Economic analyst and historian Richard Martin, believes that Britain is heading for a financial collapse, and that “no country has ever recovered from the financial position that Britain finds itself in today.” Last Friday I spoke to Richard to find out more about Britain’s dire economic situation, and to find out what investors can do to protect themselves from the inevitable crisis.
Last Friday Richard Martin, Managing Director of Global Financial Advisory Wealth Design, was kind enough to speak to me on the subject of Britain’s coming financial collapse. Richard began by outlining how it was that Britain got itself into a debt trap in the first place – a journey that can be traced back to the formation of the modern welfare state in January 1909.
How Britain got into a debt trap
Richard believes that the welfare state was formed in order to try to compensate the people of Britain for the economic hardship they felt following the break-up of the British Empire, which at its height covered almost a quarter of the Earth’s total land area.
“I think that in terms of the beginning of the welfare state – which was mostly manifested with the National Health Service – it was a way for the authorities to offer up to Britain something for nothing, as a kind of national apology for the loss of their giant empire.”
“After World War Two the welfare state really took off in earnest, and it was the kind of situation where you offer somebody something and you have to offer them a little bit more, and a little bit more, and there was no turning back.”
As Richard points out, “It started with people refusing the welfare state, calling it charity”, however they now refer to it as “an entitlement”. Eventually we got to the point where people “lost touch with what constituted good economic management and they simply threw caution to the wind, and just offered more and more and more financial and economic advantages to people in return for their votes. So now and we find ourselves in a situation where the entire debt of the country is nine times what the entire economy is worth, and it is a delusion to think that we are anything other than broke. There is no way that the country can pay back all these debts even if it wanted to.”
Today the welfare state in Britain employs around half a million civil servants, and Richard puts this in context by pointing out that “during the height of the British empire when Britain ran a quarter of the planet, the state employed just 4,000 civil servants.”
How was Britain able to run up such huge debts?
As the chart below shows, public net debt in the UK has been growing since 1915, however the vast majority of Britain’s debt was added in the last 30 years – a period during which it became cheaper and cheaper to borrow.
Official UK public net debt: 1900 – 2011 (Click on the chart for a larger version)
Chart courtesy of ukpublicspending.co.uk
In 1982, Margret Thatcher’s government had to pay 15% to borrow money for 3 years. Today the British government can borrow at 2.1% for 10 years. The cost of borrowing has been steadily falling for around three decades and it is this that allowed Britain to radically increase its debt burden – and it is a burden that continues to grow.
In 2012 the British government spent around £120 billion more than it collected in taxes. That was possible thanks to Britain’s ability to tap the international bond market and because the UK Treasury monetised around 50% of the new debt that was issued.
Our ability to continue financing our huge budget deficit is dependent upon ultra-low interest rates, however as Richard warns, “the danger is that if for any reason interest rates then rise, the game is over because governments are suddenly going to have to find a lot more money for interest payments and the system will collapse in short order. I would say to anybody who is looking to see how close we are to that situation, follow the bond market very carefully, because if you see bond prices falling and interest rates rising you know that there is a very strong red light, and the system is about to topple.”
Those watching the bond market will already have noticed that the yield on 10- year UK government bonds (known as Gilts), is already back above 2%.
UK Government Bonds 10 Year Note Yield (Click on the chart for a larger version)
Chart courtesy of Bloomberg.com
Britain’s dire debt situation
In a recent episode of his radio programme entitled Wake Up Call – The Case Of Britain, Richard exposed the true scale of Britain’s dire financial situation, stating that “Britain’s total debt equals 900% of the economy. When you add in financial sector debt, government debt, personal debt and corporate debt, the debt load of the United Kingdom rivals the Weimar Republic in scale.”
He goes on to say that, “Despite all the talk of austerity, the coalition government will add around £700 billion to the national debt in just five years. This is more than Tony Blair and Gordon Brown added to the national debt in 11 years, and is actually more than every British government of the past 100 years combined.”
“In all recorded history no country has ever recovered from the financial position the Britain finds itself in today. No government has ever been able to reverse the trend. No emergency action has ever come close to a solution. This inescapable conundrum has only ever had one outcome – financial collapse. ”
Britain’s Coming Financial Collapse: Part II, examines how the financial collapse is likely to play out, its effect on property prices, and how investors can protect themselves from it.