Friday, 20 July 2018

On fiscal fixes: No guts, no glory

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The fiscal cliff has been with us since the Presidential election a month ago; the fiscal fiasco has been with us a lot longer. It is interesting to watch the political goings on in Washington while preparing to hear Chancellor George Osborne’s Autumn Statement which is due today. Two ways of dealing with the same problem…..or not, as the case may be.

Anthony Peters, SwissInvest Strategist

The problem is simple and I feel embarrassed to have to repeat it: public sector money if flowing out faster than it is coming in. That is in itself not unnatural as we swing in and out of economic cycles.

However, the structural deficits are out of control and despite all the goodwill which might exist within the financial services of state to change that, the political means are simply not there. The US was spent into oblivion by a Republican, the UK by a traditional Labourite. Hence, a Democrat is trying to put things right over there while a Conservative is trying to do it here. The Democrat is hindered by a split Congress, the Tory by a coalition government.

But do either the left or the right have the solution? Well, of course they have but it is stored in Pandora’s box. It is not a matter of the correct ideology, it is about grasping and taking on board that muddling along until the next election is not enough. A root and branch review of our social security networks needs to be undertaken but having spent decades – and I mean decades – buying votes with “Panem et Circenses”, the political class is clueless as to how to tell the audience that the show is over and the lights are about to go out.

Margaret Thatcher remains a hate figure – hated even by those too young to remember her era in government – but she gained her reputation by eschewing what she regarded as mamby-pamby fuzzy baby-kissing and granny-hugging politics, of the type so firmly embraced by the current British Prime Monster, and laid down the law. To her, a focus group would probably have been nothing more than a box full of photographic lenses. The Chancellor is now faced with the job of trying to rein in spending while promising that nobody will lose out. He will be admitting that despite the austerity drive, spending is not falling as fast as revenues are. The government’s heavy dependency on indirect taxation is hurting but direct tax revenues are going nowhere either.

The naughty noughties

The significant fiscal revenues which the boom of the early noughties brought with it were committed in recurring and nearly irreversible expenditure as though they’d be there for ever. Whoever assured us that the invisible Scotsman who abolished the boom and bust cycle and who saved the world was, despite his ideological fixations, a first class economist had better think again. Whoever brought to the European and American arenas the belief that persistent deficits, even if capped at 3%, were sustainable in perpetuity should be hung, drawn and quartered.

All the while, the Yanks are fussing around the same issue. It’s not a question of saving US$1.3trn over 10 years, it’s about saving US$1.3trn per year, beginning now. The Social Security and the Medicare/Medicaid programmes were created when life expectancy was ten or more years less than it is today. The accelerating changes in the shape of demographic pyramid require as complete rethink of the whats, the whys and the hows. Trimming a bit here and cutting a bit there is not what is needed. It is no longer about reform, it is about a total rethink. But find me anyone who dares the think the un-thinkable and say the un-sayable and I will show you somebody who will never achieve elected public office, high or low. What is being played out in Washington and what markets are getting all hot and bothered about is an exercise in nothing more than re-arranging the deck chairs on the Titanic.

This afternoon, the entire press here in the UK will be baying for Osborne’s blood. It is not his fault that the Germans make better what the Chinese make cheaper. It is not his fault that fiscal commitments exceed anything this economy could ever generate in value added and it is not his fault that he he is saddled with a Liberal coalition partner. It is also not his fault that his political career peaked just as the wheels were beginning to fall off the economic wagon. What is his fault though, is that he made promises to the British public which we out here knew he would most probably never be able to keep.

And yet, even the FTSE is up nearly 6% year to date. That is, especially in times of low bond returns, pretty impressive. It doesn’t come close to the rampant DAX at over 26% but is more or less in line with the Dow. However, in a quiet moment, it might be worth considering that it is less than the 7% mark laid down by Italian stocks. I am glad that I’m not an economics professor who might have to try to rationally explain that to his students.

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