Britain on the brink of financial armageddon !



By James Palumbo
He's one of our top entrepreneurs who recently put all his investments
into cash. The reason: He believes Britain faces bankruptcy. You may
disagree with his bleak analysis but you can't afford NOT to read it.
A year ago, the world reacted with astonishment as Iceland technically
went bust. It seemed inconceivable that a modern democratic nation
could have such parlous finances that only an emergency $6billion bail-
out from the International Monetary Fund enabled its economy to keep
functioning.

This week, we witnessed a similar crisis in the Middle East but on a
far, far more dangerous scale, as Dubai effectively defaulted on
£48billion of loans.

Unless its more prudent and oil-rich neighbour, Abu Dhabi, launches a
rescue plan then Dubai - once a gilded monument to financial success -
will effectively be insolvent.
Facing doomsday? London's Canary Wharf. Britain has been hardest hit
by the credit crunch

Which leads us to a haunting question: as the country in the world
hardest hit by the credit crunch, with gross domestic product (GDP)
projected to decline by almost five per cent in 2009, could Britain be
next?

Let's think the unthinkable for a moment. These are the facts.

Even before the financial crisis, the British Government spent roughly
£30billion more per year than it earned in tax revenues. This money,
of course, had to be borrowed from international investors.

Today, the Government needs up to £200billion a year for at least the
next three years in order to meet its spending commitments. But the
Government's estimates invariably understate its true need, and they
have to be continually revised upwards.

Before the crunch, total government debt stood at roughly 40 per cent
of GDP. It is now around 60 per cent of GDP, but is projected to soar
close to 100 per cent in the next few years. But again, that is not
the full story.
More...UK banks and jobs at risk from Dubai domino effect
Brash, flash and built on a mind-boggling scale, it was a monument to
vanity and greed ... now Dubai is sinking under £48bn debts

Treasury estimates of the size of the national debt ignore so-called
'off balance sheet commitments', such as Private Finance Initiatives
(effectively, hospitals and schools built with money loaned by the
private sector) as well as the massive unfunded government pension
liability.

There may be other, hidden, liabilities. After this week's shocking
revelation of secret loans of £62billion made by the Bank of England
to the Royal Bank of Scotland and HBOS at the height of the credit
crunch, who knows how many other skeletons remain in the Treasury's
closet?

It is wise to assume that the true size of Britain's debts could be
much bigger than we all think.

Yet politicians of both parties can't acknowledge this. Why? Because
any dispassionate analysis would spell only one thing - we need
massive spending cuts and tax rises to avoid heading the way of
Iceland and Dubai.
Crisis: A car abandoned by its foreign owner at a luxury development
in Dubai
The news is potentially so bad that politicians simply don't want the
general public to know what's going on.

Given the scale of the crisis, what then do they propose? New Labour
is non-committal, suggesting that cuts will be prudent, thoughtful and
spare people's worst pain. The Conservatives have targeted around
£7billion of spending cuts, but these won't happen immediately and are
nothing like enough to rebalance the nation's books.

Besides, one minute the Tories are preaching 'austerity', warning that
savage cuts are needed, the next David Cameron is telling the City
that 'our strategy has to be for growth, both now and in the long
term'.

Such posturing, flip-flopping and vague promises are truly worrying.
For, make no mistake, we could be teetering on the brink of a truly
epic national crisis - one that makes the financial hardship of the
past 18 months seem like a mere inconvenience.

For the past few years, Hollywood disaster movies have shown the world
under attack by aliens or being destroyed by global warming. We have
all thrilled to images of the White House being taken out by a giant
laser beam or Big Ben frozen in an Ice Age snow drift.

Politicians don't want the public to know what's going on

A disaster movie involving countries going bust doesn't quite have the
same dramatic appeal, but it would be every bit as deadly as a tsunami
hitting London - and we have precious little left to defend us.

We've already had one big shock to Britain's financial system as many
of our best-known banks teetered on the brink. The Treasury spent
hundreds of billions of taxpayers' pounds trying to steady the ship.
The financial cupboard is now bare. So what could cause the second
wave of the disaster?

