UK headed for 1970s stagflation

2 March, 2009

A leading fund manager has said that the government does not have enough money to resolve the banking crisis and its response will inevitably lead to double digit inflation and interest rates.

This combination would destroy the value of pension schemes’ bond portfolios while increasing liabilities, among other negative effects.

Nick Clay, manager of the Newton Managed Fund, said the UK is in a catch 22 scenario where banks desperately need to repair their balance sheets while the Government is leaning on them to lend.

The Government has already invested £37billion in British banks including £17billion in the Lloyds group - which is now only worth £4billion – and printing money to continue will cause other problems.

“The UK government has nowhere near the firepower that is needed,” said Clay. “Barclays alone has a £2 trillion balance sheet, enough to swallow the UK’s GDP whole. The second is that cash being poured into Western banks is the largest inflationary pulse in history.

“We are bound to see inflation pushing up aggressively in the next year or two.”

He predicts that the next UK government will face a 10 per cent budget deficit and spending at half of GDP.

“However bad things look now, they will look a lot worse when inflation and interest rates start to shoot up,” he added.