Wednesday, 28 October 2009

The UK economy- some ironic possibilities

The following are some musings on the UK economy prompted by an adage that seems quite appropriate for our times of thinking the unthinkable.

1.The UK public finances are in dire straits with a likely deficit this year well in excess of £200 billion and with red ink as far as the eye can see. It seems highly likely that within the next three or four years outstanding public debt will exceed 100% of GDP.
2. The UK is still in recession with a -0.4% GDP reading for Q3, 2009
3. The fact that the UK faces a national election within the next nine months means that there is no immediate political will to address the problem or even to spell it out to the electorate.
4. The markets are expected to fund the deficit through the continued purchase of gilts despite the fact that the Bank of England has indicated that it is winding down its Quantitative Easing program.
5. Sterling recently has exhibited as its default mode a tendency for sudden plunges against other major currencies.
6. A recent posting here reveals that the price of gold as expressed in terms of a variety of currencies showed that holders of the UK currency had lost the most purchasing power vis a vis the precious metal over the last five years. The real point of this is to highlight that the UK economy has historically been more inflation prone than many others.
7. Could the UK government - whatever flavor it takes after June 2010 - be faced with the awkward choice of having to approach the IMF for an emergency loan to bail out the gilts market and prevent a collapse in sterling, or to adopt the euro to seek some safety under the umbrella of a more globally acceptable currency?
8. Will Tony Blair, as the possible new President of the European Union, find that he has been provided with the unique destiny of rescuing the UK economy by facilitating the early adoption of the euro in place of sterling?

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