Killer storm on the way & I don’t mean Ophelia
At the time of writing, pretty much all mainstream media sources are full of scare stories about the oncoming storm Ophelia.
You know what mostly happens on these occasions. A few trees fall over, roof tiles get blown off and, once every thirty years or so, a trampoline takes flight. Newspaper reporters are garbed in Berghaus and dispatched to the windiest, rockiest shorelines in the UK to make things look more dramatic than they actually are.
I don’t want to trivialise Ophelia. Storms can cause a lot of damage and occasionally deaths do occur. I remember the ferocity of the Great Storm of 1987 from my childhood. Our power went out and our roof was damaged. I remember toasting bread on the coal fire in a candlelit room waiting for the wind to die down and the lights to come back on.
That storm did cause death and widespread destruction but the damage it caused in monetary terms pales into insignificance to the amount of money that has just disappeared from the UK balance of accounts. And, the potential cost in human life of Ophelia will be minuscule compared to the ramifications of our collapsing Brexit economy.
Hidden behind a paywall in the Telegraph there is a report about the real storm.
In news that will come as a surprise to mainstream media darling and GERs evangelist Kevin Hague, it turns out the ONS figures for the UK economy were 490 billion pounds out, and not in a good way. (On an aside, if UK accounts can be so far off the mark, then I think so-called GERs deniers like Richard Murphy have been vindicated).
Global banks and international bond strategists have been left stunned by revised ONS figures showing that Britain is £490bn poorer than had been assumed and no longer has any reserve of net foreign assets, depriving the country of its safety margin as Brexit talks reach a crucial juncture.
A massive write-down in the UK balance of payments data shows that Britain’s stock of wealth – the net international investment position – has collapsed from a surplus of £469bn to a net deficit of £22bn. This transforms the outlook for sterling and the gilts markets.
This is compounded by a halt in foreign investment. Since the UK decided to force Scotland out of the biggest market in the world, companies have unsurprisingly stopped investing here.
Foreign direct investment (FDI) by companies is plummeting. It fell from a £120bn surplus in the first half 2016 to a £25bn deficit over the same period of this year.
Investors have in recent weeks also become wary of purchasing Sterling assets.
The Bank of New York Mellon, the world’s biggest custodial institution with $31 tn (£23 tn) under purview, says its flow data shows a marked deterioration over recent weeks in purchases of sterling assets by “real money” players such as pension funds and sovereign wealth funds.
This decline has been hidden by the speculative buying of bonds by hedge fund spivs betting on an increase in interest rates by the bank of England. This type of speculation can have the rug pulled from under it pretty quickly.
The Telegraph reports that the main reason for the £290bn adjustment is that the ONS has discovered that UK corporations have fewer investments abroad than previously thought.
The Office for National Statistics (ONS) said these revisions to the “Blue Book” stem from the discovery that Britons own fewer foreign shares than previously thought, and foreigners own more British assets.
UK companies are more likely to own dodgy UK personal debt.
Company profits are lower than imagined. What was thought to be ownership of foreign debt securities by UK corporates have turned out to be loans to over-leveraged UK citizens
Worryingly, the report warns that the UK deficit is being propped up by the kindness of the EU Central Bank.
Over recent months sterling and gilts have been propped up by huge sums leaking out of the eurozone and into UK assets as a side-effect of QE by the European Central Bank. Many of the ECB’s bond purchases occur in London. Banks rotate the proceeds into UK bonds to capture a richer yield.
So the UK is currently involved epoch-making negotiations with an entity that could torpedo our economy in an instant.
The article concludes with the following sober analysis.
Bank of America’s Mr Capleton says the UK is left facing a “triple deficit problem”. The household savings rate is close to a half-century low of 5.9pc. There is not enough internal funding in the UK to soak up the budget deficit, which could reach 4pc to 4.5pc of GDP next year if pessimists at ABN Amro and Natixis are right. A weak pound has made no dent on the trade deficit. The awful discovery that Britain’s half a trillion pound reserve does not in fact exist could bring matters to a head swiftly and brutally.
So, as we brace for Ophelia, a more dangerous storm is brewing and its effects could be sudden and devastating.
Perhaps we should name it Storm Boris or Hurricane Farage?
The report shows that the financial cost of the UK of leaving the Single Market dwarfs the total monetary cost of all physical storms that have battered these islands. In terms of the cost to life, 18 people died after the great storm of 1987 but we know tens of thousands of people have died because of austerity measures instigated after the 2008 crash.
If this report is even partially correct then I fear austerity will soon become a whole lot worse.
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