The United Kingdom is careening toward a possible currency and credit crisis that would make the world's investors even more leery of the United States.
It's one thing when it's Greece or Portugal. A credit downgrade or warning for those countries isn't exactly headline news for most investors. For most of our portfolios, these are peripheral markets.
Ireland in trouble, too? Yawn. Don't own any Irish stocks.
Italy? What's new? Italy's always running a deficit.
Spain? That's a surprise. Time to check the portfolio. But, whew, don't own any Spanish stocks.
The United Kingdom? Whoa. Now we're getting serious. How could the home of Big Ben, Queen Elizabeth II, the Bank of England, the pound sterling and clotted cream be facing a credit downgrade? Or maybe even worse?
The cost of insuring against a U.K. default in the derivatives market is only slightly lower than the price of insuring against a default by Portugal.
I don't think the United Kingdom is headed toward a default on its debt. But it is in the midst of a crisis that could reopen wounds in a global financial system that is still healing from the last crisis.
And it's not even on the radar screen for most U.S.-based individual investors. I'd put a currency and credit crisis in the United Kingdom at the top of my list for huge, potentially market-shaking -- and unexpected -- events in 2010. (For more on the most expected but still potentially market-shaking financial crisis of 2010 -- that is Japan -- see my post titled "Japan's huge budget gamble will push up global interest rates.")
Well, put the U.K. on your radar screen now. That fast-moving blip is one that you need to be tracking. A financial crisis in the United Kingdom would be bad enough on its own, but I'm 100% certain that the moment a crisis gets down-and-dirty nasty in London -- and it's certainly headed that way -- investors around the world will start asking: If it can happen in the United Kingdom, why not in the United States? More from MSN Money and MoneyShow.comBest bank stocks: Reformed sinners6 big predictions for 2010Another lost decade for investors?Jubak on video: U.K. citizens stuck with the checkHow Iraq is squeezing out Big OilJubak on video: Debt crisis brewing in EuropeFail, Britannia? Here's the problem: The financial and economic collapse in the United Kingdom was even worse than in the United States. And the country, despite huge bailouts and stimulus spending, looks like it will be the last developed economy to return to economic growth.
Without growth, only scorched-earth budget cuts can bring the United Kingdom's deficit under control -- even within five years. And with an election looming, neither the government nor the opposition is laying out a budget-cutting plan capable of convincing global financial markets that the country is committed to a solution.
That has sent the pound sterling plunging, interest rates on government debt climbing and investors fleeing U.K. assets. The country is edging toward the point where the financial markets take control of the crisis out of the hands of the government.
Countries with the most debt
But the long-term problem is that the country has been living beyond its means for years. A red-hot housing market, built on cheap debt, disguised the fact that U.K. consumers were spending more than they could afford and financing that spending with debt. The country's external accounts were just as out of balance. In 2006 -- that was before the global economic crisis -- the U.K. showed a trade deficit of almost 56 billion pounds. That was the largest deficit since the country started keeping records in 1697.
Only oil production from the North Sea fields -- and production there is now falling -- kept the external deficit from being even worse.
Does that sound like any other country in the world? I'll give you a hint: Its name also starts with a "U," and it's not Uganda, Uruguay, Ukraine or Uzbekistan.
Continued: Running up debt
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Who won the football game? Whats Obama fixing next? Been to the mall lately? What Hollywood star is making headlines?
Time to wake up America. What Jim is writing about IS what is happening and will affect ALL of us. Time for tough choices which no current leader...anywhere in the world... is willing to call us out on.
Thus, we that "ponder" the writings of people like Jim Jubak and ask...What can we as individuals do to "prepare" for what could (will) be some very tough times? This aint going to be...just like the last time.
Thoughts?
FTFA:
If you are not going to clearly describe the investment alternatives that Pimco and others are turning to, as they turn away from UK and US bonds, this article is a waste of time.
Please give us useful information. Where are Pimco and others investing their cash as they pull out of the UK and US government markets? Argentinean bonds? Iranian bonds? Chinese provincial government bonds? Japan government bonds? Thailand? Philippines? Australia?
Can the German bond market sop up all the cash looking for a safe and rewarding parking space?
Give us useful information and stop wringing your hands.
Or is it possible that there is no place for large holders of cash to go that is both more safe and more rewarding than UK and US govt bonds? If this is the case, Pimco and the others are blowing smoke. They can't abandon US and UK bond markets because they cannot describe (and you cannot describe) plausible alternatives. You should call them out on this, not act as their shill.
I think it is just as likely (not more likely) that the European Central Bank (ECB) will crack before London and drive down the Euro interest rates, especially if the dollar continues the current modest rally through the first quarter of this year. This would provide relief to the UK (and the US).
This does sound familiar alright. Just when the Brits decide to follow in America’s footsteps, we go jump off a cliff. Remind me again, which one of us has the parachute?
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