Global Economic Crisis

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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