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Why the market sold off on inauguration day. The UK has 4.4 trillion of liabilities ontop of 60 billion of reserves. UK gdp is around 2 trillion so it’s a big problem. Icelandon the Thames?
 
SERIOUSLY ALARMED 
Posted By:Ambrose Evans-Pritchardat Jan 20, 2009
The slide in sterling has turned "disorderly".We can argue over whether or not the first phase of devaluation acted as a shock-absorber fora badly mismanaged economy, providing a cushion against debt deflation and the housingcrash. But the latest dive has a very malign feel.For the first time since this crisis began eighteen months ago, I am seriously worried thatBritish government is losing control.The currency has fallenfive cents today to $1.39 against the dollar. It is now perchedprecariously on a two-decade support line -- the levels tested in 2001 and 1992. If it breaksthat line, traders may send it crashing down towards dollar parity.The danger is blindingly obvious.The $4.4 trillion of foreign liabilities accumulated by UKbanks are twice the size of the British economy. UK foreign reserves are virtually nothing at$60.6bn.(on this, more later in a piece I'm writing today)
 
If the Government is forced to nationalise RBS and perhaps Barclays with their vast exposurein dollars, euros, and yen, it risks being submerged. It is one thing for a sovereign state to letits national debt jump in a crisis -- or a war -- perhaps even to 100pc of GDP. It is another totake on foreign debts on such a scale with no reserves. Yes, the banks have foreign assets aswell to match the debts. But how much are these assets really worth?This is the moment when the "rubber hits the road" -- to borrow from American argot -- themoment when the reckless debt experiment of our economic and political leaders comes backto haunt.We cannot even do what Iceland did to save its skin. Reykjavik refused to honour the foreigndebts of its buccaneering banks. It let them default, parking the losses in ResolutionCommittees. Small islands can do that. Iceland has fish instead, and lots of metals.Britain cannot follow suit. The debts are too big. If London takes such disastrous action it willset off global panic and lead to an asset death spiral, drawing the entire world into deepdepression.What have our leaders wrought? The reckless conduct of City, the fiscal incontinence of Gordon Brown (3pc deficit at the top of the cycle), and the pitiful regulation of the UK housingboom have all combined to bring the country to the brink of disaster.England has not defaulted since the Middle Ages. There is a real risk it may do so now.And no -- just so there is no misuderstanding -- it would not have been any better if Britainhad joined the euro ten years ago. The bubble would have been just as bad, or worse, asIreland and Spain can attest. We have our disaster. They have their disaster. When the dusthas settled in five years we can make a proper judgement on the sterling-EMU issue. Not now.The Baby Boomers have had their moment in power. The most spoilt generation in history hashandled affairs with its characteristic hedonism. The results are coming in.The blithering idiots.
LONDON (Reuters) - The United States and the United Kingdom stand on the brink of the largest debt crisis in history.While both governments experiment with quantitative easing, bad banks to absorbnon-performing loans, and state guarantees to restart bank lending, the only realway out is some combination of widespread corporate default, debt write-downs andinflation to reduce the burden of debt to more manageable levels. Everything else iswindow-dressing.
 
To understand the scale of the problem, and why it leaves so few options forpolicymakers, take a look at Chart 1(https://customers.reuters.com/d/graphics/USDEBT1.pdf), which shows the growthin the real economy (measured by nominal GDP) and the financial sector (measuredby total credit market instruments outstanding) since 1952.In 1952, the United States was emerging from the Second World War and the conflictin Korea with a strong economy, and fairly low debt, split between a relatively largegovernment debt (amounting to 68 percent of GDP) and a relatively small privatesector one (just 60 percent of GDP).Over the next 23 years, the volume of debt increased, but the rise was broadly inline with growth in the rest of the economy, so the overall ratio of total debts to GDPchanged little, from 128 percent in 1952 to 155 percent in 1975.The only real change was in the composition. Private debts increased (7.8 times)more rapidly than public ones (1.5 times). As a result, there was a marked shift inthe debt stock from public debt (just 37 percent of GDP in 1975) toward privatesector obligations (117 percent). But this was not unusual. It should be seen as areturn to more normal patterns of debt issuance after the wartime period in whichthe government commandeered resources for the war effort and rationed borrowingby the private sector.From the 1970s onward, however, the economy has undergone two profoundstructural shifts. First, the economy as a whole has become much more indebted.Output rose eight times between 1975 and 2007. But the total volume of debt rose astaggering 20 times, more than twice as fast. The total debt-to-GDP ratio surgedfrom 155 percent to 355 percent.Second, almost all this extra debt has come from the private sector. Take a look atChart 2 (https://customers.reuters.com/d/graphics/USDEBT2.pdf). Despite acres of newsprint devoted to the federal budget deficit over the last thirty years, public debtat all levels has risen only 11.5 times since 1975. This is slightly faster than theeight-fold increase in nominal GDP over the same period, but government debt hasstill only risen from 37 percent of GDP to 52 percent.Instead, the real debt explosion has come from the private sector. Private debtoutstanding has risen an enormous 22 times, three times faster than the economy asa whole, and fast enough to take the ratio of private debt to GDP from 117 percentto 303 percent in a little over thirty years.For the most part, policymakers have been comfortable with rising private debtlevels. Officials have cited a wide range of reasons why the economy can safelyoperate with much higher levels of debt than before, including improvements inmacroeconomic management that have muted the business cycle and led to lowerinflation and interest rates. But there is a suspicion that tolerance for private ratherthan public sector debt simply reflected an ideological preference.THE DEBT MOUNTAINThe data in Table 1 (https://customers.reuters.com/d/graphics/USDEBT3.pdf) makesclear the rise in private sector debt had become unsustainable. In the 1960s and1970s, total debt was rising at roughly the same rate as nominal GDP. By 2000-
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