The United Kingdom

I have recently arrived for in London for a couple of weeks’ vacation with my family. It feels good to be back in the city again. I revel in its noises, smells and vibrancy. It is a city that plays home to every culture under the sun and somehow manages to impose the British culture on everyone. Along with the culture and the history is innovation and geographical positioning that has provided the country with prosperity long after its empire ended. Both of these benefits are also present in the United States but right now the two countries could not be headed down a more different path if they tried.

Currently the economy in the UK is struggling at least as much as the United States. A wander down Oxford Street and other high streets in London reveal dozens of shops offering 50% discounts or who have signs out signaling an end to business. This will result in continued commercial property woes and more banking problems. Lloyds the massive insurance and banking company recently issued a statement saying that they would lay off another 15,000 workers bringing their total to 45,000 lost jobs. Even so the government continues to cut expenditure and is set on being more austere. In response to the latest government cuts in spending there are numerous strikes happening. People do not like change particularly when it means a cut to their pay and benefits.

At present the government is trying to increase the pension age for the employees at the Public and Commercial Services. The age will be raised to 66 from 60. Furthermore to pay for the benefits and to balance this expenditure against income the government is increasing the amount that employees have to pay in to the system by roughly 3%. To me this seems reasonable. People are living far longer than they previously did so raising the age at which they will receive benefits makes sense plus the increase in the amount paid to receive the benefits is minimal.

Consider this. In the United States when the social security benefits age was set at 60 most people did not live to see 70, in fact the average life expectancy was around 65. So people on average worked the majority of their life and enjoyed five years of retirement. The program was introduced in 1935 but 75 years later the retirement age has barely moved. The early retirement age is 62 with full benefits by 67 (for most of us) but now life expectancy in the United States is hovering around 80. People are now spending more than 20% of their life expectancy retired. If we went back to the original system then the age at which people can receive retirement benefits would be raised to 73. This would repair the massive deficit in the social security budget in one easy move. It would however be political suicide but as Mr. Cameron and his cabinet are proving, it can be done. While raising the age to 66 does not completely repair the UK system forever it is a good step in the right direction.

The fallout from this though is that the UK is now dealing with strikes and the people who voted the government in are now losing faith in them. This is also a shame as there really is no easy way out of this mess and the UK government seems to be on track to make some real changes that will benefit future generations more than the current generation is prepared to admit. Taking some pain now will result in prosperity quicker and with less cost and sacrifice than waiting. The UK government seems to be set on fixing the problems through cost cutting while the United States seems hell bent on going deeper into debt to provide a short term fix while creating a far larger problem.

Until the United States can look inward and start to repair problems at home by becoming more austere it is my contention that all we are doing is plugging holes in the dike with our fingers. Eventually the banks will burst and the American way of life as we know it will be over. Hopefully the Federal Reserve and the White house are watching with interest to see how the British experiment works. Assuming that it closes the United Kingdom’s deficit without too much pain it could show the United States an alternative to their current methodology.

If Obama and Bernanke choose to ignore what is happening across the Atlantic they are missing a great opportunity. Those of you who have followed this blog for the past year or so will know that I believe that printing more money is not the solution to our problems but rather is creating irreparable damage. The UK experiment may show the United States a way to solve their problems and balance the budget. If the United States chose this option I would think that the dollar strengthens and inflation is muted. Furthermore it could be achieved while keeping interest rates low alleviating worries about the housing recovery. Therefore I hope that their egos are in check and that they learn from their cousins.

It is definitely time to remain cautious as there is no indication that the United States has any stomach to take the painful steps needed to repair the damage. Until I see signs of this the market is just too risky to justify the investment. Stay on the sidelines and earn an excellent rate of return on your cash by contact me or visiting our website http://www.fixedratedeposits.com/.