Hot on the heels of my brief look at the upcoming event comes this from John, especially for us all at ForexLive. Thanks for dragging yourself away from watching the Ashes John!
Look for the ticking time bomb in the UK Budget
"Forget all the pre-budget leaks and all the hype about faster growth rates and more employment, and look at two numbers in the Budget today: The borrowing requirement and the accumulated national debt (public debt) for last year and their projected numbers for next year
The first number, the yearly borrowing requirement, may be a little under £80bn, but the figures will probably have been massaged by not paying the B of E interest on the debt it holds, at least until after the budget, and the second number will be greater than £1500b or more emotively £1.5 trillion.
The interest payments on the 1.5 trillion will be about £50b (considerably more than the defence budget).These numbers are unsustainable into the future and this bad news is becoming more apparent.There are two ways to deal with this problem.One is to reduce the real size of the debt by ratcheting up inflation, but the Bank is worried about peoples misunderstanding of what is meant by QE.They do however still have an alternative called open market operations which allow them to create more monetary demand and act in a more secretive way.Or an alternative is to default on the national debt, which is a possibility you are currently being prepared for.
The likely event will not be one or the other, but a default on part of the debt and some increase in the rate of inflation.With minimal impact on the economy it is possible to default on the £375b of debt held, after QE, by the B of E.After all this has already been replaced by cash in the economy and just produces a bit of an accounting headache to make it disappear from public view.
A £375b default will then reduce the national debt to £1.125 trillion and require about £37.5b debt servicing to real people home and abroad. Also this creates an opportunity to repeat this process in the future and buy back more debt which can be further written off at the Bank. Alternatively we could go down the route of raising the inflation target to 4% or change targeting to nominal national income. In either case it will let the real value of the national debt be reduced by more inflation.
So ignore 99% of what is said in the budget and focus on the yearly borrowing requirement and the accumulated debt. They will be difficult to find as bad news needs to be buried, but if you find them you can become a fortune teller or more precisely a harbinger of doom regarding what will happen in the economy over the next few years.
Despite what is said by the critics of the budget today there will be absolutely no austerity, just a little less profligacy: see "Accounting identities cannot be violated: the budget and the balance of payments" at jbhearn.wordpress.com"
John Hearn 8/7/15.
