Anarchy in the UK – it’s coming sometime, maybe

Not another bearish comment on the financial system, it’s just that I went to see the Sex Pistols at Brixton Academy last night, and that song was their encore. They were ace, but now I can’t hear. Back when they got famous in inflation-ridden 1976, oil was only $50 a barrel in today’s money. Them were the days.

OK – I can’t resist. Let’s turn it into a bearish comment on the UK financial system. There’s a much quoted fact that modern society is just three missed meals from anarchy. I tried to track down the source of this wisdom – Marx perhaps, or Che Guevara? It turns out that it comes from here: “They say that every society is only three meals away from revolution. Deprive a culture of food for three meals, and you’ll have an anarchy”. Arnold Rimmer, from sci-fi comedy Red Dwarf. How far away were we from a full blown banking collapse in mid September? I think that if the Government hadn’t guaranteed all Northern Rock deposits when it did, late on Monday 17th, we would have been there. The share prices of two similarly funded mortgage banks had started to slide dramatically, which would have been negatively reported in the next day’s press, leading to queues in all directions on the UK’s high streets for the rest of the week. And queuing was not an irrational response – as my dad likes to say whenever there’s talk of a petrol blockade, “if you’re going to panic, panic early”, and off he drives to the BP garage. Deposit protection is of course limited, and who knows how long it would take to get your money back? For all the criticism the authorities have had thrown at them recently, they averted a run on the UK banking system. They did the right thing.

Which brings me to my next thought – what happens when a population loses faith in the banking sector? What happens if something like the run on Northern Rock happens again? Well we saw what happened in Japan over the last decade following the bubble bursting there, with its associated banking crisis – people put their money into the state backed Japan Post savings bank. As a result Japan Post became the largest holder of savings in the world, and accounted for 25% of all Japanese household assets. Japan Post invested a lot of these savings into Japanese Government Bonds (JGBs) and yields on those assets fell to around 0.5%. We have already started to see something similar happen here – National Savings & Investments reported record inflows around the time of the Northern Rock crisis, with sales doubling or trebling for many of its products. Sales of such products help finance the government’s budget deficit, so as a result gilt issuance will be lower than it would have been. If it does happen again, expect massive inflows into these 100% safe products, and into AAA rated gilts. And watch gilt yields fall, and fall, and fall…