Merryn's Blog

Why governments will be forced to cut back next year

This year, governments have been desperately pumping money into their economies to bounce them out of recession. But that must come to an end. And things could get very nasty.

2009 has seen government goodwill to all men. But as this reverses in 2010, the world and not just in finance could get very nasty.

This year, politicians around the planet have tried to bounce their countries out of recession. But they've spent much more than they've raked in from taxpayers. So they're borrowing more than ever before. By the end of 2009, global sovereign debt will hit almost $50 trillion.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Yes, that's right 50 million million dollars. Servicing this debt alone will cost over 6% of the global tax take in 2010, up from 2007's 4.3%. And there's only one real answer. Governments, whatever they say now, will have to take a chainsaw to their spending.

Ireland has started cutting. It's just lowered spending by €4bn but that's still less than the interest bill on the country's national debt. Greece, which is in huge trouble, as we talked about last week, hasn't yet.

Advertisement - Article continues below

Nor has Britain. The Chancellor's Pre-Budget Report was based on little more than the hope that our economy will recover enough to pay his bills. As for the States and its $14bn debt in 2010 don't ask.

So what happens now? Global bond markets, which get called on to plug the cash gap for overspending politicians, will demand two things before they lend all this extra money.

First, a higher return on the bonds they're buying. That's to compensate for the extra risks they're running. It means long-term interest rates will be forced up (as yields rise, bond prices fall) as we forecast last month. As Jeremy Warner says in The Telegraph, "a bond price crash is the surest bet in town".

Second, huge state spending cutbacks. This will mean big public sector pay cuts, fewer welfare benefits and no more 'stimulus' schemes. Taxes will also be hiked. Many economies will zap back into recession. Then, says Moody's, we could see "social unrest". That's rating-agency speak for riots in the streets, as public anger boils right over. But cash-strapped governments will be powerless to stop this.

In essence, we've lived on borrowed money for far too long. And with a real double whammy - more costly money, and much less cash government around - 2010 will be the start of payback time.

In the financial markets, that's not only bad news for bond prices; cyclical stocks, which depend on economic growth for their profits, could get severely crunched. High-yielding defensive shares look just about the best bet for 2010.




How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019

Brace yourself – the global economy might be healthier than it looks

Investors have been worried about a global recession since the start of the year. But the latest indicators suggest things might not be so bad. John S…
2 Apr 2019

The charts that matter: the Powell put is in place

The Federal Reserve has done not so much a U-turn as a handbrake turn on monetary policy this week. John Stepek looks at how that’s affected the globa…
2 Feb 2019

Most Popular

Stock markets

Here’s what really matters for markets in 2020

The current geopolitical turmoil is making headlines. But it isn’t particularly significant for investors, says John Stepek. What matters more is how …
10 Jan 2020

Mindfulness and wellbeing: the relentless, creepy rise of the enforced happiness industry

The evidence suggests we’ve never been richer or healthier, yet we are always being told how stressed and discontented we are. Jonathan Compton assess…
9 Jan 2020

A look at the state of Iran’s feeble economy

The Islamic Republic is a big player in regional geopolitics, but its economy is weak, its people in revolt and its enemies growing bolder. Simon Wils…
11 Jan 2020

UK property prices are in the doldrums

House prices barely rose in 2019. Good news, says Nicole Garcia Merida.
9 Jan 2020