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“Pick the lowest hanging cherries first and only as many as you can eat in one go.” - Some thoughts on the national debt and spending -


I


t is very difficult to look at the market, at this time, and comment on direction - as there is none.


We have reached a point where stimulus packages filtered through the banking sector have been concluded, (for the moment), and there are different economic solutions being tried around the globe, all of which are being analysed carefully to see what parts of which solutions are working.


The carry trade or just the pure hunt for yield is still creating wildly oscillating markets and nervousness and the Swiss National Bank’s announcement of preventing their currency from appreciating beyond 1.20 with the euro has even sent dealers into the Nordic currencies!


The banks are the subject of pending possible litigation and fines from their misrepresentations when they ‘sold on’ or were ‘trading in’ packaged toxic debt. The market has again become nervous of lending LIBOR funding or any other sort of liquidity funding within its own industry. I think we have been here before?


Many of us talk or hear talk of the UK being in a debt crisis and that we run the risk of losing crucial rating, making servicing our debt even harder. I remember the late 80s and early 90s when banks were losing their AAA ratings to the point that finally only one global banking group retained the ‘treasured’ rating. But, guess what! It could not trade with itself and so the rest of the world’s (reduced) ratings levels then effectively became the top rating benchmark and business carried on as usual. In fact business accelerated as banks merged, got larger balance sheets and were able to dominate larger parts of the markets. So does it really matter if every country gets downgraded from AAA to A+? Perhaps, it just means that A+ becomes the best rating in the market place.


In the UK, the Government insists that we have a debt crisis which is historically high and dangerous and that it has to be repaid to restore confidence in the markets and stimulate economic growth. But, did you know:


Ÿ As a proportion of GDP, Britain’s national debt has been higher than it is now for 200 of the last 250 years!


Ÿ Since 1750, there have only been two 30 year periods when the national debt has been lower than it is now.


Ÿ We were ‘bust’ when the Industrial Revolution was pioneered.


Ÿ We were ‘bust’ when we ruled a quarter of the world.


Ÿ We were ‘bust’ after defeating Germany at the end of the WW2.


Ÿ We were ‘bust’ when we built the NHS. 41


Our debt is not high by historical or international standards; Japan’s national debt is three times bigger than ours and they are still borrowing at good rates.


There is a school of thought that believes that cutting debt too fast kills economic growth, (Ireland and Spain). In a recession, individuals cut back on spending. They go out less, buy less, save more and demand drops off along with (naturally) economic activity. If, at the same time the government cuts back, overall demand collapses and the recession becomes a depression. That is why a government has to borrow and spend more; not to deal with mass unemployment and economic breakdown, but to concentrate on restoring growth.


The Great Depression of 1929 was our last lesson; after this crash President Hoover cut spending and tried to pay off the debt with the result the recession worsened. When Roosevelt was elected, spending was increased and unemployment fell and the economy swelled. In 1936 he also started to reduce the debt and cut spending so that the economy collapsed again, leaving only the enormous spending of WW2 to come to the rescue.


The problem is that by fixating on paying off as much debt as possible now, you smother economic growth and end up not being able to pay the debts off anyway. Good times should be used for paying off debt (rather than racking up more) and difficult times should not be seen as a debt reduction period. It is rather like panicking to pay off your mortgage, in just one year, by not eating or drinking. You will get ill and your house will still get repossessed.


Simon Stratford, Prajk Inc Ltd, enquiries@prajk.co.uk


A bit about Prajk Inc Ltd - Prajk has been an active IB representative for a major London FX broking group across many products, sourcing financial FX solutions for individuals and corporations ranging from defence, agriculture, foodstuffs pharmaceuticals and primary and second home selling and purchasing.


From September 2011, Prajk will have sole responsibility for the group in the development of FX solutions in these markets for the whole of France. This will be a major developmental period for Prajk, as it will be representing a major group with a direct FSA licensing facility concentrating entirely on this sector of the FX markets. This FSA facility is particularly important to the users of FX services when you consider the recently much publicised failure of two FX facilities that provided solutions to the public’s domestic and property requirements. Many individuals were left with no recourse to funds lost while in the midst of transactions when these companies failed.


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