BRITAIN`S DECLINE AND FALL / MACLEOD FINANCE

Britain’s decline and fall

British bulldog? More like a yapping chihuahua. Far-left socialism is destroying what was once the greatest nation in the world. The pound has yet to reflect the market’s response.

ALASDAIR MACLEOD

 

This article is a wake-up call for complacent Brits. 

The direction of travel will almost certainly make the 1976 sterling crisis look like a vicar’s tea party, when government debt to GDP at that time was half today’s level.

Britain is stuck with the current government until 2029, and with its far-left parliamentary party calling the shots, it is unsuited to deal with the inevitable crisis ahead. 

Almost certainly it means reintroducing foreign exchange controls. 

The old dollar-premium system can be reactivated overnight. 

And 2026 is also likely to see price controls on food and other essentials returning in an attempt to curb inflation.

In a crisis, moves like these appeal to socialists on the basis that they penalise those that have while protecting (apparently) the workers. 

But they only make the situation far worse.

Introduction

Sterling has been in a long-term decline against the dollar since the First World War. 

In this century, the decline has been 36% so far from its high point in November 2007. 

It’s a trend that we see continuing, despite the current anaemic rally against the US dollar.

Britain is in the grip of a far-left economically ignorant Labour party, hell-bent on destroying the status quo ante. 

The destruction encompasses all traditions associated with the white middle class. 

It seeks to abolish capitalism — a Marxist term — itself.

Back-bench Labour MPs who are actually in charge of government policy care not that the rich are finally abandoning the country. 

For them it’s good riddance to capitalist scum, leaving the undeserving middle classes to pick up the tab for welfare bills. 

Immigration is tolerated because immigrants are more sympathetic to Labour than the white middle classes, ensuring that they are politically sidelined for ever more. 

Giving the vote to sixteen-year-old children is for the same reason.

It is all sixth-form socialist naivety. 

But Britain faces another four years of this social and economic destruction before the next general election. 

It is leading to complete national emasculation, not just domestically, but also of Britain’s global influence. 

As little more than a yapping Chihuahua on the world stage, the UK will even be unable to satisfy her defence spending commitments within NATO. 

It has squandered its Brexit dividend and is becoming the dysfunctional EU’s poor relation — and that takes some doing.

A different form of anarchy is likely to stop this descent into Marxism. 

And that is the reality of markets. 

Marxism cannot escape economic reality, as the USSR finally discovered. 

Nor will Britain.

Economic reality is usually imposed from outside

Readers of this Substack need no explanation about why socialism and fiat currencies always fail — often together. 

In the UK’s case, sterling is exposed to substantial hedge fund dealing in gilts, and significant additional foreign ownership of sterling is due to London being the principal financial centre in the European time zone. 

Liquidation of these interests is a substantial threat to sterling’s value for so long as the Labour administration pursues economically destructive policies in favour of their ideologies.

As a consequence of her first budget, the chancellor Rachel Reeves has been told by her officials that revenue is coming in under budget. 

The theoretically independent treasury forecasting unit, the Office for Budget Responsibility also knows it, but is too frightened to say so outright. 

Credit agencies have had the UK on a double-A rating since 2023. 

Presumably, they await the Autumn Statement before reconsidering a long-overdue downgrade.

A CPI inflation rate of 3.8% and the retail price index at 4.5% the latter of which provides the inflation adjustment for index linked gilts are the highest in the G7. 

Broad money (M3) grew by a paltry 3.9% in the year to September, barely covering the CPI increase and indicating no economic growth as the best case. 

Deflating M3 by the RPI suggests the economy is going backwards. 

Take out deficit spending by the government, and the private sector is definitely contracting.

Anecdotally, declining business profitability around the UK confirms that government revenue returns are disappointing, probably significantly more than current estimates suggest for the current and next fiscal year.

Declining revenue leads to a debt trap being triggered, but complacent markets are yet to take this message on board. 

A debt trap occurs when revenue grows more slowly than the rate of interest which is due on the debt, which is precisely the condition in which the Chancellor finds herself.

No wonder she has postponed the Autumn Statement: she can’t cut welfare spending, that was ruled out by her backbenchers. 

And if she raises taxes, she will damage the economy even more. 

It’s now almost certain that she will increase income tax, crossing a red line in the election manifesto. 

But it is probably the least damaging option.

But none of this provides an escape from the debt trap. 

A debt trap is the market’s acknowledgement of soaring lending risk, leading to a doom-loop of ever-rising bond yields.

The last time this happened to the UK was during the previous far-left Labour government nearly fifty years ago. 

In 1976 the IMF was called in to provide a $3.9bn loan to bolster foreign currency reserves which were running low due to a run on sterling. 

As a condition of the loan, strict conditions forced the government of the day to impose spending cuts. 

At that time, even medium maturity gilt yields rose to 16%, and that was with a debt to GDP at half of today’s level. 

Furthermore, today’s foreign exchange exposure to the markets is far too large for sterling to be bailed out by an IMF loan.

It seems inevitable that sterling will test and eventually break the $1.000 level. 

It is increasingly likely that exchange controls will be reintroduced to prevent residents from selling sterling to buy foreign currencies and possibly gold as well. 

If so, sterling will be driven even lower, because exchange controls never stopped runs against sterling in the past and the signal sent would be highly negative. 

Furthermore, the rapidly approaching end of the fiat currency system makes sterling’s demise even more certain.

As we have written elsewhere, a dollar debt-cum-credit bubble is almost certain to implode in the coming months. 

Global commodity prices, producer prices, and consumer prices will rise significantly on a one to two-year view as a consequence the Fed’s dollar debasement. 

It means that bond yields all G7 currencies will rise not fall, making debt trap dynamics obvious everywhere with gilts particularly vulnerable. 

The trend is already reflected in the ultralong gilt yield, shown below. 

It is drifting higher, despite the 10-year gilt yield declining from 4.8% in early-September to 4.47% currently.

A further twist is that one-third of all gilts in issue are index linked, whose cost to the government will soar with inflation.

Conclusion

We can be certain that sterling and gilts are mispriced, with the former too high and the latter too low. 

What we don’t know at this stage is whether markets will begin to correct these anomalies before the Autumn Statement on 26 November, or after. 

Before will be a nasty shock for Rachel Reeves; after, a nasty shock for complacent markets. 

Either way, it will be disastrous for personal wealth.