In three words - a sterling crisis. So far, containment of the crisis
has focused on rescuing the banks and pumping more money into the
system through the crazy Zimbabwe-esque expedient of 'quantitative
easing' - effectively flooding the banking system with more cash.

This has cost hundreds of billions of pounds, all of which needs to be
repaid if we are to avoid rampant inflation. That means borrowing more
money from the international money markets.

But there is a problem. Until recently it was unthinkable that a
sovereign nation couldn't service its debts. And yet this is exactly
what's just happened with Dubai.

Alistair Darling helped conceal £62bn of emergency loans to UK banks
If international lenders begin to doubt the creditworthiness of UK
plc, they will downgrade our credit rating and dramatically increase
the rates of interest they charge. UK banks will have to follow suit
to match these rates, putting unsustainable pressure on our struggling
economy.

Thousands of businesses already hit by the recession will go bust.
Trapped by soaring unemployment and welfare benefits, the Government
will have to borrow more. And so the vicious debt cycle will continue
to spiral down towards national insolvency - and, potentially, social
anarchy.

Why won't our politicians get a grip?

The seeds of a possible future disaster were sown during the Blair
years. Blair inherited a strong, stable economy which had been
responsibly managed by his Conservative predecessors with acceptable
levels of government debt.

He played his first term in office with textbook good sense; it was a
continuation of Conservative policy to all extents and purposes, with
debt kept at record lows. After that, perhaps because the Opposition
was so weak, Blair and his Chancellor let rip.

The massive spending by New Labour on public services during its last
two terms was a good idea in principle but a disaster in practice.
This was because Blair was not a 'details' type of person.

As with the invasion of Iraq, he took wide-ranging decisions on
economic planning based on little more than a broad vision, no doubt
wishing to feel the hand of history upon his shoulder. Instead of the
money being carefully managed, with every penny accounted for as with
a household budget, it was sprayed about indiscriminately like a fire
hose out of control.

As a result, the Conservatives accuse the Government of 'not fixing
the roof while the sun was shining'. But the problem is they didn't
suggest it at the time. Politics had became so centrist that for the
Tories to suggest restraint at a time of economic prosperity would
have been electoral suicide.

We are now reaping the harvest of that short-sighted conformism.

Yet even now, no one in power dares speak the truth.

Christmas is only four weeks away; people don't want to hear bad news.
Our politicians also don't want to be the ones to deliver it (bad news
equals lost votes). But unfortunately, as Dubai's predicament now
shows, we've got to stop thinking that it couldn't happen to us and
start having an urgent national debate if we are to have any hope of
staving off disaster.

The Conservatives are odds-on to win the forthcoming General Election,
to be held probably in May or June. There is a view they will not
announce the full range of spending cuts they intend to make until it
is safely won.

Once in office they can claim the situation is far worse than they
envisaged and start swinging the axe. But do we want a party that
surfs into office on a wave of optimism, only then to reveal its true
character later? This is hardly the stuff of greatness.

The unfortunate reality is what we see with the Conservatives is
probably what we will get; decent enough chaps but no Margaret
Thatcher or Winston Churchill to save us in our time of need. An even
worse result would be a hung Parliament and the ensuing political
paralysis which would almost certainly cause a sterling collapse.

It is understandable that no one wants to talk the language of crisis.
Spending cuts and tax rises are not popular concepts. Perhaps it is
just a fact of human nature that it is only possible to begin the
debate when the scale of the crisis is beyond question. But history
teaches us that such obfuscation only worsens the pain in the long
run.

Present times are alarmingly like 1939, when the nations didn't want
to accept the prospect of a war, or - if they did - liked to feel
it would be over quickly.

Even our then Prime Minister, Neville Chamberlain, delayed, entering
futile peace negotiations and refusing to accept reality. It took a
great man, possibly the greatest Englishman of all time, to save the
nation.

What if the great danger in our lifetime is not a military but an
economic war? Who then has the moral courage to take the tough but
necessary action?
James Palumbo is a former City banker and founder of Ministry of
Sound, the largest independent record label in the world, which had a
turnover of £80million last year.


