As the Federal Reserve and Hank Paulson bail out the US with huge amounts of borrowed money, it seems that Chancellor Alistair Darling is entertaining a similar idea.
He hasn’t mentioned any similar plans to save the banks from meltdown – no doubt he hopes that the US has done that hard work for the UK – but apparently, on the BBC this morning, he ruled out tax increases: “This is not the time to be imposing additional burdens,” he said. But at the same time, he has no obvious plans to cut public spending.
And the trouble is, with jobs being lost and companies making less money, the existing tax take will fall back, and rising unemployment claims will drain more money from the state coffers. So where’s the money going to come from?
Easy – we’ll borrow it. According to Reuters, at the Labour Party conference, Mr Darling has argued that the government is in the position to “let borrowing rise to support the economy and families when they need it most.”
It’s one view, but as plenty of householders and indebted consumers are finding out, borrowing may not be the easy solution that it sounds. For a start, Mr Darling’s original prediction for this year’s borrowing was £43bn. Yet according to the Centre for Economics and Business Research (CEBR) it now looks as though Britain may have to borrow £90bn in 2009. Capital Economics expects borrowing to hit £100bn in 2010/11.
As The Telegraph puts it, “Britain already has the largest budget deficit of any developed country”. Such brutal borrowing figures could put the pound under yet more pressure. And here’s the vital difference between bail-out plans for the US and those for the UK. The US dollar is the world’s reserve currency. Despite all that’s happened, that still makes it a safe haven when people get scared. At one point during last week’s chaos for example, investors were actually paying the US government to guarantee their money – the yield on the one-month Treasury bill turned negative.
Sterling on the other hand, isn’t quite as important on the world stage sadly. The pound has already lost a lot of its value this year as it has become clear that we’re heading for recession and an almighty housing crash.
With news on the UK only likely to get worse, sterling can only get weaker. So what should an investor do? You could spreadbet on sterling, but it’s a pretty risky move and only to be done with money you feel comfortable with losing (and there’s not much of that around at the moment).
An alternative is to buy gold. Gold is of course, priced in dollars, which means there’s currency risk. But with sterling looking likely to continue to weaken against the dollar, that means the currency moves could well be in your favour.
And in the longer-term, there’s every chance that the dollar will weaken against gold, as investors start to realise that the best chance that the US government and its consumers have of paying off their debts is to inflate their way out of them.