Is the UK too big to save?
There’s a lot of discussion at present about the possibility the UK might face a fiscal crisis & have to “go to the IMF”.
However, an under-discussed aspect of this is: A) Would the IMF even have enough funds to bail us out? B) Would a bail out be necessary in the era of QE?
The National Debt continuously matures & needs to be rolled over. If interest rates (on GILTS) spiked, the main problem would be a huge rise in the cost of refinancing existing UK government debt. Not just the ability to borrow more.
The UK has around £1.2tr ($1.6tr) in government debts maturing between now and 2030. Under an IMF programme the IMF might need to cover most or all of that in addition to any additional debt as tax receipts fell in a crisis.
Therefore it seems plausible that a UK bailout from the IMF could cost well over $1tr, perhaps even approaching $2tr. But the IMF’s total available resources is just under $1tr. (Figures from Andrew Lilico of Europe Economics)
It is thus highly questionable whether the IMF would have sufficient resources to bail the UK out. IMF lenders would need to double their contribution, specific lenders would have to provide additional funding streams (presumably with additional conditions) or we’d default.
The alternative approach would be to QE our way into yield curve control. That means printing just enough money to prevent the government from going bust. It would mean the government re writing the Bank of England mandate. It would mean prioritising low cost of government debt over inflation (or as well as).
If the Bank of England has that kind of dual mandate then the markets could interpret such a move as worse for long term inflation and could therefore demand a higher interest rate on government debt. That could in turn necessitate more money printing, worsening inflation further. It’s a viscous circle we would do well to avoid.
Either way, we’re likely heading towards higher interest rates for mortgages and persistent inflation. To do anything else (I.e. impose genuine monetary discipline) could induce a new Great Depression for a decade or more. Something no politician wants to do.
So short term there may be no alternative. Inflation and higher rates could be here to stay. Long term we need to educate the public on the value of monetary discipline and Austrian economics. We need to change the public attitude to debt. We need people to understand there is no such thing as a “free lunch”. We’re saddling our children with crippling debt and they won’t thank us for it.
