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UK Budget - 17/11/22

by William Morris

Earlier today Jeremy Hunt raised taxes and squeezed spending in an effort to reduce the UK fiscal deficit. GBP lost 70bps on the USD and UK Gilts have solf off slightly on the day. Governments and Central banks across the Globe are faced with a near-impossible task heading into winter. Extreme pain is being felt following the fastest tightening cycle by the US Federal Reserve on record. The most up-to-date UK public sector finances report outlines August 2022 data. This report paints a grim picture of UK finances, all while, we brace for: “a deep and protracted recession in 2023” (Sanjay Raja Senior Economist at Deutsche Bank). UK government debt interest payable was £8.2bn in August 2022 – up £1.5bn from August the previous year, or 18.29%, largely due to RPI changes on index-linked gilts. The Public sector “spent more than it received in taxes and other income” (GOV.UK) to the tune of £11.8bn – borrowing £6.5bn more than in pre-covid August 2019. Public sector net debt is around 96.6% of GDP, almost 2% higher than the previous year. This is particularly notable as interest rates peaked at around 2.8% in August – going on to almost double in September, peaking around 4.5% before being bid by the BOE to the tune of £65bn (in a month were CPI hit 10.1%). The next report in September will show a marked increase in interest payable on government debt. Since 1821, 98% of countries (51/52), that have reached debt-GDP levels exceeding 130% have defaulted on their debt obligations within 0-15 years of crossing this threshold (Lyn Alden). The one outlier country in this category is Japan – which currently has a debt/GDP ratio of over 260%. The BOJ owns almost half of Japanese Government issued bonds and is the largest holder of Japanese Stock, owning around 7% of the $6trn market. It is no longer Hyperbolic to speak of the potential of a Sovereign Debt Crises among G20 and G7 nations. The UK has recovered since the BOE intervention in the UK bond market at the end of September this year. However, I would argue, policymakers, are merely portraying the illusion of control. The UK Government can stem the bleeding in relation to other nations but, is being increasingly backed into a corner by the Federal Reserve as they continue to tighten. Presenting UK policymakers with increasingly limited options to prevent a debt spiral. The UK and other nations must follow the Fed, or risk other negative outcomes such as currency destruction as has been seen in Japan with the destruction of the Japanese Yen. Chasing the Fed will cause increasing downward pressure on GDP and dramatically increase the cost of Government borrowing. Increasing the likelihood this leads to increased Government borrowing or a default. If they choose the former this will cause currency destruction into what is likely to be an already inflationary environment. Bitcoin was designed to preserve purchasing power over the long term against the collapsing value of fiat currency. While receiving negative publicity recently due to the obfuscation between itself and the wider crypto industry, the narrative that it can be viewed as a hedge against the collapse of the entire fiat system continues to hold more weight.



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