing the remaining one indefinitely.

The ruling coalition government claims that even with the defense cuts, the UK will remain one of the most potent military powers in NATO. However, with so much waste at the Ministry of Defense in London remaining, it appears that the bulk of the cuts are directed at real defensive capability.

Ever since the defeat of the of the Spanish Armada in 1588 by Francis Drake, it has been the Royal Navy that has been the most reliable deterrent to aggression in the defense of Britain. It was the fleet that kept Napoleon at bay, and stood between Adolf Hitler and the conquest of the British Isles. Once the totality of Cameron’s naval cuts take effect, however, there will be little left of the Royal Navy save a glorious history.

The die is now cast; as expected, British Prime Minister Gordon Brown has seen the Queen, following political tradition, and announced with Her Majesty’s blessing the dissolution of Parliament and the holding of a general election on May 6. Brown, the incumbent Labour Party leader of a nation that has been among the worst afflicted by the global financial and economic crisis, faces an uphill fight against the challenger and likely winner, Conservative Party leader David Cameron. What may be the wild card in the election is the possibility of a hung Parliament, with neither leading party able to garner a majority of seats, leaving the  Liberal Democrats of Nick Clegg as the improbable power brokers.

There is one overriding issue in the UK’s 2010 general election: the economy. It is a basket case, buried in public debt. Everyone in the British establishment, albeit political or financial, knows that the massive British government deficits, currently running at 13% of GDP (a higher figure than that currently afflicting Greece), are unsustainable. Despite the rhetoric from all sides of the UK political spectrum, however, no one really has a realistic solution.

The UK is in a fiscal paradox. If it raises taxes or cuts public spending to reduce the deficit, that will probably be the kiss of death for a weak and artificially induced economic recovery. Unfortunately, continuing the massive deficits are not an option; the bond market will see to that. Gordon Brown assures the British taxpayers that if they trust Labour once again after 13 years in power, his team will magically cut the deficit as a proportion of GDP by 50% within four years, while restoring economic growth and national prosperity. This is clearly an absurd campaign promise, but David Cameron’s ambiguous assurances that “improved efficiencies” can reduce spending without cutting public services are equally disingenuous.

The UK confronts a fiscal trap, as I point out in my book, “Global Economic Forecast 2010-2015: Recession Into Depression.”  The risk of a double dip recession, unsustainable public debt and deficits as a proportion to national GDP, and an aging demographic requiring increased levels of funding for pensions and benefits that the UK cannot afford, point to a fiscal collapse by 2012. The only question I believe the 2010 UK general election will really decide is on whose watch does the United Kingdom of Great Britain and Northern Ireland achieve national insolvency.

Complicating the economic problems in the UK is its disastrous banking crisis, which rivals that of the United States. Much of Britain’s banking sector is insolvent, prompting a costly bailout by Gordon Brown’s government. With plunging tax revenues due to the nation’s economic contraction, the UK has been forced to borrow vast amounts of money to cover the cost of subsidizing the nation’s zombie banks. The combination of bank bailouts and stimulus spending has created staggering budgetary deficits, prompting the governor of the Bank of England, Mervyn King, to warn that further government indebtedness threatens the long-term stability of the UK’s finances.

The IMF actually challenged the official UK government estimate on the cost of taxpayer funded bank bailouts, presented in Darling’s budget at 60 billion pounds. When the IMF issued its own cost estimate of 200 billion pounds, Gordon Brown and his team went ballistic, forcing the International Monetary Fund to lower is projection to an earlier figure of “only” 130 billion pounds, still more than double the official UK estimate. However, strong-arming the IMF cannot alter the fact that the national debt of the UK is climbing at an astronomical rate. Alistair Darling is projecting that the UK will need to borrow more than $500 billion during the next two years, a sum that exceeds the cumulative borrowing of all previous British governments since the creation of the Bank of England more than three centuries ago, according to the leader of the official opposition, David Cameron.

The UK economy has been transformed, in effect, into a candle burning at both ends. Insolvent banks are consuming taxpayer funds at a rate that is intergenerational while the domestic economy tanks and unemployment soars .In the meantime, the national debt is exploding. Deflation is raging now, while the specter of hyperinflation hovers around the corner, as eroding financial fundamentals cripple the value of Britain’s currency. Amid the acute economic and financial crisis afflicting the UK, the nation’s political establishment offers only rosy projections. Tony Blair may have been called George W. Bush’s lap dog, but Gordon Brown is proving to be his economic disciple.

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