For all the attention focused on the US dollar, especially silly hyperinflation calls, one might think there are few problems elsewhere.

That is not the case, however, as reckless credit expansion in China is the fastest in the G7 by far, Japan has the highest debt-to-GDP ratio and the UK is a certifiable fiscal-deficit basket-case.

With a spotlight on the latter, please consider UK has third biggest budget deficit in Europe

Britain’s shortfall in its finances amounted to 10.4pc of gross domestic product (GDP) in 2010, according to data for each of the EU’s 27 member states from the statistics agency Eurostat.

That meant the UK had a bigger deficit, or annual shortfall, than the recently bailed-out Portugal and also Spain, which is viewed as the next euro-using nation to potentially need international aid.

The largest deficit in proportion to the size of the country’s economy was seen in Ireland, where the extra borrowing needed to shore up the banks left its deficit at 32.4pc of GDP.

Greece, which received a €110bn bail-out last year, was second with a deficit of 10.5pc, followed by the UK. Spain, at 9.2pc, and Portugal, at 9.1pc, were in fourth and fifth place.

The data showed the Greek finances were in an even poorer state than previously thought, as the latest figure – while trimmed from the previous year’s 15.4pc – was higher than the latest 9.6pc estimate from the European Union and the International Monetary Fund.

In terms of total debt, the UK fared much better, although it was still among the 14 EU member states burdened with a debt higher than 60pc of GDP last year. EU member states are supposed to keep their debt under the 60pc level.

The debt figures, which refer to a government’s total borrowing over time, rather than the latest yearly shortfall, showed Greece was again in the worst position with a debt equivalent to 142.8pc of its GDP, followed by Italy at 119pc and Belgium at 96.8pc.

The UK was in the ninth weakest position with a debt standing at 80pc of GDP, which was worse than Spain’s 60.1pc. The average debt across the 16 members that use the euro hit a record 85.1pc, up from 79.3pc the previous year.

Given the fiscal mess in the UK, one might expect the British Pound to be among the weaker currencies in relation to the US dollar. Indeed, the following chart shows that to be the case.

British Pound vs. US Dollar Monthly Chart

Note that the British pound is 22% down from its 2008 peak vs. the US dollar in spite of retrace of a portion of its loss, and in spite of US dollar weakness against nearly everything else.

I suspect the Yen will have a date with sanity at some point as well.

Fiat Currency Rule Number 1

The above discussion leads us to saying of a friend of mine “Clyde” who is fond of pointing out “Fiat currencies don’t float, they sink at varying rates.”

Mike “Mish” Shedlock
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