The big news, for me, in the past few days wasn’t Chinese officials raising rates or Apple’s earnings but rather the United Kingdom’s budget.
The United Kingdom is probably the economy that is most similar to the United States. Obviously, both countries are English-speaking, and they have been the last two global superpowers. Both nations have become service-orientated economies that became dependent on housing and financial markets for growth in the 1990s and 2000s.
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The city of London became to Europe what New York is to the United States. Billions of dollars poured in, hedge-fund managers became the nouveau riche. Real estate went through the roof.
Like the United States when the financial crisis hit, the United Kingdom bailed out its banks. Its deficit soared to more than 11 percent of GDP. However, unlike the United States, the United Kingdom has dealt with this situation before.
After World War II, the country had to give up its empire as the costs of war caused it to go bankrupt. In the mid 1970s, the country had to receive a bailout from the IMF.
Therefore, despite its liberal leanings, the British know they have to be proactive when it comes to the national debt. They know it can lead to bankruptcy. They have released the most adventurous budget in the Western world. They are slashing 500,000 public-sector jobs. They are cutting spending by 14 percent; some departments are seeing cuts of up to 40 percent or 50 percent.
The British aren’t letting the market force their hand by raising rates, they are trying to be proactive.
Despite the problems of the British economy, its bonds have outperformed German and U.S. bonds in the past few months on hopes of this austerity. The Brits are doing this despite their debt-to-GDP ratio of 65 percent.
Unfortunately, I see no hope of such austerity in the United States. Neither political party has outlined any such plan for massive cuts.
However, if the United States wants to avoid a sovereign-debt crisis in three to five years, they should look to the British budget.
About the Author: David Skarica
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