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Brits Pounded As Debts and Deficits Hit Home. Next the U.S.

Interest-Rates / UK Debt Mar 05, 2010 - 08:18 AM GMT

By: Mike_Larson

Interest-Rates

Best Financial Markets Analysis ArticleBoy are things getting ugly in the U.K. The British currency, the pound, is getting crushed. The price of long-term British debt securities, called gilts, is heading down. And the cost of default insurance on the country’s debt is rising steadily.

My takeaway: This is but a preview of what’s to come here in the U.S.


Why the Crisis Is Coming To a Head in the U.K.

Britain’s finances are in shambles. The country’s budget deficit is running at more than 12 percent of gross domestic product, roughly the same as in Greece. In fact, for the first time, the country recorded a whopping $6.7 billion deficit in January … much worse than the $3.9 billion SURPLUS economists were expecting.

The U.K. government is planning to sell $349 billion in debt this year, the most ever, to cover its deficit. But demand is flagging, with foreign investors dumping the most U.K. sovereign debt in nine months in January and yields generally rising.

Then a few days ago, the crisis came to a head. The catalyst: New polling data that threw the British political outlook into chaos. Polls showed that the Conservative Party’s lead over the Labour Party shrunk to its lowest level in more than two years.

It now appears that neither party could come out of spring elections with a clear majority, leaving the U.K. with a “hung” parliament. That would make it much more difficult for the government to reduce the nation’s debts and deficits.

Investors are becoming more afraid of British debt.
Investors are becoming more afraid of British debt.

With all of that, it’s no wonder …

  • The British pound plunged six days in a row, its longest series of declines since October 2008.
  • The yield on 10-year U.K. government debt recently hit 4.27 percent, compared with a low last fall of 3.44 percent.
  • The cost of protecting against a British debt default in the credit default swap market surged to more than 101 basis points, or $101,000 per $10 million of debt. That’s up from around 44 bps in the fall.

Striking Similarities …

You don’t need a Ph.D. in economics to see the striking similarities between the situation in the U.K. and the situation here in the U.S. …

  • Our debt situation is totally out of control, with the national debt on track to double over the next decade to almost $19 trillion.
  • Our budget picture is a mess, with $8.5 trillion in deficits projected over the next 10 years.
  • Our foreign creditors are starting to sell our bonds, with China alone dumping $34.2 billion of Treasuries in December, the most ever.

And politically, we’re facing the same gridlock and inaction as the U.K. Just look at the deficit commission nonsense …

Bill Gross
“The sovereign debt crisis is subprime all over again.” — Bill Gross, manager of the world’s largest mutual fund.

President Obama had to create an 18-member panel by executive order because Congress voted down an earlier proposal. Since it’s a presidential commission, Congress can just ignore any findings. And those findings won’t even be released until December 1, for purely political reasons (that’s after the mid-term Congressional elections).

Lastly, just like the U.K., we have bailed out, backstopped, or otherwise taken over so many institutions and segments of the capital markets that our own balance sheet is getting shakier and shakier.

As PIMCO Chief Investment Officer and “bond guru” Bill Gross just noted in a monthly commentary:

“If core sovereigns such as the U.S., Germany, U.K., and Japan ‘absorb’ more and more credit risk, then the credit spreads and yields of these sovereigns should look more and more like the markets that they guarantee. The Kings, in other words, in the process of increasingly shedding their clothes, begin to look more and more like their subjects. Kings and serfs begin to share the same castle.”

Bottom line: We’re running this country’s finances off the rails. And just like in Greece … Ireland … Spain … and now the U.K., it’s going to come back to haunt us.

So consider dumping your long-term U.S. bonds, and buying some gold as a hedge against global debt and deficit problems. Or if you’re more aggressive, check out a service like my Crisis Opportunity ETF Trader, where my subscribers are positioned to profit from this unfolding fiscal nightmare.

Until next time,

Mike

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


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