Latest news with #economiccollapse
Telegraph
15 hours ago
- Business
- Telegraph
Mark my words, we're headed for a monster debt crisis
All things fall apart. Orders, whether domestic or geopolitical, eventually collapse. So too do monetary cycles, typically rising and falling every 80 years or so. The big cycle that began in 1945 is coming to a close as the bond markets begin to crack. Bookmark this piece: a debt crisis is coming. Let me explain what's happening. The yield on government debt is the measure of how much interest people expect to receive to lend the government money. This goes up when the market loses confidence in the government's economic plans or think the Chancellor is going to borrow plenty more. We saw yields shoot up under Liz Truss. But after Rachel Reeves's budget, yields on the UK's 30 year bonds peaked at 5.58 per cent, up from the previous 4.99 per cent peak on the worst day of the mini-budget fallout. More worryingly, the term premium, which is the part of the yield which prices the additional risk that borrowers are taking by holding the Government's long-term debt, has risen far more sharply in the UK than in America, Germany and many other developed countries. If Reeves thought Liz Truss crashed the economy, how would she describe her own failure? The markets have concluded that Reeves's plans to stimulate growth are thin – indeed, fatally contradicted by her jobs and investment destroying tax rises – meaning she will inevitably turn to yet more borrowing to fund huge spending splurges. Borrowing for the year 2024-25 was forecast to be £87 billion in Jeremy Hunt's budget of March 2024, but over this financial year Reeves's Treasury has spent £152 billion more than it received in revenue. To put this in context, in 1976 when the UK was bailed out by the IMF the national debt to GDP ratio was running at 50 per cent. Now it is around 100 per cent – and unfunded public sector pensions take it to over 200 per cent of GDP. That's before you include huge, unquantified liabilities currently swept under the carpet, like nationalising the rail and steel industries. Some will paint my warnings as fearmongering: haven't we been in worse straits before? After WW2, UK government debt peaked at around 270 per cent of GDP and dropped steadily to 50 per cent over 30 years. The truth is that we are now uncomfortably close to that level of debt, but unlike those post-war decades we have no growth to manage our way out of it. The financial repression that was possible post-war required capital controls and fixed exchange rates under Bretton Woods. Today, aggressive measures of this kind would only lead to capital flight, currency depreciation and all manner of other knock-on effects. How might this crisis unfold? Typically in a bond market crisis the most indebted countries are targeted first by bond vigilantes who sell their bonds, force their prices down and the premium up. Buyers of newly issued bonds dry up, demanding ever higher yields. The UK is exposed and the markets sense it. The US has certain advantages as the world's reserve currency, but even it is heading for trouble. In Washington, the latest debt fuelled spending spree has attracted fierce criticism from the likes of Elon Musk. If passed it would set the US on a path to record debt. Even the world's biggest economy cannot be immune from the laws of fiscal gravity forever. So worried are some in Trump's circle that in the so-called Mar-a-Lago Accord and elsewhere, Scott Bessent, now Secretary of the Treasury, and others considered how the US could reduce debt by devaluing the dollar, and even renegotiating debt to force down its liabilities. The backdrop to this is a highly unstable geopolitical world. A quarter of our debt is foreign held. China and other adversaries hold many of the cards. Not that there are friends when it comes to the markets making decisions. As Truss discovered, when there is a loss of confidence in a government's ability to service debt, markets ruthlessly intrude upon democratic government. They effectively dictated the reversal of almost all measures in the mini-budget and removed a Prime Minister. A future debt crisis would see the markets demand spending cuts of a magnitude and scale we've never known before. They will despatch Reeves back to her old job in customer relations in no time. The woman who once preposterously posed as the Iron Chancellor is now seen by the markets as a spendthrift with no growth plan – and unable to resist the unaffordable demands of her backbenchers. Egged on by Nigel Farage, she wants to fork out billions more on benefits by lifting the two-child cap. The economic growth needed to fund this debt boom is not materialising – she is funnelling money to the public sector and crushing the private sector, the engine of growth. Industrial energy prices are now the highest of any developed country, decimating the ceramic, petrochemical, glass and car industries. If Reeves can't persuade the markets she has a plan, and quickly, yields could rise even higher. She is dancing on the edge of a precipice. Of course, the roots of the present challenge go back some way. Covid lockdowns and the money printing that paid for them cast a long shadow. Unlike many who cheered the opening of the spending taps, I warned in Cabinet of the inflationary impacts and sought to run a tight ship in my department. Even before the pandemic hit, the Bank of England's QE had created the illusion that deficits could be financed without end, and that hard trade offs could be avoided. That was fantasy economics. The UK will hit the rocks if we don't change course. There is too much debt because there is too much spending. Labour may try and offset that with more taxation, but they can't do that without crushing growth altogether. If you thought you knew the depth of anger and resignation about the mismanagement of the country, you haven't seen anything yet.
