Currency crisis: UK, Japan and US

January 26th, 2010

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Continuing from Currency crisis: first countries in the line of fire- PIIGS, we will discuss more on the next sequence of events to happen. As we said before, we are not ?predicting? or forecasting the future- what we are presenting is just a rough sketch of what may possibly happen.

After the PIIGS countries, the next country to be in danger of public debt default or currency crisis is the United Kingdom. At the current rate of deterioration of its public finance, the national debt of UK will reach 17% of GDP in 2010 and 100% by 2013. Niall Ferguson, author of the famous The Ascent of Money series, said

We?re not Iceland or Ireland, but we?re closer to them than we are to the U.S.

The reason why the UK is in a more vulnerable than the US is because,

The big difference between the two countries is that the U.S. issues the world?s No. 1 currency and is regarded, partly for that reason, as a safe haven,? Ferguson says. ?The U.K. used to be, but we?re not anymore. That means we have much more currency risk here.

Of course, this does not mean that the UK government will default or that the pound will face a currency crisis. But certainly, the risk is increasing as shown by the increase in price for the credit default swaps (CDS) of UK government debt. The time-frame for a currency crisis in UK is around the vicinity of 3 to 5 years.

The next country in the line of fire is Japan. We all know about the demographic time-bomb in the United States (see How is the US going to repay its national debt?). But Japan’s population is ageing earlier than the US. Worse still, they’re ageing at a time when their government debt is twice the size of their GDP. The reason why Japanese government debt could get so high in the first place is because Japan is a nation of savers. Currently, only 6% of their national debt are held by foreigners, whereas it is 57% for the United States. However, the problem for Japan is that as their population ages, their savings rate will have to fall. That implies that buyers of Japanese government debt will turn to sellers. That means that the Japanese government will have to look to borrowing from foreigners. Time-frame: say, 5-10 years time.

Finally, the next in the line of fire is the United States. We had already mentioned about them at How is the US going to repay its national debt?, Is the GFC the final crisis? and America?s balance sheet. The time-frame is around 10 to 12 years. Others believe it is 5 to 10 years time. That’s why President Obama is pursuing health care reforms. As he admitted on TV, if the US does not solve its health care issues, the Federal government will go broke (see Ladies and Gentlemen, the US Is Insolvent).

On that note, Australia is not in better position either. As PM Kevin Rudd warned recently (see Work harder to support ageing Australians: Rudd), Australia’s time-frame is around 15 years time onwards.

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