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Why the U.K. economy is doomed along with the rest of the developed world

A study of British public policy dares to ask the question, "Might there be no way out for Britain?"

Display boards at the Australian Stock Exchange flicker with news of a falling market in Sydney, Friday, Aug. 5, 2011. (Photo: Rick Rycroft/AP)

Anyone following the wobbly state of the global economy knows that politicians around the world basically fall into two desperate camps.

The first group of so-called debt hawks sees another Great Recession coming and wants national governments to focus on austerity programs aimed at deficit reduction because rising sovereign debts are behind our current economic woes.

The second gang of policy makers admits debt is a problem, but it insists any reduction in public spending today will only make matters worse. To create jobs and prevent a double-dip global recession, this group of die-hard Keynesians wants to see emergency stimulus spending maintained and maybe even increased to support economic growth.

The Globe and Mail recently summed up the debate well.

But what if neither camp is right? What if there is simply nothing we can do to stop the looming financial train wreck from happening? That gloomy question was behind Thinking the Unthinkable, a study of British public policy options by noted British financial firm Tullett Prebon—which was brave enough to ask the question that U.K. politicians have been avoiding like the plague: “Might there be no way out for Britain?”

The report in question is the final installment of Project Armageddon, a sweeping analysis of the outlook for the U.K. economy. “The United Kingdom is mired in debt, and her economy is flat-lining,” says an executive summery by Tim Morgan, Tullett Prebon’s global head of research. “Each side of the political divide has a different take on the best solutions to these problems. The Coalition government believes that the huge fiscal deficit must be eliminated. Its opponents argue that fiscal tightening will undermine the prospects for growth.”

“Project Armageddon,” Morgan explains “was established to examine the possibility that both sides’ warnings are correct but that neither side’s prescriptions will work. We conclude that Britain’s debts are unsupportable without sustained economic growth, and that the economy, as currently configured, is aligned against growth.”

According to the British firm, only radical solutions to the U.K.’s problems can avert a debt disaster. But elected politicians have little chance of selling the public on what needs to be done.

“All macroeconomic options have been tried, and have failed,” the Project Armageddon executive summery says. “The only remaining options lie in the field of supply-side reform. Unfortunately, public opinion may be inimical to the scale of reform that is required.”

Why should you care? Keep in mind that Britain is the G7’s current shining example of prudent government action. And as the financial blog Zerohedge points out, while the Project Armageddon report is U.K.-centric, the overarching observations are more than applicable in any place that has too much debt, too little cash flows, and not enough growth.” By that, of course, Zerohedge means every developed world country is essentially in a sinking boat with no paddles, life jackets or bilge pump.

You can download the final report of Project Armageddon, but before you do, you might want to pour a stiff drink and remove all sharp objects from your immediate vicinity.

And after you are done, read “Bearing down,” a just-in-case Canadian Business cover story that lays out what the market’s baddest bad news bears advise you to do to prepare yourself for when the sky starts falling. Enjoy.