London, United Kingdom

A glance at London’s busiest streets might reveal that everything is fine in this pristine European capital. But dig deeper into the malaise that continues to challenge this leveraged economy and you see things are not as they first seem.

England is still trying to recuperate from the credit crisis and the resultant shock of economic output. Despite austerity measures by the new Cameron government, the central bank is ramping up the production of paper obligations, a.k.a the pound, to meet this nation’s ongoing debt commitments.

There’s a bull market alright, a bull market in paper as this central bank prints like there’s no tomorrow.

How on Earth the British pound can fetch almost 1.60 per U.S. dollar is an enigma. Britain hardly exports anything, the country’s banking system is still recovering and home prices recently fell the most in 18 months.

The United Kingdom is the closest thing to bust when it comes to a sovereign nation; her only savior is the printing presses at The Bank of England.

Stress tests conducted by the Committee on European Baking Supervisors revealed that Royal Bank of Scotland (RBS) has one of the biggest exposures to Irish sovereign debt. RBS is still 84% owned by the UK taxpayer and was heavily damaged by the credit crisis. The bank, to be blunt, is broke.

Deflation, not inflation, still looms large across England. Big reductions in government spending aren’t helping, either.

U.K. home prices dropped the most in 18 months in September as all of Britain’s regions posted a decline. According to Hometrack Limited, the average cost of a U.K. home fell 0.4% from the previous month to $249,000. That ranks as the third consecutive monthly drop and the biggest decline since March 2009.

Despite the massive acceleration of bank credit and an aggressive attempt by The Bank of England to grow the money-supply since 2008, benchmark 10-year government bonds (or gilts) yield just 2.93% — a spectacularly low yield considering the state of this country’s outstanding debt and growing deflationary noose.

The two biggest drunks at the credit crisis bar remain the United States and Britain. Both Anglo-Saxon economies, led down the drain by reckless bankers and poor regulatory oversight, are still hung-over and likely to be nursing a bad headache for years to come. For now, both nations are fortunate enough to be able to print their own money, a luxury most countries in Europe don’t have.

But how much longer until the bond market vigilantes change direction and attack Treasury and gilts?