Renewable capital?

Although I tend not to put too much currency into coincidences, two recent articles about the UK did stop me in my tracks. I'm now concerned that the dangerous alchemy being put in motion in London might move stateside.

Here are the two stories: first, the UK government is expecting to issue records amount of new debt to fund a foolhardy and short-lived sales tax rebate, amongst other goodies. Story number two: the UK regulator for financial services (the FSA) has indicated that it is considering a change in solvency rules for banks, forcing them to hold far higher amounts of sovereign debt.

So let's see, a spendthrift government issuing so much debt that buyers might be scared away. Forcing the banking system (which is by the way quasi-nationalised) to hold more government debt? Even your average investment banker could put that together.

Has the inept duo of Gordon Brown and Alistair Darling come up with financial alchemy? A financial perpetual machine? Unfortunately not - given that the banks are now government controlled in all but name, the funding to buy all these new gilts is itself government money! Still, it has a certain symmetry to it.

Of course in the medium term this cranky trade will break down, and damage the commercial value of the banks in the process. But it plays well to the peanut gallery with a possible election looming.