Explore more:People: Neville Chamberlain, David Cameron, Margaret
Thatcher Places: Dubai, London, Iraq, United Kingdom, Middle East
Organisations: Ministry of Sound, British Government, International
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(13)Here's what readers have had to say so far. Why not add your
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Newest Oldest Best rated Worst rated View all QUOTE
What if the great danger in our lifetime is not a military but an
economic war? Who then has the moral courage to take the tough but
necessary action?

I was told many years ago when i was young, that the next great war
would be an economic war.
It was said that Japan would teach all their people to gain a high
education and to train them to the highest standard imaginable and
from it, they would rule the world. They would become the worlds
leaders in the next war, which would be, an economic war.
- MICK, suffolk, 28/11/2009 01:26
Click to rate Rating (0) Report abuse
If they can apparently still firehose vast quantities of 'grant' money
at 'advocacy research' groups like the National Obesity Forum and
Consensus Action on Salt and Health, the cupboard can't be that bare;
if it were there would be a bonfire of these 'green travel co-
ordinators' and 'healthy weight compliance promotion officers'. Pardon
the pun, but there's a whole lot more 'fat' that could be trimmed from
public expenditure before we start talking about bankruptcy with
anything like a serious tone.
- Rich

Wrong. You have no idea what you are talking about. Britain is going
seriously bankrupt, and soon. Believe me.
- Antony, Hitchin, 28/11/2009 01:20
Click to rate Rating 3 Report abuse
Couldn't agree more with this article. Much of the media keeps talking
up (the apparently) green shoots that are emerging, but the truth is,
we are deep in the mire and getting deeper.

No politician wants to be the first to blink, so it's paralysis until
the election; meantime we simply store up more and more trouble.

My predictions after the elections:
- a 10-15% reduction in the CivilService/LocalGovernment (can shed a
load of non-jobs out there). Those left that are in non-jobs will be
transferred into front line roles (reducing the tax gap, etc).
- VAT at 20% from immediate effect.
- Interest Rates to remain low for now
- 'Gold plated' pensions and benefits for Civil Service removed
- Taxes will rise; 1% base rate, upper rate still at 50% but personal
allowance removed at a lower income amount, and in one go.
- Windfall tax on banks (rightly so, and will be very popular, a sop
to the masses)
- More quantative easing but low key so as not to spook markets.
- Bob, Southend,Essex, 28/11/2009 01:19
Click to rate Rating 4 Report abuse
So long as we can afford to spend 700m on nannying, hectoring rubbish
such as Change4Life, billions on ID cards, billions more on 'fighting
climate catastrophe' I find it difficult to believe that the powers
that be know something we don't about the parlous state of the
economy. It says something that the Govt is now the UK's biggest TV
advertiser, most of it on public health campaigns about salt, obesity,
smoking, alcohol units, not to mention climate change and all the
rest.

If they can apparently still firehose vast quantities of 'grant' money
at 'advocacy research' groups like the National Obesity Forum and
Consensus Action on Salt and Health, the cupboard can't be that bare;
if it were there would be a bonfire of these 'green travel co-
ordinators' and 'healthy weight compliance promotion officers'. Pardon
the pun, but there's a whole lot more 'fat' that could be trimmed from
public expenditure before we start talking about bankruptcy with
anything like a serious tone.
- Rich, Leeds, UK, 28/11/2009 01:03
Click to rate Rating 4 Report abuse
Britain flirted with bankruptcy in the mid-70s - it could well happen
this time round as things are even worse now!
- Andrew, St. Ives, Cambridgeshire, 28/11/2009 00:38
Click to rate Rating 6 Report abuse
I am convinced that we have not seen the real recession yet. Currently
the only people really affected are those that have lost their jobs.
The benefit classes are not losing out and the middle class due to
mortgage rates being kept low are standing still. But contrary to
government figures, inflation of the essentials, ie food, power, fuel
is soaring. Wait till mortgages start to rise. Only a small percentage
rise could cause payments to double. And benefits will have to be cut.
There is just not enough tax take.

Then the real recession starts!
.

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