A Mountain of Debt

Brown's Bankrupt Britain has a nasty habit these days of breaking records, not the good ones but the bad ones relating to the size of debt.

Sure enough, as is becoming the norm, another record has been broken. In October the UK Government had to borrow £11.4BN. This is the worst monthly figure since records began in 1946.

Tax receipts fell by £4.1BN, compared with October 2008, and spending increased by £4.5BN.

The total public sector net debt now stands at a staggering £829.7BN (59% of GDP).

Certainly the figures are not good, most certainly if the government does not come up with a credible plan to show how it will rein in the debt external and internal confidence in the UK will evaporate; the situation will become far worse, as Sterling will collapse and high achievers/businesses will uproot and leave the country.

However, the ability of the current government to set up a credible plan is limited by a number of factors:

1 Time, an election has to be held by May 2010.

2 Gordon Brown will need to play to the gallery of public opinion in order to try to win the election, any plan that sets out tax rises and spending cuts will not be aviable to fight an election on (in Gordon Brown's eyes).

3 Gordon Brown doesn't have a credible plan.

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The End of Sterling?

Jim Rogers, who co-founded the Quantum fund with George Soros, has told Bloomberg:

"I would urge you to sell any sterling you might have. It's finished. I hate to say it, but I would not put any money in the UK".

In the short term Sterling will undoubtedly fall further (and many people who short it will make fortunes out of its demise). Indeed Sterling today fell below $1.40 to its lowest point in over seven years, because of concerns about the banking crisis and debt levels.

However, currencies strengths are relative. No other developed country will escape the recession. The Euro will, in the not too distant future collapse as the folly of the "inflexible" high interest rate policy of the ECB is laid bare. The Dollar will also fall as America's economy worsens.

Sterling will rise again.

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Exports Unresponsive

Despite the fall in the value of Sterling, statistics (if they can be relied upon) show that Britain's trade deficit grew from £7.6BN in October to £8.3BN in November.

In theory a falling pound should stimulate exports, and curtail imports.

One small piece of positive news is that shoppers from the Continent are flocking to London to snap up bargains.

Richard Brown, the chief executive of Eurostar, is quoted in The Times:

"We are an international business, and while the pound is weak, that means that London is much cheaper for people coming from France and Belgium, so we have seen 15 per cent and more growth in visitors coming to London, a lot of them using our shops and buying stuff here in London."

Let us trust that the bargains that they are purchasing are British, and not foreign imports.

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Sterling Falls

The Pound continued to fall this morning, below $1.55 in early trade, as traders take account of Britain's parlous financial state.

However, those who believe that a country's machismo can best be displayed by a strong currency are seriously misguided. A falling pound, under the current circumstances, will be of great benefit to Britain's exporters.

That said, the Bank of England has a duty to cut interest rates swiftly and aggressively in order to lessen the effects of the recession.

The longer the Bank dithers, the worse it will become.

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Careless Talk Costs Cents

Alistair Darling is learning the lessons that previous Labour Chancellors have learned, namely that careless talk costs the pound dear.

Sterling continued on its downward path today, falling to a 12 year low (88.2) against the Bank of England trade weighted index of currencies and to its lowest against the dollar ($1.7669) since April 2006.

The fall has been attributed, not unsurprisingly, to Darling's outburst over the weekend over the state of the economy.

The fact that he is now barely on speaking terms with his old "friend" Gordon Brown have given the markets little comfort, as divisions over policy and presentation between number 10 and number 11 mean that the economy will suffer.

Until Brown and Darling decide what the real story is, and what to do about it, the economy will continue to decline.

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Speculators Target Sterling

Speculators are targeting Sterling, in the belief that the Bank of England does not have enough money to head off the continuing credit crunch, and that it will be forced to cut interest rates.

Bloomberg notes that the UK's Financial Services Compensation Scheme has £4.4M to protect deposits, compared with $49BN in a similar fund in the US.

It will be interesting to see how the Chancellor's plans to offer a £100,000 guarantee to all savers will be financed. The banks will most assuredly target their customers for any "perceived" increase in their cost base arising from the implementation of this scheme.

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Interest Rates Set To Rise

Yesterday's shock rise in inflation to 3.1% has sent a warning signal to the financial markets that interest rates are sure to rise, in order to try to tame the inflationary tiger.

The rise in inflation forced Mervyn King, Governor of The Bank of England, to write a letter of explanation to Gordon Brown, as its rate was more than 1% higher than the 2% target.

This was the first such letter in almost 10 years.

Mr King blamed the sustained rise in inflation partly on sharp increases in food, electricity and gas prices over the past year, but also on businesses discovering a greater degree of pricing power as the economy continued to grow.

Sterling broke the $2 barrier, for the first time since 1992, in anticipation of the rise in interest rates.

However, before savers rush to celebrate in anticipation of seeing their meagre returns on savings rise; they should be aware that banks are very happy to pass on interest rate rises to borrowers, but are remarkably recalcitrant when passing on benefits to savers.

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