Irish Times
4 days ago
- Business
- Irish Times
The Celtic Tiger was a time of vulgarity and gross incompetence, but at least we got things done
The passage of time allows us the luxury of viewing periods of history in a more considered and rounded context. In the years that followed the banking collapse and the bailout paid for by Irish citizens, the phrase ' Celtic Tiger ', which was once a source of pride, became synonymous with gross economic incompetence, greed and vulgarity. The damage has been exhaustively documented – the austerity that hit the poorest communities, the young people forced to emigrate, the builders that went bust, the young couples trapped in negative equity, the middle classes who invested in property and bank shares as a one-way ticket to prosperity only to find themselves facing hardship in their old age. The collapse of the Celtic Tiger was all of these things, but to view it entirely through the prism of how it all ended is to miss the point. READ MORE The Troika left town more than a decade ago. Now, the ratio of Ireland's debt to gross national income has fallen to 70 per cent from 170 per cent at the peak of austerity. Everybody who wants a job has one. Ghost estates, once seen as the most visible manifestation of that period and all its follies, have vanished from the landscape. There were 3,000 in 2010; there are less than one per cent of that figure now. What is the real legacy of the Celtic Tiger? Look around you. In the noughties, more than 600,000 homes were built. The State built a motorway network between 1991 and 2010, which made it immeasurably easier to get around. The tailbacks of Monasterevin and Moate, to name but a couple of bottleneck towns, are a distant memory. The M50 faced multiple objections and was eventually finished in 2005. Would it get built now? The Port Tunnel (2006), Terminal 2 of Dublin Airport (opened in 2010, but built during the boom), Cork suburban railway (2009), the Aviva Stadium, Croke Park, Dublin docklands and Temple Bar - which dates back to the Charles Haughey era - are long-term projects that will outlast the memories of those austerity years. The Celtic Tiger was informed by a can-do attitude and a spirit of optimism. Despite recovering our prosperity, we have not regained the optimism of this heady time. The most basic metric of confidence about the future, the number of children being born, has declined precipitously since peaking during the boom years. Twenty thousand fewer children were born in the State last year than in 2007, despite a significantly bigger population. This has mirrored trends throughout Europe, but Ireland in the 2000s was an outlier in having a birth rate at or around the replacement rate of 2.1 children per women. That number is now 1.5 and declining. Nevertheless, because of the Celtic Tiger era baby boom, Ireland will have a relatively healthy demographic well into the 2040s. Huge mistakes were made during the Celtic Tiger era, but huge things were accomplished. We have spent too long dwelling on the former and not enough on the latter. Few would argue with this policy, but it also abolished tax relief for investors and developments Fifteen years on from the nadir of the bust, the Troika bailout of 2010, perhaps the most important lesson from the Celtic Tiger is that we got things done. The post-boom recovery has been a time of crippling inertia exemplified by the National Children's Hospital, over-budget and long-delayed. Dublin Metrolink, the country's longest-running joke, is a manifestation of how not to get things done. The State's most acute problem, the housing crisis, is a side effect of prosperity, not austerity. Everybody knows there is a serious problem, a bigger and more intractable one than faced when the Troika arrived in town, yet attempts to resolve it have foundered repeatedly because they have been inadequate. Banks lent irresponsibly during the Celtic Tiger years and we all paid a price. We went from being incorrigible spenders to incorrigible savers. Irish people have €156 billion in saving and as a result, the banks are now stuffed with money, yet small and medium-sized developers claim they can't get credit and the equity they need to purchase zoned land is too high. The banks want the Government to offer a State guarantee credit scheme to developers. The Government's response to the property-induced economic crash was to make credit much more restrictive to those wishing to buy a home. Few would argue with this policy, but it also abolished tax relief for investors and developments. Section 23 exemptions were first introduced in 1988 to give a boost to apartment development in inner-city areas of towns and cities which had suffered decades of flight to the suburbs. Developers and investors could write off the costs of investing in apartments against their rental income over a period of 10 years. [ Department objected to Government's 'housing tsar' amid concerns over pay and recruitment Opens in new window ] [ Ireland is like the paradox of Schrödinger's cat: a wet country that has too little water Opens in new window ] By 2011, they were in such bad odour that the coalition government of Fine Gael and Labour abolished them for new entrants at the behest of the Troika. They had an inflationary impact on housing, they allowed wealthy people to shelter taxable income, they were expensive for the State, or so the arguments went. Countering that fact is that they were a huge success in getting homes and apartments built – at least 60,000 over the duration of the scheme. At this remove, the question that the Government should be drawing from the Celtic Tiger years is how so many homes were built - about 90,000 in 2006 alone - and what positive lessons can be drawn from that.
